Portland Brewing Company
2730 NW 31st Avenue
Portland, Oregon 97210
Phone 503-226-7623
Fax 503-226-2702
March 28, 2000
United States Securities and Exchange Commission
Judiciary Plaza
Document Control
450 5th Street, NW, Room 1004
Washington, D.C. 20549
RE: Portland Brewing Company
Form 10-KSB for the year ended December 31, 1999
File No. 0 - 25836
Ladies and Gentlemen:
Attached for filing on behalf of Portland Brewing Company (the "Company") is the
Company's Annual Report on Form 10-KSB for the year ended December 31,1999.
Pursuant to General Instruction C(3) of Form 10-KSB, this letter confirms that,
with respect to the Consolidated Financial Statements included in the
accompanying Form 10-KSB, there have been no changes from the preceding year in
the Company's accounting principles or practices or in the method of applying
such principles or practices.
Very Truly Yours,
Glenmore James
Executive Vice President and
Chief Financial Officer
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1999
OR
[ ] 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
(Name of small business issuer 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) (Zip Code)
Issuer's telephone number: (503) 226-7623
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB, or any amendment to this Form 10-KSB. [ ]
Revenues for the year ended December 31, 1999: $10,463,331.
State the aggregate market value of the voting stock held by
non-affiliates: Not Applicable, the Registrant's stock has no established
trading market.
The number of shares outstanding of the Registrant's Common Stock as of
March 17, 2000 was 4,994,714 shares.
Transitional Small Business Disclosure Format (check one): Yes X No
--- ---
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PORTLAND BREWING COMPANY
1999 FORM 10-KSB
TABLE OF CONTENTS
Part I
Page
Item 6. Description of Business 2
Item 7. Description of Property 10
Item 8. Directors, Executive Officers and Significant Employees 11
Item 9. Remuneration of Directors and Officers 13
Item 10. Security Ownership of Management and Certain
Security Holders 14
Item 11. Interest of Management and Others in Certain
Transactions 17
Part II
Item 1. Market Price of and Dividends on the Registrant's
Common Equity and Other Shareholder Matters 21
Item 2. Legal Proceedings 21
Item 3. Changes in and Disagreements with Accountants 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Compliance with Section 16(a) of the Exchange Act 21
Item 6. Reports on Form 8-K 22
Part F/S
Index to Consolidated Financial Statements 22
Part III
Item 1. Index to Exhibits 23
Item 2. Description of Exhibits 23
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Part I
Item 6. Description of Business
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General
The Company was incorporated in Oregon on November 14, 1983. The Company was
formed to brew and sell specialty beer (i.e., beer which is made in relatively
small batches and which generally sells at retail prices of over $5.00 per
six-pack). The Company's product line includes the following core brands:
MacTarnahan's Scottish Style Amber Ale, Original Honey Beer, Haystack Black
Porter, ZigZag River Lager and Woodstock IPA. In addition, there is a seasonal
line of beers including BobbyDazzler Old London Style Holiday Ale, Thunderhead
Cream Stout, Portland Pale Ale (also known as Kornhauser's Oast Ale) and Uncle
Otto's Oktoberfest Maerzen. Specialty products are made periodically to be
served at the Company's restaurant, The Tap Room, such as Bavarian Style Weizen,
Benchmark MM Old Ale and certain Saxer and Nor'wester products. The Company uses
distributors to sell principally to the packaged/bottle market through
authorized retail outlets and the on-premise draft market through establishments
licensed to serve alcoholic beverages. The Company sells beer primarily in its
home market of Oregon as well as in Washington, California and other western
states. In addition, in 1996, the Company began selling beer in states east of
the Rocky Mountains.
The Company opened its first brewery in January 1986 at 1339 NW Flanders Street
in Portland, Oregon. In March 1986 a pub was added which allowed customers to
view various stages of the brewing process, and in July 1996 the Company
completed an expansion which significantly increased the restaurant area of the
pub. In November 1998, the Company sold this facility. The Company opened its
second brewery in June 1993 located at 2730 NW 31st Avenue in Portland, which
initially more than doubled its annual production capacity to approximately
26,000 barrels. Subsequent equipment additions and expansion have increased
capacity to approximately 135,000 barrels per year. In July 1994, a restaurant,
The Tap Room, was constructed at the main brewery and opened to the public.
Acquisition
In October 1999, the Company acquired all of the outstanding common stock of
Harco Products, Inc., ("Harco"), from a related party. Harco produces hand
trucks for various industrial uses. The purchase price of $569,585, was paid by
the issuance of 759,447 shares of the Company's common stock valued at $0.75 per
share. In connection with the acquisition, the Company received and cancelled
30,000 shares of its Common Stock that were owned by Harco. See Item 11 -
Interest of Management and Others in Certain Transactions - Acquisition of Harco
Products, Inc. and Note 3 of Notes to Consolidated Financial Statements.
Saxer Brewing Company Asset Purchase
On January 31, 2000, the Company purchased certain assets (equipment and brands)
from Saxer Brewing Company for 900,000 shares of the Company's common stock,
$150,000 cash and a three year agreement to pay certain amounts based on barrel
sales of the Saxer and Nor'wester brands, such amount secured by the Saxer and
Nor'wester brands. In connection with the purchase, Steven C. Goebel, a majority
shareholder of Saxer Brewing Company, was appointed to the board of directors of
the Company. See Item 11 - Interest of Management and Others in Certain
Transactions - Saxer Brewing Company Asset Purchase and Note 14 of Notes to
Consolidated Financial Statements.
Industry Overview
National Beer Industry. Total beer consumption in the United States has grown
just 4.9% since 1986. (The Maxwell Report, February 2000) In the early 1980's,
when sales of imported beers were growing, a few entrepreneurs founded
micro-breweries to compete with imported beer. What came to be known as the
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domestic specialty (craft) beer market, went on to experience fifteen years of
extremely rapid growth. In addition to new small breweries, large domestic
brewers produced craft-style beers and contract brewers used excess regional
brewery capacity to add brands. Stores and pubs found it difficult to find room
for all the brands that were available, and the consumer was faced with
bewildering variety. The market saturation which began in 1996, resulted in
excess capacity throughout the industry.
The large national breweries (Anheuser-Busch, Miller Brewing Company and Adolph
Coors Brewing Company) continued to dominate the market in 1999 with
approximately an aggregate 82% share, according to Maxwell Report, February
2000. In 1999, Pabst Brewing Company purchased The Stroh Brewing Company,
closing most of its breweries and selling off some of its brands to Miller
Brewing Company, which eliminated some of the excess capacity in the industry.
Additionally, Pabst closed all but one of its own breweries and now contracts
most of its production to Miller Brewing Company. Consolidation in the industry
is expected to continue on every level for at least another year.
In 1999, sales of imported beer continued to increase, with most of the growth
in Corona, Heineken, Molson, Labatts, and Guinness, while the growth of domestic
beer consumption slowed. The domestic specialty and the imported beer markets
currently account for approximately 3% and 9%, respectively of the total U.S.
beer market, according to Beer Marketers Insight, January 2000 and February
2000.
Specialty Beer Industry--Pacific Northwest. Sales of specialty beers in Oregon
increased by approximately 7% in 1999, compared to 2% in 1998 and 1% 1997; and
accounted for approximately an 11% and 10% market share in 1999 and 1998,
respectively, according to Oregon Liquor Control Commission's beer sales data
for the respective periods. Oregon and Washington are considered to be mature
markets in the U.S. specialty beer segment. Consequently, the Company believes
that future growth will be more difficult in these two states.
Products
The Company offers a wide variety of specialty beers. The complete product line
includes core brands, which are available year-round, a rotating selection of
seasonal brands, and specialty products. Draft product (kegs) accounted for
approximately 35% and 39% of the Company's beer shipments in 1999 and 1998,
respectively.
Portland Brewing Company's core brands include:
MacTarnahan's Scottish Style Amber Ale. MacTarnahan's Scottish Style Amber
Ale is a complex, copper-colored Scottish style ale of great character made with
pale and caramel malts and Cascade hops, and is available in draft, 12 oz. and
22 oz. bottles and a 12 ounce (355 ml.) can.
Original Honey Beer. Original (Oregon) Honey Beer is a pale light-bodied
ale made with two-row barley malt, Oregon clover honey, and Nugget and
Willamette hops, and is available in draft, 12 oz. and 22 oz. packages.
Haystack Black Porter. Haystack Black Porter contains a balance of domestic
pale, caramel and black malts, enhanced with imported English chocolate malt,
and is available in draft and 12 oz. packages.
ZigZag River Lager. ZigZag River Lager is a full bodied, European style
bottom fermented lager with a slight malty sweetness and subtle hop presence,
available in draft and 12 oz. packages.
Woodstock IPA. The Company's India Pale Ale is aged with natural untoasted
American oak from the Ozarks that has been air dried for two years and is one of
the few India Pale Ales to marry the hop and oak flavors, available in draft and
12 oz. packages.
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The Company's seasonal brands (all available in draft and 12 oz. packages)
include:
Thunderhead Cream Stout. The Company's heartiest brew blends the flavor of
pale, crystal, dark malts and roasted barley, balanced with the subtle aroma of
Styrian Golding hops, and is offered from February through April.
Portland Pale Ale (also known as Kornhauser's Oast Ale). A modified recipe
of the founders' original is a clean light-bodied malt ale with ample hop aroma
and a crisp refreshing finish. The ale is brewed with two-row barley malt and a
blend of Northwest hops, including an aromatic hop oil extract added after
filtration, and is offered from April through August.
Uncle Otto's Oktoberfest Maerzen. This beer, lagered for a full two months,
is created using a blend of pale and select specialty malts, spiced with
Northern Brewer and Bohemian Saaz hops, and is offered in September and October.
BobbyDazzler Old London Style Holiday Ale. This holiday ale, is made with
five malts yielding very rich character and burgundy color and a dry hop process
which adds great aroma. This ale is offered from November through January.
Saxer Brewing Company brands include:
Saxer Bock. This beer is a golden, Helles Bock brewed in the true Bavarian
lager tradition. It is brewed with 40% more malt than normal lager giving it a
truly unique malty sweetness and a rich aroma.
Saxer Dunkel Bock. This beer is also brewed in the true Bavarian style but
with darker malts delivering a very rich, roasted malt sweetness.
Saxer Pilsner. This beer is a golden lager replicating the tradition that
started in Pilsen, Czech Republic (then Bohemia, Germany). It is very dry to the
palate yet it is very aromatic because of its unique hopping.
Saxer Lemon Lager. This is a lager beer with sucrose and flavorings added
to make a unique refreshing citrus taste.
Nor'wester brands include:
Nor'wester Hefe-weizen. This is an American style hefe-weizen brewed with
wheat malt and left unfiltered to preserve all the flavor and aroma.
Raspberry Hefe-weizen. This is a wheat ale flavored with raspberry and
other natural flavors left unfiltered to preserve all the natural flavors and
aromas.
Nor'wester Oregon Pale Ale. This is a blonde ale with a crisp hop profile
and full-bodied malt character.
Smith Rock Bock. This beer has a malty-sweet character and toffee-like
flavors brewed as a traditional pale bock.
Mr. Angel Oktoberfest. This is a classic Munich-style lager originally
brewed to celebrate the wedding of the Prince of Bavaria.
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Restaurant
The Company operates a restaurant, The Tap Room, which is located at the
Company's brewery. The Tap Room is a tasting room and restaurant that is upscale
in comparison to other brewpubs in the region. The Tap Room has a European
atmosphere, a wood-burning fireplace, outdoor patio and a terrace with an arbor.
Marketing and Sales
The Company uses both licensed beer and wine distributors/wholesalers to sell to
and service on- and off-premise accounts for specific geographic territories.
These distributors maintain broad distribution in the Company's core markets
i.e., Oregon, Washington and California. Columbia Distributing Company services
almost all of the major markets in Oregon and Washington. In California, Wine
Warehouse represents the Company on a state wide basis handling most of the
Company's sales to that state. The Company expects that Columbia Distributing
and Wine Warehouse will continue to be large volume distributors of its products
in 2000. Approximately 73 distributors represent the Company in its Western
Markets and the Company employs 11 salespeople to service its core markets: six
in Oregon, three in Washington, and two in California. Additionally, one brand
manager, two salespeople and two drivers are employed to support the Saxer and
Nor'wester brands. Because of the excess capacity in the industry, and the
mature markets of the Pacific Northwest, the Company has been expanding sales
into other markets for the last three years and is now represented in 44 states.
Shipments for all markets east of the Rocky Mountains accounted for 9% and 8% of
total shipments in 1999 and 1998, respectively. With consolidation of
independent distributors accelerating, the Company may be required to further
adjust its distribution arrangements in the future.
The Company's 1999 marketing plan focused on key western U.S. markets including
Oregon, Washington and California. Secondary markets include virtually all of
the western United States including Hawaii and Alaska and many states east of
the Rocky Mountains.
The Company has shifted its focus to individual brands and especially its
flagship, MacTarnahan's Scottish Style Amber Ale, from the family of brands
approach it had been following. Going forward, the Company plans to continue to
direct a significant portion of its marketing budget toward promoting
MacTarnahan's Scottish Style Amber Ale while secondary brands will receive less
support. The Company continues to enhance consumer awareness through increased
promotional and advertising activity in selected sports, music and community
activities which offer opportunities for introduction to the Company and
sampling of its brands. These include opportunities associated with the Seattle
Seahawks, the Portland Trailblazers and the Highland Games in Oregon and
California. Because of the intense competition for draft accounts in larger
cities, the Company's marketing efforts have been concentrated on increasing
packaged authorizations in chain retailers. In Oregon, the Company focuses
equally on draft and package sales.
Trademarks
The Company has a program to obtain United States trademark registrations for
its key bottled brands. The Company owns federal trademark registrations for the
names Portland Brewing, MacTarnahan's, Haystack Black, ZigZag River Lager, and
Woodstock IPA; the Oregon Honey Beer label design and MacTarnahan's label
design; and the mark Portland Brewing. The Company has pending applications for
federal registration of the brand names Thunderhead Cream Stout, BobbyDazzler
Ale, "Mac's" and the running Mac design icon. To the best of the Company's
knowledge, it has the right to use these marks on a nationwide basis in
connection with malt beverages.
The Company has long maintained a practice of registering its brand names as
trademarks in the State of Oregon. It owns Oregon registrations for numerous
marks, including the brand names Haystack Black, Uncle Otto's Oktoberfest,
Portland Porter, Portland Brewing, Portland Ale and Malarkey's Wild Irish Ale.
In addition, the Company owns state registrations in California, Washington and
Colorado for key brand names. To the best of the Company's knowledge, it has the
right to use the brand name of each of its current products in areas where those
products are currently distributed.
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In January 2000, the Company acquired from Saxer Brewing Company federally
registered trademarks for the names Nor'wester, Saxer, Three Finger Jack, Peach
Creme, Blacksmith, and Saxer's Lemon Lager; and the design marks for Lemon Lager
and Nor'wester. To the best of the Company's knowledge, it has the right to use
these marks on a nationwide basis in connection with malt beverages.
Competition
The specialty brewing industry has experienced significant change in the past
several years. Growth rates have slowed, distribution opportunities have become
limited, and more brewers have entered the industry. The Company believes that
category saturation continues to make growth more difficult for existing
regional specialty brewers, and that competition affecting its growth will
continue to come from imported beers, national breweries, national specialty
breweries, larger regional specialty breweries with aggressive mass marketing
capabilities, and small micro breweries and brew pubs which have strong local
appeal. The proliferation of specialty brewers, new beers, and brew pubs,
efforts by regional craft brewers to expand their production capacities and
distribution, and underutilized domestic brewing capacity are all competitive
factors for specialty brewers. Additionally, larger national brewers have
developed or are developing brands to compete directly with specialty beers.
These national competitors have advantages such as lower production costs,
larger marketing budgets, greater financial and other resources and more
developed and extensive distribution networks than the Company.
Sales of domestic specialty beer to chain stores increased only an estimated
1.3% in 1999, compared to 0.6% in 1998 and 8% percent in 1997. (Beer Marketer's
Insights - February 2000) In the northwestern U.S. markets, the top 10 domestic
specialty brewers experienced mixed performance in 1999 as four of them reported
sales decreases in California and Oregon, and six of them reported sales
decreases in Washington. (Oregon Liquor Control Commission and Washington State
Liquor Control Board, November 1999 data)
As distributors and retailers become more selective in accepting new brands, the
rate of domestic specialty brewery openings continues to decline. In 1999 in the
U.S., 39 domestic specialty breweries opened and 47 closed. However, in that
same time period, 125 BrewPubs opened and 66 closed, indicating significant
growth in these venues. (Institute of Brewing Studies, February 2000). The
Company believes that price discounting, solidifying distribution, maintaining
shelf space and increasing sales and marketing efforts will continue to be key
to near and long term survival.
Growing demand for imported beer has also negatively impacted sales of domestic
specialty beer. Import sales increased 21% in Oregon and 9% in Washington in
1999, compared to 1998. Nationally, import beers outsell domestic specialty
beers approximately three to one. However, in the northwestern U.S., domestic
specialty beers outsell imports approximately four to three. (Oregon Liquor
Control Commission and Washington State Liquor Control Board November 1999 data)
Governmental Regulation
The production and sale of alcoholic beverages is subject to extensive
regulation by the Federal Bureau of Alcohol, Tobacco and Firearms and individual
states' alcoholic beverage regulatory agencies.
License Description. The Company operates under a Brewery Public House license
which allow sales off-premise as well as through up to two retail outlets. The
Company operates one restaurant at its brewery. The Company is currently in the
process of changing its license to a Brewery license, which will allow
production, sales and distribution. Breweries under 200,000 barrels of annual
production are also allowed to have one retail outlet on brewery premises, i.e.
The Tap Room.
Taxes. The Company pays a federal excise tax (FET) of $7.00 per barrel on all
production. This tax increases to $18.00 per barrel on production above 60,000
barrels per year. In addition, the Company pays an Oregon excise tax of $2.60
per barrel and a Washington excise tax of $4.78 per barrel on beer sold in those
states. In other
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states, similar excise taxes are levied on the distributor. Increases in either
the federal or state excise taxes would inevitably raise the price of beer,
which may adversely affect sales.
Dram Shop Liability. The Oregon Supreme Court has held that the serving of
alcoholic beverages to a person known to be intoxicated may, under certain
circumstances, result in the server being held liable to third parties for
injuries caused by the intoxicated customer. The Company serves beer and wine to
its customers at its restaurant. If an intoxicated customer is served wine or
beer and subsequently commits a tort such as causing an automobile accident, the
Company may be held liable for damages to the injured person or persons. The
Company has obtained host liquor liability insurance coverage and will continue
such coverage if available at a reasonable cost. However, future increases in
insurance premiums may make it prohibitive for the Company to maintain adequate
insurance coverage. A large damage award against the Company, not adequately
covered by insurance, would adversely affect the Company's financial position.
Research and Development
The Company had minimal research and development expenditures in 1999 and 1998,
and had no customer sponsored research and development activities during such
periods. However, the Company has from time to time, developed new products.
Such products are sold to retail customers and, accordingly, associated
development costs are expensed as cost of goods sold.
Employees
As of December 31, 1999, the Company had 99 employees (84 full time), including
33 in brewing, bottling and shipping operations, 36 in retail operations, six in
administration, 19 in sales and marketing and five in the Company's hand truck
business. None of the Company's employees are covered by collective bargaining
agreements. The Company provides its full-time employees with health, dental and
life insurance, short and long term disability, and a 401(k) plan. No
contributions were made by the Company to the 401(k) plan in 1999 or 1998. The
Company believes its employee relations are good.
Concentrations of Risk
Distributor Concentration. In 1999, wholesale distributors accounted for 84% of
the Company's shipments, of which 54% were to Oregon distributors. The Company's
largest distributor, Columbia Distributing Company, which distributes the
Company's products in Oregon and Washington accounted for approximately 40% of
the Company's net sales in 1999. The next largest distributor accounted for
approximately 16% of the Company's net sales for the same period. Distribution
agreements generally grant exclusive territories to distributors. Distribution
agreements and applicable state laws limit the ability of the Company to
terminate such agreements. The Company's distributors also market and distribute
competing brands. While the Company believes it has good relationships with most
of its distributors, the Company can give no assurance that each of its
distributors will continue to effectively market and distribute the Company's
beer. Because state liquor laws and/or standard contractual provisions limit the
Company's ability to terminate a distribution agreement, the Company can give no
assurance that a distributor for any given geographic area could be replaced
without cost or replaced immediately, either temporarily or permanently, in the
event the distributor was performing poorly in its efforts to distribute the
Company's products or was otherwise unable to perform (e.g. as a result of an
employee strike or damage caused by fire or natural disaster). The Company's
inability to replace a non-performing or poorly performing distributor in a
timely fashion and/or with minimal cost could have a significant adverse effect
on the Company's results of operations, particularly if the distributor were
Columbia Distributing Company, the Company's largest distributor.
Increased Competition and Saturation in the Specialty Beer Industry. (See
"Overview" and "Competition" above.) Increased competition and the proliferation
of brands in the specialty beer industry 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 specialty beer industry will
experience growth, that it will not experience a
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downturn or that any downturn will not be severe. The Company's future success
will depend upon its ability to continue to build brand awareness and increase
sales and profits.
Operating Hazards. The Company's operations, and the brewing industry in
general, are subject to certain hazards such as contamination of brews by
micro-organisms and risk of equipment failure. The Company's products are not
heat pasteurized, irradiated or chemically treated. The Company has product
liability insurance that it believes is adequate to cover risks of contamination
to third-parties. There can be no assurance that such insurance will continue to
be available at a price or on other terms satisfactory to the Company. The
Company carries business interruption insurance to cover against insured losses
to equipment from direct physical damage.
Environmental Matters
The Company has addressed the waste water treatment issues raised in a March
1998 letter from the City of Portland, Oregon. In 1999, the Company implemented
a solution to ensure continued compliance with appropriate standards which cost
approximately $65,000. The Company is not aware of any other environmental
matters.
Sources of Liquidity
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.
In 1998, the Company recorded an extraordinary gain of $1,200,279 related to a
debt restructuring. In connection with the debt restructuring, the MacTarnahan
Limited Partnership (a related party) purchased certain secured Company debt of
the Company, which in turn resulted in a net loan payable from the Company to
the MacTarnahan Limited Partnership of $2.1 million. (See Item 11 - Interest of
Management and Others in Certain Transactions - Purchase and Restructuring of
Secured Debt.) The $2.1 million term loan ("Term Loan") is secured by
receivables, inventory, equipment and general intangibles of the Company. The
Term Loan bears interest at a per annum rate equal to the prime lending rate of
the Bank of the Northwest plus 1% (9.5% at December 31, 1999). The Term Loan was
originally due on January 31, 2000. On January 31, 2000, the available borrowing
capacity of the Term Loan was increased to $2,500,000 and the maturity date was
extended to April 1, 2001. In March 2000, the Company borrowed an additional
$400,000 under the Term Loan and paid $400,000 of the amounts outstanding under
its revolving line of credit (see below). The Company expects to place the debt
permanently with a financial institution by April 1, 2001 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. (See Item 11 - Interest of Management and Others in
Certain Transactions - Purchase and Restructuring of Secured Debt.)
In 1998, the Company was relieved of $272,915 of trade accounts payable and
issued notes in the aggregate principal amount of $148,065 to trade creditors,
to be paid over a five-year period. The notes mature on September 1, 2003 and
bear interest at 6% per annum. At December 31, 1999, $112,805 remained
outstanding under these notes.
The Company has a $750,000 revolving line of credit ("Revolving Line") with
Washington Mutual Bank (d.b.a. Western Bank), under which $435,465 was
outstanding at December 31, 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% (9.5% at December 31, 1999). In February 2000, the Revolving Line
was increased to $1,000,000, and the expiration date was extended to June 1,
2001. In March 2000, the Company paid $400,000 of the amounts outstanding under
the Revolving Line.
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On March 1, 1999, Harmer Mill & Logging Supply Co. (dba Harmer 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. (See Item 11 - Interest of Management and
Others in Certain Transactions -Series A Preferred Stock.)
In December 1997, the Company borrowed a total of $400,000 from two of its
shareholders under 10% Amortizing Subordinated Notes (the "Notes"). On August
25, 1998, the two shareholders agreed to cancel the Notes in exchange for
645,162 shares of the Company's Common Stock, resulting in the issuance of a
total of 1,290,324 shares. (See Item 11 - Interest of Management and Others in
Certain Transactions - 10% Amortizing Subordinated Notes.)
Liquidity Risks
Competition. 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. (See "Overview" and "Competition" above.)
Operating Losses. The Company experienced significant operating losses during
the years ended December 31, 1999, 1998 and 1997, and has continued to incur
losses in the first quarter of 2000. Operating results have and may continue to
fluctuate as a result of many factors including lower sales volumes and selling
prices, increased depreciation and other 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.
Purchase of Assets from Saxer Brewing Company. In January 2000 the Company
purchased inventory, equipment and the Saxer and Nor'wester brands from Saxer
Brewing Company. In March 2000 the Company began production of these brands at
its Portland brewery. The Company believes that the additional volume will
strengthen its financial performance over time. However, the production and
distribution of the Saxer and Nor'wester brands requires additional working
capital. The Company has also agreed to pay certain amounts based on barrel
sales of the Saxer and Nor'wester brands. Subsequent to December 31, 1999, the
Company increased its Term Loan from $2.1 million to $2.5 million and its
Revolving Line from $750,000 to $1,000,000 to accommodate its anticipated
additional working capital needs. There are no assurances that the production
and distribution of the Saxer and Nor'wester brands will provide sufficient cash
flow from operations to accommodate the increased working capital needs and
repayment of the increased debt.
Ability to Refinance or Retire Outstanding Debt. The Company has a Term Loan
payable to the MacTarnahan Limited Partnership (a related party) of $2.1
million. The Term Loan was originally due on January 31, 2000. On January 31,
2000, the available borrowing capacity of the Term Loan was increased to
$2,500,000 and the maturity date was extended to April 1, 2001. In March 2000,
the Company borrowed an additional $400,000 under the Term Loan and paid
$400,000 of the amounts outstanding under its Revolving Line. The Company
expects to place the debt permanently with a financial institution by April 1,
2001 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. (See Item 11 - Interest of
Management and Others in Certain Transactions - Purchase and Restructuring of
Secured Debt.)
The Company's working capital requirements over the next year are expected to be
met from cash flow through operations, funds available under the 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.
9
<PAGE>
Year 2000 Issue
Costs directly related to Year 2000 remediation efforts were immaterial in 1999
and the Company does not expect to incur additional expense in addressing Year
2000 issues. As of the date of this filing, the Company has not experienced any
Year 2000 issues with respect to its computer equipment and software or any
disruptions with its significant vendors or customers, or problems in processing
orders and billings. Additionally, the Company has not experienced difficulties
relating to Year 2000 issues resulting in disruption of service from its
infrastructure suppliers or its telecommunications and transportation supply
channels.
Item 7. Description of Property
- ------- -----------------------
The Company's brewery, located at 2730 NW 31st Avenue in Portland, showcases the
copper brewing vessels and equipment acquired in 1991 from the Sixenbrau brewery
in Nordlingen, Germany. The brewery opened in 1993 and has a present annual
production capacity of approximately 135,000 barrels of ale. The brewery has
27,000 square feet of manufacturing, shipping and warehouse space with a 1,000
square foot, three-story brewhouse (to display the copper brewing vessels), and
3,000 square feet of offices. Also included is a 3,000 square foot restaurant,
The Tap Room, complete with an outdoor seating area. The brewery lease is for a
15 year term which commenced June 15, 1993. The monthly rent is $24,906 plus
property taxes, insurance and maintenance, with an adjustment for inflation or
changes in fair market rental value on July 1, 1998 and July 1, 2003. The
increased rental adjustment was determined subsequent to July 1, 1998, resulting
in a $19,922 charge which was paid by the Company in twelve monthly installments
beginning February 1, 1999. (See Notes 7 and 9 of Notes to Consolidated
Financial Statements and Item 11- Interest of Management and Others in Certain
Transactions - Lease Agreement with Portland Brewing Building, L.L.C.)
In May 1999, the Company entered into a lease with a related party for
approximately 23,000 square feet of space in a building adjoining its brewery
located at 2750 NW 31st Avenue in Portland, Oregon ("Adjacent Building"). The
initial term of the lease is five years, with an option to extend the term until
June 14, 2008, with base rent of $12,000 per month, plus a share of taxes and
operating expenses. The Company subleases approximately 13,000 square feet of
the Adjacent Building to Power Transmission Products, Inc. for approximately
$5,000 per month. The sublease expires in April 2000, with a one-year renewal
option. In March 2000, the Company reduced the amount of subleased space by
taking back for its own use approximately 4,700 square feet, which will reduce
the sublease amount to approximately $3,200 per month. In 1999, L & L reimbursed
the Company $218,000 for its costs in constructing the shipping dock at this
property in 1996. (See Note 9 of Notes to Consolidated Financial Statements and
Item 11- Interest of Management and Others in Certain Transactions - Lease
Agreement with L & L Land Company.)
In October 1999, in connection with the purchase of Harco, the Company entered
into a lease with a related party for approximately 5,600 square feet of space
in which Harco operates. Rent under the lease is $2,500 per month and the term
of the lease is five years, and can be terminated upon 60 days notice by the
Company. (See Note 9 of Notes to Consolidated Financial Statements and Item 11-
Interest of Management and Others in Certain Transactions - Acquisition of Harco
Products, Inc. and Note 3 of Notes to Consolidated Financial Statements)
10
<PAGE>
Item 8. Directors, Executive Officers and Significant Employees
- ------- -------------------------------------------------------
Directors. The following lists the persons currently serving as directors along
with certain information. The term of office for each person elected as a
director continues until the next Annual Meeting of Shareholders and until a
successor has been elected and qualified.
Name of Director Age
Charles A. (Tony) Adams 53
Frederick L. Bowman 55
Steven C. Goebel 45
Robert M. MacTarnahan 85
R. Scott MacTarnahan 53
Howard M. Wall, Jr. 54
Charles A. (Tony) Adams. Mr. Adams has been Chairman of the Board of Directors
and President and Chief Executive Officer of the Company since February 1992. He
has been a Director of the Company since October 1988. Mr. Adams is president of
Electra Partners, Inc., a private investment holding company. Mr. Adams was
active in the real estate business beginning in 1973, including owning and
operating his own real estate company until 1983, when he became a sales
associate at CB Commercial Real Estate Group, Inc., where he was employed until
1992. He holds a B.A. in Geology from the University of Virginia and has studied
graduate level economics and business administration at the University of San
Francisco, Portland State University and Stanford University. Mr. Adams is a
director of Portco Corporation, a company which Howard M. Wall, Jr., a board
member of the Company, is president and chief executive officer.
Frederick L. Bowman. Mr. Bowman is a founder of the Company and has been Vice
President since February 1992. In July 1997 Mr. Bowman was also elected
Treasurer and Secretary, and in September 1998, Mr. Bowman was appointed to the
Board of Directors. Mr. Bowman serves as corporate liaison to the beer industry
and assists in marketing efforts including public relations and the Company's
distributor support program. He designed the Company's original products and
brewery. Previous to founding Portland Brewing Company, Mr. Bowman was involved
in the wholesale automotive industry as both a technician and a district service
manager. Mr. Bowman has attended Portland State University, University of Oregon
and Oregon State University. In addition, Mr. Bowman attended the Brewing
Microbiology and Microscopy course at the Siebel Institute in 1988.
Steven C. Goebel. In connection with the Company's purchase of certain assets
from Saxer Brewing Company in February 2000, Mr. Goebel was appointed a Director
of the Company. Mr. Goebel has been a director and president of Saxer Brewing
Company since 1995. Prior to that, Mr. Goebel was employed by The Mead
Corporation for twelve years in various marketing, sales and manufacturing
positions. Mr. Goebel is a graduate of the University of Cincinnati and has also
completed The Program for Management Development at Harvard School of Business.
Robert M. MacTarnahan. Mr. MacTarnahan has been a Director since July 1985. Mr.
MacTarnahan has been a partner in Harmer Company and Black Lake Investments for
more than five years. Until October 31, 1999, Mr. MacTarnahan was the president
of Honeyman Aluminum Products Company, a manufacturer of hand trucks for the
beverage industry, for more than 10 years. He is also active in the promotion of
the Company and the Company's MacTarnahan's Ale is named after him. See "Certain
Relationships And Related Transactions." Mr. R. Scott MacTarnahan is his son.
R. Scott MacTarnahan. Mr. MacTarnahan has been a Director since July 1985. Until
October 31, 1999, he was the vice president and general manager of Honeyman
Aluminum Products Company and has been the vice president and general manager of
Harmer Company for more than 10 years. Mr. MacTarnahan received a B.S. in
Business Administration from Portland State University in 1968. Mr. Robert M.
MacTarnahan is his father.
11
<PAGE>
Howard M. Wall, Jr. Mr. Wall has been a Director of the Company since October
1992. Since 1984 he has been the president and chief executive officer of Portco
Corporation, a Vancouver, Washington manufacturer of paper and plastic flexible
packaging for the produce, fish, and roofing industries. He has had a long
association with the Northwest hop industry as Portco developed the world's only
biodegradable paper hop string. Mr. Wall received a B.A. in English from the
University of Oregon in 1973.
Executive Officers. The following lists the names, ages and positions of the
Company's current executive officers, along with certain other information. The
Company's officers are elected by the Board of Directors at its annual meeting,
and hold office until the next annual meeting of the Board of Directors and
until their successors are elected and qualified.
Name Age Position(s) with Company
---- --- ------------------------
Charles A. (Tony) Adams 53 Chairman of the Board, President and Chief
Executive Officer
Glenmore James 45 Executive Vice President, Chief Financial
Officer and Chief Operating Officer
Frederick L. Bowman 55 Vice President, Treasurer and Secretary
Mark Carver 46 Vice President, Sales
Michael Skelley 38 Vice President, Sales
For information on the business background of Mr. Adams and Mr. Bowman, see
"Directors" above.
Glenmore James. Mr. James has been Executive Vice President and Chief Financial
Officer since June 1994, served as Executive Vice President and Treasurer from
June 1994 until July 1997, and served as Secretary from September 1996 until
July 1997. In July 1997 Mr. James was elected Chief Operating Officer. He joined
the Company full-time in April 1994. Prior to that, Mr. James acted as a
consultant to the Company. Mr. James is responsible for the financial and
operations departments of the Company. Mr. James has worked for over twenty
years in the Portland area business community, initially in financial accounting
management positions in various manufacturing and distribution companies and
more recently as an independent business consultant. Mr. James received his ICSA
certification in 1976 from Anglia University, England.
Mark Carver. Mr. Carver has been Vice President, Sales since September 1999, and
served as National Off-Premise Sales Manager and National Account Manager from
1995 until September 1999. Mr. Carver joined the Company in 1991. Prior to that,
Mr. Carver worked at the wholesale distributor level for 13 years with Pepsi
Cola and Columbia Distributing in the Portland, Oregon market. Mr. Carver
received his Bachelor of Science Degree in 1975 from the University of Oregon.
Michael Skelley. Mr. Skelley has been Vice President, Sales since September
1999, has served as Director of Sales & Marketing - Central and Eastern markets
from January 1998 until September 1999, and has served as General Sales Manager
- - Midwest and East from June 1996 until January 1998. Mr. Skelley has worked in
the beverage industry for 12 years and has 17 years of consumer product sales
and marketing experience. Mr. Skelley received his Bachelor of Arts Degree in
Business Administration/Marketing in 1984 from Coe College, Cedar Rapids, Iowa.
12
<PAGE>
Item 9. Remuneration of Directors and Officers
- ------- --------------------------------------
a. Director and Officer Remuneration
Directors receive no cash compensation for serving on the Board of Directors.
Each Director, with the exception of Mr. Adams, has been granted options under
the Company's Non-Qualified Stock Option Plan ("NQSOP"). As of December 31,
1999, options to purchase 13,500 shares of the Company's Common Stock at $5.3333
per share are outstanding under the NQSOP. No options were granted under the
NQSOP in 1999.
The following table sets forth information regarding all cash compensation
earned by each of the three most highly compensated officers and all officers as
a group for the year ended December 31, 1999.
Capacities in Which Aggregate
Name Remuneration Was Received Remuneration
---- ------------------------- ------------
Mark Carver Vice President, Sales $ 77,696
Glenmore James Executive Vice President, Chief Financial
Officer and Chief Operating Officer 106,749
Michael Skelley Vice President, Sales 104,012
All officers as
a group (5 persons) $ 413,575
b. Remuneration Plans
Incentive Stock Option Plan. In October 1992, the shareholders of the Company
approved the Company's Incentive Stock Option Plan ("ISOP"). The ISOP is
administered by the Company's Board of Directors and provides for grants to
officers and employees of options to acquire shares of the Company's Common
Stock, subject to the limitations set forth in the ISOP. The ISOP was amended in
December 1998 to increase the number of shares available for issuance thereunder
from 163,500 to 400,000. Pursuant to the ISOP, the granting of options is at the
discretion of the Board of Directors, and it has the authority to set the terms
and conditions of the options granted, including the option exercise price which
must be a price equal to at least 100% of the fair market value of the subject
shares of Common Stock at the time the option is granted. As of December 31,
1999, options covering 361,550 shares of the Company's Common Stock were
outstanding under the ISOP.
Incentive Stock Option Repricing. The Company maintains its ISOP to provide
incentives to the Company's key employees to exert their best efforts on behalf
of the Company. In 1999, the Company noted that there was a significant
difference between the exercise prices of stock options held by its employees
and the market value of the underlying stock which results in options providing
little incentive. The Board of Directors determined that establishing new,
shorter term options, based on pricing which more closely reflects the
underlying stock price, was crucial to obtaining and retaining its personnel.
Accordingly, in May 1999, options to purchase 118,800 shares of Common Stock at
prices ranging from $3.33 to $7.00 per share were repriced and regranted on
different terms, of which options to purchase 72,000 shares were held by
executive officers of the Company. Repriced options to purchase 82,800 shares
were issued at an exercise price of $0.54 per share and repriced options granted
to Mr. Adams to purchase 36,000 shares were issued at an exercise price of
$0.594 per share. All of the repriced options become exercisable on May 20,
2000.
Restated Cash Incentive Plan. The Company may award its officers and employees,
under its Restated Cash Incentive Plan ("the Plan"), bonuses in an amount up to
10 percent (10%) of net operating profits before taxes. Awards under the Plan
will be allocated among the officers and employees in accordance with the
provisions of the Plan at the discretion of the Board of Directors. No amounts
were awarded in 1999 or 1998 under the Plan.
13
<PAGE>
Non-Qualified Stock Option Plan. In August 1994, the Board of Directors adopted
the 1994 Non-Qualified Stock Option Plan ("NQSOP"). The NQSOP is administered by
the Board of Directors and provides for grants to officers, employees, directors
and consultants of options to acquire up to 45,000 shares of the Company's
Common Stock at an exercise price of at least 85% of the fair market value of
the subject shares of Common Stock at the time the option is granted. The
granting of options is at the discretion of the Board of Directors. As of
December 31, 1999, options covering 13,500 shares of the Company's Common Stock
were outstanding under the NQSOP.
Item 10. Security Ownership of Management and Certain Security Holders
- -------- -------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of voting equity securities of the Company as of March 1, 2000 as to
(i) each person who is known by the Company to own beneficially 10% or more of
the outstanding shares of such class of voting equity securities of the Company,
(ii) each of the three most highly compensated officers and (iii) all Directors
and officers as a group. Except as otherwise noted, the Company believes the
persons listed below have sole investment and voting power with respect to the
voting equity securities owned by them.
<TABLE>
<CAPTION>
Series A
Common Stock Preferred Stock (13)
--------------------------- --------------------------
Shares Percent of Shares Percent of
Name of Beneficial Owner or Beneficially Shares Beneficially Shares
Number of Persons in Group Owned (1) Outstanding Owned (1) Outstanding
-------------------------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Shareholder Group (12) 2,376,697.5 46.4 % 5,770 100 %
Robert M. MacTarnahan (2) (3) (12) 2,376,697.5 46.4 5,770 100
R. Scott MacTarnahan (2) (4) (12) 2,376,697.5 46.4 5,770 100
Charles A. (Tony) Adams (2) (5) (12) 2,376,697.5 46.4 5,770 100
Saxer Brewing Company (7) 900,000 18.1
5875 SW Lake View Blvd.
Lake Oswego, OR 97035
Frederick L. Bowman (2) (6) 72,445 1.4 - -
Steven C. Goebel (2) (7) -- -- - -
Mark Carver (2) (8) 29,100 * - -
Michael Skelley (2) (9) 25,000 * - -
Glenmore James (2) (10) 79,500 1.6 - -
All Officers and Directors as a group,
(nine persons) (11) (12) 2,593,392.5 49.1 % 5,770 100 %
</TABLE>
* Represents beneficial ownership of less than 1% of the outstanding Common
Stock.
(1) Beneficial ownership includes voting power and investment power with
respect to shares and includes shares issuable upon the exercise of
outstanding stock options and warrants.
(2) The business address for these individuals is 2730 NW 31st Avenue,
Portland, Oregon 97210.
14
<PAGE>
(3) Includes 22,860 shares owned individually by Mr. Robert M.
MacTarnahan, 433,971 shares owned by the MacTarnahan Family Trust,
73,335 shares held by Black Lake Investments and 765,162 shares held
by Harmer Mill & Logging Supply Co. (dba Harmer Company), each of
which is controlled by Mr. and Mrs. Robert M. MacTarnahan and Mr. R.
Scott MacTarnahan, 43,848.75 shares which may be purchased for $3.3333
per share upon exercise of a warrant held by MacTarnahan Limited
Partnership, whose general partner is Harmer Mill & Logging Supply Co.
and whose limited partners are Mr. Robert M. MacTarnahan and Mrs. Ruth
MacTarnahan and 6,000 shares which may be purchased for $5.3333 per
share upon exercise of a non-qualified stock option held by Mr. Robert
M. MacTarnahan. See note 12.
(4) Includes 108,492 shares owned individually by Mr. R. Scott
MacTarnahan, 73,335 shares held by Black Lake Investments, 765,162
shares held by Harmer Mill & Logging Supply Co, each of which is
controlled by Mr. Robert M. MacTarnahan and Mr. R. Scott MacTarnahan,
600 shares held by Mr. R. Scott MacTarnahan's spouse, 43,848.75 shares
which may be purchased for $3.333 per share upon exercise of a warrant
held by MacTarnahan Limited Partnership, whose general partner is
Harmer Mill & Logging Supply Co. and whose limited partners are Mr.
Robert M. MacTarnahan and Mrs. Ruth MacTarnahan and 6,000 shares which
may be purchased for $5.333 per share upon exercise of a non-qualified
stock option held by Mr. R. Scott MacTarnahan. See note 12.
(5) Includes 180,300 shares held by Electra Partners, Inc., an entity
controlled by Mr. Adams, 666,192 shares held by Mr. Adams as Trustee
of the Charles A. Adams Family Trust, 525 shares held by Mr. Adams'
daughter and 525 shares held by Mr. Adams' son, 32,886.75 shares which
may be purchased for $3.3333 upon exercise of a warrant held by
Electra Partners, Inc. and 36,000 shares which may be purchased for
$0.594 per share upon exercise of incentive stock options held by Mr.
Adams. See note 12.
(6) Includes 44,445 shares owned individually by Mr. Bowman, and 28,000
shares which may be purchased for $0.54 per share upon exercise of
incentive stock options held by Mr. Bowman.
(7) The information as to beneficial ownership is based on a Schedule 13D
filed with the Securities and Exchange Commission by Saxer Brewing
Company on February 8, 2000, reflecting its beneficial ownership of
Common Stock as of January 31, 2000. The Schedule 13D states that
Saxer Brewing Company has sole voting power with respect to 900,000
shares of Common Stock. Mr. Goebel, who is a director and the
president of Saxer Brewing Company, disclaims beneficial ownership of
these shares.
(8) Includes 1,100 shares owned individually by Mr. Carver and 28,000
shares which may be purchased for $0.54 per share upon exercise of
incentive stock options held by Mr. Carver
(9) Includes 25,000 shares which may be purchased for $0.54 per share upon
exercise of incentive stock options held by Mr. Skelley.
(10) Includes 1,500 shares owned individually by Mr. James and 78,000
shares which may be purchased for $0.54 per share upon exercise of
incentive stock options held by Mr. James.
(11) Includes 208,500 shares which may be purchased for prices ranging from
$0.54 to $5.33 per share, upon exercise of stock options held by all
Directors and officers, as a group. Includes 43,848.75 shares which
may be purchased for $3.3333 per share upon exercise of a warrant held
by MacTarnahan Limited Partnership and 32,886.75 shares which may be
purchased for $3.3333 upon exercise of a warrant held by Electra
Partners, Inc.
15
<PAGE>
(12) Robert M. MacTarnahan, Robert S. MacTarnahan, Harmer Mill & Logging
Supply Co. (dba Harmer Company) (11416 SW Lynnridge, Portland, Oregon
97225), MacTarnahan Family Trust (11416 SW Lynnridge, Portland, Oregon
97225), Black Lake Investments (11416 SW Lynnridge, Portland, Oregon
97225), MacTarnahan Limited Partnership (11416 SW Lynnridge, Portland,
Oregon 97225), Charles A. Adams, Electra Partners, Inc. (1765
Farmington Road, Aloha, Oregon 97007) and the Charles A. Adams Family
Trust (4047 Shattuck Road, Portland, Oregon 97221) are members of a
"group" as that term is used in Section 13(d)(3) of the Securities
Exchange Act of 1934 ("34 Act"). Pursuant to Rule 13d-5 promulgated
under the 34 Act, the group is deemed to beneficially own all shares
of the Company which are beneficially owned by any member of the group
and therefore the group beneficially owns 2,376,697.5 shares of Common
Stock. Because each member of the group shares investment and voting
control of the group shares, each member of the group is deemed to
beneficially own all shares of the group. Therefore, (a) Robert M.
MacTarnahan is deemed to beneficially own 1,031,520.75 shares of
Common Stock in addition to the shares described in note 3, (b) R.
Scott MacTarnahan is deemed to beneficially own 1,379,259.75 shares of
Common Stock in addition to the shares described in note 4, and (c)
Charles A. Adams is deemed to beneficially own 1,460,268.75 shares of
Common Stock in addition to the shares described in note 5. See note
13 regarding Series A Preferred Stock.
(13) On March 1, 1999, Harmer Mill & Logging Supply Co. (dba Harmer
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.
As noted above in note 12, Harmer Company and the Charles A. Adams
Family Trust are members of a "group" as that term is used in Section
13(d)(3) of the 34 Act. Pursuant to Rule 13d-5 promulgated under the
34 Act, the group is deemed to beneficially own all shares of the
Company which are beneficially owned by any member of the group and
therefore the group beneficially owns 5,770 shares of Series A stock.
Because each member of the group shares investment and voting control
of the group shares, each member of the group is deemed to
beneficially own all shares of the group.
OPTIONS, WARRANTS AND RIGHTS
The following table sets forth certain information regarding outstanding options
and warrants to purchase shares of Common Stock of the Company as of March 1,
2000 as to (i) each person who is known by the Company to own beneficially 10%
or more of the outstanding shares of the Company's Common Stock, (ii) each of
the three most highly compensated officers and (iii) all Directors and officers
as a group.
<TABLE>
<CAPTION>
Number of Shares of Common Stock
Called for by Options
Name of Holder and Warrants Exercise Price Date of Exercise
- ------------------------------- ---------------------------- ----------------- -------------------
<S> <C> <C> <C>
MacTarnahan Limited Partnership
(1) 43,848.75 $3.333 (2)
Electra Partners, Inc. (1) 32,886.75 $3.333 (2)
Robert M. MacTarnahan (1) 6,000 $5.333 (2)
R. Scott MacTarnahan (1) 6,000 $5.333 (2)
Charles A. (Tony) Adams (1) 36,000 $0.594 (3)
Frederick L. Bowman 28,000 $0.54 (4)
Mark Carver 28,000 $0.54 (5)
Michael Skelley 25,000 $0.54 (6)
Glenmore James 78,000 $0.54 (7)
All Directors and officers as
a group, (nine persons) 285,235.5 $0.54-$5.33 (8)
</TABLE>
16
<PAGE>
(1) As noted in Item 10 - Security Ownership of Management and Certain
Security Holders, Footnote 12, each of these holders are members of a
"group" as that term is used in Section 13(d)(3) of the 34 Act.
Pursuant to Rule 13d-5 promulgated under the 34 Act, the group is
deemed to beneficially own all shares of the Company which are
beneficially owned by any member of the group and therefore the group
beneficially owns 124,735.5 shares of Common Stock which may be
acquired under outstanding options and warrants, as noted in the table
above. Because each member of the group shares investment and voting
control of the group shares, each member of the group is deemed to
beneficially own all shares of the group.
(2) Options and warrants are currently exercisable.
(3) Options to purchase 36,000 shares of Common Stock issued to Mr. Adams
in November 1994 at $5.86 per share were repriced in May 1999 to
$0.594 per share. These options become exercisable on May 20, 2000.
See "Remuneration of Directors and Officers-Incentive Stock Option
Repricing."
(4) Options to purchase 8,000 shares of Common Stock issued to Mr. Bowman
in January 1996 at $7.00 per share were repriced in May 1999 to $0.54
per share. See "Remuneration of Directors and Officers-Incentive Stock
Option Repricing." Additionally, in May 1999, Mr. Bowman was granted
options to purchase 20,000 shares Common Stock at $0.54 per share. All
of Mr. Bowman's outstanding options become exercisable on May 20,
2000.
(5) Options to purchase 28,000 shares of Common Stock issued to Mr. Carver
in July 1993 at $3.33 per share were repriced in May 1999 at $0.54 per
share. See "Remuneration of Directors and Officers-Incentive Stock
Option Repricing." All of Mr. Carver's outstanding options become
exercisable on May 20, 2000.
(6) Options to purchase 25,000 shares of Common Stock issued to Mr.
Skelley in August, 1996 at $7.00 per share were repriced in May 1999
at $0.54 per share. See "Remuneration of Directors and
Officers-Incentive Stock Option Repricing." All of Mr. Skelley's
outstanding options become exercisable on May 20, 2000.
(7) Options to purchase 28,000 shares of Common Stock issued to Mr. James
at various dates from November 1994 to April 1997 at prices ranging
from $5.33 to $7.00 per share were repriced in May 1999 to $0.54 per
share. See "Remuneration of Directors and Officers-Incentive Stock
Option Repricing." Additionally, in May 1999, Mr. James was granted
options to purchase 50,000 shares Common Stock at $0.54 per share. All
of Mr. James' outstanding options become exercisable on May 20, 2000.
(8) As of December 31, 1999, options to purchase 13,500 shares of Common
Stock were exercisable. Options to purchase the remaining 195,000
shares of Common Stock become exercisable on May 20, 2000. As of
December 31, 1999, warrants to purchase 76,735.5 shares of Common
Stock were exercisable.
Item 11. Interest of Management and Others in Certain Transactions
- -------- ---------------------------------------------------------
Saxer Brewing Company Asset Purchase
On January 31, 2000, the Company purchased certain assets (equipment and brands)
from Saxer Brewing Company for 900,000 shares of the Company's common stock,
$150,000 cash and a three year agreement to pay certain amounts based on barrel
sales of the Saxer and Nor'wester brands, such amount secured by the Saxer and
Nor'wester brands. In connection with the purchase, Mr. Goebel, a majority
shareholder of Saxer Brewing Company, was appointed to the board of the Company.
Also in connection with the purchase, the
17
<PAGE>
Company and Mr. Goebel entered into a consulting agreement under which Mr.
Goebel will provide consulting services to the Company relating to brand
management and marketing, for $4,500 per month. The consulting agreement
terminates on May 31, 2000, and can be extended to June 30, 2000 at the option
of the Company.
In connection with the purchase, Charles A. Adams, the Charles A. Adams Family
Trust, Electra Partners, Inc. and Mr. Adams' children ("Adams Parties") and
Robert M. MacTarnahan, R. Scott MacTarnahan and certain entities controlled by
them ("MacTarnahan Parties") entered into a voting agreement. Under the voting
agreement, the Adams Parties and MacTarnahan Parties agreed to vote all shares
of the Company's Common Stock owned or acquired by them, for Steven C. Goebel as
a director of the Company, at each annual meeting of the Company's shareholders,
or at any special meeting of the Company's shareholders at which directors are
elected, through January 31, 2003, subject to certain conditions as specified in
the voting agreement.
Acquisition of Harco Products, Inc.
In October 1999, the Company acquired all of the outstanding common stock of
Harco Products, Inc., ("Harco"), an entity controlled by Mr. and Mrs. Robert M.
MacTarnahan and Mr. R. Scott MacTarnahan. Harco produces hand trucks for various
industrial uses. The purchase price of $569,585, was paid by the issuance of
759,447 shares the Company's common stock valued at $0.75 per share. In
connection with the acquisition, the Company received and cancelled 30,000
shares of its Common Stock that were owned by Harco. See Note 3 of Notes to
Consolidated Financial Statements. Also in connection with the purchase of
Harco, the Company and Mr. R. Scott MacTarnahan entered into a consulting
agreement under which Mr. MacTarnahan will provide consulting services to the
Company for $2,500 per month. The consulting agreement will terminate upon 30
days notice by the Company or Mr. MacTarnahan.
In connection with the purchase of Harco, the Company entered into a lease with
the McTarnahan Limited Partnership, an entity controlled by two directors of the
Company for approximately 5,600 square feet of space in which Harco operates.
Rent under the lease is $2,500 per month and the term of the lease is five
years, and can be terminated upon 60 days notice by the Company.
Lease Agreement with Portland Brewing Building, L.L.C.
In November 1992, the Company executed a triple net, 15 year lease (with three
five-year renewal options) with Portland Brewing Building Partners ("Brewing
Partners"), which developed the Company's new brewery at 2730 NW 31st Avenue in
Portland. The Company believes that the terms and conditions of its lease, as
amended, are fair and reasonable and are no less favorable to the Company than
could be obtained from unaffiliated parties. Brewing Partners was an equal 50/50
partnership of Electra Partners, Inc. ("Electra"), a company controlled by Mr.
Adams, and Harmer Mill & Logging Supply Co. ("Harmer"), a company controlled by
Mr. and Mrs. Robert M. MacTarnahan. In 1995, after a series of transactions, the
property and the lease were contributed to Portland Brewing Building, LLC, which
is owned 50% by MacTarnahan Limited Partnership (whose general partner is Harmer
and whose limited partners are Robert M. MacTarnahan and Ruth MacTarnahan);
25.1604% by Electra; and 24.8396% by L & L Land Company (a general partnership
consisting of Howard M. Wall, a director of the Company and his wife, Patricia
Wall). In connection with the negotiation of this lease, MacTarnahan Limited
Partnership and Electra Partners, Inc. each were issued warrants for the
purchase of 43,848.75 shares of Common Stock, exercisable at any time through
December 31, 2002, at an exercise price of $3.333 per share.
The monthly rent is $24,906 plus property taxes, insurance and maintenance, with
an adjustment for inflation or changes in fair market rental value on July 1,
1998 and July 1, 2003. The increased rental adjustment was determined subsequent
to July 1, 1998, resulting in a $19,922 charge which is being paid by the
Company in twelve monthly installments which began on February 1, 1999. In
December 1997, in connection with the issuance of $400,000 of 10% Amortizing
Subordinated Notes, the lease payments were reduced by $5,000 for
18
<PAGE>
each of the months of January through July 1998, and by $3,060 for each of the
months of August and September 1998.
Lease Agreement with L & L Land Company
In May 1999, the Company entered into a lease of approximately 23,000 square
feet of space (the "lease") located in the warehouse and office building
commonly known as 2750 N.W. 31st Avenue, Portland, Oregon (the "Adjacent
Building"). The Adjacent Building is owned by L & L Land Company (a general
partnership consisting of Howard M. Wall, a director of the Company, and his
wife, Patricia Wall). The term of the lease is 5 years, with one option to
extend the term until June 14, 2008. Rent under the lease is $12,000 per month.
In addition, the Company agreed to pay, as additional rent, the real property
taxes for and to insure the Adjacent Building and to be responsible for certain
types of maintenance and repairs. The lease contains a first opportunity to
purchase the Adjacent Building. The lease is guaranteed by Robert M. MacTarnahan
and Charles A. Adams. As part of the lease transaction, L & L Land Company
reimbursed the Company for $218,000 for its costs in constructing the shipping
dock. In connection with the lease, the Company entered into a sublease with
Power Transmission Products, Inc. of approximately 13,000 square feet of office
and warehouse space and a portion of the parking lot. The term of sublease is
one year, with a one-year renewal and rent is $4,974 per month, plus $365 per
month for real property taxes, plus payment of utilities, insurance and interior
maintenance. In March 2000, the Company reduced the amount of subleased space by
taking back for its own use approximately 4,700 square feet, which will reduce
the sublease amount to approximately $3,200 per month. The terms of the lease
and sublease were determined to be fair to the Company and approved by all
members of the Board of Directors, except Mr. Wall.
License Agreement with Robert M. MacTarnahan
In July 1994, the Company entered into a License Agreement ("License Agreement")
with Robert M. MacTarnahan, a director of the Company, and Harmer Mill & Logging
Supply Co. ("Harmer"), a company controlled by Mr. and Mrs. Robert M.
MacTarnahan. Pursuant to the License Agreement, (i) Mr. MacTarnahan conveyed to
the Company the right to use his surname and its variation "MacTarnahan" as a
Company trademark, and (ii) the Company has been granted an exclusive worldwide
license to use Mr. MacTarnahan's likeness, image and other personal attributes
to promote the sale of the Company's products, merchandise, and related
materials. The license expires on December 31, 2093. In consideration of the
license grant, the Company must pay a royalty of $1.00 per barrel of
MacTarnahan's Ale sold by the Company for the term of the license. The Company
has the right to terminate the License Agreement on 30-days' written notice and
the license may also terminate under other conditions as specified in the
License Agreement. In the event the license is terminated or terminates, the
Company must assign its rights to the trademark "MacTarnahan" and the above
variations to Mr. MacTarnahan. Royalties paid to Harmer under the License
Agreement for 1999 and 1998 were $27,245 and $24,426, respectively, based on the
sale of 27,245 and 24,426 barrels, respectively, of MacTarnahan's Ale during the
same periods.
10% Amortizing Subordinated Notes
In December 1997, the Company borrowed $400,000 under 10% Amortizing
Subordinated Notes (the "Notes"). Of the $400,000, $200,000 was borrowed from
each of (i) Harmer Mill & Logging Supply Co. (dba Harmer Company), an entity
controlled by Robert M. MacTarnahan, a Director of the Company; and (ii) Charles
A. Adams Family Trust, an entity controlled by Charles A. Adams, the Company's
President. On August 25, 1998, the two shareholders agreed to cancel the Notes
in exchange for 645,162 shares of the Company's Common Stock, resulting in the
issuance of a total of 1,290,324 shares.
Series A Preferred Stock
On March 1, 1999, Harmer 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-
19
<PAGE>
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. 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
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, in addition, an
amount equal to all declared but unpaid dividends on Series A.
Purchase and Restructuring of Secured Debt
On August 17, 1998, the MacTarnahan Limited Partnership purchased approximately
$3.5 million of secured Company debt held by Bank of America, NT&SA ("Debt") and
evidenced by a Business Loan Agreement dated as of December 15, 1995, as amended
("Bank of America Loan Agreement"), a Security Agreement (receivables, inventory
and equipment) dated December 15, 1995 and related UCC financing statements
("Security Agreement"). In addition, on August 17, 1998 the Company entered into
a Credit and Forbearance Agreement ("Credit and Forbearance Agreement") with the
MacTarnahan Limited Partnership pursuant to which the MacTarnahan Limited
Partnership agreed to forbear from exercising its remedies with respect to the
Debt and agreed to make up to an additional $600,000 in working capital advances
to the Company pursuant to a Promissory Note dated August 17, 1998 ("$600,000
Note") which was secured by the Security Agreement.
In September 1998, the Company entered into a revolving loan with a bank, which
replaced the $600,000 Note, and in August 1999, the Company replaced the
$600,000 revolving loan with new $750,000 Revolving Line. The Revolving Line is
guaranteed by Robert M. MacTarnahan, Charles A. Adams, Charles A. Adams Family
Trust, Harmer Mill & Logging Supply Co. and MacTarnahan Limited Partnership. In
February 2000, the Revolving Line was increased to $1,000,000, and the
expiration date was extended to June 1, 2001. In March 2000, the Company paid
$400,000 of the amounts outstanding under the Revolving Line.
On November 18, 1998, the Company and the MacTarnahan Limited Partnership
entered into a Loan Restructuring Agreement ("Restructuring Agreement") which
replaced the Bank of America Loan Agreement and the Credit and Forbearance
Agreement and reduced the outstanding amount of the loan previously due under
the Bank of America Loan Agreement (which was subsequently assigned to the
MacTarnahan Limited Partnership) to approximately $2,100,000. This in turn
resulted in a net loan payable from the Company to the MacTarnahan Limited
Partnership of $2.1 million, which is secured by receivables, inventory,
equipment and general intangibles of the Company, and bears interest at the
prime lending rate of Bank of the Northwest plus 1% per annum. This loan was due
on January 31, 2000. On January 31, 2000, the available borrowing capacity of
the Term Loan was increased to $2,500,000 and the maturity date was extended to
April 1, 2001. In March 2000, the Company borrowed an additional $400,000 under
the Term Loan and paid $400,000 of the amounts outstanding under its Revolving
Line.
In connection with the Restructuring Agreement, Charles A. Adams, the Trust,
Electra Partners, Inc. and Mr. Adams' children ("Adams Parties") entered into a
Voting Agreement with Robert M. MacTarnahan, R. Scott MacTarnahan and certain
entities controlled by them ("MacTarnahan Parties"). The Voting Agreement
replaces the letter voting agreement entered into on August 26, 1998 and
provides that the Adams Parties will vote all of their voting capital stock in
the Company at the direction of the MacTarnahan Parties. The Voting Agreement
expires upon termination of the payment of amounts owing under the Restructuring
Agreement.
20
<PAGE>
Part II
Item 1. Market Price and Dividends on the Registrant's Common Equity
and Other Shareholder Matters
- ------- ------------------------------------------------------------
There is no public trading market for the Company's Common Stock. The Company
had 5,700 shareholders of record as of March 17, 2000. The Company has never
declared any cash dividends on its Common Stock, nor does the Company intend to
do so in the near future. Pursuant to certain loan agreements, the Company
cannot declare or pay dividends on any of its outstanding stock, except
dividends payable in Common Stock of the Company, without prior written consent
of the lenders. Holders of the Company's Series A Preferred Stock are entitled
to receive cumulative dividends at the rate of 8% per annum, when and if
declared by the Board of Directors, prior to payment of dividends on Common
Stock. No cash or stock dividends have been declared to date. The Revolving Line
contains a restriction on the payment of dividends on the Company's stock
without prior consent of the lender.
Item 2. Legal Proceedings
- ------- -----------------
On December 16, 1998, Lydia Mather filed a lawsuit against the Company in the
Multnomah County Circuit Court of Oregon. The complaint alleges that Ms. Mather
attended a holiday party on the Company's premises and fell and was injured due
to the Company's negligence. Ms. Mather is seeking economic and noneconomic
damages in excess of $145,000. The Company is defending the lawsuit and does not
believe the outcome will have a material adverse effect on the results of
operations, financial condition or liquidity of the Company.
As of the date of this Report on Form 10-KSB, there are no other legal
proceedings pending to which the Company is a party or to which any of its
property is subject, and the Company does not know of any such action being
contemplated.
Item 3. Changes in and Disagreements with Accountants
- ------- ---------------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
No matters were submitted to a vote of the Company's shareholders during the
quarter ended December 31, 1999.
Item 5. Compliance with Section 16(a) of the Exchange Act
- ------- -------------------------------------------------
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's executive officers and Directors, and persons who own
more than ten percent of a registered class of the Company's equity securities
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission ("SEC"). Executive officers, Directors and greater than ten
percent stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file. Based solely on its review of the
copies of such forms received by it, or written representations from certain
reporting persons, the Company believes that, during 1999, all executive
officers, Directors and greater than 10% shareholders complied with all
applicable filing requirements, except the MacTarnahan Family Trust failed to
file its reports in connection with shares of stock received from the sale to
the Company of Harco Products, Inc.; such forms were subsequently filed.
21
<PAGE>
Item 6. Reports on Form 8-K
- ------- -------------------
There were no reports on Form 8-K filed during the quarter ended December 31,
1999.
Part F/S
Index to Consolidated Financial Statements
- ------------------------------------------
Page
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-2
Consolidated Statements of Operations for the years ended December
31, 1999 and 1998 F-3
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for years ended December 31,
1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6
22
<PAGE>
Part III
Item 1. and Item 2. Index to Exhibits and Description of Exhibits
- ------------------- ---------------------------------------------
Exhibit Exhibit
Number Number
(1-A) (S-B 601) Description
- ------- --------- -----------
2.1 3.1 Articles of Incorporation, as amended (8)
2.2 3.2 Bylaws, as amended (8)
3.1 4.1 Specimen of Common Stock Certificate (1)
3.2 4.2 Warrant issued to Electra Partners, Inc. dated March 25,
1996 (2)
3.3 4.3 Warrant issued to MacTarnahan Limited Partnership dated
March 25, 1996 (2)
6.1 10.1 Indenture of Lease between the Company and Portland Brewing
Building Partners dated November 4, 1992, as amended (1)
6.2 10.2 Sublease between the Company, Power Transmission Products,
Inc., and Pacific Realty Associates, L.P., dated
January 26, 1995 (1)
6.3 10.3 License Agreement between the Company, R. M. MacTarnahan
and Harmer Company dated July 1, 1994 (1)
6.4 10.4 The Company's Incentive Stock Option Plan, as amended and
Specimen Form Plan Documents (1) (12)
6.5 10.5 Amendment to the Company's Incentive Stock Option
Plan (7) (12)
6.6 10.6 The Company's 1994 Nonqualified Stock Option Plan and
Specimen Form Plan Documents (1) (12)
6.7 10.7 Distribution Agreement between the Company and Columbia
Distributing, dated April 8, 1996 (5)
6.8 10.8 Loan Restructuring Agreement, dated November 18, 1998 (8)
6.9 10.9 First Amendment to November 18, 1998 Loan Restructuring
Agreement (10)
6.10 10.10 Voting Agreement, dated November 18, 1998 (8)
6.11 10.11 Amendment No. 1 to November 18, 1998 Voting Agreement,
dated December 6, 1999 *
6.12 10.12 Restated Cash Incentive Plan, as amended (1) (12)
6.13 10.13 The Company's Stock Offering Purchase Plan for Employees
and Specimen Form Plan (1) (12)
6.14 10.14 Option to Purchase and Agreement and Option to Lease
between the Company and L&L Land Co., dated December
1995 (2)
6.15 10.15 Indenture of Lease between the Company and Western Stations
Co. dated May 1, 1995 (3)
6.16 10.16 Manufacturing Services Agreement between the Company and
The Stroh Brewery Company dated January 31, 1996 (4)
6.17 10.17 Loan Agreement dated September 2, 1998 (6)
6.18 10.18 Lease Agreement between the Company and L&L Land Company,
dated May 18, 1999 (certain schedules to the Lease
Agreement have been omitted) (9)
6.19 10.19 Sublease Agreement between the Company and Power
Transmission Products, Inc., dated May 1, 1999 (9)
6.20 10.20 Business Loan Agreement, dated August 16, 1999 (10)
6.21 10.21 Second Amendment to November 18, 1998 Loan Restructuring
Agreement, dated January 31, 2000 *
6.22 10.22 Amended November 18, 1998 Promissory Note, dated
January 31, 2000 *
6.23 10.23 Consulting Agreement between the Company and R. Scott
McTarnahan, dated November 1, 1999 (12) *
6.24 10.24 Lease Agreement between the Company and MacTarnahan Limited
Partnership, dated November 1, 1999*
6.25 10.25 Consulting Agreement between the Company and Steven C.
Goebel, dated January 31, 2000 (12) *
6.26 10.26 Voting Agreement, dated January 31, 2000 (11)
- -- 21.0 Subsidiaries of the Registrant*
10.0 23.0 Consent of Arthur Andersen LLP *
12.0 27 Financial Data Schedule *
(1) Incorporated by reference to the Company's Form SB-1 (Commission File
No. 33-90914-LA) as filed with the Commission on April 4, 1995.
23
<PAGE>
(2) Incorporated by reference to the Company's Form 10-KSB for the year
ended December 31, 1995 as filed with the Commission on March 28,
1996.
(3) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended March 31, 1996 as filed with the Commission on May 2, 1996.
(4) Incorporated by reference to the Company's Form 10-QSB/A No. 1 for the
quarter ended March 31, 1996 as filed with the Commission on July 31,
1996.
(5) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended September 30, 1996 as filed with the Commission on November 12,
1996.
(6) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended September 30, 1998 as filed with the Commission on November 16,
1998.
(7) Incorporated by reference to the Company's Definitive Proxy Statement
for the 1998 Annual Meeting of Shareholders, as filed with the
Commission on November 17, 1998.
(8) Incorporated by reference to the Company's Form 10-KSB for the year
ended December 31, 1998 as filed with the Commission on March 31,
1999.
(9) Incorporated by reference to the Company's Form 10-QSB/A for the
quarter ended June 30, 1999 as filed with the Commission on August 10,
1999.
(10) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended September 30, 1999 as filed with the Commission on November 12,
1999.
(11) Incorporated by reference to a Schedule 13D filed by Saxer Brewing
Company Brewing Company on February 9, 2000.
(12) Denotes a management contract or compensatory plan or arrangement.
* Filed herewith.
24
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 24th day of March, 2000.
PORTLAND BREWING COMPANY
By: /S/ CHARLES A. ADAMS
---------------------
Charles A. Adams
Chairman of the Board, President and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant in the capacities indicated and
on the 24th day of March, 2000.
Signature Title
/S/ CHARLES A. ADAMS Chairman of the Board, President and Chief
------------------------- Executive Officer (Principal Executive Officer)
- - Charles A. Adams
/S/ GLENMORE JAMES Executive Vice President and Chief Financial
------------------------- Officer (Principal Financial and Accounting
Glenmore James Officer)
/S/ FREDERICK L. BOWMAN Director
-------------------------
Frederick L. Bowman
/S/ ROBERT M. MACTARNAHAN Director
-------------------------
Robert M. MacTarnahan
/S/ R. SCOTT MACTARNAHAN Director
-------------------------
R. Scott MacTarnahan
/S/ HOWARD M. WALL, JR. Director
-------------------------
Howard M. Wall, Jr.
------------------------- Director
Steven C. Goebel
25
<PAGE>
Report of Independent Public Accountants
To the Board of Directors and Stockholders of
Portland Brewing Company:
We have audited the accompanying consolidated balance sheets of Portland Brewing
Company (an Oregon Corporation) and subsidiary as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Portland Brewing
Company and subsidiary as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
Arthur Andersen LLP
Portland, Oregon
March 10, 2000
F-1
<PAGE>
PORTLAND BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31,
------ ------------
CURRENT ASSETS: 1999 1998
---- ----
<S> <C> <C>
Cash $ 103,006 $ 52,532
Accounts receivable, net of allowance of $8,000 (1999), $0 (1998) 655,064 765,997
Inventories 729,853 554,864
Prepaid assets 218,550 266,452
------------------ ------------------
Total current assets 1,706,473 1,639,845
Property and equipment, net 6,711,257 7,249,791
Other assets, net 198,544 113,933
------------------ ------------------
Total assets $8,616,274 $9,003,569
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Line of credit $ 435,465 $ 323,626
Current portion of long-term debt 26,706 26,178
Accounts payable 809,369 879,265
Customer deposits held 131,821 133,464
Accrued payroll 170,580 134,247
Other accrued liabilities 65,853 70,052
----------------- -----------------
Total current liabilities 1,639,794 1,566,832
Long-term debt, less current portion 86,099 113,334
Stockholder term loan 2,100,000 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
of $300,040 300,040 --
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY:
Common stock, no par value, 25,000,000 shares authorized
shares issued and outstanding: 4,094,714 (1999), 3,365,267 (1998) 7,662,883 7,115,798
Stock notes receivable (375) (375)
Accumulated deficit (3,172,167) (1,892,020)
------------------ ------------------
Total stockholders' equity 4,490,341 5,223,403
------------------ ------------------
Total liabilities and stockholders' equity $8,616,274 $9,003,569
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
PORTLAND BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999 1998
----------- --------
<S> <C> <C>
Sales $ 10,463,331 $10,187,554
Less- excise tax 508,521 467,875
---------------- ----------------
Net sales 9,954,810 9,719,679
Cost of sales 7,221,743 7,327,639
---------------- ----------------
Gross profit 2,733,067 2,392,040
General and administrative expenses 1,278,665 1,331,730
Sales and marketing expenses 2,436,648 2,099,163
Loss on disposition of assets -- 406,807
---------------- ----------------
Loss from operations (982,246) (1,445,660)
Interest expense (249,850) (289,182)
Other expense, net (48,051) (186,204)
---------------- ----------------
Total other expense, net (297,901) (475,386)
---------------- ----------------
Net loss before extraordinary item (1,280,147) (1,921,046)
Extraordinary item - gain on debt restructuring -- 1,200,279
---------------- ----------------
Net loss $ (1,280,147) $ (720,767)
========== ==========
Basic and diluted net loss per share $ (0.37) $ (0.29)
========== ==========
Shares used in per share calculations 3,486,842 2,505,051
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
PORTLAND BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Retained
------------------- Stock Notes Earnings
Shares Amount Receivable (Deficit) Total
--------- ---------- ----------- --------- -------
<S> <C> <C> <C> <C> <C>
December 31, 1997 2,074,943 $6,715,798 $ (375) $(1,171,253) $5,544,170
Conversion of stockholder
loans to common stock 1,290,324 -- -- 400,000
400,000
Net loss -- -- -- (720,767) (720,767)
-------------- -------------- ----------- ----------- ------------
December 31, 1998 3,365,267 7,115,798 (375) (1,892,020) 5,223,403
Common stock issued in
connection with acquisition
of Harco Products, Inc. 759,447 569,585 -- -- 569,585
Receipt and cancellation of stock
in connection with acquisition
of Harco Products, Inc. (30,000) (22,500) -- -- (22,500)
Net loss (1,280,147) (1,280,147)
-------------- -------------- ----------- ------------ ------------
December 31, 1999 4,094,714 $7,662,883 $ (375) $(3,172,167) $4,490,341
========= ========== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
PORTLAND BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998
---------- --------
<S> <C> <C>
Cash flows relating to operating activities:
Net loss $(1,280,147) $ (720,767)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation 909,427 1,009,037
Amortization 111,574 158,655
(Gain) loss on disposition of assets (17,075) 406,807
Extraordinary item -- (1,200,279)
Changes in assets and liabilities, net of effect of acquisition:
(Increase) decrease in:
Accounts receivable, net 148,873 (113,467)
Inventories (22,915) 83,041
Prepaid assets 47,902 (64,911)
Other assets (112,627) (34,625)
Accounts payable (75,466) (93,914)
Customer deposits held (1,643) (31,739)
Accrued payroll and other accrued liabilities 29,988 42,453
---------------- ----------------
Net cash used in operating activities (262,109) (559,709)
---------------- ---------------
Cash flows relating to investing activities:
Purchase of property and equipment (535,805) (154,180)
Proceeds from sale of property and equipment 245,587 232,031
Acquisition, net of cash acquired 217,629 --
---------------- ----------------
Net cash (used in) provided by investing activities (72,589) 77,851
---------------- ----------------
Cash flows relating to financing activities:
Net borrowings under line of credit 111,839 420,781
Issuance of notes payable to distributors -- 170,353
Repayments of long-term debt (26,707) (2,209,463)
Proceeds from stockholders' loans -- 2,100,000
Issuance of preferred stock, net 300,040 --
---------------- ----------------
Net cash provided by financing activities 385,172 481,671
---------------- ----------------
Net increase (decrease) in cash 50,474 (187)
Cash, beginning of period 52,532 52,719
--------------- ---------------
Cash, end of period $103,006 $ 52,532
========== ==========
Noncash transactions:
Common stock issued in connection with acquisition $569,585 $ --
Conversion of stockholder loans to common stock -- 400,000
Reclassification of other assets to property and equipment -- 49,380
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $229,850 $289,182
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
PORTLAND BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
------------------------
Portland Brewing Company ("the Company") was incorporated in Oregon in November
1983. The Company opened its first brewery in January 1986 at 1339 NW Flanders
Street in Portland, Oregon which operated until November 1998, when the Company
sold the Flanders Street facility . The Company continues to operate a brewery
at 2730 NW 31st Avenue in Portland, Oregon, which has a capacity of
approximately 135,000 barrels of ale per year, and includes a restaurant, The
Tap Room, open to the public.
The Company experienced significant operating losses during the years ended
December 31, 1999 and 1998, and has continued to incur losses in the first
quarter of 2000. Operating results have fluctuated and may continue to fluctuate
as a result of many factors including lower sales volumes and selling prices,
increased depreciation and other 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. The Company's term loan is due on April 1, 2001. See Note 14. The
Company expects to place the debt permanently with a financial institution by
April 1, 2001, 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary. All significant intercompany balances have been
eliminated.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
- -------------------
Revenue from the sale of products is recognized at the time of shipment to the
customer.
F-6
<PAGE>
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. Raw materials includes amounts related to the Company's
hand truck business which was purchased in October 1999. See Note 3. Inventories
consist of the following:
December 31,
---------------------------------------
1999 1998
---- ----
Raw materials $352,860 $176,288
Work-in-process 177,985 164,428
Finished goods 111,268 138,357
Merchandise 87,740 49,685
Kegs, inventory value -- 26,106
----------- --------------
$729,853 $554,864
======== ========
Property and Equipment
- ----------------------
Property and equipment is stated at cost. Interest costs related to the
construction of certain long-term assets are capitalized and amortized over the
estimated useful lives of the related assets.
Property and equipment consists of the following:
December 31,
---------------------------------
1999 1998
---- ----
Plant and equipment $7,871,802 $7,456,273
Leasehold improvements 1,563,261 1,753,415
Office and laboratory equipment and vehicles 667,670 639,406
Kegs 707,366 813,956
Construction in progress 109,868 63,170
---------- -----------
Total property and equipment 10,919,967 10,726,220
Less- accumulated depreciation (4,208,710) (3,476,429)
---------- -----------
$6,711,257 $7,249,791
=========== ===========
Property and equipment is depreciated using the straight-line method over
estimated useful lives as follows:
Years
-----
Plant and equipment 10-20
Office and laboratory equipment and vehicles 5-10
Leasehold improvements 5-15
Kegs 5
F-7
<PAGE>
Package Design
- --------------
Package design costs, which include costs related to design, plates and dyes,
are amortized on a straight-line basis over three years. Package design costs,
net of accumulated amortization were $108,601 and $99,985 at December 31, 1999
and 1998, respectively. Amortization expense related to package design costs,
which is included in selling and marketing expense, was $85,634 and $113,237 in
1999 and 1998, respectively.
Income Taxes
- ------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Deferred
taxes are determined based on the estimated future tax effects of differences
between the financial statement and tax basis of assets and liabilities given
the provisions of enacted tax laws and tax rates. Deferred income tax expenses
or credits are based on the changes in the financial statement basis versus the
tax basis in the Company's assets or liabilities from period to period. See Note
8.
Net Loss Per Share
- ------------------
The Company has adopted SFAS No. 128, Earnings per Share ("SFAS 128"). Basic
loss per common 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 for all periods presented is the same as basic net loss per
share since all potential dilutive securities are excluded because they are
antidilutive.
The dilutive effect of stock options outstanding for the purchase of 375,050 and
144,525 shares at December 31, 1999 and 1998, respectively, warrants for the
purchase of 87,697.5 shares at December 31, 1999 and 1998 and 577,000 shares of
common stock into which the outstanding Series A Reedeemable Convertible
Preferred Stock are convertible at December 31, 1999 were not included in loss
per share calculations, because to do so would have been anti-dilutive.
Advertising Costs
- -----------------
Advertising costs are expensed as incurred. Total advertising expense was
$347,040 and $398,738 in 1999 and 1998, respectively.
Fair Value of Financial Instruments and Concentration of Credit Risk
- --------------------------------------------------------------------
All current assets and liabilities are carried at cost, which approximates fair
value because of the short-term nature of those instruments. The recorded
amounts of the Company's long-term debt also approximate fair value, as
estimated using discounted cash flow analysis.
Financial instruments which potentially expose the Company to concentration of
credit risk consist primarily of trade accounts receivable. For the year ended
December 31, 1999 and 1998, 40% percent and 16%, respectively, of net sales were
through two distributors. For the year ended December 31, 1998, 40%, of net
sales were through a single distributor. At December 31, 1999, 17% and 29% of
total accounts receivable, respectively, was attributable to two distributors.
At December 31, 1998, 45% and 19% of total accounts receivable, respectively,
was attributable to two distributors.
Impairment of Long-lived Assets
- -------------------------------
SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, establishes criteria for and requires recognition of
impairment losses on long-lived assets and prescribes the accounting for
long-lived assets that are expected to be disposed of in future periods. The
Company's long-lived assets are reviewed for impairment when circumstances
indicate that the carrying
F-8
<PAGE>
amount may not be recoverable. If the sum of the expected future cash flows is
less than the carrying amount of the asset, a loss is recognized. As of December
31, 1999, there were no impairments of long-lived assets.
Comprehensive Income (Loss)
- ---------------------------
On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income ("SFAS 130"), which establishes requirements for disclosure of
comprehensive income (loss). The objective of SFAS 130 is to report a measure of
all changes in equity that result from transactions and economic events other
than transactions with owners. Comprehensive income (loss) is the total of net
income (loss) and all other non-owner changes in equity. Comprehensive loss did
not differ from reported net loss in the periods presented.
Recent Accounting Pronouncements
- --------------------------------
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133") was issued. SFAS 133 establishes accounting and
reporting standards requiring every derivative instrument be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 also requires changes in the derivative instrument's fair value be
recognized currently in results of operations unless specific hedge accounting
criteria are met. SFAS 133, as amended by SFAS 137, is effective for fiscal
years beginning after June 15, 2000. The Company's management has studied the
implications of SFAS 133 and based on the initial evaluation, expects the
adoption to have no impact on the Company's financial condition or results of
operations.
3. ACQUISITION:
-----------
In October 1999, the Company acquired all of the outstanding common stock of
Harco Products, Inc. ("Harco"), from a related party. Harco produces hand trucks
for various industrial uses. The purchase price of $569,585, paid by the
issuance of shares of the Company's common stock valued at $0.75 per share. The
common stock issued in connection with this acquisition contains certain
incidental registration rights. The acquisition was 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, of approximately $36,000, will be amortized using the
straight-line method over five years. The accompanying financial statements
include the results of operations from the date of acquisition. In connection
with the acquisition, the Company received 30,000 shares of its common stock
that Harco owned, and recorded a corresponding reduction to shareholders equity.
4. LOSS ON DISPOSITION OF ASSETS:
-----------------------------
Results of operations for 1998 included a charge of $402,712 associated with a
plan designed to reduce costs and improve operational efficiencies. The non-cash
charge included the write-down of machinery and equipment used in the Company's
Flanders Street facility to fair market value. In November 1998, these assets
were sold at market value.
5. EXTRAORDINARY ITEM:
-------------------
In 1998, the Company recorded an extraordinary gain of $1,200,279 related to a
debt restructuring. The Company was relieved of $1,079,257 of debt and accrued
interest originated by a bank and $272,915 of trade accounts payable. The gain
was offset by professional fees related to the restructuring of $151,893.
(See Note 6)
F-9
<PAGE>
6. LONG-TERM DEBT AND LINE OF CREDIT:
---------------------------------
Of the $1,200,279 extraordinary gain recorded in 1998, $1,079,257 was debt and
accrued interest forgiven by the MacTarnahan Limited Partnership (a related
party) from its purchase of the Company's debt with a bank. (See Note 5) In
connection with the troubled debt restructuring, the MacTarnahan Limited
Partnership purchased approximately $3.1 million of secured Company debt held by
a bank. 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. This $2,100,000 term loan is secured by
receivables, inventory, equipment and general intangibles of the Company, and
bears interest at a per annum rate equal to the prime lending rate of the Bank
of the Northwest plus 1% (9.5% at December 31, 1999). On January 31, 2000, the
principal amount of the term loan was increased to $2,500,000 and the maturity
date was extended from January 31, 2000 to April 1, 2001. See Note 14. The
Company expects to place the debt permanently with a financial institution by
April 1, 2001 or pay off the debt through the raising of additional capital.
In 1998, the Company offered certain of its trade creditors the option of
receiving a discounted amount of cash immediately or the entire amount owed to
them to be paid over a five-year period. As a result, the Company issued notes
in the aggregate principal amount of $148,065 to trade creditors, of which
$112,805 was outstanding at December 31, 1999. The notes bear interest at 6% per
annum and mature on September 1, 2003. Payments under the notes are due in equal
monthly payment of principal and interest.
The Company has a $750,000 revolving line of credit ("Revolving Line") with
Washington Mutual Bank (d.b.a. Western Bank), under which $435,465 was
outstanding at December 31, 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% (9.5% at December 31, 1999). The Revolving Line contains certain
covenants including restrictions on additional indebtedness and payment of
dividends without the permission of the lender. The Company was in compliance
with all covenants at December 31, 1999. In February 2000, the Revolving Line
was increased to $1,000,000 and its expiration date was extended to June 1,
2001. See Note 14.
Principal payment requirements on long-term debt are as follows for the years
ending December 31:
2000 $ 28,353
2001 2,130,102
2002 31,958
2003 22,392
-------------
$2,212,805
========
7. LEASES:
-------
The following is a schedule of minimum future lease payments for the years
ending December 31:
2000 $ 436,737
2001 456,637
2002 456,637
2003 449,797
2004 446,912
Thereafter 1,021,146
-------------
$3,267,866
========
Rent expense incurred on operating leases was $386,876 and $362,083 in 1999 and
1998, respectively.
F-10
<PAGE>
8. INCOME TAXES:
-------------
The Company is in a net deferred tax asset position and has generated net
operating losses to date. Accordingly, no provision for or benefit from income
taxes has been recorded in the accompanying statements of operations for 1999.
The Company will continue to provide a valuation allowance for its deferred tax
assets until it becomes more likely than not, in management's assessment, that
the Company's net deferred tax assets will be realized. The Company has a pretax
net operating loss carryforward of approximately $4.7 million which is available
to offset future taxable income, if any, expiring through the year 2019.
The components of the net deferred tax assets and liabilities as of December 31,
1999 and 1998 are as follows:
December 31,
---------------------------------
1999 1998
---- ----
Deferred tax assets, current-
Basis difference in inventory $28,510 $27,507
Other 36,849 27,495
------------ ------------
Total current deferred tax assets 65,359 55,002
------------ ------------
Deferred tax assets, long-term-
Net operating loss carryforwards 2,096,602 1,391,836
Tax credits 115,022 115,022
------------ ------------
Total long-term deferred tax assets 2,211,624 1,506,858
Deferred tax liabilities, long term-
Basis difference in property, plant
and equipment (661,676) (603,545)
------------ ------------
Net long-term deferred tax assets 1,549,948 903,313
------------ ------------
Net deferred tax assets 1,615,307 958,315
Less: valuation allowance (1,615,307) (958,315)
------------ ------------
Net deferred taxes $ -- $ --
======= =======
9. RELATED PARTY TRANSACTIONS:
---------------------------
Lease Agreement with Portland Brewing Building, LLC
- ---------------------------------------------------
The Company leases the property at 2730 NW 31st Avenue in Portland, Oregon from
Portland Brewing Building, L.L.C., which is an entity controlled by an officer
and director and two other directors of the Company. The monthly rent is $24,906
plus property taxes, insurance and maintenance, with an adjustment for inflation
or changes in fair market rental value on July 1, 1998 and July 1, 2003. The
increased rental adjustment was determined subsequent to July 1, 1998, resulting
in a $19,922 charge which is being paid by the Company in twelve monthly
installments which began on February 1, 1999. The lease expires in August 2008.
In connection with the original negotiation of the lease in 1992, the Company
granted the lessors a warrant to purchase 87,697.5 shares of Common Stock. The
warrants are exercisable at any time through December 31, 2002, at an exercise
price of $3.333 per share.
F-11
<PAGE>
Lease Agreement with L & L Land Co.
- -----------------------------------
In 1999 the Company entered into a lease for approximately 23,000 square feet of
space in a building adjacent to the main brewery with a related party. The term
of the lease is 5 years, with one option to extend the term until June 14, 2008.
Rent under the lease is $12,000 per month. In addition, the Company agreed to
pay the real property taxes for and to insure the adjacent building and to be
responsible for certain types of maintenance and repairs. The lease contains a
first opportunity to purchase the adjacent building. The lease is guaranteed by
two shareholders of the Company. In connection with the lease, the Company
entered into a sublease with another party for approximately 13,000 square feet
of office and warehouse space and a portion of the parking lot. The term of
sublease is one year and rent is $4,974 per month, plus $365 per month for real
property taxes, plus payment of utilities, insurance and interior maintenance.
Lease Agreement with MacTarnahan Limited Partnership
- ----------------------------------------------------
In October 1999, in connection with the purchase of Harco Products, Inc., the
Company entered into a lease with a related party. Rent under the lease is
$2,500 per month. The term of the lease is five years, and can be terminated
upon 60 days notice by the Company.
The Company believes that the terms and conditions of its leases are fair and
reasonable and are no less favorable to the Company than could be obtained from
unaffiliated parties.
Purchase and Restructuring of Secured Debt
- ------------------------------------------
See Notes 5, 6 and 14.
License Agreement
- -----------------
The Company has a license agreement with one of its board members to utilize his
name and likeness. The amount of the royalty owed is $1 per barrel of
MacTarnahan's Scottish Style Amber Ale sold. Royalties paid under the license
agreement for 1999 and 1998 were $27,245 and $24,426, respectively, based on the
sale of 27,245 and 24,426 barrels, respectively, of MacTarnahan's Amber Ale
during the same periods.
10. PREFERRED STOCK:
---------------
On March 1, 1999, two shareholders of the Company purchased 2,885 shares each of
the Company's Series A Convertible Redeemable 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. 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
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 $52.00 per share for each share of Series A and, in addition, an
amount equal to all declared but unpaid dividends on Series A.
F-12
<PAGE>
11. STOCK-BASED COMPENSATION PLANS:
-------------------------------
Incentive Stock Option Plan
- ---------------------------
The Company's Incentive Stock Option Plan ("ISOP") is administered by the Board
of Directors and provides for grants of options to acquire shares of the
Company's common stock, subject to the limitations set forth in the ISOP. The
number of stock options available for grant under the ISOP is 400,000. Pursuant
to the ISOP, the Board of Directors has the authority to set the terms and
conditions of the options granted, but cannot set the option exercise price at
less than 100 percent of the fair market value of the subject shares of common
stock at the time the option is granted. Options outstanding at December 31,
1999 become exercisable on May 20, 2000.
Activity under the ISOP is summarized as follows:
Shares Subject Exercise Price
to Options Per Share
-------------- --------------
Balances, December 31, 1997 139,500 $3.33-$7.00
Options granted -- --
Options exercised -- --
Options canceled (15,975) $7.00
---------- ----------
Balances, December 31, 1998 123,525 $3.33-$7.00
Options granted 363,050 $0.54-$0.594
Options exercised -- --
Options canceled (125,025) $0.54-$7.00
---------- ----------
Balances, December 31, 1999 361,550 $0.54-$0.594
====== ========
In May 1999, options to purchase 118,800 shares of Common Stock at prices
ranging from $3.33 to $7.00 per share were repriced and regranted on different
terms, of which options to purchase 72,000 shares were held by executive
officers of the Company. Repriced options were issued at exercise prices of
$0.54 per share to $0.594 per share. All of the repriced options become
exercisable on May 20, 2000.
Nonqualified Stock Option Plan
- ------------------------------
In August 1994, the Board of Directors approved a Nonqualified Stock Option Plan
("NQSOP"). The NQSOP provides for the issuance of 45,000 stock options to
employees, nonemployee members of the Board of Directors, consultants and other
independent contractors who provide valuable service to the Company, at a
minimum of 85 percent of fair market value and have a term of 10 years. Options
to purchase 13,500 shares at $5.33 each and 21,000 shares at $5.33 each were
outstanding and exercisable at December 31, 1999 and 1998, respectively.
Statement of Financial Accounting Standards No. 123 (SFAS 123)
- --------------------------------------------------------------
SFAS 123 defines a fair value based method of accounting for employee stock
options and similar equity instruments and encourages all entities to adopt that
method of accounting for all employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by Accounting Principles Board No. 25 ("APB
25"). Entities electing to remain with the accounting in APB 25 must make pro
forma disclosures of net income and earnings per share, as if the fair value
based method of accounting defined in SFAS 123 had been applied.
F-13
<PAGE>
The Company has elected to account for its stock-based compensation plans under
APB 25; however, the Company has computed, for pro forma disclosure purposes,
the value of all options granted using the Black-Scholes option-pricing model as
prescribed by SFAS 123. No options were granted in 1998. Options granted in 1999
were valued using the following weighted average assumptions:
Risk-free interest rate 6.5%
Expected dividend yield 0%
Expected lives 4 years
Expected volatility 48%
The total value of options granted during 1999 was computed as approximately
$88,317 and is being amortized on a pro forma basis over the respective vesting
period of the options (one year). The weighted average fair value of options
granted during 1999 was $0.24 per share. If the Company had accounted for its
stock-based compensation plans in accordance with SFAS 123, the Company's pro
forma net loss and pro forma net loss per share for the years ended December 31,
1999 and 1998 would have been as follows:
As Reported Pro Forma
----------- ---------
1999
Net loss $ (1,280,147) $ (1,346,106)
Net loss per share $ (0.37) $ (0.39)
1998
Net loss $ (720,767) $ (834,489)
Net loss per share $ (0.29) $ (0.33)
The effect of applying SFAS 123 in this pro forma disclosure is not indicative
of future results. SFAS 123 does not apply to awards prior to January 1, 1995.
Additional awards are anticipated in future years.
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price and grant date:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------- --------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
December 31, Contractual Exercise December 31, Exercise
Exercise Price 1999 Life (Years) Price 1999 Price
---- ------------ ----- ---- -----
<S> <C> <C> <C> <C> <C>
$ 0.54 325,550 9.3 $ 0.54 -- $ 0.54
0.59 36,000 4.3 0.59 -- 0.59
5.33 13,500 4.7 5.33 13,500 5.33
--------- ---------
Totals 375,050 13,500
======== ======
</TABLE>
Cash Incentive Plan
- -------------------
The Company may award its officers and employees, under its Restated Cash
Incentive Plan ("the Plan"), bonuses in an amount up to 10% of net operating
profits before taxes. Awards under the Plan will be allocated
F-14
<PAGE>
among the officers and employees in accordance with the provisions of the Plan
at the discretion of the Board of Directors. No amounts were awarded in 1999 or
1998 under the Plan.
12. SEGMENT INFORMATION:
-------------------
In 1998, the Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, ("SFAS 131") which establishes new standards
for defining and reporting information about a Company's segments. It requires
that the information be reported about the segments of the Company for which
separate financial information is available and for which operating results are
regularly evaluated by executive management to make decisions about resources to
be allocated to each segment and to assess performance. Management evaluates
segment performance based on segment operating (loss) income.
The Company is organized into three product-based segments: brewery operations,
restaurant operations and hand truck manufacturing. The Company's brewery
segment brews and sells 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 Company's
restaurants was sold. The Company's remaining restaurant, which adjoins its
brewery, sells the Company's specialty beers along with lunch and dinner. In
October 1999, the Company purchased Harco Products, Inc., a company which
produces hand trucks for various industrial uses.
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. Interest expense is considered a corporate expense
and is not allocated to the three segments. In 1998, the extraordinary item
(gain on debt restructuring) is also considered a corporate expense and is not
allocated to the three segments.
Year Ended December 31,
-----------------------------------
1999 1998
----------------- -----------------
Net Sales:
Brewery $ 8,529,412 $ 7,743,255
Restaurant(s) 1,625,874 2,344,708
Less: intersegment sales (272,126) (368,284)
------------- --------------
Subtotal 9,883,160 9,719,679
Harco Products 71,650 --
------------- --------------
Total net sales $ 9,954,810 $ 9,719,679
============= ==============
Gross Profit:
Brewery $ 2,510,071 $ 2,192,138
Restaurant(s) 358,332 393,976
Less: intersegment gross profit (145,084) (194,074)
------------- --------------
Subtotal 2,723,319 2,392,040
Harco Products 9,748 --
------------- --------------
Total gross profit $ 2,733,067 $ 2,392,040
============= ==============
Depreciation and amortization expense:
Brewery $ 771,956 $ 802,948
Restaurant(s) 90,578 150,651
Harco Products 2,120 --
Unallocated corporate amounts 156,347 214,091
------------- --------------
Total depreciation and amortization expense $ 1,021,001 $ 1,167,690
============= ==============
F-15
<PAGE>
Year Ended December 31,
--------------------------------------
1999 1998
----------------- -----------------
Capital Expenditures:
Brewery $ 459,157 $ 206,839
Restaurant(s) 48,383 3,044
Harco Products -- --
Unallocated corporate amounts 28,265 13,776
------------- --------------
Total capital expenditures $ 535,805 $ 223,659
============= ==============
Total Assets:
Brewery $ 7,313,542 $ 7,954,706
Restaurant(s) 625,990 667,931
Harco Products 352,586 --
Unallocated corporate amounts 324,156 380,932
------------- --------------
Total assets $ 8,616,274 $ 9,003,569
============= ==============
13. COMMITMENTS AND CONTINGENCIES:
-----------------------------
The Company is involved from time to time in claims, proceedings and litigation
arising in the ordinary course of business. The Company believes it is not
presently a party to any litigation, the outcome of which would have a material
adverse effect on the Company's business, financial condition, results of
operations or cash flows.
14. SUBSEQUENT EVENTS:
-----------------
Saxer Brewing Company Asset Purchase
- ------------------------------------
On January 31, 2000, the Company purchased certain assets (equipment and brands)
from Saxer Brewing Company ("Saxer")for 900,000 shares of the Company's common
stock, $150,000 cash and a three year agreement to pay certain amounts based on
barrel sales of the Saxer and Nor'wester brands, such amount secured by the
Saxer and Nor'wester brands. In connection with the purchase, Mr. Goebel, a
majority shareholder of Saxer, was appointed to the board of the Company.
Long Term Debt
- --------------
At December 31, 1999 the Company had a loan payable to the MacTarnahan Limited
Partnership (a related party) of $2.1 million. On January 31, 2000, the
borrowing capacity under the term loan was increased from $2,100,000 to
$2,500,000 and the maturity date was extended from January 31, 2000 to April 1,
2001. In March 2000, the Company borrowed an additional $400,000 under the term
loan and paid $400,000 of the amounts outstanding under its Revolving Line. See
Note 6.
Revolving Line
- --------------
In February 2000, the Revolving Line was increased to $1,000,000 and the
expiration date was extended to June 1, 2001. In March 2000, the Company paid
$400,000 of the amounts outstanding under the Revolving Line. See note 6.
F-16
EXHIBIT 10.11
AMENDMENT NO. 1 TO
VOTING AGREEMENT
The undersigned hereby agree that the Voting Agreement dated as of November
18, 1998 among them (the "Voting Agreement") shall be amended to delete
reference to Harco Products, Inc. as one of the MacTarnahan Parties and to add
the MacTarnahan Family Trust as one of the MacTarnahan Parties. The undersigned
also agree that Schedule 1 to the Voting Agreement shall be amended to provide
as follows:
Name Number of Shares Owned
Electra Partners, Inc. 180,300 Shares plus warrant to
purchase 32,886.75 shares
Charles A. Adams Family Trust 666,192 shares
Charles A. Adams Option to purchase 36,000 shares
Charles Francis Adams III 525 Shares
Katherine Maxwell Adams 525 shares
R.M. MacTarnahan 22,860 shares plus an option to
purchase 6,000 shares
Jean MacTarnahan 600 shares
R.S. MacTarnahan 97,714 shares plus an option to
purchase 6,000 shares
MacTarnahan Limited Partnership Warrant to purchase 43,848.75
shares
Black Lake Investments 73,335 shares
Harmer Mill & Logging Co. 765,162 shares
MacTarnahan Family Trust 390,858 shares
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
6th day of December, 1999.
Harmer Mill & Logging Supply Co.
/s/ ROBERT MALCOLM MACTARNAHAN By: /s/ ROBERT SCOTT MACTARNAHAN
- ------------------------------ -------------------------------
Robert Malcolm MacTarnahan Robert Scott MacTarnahan,
Vice President
MacTarnahan Family Trust
/s/ ROBERT SCOTT MACTARNAHAN By: /s/ ROBERT M. MACTARNAHAN
- ---------------------------- -------------------------------
Robert Scott MacTarnahan Robert M. MacTarnahan, Trustee
MacTarnahan Limited Partnership Black Lake Investments
By: Harmer Mill & Logging Supply Co. /s/ ROBERT MALCOLM MACTARNAHAN
-----------------------------------
Robert Malcolm MacTarnahan, Partner
By: /s/ ROBERT SCOTT MACTARNAHAN
- --------------------------------
Robert Scott MacTarnahan, /s/ ROBERT SCOTT MACTARNAHAN
Vice President -----------------------------------
Robert Scott MacTarnahan, Partner
Electra Partners, Inc.
/s/ CHARLES ANTHONY ADAMS
- --------------------------------
Charles Anthony Adams By: /s/ CHARLES ANTHONY ADAMS
--------------------------------
Charles Anthony Adams, President
Charles A. Adams Family Trust
/s/ CHARLES FRANCIS ADAMS III
- --------------------------------
Charles Francis Adams III
By: /s/ CHARLES ANTHONY ADAMS
-------------------------------
Charles Anthony Adams, Trustee
/s/ KATHERINE MAXWELL ADAMS
- --------------------------------
Katherine Maxwell Adams
EXHIBIT 10.21
SECOND AMENDMENT TO
LOAN RESTRUCTURING AGREEMENT
THIS SECOND AMENDMENT TO LOAN RESTRUCTURING AGREEMENT (this "Second
Amendment") is effective as of January 31, 2000, by and among the
MACTARNAHAN LIMITED PARTNERSHIP, an Oregon limited partnership
("Lender"), HARMER MILL & LOGGING SUPPLY CO., an Oregon corporation
("Guarantor") and PORTLAND BREWING COMPANY, an Oregon corporation
("Borrower").
Recitals.
--------
A. Lender, Guarantor and Borrower are parties to a Loan Restructuring
Agreement dated November 18, 1998, as amended by the First Amendment
dated November 1998 (the "Loan Agreement"), pursuant to which, among
other things, Borrower has executed and delivered to Lender a
$2,100,000 promissory note. Terms with initial capitals, if not
otherwise defined herein, shall have the meanings given them in the
Loan Agreement.
B. The BNW Credit Line has been paid and has terminated, resulting in the
termination of the Guarantee, the Pledge Agreement, the Reimbursement
Agreement, and the Guarantor's interest in the Assignment of Interest
under Security Agreement, the Security Instruments and the Loan
Agreement.
C. The parties desire to amend the Loan Agreement as provided in this
Second Amendment.
Agreement.
---------
NOW THEREFORE, in consideration of the premises and of the mutual covenants
contained herein, the parties agree:
1. Amended Note. The Term Note shall be replaced with Borrower's Amended
Promissory Note in the form of Exhibit A1, wherein the principal
amount of the Amended Promissory Loan will increase to $2,500,000, and
the Maturity Date of the Amended Promissory Note will extend to April
1, 2001.
All references in the Loan Agreement to the Term Note will refer to
and be replaced with the Amended Promissory Note.
2. Borrower's Covenant. Lender and Guarantor consent to the following
transactions:
(a) The Borrower borrowing up to $1,000,000 from Washington Mutual
Bank, doing business as Western Bank and secured by Borrower's
accounts receivable, chattel paper, inventory and general
intangibles.
(b) The Borrower purchasing certain assets from Saxer Brewing Company
in accordance with an Asset Purchase Agreement dated as of
January 31, 2000 and granting a security interest to Saxer
Brewing Company in the intellectual property purchased from Saxer
Brewing Company to secure certain obligations contained in the
Asset Purchase Agreement.
(c) The Borrower selling certain equipment in the amount of $69,000
to affiliates and entering into a leaseback arrangement with
respect to the equipment.
<PAGE>
(d) The Borrower purchasing the stock of Harco Products, Inc. in
accordance with the terms of a Stock Purchase Agreement dated as
of October 31, 1999 among the Borrower as the Buyer and R. Scott
MacTarnahan, Andrea J. MacTarnahan, Sara A. Whitworth, and Robert
M. and Ruth A. MacTarnahan, Trustees of the MacTarnahan Family
Trust U/A/D 4/13/94 as the Sellers.
3. Borrower's Confirmation. The Borrower confirms that Lender has a
security interest in the collateral described in UCC-1 Financing
Statement No. S82240, filed on December 25, 1995, including all of
Borrower's brands.
4. Guarantor's Acknowledgement. Guarantor acknowledges (a) that the BNW
Credit Line has been paid and the Guarantor is released and discharged
from all obligations under the Guaranty and Pledge Agreement; (b) that
each of the Reimbursement Agreement, and Guarantor's interest in the
Assignment of Interest under Security Agreement, Security Instruments
and the Loan Agreement has terminated; (c) that all references in the
Loan Agreement to the Guarantor, the Guaranty, the Pledge Agreement,
the Reimbursement Agreement and Guarantor's interest in the Assignment
of Interest under Security Agreement, Security Instruments and the
Loan Agreement will be disregarded and will have no further effect;
(d) that the Guarantor has no further interest or rights under the
specified documents; and (e) that neither the Lender nor the Borrower
need obtain the Guarantor's consent for any further transactions
involving the Loan Agreement.
5. Amendment. References to the Loan Agreement shall mean the Loan
Agreement as the same has been amended by this Second Amendment.
6. Ratification. Except as amended by this Second Amendment, the Loan
Agreement and documents related to the Loan Agreement are ratified and
confirmed in all respects.
IN WITNESS WHEREBY, the parties have executed this Agreement by and through
their duly authorized officers as of the date and year first written above.
MACTARNAHAN LIMITED PARTNERSHIP
an Oregon limited partnership
By: Harmer Mill & Logging Supply Co.,
dba Harmer Company, its general manager
By: /s/ ROBERT M. MACTARNAHAN
--------------------------------------
Name: Robert M. MacTarnahan
Title: President
HARMER MILL & LOGGING SUPPLY CO.,
an Oregon corporation
By:/s/ ROBERT M. MACTARNAHAN
---------------------------------------
Name: Robert M. MacTarnahan
Title: President
PORTLAND BREWING COMPANY, an Oregon corporation
By: /s/ CHARLES A. ADAMS
--------------------------------------
Name: Charles A. Adams
Title: President and Chief Executive Officer
EXHIBIT 10.22
AMENDED PROMISSORY NOTE
$2,500,000.00 Portland, Oregon
November 18, 1998
FOR VALUE RECEIVED, PORTLAND BREWING COMPANY, an Oregon corporation
("Borrower"), promises to pay to the order of MACTARNAHAN LIMITED PARTNERSHIP,
an Oregon limited partnership ("Lender"), the principal sum of TWO MILLION FIVE
HUNDRED THOUSAND AND 00/100 DOLLARS ($2,500,000.00), with interest from the date
funds are advanced hereunder or so much thereof as is advanced hereunder, until
the date paid, at a per annum rate equal to the Prime Rate (defined below), plus
one percent (1%) (calculated on the basis of a 365/366 year), the same to be
paid in lawful money of the United States of America. Principal, interest, late
charges, default interest and any other amounts payable hereunder to Lender are
payable at 11416 SW Lynnridge Ave., Portland, OR 97225, or such other place as
the holder may direct. As used in this Note, "Prime Rate" at any time means the
highest "Prime Rate" of interest announced by Bank of the Northwest and in
effect at such time for credit extended by Bank of the Northwest.
1. Payments.
--------
1.1 Interest. Interest only, from the date of this Note, to and including
October 31, 1998, shall be payable on November 1,1998. Thereafter, Borrower
shall pay interest only in consecutive monthly payments commencing on December
1, 1998, and continuing on the first day of each month thereafter until the
Maturity Date, as defined below.
1.2 Maturity. All principal and outstanding interest, if not sooner paid as
required or permitted by the terms of this Note, shall be due and payable on
April 1, 2001 (the "Maturity Date").
1.3 Late Charges. To cover the extra expense involved in handling
delinquent payments, Borrower shall pay Lender, on demand, a late charge in the
amount of ten percent (10%) of any monthly interest payment not paid in full
within five (5) days of its due date.
2. Prepayments. All or any portion of the principal amount of this Note may be
prepaid at any time, provided that any such prepayment of principal must be
accompanied by payments of all interest accrued to the date of such
prepayment. Any amount prepaid by Borrower shall not affect Borrower's
obligation to continue to make the interest payments computed on the unpaid
principal sum from time to time outstanding, at the times described in
Section 1.1.
3. Security. This Note is made pursuant to that certain Loan Restructuring
Agreement dated November 18, 1998, as amended, (the "Loan Agreement") and
is secured by that certain Security Agreement (Receivables, Inventory and
Equipment) given by Borrower to Bank of America, Oregon, dated December 15,
1995 (the "Security Agreement"), the secured party's interest under which
was transferred and assigned to Lender by instrument dated August 17, 1998.
The Security Agreement also secures Borrower's obligations under the Loan
Agreement.
4. Default. If
(a) the entire principal balance of this Note is not paid in full when due,
or
<PAGE>
(b) for any payment of interest due hereunder the entire amount due
(including any applicable default interest and late charges) is not paid within
five (5) days of the date upon which notice of default in the making of such
payment was given to Borrower, or
(c) there occurs a default under the Security Agreement or the Loan
Agreement,
then an Event of Default shall exist hereunder. Upon the occurrence of an
Event of Default, or at any time thereafter, at the option of Lender, the
whole of the principal sum then remaining unpaid, together with all
interest accrued thereon, shall become immediately due and payable without
notice, and the lien or liens given to secure its payment may be
foreclosed. Failure to exercise the acceleration or foreclosure option, or
any other right that Lender may, in an Event of Default, be entitled to,
shall not constitute a waiver of the right to exercise either such option
or any other right for a continuing or subsequent Event of Default.
5. Default Charges. At its option Lender may accept delinquent payments.
Following any Event of Default, due but unpaid interest shall become a part
of the principal and shall bear interest at the rate provided in this Note.
In addition, Borrower shall pay, during the period an Event of Default
continues, default interest on the unpaid principal balance (including the
amount of any unpaid interest added thereto) at the rate provided in this
Note plus two percent (2%) per annum. Any such default interest which has
accrued, and late charges, if any, shall be paid at the time of and as a
condition precedent to the curing of an Event of Default. Lender's
acceptance of delinquent payments, any late charge thereon as calculated
pursuant to Section 1.3 and/or any default interest thereon calculated
pursuant to this Section 5 shall not constitute a waiver of Lender's right
to declare the whole principal sum and all interest accrued thereon
immediately due and payable upon or following the occurrence of any
subsequent Event of Default.
6. Costs of Default. Borrower shall pay all costs of collection when incurred
by Lender, including, but not limited to, reasonable attorneys' fees.
Lender is authorized to consult with, employ, and pay attorneys upon an
Event of Default or upon institution of legal proceedings by or against
Lender in connection with this Note, the Security Agreement, or the Loan
Agreement, and Borrower shall reimburse Lender for all of Lender's legal
fees and costs in such amount as the court in any such proceeding and on
any appeals from any judgment or decree entered therein may adjudge
reasonable. Borrower shall pay all other costs incurred by Lender in
collecting or attempting to collect any sums due under this Note or
protecting or enforcing any rights of Lender under this Note and/or the
Security Agreement or Loan Agreement, including, without limitation,
Lender's attorneys' fees and costs in such amount as the court in any such
proceeding and on any appeals from any judgment or decree entered therein
may adjudge reasonable. All such amounts paid by Lender shall have equal
priority with, and be secured by, the Security Agreement. All such amounts
shall bear interest from the date of expenditure until paid at the interest
rate provided in this Note.
7. Waivers. Borrower and all endorsers and all persons liable or to become
liable on this Note waive demand, protest and notice of demand, protest and
nonpayment, and hereby consent to: (i) any and all extensions in the time
for making payments under this Note as Lender, in its sole discretion, may
grant from time to time, (ii) the release of all or any part of the
collateral subject to the Security Agreement, and (iii) the release of any
party liable for payment of the obligations hereunder. Borrower and all
endorsers and all persons liable hereto further waive exhaustion of legal
remedies and the right to plead any and all statutes of limitation as a
defense to any demand on this Note, to any agreement to pay the same, or to
any demands secured by the Security Agreement. If Borrower consists of two
or more persons or entities, all of the obligations herein contained shall
be considered joint and several obligations of them. All of the obligations
herein contained shall be binding upon Borrower and Borrower's
distributees, personal representatives, successors, and assigns. All
obligations of Borrower shall inure to the benefit of the distributees,
personal representatives, successors and assigns of Lender.
<PAGE>
In any action or proceeding to recover any sums herein provided for, no
defense of adequacy of security or that resort must first be had to
security or to any other person shall be asserted.
8. Governing Law. This Note shall be governed by the laws of the state of
Oregon.
9. Notices. Notices hereunder shall be given in the manner, and shall be
effective at the times, provided in the Loan Agreement.
"Borrower"
PORTLAND BREWING COMPANY, an Oregon corporation
By: /s/ CHARLES A. ADAMS
---------------------------------------
Charles A. Adams
President and Chief Executive Officer
EXHIBIT 10.23
CONSULTING AGREEMENT
This Consulting Agreement (the "Agreement") is made and entered into
effective as of November 1, 1999 by and between PORTLAND BREWING COMPANY, an
Oregon corporation (the "Company"), and R. SCOTT MacTARNAHAN ("Consultant").
RECITAL
Consultant is a director of the Company, a director of Harco Products,
Inc., an Oregon corporation and a wholly-owned subsidiary of the Company
("Harco"), and a former officer of Harco. The Company desires to retain
consulting services from Consultant and Consultant desires to provide consulting
services to the Company.
AGREEMENT
1. CONSULTING SERVICES
Consultant will advise and consult with the management of the Company on
all matters reasonably requested of him, including (without limitation) matters
related to Harco or any other subsidiary or affiliate of the Company. Consultant
will comply with the policies, standards, and regulations of the Company as may
be established from time to time, and will perform his consulting duties
faithfully, intelligently, to the best of his ability, and in the best interests
of the Company. The consulting services provided will not amount to more than 20
hours per calendar month and will be provided on dates and at times reasonably
convenient to both parties.
2. STATUS OF CONSULTANT
Consultant will act as an independent contractor of the Company, and under
no circumstances will Consultant be considered an employee of the Company. The
Company will not provide any insurance covering Consultant's consulting
activities, and Consultant will provide whatever insurance Consultant believes
to be necessary under the circumstances to cover his consulting activities. The
Company will not withhold any taxes from any consideration paid to Consultant,
and Consultant will assume full responsibility for the payment of all federal,
state and local taxes or contributions imposed or required under employment
insurance, social security, worker's compensation, and income tax laws arising
by reason of the performance of Consultant's consulting services. Consultant
will defend, indemnify, and hold harmless the Company, and its shareholders,
directors, officers, employees, and agents from and against any and all losses,
claims, expenses, costs, attorney's fees, demands, damages, suits, judgments,
actions and causes of action resulting from or arising out of Consultant's
failure to pay or remit such taxes or contributions.
3. CONSIDERATION
The Company will pay to Consultant the sum of $2,500.00 per calendar month,
payable on the last day of each calendar month. Consultant will be entitled to
receive consideration for his consulting services regardless of the number of
hours of services actually provided by Consultant in any given month and
regardless of whether the Company requests Consultant to provide any services at
all in any given month. The Company will reimburse Consultant for all reasonable
expenses necessarily incurred by Consultant in the performance of his consulting
services, provided Consultant complies with the reimbursement policies of the
Company as may be established from time to time.
<PAGE>
4. TERMINATION
Either party may terminate this Agreement upon 30 days' prior written
notice to the other party. This Agreement will terminate immediately upon the
death of Consultant.
5. GENERAL
5.1 No Assignment by Consultant. This Agreement is personal to Consultant
and Consultant may not assign or delegate any of his rights or obligations under
the Agreement without the prior written consent of the Company.
5.2 Binding Effect. Except as otherwise provided in this Agreement, this
Agreement will be binding upon the parties and their heirs, personal
representatives, successors, and assigns, and will inure to their benefit.
5.3 Amendment. This Agreement may be amended only by a written instrument
executed by the party against whom enforcement is sought.
5.4 Notices. All notices or other communications required or permitted by
this Agreement must be in writing and will be deemed to have been duly given
when delivered personally to the party for whom such notice was intended, or
upon actual receipt if sent by facsimile or delivered by a nationally recognized
overnight delivery service, or at the expiration of the third day after the date
of deposit if deposited in the United States mail, postage pre-paid, certified
or registered, return receipt requested, to the respective parties at the
following addresses, or at such other address that a party may specify by notice
given to the other parties:
To Consultant: To the Company:
Scott MacTarnahan Portland Brewing Company
11270 S.W. Lynnridge Avenue 2730 Northwest 31st Avenue
Portland, Oregon 97225 Portland, Oregon 97210
5.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
5.6 Severability. If any provision of this Agreement is deemed to be
invalid or unenforceable in any respect for any reason, the validity and
enforceability of any such provision in any other respect and of the remaining
provisions of this Agreement will not be in any way impaired.
5.7 Further Assurances. The parties agree to execute other documents
reasonably necessary to further effect and evidence the terms of this Agreement,
as long as the terms and provisions of the other documents are fully consistent
with the terms of this Agreement.
5.8 No Third-Party Beneficiaries. Nothing in this Agreement, express or
implied, is intended to confer on any person, other than the parties to this
Agreement, any right or remedy of any nature whatsoever.
5.9 Nonwaiver. The waiver by any party of a breach or violation of any
provision of this Agreement will not operate and may not be construed as a
waiver of any other provision or any subsequent breach of the same provision. No
waiver will be binding unless executed in writing by the party making the
waiver.
5.10 Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Oregon.
<PAGE>
5.11 Attorney's Fees. In the event of litigation arising out of, or in any
related to any term set forth in this Agreement, including (without limitation)
any proceeding brought under the United States Bankruptcy Code, the losing party
will pay to the prevailing party, in addition to any other relief awarded, the
prevailing party's reasonable attorney's fees, costs and expenses incurred at
arbitration, at trial, on appeal and on petition for review.
5.12 Entire Agreement. This Agreement sets forth the entire understanding
of the parties with respect to the subject matter of this Agreement and
supersedes any and all prior and contemporaneous negotiations, understandings
and agreements, whether written or oral, between the parties with respect to
such subject matter.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COMPANY:
PORTLAND BREWING COMPANY
/s/ CHARLES A. ADAMS
-------------------------------------------
Its: President and Chief Executive Officer
CONSULTANT:
/s/ SCOTT MACTARNAHAN
-------------------------------------------
Scott MacTarnahan
EXHIBIT 10.24
LEASE
1. BASIC LEASE TERMS.
(a) Effective Date of this Lease: November 1, 1999.
(b) Parties and Notice Addresses:
Landlord: MACTARNAHAN LIMITED PARTNERSHIP, an Oregon limited
partnership whose address is 11416 S.W. Lynnridge Avenue, Portland,
Oregon 97225, phone number (503) 644-5342.
Tenant: HARCO PRODUCTS, INC., an Oregon corporation, whose address
shall be at the Premises.
(c) Description of Premises: Approximately 5,600 existing square foot
space as shown on attached Exhibit "A" located at 4670 S.W. Pacific
Avenue, Beaverton, Oregon.
(d) Term: The term of this Lease shall commence on November 1, 1999 (the
"Commencement Date") and shall expire on October 31, 2004 (the
"Expiration Date"); provided, however, that the term of this Lease may
be terminated by Tenant upon 60 days' written notice to Landlord;
provided, however, that if Tenant assigns its interest in the Lease
pursuant to Section 19(a) or 19(b), then the 60-day notice period will
be extended to a 180-day notice period.
(e) Base Monthly Rent: Base Monthly Rent shall be $2,500 per month.
(f) Security Deposit: None.
(g) Use: The Premises shall be used for any lawful purpose as allowed
pursuant to Section 6 below, and for no other purpose whatsoever.
<PAGE>
2. PREMISES.
(a) Demise and Description. Landlord leases to Tenant and Tenant leases
from Landlord the premises described in Section 1 and depicted on
Exhibit "A" attached (the "Premises"), which are located in the
project depicted on Exhibit "A" attached (the "Project"). The Project
is agreed to contain a total of 15,600 square feet of space at this
time. All square footages set forth herein are approximate, but are
agreed figures, and no claim shall be based upon any inaccuracy or
remeasurement.
(b) Inspection. Tenant executes this Lease for the Premises in their
present condition "AS IS." Tenant acknowledges that Tenant is not
relying on any representation of Landlord or of any agent of Landlord,
express or implied, as to the condition of the Premises, the
suitability of the Premises for particular purposes, or compliance of
the Premises with any city, county, state and/or federal statute, code
or ordinance. Landlord has not made, and no agent of Landlord has made
or is authorized to make, any representation or warranty to Tenant
regarding the Premises or the Project. Tenant is leasing the Premises
pursuant to its own independent examination, study and inspection of
the Premises and Tenant is relying upon its own determination of the
value of the Premises and the uses to which the Premises may be put.
(c) Common Areas. Tenant and its employees and visitors shall have a
license to use the common areas of the Project, in common with others,
during the time that Tenant has a right to occupy the Premises. This
license is subject to the provisions of this Lease, to events beyond
the reasonable control of Landlord (including government regulation,
casualty, or condemnation), and to the reserved right of Landlord to
delete from, add to, reconfigure, or otherwise modify the common areas
from time to time; provided, any deletions, additions,
reconfigurations or modifications which are not required by government
regulation shall not materially interfere with the visibility of or
access to the Premises. Tenant shall not make excessive use of the
common areas and shall comply with such rules and regulations
regarding the common areas as Landlord may reasonably adopt from time
to time. Landlord shall at all times throughout the term of this Lease
operate, or cause the operation of, the common areas, including the
parking areas, in the Project in a good manner consistent with past
practice. No charge shall be made or imposed upon Tenant or its
employees or visitors for parking within the Project without the prior
approval of Tenant. Parking is intended for the employees and visitors
of Tenant and the other lessees of the Project. Landlord shall not
allow the parking ratio to be less than required by any applicable
law, subject to changes in law, takings or sales in lieu of
condemnation, and other acts of government.
3. TERM. The term of this Lease is for the period set forth in Section 1,
commencing on the Commencement Date and expiring on the Expiration Date,
unless earlier terminated in accordance with the provisions of this Lease.
Upon request, the parties shall execute an Amendment hereto specifying the
exact Commencement Date and Expiration Date.
<PAGE>
4. RENT.
(a) Base Monthly Rent.
(1) Generally. Tenant shall pay Landlord base monthly rent in the
applicable amount(s) set forth in this Lease ("Base Monthly
Rent"). Base Monthly Rent shall be paid monthly in advance on the
first day of each and every calendar month. Base Monthly Rent
shall commence to accrue as of the Commencement Date; Base
Monthly Rent shall be prorated and paid in advance for any
partial first month. The obligation of Tenant to pay any amount
hereunder to Landlord shall be deemed an obligation to pay rent.
(2) Initial Occupancy Provisions. Tenant shall be given possession of
the Premises upon mutual execution and delivery of this Lease.
(b) Expenses. Beginning on and as of delivery of possession, Tenant shall
pay to Landlord the Tenant's Share (defined below) of Expenses related
to the Project.
(1) Expenses Defined. The term "Expenses" shall mean all costs
incurred by Landlord in connection with the ownership, operation,
management, improvement, replacement (excluding roof replacement
and excluding replacements and repairs to the structure of the
building not necessitated by the act or negligence of Tenant),
repair and maintenance of the Project, including roof repairs and
maintenance, but excluding (i) landscape upkeep and parking lot
cleaning and sweeping, and (ii) costs incurred by Landlord under
Section 13(c) below. Expenses include but are not limited to
taxes (including the then current installments of all local
improvement district assessments and other assessments),
insurance premiums, utility charges (electric, gas, and all
others), repair and maintenance costs, and a management and
administrative fee equal to ten percent (10%) of all Expenses
excluding taxes and insurance premiums.
(2) Tenant's Share. Tenant's Share of Expenses is defined as the
total annual amount of Expenses multiplied by a fraction, the
numerator of which is the square footage of the Premises and the
denominator of which is the square footage of the Project.
Tenant's Share of Expenses shall be calculated on an annual basis
for each calendar year, including the remainder of the calendar
year in which the Commencement Date occurs, shall be prorated for
partial calendar years, and shall be adjusted in the case of any
change in the square footage of the Premises and/or Project.
(3) Taxes and Insurance. Tenant shall pay to Landlord Tenant's Share
of taxes and insurance once each year within ten (10) days of
Landlord's invoice for the same.
(4) Estimate and Monthly Payment of Expenses; Annual Reconciliation.
Tenant shall pay to Landlord, monthly in advance, as additional
rent, one-twelfth (1/12th) of the annual estimate of Tenant's
Share of Expenses other than taxes and insurance then in effect,
beginning as of the date of delivery of possession. Immediately
prior to the Commencement Date, and prior to each calendar year
thereafter, Landlord shall estimate Tenant's Share of Expenses
other than taxes and insurance for the coming calendar year, and
such estimate shall be the basis for the foregoing payment;
Landlord may revise such estimate and readjust Tenant's payments
accordingly once during each year. Following each calendar year,
Landlord shall prepare an accounting of actual Expenses other
than taxes and
<PAGE>
insurance incurred during the prior calendar year and shall
deliver the same to Tenant. If the additional rent paid by Tenant
under this Section 4(b)4 during the preceding calendar year was
less than the actual amount of Tenant's Share of Expenses other
than taxes and insurance, Landlord shall so notify Tenant and
Tenant shall pay the shortfall to Landlord within thirty (30)
days of receipt of such notice; such amount shall be deemed to
have accrued during the prior calendar year and shall be due and
payable from Tenant even if this Lease shall have expired or if
this Lease or Tenant's right of possession shall have been
terminated prior to Tenant's receipt of this notice. If Tenant's
payments were greater than the actual amount of Tenant's Share of
Expenses other than taxes and insurance, then the overpayment
shall be credited by Landlord to Expense payments next due under
this Section 4(b)4. Tenant shall have thirty (30) days from
receipt of the annual accounting notice within which to give
written notice of a disagreement with any item with respect to
the calculation of Tenant's Share of Expenses with respect to the
preceding calendar year; failure to so notify Landlord shall
represent a final determination of Tenant's Share of Expenses
with respect to such calendar year as to any matter not the
subject of such a notice. Tenant shall have the right to review,
at Landlord's place of business, the records which relate to any
item of disagreement covered by such a written notice; in the
event such review proves an improper overcharge of Expenses
(e.g., charges for repair work performed at a different
location), Tenant's sole remedy shall be (a) a credit for the
overcharge, and (b) if the overcharge exceeds $500 in any
calendar year, reimbursement for the reasonable out-of-pocket
costs incurred by Tenant in connection with the review, excluding
attorneys fees except as allowed under Section 28(e) below.
(c) General Rent Provisions. All amounts payable hereunder from Tenant to
Landlord shall be deemed rent. All rent shall be paid by its
respective due date at the address shown in Section 1, or such other
place as Landlord may designate in writing from time to time. All rent
shall be paid without prior demand or notice and without any deduction
or offset whatsoever except only that Tenant shall have the right to
offset against rent the amount of any final judgment obtained by
Tenant against Landlord which is not then subject to appeal or review
or to any unexpired right to appeal or to request review. All rent
shall be paid in lawful money of the United States of America.
Proration of rent due for any partial month shall be calculated by
dividing the number of days in the month for which rent is due by the
actual number of days in that month and multiplying by the applicable
monthly rate.
Tenant acknowledges that late payment by Tenant to Landlord of any
rent or other sums due under this Lease will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of such cost
being extremely difficult and impractical to ascertain. Therefore, if
any rent or other sum due from Tenant is not received within five (5)
days of the date when first due, Tenant shall pay to Landlord an
additional sum equal to 5% of such overdue payment. Landlord and
Tenant hereby agree that such late charge represents a fair and
reasonable estimate of the costs that Landlord will incur by reason of
any such late payment and that the late charge is in addition to any
and all remedies available to the Landlord and that the assessment
and/or collection of the late charge shall not be deemed a waiver of
default. Additionally, all such delinquent rent or other sums, plus
this late charge, shall bear interest at the rate of 12% per annum,
or, if lower, the maximum interest rate permitted by law. If any
payment is returned for insufficient funds, Landlord may require
Tenant to pay all future payments by cashier's check.
<PAGE>
5. DEPOSIT. There will be no security deposit.
6. USE OF PREMISES.
(a) Generally. Tenant shall use the Premises solely for the continued
operation of the business of Tenant as previously operated. Tenant may
change such use only with the prior written consent of Landlord; such
consent shall be granted for any lawful and reputable legal use which
(i) is not prohibited hereunder, and (ii) is not in conflict with any
exclusive use right granted by Landlord to another lessee at the
Project.
(b) Compliance. Tenant shall promptly comply, and take all steps necessary
to cause the Premises to comply, with all laws, ordinances, codes,
orders and regulations affecting the Premises, including, without
limitation, those relating to Hazardous Substances, earthquake
preparedness, disabled persons, and/or any elevator or HVAC system;
but only to the extent that work is required by any act, use or other
work of Tenant. Tenant shall not do or permit anything to be done in
or about the Premises or bring or keep anything in the Premises that
will materially increase the risk to the Premises or Landlord. Tenant
shall not conduct nor permit (i) any nuisance, waste, or illegal
activity at the Premises, or (ii) any activity which unreasonably
interferes with the quiet enjoyment of other occupants of the Project.
7. EMISSIONS; STORAGE, USE AND DISPOSAL OF WASTE.
(a) Emissions. Tenant shall not:
(1) Release any air or water pollution from the Premises or the
Project.
(2) Release from the Premises or the Project any liquid, solid or
gaseous matter, or any combination thereof, into the atmosphere,
the ground or any body of water in violation of any law,
ordinance or regulation.
(3) Produce any unreasonable odor, noise, vibration, glare, light or
heat discernible from outside the Premises.
(b) Hazardous Substances.
(1) Generally. Without Landlord's prior written consent, Tenant shall
not bring into the Premises or the Project any "Hazardous
Substance" (except small quantities of cleaning materials or
office supplies which are used and stored in compliance with all
legal requirements, and except substances that Tenant has
previously brought into the Premises or the Project in the
ordinary course of its business). "Hazardous Substance" means (a)
any substance commonly known as such, including, without
limitation, oil, gasoline, or any similar substance, and/or (b)
any substance referred to as such or by any similar designation
in any law or regulation now or hereafter in existence relating
to health or environmental protection or relating to the use,
storage, or disposal of wastes. If Tenant desires to bring into
the Premises or any other portion of the Project any Hazardous
Substance, Tenant shall first obtain Landlord's prior written
consent in each instance, which may be withheld or conditioned by
Landlord in its discretion; any such request shall be accompanied
by a list of the Hazardous Substances and such other information
as Landlord may request.
(2) Release. Tenant shall in all events use and contain any Hazardous
Substances in strict compliance with all laws and shall not allow
any release of the same.
<PAGE>
(3) Storage. Tenant shall not store or keep any gasoline or other
fuel or explosive substances within the Premises.
(c) Disposal of Waste.
(1) Refuse Disposal. Tenant shall not keep any trash, garbage, waste
or other refuse on the Premises except in sanitary containers and
shall regularly and frequently remove the same from the Premises.
(2) Sewage Disposal. Tenant shall properly dispose of all sanitary
sewage and shall not use the sewage disposal system for the
disposal of anything except sanitary sewage nor in excess of the
amount which can be accommodated by such system. Tenant shall
keep the sewage disposal system free of all obstructions and in
good operating condition.
(d) Information. Tenant shall provide Landlord with any and all
information regarding Hazardous Substances affecting the Premises in
its possession, including copies of all filings and reports to
governmental entities at the time they are originated, and any other
information reasonably requested by Landlord. In the event of any
accident, spill or other incident involving Hazardous Substances,
Tenant shall immediately report the same to Landlord and shall supply
Landlord with all information and reports with respect to the same.
All information described herein shall be provided to Landlord
regardless of any claim by Tenant that it is confidential or
privileged.
(e) Compliance with Law. Notwithstanding any other provision in this Lease
to the contrary, Tenant shall comply with all laws, statutes,
ordinances, regulations, rules and other governmental requirements
relating to the storage, use and disposal of Hazardous Substances.
Landlord represents that (i) Landlord has received no written notice
from a governmental authority that the handling, transportation,
storage, treatment or use of Hazardous Substances at the Project to
date has not been in compliance with all applicable laws, regulations
and ordinances, and (ii) to its actual knowledge without
investigation, the Project has not been used as a landfill or dump and
no Hazardous Substances have been illegally discharged, deposited, or
dumped at the Project.
(f) Indemnification. Tenant shall defend, indemnify and hold Landlord (as
defined in Section 15) harmless from any loss, claim, liability or
expense (including attorneys' fees, fines, penalties, and
investigation, response, remediation, and response costs), arising out
of or in connection with Tenant's failure to observe or comply with
the provisions of this Section 7.
<PAGE>
8. COMPLIANCE WITH LAWS.
(a) Americans with Disabilities Act ("A.D.A.").
(1) Common Areas. Landlord agrees to adopt and to pursue a plan
intended to comply with Landlord's reasonable interpretation of
the A.D.A. as the same relates to the common areas of the
Project. Notwithstanding the foregoing, if Landlord reasonably
determines that a modification of the common areas may be legally
required under the A.D.A. or similar law or regulation by reason
of the particular activities conducted by Tenant at the Premises,
Landlord shall have the right (but not the obligation) to make
such modification and to perform all work required by reason of
such modification, and all costs incurred by Landlord in so doing
shall be reimbursed by Tenant within ten (10) days following
written notice from Landlord to Tenant. However, Landlord shall
consult with Tenant prior to performing such work and shall
cooperate with Tenant in any efforts which Tenant undertakes to
confirm that such work is not legally required so long as any
such cooperation and any delay to work by Landlord does not
subject Landlord to the possibility of legal liability.
(2) Premises. Tenant acknowledges that (a) compliance of the Premises
with the A.D.A. depends upon the uses of the Premises, the
location of each use within the Premises, alterations which
Tenant makes to the Premises, and changes to these factors over
time, and (b) Tenant may have obligations under the A.D.A. as an
employer which may differ from its obligations as the operator of
the Premises. Tenant shall make only such uses of the Premises as
comply with the A.D.A. Tenant agrees, at its expense, to cause
the Premises to comply with the A.D.A., but only to the extent
that work is required by any act, use or other work of Tenant.
Tenant further specifically agrees that, in connection with its
installation of alterations and tenant improvements, Tenant shall
comply with all requirements of the A.D.A. related to the
alterations and tenant improvements, including, but not limited
to, any requirements to improve or modify other portions or
aspects of the Premises or the Project in connection with or as a
result of the alterations or tenant improvements contemplated by
Tenant, all at the expense of Tenant.
(3) Relation To Other Provisions. Nothing in this Section 8(a) shall
expand the rights, nor limit the duties, of Tenant pursuant to
any other Section of this Lease.
(b) Other Laws and Codes. The Premises, the alteration and improvement of
the Premises by Tenant, and the use and occupancy of the Premises by
Tenant, are subject to all applicable laws, codes, regulations, and
approvals. Tenant shall comply with the same and cause the Premises to
comply with the same, at the expense of Tenant. Landlord represents
that Landlord has not received any outstanding uncured written notice
from any governmental authority of any violation of the Premises with
present laws, codes, regulations or approvals; however, Landlord does
not represent that the Premises in fact complies with all applicable
laws, codes, regulations and approvals.
(c) Indemnity. Tenant shall defend, indemnify and hold Landlord (as
defined in Section 15) harmless from any claim or cause of action and
all related costs and expenses (including attorney fees incurred by or
demanded from Landlord) arising out of or related to the failure of
Tenant to perform any obligation under this Section 8.
9. SIGNAGE. Not applicable.
<PAGE>
10. PERSONAL PROPERTY TAXES. Tenant shall pay before delinquency all taxes,
assessments, license fees and public charges levied, assessed or imposed
upon operations at the Premises or upon trade fixtures, merchandise and/or
personal property in or about the Premises.
11. PARKING. Tenant shall not allow its employees or visitors (a) to use the
parking areas of the Project other than for transient parking of standard
and compact size cars, nor (b) to park overnight or to park at any time
other than while in the Premises. Landlord reserves the right to assign,
redesign and/or reconfigure parking areas.
12. UTILITIES. Tenant shall pay, as and when due, the cost of phone,
electricity, gas water, sewer and any other utility services provided to
the Premises. Such costs shall be determined by separate metering or
monitoring provided by Landlord when feasible and economical, or by a
reasonable allocation made by Landlord. Tenant shall arrange for and pay
for all garbage service and janitorial service to the Premises.
13. MAINTENANCE.
(a) By Landlord. Landlord shall maintain the existing structural parts of
the Premises, which shall include only the existing foundations,
footings, bearing and exterior walls (excluding glass), concrete slab,
roof (excluding skylight), plumbing and electrical outside of the
Premises, and gutters and downspouts (although Tenant shall be
responsible for keeping the gutters and downspouts of the Premises
clean and unobstructed); provided, however, (a) any costs incurred by
Landlord in such maintenance shall be deemed "Expenses" under Section
4 above unless specifically excluded pursuant to Section 4 above, and
(b) any maintenance or repair to the Premises or any other portion of
the Project necessitated by the activities of Tenant or by the
negligence or excessive use of Tenant shall be reimbursed solely by
Tenant within thirty (30) days of request.
(b) By Tenant. Except as expressly set forth in Section 13(a) above,
Tenant shall, commencing on delivery of possession, maintain in good
condition and repair, at its expense, the entirety of the Premises,
including, but not limited to, all interior walls, floors, and
ceilings, all doors, windows and other glass, all fixtures, and the
plumbing, electrical and HVAC systems. Tenant shall be responsible for
snow and ice removal and shall be responsible for freeze protection of
the water system within the Premises. Landlord shall maintain an HVAC
maintenance and full service contract and Tenant shall reimburse
Landlord for the charges under the same within ten (10) days of
invoicing, and a management and administrative fee equal to ten
percent (10%) of all such charges excluding taxes and insurance
premiums. Upon expiration or termination of this Lease or of Tenant's
right of possession, Tenant shall surrender the Premises to Landlord,
in at least as good a condition as when first delivered to or
constructed by Tenant, excepting ordinary wear and tear and damage due
to casualty.
(c) Special Repairs. Landlord shall, at its cost and without reimbursement
under Section 4(b) above, accomplish the following at such time or
times as Landlord determines necessary: (a) replacement of the roof;
(b) repair of any latent or patent defects in the roof or structural
elements of the Premises existing on the date hereof; and (c)
remediation of any Hazard Substances contamination at the Premises
which is not caused, contributed to, exposed, disturbed nor worsened
by Tenant.
14. ALTERATIONS. The following provisions of this Section 14 govern subsequent
alterations of the Premises.
(a) Project. Tenant shall make no alterations to the Project other than
alterations to the Premises.
<PAGE>
(b) Alterations to Premises. Tenant shall make no alterations to the
Premises without first obtaining Landlord's prior written consent,
which prior consent may be withheld or conditioned in Landlord's
discretion; provided (a) no consent shall be necessary for
nonstructural interior alterations costing less than $2,000, and (b)
consent shall not be unreasonably withheld or conditioned for other
nonstructural changes. Any request for consent shall not be deemed
complete until the request is made in writing and is accompanied by
complete plans and specifications for the contemplated work. Tenant
shall obtain all necessary permits prior to commencement of any work
and shall contract with a licensed general contractor reasonably
acceptable to Landlord for construction of the work. Work shall not be
commenced until Tenant has obtained course of construction insurance
satisfactory to Landlord and delivered proof of such insurance to
Landlord. All work shall be prosecuted diligently and shall be
conducted in strict compliance with the approved plans and
specifications and with the applicable permits. Upon completion of the
work, Tenant shall supply to Landlord fully complete and correct "as
built" plans and specifications for the work and satisfactory
government final inspection reports (and certificates of occupancy, if
applicable). Tenant shall also comply with any conditions imposed by
Landlord in connection with Landlord's consent as allowed by this
Section.
(c) Payment. Tenant shall pay for all work at the Premises and all
materials delivered to the Premises. Payments shall be made on a
monthly basis, in full, or on such more rapid terms as are part of the
agreement between Tenant and its general contractor. Tenant shall not
allow any lien to be filed or perfected with regard to the Premises,
any portion of the Project, or any interest of Tenant related to this
Lease or the Premises. In the event any such lien is filed or
perfected, Landlord shall have the right, without waiver of the
default nor of any other remedy, to cause such lien to be removed (by
any means, including payment of the underlying claim); however,
Landlord shall give to Tenant at least thirty (30) days written notice
prior to Landlord taking steps to remove any such lien. Tenant shall
defend and indemnify Landlord, the Premises, and the Project against
any lien or other claim with regard to alteration and/or tenant
improvement work, and shall reimburse Landlord for all expenses in
connection with any such lien or claim, including attorney fees.
Landlord shall have the right to post notices of nonresponsibility at
the Premises.
(d) Removal. All alterations and tenant improvements (including all
carpeting, window treatments, and wall coverings), excluding trade
fixtures, shall be deemed a part of the Premises and shall remain on
and be surrendered with the Premises. However, Landlord shall have the
right to elect that certain alterations or tenant improvements remain
the property of Tenant and must be removed by Tenant (and affected
surfaces restored) at the expiration or termination of this Lease or
of Tenant's right of possession. This election must be made by
Landlord at the time Landlord issues its prior written consent to the
applicable alteration or tenant improvement. However, if Tenant fails
to obtain Landlord's prior written consent to the particular
alteration or tenant improvement, or if such consent is not required
hereunder, Landlord shall have the right to make this election at any
time within 90 days following the expiration or termination of this
Lease or of Tenant's right of possession.
(e) Exterior Work. Any exterior work, including painting, shall be subject
to the prior written consent of Landlord required by this Section 14.
All exterior painting, exterior sheet metal work, roof work, or work
in the common areas, if approved, shall be performed by Landlord, but
at the expense of Tenant (Landlord may require that Tenant deposit
such expense with Landlord prior to commencement of the work), or, at
the election of Landlord, by Tenant at its expense using contractors
reasonably approved by Landlord. If Tenant requests a change in paint
color on the exterior of the Premises, Landlord shall have
<PAGE>
the right to condition approval of the new color upon a change in
color to the balance of the Project, at Tenant's expense.
15. RELEASE AND INDEMNITY.
(a) Generally. Except as provided in Sections 15(b) and 16(e) below,
Tenant agrees that Landlord shall not be liable to Tenant for any
damage to Tenant or Tenant's property or business from any cause, and
Tenant waives all claims against Landlord for damage to persons,
property, or business arising for any reason in, on or about the
Premises. Tenant shall defend, indemnify and hold Landlord harmless
from all damages arising out of any damage to any person, property, or
business occurring in, on or about the Premises, including damage
caused by any act or omission of Tenant, Tenant's use of the Premises,
or Tenant's breach of any term of this Lease. For purposes of this
Section 15(a), and all other release, indemnity, and limitation of
liability provisions of this Lease other than Section 15(b), the term
"Landlord" shall include the Landlord (the originally named Landlord
and all successor lessors), all of Landlord's owners (partners,
members, shareholders, etc.), all of Landlord's agents, all master
lessors and/or ground lessors and the owners and agents of the same,
and all employees and managers of the foregoing.
(b) Landlord Indemnity. Subject to Sections 16(e), 27 and 28(c) below,
Landlord shall indemnify Tenant from any claim asserted against Tenant
to the extent arising out of the negligence of Landlord or out of a
default by Landlord as defined in, but subject to the provisions of,
Section 28(l) below.
16. INSURANCE.
(a) Liability. Tenant, at its cost, shall maintain comprehensive liability
and property damage insurance with a single combined liability limit
of $2,000,000, insuring against all liability of Tenant and its
representatives, employees, invitees, and agents arising out of or in
connection with Tenant's use or occupancy of the Premises. Such
insurance shall insure performance by Tenant of the indemnity
provisions of Section 15, but only to the extent that commercial
liability insurance policies that are customary in the industry
provide such coverage. Landlord shall be named as an additional
insured.
(b) Personal Property and Business Interruption. At its cost, Tenant shall
maintain a policy of standard fire and extended coverage insurance
with vandalism and malicious mischief endorsements and all risk
coverage on all Tenant's personal property and trade fixtures located
at the Premises in an amount equal to at least 90% of their full
replacement value or such higher amount as is necessary to avoid
co-insurance.
(c) Policies. All insurance required to be provided by Tenant under this
Lease (a) shall release Landlord from any claims for damage to any
person, to the Premises, and to Tenant's business, fixtures, personal
property, improvements and alterations in or on the Premises, (b)
shall be issued by an insurance company authorized to do business in
Oregon with a financial rating and a management rating, as rated in
the most recent edition of Best's Insurance Reports, reasonably
acceptable to Landlord, (c) shall be issued as a primary policy, (d)
shall contain an endorsement requiring at least 30 days' prior written
notice to Landlord and Landlord's lender before cancellation,
expiration, or change in coverage, scope or amount of any policy (a
"best efforts" type of notice provision is not acceptable), and (e)
shall have no deductible greater than $5,000. Tenant shall deliver a
certificate or copy of each such policy, together with evidence of
payment of all current premiums, to Landlord upon execution of this
Lease and at least thirty (30) days prior to the scheduled expiration
date of any such policy. Tenant's failure to maintain any insurance
coverage
<PAGE>
required hereunder or to provide evidence of such coverage to Landlord
shall constitute a default under this Lease.
(d) Landlord's Insurance. Landlord shall maintain such casualty,
liability, rent loss, and other insurance regarding the Project as
Landlord deems appropriate from time to time. The costs of such
insurance (including premiums and deductibles) shall be deemed
"Expenses" under Section 4(b) above. Such insurance shall include, at
a minimum, comprehensive liability insurance with a combined single
limit of at least $2,000,000 covering claims arising in the common
areas of the Project and extended coverage fire and casualty insurance
(including earthquake) on a replacement cost basis with rent loss
coverage in an amount selected by Landlord but which is sufficient to
avoid co-insurance. Tenant shall be named as an additional insured on
Landlord's liability policy. Landlord shall deliver a certificate of
insurance to Tenant upon annual request.
(e) Waiver of Subrogation. Anything in this Lease to the contrary
notwithstanding, Landlord and Tenant each hereby waives any and all
rights of recovery, claims, and causes of action against the other and
its agents (including partners, both general and limited), officers,
directors, shareholders and employees for any loss or damage that may
occur to the Premises or any improvements thereto, the Project, or any
improvements thereto, or any property of such party therein, by reason
of fire, the elements, or any other cause which could be insured
against under the terms of a fire and extended coverage insurance
policy, regardless of cause or origin, including negligence of the
other party hereto, its agents, officers, or employees, and each party
covenants that no insurer shall hold any right of subrogation against
such other party.
17. DESTRUCTION.
(a) Project. Damage to or destruction of portions of the Project other
than the Premises shall not affect the rights and obligations of the
parties under this Lease.
(b) Premises. If a casualty occurs at the Premises, Landlord shall have
the right to terminate this Lease by written notice given within 60
days of such casualty in the event (a) Landlord estimates that the
cost of restoration necessitated by such casualty (including the cost
of all work which must be undertaken in connection with the
restoration) shall exceed 50% of the then replacement cost of the
building in which the Premises are located, (b) Landlord estimates
that the uninsured portion of such restoration cost exceeds $250,000,
or (c) the term of this Lease is then scheduled to expire within one
(1) year following the date of the casualty. In the event Landlord
terminates this Lease pursuant to this Section 17(b), the termination
shall be without liability to Landlord, and Tenant shall vacate the
Premises within thirty (30) days of receipt of the termination notice.
In all other instances, following a casualty, Landlord shall proceed
with reasonable diligence to restore the damaged portions of the
Premises to approximately their condition prior to the casualty.
Tenant acknowledges that the restoration may not produce an exact
recreation of the former condition of the Premises, since laws, codes,
and site conditions may require some variation from the previous
Premises to the restored Premises.
(c) No Claim. Tenant shall have no claim against Landlord for any damage
suffered by reason of any damage or destruction. Rent shall be abated
by reason of damage or destruction to the Premises to the extent and
so long as Tenant is unable to use the same for the conduct of its
business.
18. CONDEMNATION. In the event the entirety of the Premises is taken by eminent
domain, this Lease shall terminate as of the earlier that title or the
right of possession passes to the condemning authority. If a part of the
Premises is so taken, this Lease shall terminate as to the part so taken as
of
<PAGE>
the earlier of the passing of possession or title to the condemning
authority, and this Lease shall remain in full force and effect as to the
portion of the Premises not so taken, except that Base Monthly Rent shall
be reduced to the same proportion that the area of the remaining Premises
bears to the area of the entire Premises immediately prior to such taking,
and Landlord shall perform any necessary restoration work; provided,
however, (a) Landlord shall have the right to terminate this Lease due to
such partial taking by ten (10) days' written notice given within ninety
(90) days of the passage of title or possession, and (b) in the event the
remaining Premises are unsuitable for use by Tenant, then Tenant shall have
the right to terminate this Lease by ten (10) days' written notice given
during such ninety (90) day period. Any award for the taking of all or any
part of the Premises shall be the sole and exclusive property of Landlord
and Tenant shall not have the right to participate in the condemnation
proceedings. However, Tenant shall be entitled to any award for relocation
benefits or for the loss of tangible personal property owned by Tenant, so
long as the same does not reduce the award otherwise payable to Landlord.
19. ASSIGNMENT OR SUBLEASE.
(a) Assignment or Subletting. Tenant shall not assign its interest in this
Lease or the Premises or sublease all or any part of the Premises or
allow any other person or entity to occupy or use all or any part of
the Premises nor to operate a concession at the Premises without first
obtaining Landlord's written consent. Landlord's prior written consent
to an assignment, sublease, or occupancy/concession shall not be
unreasonably withheld, but may be issued subject to conditions. One
such condition may be payment of a reasonable security deposit. Any
request for consent shall be complete only upon delivery to Landlord
of all information requested by Landlord to evaluate a request for
such consent. Any assignment, sublease, or occupancy/concession
without Landlord's written consent shall be voidable and, at
Landlord's election, shall constitute a default.
(b) Ownership Changes. If Tenant is a partnership, a withdrawal or change,
voluntary, involuntary, or by operation of law, of any partner, or the
dissolution of the partnership, shall be deemed a voluntary
assignment. If Tenant consists of more than one person, a purported
assignment, voluntary or involuntary or by operation of law from one
person to the other shall be deemed a voluntary assignment. If Tenant
is a corporation or limited liability company, any dissolution, merger
(upstream or downstream), consolidation, or other reorganization of
Tenant, or sale or other transfer of a controlling percentage of the
capital stock (or membership interest) of Tenant other than with
Portland Brewing Company or any subsidiary or other affiliate of
Portland Brewing Company, or the sale of at least 50% of the value of
the operating assets of Tenant to any person other than to Portland
Brewing Company or any subsidiary or other affiliate of Portland
Brewing Company shall be deemed a voluntary assignment. The phrase
"controlling percentage" means ownership of and right to vote stock or
membership interests possessing at least 25% of the total combined
voting power of any class of equity securities (e.g., stock or
membership interests) issued and outstanding. The preceding two
sentences shall not apply to the sale of stock by or of corporations
the stock of which is publicly traded through an exchange; a public
offering of the stock of a corporate Tenant shall not be deemed an
assignment.
(c) Portland Brewing Company Transfer. Notwithstanding the foregoing,
Tenant shall have the right to assign this Lease or to sublet a
portion of the Premises to Portland Brewing Company or any subsidiary
or other affiliate of Portland Brewing Company. Tenant shall give to
Landlord at least thirty (30) days prior written notice of any such
sublease, and shall comply with such conditions as are requested by
Landlord in connection with such sublease.
<PAGE>
(d) Involuntary Assignment. No interest of Tenant in this Lease shall be
assignable by involuntary assignment through operation of law
(including without limitation the transfer of this Lease by testacy or
intestacy). Each of the following acts shall be considered an
involuntary assignment: (i) if Tenant is or becomes insolvent, (ii) if
Tenant makes an assignment for the benefit of creditors, or if Tenant
becomes a debtor in a case under the Bankruptcy Act (or if Tenant is a
partnership or consists of more than one person or entity, if any
partner of the partnership or other such person or entity is the
debtor), (iii) if a writ of attachment or execution is levied on this
Lease; or (iv) if, in any proceeding or action to which Tenant is a
party, a receiver is appointed with authority to take possession of
the Premises. An involuntary assignment shall constitute a default by
Tenant, and Landlord shall have the right to elect to terminate this
Lease, in which case this Lease shall not be treated as an asset of
Tenant.
(e) Termination. In the event this Lease expires or is terminated, or
Landlord terminates the right of possession of Tenant, all
subtenancies of the Premises shall terminate at that time, or at the
election of Landlord, one or more of such subtenancies shall continue
but with the lessor's interest in the same being deemed assigned to
Landlord; provided, however, that Landlord shall have no obligation,
and Tenant shall continue to be liable, with respect to any prepaid
amounts, security deposits, and acts or omissions by Tenant which
occurred or relate to the period prior to the deemed assignment of
such a subtenancy to Landlord.
(f) Payment. Whether or not consent is granted, and in cases where consent
is not required but prior notice and compliance with conditions is
required, Tenant shall reimburse Landlord for all costs incurred by
Landlord in connection with the assignment, sublease or concession up
to a maximum reimbursement of $1,000.
(g) Encumbrances. Tenant shall not, voluntarily or involuntarily, create
nor allow any lien, encumbrance or security interest to arise, be
filed or be perfected against the Premises, any improvements or
alterations, or the lessee's interest in this Lease.
20. DEFAULT. The occurrence of any of the following shall constitute a default
by Tenant: (a) a failure to pay rent or other charge within five (5) days
of written notice that the same is due but unpaid (provided, only one such
written notice need be given in any calendar year and failure to pay any
rent or other charge thereafter in such calendar year within five (5) days
of when due shall be a default without the need for any such written
notice); (b) failure to perform any other provision of this Lease within
ten (10) days of written notice of such failure (although no such written
notice shall be required for a failure if a failure of the same nature has
already occurred under this Lease); (c) Tenant becomes insolvent; (d)
Tenant becomes a debtor in a bankruptcy proceeding; or (e) any guarantor of
this Lease fails to perform any obligation under its guaranty, any such
guarantor attempts to revoke its guaranty, any such guarantor becomes
insolvent, any such guarantor dissolves or otherwise ceases to exist, any
such guarantor becomes a debtor in a bankruptcy proceeding, or any such
guarantor fails to perform any obligation under its guaranty.
21. LANDLORD'S REMEDIES.
(a) Generally. Landlord shall have the following remedies if Tenant is in
default of the Lease. These remedies are not exclusive; they are
cumulative and in addition to any remedies now or later allowed by
law. Landlord may terminate this Lease and/or Tenant's right to
possession of the Premises at any time. No act by Landlord other than
giving notice to Tenant shall terminate this Lease. Acts of
maintenance, efforts to relet the Premises, or the appointment of a
receiver on Landlord's initiative to protect Landlord's interest under
this Lease shall not constitute a termination of Tenant's right to
possession.
<PAGE>
(b) Damages. Upon termination of this Lease or of Tenant's right to
possession, Landlord has the right to recover from Tenant: (i) the
worth of the unpaid rent that had been earned at the time of
termination; (ii) the worth of the amount of the unpaid rent that
would have been earned after the date of termination less the worth of
replacement rent that could be earned by Landlord; and (iii) any other
amount, including but not limited to expenses incurred to relet the
Premises, court, attorney, and collection costs, necessary to
compensate Landlord for all detriment caused by Tenant's default. "The
Worth," as used in item (i) in this Section 21, is to be computed by
allowing interest at the rate of 12 percent per annum or, if lower,
the maximum interest rate permitted by law. "The Worth" as used in
item (ii) in this Section 21, is to be computed by discounting the
amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of termination of Tenant's right of possession.
"Unpaid rent" shall include Base Monthly Rent and Expenses. Nothing in
this Section shall limit any obligation imposed by Oregon law upon
Landlord to mitigate its damages.
(c) Performance by Landlord. All covenants and agreements to be performed
by Tenant under this Lease shall be performed by Tenant at its sole
cost and expense and without any offset against rent. If Tenant shall
fail to pay any sum of money owed to any party other than Landlord for
which it is liable hereunder, or if Tenant shall fail to perform any
other act on its part to be performed hereunder, Landlord may, without
waiving such default or any other right or remedy, but shall not be
obligated to, make any such payment or to perform any such other act
to be made or performed by Tenant. All sums so paid by Landlord, and
necessary incidental costs, together with interest thereon at the rate
specified hereinabove from the date of expenditure by Landlord, shall
be payable to Landlord on demand.
22. ENTRY ON PREMISES. Landlord and its authorized representatives shall have
the right to enter the Premises at all reasonable times for any of the
following purposes: (a) to determine whether the Premises are in good
condition and whether Tenant is complying with its obligations under this
Lease; (b) to show the Premises to lenders, brokers, or persons interested
in leasing or purchasing the Premises, or (c) to perform work, maintenance
or repairs or to take steps to protect Landlord's interests. All entries
outside of normal business hours shall be preceded by notice to Tenant
except in cases of emergency. Landlord shall not be liable in any manner
for any inconvenience, disturbance, loss of business, nuisance or other
damage arising out of Landlord's entry onto the Premises nor shall any
entry be deemed an eviction. In an emergency, Landlord may enter by any
means deemed necessary. Tenant shall not be entitled to an abatement or
reduction of rent if Landlord exercises any rights reserved in this Section
22. Landlord shall use reasonable efforts to limit the duration and degree
of any disturbance caused to Tenant by entry onto the Premises by Landlord.
23. SUBORDINATION. Without the necessity of any additional document being
executed by Tenant for the purpose of effecting a subordination, and at the
election of Landlord or any mortgagee or any beneficiary of a Deed of Trust
with a lien on the Premises or any ground lessor with respect to the
Premises, this Lease shall be subject and subordinate at all times to (a)
all ground leases or underlying leases which may now exist or hereafter be
executed affecting the Premises, and (b) the lien of any mortgage or deed
of trust which may now exist or hereafter be executed in any amount for
which the Premises, ground leases or underlying leases, or Landlord's
interest or estate in any of said items is specified as security; provided,
however, no default by Landlord under any such mortgage or other security
instrument shall affect Tenant's rights under this Lease, so long as Tenant
pays and performs all of its obligations hereunder. In the event that any
ground lease or underlying lease terminates for any reason or any mortgage
or Deed of Trust is foreclosed or a conveyance in lieu of foreclosure is
made for any reason, Tenant shall, notwithstanding any subordination,
attorn to and become the Tenant of the successor in interest to Landlord.
Tenant covenants and agrees to execute and deliver, upon request by
Landlord and in the form reasonably requested by Landlord
<PAGE>
any additional documents evidencing the priority or subordination of this
Lease with respect to any such ground lease or underlying leases or the
lien of any such mortgage or Deed of Trust so long as any subordination
agreement required by such a ground lessor or lender includes a provision
to the effect that, so long as Tenant performs all of its obligation
hereunder, the rights of Tenant hereunder shall not be disturbed.
Tenant, within twenty days of request from Landlord from time to time,
shall execute and deliver to Landlord a certificate stating that this Lease
is not in default (or specifying the defaults), and is in full force and
effect without modification (or stating the modifications). This
certificate shall also state the amount of current monthly rent, the dates
to which rent has been paid in advance, and the amount of any security
deposit and prepaid rent, and such other factual matters as are reasonably
requested. Failure to deliver this certificate to Landlord within twenty
days shall entitle Landlord, without waiver of the default or of other
remedies, to issue an estoppel certificate supplying the requested
information to Landlord's knowledge; a copy of the same shall be delivered
to Tenant, and Tenant shall be estopped to deny the matters set forth in
such estoppel certificate.
24. NOTICE. Any notice under this Lease shall be in writing and shall be either
hand delivered, sent by overnight courier, sent by facsimile with hard copy
by regular mail, or sent by mailed notice meaning prepaid certified first
class mail, return receipt requested, addressed as set forth in Section 1.
Notice shall be deemed to be communicated upon hand delivery, facsimile
transmission, delivery by overnight courier, or three (3) days following
such deposit of mailed notice. Either party may change its address by such
a written notice to the other party. As a courtesy, each party shall
simultaneously send a copy of any notice given hereunder also to the last
known attorney of the other party, but failure to do so shall not affect
the rights of the party giving the notice nor invalidate any notice given.
25. WAIVER. No delay or omission in the exercise of any right or remedy by
Landlord shall impair such right or remedy or be construed as a waiver. No
act or conduct of Landlord, including without limitation acceptance of the
keys to the Premises, shall constitute an acceptance of the surrender of
the Premises by Tenant before the expiration of the term. Only written
notice from Landlord to Tenant shall constitute acceptance of the surrender
of the Premises and accomplish termination of the Lease. Landlord's consent
to or approval of any act by Tenant requiring Landlord's consent or
approval shall not be deemed to waive or render unnecessary Landlord's
consent to or approval of any subsequent act by Tenant. Any waiver by
Landlord of any default may be proved and established only by a writing
signed by Landlord expressly setting forth the waiver. No waiver by
Landlord of a default shall be a waiver of any other default concerning the
same or any other provision of the Lease.
26. SURRENDER OF PREMISES; HOLDING OVER. Upon the expiration of this Lease or
the sooner termination of this Lease or of Tenant's right of possession,
Tenant shall (a) surrender the Premises to Landlord in accordance with
Section 14 above, and (b) remove all of its personal property which is not
then encumbered by a lien asserted by Landlord. Tenant waives all claims
against Landlord for any damage to personal property not so removed and
Tenant shall be liable to Landlord for Landlord's cost for storage,
removal, or disposal of such personal property.
If Tenant remains in possession of the Premises after such expiration or
termination, or after the date in any notice given by Landlord to Tenant
terminating this Lease or Tenant's right of possession, in either case
without a written extension agreement being executed by Landlord and
Tenant, then, without waiver of the right of summary eviction, such
possession by Tenant shall be a tenancy at sufferance terminable on written
notice at any time, by either party. All provisions of this Lease, except
those pertaining to term and rent, shall apply to the tenancy. Tenant shall
pay Base Monthly Rent, prorated daily, at the rate of 125% of Base Monthly
Rent for the last full rent paying calendar month during the regular term,
plus 100% of Expenses pursuant to Section 4(b).
<PAGE>
27. LIMITATION OF LIABILITY. The liability of Landlord upon any claim made by
Tenant related to this Lease, or otherwise related to the Premises or
Project (for breach of this Lease, in tort, for statutory liability, or
otherwise) is expressly limited to the interest of Landlord in the Project,
and Tenant shall have no recourse to any other assets of Landlord. In
addition, and without limiting the effect of the foregoing, in the event
Landlord is a limited liability company, joint venture, partnership or
co-tenancy, then (a) the sole and exclusive remedy of Tenant shall be
against the limited liability company, joint venture, partnership or
co-tenancy and its assets, and (b) no member, venturer, partner or
co-tenant (nor any owner or agent of the same) shall be sued by Tenant or
named as a party in litigation by Tenant, and no judgment may be taken or
enforced by Tenant against any such member, venturer, partner or co-tenant
(nor any owner or agent of the same). In no event whatsoever shall any
claim be made against any ground lessor or master lessor of the Premises.
28. MISCELLANEOUS PROVISIONS.
(a) Time of Essence. Time is of the essence of each provision of this
Lease.
(b) Successor. This Lease shall be binding on and inure to the benefit of
the parties and their successors.
(c) Landlord's Consent. Any consent required by Landlord under this Lease
shall be valid only if granted in writing and, unless otherwise
specifically provided herein, may be withheld or conditioned by
Landlord in its sole and absolute discretion. In no event shall Tenant
have the right to terminate this Lease, and in no event shall Landlord
be liable for monetary damages, based upon a claim arising from the
withholding or conditioning of consent; the sole remedy of Tenant for
any alleged improper withholding or conditioning of consent shall be a
court order requiring Landlord to grant the requested consent on terms
ordered by the court.
(d) Commissions. Each party represents that no commission is owed to any
real estate broker, finder, or other person with respect to this
Lease.
(e) Attorney Fees and Costs. In the event of litigation arising out of or
in connection with the Lease, the prevailing party shall be entitled
to recover from the other party reasonable attorney's fees and costs
incurred at and in preparation for trial and any appeal or review, as
well as in bankruptcy proceedings and/or arbitration proceedings. If
Landlord employs a collection agency to recover delinquent charges,
Tenant agrees to pay all collection agency and attorneys' fees charged
to Landlord in addition to rent, late charges, interest, and other
sums payable under this Lease.
(f) Landlord's Successors. In the event of a sale or other conveyance by
Landlord of the Premises, the same shall operate to release the
conveying Landlord from any later arising liability under this Lease,
and, in such event, Landlord's successor in interest shall be solely
responsible for all such obligations under this Lease. Similarly, no
succeeding Landlord shall be in any way liable for claims which arise
prior to conveyance of the Premises to such successor.
(g) Interpretation. This Lease shall be construed and interpreted in
accordance with the laws of the state of Oregon. Each party has had
the full opportunity to have this Lease reviewed by such attorneys and
others as each such party deems fit; this Lease shall not be construed
strictly nor adversely against Landlord by reason of the same having
been initially drafted by the attorneys for Landlord. This Lease
constitutes the entire agreement between the parties with respect to
the Premises and may be amended only by a written document signed by
both Landlord and Tenant. When required by the context of this Lease,
the
<PAGE>
singular shall include the plural, and the masculine shall include the
feminine and/or neuter. "Party" shall mean Landlord or Tenant. If more
than one person or entity constitutes Tenant, the obligations imposed
upon that party shall be joint and several; if Tenant consists of or
includes a partnership, all partners shall be jointly and severally
liable. In the event any provision hereof is held to be void or
unenforceable as written, the parties intend and desire that (i) such
provision be enforced to the fullest extent allowed by law, (ii) if
necessary, a court reform the provision to allow for such enforcement,
and (iii) the balance of this Lease remain fully enforceable.
(h) Survival. The indemnity, release, limitation of liability, and
attorneys fees provisions hereof shall survive the expiration or
termination of this Lease or other Tenant's right of possession. No
such expiration or termination shall relieve Tenant from any liability
hereunder.
(i) Relationship; No Joint Venture or Partnership. The relationship of
Landlord and Tenant is only that of a lessor and a lessee; no other
relationship (such as a partnership, joint venture or agency
relationship) is intended nor created hereby.
(j) Lease Memorandum. At the request of Tenant, Landlord shall execute a
recordable memorandum of this Lease. Upon request at or after the
expiration or termination of this Lease or of Tenant's right of
possession, Tenant shall execute and deliver to Landlord a Quitclaim
Deed which Landlord may record to remove such memorandum of lease.
(k) Landlord Obligations. Landlord shall pay the property taxes assessed
against the Project prior to foreclosure of the same for delinquency.
Landlord represents to Tenant that it has full right and power to
execute this Lease, to perform its obligations hereunder, and to grant
the estate demised herein. Subject to the provisions hereof, Landlord
covenants that, so long as Tenant fully and timely performs all of its
obligations hereunder, Tenant shall have possession of the Premises
free from eviction by Landlord or those claiming through Landlord
(including Landlord's lenders), subject to acts of government and the
provisions of this Lease.
(l) Landlord Default. Landlord shall not be deemed in default of this
Lease unless and until Landlord shall have failed to perform any of
its obligations set forth in this Lease and such failure shall have
continued for thirty (30) days following the giving by Tenant of
written notice to Landlord specifying the failure; provided, however,
in the event more than thirty (30) days is reasonably required to cure
such failure, Landlord shall not be deemed in default hereunder if
Landlord commences cure within such thirty (30) day period and
thereafter pursues cure to completion. In the event of a Landlord
default, Tenant shall be entitled to collect its actual damages
arising from such default, but consequential and incidental damages
are hereby waived. Upon the failure of Landlord to pay any taxes or
assessments which are liens against the Premises prior to foreclosure
of the same, and the continuance of such failure following the
expiration of the applicable notice and cure period, Tenant shall have
the right to pay such taxes and related charges to cure such default
on behalf of and at the expense of Landlord, and the amount so paid
shall be reimbursed to Tenant by Landlord within thirty (30) days
after written demand, with interest thereon at the rate of 12 percent
per annum. Further, in the event of a failure by Landlord to perform
any of its maintenance obligations under Section 13 above, and the
continuance of such failure following the expiration of the applicable
notice and cure period, Tenant shall have the right to perform all
necessary work on behalf of and at the expense of Landlord, and the
necessary cost of such work shall be paid to Tenant by Landlord within
thirty (30) days after written demand, with interest thereon at 12
percent per annum, so long as Tenant provides to Landlord evidence of
the performance of such work, evidence of payment in full for such
work, and evidence of lien waivers from all
<PAGE>
contractors who performed any such work or who would otherwise have
the right to claim a lien by reason of such work; any such work
undertaken by Tenant shall be undertaken in compliance with the
provisions of Section 14 above. Tenant shall have no right to
terminate this Lease based upon a default by Landlord unless such
default materially interferes with the ability of Tenant to continue
to conduct its business at the Premises for at lease thirty (30)
consecutive days. Nothing in this Section 28(l) shall limit the
operation of Sections 27 and 28(c).
(m) Quiet Enjoyment. So long as Tenant pays and performs in full, as and
when due, all obligations of Tenant hereunder, Landlord covenants that
Tenant shall have possession of the Premises, subject to the terms and
provisions of this Lease, the rights of Landlord under this Lease, and
all acts and requirements of governmental authority.
LANDLORD: MACTARNAHAN LIMITED PARTNERSHIP
By: HARMER MILL & LOGGING SUPPLY CO., a
corporation, general partner
By: /s/ R. SCOTT MACTARNAHAN
Its: VICE PRESIDENT
TENANT: HARCO PRODUCTS, INC., an Oregon corporation
By: /s/ CHARLES A. ADAMS
Its: President and Chief Executive Officer
Exhibits
- --------
A - Premises and Project
EXHIBIT 10.25
CONSULTING AGREEMENT
This Consulting Agreement (the "Agreement") is made and entered into as of
January 31, 2000 between PORTLAND BREWING COMPANY, an Oregon corporation (the
"Company"), and Steve Goebel ("Consultant").
RECITALS:
A. Consultant is a shareholder, officer, and director of Saxer Brewing Company
and will be appointed a director of the Company in connection with the
Company's purchase of certain assets from Saxer Brewing Company pursuant to
an Asset Purchase Agreement between the Company and Saxer Brewing Company;
and
B. The Company desires to retain Consultant to provide certain consulting
services and Consultant desires to provide such services to the Company
upon the terms and conditions described in this Agreement.
AGREEMENT
1. CONSULTING SERVICES. Consultant will advise and consult with the management
of the Company concerning such matters related to brand management and marketing
as management of the Company may reasonably request. Consultant will comply with
the policies, standards, and regulations of the Company as may be established
from time to time, and will perform his consulting duties faithfully,
intelligently, to the best of his ability, and in the best interests of the
Company. The consulting services provided will not amount to more than 60 hours
per calendar month and will be provided on dates and at times reasonably
convenient to both parties.
2. STATUS OF CONSULTANT. Consultant will act as an independent contractor of the
Company, and under no circumstances will Consultant be considered an employee of
the Company. CONSULTANT SHALL HAVE NO RIGHT, POWER OR AUTHORITY OF ANY KIND OR
NATURE TO BIND THE COMPANY TO ANY CONTRACT OR COMMITMENT, TO INCUR ANY
OBLIGATION OR INDEBTEDNESS ON BEHALF OF THE COMPANY, OR OTHERWISE TO ACT FOR OR
ON BEHALF OF THE COMPANY IN ANY RESPECT. The Company will not provide any
insurance covering Consultant's consulting activities, and Consultant will
provide whatever insurance Consultant believes to be necessary under the
circumstances to cover his consulting activities. The Company will not withhold
any taxes from any consideration paid to Consultant, and Consultant will assume
full responsibility for the payment of all federal, state and local taxes or
contributions imposed or required under employment insurance, social security,
worker's compensation, and income tax laws arising by reason of the performance
of Consultant's consulting services. Consultant will defend, indemnify, and hold
harmless the Company, and its shareholders, directors, officers, employees, and
agents from and against any and all losses, claims, expenses, costs, attorney's
fees, demands, damages, suits, judgments, actions and causes of action resulting
from or arising out of Consultant's failure to pay or remit such taxes or
contributions, but not including any claim or action arising out of or
challenging the characterization of Consultant as an independent contractor
rather than an employee of the Company.
3. NON-COMPETITION. Consultant covenants and agrees, on behalf of himself and
any affiliated business or entity ("Affiliates"), that during the term of this
Agreement and so long as Consultant is a director of the Company, Consultant and
his Affiliates shall not, in North America:
(i) sell, produce or market product or render services or advice to any
business competitive with the business of the Company, except Consultant and his
Affiliates, as a contract brewer, may produce but not market product for The
Boston Beer Company or Oregon Beer & Brewing Company, a division of The
<PAGE>
Boston Beer Company or under any other agreement or arrangement which Company
may consent to in writing; or
(ii) directly or indirectly (A) induce or attempt to induce any employee of
the Company to leave the employ of the Company, (B) in any way interfere with
the relationship between the Company and any employee of the Company, (C)
employ, or otherwise engage as an employee, independent contractor, or
otherwise, any employee of the Company, or (D) induce or attempt to induce any
customer, supplier, licensee, or business relation of the Company to cease doing
business with the Company, or in any way interfere with the relationship between
any customer, supplier, licensee, or business relation of the Company.
Nothing in this Agreement, shall prevent or limit Consultant or his
Affiliates from selling Saxer Brewing Company's remaining brewery assets as an
operating business or otherwise, subject to the Company's right of first refusal
to purchase any such assets or business on the same terms and conditions as any
other potential purchaser. Any such sale to a party other than the Company shall
not be construed to be competitive with the Company for the purposes of this
Agreement.
Consultant agrees that this covenant is reasonable with respect to its
duration, geographical area, and scope.
4. CONFIDENTIALITY. In performing services for the Company, Consultant
acknowledges that he will receive and have access to confidential information.
Consultant agrees not to use or disclose any confidential information except as
expressly agreed to by the Company.
5. CONSIDERATION. During the term of this Agreement, the Company will pay to
Consultant the sum of $4,500.00 per calendar month, payable on the last day of
each calendar month. Consultant will be entitled to receive consideration for
his consulting services regardless of the number of hours of services actually
provided by Consultant in any given month and regardless of whether the Company
requests Consultant to provide any services at all in any given month. The
Company will reimburse Consultant for all reasonable expenses necessarily
incurred by Consultant in the performance of his consulting services, provided
Consultant complies with the reimbursement policies of the Company as may be
established from time to time.
6. TERMINATION. This Agreement shall terminate on May 31, 2000, unless extended
until June 30, 2000 by the Company. To extend the Agreement to June 30, 2000,
the Company shall give Consultant notice to that effect on or before May 10,
2000. This Agreement will terminate immediately upon the death of Consultant.
7. OWNERSHIP OF WORK. All right, title, and interest of every kind and nature
whatsoever in and to computer programs, software, firmware, inventions,
discoveries, improvements, developments, processes, formulae, methods,
techniques, trade secrets, products, and research actually made, developed, or
secured by Consultant, or demonstrably anticipated to be made developed, or
secured by Consultant in connection with the provision of services under this
Agreement, shall be the sole and exclusive property of the Company and shall be
disclosed promptly to the Company. All work created pursuant to this Agreement
that may be protectable under copyright laws, shall be deemed to be "work made
for hire" and will be owned by the Company; and, in any event, Consultant
assigns all copyrights in such work to the Company.
8. GENERAL.
8.1 No Assignment by Consultant. This Agreement is personal to Consultant
and Consultant may not assign or delegate any of his rights or obligations under
the Agreement without the prior written consent of the Company.
<PAGE>
8.2 Binding Effect. Except as otherwise provided in this Agreement, this
Agreement will be binding upon the parties and their heirs, personal
representatives, successors, and assigns, and will inure to their benefit.
8.3 Amendment. This Agreement may be amended only by a written instrument
executed by the party against whom enforcement is sought.
8.4 Notices. All notices or other communications required or permitted by
this Agreement must be in writing and will be deemed to have been duly given
when delivered personally to the party for whom such notice was intended, or
upon actual receipt if sent by facsimile or delivered by a nationally recognized
overnight delivery service, or at the expiration of the third day after the date
of deposit if deposited in the United States mail, postage pre-paid, certified
or registered, return receipt requested, to the respective parties at the
following addresses, or at such other address that a party may specify by notice
given to the other parties:
To Consultant: To the Company:
Steve Goebel Portland Brewing Company
4019 SW Downsview Court 2730 Northwest 31st Avenue
Portland, OR 97221 Portland, Oregon 97210
Attn: Charles A. Adams
With a copy to:
Tonkon Torp, LLP Schwabe, Williamson & Wyatt, P.C.
1600 Pioneer Tower PacWest Center, Suites 1600-1800
888 SW Fifth Ave. 1211 SW Fifth Ave.
Portland OR 97204 Portland, OR 97204
Attn: Steven M. Wilker Attn: Carmen M. Calzacorta
8.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
8.6 Severability. If any provision of this Agreement is deemed to be
invalid or unenforceable in any respect for any reason, the validity and
enforceability of any such provision in any other respect and of the remaining
provisions of this Agreement will not be in any way impaired.
8.7 Further Assurances. The parties agree to execute other documents
reasonably necessary to further effect and evidence the terms of this Agreement,
as long as the terms and provisions of the other documents are fully consistent
with the terms of this Agreement.
8.8 No Third-Party Beneficiaries. Nothing in this Agreement, express or
implied, is intended to confer on any person, other than the parties to this
Agreement, any right or remedy of any nature whatsoever.
8.9 Non-waiver. The waiver by any party of a breach or violation of any
provision of this Agreement will not operate and may not be construed as a
waiver of any other provision or any subsequent breach of the same provision. No
waiver will be binding unless executed in writing by the party making the
waiver.
8.10 Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Oregon.
8.11 Attorney's Fees. In the event of litigation arising out of, or in
any related to any term set forth in this Agreement, including (without
limitation) any proceeding brought under the United States Bankruptcy Code, the
losing party will pay to the prevailing party, in addition to any other relief
awarded,
<PAGE>
the prevailing party's reasonable attorney's fees, costs and expenses incurred
at arbitration, at trial, on appeal and on petition for review.
8.12 Entire Agreement. This Agreement sets forth the entire understanding
of the parties with respect to the subject matter of this Agreement and
supersedes any and all prior and contemporaneous negotiations, understandings
and agreements, whether written or oral, between the parties with respect to
such subject matter.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COMPANY:
PORTLAND BREWING COMPANY
/s/ CHARLES A. ADAMS
-------------------------------------------
Its: President and Chief Executive Officer
CONSULTANT:
/s/ STEVE GOEBEL
-------------------------------------------
Steve Goebel
EXHIBIT 21
PORTLAND BREWING COMPANY
SUBSIDIARIES OF THE REGISTRANT
Harco Products, Inc. (an Oregon corporation)
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated March 10, 2000, included in this Form 10-KSB, into the Company's
previously filed Registration Statement File No. 33-93754 on Form S-8.
ARTHUR ANDERSEN LLP
Portland, Oregon
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements found in the Company's Report on Form 10-KSB
for the year ended December 31, 1999, and is qualified in its entirety by
reference to such Consolidated Financial Statements.
</LEGEND>
<CIK> 0000943658
<NAME> PORTLAND BREWING COMPANY
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 103,006
<SECURITIES> 0
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300,040
0
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</TABLE>
