-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IjoskIAkCZnVg0JD1eQ8soNOWScZhhFa28Day4ZNz87PNnRAi9A+td/FpeejzTEd r4OXtTLpFSn90u5X1HsYXg== 0000950005-98-000882.txt : 19981116 0000950005-98-000882.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950005-98-000882 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MENDOCINO BREWING CO INC CENTRAL INDEX KEY: 0000919134 STANDARD INDUSTRIAL CLASSIFICATION: MALT BEVERAGES [2082] IRS NUMBER: 680318293 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-13636 FILM NUMBER: 98746412 BUSINESS ADDRESS: STREET 1: 13351 S HWY 101 CITY: HOPLAND STATE: CA ZIP: 95449 BUSINESS PHONE: 7077441015 MAIL ADDRESS: STREET 1: 13351 S HWY 101 CITY: HOPLAND STATE: CA ZIP: 95449 10QSB 1 FORM 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT For the transition period from _____________ to _____________ Commission file number 1-13636 Mendocino Brewing Company, Inc. (Exact name of small business issuer as specified in its charter) California 68-0318293 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 13351 South Highway 101, Hopland, California 95449 (Address of principal executive offices) (707) 744-1015 (Issuer's telephone number) Not Applicable (Former name, former address and former fiscal year, if changed since last report) 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 [ ] APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares of the issuer's common stock outstanding as of September 30, 1998 is 4,497,059. PART I Item 1. Financial Statements. MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET September 30, 1998 (Unaudited)
ASSETS CURRENT ASSETS Cash and cash equivalents $ 190,700 Accounts receivable 849,800 Inventories 966,200 Prepaid expenses 129,500 Deferred income taxes 400,000 ------------ Total Current Assets: 2,536,200 ------------ PROPERTY AND EQUIPMENT 15,514,600 ------------ OTHER ASSETS Goodwill 63,400 Prepaid points and other assets 114,800 Deferred Income taxes 944,100 ------------ Total Other Assets: 1,122,300 ------------ Total Assets: $ 19,173,100 ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable 1,060,400 Accrued wages and related expense 221,100 Other accruals 270,500 Current maturities of obligations under capital lease 177,400 Current maturities of obligations under long-term debt 25,700 ------------ Total Current Liabilities: 1,755,100 LONG TERM DEBT, less current maturities 5,189,500 LONG TERM DEBT, capital leases - less current maturities 1,621,300 ------------ Total Liabilities: 8,565,900 ------------ STOCKHOLDERS' EQUITY Common stock, no par value: 20,000,000 shares authorized, 4,497,059 shares issued and outstanding 12,413,000 Preferred stock, Series A, no par value, with aggregate liquidation preference of $227,600: 227,600 shares authorized, issued and outstanding 227,600 Retained earnings (2,033,400) ------------ Total Stockholders' Equity 10,607,200 ------------ Total Liabilities and Stockholders' Equity: $ 19,173,100 ============ The accompanying notes are an integral part of these financial statements.
1 MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
-------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED September 30, September 30, -------------------------------------------------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- SALES $ 2,360,000 $ 1,467,700 $ 5,360,300 $ 3,792,200 LESS EXCISE TAXES 134,500 79,300 303,900 198,700 ----------- ----------- ----------- ----------- NET SALES 2,225,500 1,388,400 5,056,400 3,593,500 COST OF GOODS SOLD 1,465,700 899,700 3,823,500 2,240,600 ----------- ----------- ----------- ----------- GROSS PROFIT 759,800 488,700 1,232,900 1,352,900 ----------- ----------- ----------- ----------- OPERATING EXPENSES Retail operating 141,100 196,600 373,500 531,200 Marketing 422,600 184,200 911,100 615,000 General and administrative 480,900 216,800 1,385,900 606,000 ----------- ----------- ----------- ----------- 1,044,600 597,600 2,670,500 1,752,200 ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS (284,800) (108,900) (1,437,600) (399,300) ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSE) Interest income 100 1,300 1,900 4,400 Other income (expense) 16,700 7,100 12,500 12,800 Write off of deferred offering costs -- -- -- (141,000) Interest expense (153,300) (44,000) (404,900) (73,600) ----------- ----------- ----------- ----------- (136,500) (35,600) (390,500) (197,400) ----------- ----------- ----------- ----------- LOSS BEFORE INCOME TAXES (421,300) (144,500) (1,828,100) (596,700) Provision For Income Taxes 190,700 131,000 731,200 244,600 ----------- ----------- ----------- ----------- NET LOSS $ (230,600) $ (13,500) $(1,096,900) $ (352,100) =========== =========== =========== =========== LOSS PER SHARE $ (0.05) $ (0.01) $ (0.24) $ (0.15) =========== =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,497,059 2,341,548 4,497,059 2,335,106 =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements.
2 MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
-------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED September 30, September 30, -------------------------------------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $ (230,600) $ (13,500) $(1,096,900) $ (352,200) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization 183,100 126,900 515,300 237,600 Deferred income taxes (190,700) (111,600) (731,200) (135,200) Changes in: Accounts receivable (161,400) (23,200) (520,100) (123,600) Inventories (276,700) (126,300) (422,100) (48,800) Prepaid expenses and taxes 162,300 600 (96,700) (8,500) Refundable income tax 106,300 (19,400) 106,300 (109,400) Accounts payable -- (97,800) 332,100 206,400 Accrued wages and related expenses (4,000) 11,200 51,400 30,400 Accrued liabilities (154,200) 384,200 (58,000) 420,000 ----------- ----------- ----------- ----------- Net cash provided (used) by operating activities: (565,900) 131,100 (1,919,900) 116,700 ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment, and leasehold (33,400) (264,600) (199,500) (1,925,900) improvements Purchase of goodwill (17,600) -- (17,600) 14,000 ----------- ----------- ----------- ----------- Net cash used by investing activities: (51,000) (264,600) (217,100) (1,911,900) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from short-term borrowing (600,000) (1,300) (600,000) 797,700 Principal payments on long-term debt (12,400) -- (18,300) -- Borrowings on long-term debt 1,462,200 -- 2,445,300 -- Proceeds from obligation under capital lease -- -- -- -- Payments on obligation under long-term lease (56,900) (38,700) (139,700) (89,900) Refundable deposit -- 464,000 -- 964,000 Accrued construction costs (500) 25,900 (500) 76,000 Proceeds from sale of common stock -- -- -- 164,200 Deferred stock offering costs -- -- -- 37,700 Deferred private placement costs (65,400) (415,000) (65,400) (496,800) ----------- ----------- ----------- ----------- Net cash provided by financing activities: 727,000 34,900 1,621,400 1,452,900 ----------- ----------- ----------- ----------- DECREASE IN CASH AND CASH EQUIVALENTS 110,100 (98,600) (515,600) (342,300) CASH AND CASH EQUIVALENTS, beginning of period 80,600 251,000 706,300 494,700 ----------- ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of period $ 190,700 $ 152,400 $ 190,700 $ 152,400 =========== =========== =========== =========== Supplemental cash flow information includes the following: Cash paid during the period for: Interest $ 129,700 $ 154,400 $ 404,900 $ 402,300 ----------- ----------- ----------- ----------- Non-cash investing and financing activities for the nine month period ending September 30, 1998, consisted of acquiring fixed assets of $185,500 through capital leases and stock issued for goodwill of $45,800. The accompanying notes are an integral part of these financial statements.
3 MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 -- Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended December 31, 1997. In the opinion of Management, all adjustments considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. Note 2 -- Short-Term Borrowing The Company has a note payable outstanding to an individual in the amount of $93,700, with interest accruing at 9%, due December 31, 1998, secured by real property and subordinated to bank debt. Note 3 -- Long Term Debt In March 1998, the Company refinanced its short-term construction note that matured on January 1, 1998, to a $2,700,000 note, with interest at Treasury Constant Maturity Index for five year treasuries plus 4.17%, currently 9.86%. The note requires monthly payments of principal and interest of $24,400. The note matures in December 2012 with a balloon payment of $1,940,000 and is secured by real property located in Ukiah, California. The Company's largest shareholder, United Breweries of America, Inc. ("UBA"), has agreed to provide the Company with a credit facility of up to $2,000,000. Each advance will bear interest at the prime rate of Bank of America of San Francisco, plus 1.5%, and is due 18 months from the date of such advance. As of September 30, 1998, UBA has advanced $1,014,000 under the credit facility. The entire principal balance, together with all unpaid interest, is convertible into common stock of the Company on or before the maturity date at a rate of one share of common stock for each $1.50 principal and unpaid interest. The CIT Group/Credit Finance, Inc., has provided the Company with a $3,000,000 maximum line of credit with an advance rate of 80% of the qualified accounts receivable and 60% of the inventory at an interest rate of prime rate of Chase Manhattan Bank in New York plus 2.25% payable monthly, maturing September 23, 2000. The line of credit is secured by all accounts, general intangibles, inventory, and equipment of the Company except for the specific equipment and fixtures of the Company subject to a lien in favor of Finova Capital Corporation, as well as by a second deed of trust on the property of the Company in Mendocino County, California. $1,483,968 of the line of credit was advanced to the Company as an initial term loan, which is repayable in immediately available funds in sixty consecutive monthly installments, each in the amount of $24,733, commencing on March 24, 1999. $600,000 of the initial term loan was used to repay all amounts outstanding on the loan from WestAmerica Bank. 4 Note 4 -- Income Taxes As of September 30, 1998, the Company had available net operating loss carryovers of approximately $3,329,300 and $2,192,700 of federal and California net operating losses, respectively. The benefit from these loss carryforwards has been recorded, resulting in a deferred tax asset. A valuation allowance is not provided since the Company believes it is more likely than not that the loss carryforwards will be fully utilized. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis should be read in conjunction with the financial statements and the Notes thereto included as Item 1 of this Report. The discussion of results and trends does not necessarily imply that these results and trends will continue. Forward-Looking Information The Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-QSB contain forward-looking information. The forward-looking information involves risks and uncertainties that are based on current expectations, estimates and projections about the Company's business, Management's beliefs and assumptions made by Management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar expressions are intended to identify such forward-looking information. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking information due to numerous factors, including, but not limited to, availability of financing for operations, successful performance of internal operations, impact of competition, changes in distributor relationships or performance and other risks detailed below as well as those discussed elsewhere in this Form 10-QSB and from time to time in the Company's Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic economic conditions. Overview The third quarter of 1998 was highlighted by a substantial increase in sales volume both out of the facility located in Ukiah, California, and the facility located in Saratoga Springs, New York. The increase in net sales during the nine-month period ending September 30, 1998, was achieved in significant part through increased and improved marketing efforts. Sales (measured in barrels) during the first nine months of 1998 increased to 27,475 barrels from 15,411 barrels in the first nine months of 1997. This represents an increase of 78% over the first nine months of 1997. Of the total sales of 27,475 barrels, the sales out of the Ukiah facility amounted to 21,774 barrels and the sales out of the Saratoga Springs facility amounted to 5,701 barrels. As against sales of 15,210 barrels during the first six months of 1998, the volume achieved during the third quarter ending September 1998 was 12,265 barrels. The high costs associated 5 with the new brewery located at Ukiah, the fixed costs of the Ten Springs brewery, and the interest expenses contributed to a net loss of $1,096,900 for the first nine months of 1998. Loss from operations increased to 28.44% of net sales for the first nine months of 1998, as compared to the 11.11% loss from operations for the corresponding period of 1997. UBA, the Company's largest shareholder, has agreed to provide the Company with a credit facility of up to $2,000,000 for working capital purposes. Each advance will bear interest at prime rate of Bank of America of San Francisco plus 1.5% and is due and payable 18 months after the date of such advance. UBA has advanced $1,014,000 to the Company under such credit facility as of September 30, 1998. The entire principal balance, together with all unpaid interest, is convertible into common stock of the Company on or after the maturity date at a rate of one share of common stock for each $1.50 principal and unpaid interest. Failure of UBA to fund this credit facility could have a material adverse effect on the Company's business, financial condition and results of operation. The CIT Group/Credit Finance, Inc. has provided the Company with a $3,000,000 maximum line of credit with an advance rate of 80% of the qualified accounts receivable and 60% of the inventory at an interest rate of prime rate of Chase Manhattan Bank of New York plus 2.25% payable monthly, maturing September 23, 2000. The line of credit is secured by all accounts, general intangibles, inventory, and equipment of the Company except for the specific equipment and fixtures of the Company subject to a lien in favor of Finova Capital Corporation, as well as by a second deed of trust on the property of the Company in Mendocino County, California. $1,483,968 of the line of credit was advanced to the Company as an initial term loan, which is repayable in immediately available funds in sixty consecutive monthly installments, each in the amount of $24,733, commencing on March 24, 1999. $600,000 of the initial term loan was used to repay all amounts outstanding on the loan from WestAmerica Bank. To the extent that the loan is not extended or refinanced at the end of the term of the loan, the Company will be required to repay the loan. Failure of the Company to repay the loan or to find a lender to refinance the loan could have a material adverse effect on the Company's business, financial condition and results of operations. Results of Operations Nine Months Ending September 30, 1998 Compared to Nine Months Ending September 30, 1997. The following discussion sets forth information for the nine-month periods ending September 30, 1998 and 1997. This information has been derived from unaudited interim financial statements of the Company contained elsewhere herein and reflects, in Management's opinion, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for these periods. Results of operations for any interim period are not necessarily indicative of results to be expected for the full fiscal year. The following table sets forth, as a percentage of sales, certain items included in the Company's Statements of Income, as set forth above under "Financial Statements," for the periods indicated: 6 -------------------------- Nine Months Ended September 30 -------------------------- 1998 1997 Statements of Income Data: Sales 106.01% 105.53% Excise taxes 6.01 5.53 ------ ------ Net Sales 100.00 100.00 Costs of Sales 75.62 62.35 ------ ------ Gross Profit 24.38 37.65 Retail Operating Expense 7.39 14.78 Marketing Expense 18.02 17.12 General and Administrative Expenses 27.41 16.86 ------ ------ Total Operating Expenses 52.82 48.76 ------ ------ Loss from Operations (28.44) (11.11) Other Income (expense) 0.29 (3.45) Interest income (expense) (8.00) (2.05) ------ ------ Loss before income taxes (36.15) (16.61) Benefit from income taxes 14.46 6.81 ------ ------ Net Loss (21.69) (9.80) ====== ====== ------------------------------- At September 30 ------------------------------- 1998 1997 Balance Sheet Data: Cash and Cash Equivalents $ 190,700 $ 152,400 Working Capital 781,100 (6,176,500) Property and Equipment 15,514,600 11,128,600 Deposits and Other Assets 178,200 100 Total Assets 19,173,100 13,059,500 Long-term Debt 6,810,800 1,622,600 Total Liabilities 8,565,900 9,111,400 Shareholder's equity 10,607,200 3,948,100 Net Sales. Net sales for the first nine months of 1998 were $5,056,400 compared to $3,593,500 for the first nine months of 1997, representing an increase of 40.71%. The sales volume increased to 27,475 barrels during the first nine months of 1998 from 15,411 barrels during the first nine months of 1997, representing an increase of 78.28%. Of the total sales of 27,475 barrels, the sales out of the Ukiah facility amounted to 21,774 barrels and the sales measured in barrels from the Saratoga Springs facility was 5,701 barrels. Management attributes the growth in sales at the Ukiah facility to new marketing strategies including new point of sale materials. 7 The growth in sales at the Saratoga Springs facility is due primarily to contract brewing arrangements and the launch of new brands on the East Coast. The increase in overall net sales during the first nine months of 1998 was achieved solely by higher wholesale shipments during the nine month period. The wholesale beer sales registered an increase of 1,720,900 during the first nine months of 1998 when compared to the corresponding period of 1997. In view of Management's focus on wholesale beer sales, retail sales for the first nine months of 1998 decreased by 152,700 when compared to that of the corresponding period of 1997. Cost of Goods Sold. Cost of goods sold as a percentage of net sales during the nine month period was 75.62% when compared to 62.35% for the corresponding period of 1997 representing an increase of 13.27%. During the nine month period, depreciation increased by $277,700, labor costs increased by $161,000, utilities increased by $126,600, insurance increased by $92,300, rentals increased by $83,300, property taxes increased by $102,700. Management attributed the increase to higher fixed and production costs and to the under utilization of brewing facilities in Ukiah, California and Saratoga Springs, New York. Gross Profit. As a result of the high cost of sales as explained above, the gross profit for the first nine months of 1998 decreased to $1,232,900 from $1,352,900 for the same period in 1997, representing a decrease of 8.86%. As a percentage of net sales, the gross profit during the first nine months of 1998 decreased to 24.38% from 37.65% for the corresponding period of 1997. Operating Expenses. Operating expenses for the first nine months of 1998 were $2,670,500 as compared to $1,752,200 for the first nine months of 1998, representing an increase of 52.40%. Operating expenses consists of retail operating expenses, marketing and distribution expenses and general and administrative expenses. Retail operating expenses for the first nine months of 1998 were $373,500 as compared to $531,200 for the corresponding period of 1997, representing a decrease of 29.68%. As a percentage of net sales retail operating expenses decreased to 7.39% as compared to 14.78% for the same period in 1997. The decrease in retail operating expenses reflects a decrease in labor costs of $74,400, marketing and advertising costs of $57,800, supplies of $25,800 and a net increase in other expenses of $300. The decrease in operating expenses is attributable to cost cutting and better management of the Hopland pub and merchandise store. Marketing and Distribution expenses for the first nine months of 1998 were $911,100 as compared to $615,000 for the same period in 1997. As a percentage of net sales, marketing and distribution accounted for 18.02% when compared to 17.12% during the first six months of 1997. The increase in marketing and distribution expenses comprised of an increase in marketing labor costs by $261,900, travel and entertainment by $39,800, cost of point of sales materials and sales promotions increased by $115,300, 15th year anniversary celebration costs of $15,600, offset by a decrease in freight costs by $54,250, decrease in label and package development costs by $37,900, decrease in warehouse rent by $15,000, decrease due to a non-recurrence of a $30,000 provision in connection with the termination of a distributor and net of other expenses increased by $650. General and Administrative expenses were $1,385,900 as compared to $606,000 for the first nine months of 1998. As a percentage of net sales, the general and administrative expenses were 8 27.41% in the first nine months of 1998 as compared to 16.86% in the corresponding period of 1997. In comparison with the corresponding period of last year, the first nine months of 1998 had an increase in labor costs by $381,100, travel and entertainment by $128,400, legal and professional services by $171,000, rent by $19,000, supplies by $16,000, telephone expenses by $24,200, depreciation by $35,200, and net of all other expenses by $5,000. The increase is attributable to more employees and additional breweries located at Ukiah and Saratoga Springs. Other Income (Expense). The other expense for the first nine months of 1998 was $390,500 as compared to that of $197,400 for the corresponding period of 1997. The increase of $193,100 is mainly attributable to an increase in interest expense to the extent of $331,300 during the first nine months of 1998 when compared to the relevant period in 1997 offset by non-recurrence of a write off of deferred offering costs to the extent of $141,000 in 1997. Benefit from Income Taxes. The benefit from income taxes for the first nine months of 1998 was $731,200 as compared to $244,600 for the corresponding period of 1997. The benefit from income taxes is due to the expected future benefit of carrying forward of net operating losses. Net Loss. Net Loss for the first nine months of 1998 was $1,096,900 as compared to net loss of $352,100 during the first nine months of 1997. As a percentage of net sales, net loss for the first nine months of 1998 was 21.69% as compared to 9.80% for the corresponding period of 1997. Segment Information The Company's business presently consists of two segments. The first is brewing for wholesale to distributors and other retailers. This segment accounted for 89.6% of the Company's total gross sales during the first nine months of 1998. The second segment consists of brewing beer for sale along with food and merchandise at the Company's brewpub and retail merchandise store located at the Hopland Brewery. This segment accounted for 10.4% of the Company's total gross sales during the first nine months of 1998. With expanded wholesale beer production in both Ukiah and Saratoga Springs, Management expects that retail sales, as a percentage of total sales, will decrease proportionally to the expected increase in the Company's wholesale sales. The Company's business segments are brewing operations and a retail establishment known as Hopland Brewery. A summary of each segment is as follows:
Nine Months Ended September 30, 1998 ---------------------------------------------------------------------------- Brewing Corporate and Operations Hopland Brewery Other Total ------------------ ------------------- ------------------ ------------------ Sales 4,805,100 555,200 - 5,360,300 Operating profit (loss) (1,382,700) (54,900) - (1,437,600) Identifiable assets 16,307,100 86,000 2,780,000 19,173,100 Depreciation and amortization 459,900 4,600 50,800 515,300 Capital Expenditures 278,800 - 106,200 385,000 9 Nine Months Ended September 30, 1997 ---------------------------------------------------------------------------- Brewing Corporate and Operations Hopland Brewery Other Total ------------------ ------------------- ------------------ ------------------ Sales 3,084,200 708,000 - 3,792,200 Operating profit (loss) (375,900) (23,400) - (399,300) Identifiable assets 10,505,200 100,400 2,453,900 13,059,500 Depreciation and amortization 199,900 5,100 8,000 213,000 Capital Expenditures 2,037,800 - 31,900 2,069,700
Seasonality Beer consumption nationwide has historically increased by approximately 20% during the summer months as compared to other months of the year. It is not clear to what extent seasonality will affect the Company as it expands its capacity and its geographic markets. Capital Demands The Company has yet to complete the build-out of its administrative space and the exterior landscaping of the Ukiah facility. The Ukiah brewery is presently operating under a temporary certificate of occupancy from the City of Ukiah. Completion of construction is a condition to the issuance of a final certificate of occupancy. Failure to complete construction and obtain a final certificate of occupancy could have a material adverse effect on the Company's business, financial condition and results of operation. Liquidity and Capital Resources Long Term Debt. The Company has in place a $2,700,000 term loan from the Savings Bank of Mendocino County. The loan is payable in monthly installments of $24,400, including interest at the Treasury Constant Maturity Index plus 4.17%, currently 9.86%, maturing December 2012 with a balloon payment in the amount of $1,940,000, secured by some of the assets of the Company (other than the Ten Springs Brewery), including without limitation, a first priority deed of trust on the Ukiah land and improvements, fixtures and most of the equipment of the Company. Shareholder Commitment. The Company's largest shareholder, UBA, agreed to provide the Company with a credit facility of up to $2,000,000. Each advance will bear interest at the prime rate plus 1.5% and are due and payable 18 months after the date of such advance. The advances will have a conversion feature into unregistered shares of the Company's common stock. The entire principal balance, together with all unpaid interest, is convertible into common stock of the Company, on or after the maturity date, at a rate of one share of common stock for each $1.50 principal and unpaid interest. UBA has advanced a total of $1,014,000 as of September 30, 1998. Equipment Lease. The Company has leased from FINOVA Capital Corporation new brewing equipment at a total cost of approximately $1,780,000 to the Company for a term of 7 years (commencing December 1996) with monthly rental payments of approximately $27,100 each. At expiration of the initial term of the lease, the Company may purchase the equipment at its then current fair market value but not less than 25% nor more than 30% of the original cost of the 10 equipment, or at the Company's option, may extend the term of the lease for an additional year at monthly rental payments of approximately $39,000 with an option to purchase the equipment at the end of the year at then current fair market value. The lease is not pre-payable. Seller Financing of Ukiah Real Estate. The seller of the Ukiah land holds a promissory note, secured by a third priority deed of trust on the Ukiah property, with a remaining principal balance as of September 30, 1998 of $93,700 at 9% annual interest due on December 31, 1998 pursuant to a verbal agreement with the spokesman for the lending group. Credit Facility. The CIT Group/Credit Finance, Inc., located in Chicago, Illinois has provided the Company with a $3,000,000 maximum line of credit with an advance rate of 80% of the qualified accounts receivable and 60% of the inventory at an interest rate of prime rate of Chase Manhattan Bank of New York plus 2.25% payable monthly, maturing September 23, 2000. The line of credit is secured by all accounts, general intangibles, inventory, and equipment of the Company except for the specific equipment and fixtures of the Company subject to a lien in favor of Finova Capital Corporation, as well as by a second deed of trust on the property of the Company in Mendocino County, California. $1,483,968 of the line of credit was advanced to the Company as an initial term loan, which is repayable in immediately available funds in sixty consecutive monthly installments, each in the amount of $24,733, commencing on March 24, 1999. $600,000 of the initial term loan was used to repay all amounts outstanding on the loan from WestAmerica Bank. Keg Management Arrangement. The Company has entered into a keg management agreement with MicroStar Keg Management LLC. Under this arrangement, MicroStar provides the Company with half-barrel kegs for which the Company pays a filling fee. Distributors return the kegs to MicroStar instead of the Company. MicroStar then supplies the Company with additional kegs. If the agreement terminates, the Company is required to purchase a certain number of kegs from MicroStar. The Company would probably finance the purchase through debt or lease financing, if available. The Company's ratio of current assets to current liabilities on September 30, 1998, was 1.44 to 1.0 and its ratio of assets to liabilities was 2.24 to 1.0. Year 2000 Readiness Many currently-installed computer systems and software products are coded to accept only two digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept four digit entries in order to distinguish 21st century dates from 20th century dates. On January 1, 2000, many computer, and embedded systems, may recognize the year "00" as 1900 rather than 2000. Because many computer functions are date-sensitive, this error may cause systems to process data inaccurately or shut down if they do not recognize the date. If not corrected, this could result in a system failure or miscalculations causing disruptions of operations. The Company is taking steps to ensure its operations will not be adversely impacted by potential year 2000 computer failures. The Company is assessing all systems for year 2000 impacts and 11 costs of upgrading or replacing systems that are not year 2000 ready, and testing and monitoring systems for year 2000 readiness. The Company does not expect the year 2000 project costs to have a material effect on its financial position or results of operations. The Company believes that its most significant internal risk posed by the year 2000 problem is the possibility of a failure of equipment involved in its brewing processes. If the brewing processes equipment were to fail, the Company would have to implement manual processes, which may slow production levels that would affect the Company's sales volume. The programmable logic controller connected to the brewing equipment and the processes are not date sensitive. A testing of the brewing house facility computer operations indicated that all of the computer systems are year 2000 compliant; however, there can be no assurance that problems may not arise relevant to year 2000. The third parties whose year 2000 problems could have the greatest effect on the Company are believed by the Company to be banks that maintain the Company's depository accounts, the company that processes the Company's payroll, and the Company's suppliers and distributors. The Company has not confirmed the state of year 2000 readiness of these parties. The Company has not yet established a "contingency plan" to address potential year 2000 problems and is currently considering the extent to which it will develop a formal contingency plan. Impact of Expansion on Cash Flow. The Company must make timely payment of its debt and lease commitments to continue its operations. Unused capacity at the Ukiah facility and the Saratoga Springs facility has placed additional demands on the Company's working capital. Working capital for day to day business operations had historically been provided primarily through operations. Beginning approximately with the second quarter of 1997, the time at which the Ukiah brewery commenced operations, proceeds from operations have not been able to provide sufficient working capital for day to day operations. UBA agreed to provide a loan of up to $2,000,000 for working capital purposes. In addition, pursuant to the Investment Agreement dated October 24, 1997 between the Company and UBA, UBA agreed to provide directly or indirectly funding for the working capital requirements of the Ten Springs Brewery in an amount not to exceed $1,000,000 until October 24, 1999, or until the brewery's operations are profitable, whichever comes first. UBA, through its affiliated entities, has fulfilled this obligation by facilitating the CIT Group $3,000,000 loan transaction. PART II Item 1. Legal Proceedings. The Company is engaged in ordinary and routine litigation incidental to its business. Management does not anticipate that any amounts, which it may be required to pay by reason thereof, will have a material effect on the Company's financial position. 12 Item 2. Changes in Securities. None. Item 3. Default Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 6. Exhibits and Reports on Form 8-K.
Exhibit Number Description of Document - -------------- ----------------------- 3.1 (A) Articles of Incorporation, as amended, of the Company. 3.2 (B) Bylaws of the Company 4.1 Articles 5 and 6 of the Articles of Incorporation, as amended, of the Company (Reference is made to Exhibit 3.1). 4.2 Article 10 of the Restated Articles of Incorporation, as amended, of the Company (Reference is made to Exhibit 3.2). 10.1 (A) Mendocino Brewing Company Profit Sharing Plan. 10.2 (A) 1994 Stock Option Plan (previously filed as Exhibit 99.6). 10.3 (M) Employment Agreement with H. Michael Laybourn. 10.4 (A) Wholesale Distribution Agreement between the Company and Bay Area Distributing. 10.5 (A) Wholesale Distribution Agreement between the Company and Golden Gate Distributing. 10.6 (A) Sales Contract between the Company and John I. Hass, Inc. 10.7 (F) Liquid Sediment Removal Services Agreement with Cold Creek Compost, Inc. 10.8 (A) Lease Agreement between the Company and Kohn Properties. 10.9 (C) Commercial Real Estate Purchase Contract and Receipt for Deposit (previously filed as Exhibit 19.2). 10.10 (D) Installment Note between Ukiah Redevelopment Agency and Langley et al. (previously filed as Exhibit 19.5). 10.11 (F) Promissory Note for $76,230 in favor of Langley et al. 10.12 (G) Agreement to modify note and deed of trust dated June 6, 1995 with Langley, et al. 10.13 (G) Agreement to modify note dated June 6, 1995 with Langley, et al. 10.14 (G) Amendment to installment note payable to Langley, et al. 10.15 (N) Commercial Lease between Stewart's Ice Cream Company, Inc. and Releta Brewing Company LLC. 10.16 (M) Agreement between United Breweries of America, Inc. and Releta Brewing Company LLC regarding payment of certain liens. 10.17 (K)+ Keg Management Agreement with MicroStar Keg Management LLC. 10.18 (E) Agreement to Implement Condition of Approval No. 37 of the Site Development Permit 95-19 with the City of Ukiah, California (previously filed as Exhibit 19.6). 10.19 (G) Manufacturing Business Expansion and Relocation Agreement with the City of Ukiah. 10.20 (G) Manufacturing Business Expansion and Relocation Agreement with the Ukiah Redevelopment Agency. 13 Exhibit Number Description of Document - -------------- ----------------------- 10.21 (O) $2,700,000 Note in favor of the Savings Bank of Mendocino County. 10.22 (O) Hazardous Substances Certificate and Indemnity with the Savings Bank of Mendocino County. 10.23 (J) Equipment Lease with FINOVA Capital Corporation. 10.24 (J) Tri-Election Rider to Equipment Lease with FINOVA Capital Corporation. 10.25 (J) Master Lease Schedule with FINOVA Capital Corporation. 10.26 (L) Investment Agreement with United Breweries of America, Inc. 10.27 (L) Shareholders' Agreement Among the Company, United Breweries of America, Inc., H. Michael Laybourn, Norman Franks, Michael Lovett, John Scahill, and Don Barkley. 10.28 (L) Registration Rights Agreement Among the Company, United Breweries of America, Inc., H. Michael Laybourn, Norman Franks, Michael Lovett, John Scahill, and Don Barkley. 10.29 (P) Indemnification Agreement with Vijay Mallya. 10.30 (P) Indemnification Agreement with Michael Laybourn. 10.31 (P) Indemnification Agreement with Jerome Merchant. 10.32 (P) Indemnification Agreement with Yashpal Singh. 10.33 (P) Indemnification Agreement with P.A. Murali. 10.34 (P) Indemnification Agreement with Robert Neame. 10.35 (P) Indemnification Agreement with Sury Rao Palamand. 10.36 (P) Indemnification Agreement with Kent Price. 10.37 Loan and Security Agreement between the Company, Releta Brewing Company LLC and The CIT Group/Credit Finance, Inc. regarding a $3,000,000 maximum line of credit. 10.38 Patent, Trademark and License Mortgage by the Company in favor of The CIT Group/Credit Finance, Inc. 10.39 Patent, Trademark and License Mortgage by Releta Brewing Company LLC in favor of The CIT Group/Credit Finance, Inc. 27 Financial Data Schedule. - --------------- (A) Incorporated by reference from the Company's Registration Statement dated June 15, 1994, as amended, previously filed with the Commission, Registration No. 33-78390-LA. (B) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1994, previously filed with the Commission. (C) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended March 31, 1995, previously filed with the Commission. (D) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended June 30, 1995, previously filed with the Commission. (E) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended September 30, 1995, previously filed with the Commission. (F) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1995, previously filed with the Commission. (G) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended June 30, 1996, previously filed with the Commission. (H) Incorporated by reference from the Company's Report on Form 10-QSB/A No. 1 for the quarterly period ended June 30, 1996, previously filed with the Commission. 14 Exhibit Number Description of Document - -------------- ----------------------- (J) Incorporated by reference from the Company's Registration Statement dated February 6, 1997, as amended, previously filed with the Commission, Registration No. 33-15673. (K) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1996, previously filed with the Commission. (L) Incorporated by reference from the Schedule 13D filed with the Commission on November 3, 1997, by United Breweries of America, Inc. and Vijay Mallya. (M) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended September 30, 1997. (N) Incorporated by reference from the Company's Report on Form 10-QSB/A No. 1 for the quarterly period ended September 30, 1997. (O) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1997, previously filed with the Commission. (P) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended June 30, 1998. + Portions of this Exhibit were omitted pursuant to an application for an order declaring confidential treatment filed with the Securities and Exchange Commission.
No reports on Form 8-K were filed during the quarter for which this report is filed. 15 SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGISTRANT: MENDOCINO BREWING COMPANY, INC. Dated: November 12, 1998 By: /s/ H. Michael Laybourn ------------------------------ H. Michael Laybourn President Dated: November 12, 1998 By: /s/ P.A. Murali ------------------------------ P.A. Murali Chief Financial Officer 16 EXHIBIT INDEX Exhibit Number ------ 10.37 Loan and Security Agreement between the Company, Releta Brewing Company LLC and The CIT Group/Credit Finance, Inc. regarding a $3,000,000 maximum line of credit. 10.38 Patent, Trademark and License Mortgage by the Company in favor of The CIT Group/Credit Finance, Inc. 10.39 Patent, Trademark and License Mortgage by Releta Brewing Company LLC in favor of The CIT Group/Credit Finance, Inc. 27 Financial Data Schedule. EX-10.37 2 LOAN AND SECURITY AGREEMENT Exhibit 10.37 LOAN AND SECURITY AGREEMENT This Agreement is between the undersigned Borrowers and the undersigned Lender concerning loans and other credit accommodations to be made by Lender to Borrowers. SECTION 1. PARTIES 1.1 The "Borrowers" are the corporations identified as the Borrower in Section 10.6(c) and their respective successors and assigns. All references to Borrowers shall mean each of them, jointly and severally, individually and collectively, and the successors and assigns of each. 1.2 The "Lender" is The CIT Group/Credit Finance, Inc. and its successors and assigns. SECTION 2. LOANS AND OTHER CREDIT ACCOMMODATIONS 2.1 Revolving Loans. Lender shall, subject to the terms and conditions contained herein, make revolving loans to each Borrower ("Revolving Loans") in amounts requested by such Borrower from time to time, but not in excess of the Net Availability, as defined in Section 2.1(c) below, for such Borrower existing immediately prior to the making of the requested loan and provided the requested loan would not cause the outstanding Obligations, as defined in Section 4.2 below, to exceed the Maximum Credit, as defined in Section 2.1(a) below. (a) The "Maximum Credit" is set forth in Section 10.1(a) hereof. (b) The "Gross Availability" shall be calculated at any time for each Borrower as (i) the product obtained by multiplying the outstanding amount of Eligible Accounts, as defined in Section 2.1(d) below, for such Borrower, net of all taxes, discounts, allowances and credits given or claimed, by the Eligible Accounts Percentage set forth in Section 10.1(b)(i), plus: (ii) the product(s) obtained by multiplying the applicable Eligible Inventory Percentage(s), if any, for such Borrower set forth in Section 10.1(b)(ii) by the values (as determined by Lender based on the lower of cost or market) of Eligible Inventory for such Borrower, but the amount so added shall not exceed in the aggregate (taking into account all Borrowers) any sublimits set forth in Section 10.1(c), (c) The "Net Availability" shall be calculated at any time as an amount equal to the Gross Availability for all Borrowers in the aggregate minus the aggregate amount of all then-outstanding Obligations to Lender other than the then outstanding principal balance of the Term Loans, as defined in Section 2.2(a) below, if any. Exhibit 10.37 - 1 (d) "Eligible Accounts" are accounts created by each Borrower in the ordinary course of its business which are and remain acceptable to Lender for lending purposes. General criteria for Eligible Accounts are set forth below but may be revised from time to time by Lender, in its sole judgment, on fifteen (15) days' prior written notice to such Borrower. Lender shall, in general, deem accounts to be Eligible Accounts if: (1) such accounts arise from bona fide completed transactions and have not remained unpaid for more than the number of days after the invoice date set forth in Section 10.1(d); (2) the amounts of the accounts reported to Lender are absolutely owing to a Borrower and do not arise from sales on consignment, guaranteed sale or other terms under which payment by the account debtors may be conditional or contingent; (3) the account debtor's chief executive office or principal place of business is located in the United States; provided, however, that an account arising from an account debtor outside of the United States may be an Eligible Account to the extent that the sale is secured by either a letter of credit or foreign credit insurance terms acceptable to Lender in its sole discretion; (4) such accounts do not arise from progress billings retainages or bill and hold sales; (5) there are no contra relationships, setoffs, counterclaims or disputes existing with respect thereto and there are no other facts existing or threatened which would impair or delay the collectibility of all or any portion thereof; (6) the goods giving rise thereto were not at the time of the sale subject to any liens except those permitted in this Agreement; (7) such accounts are not accounts with respect to which the account debtor or any officer or employee thereof is an officer, employee or agent of or is affiliated with a Borrower, directly or indirectly, whether by virtue of family membership, ownership, control, management or otherwise; (8) such accounts are not accounts with respect to which the account debtor is the United States or any State or political subdivision thereof or any department, agency or instrumentality of the United States, any State or political subdivision, unless there has been compliance with the Assignment of Claims Act or any similar State or local law, if applicable; (9) the applicable Borrower has delivered to Lender or Lender's representative such documents as Lender may have requested pursuant to Section 5.8 hereof in connection with such accounts and Lender shall have received a verification of such accounts, satisfactory to it, if sent to the account debtor or any other obligor or any bailee pursuant to Section 5.4 hereof; (10) there are no facts existing or threatened which might result in any adverse change in the account debtor's financial condition; (11) such accounts owed by a single account debtor or its affiliates do not represent more than twenty percent (20%) of all otherwise Eligible Accounts to a Borrower (accounts excluded from Eligible Accounts solely by reason of this subsection (11) shall nevertheless be considered Eligible Accounts to the extent of the amount of such accounts which does not exceed twenty percent (20%) of all otherwise Eligible Accounts of such Borrower); (12) such accounts are not owed by an account debtor who is or whose affiliates are past due upon other accounts owed to a Borrower comprising more than fifty percent (50%) of the accounts of such account debtor or its affiliates owed to such Borrower; (13) such accounts are owed by account debtors whose total indebtedness to a Borrower does not exceed the amount of any customer credit limits as established, and changed, from time to time by Lender on notice to such Borrower (accounts excluded from Eligible Accounts solely by reason of this subsection (13) shall nevertheless be considered Eligible Accounts of such Borrower to the extent the amount of such accounts does not exceed such customer credit limit); (14) such accounts are Exhibit 10.37 - 2 owed by account debtors deemed creditworthy at all times by Lender; and (15) in the event the account debtor is located in the State of New Jersey or the State of Minnesota, the applicable Borrower has filed a notice of business activities report with the appropriate officials in such state for the then current year. (e) "Eligible Inventory" is inventory owned by a Borrower which is and remains acceptable to Lender for lending purposes and is located at one of the addresses set forth in Section 10.6(e), and is not work-in-progress. Eligible Inventory shall not include (i) inventory in the possession of a bailee, consignee, warehouseman or processor or located at a location leased by a Borrower, unless such bailee, consignee, warehouseman, processor or landlord, as applicable, delivers to Lender an agreement in form and substance satisfactory to Lender, together with such Uniform Commercial Code financing statements as Lender shall require, or (ii) inventory located at a location owned by a Borrower which is subject to a mortgage in favor of any person or entity other than Lender, unless such person or entity delivers to Lender an agreement in form and substance satisfactory to Lender. (f) Lender shall have a continuing right to deduct reserves in determining the Gross Availability ("Reserves"), and to increase and decrease such Reserves from time to time, if and to the extent that, in Lender's sole judgment, such Reserves are necessary to protect Lender against any state of facts which does, or would, with notice or passage of time or both, constitute an Event of Default, as defined in Section 7.1, or have an adverse effect on any Collateral, as defined in Section 4.3. Lender may, at its option, implement Reserves by designating as ineligible a sufficient amount of accounts or inventory which would otherwise be Eligible Accounts or Eligible Inventory so as to reduce Gross Availability by the amount of the intended Reserve. (g) Subject to the terms and conditions hereof, including but not limited to the existence of sufficient Gross and Net Availability, Borrowers agree to borrow, in the aggregate, sufficient amounts from time to time so that the outstanding Revolving Loans and Term Loans, shall at all times equal or exceed the principal amount set forth in Section 10.1(e) as the Minimum Borrowing; provided, that if Borrowers fail to do so, interest shall nevertheless accrue on the Obligations as if Borrowers had at all times borrowed such amounts as would have been sufficient to maintain the outstanding Revolving Loans and Term Loans at an amount equal to the Minimum Borrowing (and Lender shall have the right to charge on a monthly basis each Borrower's loan account for such additional interest, pro rata, based upon the proportionate portion of the principal amount of the then current Obligations owed by each such Borrower), and provided further that such accrual shall not impose upon Lender any obligation to make loans to Borrowers to increase the outstanding Revolving Loans and Term Loans to such Minimum Borrowing. (h) If a voluntary or involuntary petition under the bankruptcy laws of the United States is filed against any Borrower, then Lender need not make loans hereunder. 2.2 Term Loan. Exhibit 10.37 - 3 (a) Any term loan and the terms of such loan made by Lender to any Borrower are set forth in Section 10.2(a) ("Initial Term Loan"). (b) The amount of any additional term loans available to any Borrower after the date hereof is set forth in Section 10.2(b) ("Additional Term Loans" and together with the Initial Term Loan, the "Term Loans") and repayable as set forth in Section 10.2. (c) All appraisals conducted in connection with the Term Loans shall be conducted at Borrowers' expense by an independent appraiser acceptable to Lender. In addition, with respect to the Additional Term Loans, (i) Lender shall have received such appraisal at least fourteen (14) days prior to the date of the requested advance for such Additional Term Loan, (ii) Lender shall have received evidence satisfactory to Lender that the machinery and equipment has been purchased by a Borrower and delivered to such Borrower at one of its locations set forth in Section 10.6(e) and that such machinery and equipment is in place and operational, and (iii) Lender shall have received invoices and such other documentation as requested by Lender. 2.3 Accommodations. Lender may, in its sole discretion, issue or cause to be issued, from time to time at any Borrower's request and on terms and conditions and for purposes satisfactory to Lender, credit accommodations consisting of letters of credit, bankers' acceptances, merchandise purchase guaranties or other guaranties or indemnities for such Borrower's account ("Accommodations"). Such Borrower shall execute and perform additional agreements relating to the Accommodations in form and substance acceptable to Lender and the issuer of any Accommodations, all of which shall supplement the rights and remedies granted herein. Any payments made by Lender or any affiliate of Lender in connection with the Accommodations shall constitute additional Revolving Loans to such Borrower. 2.4 Certain Amounts Due On Demand. Lender may, in its sole discretion, make or permit Revolving Loans, Accommodations or other Obligations in excess of the Maximum Credit, Gross or Net Availability or applicable formulas or sublimits. All or any portion of such excess(es) shall be immediately due and payable upon Lender's demand. SECTION 3. INTEREST AND FEES 3.1 Interest. (a) Interest on the Revolving Loans and Term Loans shall be payable by each Borrower on the first day of each month, calculated upon the closing daily balances in the loan account of such Borrower for each day during the immediately preceding month, at the per annum rate set forth as the "Interest Rate" in Section 10.4(a). The Interest Rate shall increase or decrease by an amount equal to each increase or decrease, respectively, in the Prime Rate, as defined in Section 3.1(b) below, effective as of the date of each such change. On and after any Event of Default or termination or non-renewal hereof, interest on all unpaid Obligations shall accrue at a rate equal to two percent (2%) per annum in excess of the Interest Rate otherwise payable until such time as all Obligations are indefeasibly paid in full (notwithstanding entry of any judgment against any Borrower or the exercise of any other right or remedy by Lender), and all such interest shall be Exhibit 10.37 - 4 payable on demand. Interest shall in no month be less than the Interest Rate multiplied by the Minimum Loan. In no event shall charges constituting interest exceed the rate permitted under any applicable law or regulation, and if any provision of this Agreement is in contravention of any such law or regulation, such provision shall be deemed amended to conform thereto. (b) The "Prime Rate" is the rate of interest publicly announced by The Chase Manhattan Bank in New York, New York, or its successors, and assigns from time to time as its prime rate (the Prime Rate is not intended to be the lowest rate of interest charged by The Chase Manhattan Bank to its borrowers). 3.2 Closing Fee. In consideration of Lender's establishment of the credit facility described herein, Borrowers, jointly and severally, shall pay to Lender a closing fee in the amount identified in Section 10.4(c), which fee shall be fully earned and paid at Closing. 3.3 Facility Fee. For the initial and each renewal Term, as defined in Section 9.1, if any, Borrowers shall pay Lender a Facility Fee equal to the amount identified in Section 10.4(d), which Facility Fee Borrowers acknowledge has been fully earned by Lender as of the commencement of the initial Term and each such renewal Term. 3.4 Account Servicing/Collateral Handling Fee. Borrowers, jointly and severally, shall pay Lender, on the date hereof and on the first day of each calendar month period during the initial and each renewal Term, an Account Servicing/Collateral Handling Fee in the amount set forth in Section 10.4(e). 3.5 Unused Line Fee. Borrowers shall pay Lender monthly, on the first day of each month, in arrears, an Unused Line Fee for each month during the initial and each renewal Term at the rate per annum set forth in Section 10.4(f), calculated as described in Section 10.4(f). 3.6 Charges to Loan Account. At Lender's option, all payments of principal, interest, fees, costs, expenses and other charges provided for in this Agreement, or in any other agreement now or hereafter existing between Lender and any Borrower, may be charged on the date when due, as principal to any loan account of such Borrower maintained by Lender. Interest, fees for Accommodations, the Unused Line Fee and any other amounts payable by any Borrower to Lender based on a per annum rate shall be calculated on the basis of actual days elapsed over a 360-day year. 3.7 Calculation of Credit Balances. For purposes of calculating any interest, fees, balances or expenses hereunder, the outstanding daily principal balance of the Revolving Loans shall be deemed to be zero in the event the outstanding daily principal balance of the Revolving Loans is a credit balance (i.e., less than zero). SECTION 4. GRANT OF SECURITY INTEREST 4.1 Grant of Security Interest. To secure the payment and performance in full of all Obligations, each Borrower hereby grants to Lender a continuing security interest in and lien upon, and a right of setoff against, and each Borrower hereby assigns and pledges to Lender, all Exhibit 10.37 - 5 of such Borrower's Collateral, as defined in Section 4.3 below, including any Collateral not deemed eligible for lending purposes. 4.2 "Obligations" shall mean any and all Revolving Loans, Term Loans, Accommodations and all other indebtedness, liabilities and obligations of every kind, nature and description owing by Borrowers to Lender and/or its affiliates, including principal, interest, charges, fees and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, whether arising under this Agreement or otherwise, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal Term or after the commencement of any case with respect to any Borrower under the United States Bankruptcy Code or any similar statute, whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, original, renewed or extended and whether arising directly or howsoever acquired by Lender including from any other entity outright, conditionally or as collateral security, by assignment, merger with any other entity, participations or interests of Lender in the obligations of any Borrower to others, assumption, operation of law, subrogation or otherwise and shall also include all amounts chargeable to any Borrower under this Agreement or in connection with any of the foregoing. 4.3 "Collateral" shall mean all of the following property of each Borrower: All now owned and hereafter acquired right, title and interest of such Borrower in, to and in respect of all: accounts, interests in goods represented by accounts, returned, reclaimed or repossessed goods with respect thereto and rights as an unpaid vendor; contract rights; chattel paper; investment property; general intangibles (including, but not limited to, tax and duty refunds, registered and unregistered patents, trademarks, service marks, copyrights, trade names, applications for the foregoing, trade secrets, goodwill, processes, drawings, blueprints, customer lists, licenses, whether as licensor or licensee, chooses in action and other claims, and existing and future leasehold interests in equipment and fixtures); documents; instruments; letters of credit, bankers' acceptances or guaranties; cash monies, deposits, securities, bank accounts, deposit accounts, credits and other property now or hereafter held in any capacity by Lender, its affiliates or any entity which, at any time, participates in Lender's financing of such Borrower or at any other depository or other institution; agreements or property securing or relating to any of the items referred to above; All now owned and hereafter acquired right, title and interest of such Borrower in, to and in respect of goods, including, but not limited to: All inventory, wherever located, whether now owned or hereafter acquired, of whatever kind, nature or description, including all raw materials, work-in-process, finished goods, and materials to be used or consumed in such Borrower's business; and all names or marks affixed thereto or to be affixed thereto for purposes of selling same by the seller, manufacturer, lessor or licensor thereof; All equipment and fixtures, wherever located, whether now owned or hereafter acquired, including, without limitation, all machinery, equipment, motor vehicles, furniture and fixtures, and any and all additions, substitutions, replacements (including spare parts), and accessions thereof and thereto (collectively, the "Equipment and Fixtures"); Exhibit 10.37 - 6 All consumer goods, farm products, crops, timber, minerals or the like (including oil and gas), wherever located, whether now owned or hereafter acquired, of whatever kind, nature or description; All now owned and hereafter acquired right, title and interests of such Borrower in, to and in respect of any personal property in or upon which Lender has or may hereafter have a security interest, lien or right of setoff; All present and future books and records relating to any of the above including, without limitation, all computer programs, printed output and computer readable data in the possession or control of such Borrower, any computer service bureau or other third party; and All products and proceeds of the foregoing in whatever form and wherever located, including, without limitation, all insurance proceeds and all claims against third parties for loss or destruction of or damage to any of the foregoing. Notwithstanding the foregoing, the specific Equipment and Fixtures of MBC subject to a lien in favor of Finova Capital Corporation ("Finova") as evidenced by UCC financing statement filing number 9628160343, filed with the Secretary of State of California on October 4, 1996, and UCC financing statement filing number 00020157, filed with the County Recorder of Mendocino County, California on December 12, 1996, shall not be subject to Lender's rights and remedies with respect to Collateral hereunder until the earlier of such time as MBC no longer owes any indebtedness to Finova, Finova terminates its lien on such Equipment and Fixtures or Finova otherwise agrees in writing. SECTION 5. COLLECTION AND ADMINISTRATION 5.1 Collections. Each Borrower shall, at such Borrower's expense and in the manner requested by Lender from time to time, direct that remittances and all other proceeds of accounts and other Collateral shall be sent to a lock box designated by and/or maintained in the name of Lender, and deposited into a bank account now or hereafter selected by Lender and maintained in the name of Lender under arrangements with the depository bank under which all funds deposited to such bank account are required to be transferred solely to Lender. Each Borrower shall bear all risk of loss of any funds deposited into such account. In connection therewith, each Borrower shall execute such lock box and bank account agreements as Lender shall specify. Any collections or other proceeds received by any Borrower shall be held in trust for Lender and immediately remitted to Lender in kind. 5.2 Payments. All Obligations shall be payable at Lender's office set forth below or at Lender's bank designated in Section 10.6(b) or at such other bank or place as Lender may expressly designate from time to time for purposes of this Section. Lender shall apply all proceeds of accounts or other Collateral of any Borrower received by Lender and all other payments in respect of the Obligations to the Revolving Loans owed by such Borrower, whether or not then due or to any other Obligations of such Borrower then due, in whatever order or manner Lender shall determine; provided, however, that any such proceeds of accounts or other Collateral of Mendocino Brewing Company, Inc. ("MBC") may be applied by Lender to Obligations owed by any Borrower. For purposes of determining Gross and Net Availability and Exhibit 10.37 - 7 for the calculation of Minimum Borrowing, remittances and other payments with respect to the Collateral and Obligations will be treated as credited to the loan account of the applicable Borrower maintained by Lender and Collateral balances to which they relate, upon the date of Lender's receipt of advice from Lender's bank that such remittances or other payments have been credited to Lender's account or in the case of remittances or other payments received directly in kind by Lender, upon the date of Lender's deposit thereof at Lender's bank, subject to final payment and collection. In computing interest charges, the loan account of each Borrower maintained by Lender will be credited with remittances and other payments the number of Business Days, as defined below, set forth in Section 10.4(b) after the day Lender has received advice of receipt of remittances in Lender's account at Lender's Bank. For purposes of this Agreement, "Business Day" shall mean any day other than a Saturday, Sunday or any other day on which banks located in states where Lender has its offices, are authorized to close. 5.3 Loan Account Statements. Lender shall render to each Borrower monthly a loan account statement. Each statement shall be considered correct and binding upon such Borrower as an account stated, except to the extent that Lender receives, within sixty (60) days after the mailing of such statement, written notice from such Borrower of any specific exceptions by such Borrower to that statement. 5.4 Direct Collections. Lender may, at any time, whether or not an Event of Default has occurred, without notice to or assent of any Borrower, (a) notify any account debtor that the accounts and other Collateral which includes a monetary obligation have been assigned to Lender by such Borrower and that payment thereof is to be made to the order of and directly to Lender, (b) send, or cause to be sent by its designee, requests (which may identify the sender by a pseudonym) for verification of accounts and other Collateral directly to any account debtor or any other obligor or any bailee with respect thereto, and (c) demand, collect or enforce payment of any accounts or such other Collateral, but without any duty to do so, and Lender shall not be liable for any failure to collect or enforce payment thereof. Notwithstanding the foregoing, Lender will use its best efforts to give reasonably concurrent notice to Borrowers of any action taken by Lender under this Section. At Lender's request, all invoices and statements sent to any account debtor, other obligor or bailee, shall state that the accounts and such other Collateral have been assigned to Lender and are payable directly and only to Lender. 5.5 Attorney-in-Fact. Each Borrower hereby appoints Lender and any designee of Lender as such Borrower's attorney-in-fact and authorizes Lender or such designee, at such Borrower's sole expense, to exercise at any times in Lender's or such designee's discretion all or any of the following powers, which powers of attorney, being coupled with an interest, shall be irrevocable until all Obligations have been paid in full: (a) receive, take, endorse, assign, deliver, accept and deposit, in the name of Lender or such Borrower, any and all cash, checks, commercial paper, drafts, remittances and other instruments and documents relating to the Collateral or the proceeds thereof, (b) transmit to account debtors, other obligors or any bailees notice of the interest of Lender in the Collateral or request from account debtors or such other obligors or bailees at any time, in the name of such Borrower or Lender or any designee of Lender, information concerning the Collateral and any amounts owing with respect thereto, (c) notify account debtors or other obligors to make payment directly to Lender, or notify bailees as to the disposition of Collateral, (d) take or bring, in the name of Lender or such Borrower, all steps, actions, suits or proceedings deemed by Lender necessary or desirable to effect collection Exhibit 10.37 - 8 of or other realization upon the accounts and other Collateral, (e) after an Event of Default, change the address for delivery of mail to such Borrower and to receive and open mail addressed to such Borrower, (f) after an Event of Default, extend the time of payment of, compromise or settle for cash, credit, return of merchandise, and upon any terms or conditions, any and all accounts or other Collateral which includes a monetary obligation and discharge or release the account debtor or other obligor, without affecting any of the Obligations, and (g) execute in the name of such Borrower and file against such Borrower in favor of Lender financing statements or amendments with respect to the Collateral. 5.6 Liability. Each Borrower hereby releases and exculpates Lender, its officers, employees and designees, from any liability arising from any acts under this Agreement or in furtherance thereof, whether as attorney-in-fact or otherwise, whether of omission or commission, and whether based upon any error of judgment or mistake of law or fact, except for willful misconduct or gross negligence. In no event will Lender have any liability to any Borrower for lost profits or other special or consequential damages. 5.7 Administration of Accounts. After written notice by Lender to any Borrower and automatically, without notice, after an Event of Default, such Borrower shall not, without the prior written consent of Lender in each instance, (a) grant any extension of time of payment of any of the accounts or any other Collateral which includes a monetary obligation, (b) compromise or settle any of the accounts or any such other Collateral for less than the full amount thereof, (c) release in whole or in part any account debtor or other person liable for the payment of any of the accounts or any such other Collateral, or (d) except in ordinary course of business consistent with past practices, grant any credits, discounts, allowances, deductions, return authorizations or the like with respect to any of the accounts or any such other Collateral. 5.8 Documents. At such times as Lender may request and in the manner specified by Lender, each Borrower shall deliver to Lender or Lender's representative, as Lender shall designate, copies or original invoices, agreements, proofs of rendition of services and delivery of goods and other documents evidencing or relating to the transactions which gave rise to accounts or other Collateral, together with customer statements, schedules describing the accounts or other Collateral and/or statements of account and confirmatory assignments to Lender of the accounts or other Collateral, in form and substance satisfactory to Lender and duly executed by such Borrower. Without limiting the provisions of Section 5.7 above, each Borrower's granting of credits, discounts, allowances, deductions, return authorizations or the like will be promptly reported to Lender in writing. In no event shall any such schedule or confirmatory assignment (or the absence thereof or omission of any of the accounts or other Collateral therefrom) limit or in any way be construed as a waiver, limitation or modification of the security interests or rights of Lender or the warranties, representations and covenants of any Borrower under this Agreement. Any documents, schedules, invoices or other paper delivered to Lender by any Borrower may be destroyed or otherwise disposed of by Lender six (6) months after receipt by Lender, unless such Borrower requests their return in writing in advance and makes prior arrangements for their return at such Borrower's expense. 5.9 Access. From time to time as requested by Lender, at the sole expense of Borrowers, Lender or its designee shall have access, prior to an Event of Default during reasonable business hours and on or after an Event of Default at any time, to all of the premises Exhibit 10.37 - 9 where Collateral is located for the purposes of inspecting the Collateral, and all of each Borrower's books and records, and Borrowers shall permit Lender or its designee to make such copies of such books and records or extracts therefrom as Lender may request. Without expense to Lender, Lender may use such of each Borrower's personnel, equipment, including computer equipment, programs, printed output and computer readable media, supplies and premises for the collection of accounts and realization on other Collateral as Lender, in its sole discretion, deems appropriate. Each Borrower hereby irrevocably authorizes all accountants and third parties to disclose and deliver to Lender at Borrowers' expense all financial information, books and records, work papers, management reports and other information in their possession regarding each Borrower. Notwithstanding the foregoing, no counsel representing any Borrower shall be required to deliver documentation to Lender which is reasonably deemed to be protected by the attorney-client privilege or attorney work product doctrine; provided, however that the foregoing exception shall not permit any counsel representing any Borrower to withhold documentation from Lender concerning (i) attorney letters to or from any Borrower's management and/or auditors with respect to litigation in connection with an audit or year-end review involving such Borrower or (ii) notices received by any Borrower or counsel representing any Borrower concerning litigation involving any Borrower. 5.10 Environmental Audits. Not more than once annually, as requested by Lender, at the sole expense of Borrowers, each Borrower shall provide Lender, or its designee, complete access to all of such Borrower's facilities for the purpose of conducting an environmental audit of such facilities as Lender or its designees may deem necessary. Each Borrower agrees to cooperate with Lender with respect to any environmental audit conducted by Lender or its designee pursuant to this Section 5.10. SECTION 6. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS Borrowers hereby represent, warrant and covenant to Lender the following, the truth and accuracy of which, and compliance with which, shall be continuing conditions of the making of loans or other credit accommodations by Lender to Borrowers: 6.1 Financial and Other Reports. Each Borrower shall keep and maintain its books and records in accordance with generally accepted accounting principles, consistently applied. Each Borrower shall, at its expense, (a) on each day on which such Borrower requests a Revolving Loan (and in no event less frequently than weekly), deliver to Lender a borrowing base certificate in the form attached hereto as Exhibit A, and (b) as soon as possible but in no event later than the third (3rd) Business Day of each week, deliver to Lender weekly inventory reports. In addition, each Borrower shall, at its expense, (a) on or before the twenty-first (21st) day of each month, deliver to Lender: true and complete monthly agings of its accounts receivable, accounts payable and notes payable, together with an accounts receivable reconciliation and an inventory reconciliation for the immediately preceding month; and (b) on or before the end of each month, monthly internally prepared interim financial statements for the immediately preceding month, all certified by the chief financial officer of Borrower. Annually, MBC shall deliver audited, consolidated and consolidating financial statements of MBC accompanied by the report and opinion thereon of independent certified public accountants acceptable to Lender, as soon as available, but in no event later than ninety (90) days after the Exhibit 10.37 - 10 end of MBC's fiscal year. MBC shall, at its expense, on or before the end of each fiscal year, deliver to Lender consolidated and consolidating projections for Borrowers for the immediately following fiscal year of Borrowers accompanied by a written statement identifying the assumptions used by Borrowers in connection with the preparation of such projections. All of the foregoing shall be in such form and together with such information with respect to the business of Borrowers as Lender may in each case request. 6.2 Trade Names. Each Borrower may from time to time render invoices to account debtors under its trade names set forth in Section 10.6(g) below after Lender has received prior written notice from such Borrower of the use of such trade names and as to which, each Borrower agrees that: (a) each trade name does not refer to another corporation or other legal entity, (b) all accounts and proceeds thereof (including any returned merchandise) invoiced under any such trade names are owned exclusively by such Borrower and are subject to the security interest of Lender and the other terms of this Agreement, and (c) all schedules of accounts and confirmatory assignments including any sales made or services rendered using the trade name shall show such Borrower's name as assignor and Lender is authorized to receive, endorse and deposit to any loan account of such Borrower maintained by Lender all checks or other remittances made payable to any trade name of such Borrower representing payment with respect to such sales or services. 6.3 Losses. Each Borrower shall promptly notify Lender in writing of any loss, damage, investigation, action, suit, proceeding or claim relating to a material portion of the Collateral or which may result in any material adverse change in such Borrower's business, assets, liabilities or condition, financial or otherwise. 6.4 Books and Records. Each Borrower's books and records concerning accounts and its chief executive office are and shall be maintained only at the address set forth in Section 10.6(d). Borrower's only other places of business and the only other locations of Collateral, if any, are and shall be the addresses set forth in Section 10.6(f) hereof, except such Borrower may change such locations or open a new place of business in the United States of America after thirty (30) days prior written notice to Lender. Prior to any change in location or opening of any new place of business, each Borrower shall execute and deliver or cause to be executed and delivered to Lender such financing statements, financing documents and security and other agreements as Lender may reasonably require, including, without limitation, those described in Section 6.14 below. 6.5 Title. Each Borrower has and at all times will continue to have good and marketable title to all of the Collateral, free and clear of all liens, security interests, claims or encumbrances of any kind except in favor of Lender and except, if any, those set forth on Schedule A hereto. 6.6 Disposition of Assets. Without the prior written consent of Lender, no Borrower shall, directly or indirectly: (a) sell, lease, transfer, assign, abandon or otherwise dispose of any part of the Collateral or any material portion of its other assets (other than sales of inventory to buyers in the ordinary course of business); (b) consolidate with or merge with or into any other entity, or permit any other entity to consolidate with or merge with or into any Borrower; or Exhibit 10.37 - 11 (c) form or acquire any interest, whether equity, assets or otherwise, in any firm, corporation or other entity. 6.7 Insurance. Each Borrower shall at all times maintain, with financially sound and reputable insurers, insurance (including, without limitation, at the option of Lender, flood insurance and, to the extent commercially reasonable, earthquake insurance) with respect to the Collateral and other assets (the "Insurance Coverage"). All such insurance policies shall be in such form, substance, amounts and coverage as may be satisfactory to Lender and shall provide for thirty (30) days' prior written notice to Lender of cancellation or reduction of coverage. Each Borrower hereby irrevocably appoints Lender and any designee of Lender as attorney-in-fact for such Borrower to obtain at such Borrower's expense, any such insurance should such Borrower fail to do so and, after an Event of Default, to adjust or settle any claim or other matter under or arising pursuant to such insurance or to amend or cancel such insurance. Each Borrower shall deliver to Lender evidence of such insurance and a lender's loss payable endorsement satisfactory to Lender as to all existing and future insurance policies with respect to the Collateral. In the event any Borrower, at any time, fails to provide Lender with evidence of the Insurance Coverage as required by this Agreement, Lender, upon five (5) days prior written notice to any Borrower, may purchase the Insurance Coverage at such Borrower's expense to protect Lender's interests in the Collateral. Such insurance may, but need not, protect such Borrower's interests, and Lender shall be under no obligation to so protect Borrower's interests. The Insurance Coverage that Lender purchases on behalf of any Borrower may not pay any claim that such Borrower makes or any claim that is made against such Borrower in connection with the Collateral. A Borrower may later cancel any Insurance Coverage purchased by Lender, but only after providing Lender with evidence that Insurance Coverage has been obtained as provided for in this Agreement. In the event Lender purchases all or any portion of the Insurance Coverage for the Collateral or as otherwise required hereunder, Borrowers will be responsible for all costs and expenses of such Insurance Coverage, including, but not limited to, interest and any other charges imposed by Lender in connection with the purchase of the Insurance Coverage, until the effective date of the cancellation or expiration of the Insurance Coverage. The costs and expenses of any Insurance Coverage purchased by Lender shall be added to Borrowers' Obligations. Each Borrower acknowledges that the cost of the Insurance Coverage purchased by Lender pursuant hereto may be more than the cost of insurance such Borrower may be able to obtain on its own. Each Borrower shall deliver to Lender, in kind, all instruments representing proceeds of insurance received by such Borrower. Lender may apply any insurance proceeds received at any time to the cost of repairs to or replacement of any portion of the Collateral and/or, at Lender's option, to payment of or as security for any of the Obligations, whether or not due, in any order or manner as Lender determines. 6.8 Compliance With Laws. Each Borrower is and at all times will continue to be in compliance with the requirements of all material laws, rules, regulations and orders of any governmental authority relating to its business (including laws, rules, regulations and orders relating to taxes, payment and withholding of payroll taxes, employer and employee contributions and similar items, securities, employee retirement and welfare benefits, employee health and safety, or environmental matters) and all material agreements or other instruments binding on such Borrower or its property. All of each Borrower's inventory shall be produced in accordance with the requirements of the Federal Fair Labor Standards Act of 1938, as amended Exhibit 10.37 - 12 and all rules, regulations and orders related thereto. Each Borrower shall pay and discharge all taxes, assessments and governmental charges against such Borrower or any Collateral prior to the date on which penalties are imposed or liens attach with respect thereto, unless the same are being contested in good faith and, at Lender's option, Reserves are established for the amount contested and penalties which may accrue thereon. 6.9 Accounts. With respect to each account deemed an Eligible Account, except as reported in writing to Lender, no Borrower has knowledge that any of the criteria for eligibility are not or are no longer satisfied. As to each account, except as disclosed in writing to Lender at the time such account arises (a) each is valid and legally enforceable and represents an undisputed bona fide indebtedness incurred by the account debtor for the sum reported to Lender, (b) each arises from an absolute and unconditional sale of goods, without any right of return or consignment, or from a completed rendition of services, (c) each is not, at the time such account arises, subject to any defense, offset, dispute, contra relationship, counterclaim, or any given or claimed credit, allowance or discount, and (d) all statements made and all unpaid balances and other information appearing in the invoices, agreements, proofs of rendition of services and delivery of goods and other documentation relating to the accounts, and all confirmatory assignments, schedules, statements of account and books and records with respect thereto, are true and correct and in all respects what they purport to be. 6.10 Equipment. With respect to each Borrower's equipment, such Borrower shall keep the equipment in good order and repair, and in running and marketable condition, ordinary wear and tear excepted. 6.11 Financial Covenants. Each Borrower shall at all times maintain working capital and net worth (each as determined in accordance with generally accepted accounting principles, in effect on the date hereof, consistently applied) in the amounts set forth in Sections 10.5(a) and (b) and no Borrower shall directly or indirectly, expend or commit to expend, for fixed or capital assets (including capital lease obligations) an amount in excess of the capital expenditure limit set forth in Section 10.5(c) in any fiscal year of any Borrower. 6.12 Affiliated Transactions. No Borrower will, directly or indirectly: (a) lend or advance money or property to, guarantee or assume indebtedness of, or invest (by capital contribution or otherwise) in any other Borrower, person, firm, corporation or other entity; (b) declare, pay or make any dividend, redemption or other distribution on account of any shares of any class of stock of such Borrower now or hereafter outstanding; (c) make any payment of the principal amount of or interest on any indebtedness owing to any officer, director, shareholder, or affiliate of such Borrower (except as specifically permitted by Section 6.17 below); (d) make any loans or advances to any officer, director, employee, shareholder or affiliate of such Borrower; or (e) enter into any sale, lease or other transaction with any officer, director, employee, shareholder or affiliate of Borrower on terms that are less favorable to such Borrower than those which might be obtained at the time from persons who are not an officer, director, employee, shareholder or affiliate of such Borrower. 6.13 Fees and Expenses. Borrowers shall pay, on Lender's demand, all costs, expenses, filing fees and taxes payable in connection with the preparation, execution, delivery, recording, administration, collection, liquidation, enforcement and defense of the Obligations, Exhibit 10.37 - 13 Lender's rights in the Collateral, this Agreement and all other existing and future agreements or documents contemplated herein or related hereto, including any amendments, waivers, supplements or consents which may hereafter be made or entered into in respect hereof, or in any way involving claims or defense asserted by Lender or claims or defense against Lender asserted by any Borrower, any guarantor or any third party directly or indirectly arising out of or related to the relationship between any Borrower and Lender or any guarantor and Lender, including, but not limited to the following, whether incurred before, during or after the initial or any renewal Term or after the commencement of any case with respect to any Borrower or any guarantor under the United States Bankruptcy Code or any similar statute: (a) all costs and expenses of filing or recording (including Uniform Commercial Code financing statement filing taxes and fees, documentary taxes, intangibles taxes and mortgage recording taxes and fees, if applicable); (b) all title insurance and other insurance premiums, appraisal fees, fees incurred in connection with any environmental report, audit or survey and search fees; (c) all fees as then in effect relating to the wire transfer of loan proceeds and other funds and fees then in effect for returned checks and credit reports; (d) all expenses and costs heretofore and from time to time hereafter incurred by Lender during the course of periodic field examinations of the Collateral and any Borrower's operations, plus a per diem charge at the rate set forth in Section 10.4(g) for Lender's examiners in the field and office; and (e) the reasonable costs, fees and disbursements of in-house and outside counsel to Lender including, but not limited to, fees and disbursements incurred as a result of litigation between the parties hereto, any third party and in any appeals arising therefrom. 6.14 Further Assurances. At the request of Lender, at any time and from time to time, at Borrowers' sole expense, each Borrower shall execute and deliver or cause to be executed and delivered to Lender, such agreements, documents and instruments, including waivers, consents and subordination agreements from mortgagees or other holders of security interests or liens, landlords or bailees, and do or cause to be done such further acts as Lender, in its discretion, deems necessary or desirable to create, preserve, perfect or validate any security interest of Lender or the priority thereof in the Collateral and otherwise to effectuate the provisions and purposes of this Agreement. Each Borrower hereby authorizes Lender to file financing statements or amendments against such Borrower in favor of Lender with respect to the Collateral, without such Borrower's signature and to file as financing statements any carbon, photographic or other reproductions of this Agreement or any financing statements signed by such Borrower. 6.15 Revolving Loan. The Revolving Loans available to each Borrower will not at any time exceed the Gross Availability for such Borrower, unless Lender has consented. 6.16 Environmental Condition. To each Borrower's knowledge, none of any Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a hazardous waste or hazardous substance disposal site, or a candidate for closure pursuant to any environmental protection statute. To each Borrower's knowledge, no lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned by any Borrower. No Borrower has received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency regarding any action or omission by any Borrower resulting in the releasing, or otherwise exposing of hazardous waste or hazardous substances into the Exhibit 10.37 - 14 environment. Each Borrower is in compliance (in all material respects) with all statutes, regulations, ordinances and other legal requirements pertaining to the production, storage, handling, treatment, release, transportation or disposal of any hazardous waste or hazardous substance. 6.17 Certain Funded Indebtedness. As of the date of this Agreement, no Borrower has indebtedness for borrowed money except as set forth on Schedule B attached hereto and made a part hereof. Borrower may make payments of principal and interest to each of the lenders set forth on Schedule B hereto if, and only if, (i) no Event of Default exists and is continuing and (ii) no Event of Default would be caused by making such payment of principal or interest. 6.18 Year 2000. Borrowers shall take all action necessary to assure that their respective computer-based systems are able to effectively process data including dates and date sensitive functions. Borrowers represent and warrant that the "Year 2000 Problem" will not result in a material adverse effect on any Borrower's business condition. Upon request, Borrowers shall provide assurances acceptable to Lender that Borrowers' computer systems and software are or will be Year 2000 compliant on a timely basis. Borrowers shall immediately advise Lender in writing of any material changes in any Borrower's Year 2000 plan, timetable or budget. The term "Year 2000 Problem" means the inability of certain computer applications to recognize and correctly perform date-sensitive functions involving certain dates prior to and after December 31, 1999. SECTION 7. EVENTS OF DEFAULT AND REMEDIES 7.1 Events of Default. All Obligations shall be immediately due and payable, without notice or demand, and any provisions of this Agreement as to future loans and credit accommodations by Lender shall terminate automatically, upon the termination or non-renewal of this Agreement or, at Lender's option, upon or at any time after the occurrence or existence of any one or more of the following "Events of Default": (a) Any Borrower fails to pay when due any of the Obligations or fails to perform any of the terms of this Agreement or any other existing or future financing, security or other agreement between Borrowers and Lender or any affiliate of Lender; provided, however, that Borrowers shall be entitled to a cure period of five (5) days following written notice by Lender to any Borrower for any failure by such Borrower to deliver any financial information required to be delivered under Section 6.1 above; (b) Any representation, warranty or statement of fact made by any Borrower to Lender in this Agreement or any other agreement, schedule, confirmatory assignment or otherwise, or to any affiliate of Lender, shall prove inaccurate or misleading; (c) Any guarantor of the Obligations revokes, terminates or fails to perform any of the terms of any guaranty, endorsement or other agreement of such party in favor of Lender or any affiliate of Lender; (d) Any judgment or judgments aggregating in excess of $50,000 not covered by insurance (such insurance coverage being reasonably satisfactory to Lender in its sole Exhibit 10.37 - 15 discretion in all cases) or any injunction or attachment is obtained against any Borrower or any guarantor which remains unstayed for a period of ten (10) days or is enforced; (e) Any Borrower or any guarantor or a general partner of a guarantor or Borrower (which is a partnership), being a natural person, dies, or Borrower or any guarantor which is a partnership or corporation, is dissolved, or any Borrower or any guarantor which is a corporation fails to maintain its corporate existence in good standing, or the usual business of any Borrower or any guarantor ceases or is suspended; (f) Any change in the chief executive officer or controlling ownership (or equivalent executive positions) of any Borrower; (g) Any Borrower or any guarantor becomes insolvent, makes an assignment for the benefit of creditors, makes or sends notice of a bulk transfer or calls a general meeting of its creditors or principal creditors; (h) Any petition or application for any relief under the bankruptcy laws of the United States now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at law or in equity) is filed by or against Borrower or any guarantor; provided, however, if any of the above actions are filed on an involuntary basis against a Borrower or Guarantor, and such Borrower or Guarantor shall not acquiesce thereto, such Borrower or Guarantor, as the case may be, shall have sixty (60) days after the date of such filing to terminate or dismiss such action; provided, however, that Lender shall have no obligation to lend any funds to any Borrower during such sixty (60) day period; (i) The indictment or threatened indictment of any Borrower or any guarantor under any criminal statute, or commencement or threatened commencement of criminal or civil proceedings against any Borrower or any guarantor, pursuant to which statute or proceedings the penalties or remedies sought or available include forfeiture of any of the property of such Borrower or such guarantor; (j) Any default or event of default occurs on the part of any Borrower under any agreement, document or instrument to which such Borrower is a party or by which such Borrower or any of its property is bound, creating or relating to any indebtedness of such Borrower to any person or entity other than Lender if the effect of such default is to accelerate, or to permit the acceleration of, the maturity of all or any part of such indebtedness, or all or any part of any such indebtedness shall be declared to be due and payable or required to be prepaid or any other reason, in either event prior to the stated maturity thereof; (k) Lender in good faith believes that either (i) the prospect of payment or performance of the Obligations is impaired or (ii) the Collateral is not sufficient to secure fully the Obligations; or Exhibit 10.37 - 16 (l) Any material change occurs in the nature or conduct of any Borrower's business. 7.2 Remedies. Upon the occurrence of an Event of Default and at any time thereafter, Lender shall have all rights and remedies provided in this Agreement, any other agreements between any Borrower and Lender, the Uniform Commercial Code or other applicable law, all of which rights and remedies may be exercised without notice to Borrowers, all such notices being hereby waived, except such notice as is expressly provided for hereunder or is not waivable under applicable law. All rights and remedies of Lender are cumulative and not exclusive and are enforceable, in Lender's discretion, alternatively, successively, or concurrently on any one or more occasions and in any order Lender may determine. Without limiting the foregoing, Lender may (a) accelerate the payment of all Obligations and demand immediate payment thereof to Lender, (b) with or without judicial process or the aid or assistance of others, enter upon any premises on or in which any of the Collateral may be located and take possession of the Collateral or complete processing, manufacturing and repair of all or any portion of the Collateral, (c) require any Borrower, at Borrowers' expense, to assemble and make available to Lender any part or all of the Collateral at any place and time designated by Lender, (d) collect, foreclose, receive, appropriate, setoff and realize upon any and all Collateral, (e) extend the time of payment of, compromise or settle for cash, credit, return of merchandise, and upon any terms or conditions, any and all accounts or other Collateral which includes a monetary obligation and discharge or release the account debtor or other obligor, without affecting any of the Obligations, (f) sell, lease, transfer, assign, deliver or otherwise dispose of any and all Collateral (including, without limitation, entering into contracts with respect thereto, by public or private sales at any exchange, broker's board, any office of Lender or elsewhere) at such prices or terms as Lender may deem reasonable, for cash, upon credit or for future delivery, with the Lender having the right to purchase the whole or any part of the Collateral at any such public sale, all of the foregoing being free from any right or equity of redemption of any Borrower, which right or equity of redemption is hereby expressly waived and released by Borrowers. If any of the Collateral is sold or leased by Lender upon credit terms or for future delivery, the Obligations shall not be reduced as a result thereof until payment therefor is finally collected by Lender. If notice of disposition of Collateral is required by law, seven (7) days prior notice by Lender to Borrowers designating the time and place of any public sale or the time after which any private sale or other intended disposition of Collateral is to be made, shall be deemed to be reasonable notice thereof and each Borrower waives any other notice. In the event Lender institutes an action to recover any Collateral or seeks recovery of any Collateral by way of prejudgment remedy, each Borrower waives the posting of any bond which might otherwise be required. 7.3 Application of Proceeds. Lender may apply the cash proceeds of Collateral actually received by Lender from any sale, lease, foreclosure or other disposition of the Collateral to payment of any of the Obligations, in whole or in part (including reasonable attorneys' fees and legal expenses incurred by Lender with respect thereto or otherwise chargeable to Borrowers) and in such order as Lender may elect, whether or not then due. Borrowers shall remain liable to Lender for the payment of any deficiency together with interest at the highest rate provided for herein and all costs and expenses of collection or enforcement, including reasonable attorneys' fees and legal expenses. Exhibit 10.37 - 17 7.4 Lender's Cure of Third Party Agreement Default. Lender may, at its option, cure any default by any Borrower under any agreement with a third party or pay or bond on appeal any judgment entered against any Borrower, discharge taxes, liens, security interests or other encumbrances at any time levied on or existing with respect to the Collateral and pay any amount, incur any expense or perform any act which, in Lender's sole judgment, is necessary or appropriate to preserve, protect, insure, maintain, or realize upon the Collateral. Lender may charge any Borrower's loan account for any amounts so expended, such amounts to be repayable by Borrower on demand. Lender shall be under no obligation to effect such cure, payment, bonding or discharge, and shall not, by doing so, be deemed to have assumed any obligation or liability of any Borrower. SECTION 8. JURY TRIAL WAIVER; CERTAIN OTHER WAIVERS AND CONSENTS 8.1 JURY TRIAL WAIVER. BORROWERS AND LENDER EACH WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING INSTITUTED BY ANY OF THEM AGAINST ANY OTHER WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, THE OBLIGATIONS, THE COLLATERAL, ANY ALLEGED TORTUOUS CONDUCT BY ANY BORROWER OR LENDER, OR, IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP BETWEEN ANY BORROWER AND LENDER. IN NO EVENT WILL LENDER BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES. 8.2 Counterclaims. Each Borrower waives all rights to interpose any claims, deductions, setoffs or counterclaims of any kind, nature or description in any action or proceeding instituted by Lender with respect to this Agreement, the Obligations, the Collateral or any matter arising therefrom or relating thereto, except compulsory counterclaims. 8.3 Jurisdiction. Each Borrower hereby irrevocably submits and consents to the nonexclusive jurisdiction of the State and Federal Courts located in the State in which the office of Lender designated in Section 10.6(a) is located and any other State where any Collateral is located with respect to any action or proceeding arising out of this Agreement, the Obligations, the Collateral or any matter arising therefrom or relating thereto. In any such action or proceeding, each Borrower waives personal service of the summons and complaint or other process and papers therein and agrees that the service thereof may be made by mail directed to such Borrower at its chief executive office set forth herein or other address thereof of which Lender has received notice as provided herein, service to be deemed complete five (5) days after mailing, or as permitted under the rules of either of said Courts. Any such action or proceeding commenced by any Borrower against Lender will be litigated only in a Federal Court located in the district, or a State Court in the State and County, in which the office of Lender designated in Section 10.6(a) is located and each Borrower waives any objection based on forum non conveniens and any objection to venue in connection therewith. 8.4 No Waiver by Lender. Lender shall not, by any act, delay, omission or otherwise be deemed to have expressly or impliedly waived any of its rights or remedies unless such waiver shall be in writing and signed by an authorized officer of Lender. A waiver by Lender of any right or remedy on any one occasion shall not be construed as a bar to or waiver of any such right Exhibit 10.37 - 18 or remedy which Lender would otherwise have on any future occasion, whether similar in kind or otherwise. SECTION 9. TERM OF AGREEMENT; MISCELLANEOUS 9.1 Term. This Agreement shall only become effective upon execution and delivery by Borrowers and Lender and shall continue in full force and effect for a term set forth in Section 10.7 from the date hereof and shall be deemed automatically renewed for successive terms of equal duration thereafter (each a "Term") unless terminated as of the end of the initial or any renewal term by either party giving the other written notice at least sixty (60) days' prior to the end of the then-current Term. 9.2 Early Termination. At any time prior to the end of the then current Term, Borrowers may terminate this Agreement by giving Lender at least thirty (30) days but no more than seventy-five (75) days prior written notice and payment in full of all of the Obligations as provided herein, including, but not limited to, the Early Termination Fee, described hereinbelow, the unpaid Facility Fee, described hereinbelow, and any other fees. Lender shall also have the right to terminate this Agreement at any time upon or after the occurrence of an Event of Default. If Lender terminates this Agreement upon or after the occurrence of an Event of Default, Borrowers shall pay Lender forthwith, in full, payment of all Obligations, including, but not limited to, the Early Termination Fee, the Facility Fee and any other fees. In view of the impracticality and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Lender's lost profits, the "Early Termination Fee" shall be equal to: (a) if such termination occurs prior to the first anniversary of the date hereof, an amount equal to three percent (3%) of the Maximum Credit; or (b) if such termination occurs on or after the first anniversary of the date hereof, an amount equal to one percent (1%) of the Maximum Credit, plus, if Borrowers so terminate this Agreement and repay the Obligations without having provided Lender with at least thirty (30) days' prior written notice thereof, an additional amount equal to thirty (30) days of interest at the applicable Interest Rate based on the average outstanding amount of the Obligations for the six (6) month period immediately preceding the date of termination. Notwithstanding anything contained in this Section 9.2 to the contrary, no Early Termination Fee shall be charged to Borrowers if either party terminates this Agreement pursuant to the terms of Section 9.1 hereof. 9.3 Additional Costs Collateral. Upon termination of this Agreement by Borrowers, as permitted herein, in addition to payment of all Obligations which are not contingent, Borrowers shall deposit such amount of cash collateral as Lender determines is necessary to secure Lender from loss, cost, damage or expense, including reasonable attorneys' fees, in connection with any open Accommodations or remittance items or other payments provisionally credited to the Obligations and/or to which Lender has not yet received final and indefeasible payment. Exhibit 10.37 - 19 9.4 Notices. Except as otherwise provided, all notices, requests and demands hereunder shall be (a) made to Lender at its address set forth in Section 10.6(a) and to each Borrower at its chief executive office set forth in Section 10.6(d), or to such other address as a party may designate by written notice to the others in accordance with this provision, and (b) deemed to have been given or made: if by hand, immediately upon delivery; if by telex, telegram or telecopy (fax), immediately upon receipt on a Business Day; if by overnight delivery service, on the Business Day after dispatch; and if by first class or certified mail, three (3) days after mailing. 9.5 Severability. If any provision of this Agreement is held to be invalid or unenforceable, such provision shall not affect this Agreement as a whole, but this Agreement shall be construed as though it did not contain the particular provision held to be invalid or unenforceable. 9.6 Entire Agreement; Amendments; Assignments. This Agreement contains the entire agreement of the parties as to the subject matter hereof, all prior commitments, proposals and negotiations concerning the subject matter hereof being merged herein. Neither this Agreement nor any provision hereof shall be amended, modified or discharged orally or by course of conduct, but only by a written agreement signed by an authorized officer of Lender. This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns, except that any obligation of Lender under this Agreement shall not be assignable nor inure to the respective successors and assigns of Borrowers. 9.7 Discharge of Borrowers. No termination of this Agreement shall relieve or discharge Borrowers of their Obligations, grants of Collateral, duties and covenants hereunder or otherwise until such time as all Obligations to Lender have been indefeasibly paid and satisfied in full, including, without limitation, the continuation and survival in full force and effect of all security interests and liens of Lender in and upon all then existing and thereafter-arising or acquired Collateral and all warranties and waivers of Borrowers. 9.8 Usage. All terms used herein which are defined in the Uniform Commercial Code shall have the meanings given therein unless otherwise defined in this Agreement and all references to the singular or plural herein shall also mean the plural or singular, respectively. 9.9 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State in which the office of Lender set forth in Section 10.6(a) below is located. 9.10 Reimbursement Among Each Borrower. To the extent that any Borrower shall be required to pay a portion of the Obligations which shall exceed the amount of loans, advances or other extensions of credit received by any such Borrower and all interest, costs, fees and expenses attributable to such loans, advances or other extensions of credit, then such Borrower shall be reimbursed by each other Borrower for the amount of such excess pro rata, based on their respective receipt of such loans, advances and extensions of credit. This Section 9.10 is intended only to define the relative rights of each Borrower among Borrowers and nothing set forth in this Section 9.10 is intended to or shall impair the obligations of Borrowers, jointly and Exhibit 10.37 - 20 severally, to pay the Obligations to Lender as and when the same shall become due and payable in accordance with the terms hereof. 9.11 Joint and Several Liability. The liability of Borrowers under this Agreement and the other agreements, documents or instruments delivered in connection herewith in general shall be joint and several, and each reference herein to Borrowers shall be deemed to refer to each such Borrower. In furtherance and not in limitation of Lender's rights and remedies hereunder or at law, Lender may proceed under this Agreement and the other agreements, documents or instruments delivered in connection herewith against any one or more Borrowers in its absolute and sole discretion for any of the Obligations. SECTION 10. ADDITIONAL DEFINITIONS AND TERMS
10.1 Financing Terms. (a) Maximum Credit: $3,000,000 (b) Gross Availability Formulas: (i) Eligible Accounts Percentage: 80%; provided such percentage may be reduced by Lender in its sole discretion if the rolling average of the accounts dilution percentage measured over any six (6) month period applicable to the Eligible Accounts is greater than six percent (6%). (ii) Eligible Inventory Percentage: 60% of acceptable and eligible raw material and finished goods inventory. (c) Sublimits(s): N/A (d) Maximum days after Invoice Date for Eligible Accounts: 90 days (e) Minimum Borrowing: $1,000,000
10.2 Term Loan: (a) Initial Term Loan: An Initial Term Loan shall be made to Borrowers on the date hereof in the aggregate amount of One Million Four Hundred Eighty-Three Thousand Nine Hundred Sixty-Eight and xx/100 Dollars ($1,483,968). The Initial Term Loan shall be repayable in immediately available funds, in sixty (60) consecutive monthly installments (or earlier, as hereinafter provided) by RBC, each in the amount Exhibit 10.37 - 21 of Twenty Four Thousand Seven Hundred Thirty-Three and xx/100 Dollars ($24,733), commencing March 24, 1999 and on the first day of each month thereafter; provided, that notwithstanding the foregoing, the then unpaid balance thereof shall be due and payable in full on the date of the expiration the Term. (b) Additional Term Loans: N/A 10.3 Reserved. 10.4 Interest, Fees & Charges: (a) Interest Rate: Prime Rate plus 2.25% per annum. (b) Clearance: Three (3) Business Days (c) Closing Fee: N/A (d) Facility Fee: 0.25% of the Maximum Credit at closing of this Agreement and 0.50% of the Maximum Credit at each anniversary of closing of this Agreement (e) Account Servicing/ Collateral Handling Fee: N/A (f) Unused Line Fee: N/A (g) Field Examination per diem charge per examiner per day: $650 10.5 Financial Covenants: (a) Working Capital: N/A (b) Net Worth: N/A (c) Capital Expenditures: N/A
10.6 (a) Lender's Office: 10 South LaSalle Street Chicago, Illinois 60603 (b) Lender's Bank: Bank of America, Illinois 231 South LaSalle Street Chicago, Illinois 60697 (c) Borrowers: (i) Mendocino Brewing Company, Inc., Exhibit 10.37 - 22 a California corporation ("MBC") (ii) Releta Brewing Company LLC, a Delaware limited liability company ("RBC") (d) (i) Borrowers' Chief Executive MBC: 13351 Highway 101 South Office: P.O. Box 400 Hopland, CA 95449 RBC: 131 Excelsior Avenue Saratoga Springs, NY 12866 (ii) Borrowers' Principal Place of MBC: 1601 Airport Road Business Ukiah, CA 95482 RBC: See (d)(i) above (e) Locations of Eligible Inventory 1601 Airport Road Collateral: Ukiah, CA 95482 131 Excelsior Avenue Saratoga Springs, NY 12866 20 Prospect Street Ballston Spa, NY 12020 13351 Highway 101 South P.O. Box 400 Hopland, CA 95449 (f) Borrowers' Other Offices and N/A Locations of Collateral: (g) Borrower's Trade Names for MBC: Mendocino Brewing Invoicing: Company Mendocino Brewing Company Tavern Mendocino Brewing Shop Carmel Brewing Company RBC: Ten Springs Brewing Company
10.7 Term: Two (2) Years Exhibit 10.37 - 23 IN WITNESS WHEREOF, Borrowers and Lender have duly executed this Loan and Security Agreement as of this 24th day of September, 1998. BORROWERS: MENDOCINO BREWING COMPANY, INC. By: /s/ P.A. Murali -------------------------- Title: Secretary ----------------------- RELETA BREWING COMPANY LLC By: /s/ P.A. Murali -------------------------- Title: Secretary ----------------------- LENDER: THE CIT GROUP/CREDIT FINANCE, INC. By: /s/ Richard Simons -------------------------- Title: Senior Vice President ----------------------- Exhibit 10.37 - 24 EXHIBIT A BORROWING BASE CERTIFICATE COLLATERAL REPORT
THE CIT GROUP/CREDIT FINANCE, INC. Date: ___________________ Report # ____________________ Period Covered _______________ to _______________ ACCOUNTS RECEIVABLE 1. Balance brought forward: $____________ (Previous Report #__________ Date __________) ADDITIONS 2. New Sales (gross) $____________(+) 3. Miscellaneous debits ____________(+) $____________(+) DEDUCTIONS 4. Collections (net cash) $____________(-) 5. Discounts allowed ____________(-) 6. Credit memos ____________(-) 7. Miscellaneous credits ____________(-) $____________(-) 8. Gross balance this report $____________ INELIGIBLES 9. Over _____ days past invoice date $____________(-) 10. Cross-age (_____%) ____________(-) 11. Contras ____________(-) 12. Others (per attached schedule) ____________(-) ____________(-) 13. TOTAL ELIGIBLE RECEIVABLES $____________ 14. BORROWING BASE VALUE (_____% of $____________ line 13) INVENTORY (Note: Multiple advance rates use Attachment I) 15. Balance brought forward: $____________ (Previous Report #_________ Exhibit 10.37 - A1 Date __________) 16. Additions $____________(+) 17. Deductions ____________(-) 18. Gross Balance this Report $____________ INELIGIBLES 19. Slow-moving/obsolete items ____________(-) 20. Consignments ____________(-) 21. In-transit ____________(-) 22. Others (per attached schedule) ____________(-) $____________(-) 23. TOTAL ELIGIBLE INVENTORY $____________ 24. BORROWING BASE VALUE (_____% of line 23 or see Attachment I) $____________ 25. Inventory Sublimit ____________ 26. Maximum Inventory Advance (Lesser of lines 24 and 25) $____________ OTHERS 27. BORROWING BASE VALUE (see $____________ Attachment I) 28. TOTAL BORROWING BASE (14 + 26 + 27) Not Exceeding Facility Limit $__________(A) $____________(B) BORROWING BASE RESERVED 29. Letter-of-Credit $_____________ 30. Other _____________ 31. Other _____________ 32. TOTAL BORROWING BASE RESERVED THIS REPORT $____________ 33. EXCESS BORROWING BASE (Lesser of 28A and 28B minus 32) $____________ LOANS OUTSTANDING 34. Loan Balance (Previous Report #__________ Date __________) $____________ 35. Less: Collections- A/R__________ 36. - non A/R __________ ____________(-) Exhibit 10.37 - A2 37. Add: New Advances ____________(+) 38. Ending Loan Balance this report (34 minus 36 plus 37) $____________ 39. Excess/(Short) Borrowing Base $____________ (Lesser of 28A and 28B minus 32 and 38) TERM LOANS 40. Balance this Report $____________ TOTAL LOANS OUTSTANDING THIS REPORT 41. (Lines 38 and 40) $____________
Pursuant to, and in accordance with, the terms and provisions of that certain Loan and Security Agreement ("Agreement"), between The CIT Group/Credit Finance, Inc. ("Secured Party") and ___________________________ ("Borrower"), Borrower is executing and delivering to Secured Party this Collateral Report accompanied by supporting data (collectively referred to as "Report"). Borrower warrants and represents to Secured Party that this Report is true, correct, and based on information contained in Borrower's own financial accounting records. Borrower, by the executing of this Report, hereby ratifies, confirms and affirms as of the terms, conditions and provisions of the Agreement, and further certifies on this _____ day of _____________, 19___, that the Borrower is in compliance with said Agreement. Borrower: ___________________________________________ By: ___________________________________________ Title: ___________________________________________ Exhibit 10.37 - A3 ATTACHMENT I
THE CIT GROUP/CREDIT FINANCE, INC. Date:___________________ Report #____________________ INVENTORY (Applicable if more than one rate of advance) Category of Inventory ___________ __________ __________ __________ Rate of Advance ___________ __________ __________ __________ TOTAL ---------- 42. Balance brought forward: ___________ __________ __________ __________ __________ 43. Previous Report #:__________ 44. Date:_______________ 45. Additions ___________ __________ __________ __________ __________ 46. Deductions ___________ __________ __________ __________ __________ 47. Gross Balance this Report ___________ __________ __________ __________ __________ INELIGIBLES 48. Slow-moving/obsolete items ___________ __________ __________ __________ __________ 49. Consignments ___________ __________ __________ __________ __________ 50. In-transit ___________ __________ __________ __________ __________ 51. Others (per attached schedule) ___________ __________ __________ __________ __________ 52. TOTAL ELIGIBLE INVENTORY ___________ __________ __________ __________ __________ 53. BORROWING BASE VALUE ___________ __________ __________ __________ __________ (carried over to Line 24 of main Collateral Report) OTHERS (Applicable if other collateral used for Revolving Loan) Collateral Advance Borrowing Value Rate Base Value ----- ---- ---------- 54. Notes Receivable ___________ __________ __________ 55. Machinery & Equipment ___________ __________ __________ 56. Real Estate ___________ __________ __________ 57. Letter-of-Credit ___________ __________ __________ 58. Others _________________________________ ___________ __________ __________ Exhibit 10.37 - A4 59. Sub-total ___________ __________ __________ UNAPPLIED CASH 60. Collections not applied to loan and collateral $ 61. Borrowing Base Value=Unapplied Cash X (100% - Advance Rate %) __________ 62. TOTAL (59 + 61) $__________ (carried over to Line 27 of main Collateral Report)
Exhibit 10.37 - A5 ACCOUNTS RECEIVABLE RECONCILIATION COMPANY _________________________ MONTH ENDING _________________
Daily Collateral Report Aged Trial General Ledger ------ Balance Balance (#________________ ) ---------- -------------- Accounts Receivable Balance $ __________ $ __________ $ __________ Reconciling Items: 1. _______________________________________________ __________ __________ __________ 2. _______________________________________________ __________ __________ __________ 3. _______________________________________________ __________ __________ __________ 4. _______________________________________________ __________ __________ __________ 5. _______________________________________________ __________ __________ __________ 6. _______________________________________________ __________ __________ __________ $ __________ $ __________ $ __________ Aged Trial General Ledger Financial Balance Total Balance Statement (Note 1) (Note 2) Balance (Note 3) Date: _______________________________________________ By: __________ Title: _________ Reconciliation Notes: 1. Daily Collateral Report to the Accounts Receivable Aging. 2. Accounts Receivable Aging to the General Ledger Balance. 3. General Ledger Balance to the Financial Statements. Exhibit 10.37 - A6 INVENTORY RECONCILIATION COMPANY _________________________ MONTH ENDING _________________ Daily Collateral Report Detail or (#____________) Summary Report General Ledger Balance Balance Balance ------- ------- ------- Inventory Balance $ __________ $ __________ $ __________ Reconciling Items: 1. _______________________________________________ __________ __________ __________ 2. _______________________________________________ __________ __________ __________ 3. _______________________________________________ __________ __________ __________ 4. _______________________________________________ __________ __________ __________ 5. _______________________________________________ __________ __________ __________ 6. _______________________________________________ __________ __________ __________ $ __________ $ __________ $ __________ Detail or General Ledger Financial Summary Report Balance Statement Balance Balance (Note 1) (Note 2) (Note 3) Date: _______________________________________________ By: __________ Title: _________ Reconciliation Notes: 1. Daily Collateral Report to the Detail or Summary Report Balance. 2. Detail or Summary Report Balance to the General Ledger Balance. 3. General Ledger Balance to the Financial Statements.
Exhibit 10.37 - A7 SCHEDULE A Permitted Liens I. Mendocino Brewing Company Inc. Secured Party File Number Date Filed Collateral ------------- ----------- ---------- ---------- A. Finova Capital Corporation 9628160343 10/04/96 Equipment B. Finova Capital Corporation 00020157 12/12/96 Equipment C. Savings Bank of Mendocino 9630260566 10/23/96 Blanket lien D. Savings Bank of Mendocino 00018459 11/07/96 Fixture Filing E. Safeco Credit Co., Inc. 9705660610 02/18/97 Forklift F. Trinity Capital Corporation 9815460979 06/01/98 Computers G. The Manifest Group Will be filed ~09/98 Depalitizer H. The Manifest Group Will be filed ~09/98 Digital Gehaltemeter and accessories II. Releta Brewing Company LLC Secured Party File Number Date Filed Collateral ------------- ----------- ---------- ---------- A. Associates Leasing, Inc. 98-1200 04/23/98 Forklifts (2) B. Associates Leasing, Inc. 079747 04/14/98 Forklifts (2) Exhibit 10.37 - A8 SCHEDULE B Funded Indebtedness I. Mendocino Brewing Company Inc. Approx. Amount Lender Outstanding (09/01/98) ------ ---------------------- A. Finova Capital Corporation $1,669,846.70 B. Savings Bank of Mendocino $2,733,110.62 C. United Breweries of America Inc. $ 975,487.88 D. Safeco Credit Co., Inc. $ 13,566.39 E. Trinity Capital Corporation $ 17,572.64 F. The Manifest Group $ 13,793.50 G. Colonial Pacific Leasing $ 118,608.43 II. Releta Brewing Company LLC A. Associates Leasing, Inc. $ 43,710.15 Exhibit 10.37 - A9 EX-10.38 3 PATENT, TRADEMARK AND LICENSE MORTGAGE Exhibit 10.38 PATENT, TRADEMARK AND LICENSE MORTGAGE THIS PATENT, TRADEMARK AND LICENSE MORTGAGE (the "Mortgage") made as of this 24th day of September, 1998, by Mendocino Brewing Company, Inc., a California corporation, having an address at 13351 Highway 101 South, P.O. Box 400, Hopland, California 95449 ("Mortgagor"), in favor of The CIT Group/Credit Finance, Inc. with an office at 10 South LaSalle Street, Chicago, Illinois 60603 ("Mortgagee"): W I T N E S S E T H: WHEREAS, Mortgagor and Mortgagee are parties to a certain Loan and Security Agreement (the "Loan Agreement") and other related loan documents, each of even date herewith (collectively, with the Loan Agreement, the "Loan Agreements"), which Loan Agreements provide (i) for Mortgagee, from time to time, to extend credit to or for the account of Mortgagor and (ii) for the grant by Mortgagor to Mortgagee of a security interest in certain of Mortgagor's assets, including, without limitation, its patents, patent applications, trademarks, trademark applications, trade names, service marks, service mark applications, goodwill and licenses; NOW, THEREFORE, in consideration of the premises set forth herein and for other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, Mortgagor agrees as follows: 1. Incorporation of Loan Agreements. The Loan Agreements and the terms and provisions thereof are hereby incorporated herein in their entirety by this reference thereto. All terms capitalized but not otherwise defined herein shall have the same meanings herein as in the Loan Agreements. 2. Mortgage of Patents, Trademarks and Licenses. To secure the complete and timely satisfaction of all of Mortgagor's Obligations, Mortgagor hereby grants, bargains, assigns, mortgages, pledges, sells, creates a security interest in, transfers and conveys to Mortgagee, as and by way of a first mortgage and security interest having priority over all other security interests, with power of sale, to the extent permitted by law, upon the occurrence of an Event of Default, in all of Mortgagor's right, title and interest in and to all of its now existing and hereafter created or acquired: (i) patents and patent applications, including, without limitation, the inventions and improvements described and claimed therein, and those patents listed on Exhibit A attached hereto and hereby made a part hereof, and (a) the reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof, (b) all income, damages and payments now and hereafter due or payable under or with respect thereto, including, without Exhibit 10.38 - 1 limitation, damages and payments for past or future infringements thereof, (c) the right to sue for past, present and future infringements thereof, and (d) all rights corresponding thereto throughout the world, if any (all of the foregoing patents and applications, together with the items described in clauses (a)-(d) of this subsection 2(i), are sometimes hereinafter referred to individually as a "Patent" and, collectively, as the "Patents"); (ii) trademarks, trademark registrations, trademark applications, trade names and tradestyles, brand names, service marks, service mark registrations and service mark applications, including, without limitation, the trademarks, trade names, brand names, service marks and applications and registrations thereof listed on Exhibit B attached hereto and hereby made a part hereof, and (a) renewals or extensions, thereof, (b) all income, damages and payments now and hereafter due or payable with respect thereto, including, without limitation, damages and payments for past or future infringements thereof, (c) the right to sue for past, present and future infringements thereof, and (d) all rights corresponding thereto throughout the world (all of the foregoing trademarks, trade names and tradestyles, brand names, service marks and applications and registrations thereof, together with the items described in clauses (a)-(d) of this subsection 2(ii), are sometimes hereinafter referred to individually as a "Trademark" and, collectively, as the "Trademarks"); (iii) license agreements (to the extent such license agreements may be assigned without violating the terms of any such license agreement) with respect to any of the Patents or the Trademarks or any other patent, trademark, service mark or any application or registration thereof or any other trade name or tradestyle between Mortgagor and any other party, whether Mortgagor is a licensor or licensee under any such license agreement, including, without limitation, the licenses listed on Exhibit C attached hereto and hereby made a part hereof (all of the foregoing license agreements and Mortgagor's rights thereunder are referred to collectively as the "Licenses"); and (iv) the goodwill of Mortgagor's business connected with and symbolized by the Trademarks. 3. Warranties and Representations. Except as disclosed in Exhibits A, B and C hereto, Mortgagor warrants and represents to Mortgagee that: (i) no Patent, Trademark or License has been adjudged invalid or unenforceable nor has any such Patent, Trademark or License been canceled, in whole or in part and each such Patent, Trademark and License is presently subsisting; (ii) each Patent, Trademark and License Material to the Mortgagor's business is valid and enforceable; Exhibit 10.38 - 2 (iii) Mortgagor is the sole and exclusive owner of the entire and unencumbered right, title and interest as they may appear in and to each Patent, Trademark and License, free and clear of any liens, charges and encumbrances, including without limitation licenses, shop rights and covenants by Mortgagor not to sue third persons; (iv) Mortgagor has adopted, used and is currently using all of the Trademarks; (v) Mortgagor has no notice of any suits or actions commenced or threatened with reference to the Patents, Trademarks or Licenses; and (vi) Mortgagor has the unqualified right to execute and deliver this Mortgage and perform its terms. 4. Restrictions on Future Agreements. Mortgagor agrees that until all Obligations shall have been satisfied in full and the Loan Agreements shall have been terminated, Mortgagor shall not, without the prior written consent of Mortgagee, sell or assign its interest in, or grant any license or sublicense under the Patents, Trademarks or Licenses, or enter into any other agreement with respect to the Patents, Trademarks or Licenses, and Mortgagor further agrees that it shall not take any action or permit any action to be taken by others subject to its control, including licensees, or fail to take any action which would affect the validity of the rights transferred to Mortgagee under this Mortgage. 5. New Patents, Trademarks, and Licenses. Mortgagor represents and warrants that the Patents, Trademarks and Licenses listed on Exhibits A, B and C, respectively, constitute all of the Patents, Trademarks, and Licenses now owned by Mortgagor. If, before all Obligations shall have been satisfied in full or before the Loan Agreements have been terminated, Mortgagor shall (i) become aware of any existing Patents, Trademarks or Licenses of which Mortgagor has not previously informed Mortgagee, (ii) obtain rights to any new patentable inventions, Patents, Trademarks or Licenses, or (iii) become entitled to the benefit of any Patents, Trademarks or Licenses which benefit is not in existence on the date hereof, the provisions of this Mortgage above shall automatically apply thereto and Mortgagor shall give to Mortgagee prompt written notice thereof. Mortgagor hereby authorizes Mortgagee to modify this Mortgage by amending Exhibits A, B and C, as applicable, to include any such Patents, Trademarks and Licenses. 6. Royalties; Terms. The term of the mortgages granted herein shall extend until the earlier of (i) the expiration of each of the respective Patents, Trademarks and Licenses assigned hereunder, and (ii) the payment in full of all Obligations and the termination of the Loan Agreements. Mortgagor agrees that upon the occurrence of an Event of Default, the use by Mortgagee of all Patents, Trademarks and Licenses shall be worldwide, except as limited by their terms, and without any liability for royalties or other related charges from Mortgagee to Mortgagor. Exhibit 10.38 - 3 7. Grant of License to Mortgagor. Unless and until an Event of Default shall have occurred, Mortgagee hereby grants back to Mortgagor the exclusive, nontransferable right and license to use the Trademarks in the ordinary course of its business, to exercise Mortgagee's rights under the Licenses, and to make, have made, use and sell the inventions disclosed and claimed in the Patents for Mortgagor's own benefit and account and for none other. Mortgagor agrees not to sell or assign its interest in, or grant any sublicense under, the license granted to Mortgagor in this Section 7, without the prior written consent of Mortgagee. From and after the occurrence of an Event of Default, Mortgagor's license with respect to the Patents, Trademarks and Licenses set forth in this Section 7 shall terminate upon receipt by Mortgagor of written notice of such termination from Mortgagee, and Mortgagee shall have, in addition to all other rights and remedies given it by this Mortgage, those allowed by law and the rights and remedies of a secured party under the Uniform Commercial Code as enacted in Illinois. 8. Mortgagee's Right to Inspect. Mortgagee shall have the right, at any time and from time to time during normal business hours and prior to payment in full of all Obligations and termination of the Loan Agreements, to inspect Mortgagor's premises and to examine Mortgagor's books, records and operations, including, without limitation, Mortgagor's quality control processes. Upon the occurrence of an Event of Default, Mortgagor agrees that Mortgagee, or a conservator appointed by Mortgagee, shall have the right to establish such additional product quality controls as Mortgagee, or said conservator, in its sole judgment, may deem necessary to assure maintenance of the quality of products sold by Mortgagor under the Trademarks. The foregoing notwithstanding, unless and until an Event of Default shall have occurred, Mortgagee agrees to hold confidential and not disclose or use any information regarding any Patent, Trademark or License unless such disclosure is required by applicable law or court order. This obligation shall survive the termination of this Agreement, the release of the mortgage herein and such reassignment of the Patents, Trademarks or Licenses, as applicable, unless such termination is due to an Event of Default. 9. Release of Mortgage. This Mortgage is made for collateral purposes only. Upon payment in full of all Obligations and termination of the Loan Agreements, Mortgagee shall execute and deliver to Mortgagor all deeds, assignments and other instruments, and shall take such other actions, as may be necessary or proper to re-vest in Mortgagor full title to the Patents, Trademarks and Licenses, subject to any disposition thereof which may have been made by Mortgagee pursuant to the Loan Agreements. 10. Expenses. All expenses incurred in connection with the performance of any of the agreements set forth herein shall be borne by Mortgagor. All fees, costs and expenses, of whatever kind or nature, including attorneys' and paralegals' fees and legal expenses, incurred by Mortgagee in connection with the filing or recording of any documents (including all taxes in connection therewith) in public offices, the payment or discharge of any taxes, counsel fees, maintenance fees, encumbrances or otherwise in protecting, maintaining or preserving the Patents, Trademarks and Licenses, or in defending or prosecuting any actions or proceedings arising out of or related to the Patents, Trademarks and Licenses, shall be borne by and paid by Mortgagor on demand by Mortgagee and until so paid shall be added to the principal amount of Exhibit 10.38 - 4 the Obligations and shall bear interest at the rate for Revolving Loans. 11. Duties of Mortgagor. Subject to Mortgagor's reasonable business judgement and in the ordinary course of Mortgagor's business, Mortgagor shall have the duty (i) to file and prosecute diligently any patent, trademark or service mark applications pending as of the date hereof or hereafter until all Obligations shall have been paid in full and the Loan Agreements have been terminated, (ii) to make application on unpatented but patentable inventions and on trademarks and service marks, (iii) to preserve and maintain all rights in the Patents, Trademarks and Licenses, and (iv) to ensure that the Patents, Trademarks and Licenses are and remain enforceable. Any expenses incurred in connection with Mortgagor's obligations under this Section 11 shall be borne by Mortgagor. Mortgagor shall not abandon any right to file a patent, trademark or service mark application, or abandon any pending patent application, or any other Patent, Trademark or License without the consent of Mortgagee. 12. Mortgagee's Right to Sue. After an Event of Default, Mortgagee shall have the right, but shall in no way be obligated, to bring suit in its own name to enforce the Patents, Trademarks and Licenses, and, if Mortgagee shall commence any such suit, Mortgagor shall, at the request of Mortgagee, do any and all lawful acts and execute any and all proper documents required by Mortgagee in aid of such enforcement and Mortgagor shall promptly, upon demand, reimburse and indemnify Mortgagee for all costs and expenses incurred by Mortgagee in the exercise of its rights under this Section 12. 13. Waivers. No course of dealing between Mortgagor and Mortgagee, nor any failure to exercise, nor any delay in exercising, on the part of Mortgagee, any right, power or privilege hereunder or under the Loan Agreements shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 14. Severability. The provisions of this Mortgage are severable, and if any clause or provision shall be held invalid and unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Mortgage in any jurisdiction. 15. Modification. This Mortgage cannot be altered, amended or modified in any way, except as specifically provided in Section 5 hereof or by a writing signed by the parties hereto. 16. Cumulative Remedies; Power of Attorney; Effect on Loan Agreements. All of Mortgagee's rights and remedies with respect to the Patents, Trademarks and Licenses, whether established hereby or by the Loan Agreements, or by any other agreements or by law shall be cumulative and may be exercised singularly or concurrently. Mortgagor hereby authorizes Mortgagee upon the occurrence of an Event of Default, to make, constitute and appoint any officer or agent of Mortgagee as Mortgagee may select, in its sole discretion, as Mortgagor's true and lawful attorney-in-fact, with power to (i) endorse Mortgagor's name on all applications, documents, papers and instruments necessary or desirable for Mortgagee in the Exhibit 10.38 - 5 use of the Patents, Trademarks and Licenses, or (ii) take any other actions with respect to the Patents, Trademarks and Licenses as Mortgagee deems to be in the best interest of Mortgagee, or (iii) grant or issue any exclusive or non-exclusive license under the Patents, Trademarks or Licenses to anyone, or (iv) assign, pledge, convey or otherwise transfer title in or dispose of the Patents, Trademarks or Licenses to anyone. Mortgagor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney shall be irrevocable until all Obligations shall have been paid in full and the Loan Agreements have been terminated. Mortgagor acknowledges and agrees that this Mortgage is not intended to limit or restrict in any way the rights and remedies of Mortgagee under the Loan Agreements but rather is intended to facilitate the exercise of such rights and remedies. Mortgagee shall have, in addition to all other rights and remedies given it by the terms of this Mortgage and the Loan Agreements, all rights and remedies allowed by law and the rights and remedies of a secured party under the Uniform Commercial Code as enacted in Illinois. 17. Binding Effect; Benefits. This Mortgage shall be binding upon Mortgagor and its respective successors and assigns, and shall inure to the benefit of Mortgagee, its successors, nominees and assigns. 18. Governing Law. This Mortgage shall be governed by and construed in accordance with the internal laws of the State of Illinois. 19. Headings. Paragraph headings used herein are for convenience only and shall not modify the provisions which they precede. 20. Further Assurances. Mortgagor agrees to execute and deliver such further agreements, instruments and documents, and to perform such further acts, as Mortgagee shall reasonably request from time to time in order to carry out the purpose of this Mortgage and agreements set forth herein. 21. Survival of Representations. All representations and warranties of Mortgagor contained in this Mortgage shall survive the execution and delivery of this Mortgage and shall be remade on the date of each borrowing under the Loan Agreements. [SIGNATURE PAGE FOLLOWS] Exhibit 10.38 - 6 IN WITNESS WHEREOF, Mortgagor has duly executed this Mortgage in favor of Mortgagee, as of the date first written above. ATTEST: MENDOCINO BREWING COMPANY, INC. /s/ Yashpal Singh By: /s/ P.A. Murali - -------------------------- -------------------------- Its: C.O.O. Its: Secretary -------------------- -------------------- Agreed and Accepted as of this 24th day of September, 1998 THE CIT GROUP/CREDIT FINANCE, INC. By: /s/ Richard Simons ---------------------------- Its: Senior V.P. --------------------------- Exhibit 10.38 - 7 STATE OF California ) ) SS. COUNTY OF Mendocino ) The foregoing Patent, Trademark and License Mortgage was executed and acknowledged before me this 16 day of Sept., 1998, by P.A. Murali and Yashpal Singh, personally known to me to be the Secretary and C.O.O. of Mendocino Brewing Company, Inc., a California corporation, on behalf of such corporation. /s/ Sharon Cline ------------------------------ Notary Public THIS INSTRUMENT PREPARED BY AND AFTER FILING RETURN TO: Michael A. Nemeroff, Esq. Vedder, Price, Kaufman & Kammholz 222 North LaSalle Street Chicago, Illinois 60601 Exhibit 10.38 - 8 EXHIBIT A PATENTS None Exhibit 10.38 - A1 EXHIBIT B Mendocino Brewing Company, Inc. A. Registered Trademarks. 1. Red Tail Ale (and design)(1) 2. Blue Heron Pale Ale (and design)(2) 3. Black Hawk Stout(3) 4. Eye of the Hawk Select Ale (and design) 5. Yuletide Porter(4) 6. Peregrine Pale Ale(5) 7. Springtide Pale Ale 8. Frolic Shipwreck Ale 1850(6) 9. Carmel Amber Ale 10. Carmel Wheat Hefe-Weizen 11. Brewsletter 12. Mendocino Brewing Company B. Unregistered Trademarks. 1. American Classic 2. California's First Brewpub Since Prohibition(7) 3. Eye of the Hawk 4. Eye of the Hawk Select 5. Eye of the Hawk Select 6. Frolic 7. Frolic Shipwreck 8. Frolic Shipwreck 1850 9. Hops cluster design 10. Mendocino Brewing Company scroll and hops and barley design 11. Peregrine(8) 12. Purple Haze(9) 13. Red Tail 14. Springtide(10) - --------------- (1) Possible infringement by Clarks Crossing Brewpub and the Fox and Hound Brewpub in Saskatoon, Saskatchewan, Canada (both market Red Tail Ale); and Al Frisco's in Toronto, Canada (Red Tail Lager). (2) Cannot be used in the States of Oregon, Idaho, Washington, and Montana. (3) Per an agreement with Hiram Walker & Sons, Inc. the trademark can only be used in connection with the words Mendocino Brewing Company. (4) Possible infringement by Crooked River Brewing Co. and Louisiana Jack's Silo Brewpub (both market Yuletide Ale) (5) Registration in process. Mark has never been affixed to goods, although has been used at the Hopland Brewery. (6) Mendocino County Museum prints the labels under an agreement with MBC. (7) May not be attached to a product. (8) Used in connection with the sale of a product on a menu or tap handle, but not actually attached to a product. (9) Not actually attached to a product. Exhibit 10.38 - B1 15. Springtide Celebration(11) 16. Strawberry Blonde(12) 17. The Legend 18. The Legend Grows 19. Yuletide Note: In addition to the above, MBC is aware that the following brands could be deemed to be similar to the brands of MBC: Eugene City Brewing Co/West Brothers Bar-B-Q Black Hole Stout Flagstaff Brewing Co Blackbird Porter Redhook Ale Brewery (No 2) Blackhook Redhook Ale Brewery Blackhook Porter Blue Ridge Brewing Co Hawksbill Golden Harrison Hollow Brewhouse Nighthawk Snowfest Arrowhead Brewing Co Red Feather Pale Ale Eugene City Brewing Co/West Brothers Bar-B-Q Red Tape Ale Blue Cat Brew Pub Red Toad Twenty Tank Brewery Red Top Rohrbach Brewing Co Red Wing Big Buck Brewery and Steakhouse Redbird Ale Redhook Ale Brewery Redhook ESB Redhook Ale Brewery Redhook Rye Mishawaka Brewing Co Silver hawks Pilsner Padre Island Brewing Co Tailing Red Amber Hereford and Hops White Tail Ale Wisconsin Brewing Co White Tail Cream Ale Copper Tank Brewing Co/Austin Microbrewers LLC White Tail Pale Ale Mickey Finn's Brewery/Libertyville Brewing Co White Tail Wheat Ale Whitetail Brewing Inc Whitetail Ale Whitetail Brewing Inc Whitetail Brown Ale Whitetail Brewing Inc Whitetail Maple Wheat Whitetail Brewing Inc Whitetail Stout Whitetail Brewing Inc Whitetail Wheat Montana Brewing Co Yellowtail Pale Ale Redwood Coast Brewing Co Yule Tied - -------------------------------------------------------------------------------- (10) Used in connection with the sale of a product on a menu or tap handle, but not actually attached to a product. (11) This mark has been claimed by Mendocino Brewing Company, Inc., but the Company has ceases using the mark in light of claims made by Sierra Nevada that the mark conflicts with its Celebration Ale. (12) Belmont Brewing Company markets a Strawberry Blonde fruit ale. Exhibit 10.38 - B2 Exhibit 10.38 - B3 EXHIBIT C LICENSE AGREEMENTS None Exhibit 10.38 - C1 EX-10.39 4 PATENT, TRADEMARK AND LICENSE MORTGAGE Exhibit 10.39 PATENT, TRADEMARK AND LICENSE MORTGAGE THIS PATENT, TRADEMARK AND LICENSE MORTGAGE (the "Mortgage") made as of this 24th day of September, 1998, by Releta Brewing Company, LLC, a Delaware limited liability company, having an address at 131 Exelsior Avenue, Saratoga Springs, New York 12866 ("Mortgagor"), in favor of The CIT Group/Credit Finance, Inc. with an office at 10 South LaSalle Street, Chicago, Illinois 60603 ("Mortgagee"): W I T N E S S E T H: WHEREAS, Mortgagor and Mortgagee are parties to a certain Loan and Security Agreement (the "Loan Agreement") and other related loan documents, each of even date herewith (collectively, with the Loan Agreement, the "Loan Agreements"), which Loan Agreements provide (i) for Mortgagee, from time to time, to extend credit to or for the account of Mortgagor and (ii) for the grant by Mortgagor to Mortgagee of a security interest in certain of Mortgagor's assets, including, without limitation, its patents, patent applications, trademarks, trademark applications, trade names, service marks, service mark applications, goodwill and licenses; NOW, THEREFORE, in consideration of the premises set forth herein and for other good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, Mortgagor agrees as follows: 1. Incorporation of Loan Agreements. The Loan Agreements and the terms and provisions thereof are hereby incorporated herein in their entirety by this reference thereto. All terms capitalized but not otherwise defined herein shall have the same meanings herein as in the Loan Agreements. 2. Mortgage of Patents, Trademarks and Licenses. To secure the complete and timely satisfaction of all of Mortgagor's Obligations, Mortgagor hereby grants, bargains, assigns, mortgages, pledges, sells, creates a security interest in, transfers and conveys to Mortgagee, as and by way of a first mortgage and security interest having priority over all other security interests, with power of sale, to the extent permitted by law, upon the occurrence of an Event of Default, in all of Mortgagor's right, title and interest in and to all of its now existing and hereafter created or acquired: (i) patents and patent applications, including, without limitation, the inventions and improvements described and claimed therein, and those patents listed on Exhibit A attached hereto and hereby made a part hereof, and (a) the reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof, (b) all income, damages and payments now and hereafter due or payable under or with respect thereto, including, without limitation, damages and payments for past or future infringements thereof, (c) the right to sue for past, present and future infringements thereof, and (d) all rights Exhibit 10.39 - 1 corresponding thereto throughout the world, if any (all of the foregoing patents and applications, together with the items described in clauses (a)-(d) of this subsection 2(i), are sometimes hereinafter referred to individually as a "Patent" and, collectively, as the "Patents"); (ii) trademarks, trademark registrations, trademark applications, trade names and tradestyles, brand names, service marks, service mark registrations and service mark applications, including, without limitation, the trademarks, trade names, brand names, service marks and applications and registrations thereof listed on Exhibit B attached hereto and hereby made a part hereof, and (a) renewals or extensions, thereof, (b) all income, damages and payments now and hereafter due or payable with respect thereto, including, without limitation, damages and payments for past or future infringements thereof, (c) the right to sue for past, present and future infringements thereof, and (d) all rights corresponding thereto throughout the world (all of the foregoing trademarks, trade names and tradestyles, brand names, service marks and applications and registrations thereof, together with the items described in clauses (a)-(d) of this subsection 2(ii), are sometimes hereinafter referred to individually as a "Trademark" and, collectively, as the "Trademarks"); (iii) license agreements (to the extent such license agreements may be assigned without violating the terms of any such license agreement) with respect to any of the Patents or the Trademarks or any other patent, trademark, service mark or any application or registration thereof or any other trade name or tradestyle between Mortgagor and any other party, whether Mortgagor is a licensor or licensee under any such license agreement, including, without limitation, the licenses listed on Exhibit C attached hereto and hereby made a part hereof (all of the foregoing license agreements and Mortgagor's rights thereunder are referred to collectively as the "Licenses"); and (iv) the goodwill of Mortgagor's business connected with and symbolized by the Trademarks. 3. Warranties and Representations. Except as disclosed in Exhibits A, B and C hereto, Mortgagor warrants and represents to Mortgagee that: (i) no Patent, Trademark or License has been adjudged invalid or unenforceable nor has any such Patent, Trademark or License been canceled, in whole or in part and each such Patent, Trademark and License is presently subsisting; (ii) each Patent, Trademark and License Material to the Mortgagor's business is valid and enforceable; (iii) Mortgagor is the sole and exclusive owner of the entire and unencumbered right, title and interest as they may appear in and to each Patent, Trademark and License, free and clear of any liens, charges and encumbrances, Exhibit 10.39 - 2 including without limitation licenses, shop rights and covenants by Mortgagor not to sue third persons; (iv) Mortgagor has adopted, used and is currently using all of the Trademarks; (v) Mortgagor has no notice of any suits or actions commenced or threatened with reference to the Patents, Trademarks or Licenses; and (vi) Mortgagor has the unqualified right to execute and deliver this Mortgage and perform its terms. 4. Restrictions on Future Agreements. Mortgagor agrees that until all Obligations shall have been satisfied in full and the Loan Agreements shall have been terminated, Mortgagor shall not, without the prior written consent of Mortgagee, sell or assign its interest in, or grant any license or sublicense under the Patents, Trademarks or Licenses, or enter into any other agreement with respect to the Patents, Trademarks or Licenses, and Mortgagor further agrees that it shall not take any action or permit any action to be taken by others subject to its control, including licensees, or fail to take any action which would affect the validity of the rights transferred to Mortgagee under this Mortgage. 5. New Patents, Trademarks, and Licenses. Mortgagor represents and warrants that the Patents, Trademarks and Licenses listed on Exhibits A, B and C, respectively, constitute all of the Patents, Trademarks, and Licenses now owned by Mortgagor. If, before all Obligations shall have been satisfied in full or before the Loan Agreements have been terminated, Mortgagor shall (i) become aware of any existing Patents, Trademarks or Licenses of which Mortgagor has not previously informed Mortgagee, (ii) obtain rights to any new patentable inventions, Patents, Trademarks or Licenses, or (iii) become entitled to the benefit of any Patents, Trademarks or Licenses which benefit is not in existence on the date hereof, the provisions of this Mortgage above shall automatically apply thereto and Mortgagor shall give to Mortgagee prompt written notice thereof. Mortgagor hereby authorizes Mortgagee to modify this Mortgage by amending Exhibits A, B and C, as applicable, to include any such Patents, Trademarks and Licenses. 6. Royalties; Terms. The term of the mortgages granted herein shall extend until the earlier of (i) the expiration of each of the respective Patents, Trademarks and Licenses assigned hereunder, and (ii) the payment in full of all Obligations and the termination of the Loan Agreements. Mortgagor agrees that upon the occurrence of an Event of Default, the use by Mortgagee of all Patents, Trademarks and Licenses shall be worldwide, except as limited by their terms, and without any liability for royalties or other related charges from Mortgagee to Mortgagor. 7. Grant of License to Mortgagor. Unless and until an Event of Default shall have occurred, Mortgagee hereby grants back to Mortgagor the exclusive, nontransferable right and license to use the Trademarks in the ordinary course of its business, to exercise Mortgagee's rights under the Licenses, and to make, have made, use and sell the inventions disclosed and claimed in the Patents for Mortgagor's own benefit and account and for none other. Mortgagor Exhibit 10.39 - 3 agrees not to sell or assign its interest in, or grant any sublicense under, the license granted to Mortgagor in this Section 7, without the prior written consent of Mortgagee. From and after the occurrence of an Event of Default, Mortgagor's license with respect to the Patents, Trademarks and Licenses set forth in this Section 7 shall terminate upon receipt by Mortgagor of written notice of such termination from Mortgagee, and Mortgagee shall have, in addition to all other rights and remedies given it by this Mortgage, those allowed by law and the rights and remedies of a secured party under the Uniform Commercial Code as enacted in Illinois. 8. Mortgagee's Right to Inspect. Mortgagee shall have the right, at any time and from time to time during normal business hours and prior to payment in full of all Obligations and termination of the Loan Agreements, to inspect Mortgagor's premises and to examine Mortgagor's books, records and operations, including, without limitation, Mortgagor's quality control processes. Upon the occurrence of an Event of Default, Mortgagor agrees that Mortgagee, or a conservator appointed by Mortgagee, shall have the right to establish such additional product quality controls as Mortgagee, or said conservator, in its sole judgment, may deem necessary to assure maintenance of the quality of products sold by Mortgagor under the Trademarks. The foregoing notwithstanding, unless and until an Event of Default shall have occurred, Mortgagee agrees to hold confidential and not disclose or use any information regarding any Patent, Trademark or License unless such disclosure is required by applicable law or court order. This obligation shall survive the termination of this Agreement, the release of the mortgage herein and such reassignment of the Patents, Trademarks or Licenses, as applicable, unless such termination is due to an Event of Default. 9. Release of Mortgage. This Mortgage is made for collateral purposes only. Upon payment in full of all Obligations and termination of the Loan Agreements, Mortgagee shall execute and deliver to Mortgagor all deeds, assignments and other instruments, and shall take such other actions, as may be necessary or proper to re-vest in Mortgagor full title to the Patents, Trademarks and Licenses, subject to any disposition thereof which may have been made by Mortgagee pursuant to the Loan Agreements. 10. Expenses. All expenses incurred in connection with the performance of any of the agreements set forth herein shall be borne by Mortgagor. All fees, costs and expenses, of whatever kind or nature, including attorneys' and paralegals' fees and legal expenses, incurred by Mortgagee in connection with the filing or recording of any documents (including all taxes in connection therewith) in public offices, the payment or discharge of any taxes, counsel fees, maintenance fees, encumbrances or otherwise in protecting, maintaining or preserving the Patents, Trademarks and Licenses, or in defending or prosecuting any actions or proceedings arising out of or related to the Patents, Trademarks and Licenses, shall be borne by and paid by Mortgagor on demand by Mortgagee and until so paid shall be added to the principal amount of the Obligations and shall bear interest at the rate for Revolving Loans. 11. Duties of Mortgagor. Subject to Mortgagor's reasonable business judgement and in the ordinary course of Mortgagor's business, Mortgagor shall have the duty (i) to file and prosecute diligently any patent, trademark or service mark applications pending as of the date hereof or hereafter until all Obligations shall have been paid in full and the Loan Agreements have been terminated, (ii) to make application on unpatented but patentable inventions and on trademarks and service marks, (iii) to preserve and maintain all rights in the Exhibit 10.39 - 4 Patents, Trademarks and Licenses, and (iv) to ensure that the Patents, Trademarks and Licenses are and remain enforceable. Any expenses incurred in connection with Mortgagor's obligations under this Section 11 shall be borne by Mortgagor. Mortgagor shall not abandon any right to file a patent, trademark or service mark application, or abandon any pending patent application, or any other Patent, Trademark or License without the consent of Mortgagee. 12. Mortgagee's Right to Sue. After an Event of Default, Mortgagee shall have the right, but shall in no way be obligated, to bring suit in its own name to enforce the Patents, Trademarks and Licenses, and, if Mortgagee shall commence any such suit, Mortgagor shall, at the request of Mortgagee, do any and all lawful acts and execute any and all proper documents required by Mortgagee in aid of such enforcement and Mortgagor shall promptly, upon demand, reimburse and indemnify Mortgagee for all costs and expenses incurred by Mortgagee in the exercise of its rights under this Section 12. 13. Waivers. No course of dealing between Mortgagor and Mortgagee, nor any failure to exercise, nor any delay in exercising, on the part of Mortgagee, any right, power or privilege hereunder or under the Loan Agreements shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 14. Severability. The provisions of this Mortgage are severable, and if any clause or provision shall be held invalid and unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Mortgage in any jurisdiction. 15. Modification. This Mortgage cannot be altered, amended or modified in any way, except as specifically provided in Section 5 hereof or by a writing signed by the parties hereto. 16. Cumulative Remedies; Power of Attorney; Effect on Loan Agreements. All of Mortgagee's rights and remedies with respect to the Patents, Trademarks and Licenses, whether established hereby or by the Loan Agreements, or by any other agreements or by law shall be cumulative and may be exercised singularly or concurrently. Mortgagor hereby authorizes Mortgagee upon the occurrence of an Event of Default, to make, constitute and appoint any officer or agent of Mortgagee as Mortgagee may select, in its sole discretion, as Mortgagor's true and lawful attorney-in-fact, with power to (i) endorse Mortgagor's name on all applications, documents, papers and instruments necessary or desirable for Mortgagee in the use of the Patents, Trademarks and Licenses, or (ii) take any other actions with respect to the Patents, Trademarks and Licenses as Mortgagee deems to be in the best interest of Mortgagee, or (iii) grant or issue any exclusive or non-exclusive license under the Patents, Trademarks or Licenses to anyone, or (iv) assign, pledge, convey or otherwise transfer title in or dispose of the Patents, Trademarks or Licenses to anyone. Mortgagor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney shall be irrevocable until all Obligations shall have been paid in full and the Loan Agreements have been terminated. Mortgagor acknowledges and agrees that this Mortgage is not intended to limit or restrict in any way the rights and remedies of Mortgagee under the Loan Agreements but rather is intended to Exhibit 10.39 - 5 facilitate the exercise of such rights and remedies. Mortgagee shall have, in addition to all other rights and remedies given it by the terms of this Mortgage and the Loan Agreements, all rights and remedies allowed by law and the rights and remedies of a secured party under the Uniform Commercial Code as enacted in Illinois. 17. Binding Effect; Benefits. This Mortgage shall be binding upon Mortgagor and its respective successors and assigns, and shall inure to the benefit of Mortgagee, its successors, nominees and assigns. 18. Governing Law. This Mortgage shall be governed by and construed in accordance with the internal laws of the State of Illinois. 19. Headings. Paragraph headings used herein are for convenience only and shall not modify the provisions which they precede. 20. Further Assurances. Mortgagor agrees to execute and deliver such further agreements, instruments and documents, and to perform such further acts, as Mortgagee shall reasonably request from time to time in order to carry out the purpose of this Mortgage and agreements set forth herein. 21. Survival of Representations. All representations and warranties of Mortgagor contained in this Mortgage shall survive the execution and delivery of this Mortgage and shall be remade on the date of each borrowing under the Loan Agreements. [SIGNATURE PAGE FOLLOWS] Exhibit 10.39 - 6 IN WITNESS WHEREOF, Mortgagor has duly executed this Mortgage in favor of Mortgagee, as of the date first written above. ATTEST: RELETA BREWING COMPANY, LLC /s/ H. Michael Laybourn By: /s/ P.A. Murali - ----------------------------- ----------------------------- Its: President Its: Secretary ------------------------ ----------------------------- Agreed and Accepted as of this ____ day of _______________, 1998 THE CIT GROUP/CREDIT FINANCE, INC. By: /s/ R.A. Simons ------------------------- Its: Senior V.P. ------------------------ Exhibit 10.39 - 7 STATE OF California ) ) SS. COUNTY OF Mendocino ) The foregoing Patent, Trademark and License Mortgage was executed and acknowledged before me this 16 day of Sept., 1998, by P.A. Murali and H. Michael Laybourn, personally known to me to be the Secretary and President of Releta Brewing Company, LLC, a Delaware limited liability company, on behalf of such limited liability company. /s/ Sharon Cline ---------------------------- Notary Public THIS INSTRUMENT PREPARED BY AND AFTER FILING RETURN TO: Michael A. Nemeroff, Esq. Vedder, Price, Kaufman & Kammholz 222 North LaSalle Street Chicago, Illinois 60601 Exhibit 10.39 - 8 EXHIBIT A PATENTS None Exhibit 10.39 - A1 EXHIBIT B Releta Brewing Company LLC A. Registered Trademarks. None B. Unregistered Trademarks. 1. North Country Ale(1) 2. White Face(2) 3. Whiteface(3) 4. White Face Pale Ale 5. Saratoga Classic Pilsner Beer 6. Fat Bear(4) 7. Fat Bear Stout 7. Ten Springs(5) 8. Northern Exposure(6) - ----------------------------------- (1) Registration in process. (2) Registration in process. (3) Registration in process. (4) Registration in process. (5) Registration in process. (6) Registration in process. Exhibit 10.39 - B1 EXHIBIT C LICENSE AGREEMENTS None Exhibit 10.39 - C1 EX-27 5 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 190,700 0 849,800 0 966,200 2,536,200 16,909,532 1,394,932 19,173,100 1,755,100 0 0 227,600 12,413,000 (2,033,400) 19,173,100 5,056,400 5,360,300 3,823,500 4,127,400 (12,500) 0 404,900 (1,828,100) (731,200) (1,096,900) 0 0 0 (1,096,900) (0.24) 0
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