-----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, On+ejFEQIdI3OKeiiCUZQQLfW+8nF9J22F/lBONE3S+4NBPeHZl1nJtty7NYkYTn UDL4jExnODE2aWrT5NZ2pA== 0001144204-10-028089.txt : 20100517 0001144204-10-028089.hdr.sgml : 20100517 20100517135448 ACCESSION NUMBER: 0001144204-10-028089 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20100331 FILED AS OF DATE: 20100517 DATE AS OF CHANGE: 20100517 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13636 FILM NUMBER: 10837365 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 10-Q 1 v185349_10q.htm Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
   
  For the quarterly period ended  March 31, 2010
 
OR
 
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from                                                                           to                                
 
Commission file number 1-13636
 
Mendocino Brewing Company, Inc.
(Exact name of Registrant as Specified in its Charter)
 
California
68-0318293
(State or Other Jurisdiction of
(IRS Employer
Incorporation or Organization)
Identification No.)
 
1601 Airport Road, Ukiah, CA 95482
(Address of principal executive offices)
 
(707) 463-2087
(Registrant's Telephone Number, Including Area Code)
 
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
 
Indicate by check mark whether the registrant (1) has filed all reports  required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 (check one)
 
Large accelerated filer ¨   Accelerated filer ¨   Non-accelerated filer ¨ Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  The number of shares of the issuer's common stock outstanding as of May 11, 2010 is 12,427,262.
 
 
PART I
 
Item 1.                      Financial Statements.
 
MENDOCINO BREWING COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
March 31,2010
(Unaudited)
    
December 31, 2009 (Audited)
  
ASSETS
            
Current Assets
            
Cash
   $ 167,600     $ 140,900  
Accounts receivable, net of allowance for
                
doubtful accounts of $485,000 and $504,900, respectively
     5,242,000       11,267,700  
Inventories
     1,869,300       1,862,600  
Prepaid expenses
     199,000       543,300  
                 
Total Current Assets
     7,477,900       13,814,500  
                 
Property and Equipment (net of accumulated depreciation)
                
      12,238,400       12,474,200  
Other Assets
                
Deposits and other assets
     292,200       288,200  
Intangibles, (net of amortization)
     47,600       47,600  
                 
Total Other Assets
     339,800       335,800  
                 
Total Assets
   $ 20,056,100     $ 26,624,500  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
                 
Current Liabilities
                
Secured lines of credit
   $ 2,466,800     $ 3,126,200  
Accounts payable
     6,888,400       12,088,200  
Accrued liabilities
     1,213,200       1,504,100  
Current maturities of notes to related parties
     91,100       97,000  
Current maturities of obligation under long-term debt
     320,700       319,800  
Current maturities of obligation under capital lease
     134,100       142,700  
Total Current Liabilities
     11,114,300       17,278,000  
                 
Long-Term Liabilities
                
Notes to related parties including accrued
                
interest of $1,240,800 and $1,218,400, respectively
     3,338,400       3,327,800  
Long term debt, less current maturities
     3,430,500       3,509,500  
Obligations under capital leases, less current maturities
     124,700       161,500  
                 
Total Long-Term Liabilities
     6,893,600       6,998,800  
                 
Total Liabilities
     18,007,900       24,276,800  
                 
Stockholders' Equity
                
Preferred stock, Series A, no par value, with
                
liquidation preference of $1 per share; 10,000,000
                
shares authorized, 227,600 shares issued and outstanding
     227,600       227,600  
Common stock, no par value 30,000,000 shares authorized,
                
12,427,262 shares issued and outstanding
     15,043,300       15,043,300  
Accumulated comprehensive income
     554,600       436,800  
Accumulated deficit
     (13,777,300 )     (13,360,000 )
                 
Total Stockholders' Equity
     2,048,200       2,347,700  
                 
Total Liabilities and Stockholders' Equity
   $ 20,056,100     $ 26,624,500  

See accompanying notes to these condensed financial statements.
 
1
 
MENDOCINO BREWING COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

   
Three Months Ended
  
   
March 31,
  
   
2010
    
2009
  
             
Sales
   $ 8,603,300     $ 7,292,500  
Less excise taxes
     168,200       155,400  
Net Sales
     8,435,100       7,137,100  
Cost of goods sold
     6,290,000       5,373,800  
                 
Gross Profit
     2,145,100       1,763,300  
Operating Expense
                
Marketing
     1,405,300       984,200  
General and administrative
     1,028,900       961,700  
Total Operating Expense
     2,434,200       1,945,900  
                 
Income (loss) from operations
     (289,100 )     (182,600 )
                 
Other income (expense)
                
Miscellaneous income
     7,100       6,600  
Profit on sale of assets
     --       6,500  
Interest expense
     (132,700 )     (122,800 )
Total Other Expense
     (125,600 )     (109,700 )
                 
Income (loss) before income taxes
     (414,700 )     (292,300 )
                 
Provision for income taxes
     2,600       --  
                 
Net Income (loss)
     (417,300 )     (292,300 )
                 
Foreign currency translation gain (loss)
     117,800       11,700  
                 
Comprehensive Loss
     (299,500 )     (280,600 )
                 
Net Income (loss) per common share (basic and diluted)
   $ ( 0.03 )   $ ( 0.02 )
                 
Weighted average common shares outstanding
                
Basic and diluted
     12,427,262       12,198,666  

See accompanying notes to these condensed financial statements.
 
2
 
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Three Months Ended
  
   
March 31,
  
   
2010
    
2009
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net Income (Loss)
   $ (417,300 )   $ (292,300 )
Adjustments to reconcile net loss to net cash from operating activities:
                
Depreciation and amortization
     269,300       254,600  
Allowance for doubtful accounts
     9,400       14,600  
Interest accrued on related party debt
     22,400       22,400  
     Non cash compensation
     --       80,000  
     (Profit) on sale of assets
     --       (6,500 )
Changes in:
                
Accounts receivable
     5,556,400       938,200  
Inventories
     (6,700 )     (240,200 )
Prepaid expenses
     329,900       (60,900 )
Deposits and other assets
     11,200       32,000  
Accounts payable
     (4,690,700 )     (257,700 )
Accrued liabilities
     (257,800 )     (110,200 )
Net cash provided by (used in) operating activities
     826,100       374,000  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Purchases of property, equipment, and leasehold improvements
     (112,700 )     (80,000 )
Proceeds from sale of fixed assets
     --       9,300  
Net cash used in investing activities
     (112,700 )     (70,700 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Net repayment on line of credit
     (582,000 )     (204,100 )
Repayment on long-term debt
     (78,100 )     (76,300 )
Payments on obligations under long term leases
     (36,500 )     (35,800 )
Net cash provided by (used in) financing activities
     (696,600 )     (316,200 )
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
     9,900       (12,700 )
                 
NET CHANGE IN CASH
     26,700       (25,600 )
                 
CASH, beginning of period
     140,900       273,700  
                 
CASH, end of period
   $ 167,600     $ 248,100  
                 
SUPPLEMENTARY CASH FLOW INFORMATION
                
Cash paid during the period for:
                
Income taxes
   $ 2,600       --  
Interest
   $ 110,300     $ 100,400  

See accompanying notes to these condensed financial statements.

3

MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(Unaudited)
 
1.           Description of Operations and Summary of Significant Accounting Policies
 
Description of Operations
 
Mendocino Brewing Company, Inc., (the "Company", “we” or "MBC"), has operating subsidiaries, Releta Brewing Company, ("Releta"), and United Breweries International, Limited (UK), ("UBIUK").  In the United States, MBC and its subsidiary, Releta, operate two breweries that produce beer for the specialty "craft" segment of the beer market.  The breweries are located in Ukiah, California and Saratoga Springs, New York.  We also own and operate a brewpub and gift store located in Hopland, California.  The majority of sales for MBC are in California.  We brew several brands, of which Red Tail Ale is the flagship brand.  In addition, we perform contract brewing for several other brands, and we hold the license to distribute Kingfisher Premium Lager Beer in the United States.
 
Our UK subsidiary, United Breweries International (UK) Limited (“UBIUK”), is a holding company for UBSN Limited (“UBSN”).  UBSN is a distributor of alcoholic beverages, mainly Kingfisher Lager, in the United Kingdom and Europe.  The distributorship is located in Faversham, Kent in the United Kingdom.
 
Principles of Consolidation
 
The consolidated financial statements present the accounts of Mendocino Brewing Company, Inc., and its wholly-owned subsidiaries, Releta and UBIUK.  All inter-company balances, profits and transactions have been eliminated.
 
Basis of Presentation and Organization
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with US generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US generally accepted accounting principles for complete annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, except as otherwise indicated, considered necessary for a fair presentation of the financial condition, results of operations and cash flows for the periods presented. These condensed financial statements should be read in conjunction with the audited consolidated financial statements included in the Company's  most recent Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, which contains additional financial and operating information and information concerning the significant accounting policies followed by the Company. The financial statements and notes are representations of the management and the Board of Directors, who are responsible for their integrity and objectivity.
 
Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 or any future period.
 
4
 
SIGNIFICANT ACCOUNTING POLICIES
 
There have been no significant changes in our significant accounting policies during the three months ended March 31, 2010 compared to what was previously disclosed in the our Annual Report on 10-K for the year ended December 31, 2009.
 
Cash and Cash Equivalents, Short and Long-Term Investments
 
For purposes of cash flows, we consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.  Other investments with maturities less than twelve months from the balance sheet date are considered short-term investments, and those with maturities greater than twelve months from the balance sheet date are considered long-term investments.
 
Fair Value of Financial Instruments. 
 
 
The levels of the fair value hierarchy established by ASC 820 are:
 
Level 1:  inputs are quoted prices, unadjusted, in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
 
Level 2:  inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.  A Level 2 input must be observable for substantially the full term of the asset or liability.
 
Level 3:  inputs are unobservable and reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.
 
At March 31, 2010 and December 31, 2009 the Company does not have any assets or liabilities which are recorded at fair value on a recurring basis.
 
The Company considers the recorded value of certain of its financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses, to approximate the fair value of the respective assets and liabilities at March 31, 2010 and December 31, 2009 based upon the short-term nature of the assets and liabilities. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of short and long term notes payable approximate fair value.
 
The carrying value of certain of the financial instruments, of other current assets and accrued expenses, approximate fair value due to their short maturities.
 
5
 
Deferred Financing Costs
 
Costs relating to obtaining financing are capitalized and amortized over the term of the related debt. Deferred financing costs were $311,300, and the related accumulated amortization at March 31, 2010 was $229,600.  Amortization of deferred financing costs charged to operations was $16,300 for the quarters ended March 31, 2010 and 2009.  We will continue to amortize these fees until 2011.  When a loan is paid in full, any unamortized financing costs are removed from the related accounts and charged to operations.
 
Concentration of Credit Risks
 
Financial instruments that potentially subject us to credit risk consist principally of trade receivables, cash deposits in excess of FDIC limits, and assets located in the United Kingdom.  Substantially all of the Company's cash deposits are deposited with commercial banks in the US and the UK.
 
Wholesale distributors account for substantially all accounts receivable; therefore, this risk concentration is limited due to the number of distributors and the laws regulating the financial affairs of distributors of alcoholic beverages.  The Company has approximately $114,700 in cash deposits and $3,545,400 of accounts receivable due from customers located in the United Kingdom as of March 31, 2010.
 
Income Taxes
 
We account for our income taxes using the Financial Accounting Standards Board Statements of Financial Accounting Standards No. 109, "Accounting for Income Taxes," codified within ASC 272, 740, 805, 830, 942, 958 and 995 which requires the establishment of a deferred tax asset or liability for the recognition of future deductible or taxable amounts and operating loss and tax credit carryforwards.  Deferred tax expense or benefit is recognized as a result of timing differences between the recognition of assets and liabilities for book and tax purposes during the year.
 
  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  Deferred tax assets are recognized for deductible temporary differences and operating loss, and tax credit carryforwards.  A valuation allowance is established to reduce the deferred tax asset if it is "more likely than not" that the related tax benefits will not be realized. Management believes that sufficient uncertainty exists regarding the future realization of deferred tax assets and, accordingly, a full valuation allowance has been provided against net deferred tax assets. Tax expense has taken into account any change in the valuation allowance for deferred tax assets where the realization of various deferred tax assets is subject to uncertainty.
 
 There are no changes in the carrying value of our tax assets or liabilities for any unrecognized tax benefits.
 
Basic and Diluted Earnings (Loss) per Share
 
In accordance with SFAS No. 128, "Earnings Per Share," (ASC 260) the basic earnings (loss) per share is computed by dividing the earnings (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period.  Basic net earnings (loss) per share exclude the dilutive effect of stock options or warrants and convertible notes.  If our operations result in net loss for any period, Diluted net loss per share would be the same as basic net loss per share, since the effect of any potentially dilutive securities is excluded, as they are anti-dilutive due to the net loss.  The computation of the dilutive effect of the Company's convertible notes for the three month period ended March 31, 2010 and 2009 is shown in the table below.
 
6
 
   
Three months ended
  
   
March 31,2010
    
March 31, 2009
  
Net income (loss)
   $ (417,300 )   $ (292,300 )
Weighted average common shares outstanding
     12,427,262       12,198,666  
Basic net income (loss) per share
   $ (0.03 )   $ (0.02 )
 
Foreign Currency Translation
 
The assets and liabilities of UBIUK were translated at the United Kingdom pound sterling - US dollar exchange rates in effect at March 31, 2010 and December 31, 2009, and the statements of operations were translated at the average exchange rates for each of the three months ended March 31, 2010 and 2009.  Gains and losses resulting from the translations were deferred and recorded as a separate component of consolidated stockholders' equity.  Cash at UBIUK was translated at exchange rates in effect at March 31, 2010 and December 31, 2009, and its cash flows were translated at the average exchange rates for each of the three months ended March 31, 2010 and 2009.  Changes in cash resulting from the translations are presented as a separate item in the statements of cash flows.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America includes having the Company make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities.  The amounts estimated could differ from actual results.  Significant estimates include the allowance for bad debts, depreciation and amortization periods, and the future utilization of deferred tax assets.  The Company has determined that deferred tax assets associated with net operating loss carryforwards in the US may expire prior to utilization.  The Company has placed a valuation allowance on these assets in the US.
 
Comprehensive Income (Loss)
 
Comprehensive income (loss) is composed of our net income (loss) and changes in equity from non-stockholder sources.  The accumulated balances of these non-stockholder sources are reflected as a separate item in the equity section of the balance sheet.
 
The components of other comprehensive income for the three months ended March 31, 2010 and 2009 are reflected as a separate item in the statement of operations.
 
Reportable Segments
 
We manage our operations through two business segments: brewing operations, including tavern and tasting room operations (domestic) and distributor operations (international).  The international business segment sells our products outside the United States.
 
7
 
We evaluate performance based on net operating profit.  Where applicable, portions of the administrative function expenses are allocated between the operating segments.  The operating segments do not share manufacturing or distribution facilities.  In the event any materials and/or services are provided to one operating segment by the other, the transaction is valued according to the our transfer policy, which approximates market price.  The costs of operating the manufacturing plants are captured discretely within each segment.  Our property, plant and equipment, inventory, and accounts receivable are captured and reported discretely within each operating segment.
 
Reclassifications
 
            Certain amounts in the prior periods presented have been reclassified to conform to the current period financial statement presentation.  These reclassifications have no effect on previously reported net losses or accumulated deficit.

 
2.           Liquidity and Management Plans
 
At March 31, 2010, we had cash and cash equivalents of $167,600 a working capital deficit of $3,636,400 and an accumulated deficit of $13,777,300.  Additionally, we have a history of past losses as infrastructure costs were incurred in advance of obtaining customers. At March 31, 2010, we were in default on two of the financial covenants in our secured credit facility. This violation has resulted in a higher rate of interest until the violation is cured.
 
Management has taken several actions to ensure that the Company will have sufficient cash for its working capital needs through March 31, 2011, including reductions in discretionary expenditures, optimizing prices and discounts to increase margin, introduction of new products, new packaging and securing additional brewing contracts. In addition, our majority shareholder issued a letter of support to provide financial assistance when required. We may also seek additional capital infusions to support operations. Management believes that these actions will enable us to meet our working capital needs through March 31, 2011.
 

3.           Inventories
 
Inventories are stated at the lower of average cost or market and consist of the following:
 
   
March 31,2010
    
December 31, 2009
  
Raw Materials
   $ 737,900     $ 591,600  
Beer-in-process
     275,100       241,300  
Finished Goods
     817,300       988,800  
Merchandise
     39,000       40,900  
TOTAL
   $ 1,869,300     $ 1,862,600  

4.           Line of Credit and Note Payable
 
In November 2006, Marquette Business Credit, Inc. ("Marquette") provided a line of credit drawable up to 85% of eligible receivables and 60% of eligible inventory for a period up to June 2011.  The borrowings are collateralized, with recourse, by certain eligible trade receivables up to a maximum percentage of 85% of the qualified net amounts of such receivables of each of MBC and Releta and 60% of MBC's and Releta's eligible inventory located in the US.  This facility carries interest at a rate of one-month LIBOR plus 4.25% and is secured by substantially all of the assets, excluding real property, of Releta and MBC. The amount outstanding on this line of credit as of March 31, 2010 was approximately $1,623,100. At March 31, 2010, we were in default on two of the financial covenants.
 
8
 
We retain the right to recall any of the collateralized receivables under the line of credit, and the receivables are subject to recourse.  Therefore, the transaction does not qualify as a sale under the terms of Financial Accounting Standards Board Statement No. 125 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (ASC 860).  Included in our Balance Sheet as Accounts receivable at March 31, 2010, are account balances totaling $1,696,600 of uncollected accounts receivables collateralized to Marquette under this facility.
 
On April 26, 2005, Royal Bank of Scotland Commercial Services Limited ("RBS") provided an invoice discounting facility to UBSN Limited for a maximum amount of £1,750,000 based on 80% prepayment against qualified accounts receivable related to UBSN's United Kingdom customers.  The initial term of the facility was for a one year period after which time the facility could be terminated by either party by providing the other party with six months notice.  The facility carries an interest rate of 1.38% above the RBS base rate and a service charge of 0.10% of each invoice discounted.  The amount outstanding on this line of credit as of March 31, 2010 was approximately $843,700.
 
5.           Long-Term Debt
 
Maturities of long-term debt for succeeding years are as follows:
 
   
March 31, 2010
    
December 31, 2009
  
Notes to a financial institution, payable in monthly installments of $20,500, plus interest at one month LIBOR plus 5.25% with a balloon payment of $622,400 in June 2011; secured by substantially all assets of Releta Brewing Company and Mendocino Brewing Company, excluding real property at Ukiah.
   $ 929,900     $ 991,400  
                 
Note to a financial institution, payable in monthly installments of $27,300 including interest at prime plus 1.75% with a balloon payment of approximately $2,737,000 in June 2011.
     2,821,300       2,837,900  
      3,751,200       3,829,300  
                 
Less current maturities
     320,700       319,800  
    $ 3,430,500     $ 3,509,500  

Principal maturities of long-term debt as of March 31, 2010 are as follows:
 
Nine months ending December 31, 2010
   $ 240,500  
Year 2010
   $ 3,510,700  
Total
   $ 3,751,200  

 
9
 
6.           Notes to Related Party
 
Subordinated Convertible Notes Payable
 
Notes payable to a related party consist of unsecured convertible notes to United Breweries of America ("UBA") for a total value of $3,156,200 as of March 31, 2010, including interest at the prime rate plus 1.5%, but not to exceed 10% per year.  The UBA notes are convertible into common stock at $1.50 per share.  The UBA notes have been extended until June 2010.  UBA may demand payment within 60 days of the end of the extension period but is precluded from doing so because the notes are subordinated to long-term debt agreements with Grand Pacific Financing Corporation and Marquette, both maturing in June 2011. Therefore, the Company will not require the use of working capital to repay any of the UBA notes until the above-mentioned facilities are repaid.  Accordingly, the entire amount due under the UBA notes is classified as a long term liability.  The UBA notes include $1,240,800 and $1,218,400 of accrued interest at March 31, 2010 and December 31, 2009, respectively.
 
5% Notes Payable
 
Notes payable also include an unsecured loan from Shepherd Neame Limited to UBSN  payable in annual installments of $76,100 with interest at 5% per year maturing in June 2013.  The amounts outstanding under this loan as of March 31, 2010 and December 31, 2009 were $273,300 and $291,000 respectively, including current maturities of $91,100 and $97,000 on those dates.
 
Capital Lease Obligations
 
The Company leases certain brewing equipment, vehicles and office equipment under agreements that are classified as capital leases.  The future minimum lease payments required under the capital leases and the present value of the net minimum lease payments as of March 31, 2010, are as follows:
 

Nine months ending December 31, 2010
   $ 116,700  
Year ending December 31, 2011
     110,600  
Year ending December 31, 2012
     63,600  
      290,900  
Less amounts representing interest
     (32,100 )
Present value of minimum lease payments
     258,800  
Less current maturities
     (134,100 )
Non-current leases payable
   $ 124,700  

 
7.           Commitments and Contingencies
 
Legal
 
We are periodically involved in legal actions and claims that arise as a result of events that occur in the normal course of operations.  We are not currently aware of any legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our financial position or results of operations.
 
10
 
Operating Leases
 
We lease many of our operating and office facilities for various terms under long-term, non-cancelable operating lease agreements.  The leases expire at various dates through 2015 and provide for renewal options ranging from month-to-month to five year terms.  In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties.  The leases provide for increases in future minimum annual rental payments based on defined increases which are generally meant to correlate with the consumer price index, subject to certain minimum increases.  Also, the agreements generally require us to pay executory costs (real estate taxes, insurance and repairs).
 
We and our subsidiaries have various lease agreements for the brewpub and gift store in Hopland, California; a sales office in Petaluma, California; land at its Saratoga Springs, New York, facility; a building in the United Kingdom; and certain personal property.  The land lease includes a renewal option for two additional five-year periods, which we intend to exercise, and some leases are adjusted annually for changes in the consumer price index.  The leases begin expiring in 2010.
 
   
Nine Months ended December 31, 2010
   $ 192,200  
Year 2011
     228,000  
Year 2012
     214,300  
Year 2013
     207,300  
Year 2014
     119,500  
Thereafter
     7,800  
    $ 969,100  


Keg Management Agreement
 
In September 2009, we renewed the keg management agreement with MicroStar Keg Management LLC.  Under this arrangement, MicroStar provides all kegs for which we pay a service fee depending on the applicable territory.  The agreement is effective for five years ending in September 2014.  If the agreement is terminated, we are required to purchase four times the average monthly keg usage for the preceding six-month period from MicroStar.  We expect to continue this relationship. 
 
8.           Related-Party Transactions
 
We and our subsidiaries have entered into or amended several agreements with affiliated and related entities. Among these were a Market Development Agreement, a Distribution Agreement, and a Brewing License Agreement between MBC and UBSN; a Distribution Agreement between UBI and UBSN; a Trademark Licensing Agreement between MBC and Kingfisher of America, Inc.; and a License Agreement between UBI and UB Limited. UBSN is a party to a brewing agreement and a loan agreement with Shepherd Neame Limited ("Shepherd Neame"). Additional information about these transactions may be found in the Company's annual report on Form 10-K for the year ended December 31, 2009.
 
The following table reflects the value of the transactions for the quarters ended March 31, 2010 and 2009 and the balances outstanding as of March 31, 2010 and 2009.
 
   
2010
    
2009
  
Sales to Shepherd Neame
   $ 1,786,400     $ 998,000  
Purchases from Shepherd Neame
   $ 3,759,900     $ 2,946,700  
Expense reimbursement to Shepherd Neame
   $ 200,100     $ 253,500  
Interest expense related to UBA convertible notes
   $ 22,400     $ 22,400  
Accounts payable to Shepherd Neame
   $ 4,938,000     $ 3,679,000  
Accounts receivable from Shepherd Neame
   $ 753,600     $ 859,300  

11

9.           Stockholders' Equity
 
The following table summarizes equity transactions during the three months ended March 31, 2010.
 
   
Series A Preferred Stock
    
Common Stock
                    
   
Shares
    
Amount
    
Shares
    
Amount
    
Other Comprehensive
Income / (Loss)
    
Accumulated Deficit
    
Total Equity
  
                                           
Balance, December 31, 2009
     227,600     $ 227,600       12,427,262     $ 15,043,300     $ 436,800     $ (13,360,000 )   $ 2,347,700  
Net loss
     -       -       -       -       -       (417,300 )     (417,300 )
                                                         
Currency Translation Adjustment
     -       -       -       -       117,800       -       117,800  
                                                         
Balance, March 31, 2010
     227,600     $ 227,600       12,427,262     $ 15,043,300     $ 554,600     $ (13,777,300 )   $ 2.048,200  

Preferred Stock
 
Ten million shares of preferred stock have been authorized, of which 227,600 are designated as Series A. Series A shareholders are entitled to receive cash dividends and/or liquidation proceeds equal, in the aggregate, to $1.00 per share before any cash dividends are paid on the common stock or any other series of preferred stock.  When the entire Series A dividend/liquidation proceeds have been paid, the Series A shares are automatically canceled and will cease to be outstanding.  Only a complete corporate dissolution will cause a liquidation preference to be paid.
 
10.           Equity Issuances
 
No stock options were outstanding as of March 31, 2010 and March 31, 2009.
 
Valuation and Expense Information under SFAS 123(R)
 
 
 
Our business presently consists of two segments.  The first is brewing for wholesale to distributors and other retailers including beer for sale along with merchandise at the brewpub and retail merchandise store located at the Hopland brewery and at the Saratoga Springs brewery.  The second consists of distributing alcoholic beverages to retail establishments and restaurants in the United Kingdom, Europe and Canada.  A summary of each segment is as follows:
 
12
 
   
Three months ended March 31, 2010
  
   
Domestic Operations
    
Foreign
Territory
    
Corporate & Others
    
Total
  
Net Sales
   $ 3,247,400     $ 5,187,700     $ -     $ 8,435,100  
Operating Loss
   $ (58,700 )   $ (230,400 )   $ -     $ (289,100 )
Identifiable Assets
   $ 12,640,300     $ 5,173,000     $ 2,242,800     $ 20,056,100  
Depreciation & Amortization
   $ 150,400     $ 118,900     $ -     $ 269,300  
Capital Expenditures
   $ 15,500     $ 97,200     $ -     $ 112,700  
 
   
Three months ended March 31, 2009
  
   
 Domestic Operations
    
 Foreign
Territory
    
 Corporate & Others
    
 Total
  
Net Sales
   $ 3,171,800     $ 3,965,300     $ -     $ 7,137,100  
Operating Loss
   $ (148,100 )   $ (34,500 )   $ -     $ (182,600 )
Identifiable Assets
   $ 13,266,100     $ 5,720,700     $ 2,470,400     $ 21,457,200  
Depreciation & Amortization
   $ 147,500     $ 107,100     $ -     $ 254,600  
Capital Expenditures
   $ 14,200     $ 65,800     $ -     $ 80,000  
 
12.           Unrestricted Net Assets
 
Our wholly-owned subsidiary, UBIUK, has undistributed losses of approximately $1,595,900 as of March 31, 2010.  Under UBSN's line of credit agreement with RBS, distributions and other payments to us from our subsidiary are not permitted if retained earnings drop below approximately $1,519,000.  Condensed financial information of the parent company, Mendocino Brewing Company, Inc. together with its other subsidiary, Releta Brewing Company is as follows:
 
13
 
   
March 31, 2010
    
December 31, 2009
  
   
(unaudited)
    
(audited)
  
Assets
            
Cash
   $ 52,900     $ 46,700  
Accounts receivable
     1,696,600       1,695,500  
Inventories
     1,869,300       1,862,600  
Other current assets
     153,500       161,400  
Total current assets
     3,772,300       3,766,200  
                 
Investment in UBIUK
     1,225,000       1,225,000  
Property and equipment
     10,771,000       10,889,600  
Other assets
     339,800       335,800  
Total assets
   $ 16,108,100     $ 16,216,600  
                 
Liabilities and Stockholders' Equity
                
Line of credit
   $ 1,623,100     $ 1,562,900  
Accounts payable
     1,653,400       1,546,900  
Accrued liabilities
     856,800       831,400  
Current maturities of debt and leases
     378,700       381,500  
Total current liabilities
     4,512,000       4,322,700  
                 
Intercompany payable to UBIUK
     209,800       275,100  
Long-term debt and capital leases
     3,504,200       3,594,800  
Notes payable to related party
     3,156,200       3,133,800  
Total long-term liabilities
     6,870,200       7,003,700  
Total liabilities
   $ 11,382,200     $ 11,326,400  
                 
Stockholders' equity
                
Preferred stock
     227,600       227,600  
Common stock
     15,043,300       15,043,300  
Accumulated deficit
     (10,545,000 )     (10,380,700 )
Total stockholders' equity
     4,725,900       4,890,200  
Total liabilities and stockholders' equity
   $ 16,108,100     $ 16,216,600  
 
14
 
 
12.           Unrestricted Net Assets (continued)
 
Statements of Operations
  
Quarter ended March 31
  
   
2010
    
2009
  
   
(unaudited)
    
(unaudited)
  
Net sales
   $ 3,247,400     $ 3,171,800  
Cost of goods sold
     2,553,900       2,452,000  
Selling, marketing, and retail expenses
     319,700       304,600  
General and administrative expenses
     460,700       588,200  
Income (loss) from operations
     (86,900 )     (173,000 )
                 
Other (income) and expense
     (38,400 )     (45,300 )
Interest expense
     113,200       101,800  
Provision for taxes
     2,600       --  
Net profit(loss)
   $ (164,300 )   $ (229,500 )
 
Statements of Cash Flows
  
 Quarter ended March 31
  
   
2010
    
2009
  
   
(unaudited)
    
(unaudited)
  
 Cash flows from operating activities
   $ 120,200     $ 281,900  
 Purchase of property and equipment
     (15,500 )     (14,200 )
 Proceeds from sale of fixed assets
     --       9,300  
 Net borrowing (repayment) on line of credit
     60,200       (66,900 )
 Repayment on long term debt
     (78,100 )     (76,300 )
 Payment on obligation under capital lease
     (15,300 )     (19,600 )
 Net change in payable to UBI
     (65,300 )     (68,600 )
 Increase (decrease) in cash
     6,200       45,600  
 Cash, beginning of period
     46,700       105,400  
 Cash, end of period
   $ 52,900     $ 151,000  
 
13.        Income Taxes
 
 In the three months ending March 31, 2010 and 2009, we only recorded tax expense related to state franchise taxes.  We did not report any income tax expense due to the availability of deferred tax assets available to offset any taxable income in the United States and the United Kingdom.  We have established a full valuation allowance against our deferred tax assets based on its assessment that it does not yet meet the criteria that deferred tax assets will more likely than not be realized.  During the three months ending March 31, 2010 and 2009, our effective tax rates were de minimus.  The difference between our effective tax rates and the 35% United States federal statutory tax rate and the United Kingdom's statutory tax rate resulted primarily from a tax benefit related to a reduction in the federal and state deferred tax asset valuation allowance.
 
Our major tax jurisdictions are (i) United States (federal), (ii) California (state), (iii) New York (state) and (iv) United Kingdom.  Tax returns remain open to examination by the applicable governmental authorities for tax years 2005 through 2009.  The federal and state taxing authorities may choose to audit tax returns for prior years due to significant tax attribute carryforwards for those prior years.  However, such audits will be limited to adjustments to such carryforward tax attributes.  We are not currently being audited in any major tax jurisdiction.
 
15
  
14.        Subsequent Events
 
            The Company has evaluated and disclosed subsequent events through the date of this filing and is not aware of any other subsequent event that would have a material impact on the accompanying unaudited Condensed Consolidated Financial Statements.

 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity/cash flows of the Company for the three months ended March 31, 2010, compared to the three months ended March 31, 2009. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2009.
 
In this Report, the terms "we", "us", "our", and "the Company" and its variants are generally used to refer to Mendocino Brewing Company, Inc. and its subsidiaries, while the term "MBC" is used to refer to Mendocino Brewing Company, Inc. as an individual entity standing alone.
 
Forward Looking Statements
 
Various portions of this Quarterly Report, including but not limited to the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain forward-looking information. Such 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 those and similar words are intended to identify such forward-looking information. Any forward-looking statements made by the Company are intended to provide investors with additional information with which they may assess the Company's future potential. All forward-looking statements are based on assumptions about an uncertain future and are based on information available at the date such statements are issued. 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: changes in the pricing environment for the Company's products; changes in demand for malt beverage products in different Company markets; changes in distributor relationships or performance; changes in customer preference for the Company's malt beverage products; regulatory or legislative changes; the impact of competition; changes in raw materials prices; availability of financing for operations; changes in interest rates; changes in the company's European beer and/or restaurant business, and other risks discussed elsewhere in this Quarterly Report and from time to time in the Company's Securities and Exchange Commission (the "Commission") filings and reports. In addition, such statements could be affected by general industry and market conditions and growth rates, and in general domestic and European economic and political conditions. The Company undertakes no obligation to update these forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made or to publicly release the results of any revision to these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.
 
16
 
Critical Accounting Policies
 
There have been no significant changes in the Company's accounting policies during the three months ended March 31, 2010 compared to what was previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2009.
 
The process of preparing financial statements, in accordance with generally accepted accounting principles in the United States requires our management to make estimates and judgments regarding certain items and transactions.  These judgments are based on historical experience, current economic and industry trends, information provided by outside sources, and management estimates.  It is possible that materially different amounts could be recorded if these estimates and judgments change or if our actual results differ from these estimates and judgments.  We consider the following to be our most significant critical accounting policies which involve the judgment of our management.
 
Revenue Recognition
 
We recognize revenue from sales upon the transfer of title for the goods.  We classify amounts billed to customers for shipping and handling as revenues, with the related shipping and handling costs included in cost of goods sold.
 
We account for cash consideration paid to customers for services or product placement fees as a reduction in revenue rather than as an expense.
 
Inventories
 
Consolidated inventories are stated at the lower of cost or market.  On a quarterly basis, we evaluate the carrying costs of our inventory to ensure that it is stated at the lower of cost or market.  Our products are typically not subject to obsolescence and consequently our reserves for slow moving and obsolete inventory have historically been zero.  Cash flows from the sale of inventory are reported in cash flows from operations in our consolidated statement of cash flows.
 
Income Taxes
 
We conduct operations in separate legal entities which are located in different tax jurisdictions; as a result, income tax amounts are reflected in our consolidated financial statements for each of such tax jurisdictions.
 
We record net operating losses and credit carryforwards in the event we expect such benefits to be realized.  Deferred taxes result from differences between the financial and tax bases of our assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted.  We record valuation allowances to reduce our deferred tax assets when it is more likely than not that a tax benefit will not be realized.
 
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making our assessment.  Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences, net of our existing valuation allowances.
 
17
 
Segment Information
 
Prior to 2001, the Company's business operations were exclusively located in the United States, and were divided into two segments, manufacturing and distribution of beer, which accounted for the majority of the Company's gross sales, and retail sales (primarily at the Company's Hopland, California, tavern and merchandise store) which generally accounted for less than 5% of gross sales (by revenue). With the Company's acquisition of United Breweries International (UK), Ltd. ("UBI") in August 2001, however, the Company gained a new business segment, distribution of beer outside the United States, primarily in the U.K. and Ireland, continental Europe, and Canada (the "Foreign Territory"). This segment accounted for 54% and 60% of the Company's gross sales during the first quarter of 2010 and 2009 respectively, with the Company's United States operations, including manufacturing and distribution of beer as well as retail sales (the "Domestic Territory") accounting for the remaining 46% and 40% during the first quarter of 2010 and 2009, respectively.  With expanded wholesale distribution of beer and the closure of the restaurant at the Hopland facility, Management expects that retail sales, as a percentage of total sales, will decrease proportionally to the expected increase in the Company's wholesale sales.
 
Seasonality
 
Sales of the Company's products are somewhat seasonal. Historically, sales volumes in all geographic areas have been comparatively low during the first quarter of the calendar year in both the Company's Domestic Territory and Foreign Territory. In the Domestic Territory, sales volumes have been stronger during the second and third quarters and slower again during the fourth quarter, while in the Foreign Territory the fourth quarter has generated stronger sales volume. The volume of sales in any given area may also be affected by local weather conditions. Because of the seasonality of the Company's business, results for any one quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
 
Summary of Financial Results
 
The Company ended the first quarter of 2010 with a net loss of $417,300, as compared to a net loss of $292,300 for the same period in 2009.  As set forth more fully under "Results of Operations," below, during the first quarter of 2010 the Company experienced an increase in net sales of $1,298,000 as compared to the first quarter of 2009. Costs of goods sold increased by $916,200, operating expenses increased by $488,300, and interest expenses increased by $9,900, all of which contributed to the Company's results for the period.
 
Results of Operations
 
Net Sales
 
Overall net sales for the first quarter of 2010 were $8,435,100, an increase of $1,298,000, or 18%, compared to $7,137,100 for the first quarter of 2009.
 
Domestic Operations. Domestic net sales for first quarter of 2010 were $3,247,400 compared to $3,171,800 for the same period in 2009, an increase of $75,600, or 2%.  The sales volume increased to 16,100 barrels in the first quarter of 2010 from 15,700 barrels in the first quarter of 2009, representing an increase of 400 barrels, or 3%.  Of the numerical barrel increase, sales of our brands increased by 1,000 barrels, Kingfisher sales increased by 300 barrels and sales of contract brands decreased by 900 barrels.
 
Foreign Territory: Net sales for the first quarter of 2010 were $5,187,700 (£ 3,323,100) compared to $3,965,300 (£ 2,763,100) during the corresponding period of 2009, an increase of $1,222,400, or 31% due to increase in sales volume and the impact of the currency exchange rate. During the first quarter of 2010, UBSN sold 17,400 barrels compared to 14,700 barrels during the first quarter of 2009, an increase of 2,700 barrels or 18%.  If measured on a constant exchange rate basis, net sales for the first quarter of 2010 would have increased 20% from the first quarter of 2009.
 
18
 
Cost of Goods Sold
 
Cost of goods sold as a percentage of net sales during the first quarter of both 2010 and 2009 was 75%.
 
Domestic Operations:  Cost of goods sold as a percentage of net sales in the Domestic Territory during the first quarter of 2010 was 78%, as compared to 77%, during the corresponding period of 2009.
 
Foreign Territory: Cost of goods sold as a percentage of net sales in the Foreign Territory during the first quarter of 2010 was 73%, as compared to 74% during the corresponding period of 2009 (in each case as calculated in US dollars, after taking into account the effects of the exchange rate calculation).
 
Gross Profit
 
As a result of increase in net sales described above, gross profit for the first quarter of 2010 increased to $2,145,100 compared to $1,763,300 during the corresponding period of 2009.  As a percentage of net sales, gross profit during the first quarter of both 2010 and 2009 remained at 25%.
 
Operating Expenses
 
Operating expenses for the first quarter of 2010 were $2,434,200, an increase of $488,300, or 25%, as compared to $1,945,900 for the corresponding period of the year 2009. Operating expenses consist of marketing and distribution expenses and general and administrative expenses.
 
Marketing and Distribution Expenses: The Company's marketing and distribution expenses for the first quarter of 2010 were $1,405,300, as compared to $984,200 for the first quarter of 2009, representing an increase of $421,100 or 43%.  These expenses were 17% and 14% of net sales for the first quarter of the years 2010 and 2009, respectively.
 
Domestic Operations: Expenses for the first quarter of 2010 were $319,700 compared to $304,600 during the corresponding period of 2009, representing an increase of $15,100 or 5%.  As a percentage of net sales in the Domestic Territory, the expenses were 10% during the first quarter of 2010 compared to 9% during the first quarter of 2009.
 
Foreign Territory:  Expenses for the first quarter of 2010 were $1,085,600 compared to $679,600 during the corresponding period of 2009, representing an increase of $406,000 or 60%. The increases were mainly due to increased manpower, increased commission on sales associated with increased sales to supermarkets and convenience stores and onetime cost related to a media campaign in London and the surrounding commuter environs. As a percentage of net sales in the United Kingdom, the expenses were 21% and 17% during the first quarter of 2010 and 2009 respectively (in each case as calculated in US dollars, after taking into account the effects of the exchange rate calculation).
 
General and Administrative Expenses: The Company's general and administrative expenses were $1,028,900 for the first quarter of 2010 compared to $961,700 for the corresponding period in 2009. As a percentage of net sales, these expenses decreased to 12% during the first quarter of the year 2010 compared to 14% for the first quarter of the year 2009.
 
19
 
Domestic Operations.  Domestic general and administrative expenses increased to $460,700 for the first quarter of 2010 representing a decrease of $127,500 or 22% compared to $588,200 for the first quarter of 2009. In the first quarter of the year 2009, there was a onetime issuance of common stock as compensation to the outside members of the Board of Directors for their services and legal and professional costs related to our capital raising efforts.  As a percentage of net sales in the Domestic Territory, expenses decreased to 14% during the first quarter of 2010 compared to 19% during the first quarter of 2009.
 
Foreign Territory.  General and administrative expenses related to the Foreign Territory were $568,200 for the first quarter of 2010, representing an increase of $194,700, or 52%, as compared to $373,500 for the first quarter of 2009 (in each case as calculated in US dollars, after taking into account the effects of the exchange rate calculation). The increases were mainly due to the salary of the Chief Executive Officer appointed during the fourth quarter of 2009 and onetime professional costs associated with the strategic review that was carried out on the pricing, staffing and market research of the business. As a percentage of net sales in the Foreign Territory, the expenses were 11% during the first quarter of 2010 compared to 10% during the first quarter of 2009.
 
Other Expenses
 
Other expenses for the first quarter of 2010 totaled $125,600, representing an increase of $15,900 or 15% when compared to other expenses of $109,700 for the first quarter of the year 2009 mainly due to increase in interest expenses as a result of an increased interest rate of our domestic debts.
 
Income Taxes
 
The Company recorded a provision of $2,600 for income taxes associated with its domestic operations during the first quarter of 2010.
 
Net Loss
 
The Company's net loss for the first quarter of 2010 was $417,300, as compared to a net loss of $292,300 for the first quarter of 2009.  After providing for a positive foreign currency translation adjustment of $117,800 during the first quarter of 2010 (as compared to $11,700 for the same period in 2009), the comprehensive loss for the first quarter of 2010 was $299,500, compared to $280,600 for the same period in 2009.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Unused capacity at our Ukiah and Saratoga Springs facilities has continued to place demands on our working capital.  Beginning approximately in the second quarter of 1997, the time at which the Ukiah brewery commenced operations, proceeds from operations have not been able to provide us with sufficient working capital.
 
We are a party to several loans, lines of credit, other credit facilities and lease agreements (collectively, "Indebtedness").  Certain of the agreements governing our Indebtedness contain cross-default provisions which may cause an event of default under one agreement to result in an event of default under a separate agreement.  In addition, certain of the agreements governing our Indebtedness contain provisions pursuant to which a material adverse change in our financial condition may result in an event of default under such agreements.  In case of an event of default, the agreements provide the lenders with several rights and remedies, including, but not limited to, acceleration and termination of the facility, implementation of default interest rates, and secured party rights with respect to the collateral (including the power to sell such collateral).  Substantially all of our assets, including the real property in Ukiah, are pledged as collateral pursuant to the terms of the agreements governing our Indebtedness.  (The agreements relating to our Indebtedness are described in more detail below under "Description of Our Indebtedness", "Long-Term Debt" and "Other Loans and Credit Facilities".)
 
20
 
On May 8, 2009, we received written notice (the "Notice") from Marquette Business Credit, Inc. ("Marquette") that as of March 31, 2009 an event of default had occurred and was continuing under the loan and security agreement by and among Marquette (as lender) and MBC and Releta (as borrowers) dated November 16, 2006 (the "Loan Agreement") which covers our revolving line of credit, term loan and capex loan with Marquette.  As of the date of this filing, Marquette has elected to implement the default interest rates provided for under the Loan Agreement which impacts the applicable interest rates on the revolving line of credit, term loan and capex loan with retroactive effect from and after April 1, 2009.  Although Marquette indicated in the Notice that it would not be asserting its additional rights and remedies as of the date of the Notice, it reserved the right to exercise its additional rights and remedies at any time in the future.  (For additional information relating to the event of default under the Marquette Loan Agreement see "Description of Our Indebtedness Marquette Business Credit, Inc. Facility" below.)
 
As of the date of this filing, we have not received notice from any of our other lenders of the occurrence of an event of default under the agreements governing our remaining Indebtedness, and to the knowledge of our Management no additional events of default currently exist under any other agreements relating to our Indebtedness.  We are currently making timely payments of principal and interest relating to our Indebtedness as such Indebtedness becomes due and anticipate that we will continue to make such timely payments in the immediate future.  However, if we fail to maintain any of the financial covenants under the various agreements governing our Indebtedness, fail to make timely payments of amounts due under our Indebtedness, or commit any other breach resulting in an event of default under the agreements governing our Indebtedness, such events of default (including cross-defaults) could have a material adverse effect on our financial condition.  In case of the acceleration and termination of our existing Indebtedness, we may need to obtain replacement financing.  If we are unable to obtain such replacement financing, it may result in a material adverse effect on our financial condition and our ability to continue operations.  In addition, actions available to secured parties relating to our assets that have been pledged as collateral could have a material adverse effect on our financial conditions and operations.
 
Management has taken several actions to ensure that the Company will have sufficient cash for its working capital needs through March 31, 2011, including reductions in discretionary expenditures, optimizing prices and discounts to increase margin, introduction of new products, new packaging and securing additional brewing contracts. In addition, our majority shareholder issued a letter of support to provide financial assistance when required. We may also seek additional capital infusions to support operations. Management believes that these actions will enable us to meet our working capital needs through March 31, 2011.
 
As of March 31, 2010, we had cash and cash equivalents of $167,600, a working capital deficit of $3,636,400 and an accumulated deficit of $13,777,300.  Additionally, we have a history of past losses as infrastructure costs were incurred in advance of obtaining customers. As discussed above, on March 31, 2010, we were in default on two of the financial covenants in our secured credit facility with Marquette. This violation has resulted in a higher rate of interest until the violation is cured.
 
21
 
Net cash provided by operating activities for the three months ended March 31, 2010 was $826,100, compared to $374,000 for the three months ended March 31, 2009. We generally do not require significant cash on hand to meet our operating needs.
 
Net cash used in investing activities totaled approximately $112,700 for the three months ended March 31, 2010 compared to $70,700 for the corresponding period of 2009. Net cash used for investing activities consists of purchases of capital assets.
 
Net cash used in financing activities totaled approximately $696,600 during the three months ended March 31, 2010, compared to $316,200 during the corresponding period of 2009. For the three months ended March 31, 2010, net cash used in financing activities principally consisted of temporary reduction in use of revolving line of credit, debt payments and lease installments.
 
DESCRIPTION OF OUR INDEBTEDNESS:
 
Marquette Business Credit Line of Credit
 
In November 2006, Marquette provided a line of credit drawable up to 85% of eligible receivables and 60% of eligible inventory which terminates in June 2011.  The borrowings were collateralized, with recourse, by certain eligible trade receivables up to a maximum percentage of 85% of the qualified net amounts of such receivables of each of MBC and Releta and 60% of MBC's and Releta's eligible inventory located in the US.  This facility accrues interest at a rate of one-month LIBOR plus 4.25% and is secured by substantially all of the assets, excluding the real property of Releta and MBC. On May 8, 2009, we received notification from Marquette of an event of default under the Loan Agreement, as a result of which Marquette has increased the interest rate under the facility to the default rate with retroactive effect from and after April 1, 2009.   (For additional information see "Marquette Business Credit Inc. Facility".)
 
Master Line of Credit. On August 31, 1999, MBC and United Breweries of America, Inc. ("UBA"), one of our principal shareholders, entered into a Master Line of Credit Agreement, which was subsequently amended in April 2000 and February 2001 (the "Credit Agreement"). The terms of the Credit Agreement provide us with a line of credit with a principal amount of up to $1,600,000. As of the date of this filing, UBA has made thirteen (13) separate advances to us under the Credit Agreement and one additional advance on substantially the same terms as those under the Credit Agreement, pursuant to a series of individual eighteen-month promissory notes issued by us to UBA (the "UBA Notes"). UBA has executed an Extension of Term of Notes under Master Line of Credit Agreement (the "Extension Agreement"). The Extension Agreement confirms UBA's extension of the terms of the UBA Notes for a period ending on June 30, 2010.  The aggregate outstanding principal amount of the UBA Notes as of March 31, 2010 was $1,915,400, and the accrued but unpaid interest thereon was equal to approximately $1,240,800, for a total amount outstanding of $3,156,200.
 
The outstanding principal amount of the notes and the unpaid interest thereon may be converted, at UBA's discretion, into shares of our unregistered Common Stock at a conversion rate of $1.50 per share. As of March 31, 2010, the outstanding principal and interest on the notes was convertible into approximately 2,104,100 shares of our Common Stock. On December 28, 2001, we entered into a Confirmation of Waiver with UBA which confirmed that as of August 13, 2001, UBA waived its rights with regard to all conversion rate protection as set forth in the UBA Notes.
 
The UBA Notes require us to make quarterly interest payments to UBA on the first day of April, July, October, and January. To date, UBA has permitted us to capitalize all accrued interest; therefore, we have borrowed the maximum amount available under the facility. Upon maturity of any of the UBA Notes, unless UBA has given us prior instructions to commence repayment of the outstanding principal balance, the outstanding principal and accrued but unpaid interest on such Note may be converted, at the option of UBA, into shares of our common stock. If UBA does not elect to so convert any UBA Notes upon maturity, it has the option to extend the terms of the UBA Notes for any period of time mutually agreed upon by UBA and us. During the extended term of the UBA Notes, UBA has the right to require us to repay the outstanding principal balance, along with the accrued and unpaid interest thereon, to UBA within sixty (60) days.
 
22
 
The UBA Notes are subordinated to credit facilities extended to us by Grand Pacific Financing Corporation and Marquette Business Credit under subordination agreements executed by UBA. As per the terms of the subordination agreements, UBA is precluded from demanding repayment of the UBA Notes unless the Grand Pacific Financing Corporation and Marquette facilities are repaid in full. Therefore, we do not expect to make payments on any of the UBA Notes within the next year.
 
LONG TERM DEBT:
 
Grand Pacific Financing Corporation Loan: On July 3, 2006, we obtained a $3.0 million loan from Grand Pacific Financing Corporation ("Grand Pacific"), secured by a first priority deed of trust on the Ukiah land, fixtures attached to the land, and improvements.  The loan is payable in partially amortizing monthly installments of $27,261  including interest at the rate of 1.75% over the prime rate published by The Wall Street Journal, maturing June 28, 2011 with a balloon payment.  The amount of the balloon payment will vary depending on the change in interest rates over the term of the loan. We used the proceeds of the loan to repay in full all the then outstanding loans owed to Savings Bank of Mendocino County. Grand Pacific also collects on a monthly basis an amount of approximately $10,554 towards property taxes payable on the Ukiah property and pays such taxes when they become due.
 
Marquette Business Credit Inc. Facility: In November, 2006, Marquette extended a total facility of $4,925,000 with a maturity date of June 27, 2011 consisting of a $2,750,000 revolving facility, a $1,525,000 term loan and a $650,000 capital expenditure loan. The rate of interest on the term loan and capital expenditure loan is the one-month LIBOR rate published in the Wall Street Journal plus a margin of 5.25% and the rate of interest on the revolving facility is one-month LIBOR rate published in the Wall Street Journal plus a margin of 4.25%. The facility is subject to certain financial covenants including prescribed minimum fixed charges coverage, maintaining prescribed minimum tangible net worth and minimum earning before interest, depreciation and taxes. The facility also has a prepayment penalty if settled prior to the maturity date. The facility is secured by substantially all of the Company's assets located in the United States excluding real property and fixtures located at our property in Ukiah, California.
 
On May 8, 2009, we received written notice (the "Notice") from Marquette that an event of default had occurred and was continuing under that certain Loan and Security Agreement, dated as of November 16, 2006 by and among us and our subsidiary Releta Brewing Company, LLC (as borrowers) and Marquette (as lender) (the "Loan Agreement") relating to a revolving loan, a term loan and a capex loan provided by Marquette to us.
 
Specifically, the event of default was triggered by our failure to remain in compliance with a financial covenant in the Loan Agreement relating to the maintenance of a fixed charge coverage ratio of at least 1.05 to 1.0 for the period of twelve consecutive calendar months ending on March 31, 2009.
 
In addition, the Company has failed to maintain the net worth required by a covenant in the Loan Agreement.
 
As of May 14, 2009, Marquette has elected to assess the default interest rates under the Loan Agreement; these rates are as follows: (i) for the revolving loan, LIBOR plus 7.125% per annum and (ii) for the capex loan, the term loan and any other obligations owed by us to Marquette, LIBOR plus 8.125% per annum.  The default interest rates will apply to the outstanding balances under the respective loans with retroactive effect from and after April 1, 2009.
 
23
 
Pursuant to the terms of the Loan Agreement, in case of an event of default, Marquette is also entitled in its sole and absolute discretion to (i) terminate its commitment to us to make loans under the Loan Agreement, (ii) to declare all outstanding amounts due under the Loan Agreement immediately due and payable and/or (iii) exercise any or all other rights and remedies available to it under the Loan Agreement or applicable law.  To date, Marquette has not exercised such additional rights.  However, Marquette has not waived its rights to pursue such remedies in the future.  Notwithstanding the failure to maintain the fixed charge coverage ratio, we have to date made every scheduled payment of principal and interest under the Loan Agreement.
 
OTHER LOANS AND CREDIT FACILITIES.
 
Royal Bank Of Scotland Facility:  Royal Bank of Scotland ("RBS") provided UBSN with a £1,750,000 maximum revolving line of credit with an advance rate based on 80% of UBSN's qualified accounts receivable on April 26, 2005.  This facility originally had a maturity of twelve months, but has been automatically extended and will continue in place unless terminated by either party upon six months' written notice.
 
Shepherd Neame Loan: Shepherd Neame has a contract with UBSN to brew Kingfisher Premium Lager for the our European and Canadian markets. As consideration for extending the brewing contract, Shepherd Neame advanced a loan of £600,000 to UBSN, repayable in annual installments of £60,000 per year, commencing in June 2003. The loan carries a fixed interest rate of 5% per year.
 
Weighted Average Interest: The weighted average interest rates paid on our US debts was 6% for the first quarter of 2010 and 5.6% for the corresponding period in 2009. For loans primarily associated with our Foreign territory, the weighted average rate paid was 2.8% for the first quarter of 2010 and 5.0% for the corresponding period in 2009.
 
Keg Management Arrangement: Effective September 1, 2009, we entered into a five-year keg management agreement with MicroStar Keg Management, LLC ("MicoStar").  Under this arrangement, MicroStar provides us with half-barrel kegs for which we pay filling and usage fees.  Distributors return the kegs directly to MicroStar.  MicroStar then supplies us with additional kegs.  If the agreement is not extended and terminates, we are required to purchase a certain number of kegs from MicroStar.  We anticipate that we would finance such purchase through debt or lease financing, if available.  However, there can be no assurance that we will be able to finance the purchase of the required kegs.  Our failure to purchase the required kegs from MicroStar upon termination of the agreement would likely have a material adverse effect on our operations.
 
Current Ratio: Our ratio of current assets to current liabilities on March 31, 2010 was 0.7 to 1.0 and its ratio of total assets to total liabilities was 1.1 to 1.0. Our ratio of current assets to current liabilities on March 31, 2009 was 0.8 to 1.0 and its ratio of total assets to total liabilities was 1.2 to 1.0.
 
Restricted Net Assets: The Company's wholly-owned subsidiary, UBIUK, has undistributed losses of approximately $1,595,900 as of March 31, 2010.
 
Under UBSN's line of credit agreement with RBS, distributions and other payments to the Company from its subsidiary are not permitted if retained earnings drop below approximately $1,519,000.
 
24
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
 
Not required for smaller reporting company.
 
Item 4.  Controls and Procedures
 
Evaluation Of Disclosure Controls And Procedures
 
Our Management team, under the supervision and with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the last day of the quarter ended March 31, 2010. The term disclosure controls and procedures means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our chief executive and chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our chief executive officer and our chief financial officer concluded that, our disclosure controls and procedures were effective as of March 31, 2010.
 
Changes In Internal Control Over Financial Reporting
 
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter (the three months ending March 31, 2010) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
PART II
 
OTHER INFORMATION
 
Item 3.  Default Upon Senior Securities
 
An event of default has occurred and is continuing under the Loan and Security Agreement by and among Marquette Business Credit, Inc., MBC and Releta. Marquette is  currently charging a default interest rate. All scheduled  payments of principal and interest have been made. For additional information, see Item 2 of Part I.
 
Item 6.
Exhibits
 
Exhibit Number
  
Description of Document
3.1
(T)
Articles of Incorporation of the Company, as amended.
3.2
(T)
Bylaws of the Company, as amended.
10.1
  
[Intentionally omitted]
10.2
  
[Intentionally omitted]
10.3
(A)
Wholesale Distribution Agreement between the Company and Bay Area Distributing.
 
25
 
Exhibit Number
  
Description of Document
10.4
  
[Intentionally omitted]
10.5
(B)
Liquid Sediment Removal Services Agreement with Cold Creek Compost, Inc.
10.6
  
[Intentionally omitted]
10.7
(C)
Commercial Real Estate Purchase Contract and Receipt for Deposit (previously filed as Exhibit 19.2).
10.8
(D)
[Intentionally omitted]
10.9
  
[Intentionally omitted]
10.10
  
[Intentionally omitted]
10.11
(G)
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).
10.12
  
[Intentionally omitted]
10.13
  
[Intentionally omitted]
10.14
  
[Intentionally omitted]
10.15
  
[Intentionally omitted]
10.16
  
[Intentionally omitted]
10.17
  
[Intentionally omitted]
10.18
  
[Intentionally omitted]
10.19
(K)
Investment Agreement with United Breweries of America, Inc.
10.20
  
[Intentionally omitted]
10.21
  
[Intentionally omitted]
10.22
(L)
Indemnification Agreement with Vijay Mallya.
10.23
(L)
Indemnification Agreement with Michael Laybourn.
10.24
(L)
Indemnification Agreement with Jerome Merchant.
10.25
(L)
Indemnification Agreement with Yashpal Singh.
10.27
(L)
Indemnification Agreement with Robert Neame.
10.28
(L)
Indemnification Agreement with Sury Rao Palamand.
10.29
(L)
Indemnification Agreement with Kent Price.
10.30
  
[Intentionally omitted]
10.31
  
[Intentionally omitted]
10.32
  
[Intentionally omitted]
10.33
  
[Intentionally omitted]
10.35
(O)
Master Line of Credit Agreement between the Company and United Breweries of America Inc. dated August 31, 1999.
10.36
(O)
Convertible Note in favor of United Breweries of America Inc. dated September 7, 1999.
10.37
(P)
Convertible Note in favor of United Breweries of America Inc. dated October 21, 1999.
10.38
(P)
Convertible Note in favor of United Breweries of America Inc. dated November 12, 1999.
10.39
(P)
Convertible Note in favor of United Breweries of America Inc. dated December 17, 1999.
10.40
(P)
Convertible Note in favor of United Breweries of America Inc. dated December 31, 1999.
10.41
(P)
Convertible Note in favor of United Breweries of America Inc. dated February 16, 2000.
10.42
(P)
Convertible Note in favor of United Breweries of America Inc. dated February 17, 2000.
 
26
 
Exhibit Number
  
Description of Document
10.43
(P)
Convertible Note in favor of United Breweries of America Inc. dated April 28, 2000.
10.44
(P)
First Amendment to Master Line of Credit Agreement between the Company and United Breweries of America Inc. dated April 28, 2000.
10.45
(Q)
Convertible Note in favor of United Breweries of America Inc. dated September 11, 2000.
10.46
(Q)
Convertible Note in favor of United Breweries of America Inc. dated September 30, 2000.
10.47
(Q)
Convertible Note in favor of United Breweries of America Inc. dated December 31, 2000.
10.48
(Q)
Convertible Note in favor of United Breweries of America Inc. dated February 12, 2001.
10.49
(R)
Convertible Note in favor of United Breweries of America Inc. dated July 1, 2001.
10.50
(S)
Confirmation of Waiver Between Mendocino Brewing Company, Inc. and United Breweries of America Inc. dated as of December 28, 2001.
10.51
(S)
Extension of Term of Notes Under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America Inc., dated February 14, 2002.
10.52
(T)
License Agreement between United Breweries Limited and United Breweries International (U.K.), Limited.
10.53
(T)
Supplemental Agreement to License Agreement between United Breweries Limited and United Breweries International (U.K.), Limited.
10.54
(T)
Distribution Agreement between United Breweries International (U.K.), Limited and UBSN, Ltd.
10.55
(T)
Supplemental Agreement to Distribution Agreement between United Breweries International (U.K.), Limited and UBSN, Ltd.
10.56
(T)
Market Development, General and Administrative Services Agreement between Mendocino Brewing Company, Inc. and UBSN, Ltd.
10.57
(T)
Contract to Brew and Supply Kingfisher Products among Shepherd Neame, Limited, United Breweries International (U.K.), Limited and UBSN, Ltd.
10.58
(T)
Supplemental Agreement to Contract to Brew and Supply Kingfisher Products among Shepherd Neame, Limited, United Breweries International (U.K.), Limited. and UBSN, Ltd.
10.59
(T)
Loan Agreement between Shepherd Neame, Limited and UBSN, Ltd.
10.60
(T)
Brewing License Agreement between UBSN, Ltd. and Mendocino Brewing Company, Inc.
10.61
(T)
Kingfisher Trade Mark and Trade Name License Agreement between Kingfisher of America, Inc. and Mendocino Brewing Company, Inc.
10.62
(U)
First Amendment to Extension of Term of Notes Under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America Inc. dated November 13, 2002.
10.63
(U)
Second Amendment to Extension of Term of Notes Under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America Inc. dated March 31, 2003.
10.64
  
[Intentionally omitted]
10.65
  
[Intentionally omitted]
10.66
(W)
Third Amendment to Extension of Term of Notes under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America Inc. dated August 14, 2003.
10.67
  
[Intentionally omitted]
 
27
 
Exhibit Number
  
Description of Document
10.68
(X)
Fourth Amendment to Extension of Term of Notes Under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America Inc. dated as of August 14, 2004.
10.69
  
[Intentionally omitted]
10.70
(Z)
Second Agreement dated October 9, 1998 between UBSN, Ltd. and Shepherd Neame, Ltd.
10.71
  
[Intentionally omitted]
10.72
  
[Intentionally omitted]
10.73
  
[Intentionally omitted]
10.74
(BB)
Convertible Promissory Note of Mendocino Brewing Company, Inc. in favor of United Breweries of America Inc. dated March 2, 2005.
10.75
  
[Intentionally omitted]
10.76
(DD)
Invoice Discounting Agreement between The Royal Bank of Scotland Commercial Services Limited and UBSN Limited, dated April 26, 2005.
10.77
  
[Intentionally omitted]
10.78
  
[Intentionally omitted]
10.79
(EE)
Loan Agreement by and between Mendocino Brewing Company, Inc. and Grand Pacific Financing Corporation dated June 28, 2006.
10.80
(EE)
Promissory Note of Mendocino Brewing Company, Inc. in favor of Grand Pacific Financing Corporation, dated June 28, 2006.
10.81
  
[Intentionally omitted]
10.82
(FF)
Loan and Security Agreement by and among Marquette Business Credit Inc. and Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC, dated November 16, 2006.
10.83
(FF)
Revolving Note of Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC in favor of Marquette Business Credit Inc., dated November 16, 2006.
10.84
(FF)
Term Note of Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC in favor of Marquette Business Credit Inc., dated November 16, 2006.
10.85
(FF)
CAPEX Note of Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC in favor of Marquette Business Credit Inc., dated November 16, 2006.
10.86
(FF)
Fifth Amendment to Extension of Term of Notes Under Master Line of Credit Agreement, effective August 31, 2005.
10.87
(FF)
Sixth Amendment to Extension of Term of Notes under Master Line of Credit Agreement, effective December 31, 2006.
10.88
(FF)
Second Amendment to Convertible Promissory Note, effective December 31, 2006.
10.89
(GG)
Seventh Amendment to Extension of Term of Notes under Master Line of Credit Agreement, effective June 30, 2007
10.90
(GG)
Third Amendment to Convertible Promissory Note, effective June 30, 2007
10.91
(HH)
Employment Agreement of Yashpal Singh (Management Contract)
10.92
[II]
Eighth Amendment to Extension of Term of Notes under Master Line of Credit Agreement, effective June 30, 2008.
10.93
(II)
Fourth Amendment to Convertible Promissory Note, effective June 30, 2008.
10.94
(JJ)
Directors' Compensation Plan, as amended (Management Contract)
10.95
(KK)
Ninth Amendment to Extension of Term Notes under Master Line of Credit Agreement, effective June 30, 2009.
10.96
(KK)
Fifth Amendment to Convertible Promissory Notes, effective June 30, 2009.
10.97
(LL)
Separation and Severance Agreement by and between the Company and Yashpal Singh, effective August 27, 2009 (Management Contract).
10.98†
(MM)
Keg Management Agreement by and between MicroStar Keg Management, LLC and the Company effective September 1, 2009.
14.1
(V)
Code of Ethics

† Certain portions have been omitted and have been filed separately with the SEC pursuant to a request for confidential treatment under Rule 24b-2 as promulgated under the Securities Exchange Act of 1934.

28
 
NOTES: Each Exhibit listed above that is annotated with one or more of the following letters is incorporated by reference from the following sources:
 
 
(A)
The Company's Registration Statement dated June 15, 1994, as amended, previously filed with the Commission, Registration No. 33-78390-LA.
 
 
(B)
The Company's Annual Report on Form 10-KSB for the period ended December 31, 1995.
 
 
(C)
The Company's Quarterly Report on Form 10-QSB for the period ended March 31, 1995.
 
 
(D)
The Company's Quarterly Report on Form 10-QSB/A No. 1 for the period ended September 30, 1997.
 
 
(F)
The Company's Annual Report on Form 10-KSB for the period ended December 31, 1996.
 
 
(G)
The Company's Quarterly Report on Form 10-QSB for the period ended September 30, 1995.
 
 
(I)
The Company's Annual Report on Form 10-KSB for the period ended December 31, 1997.
 
 
(K)
Schedule 13D filed November 3, 1997, by United Breweries of America, Inc. and Vijay Mallya.
 
 
(L)
The Company's Quarterly Report on Form 10-QSB for the period ended June 30, 1998.
 
 
(N)
The Company's Quarterly Report on Form 10-QSB for the period ended June 30, 1999.
 
 
(O)
Amendment No. 5 to Schedule 13D filed September 15, 1999, by United Breweries of America, Inc. and Vijay Mallya.
 
 
(P)
Amendment No. 6 to Schedule 13D filed May 12, 2000, by United Breweries of America, Inc. and Vijay Mallya.
 
 
(Q)
Amendment No. 7 to Schedule 13D filed February 22, 2001, by United Breweries of America, Inc. and Vijay Mallya.
 
 
(R)
Amendment No. 8 to Schedule 13D filed August 22, 2001, by United Breweries of America, Inc and Vijay Mallya.
 
 
(S)
The Company's Current Report on Form 8-K filed as of February 19, 2002.
 
 
(T)
The Company's Annual Report on Form 10-KSB for the period ended December 31, 2001.
 
 
(U)
Amendment No. 9 to Schedule 13D filed March 31, 2003, by United Breweries of America, Inc. and Vijay Mallya.
 
 
(V)
The Company's Annual Report on Form 10-KSB for the year ended December 31, 2003.
 
 
(W)
Amendment No. 10 to Schedule 13D filed August 18, 2003 by United Breweries of America, Inc. and Dr. Vijay Mallya.
 
 
(X)
Amendment No. 11 to Schedule 13D, jointly filed by United Breweries of America, Inc. and Dr. Vijay Mallya on August 16, 2004.
 
29
 
 
(Z)
The Company's Quarterly Report on Form 10-Q for the period ended September 30, 2004.
 
 
(BB)
The Company's Current Report on Form 8-K filed as of March 8, 2005.
 
 
(DD)
The Company's Quarterly Report on Form 10-Q for the period ended June 30, 2005.
 
 
(EE)
The Company's Quarterly Report on Form 10-Q for the period ended June 30, 2006.
 
 
(FF)
The Company's Annual Report on Form 10-K for the year ended December 31, 2006.
 
 
(GG)
The Company's Quarterly Report on Form 10Q for the period ended June 30, 2007.
 
 
(HH)
The Company's Annual Report on Form 10-QK/A for the period ended December 31, 2007.
 
 
(II)
The Company's Quarterly Report on Form 10-Q for the period ended September 30, 2008.
 
 
(JJ)
The Company's Annual Report on Form 10-K for the year ended December 31, 2008.
 
 
(KK)
The Company's Quarterly Report on Form 10-Q for the period ended June 30, 2009.
 
 
(LL)
The Company's Current Report on Form 8-K filed as of August 31, 2009.
 
 
(MM)
The Company's Quarterly Report on Form 10-Q for the period ended September 30, 2009.
 
 
(NN)
The Company's Annual Report on Form 10-K for the year ended December 31, 2009.
 
 (b)
Exhibits Attached  The following Exhibits are attached to this Quarterly Report on Form 10-Q:
 
10.99
Commercial Lease between Stewart's Shop Corporation and Releta Brewing Company LLC.
 
 
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
 
 
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
 
 
32.1
Certification of Chief Executive Officer Pursuant to U.S.C. 1350.
 
 
32.2
Certification of Chief Financial Officer Pursuant to U.S.C. 1350.
 
(c)           Excluded Financial Statements.  None.

 
30

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  MENDOCINO BREWING COMPANY, INC.  
       
Dated:  May 14, 2010    
By:
/s/ Yashpal Singh  
   
Yashpal Singh
  
    President and Chief Executive Officer  
       
 
  Company Name  
       
Dated:  May 14, 2010        
By:
/s/ Mahadevan Narayanan  
    Mahadevan Narayanan  
    Chief Financial Officer and Secretary  
       
 
31
                                                          
 EX-10.99 2 v185349_ex10-99.htm Unassociated Document
COMMERICAL LEASE


Dated this 1st day of August, 2009
 
Between:
STEWART’S SHOPS CORP. as “Landlord”
 
A New York Corporation
 
P.O. Box 435
 
Saratoga Springs, NY 12866
 
Attn: William Dake, President
And:
  
 
RELETA BREWING COMPANY LLC as “Tenant”
 
A Delaware LLC,
 
131 Excelsior Ave.
 
Saratoga Springs, NY 12866

Landlord Leases to Tenant and Tenant Leases from Landlord the following described property (the “Premises”) on the terms and conditions stated below:

A property of approximately 3.66 acres, which includes a building space of approximately 35,000 square feet, and all appurtenances and improvements thereto, which building is more particularly described as follows:

Building 3, Saratoga Dairy, Excelsior Ave., Saratoga Springs, New York, the exact legal description of which is attached as Exhibit “A”.

The premises shall also include the sharing of rights to use springwater from the natural spring located on the premises. Tenant to bear all expense to plumb the spring to allow its use.

Landlord hereby acknowledges that there are no other tenants in possession or with a right to possession of any part or portion of the Premises.

SECTION 1. OCCUPANCY

1.1 ORIGINAL TERM. The term of this Lease shall commence AUGUST 15, 2009 and shall expire on JULY 14, 2014. This is deemed the original term. The “Term Commencement date” is AUGUST 15, 2009.

1.2 RENEWAL OPTION. If the Lease is not in default at the time each option is exercised or at the time the renewal term is to commence, Tenant shall have the option to renew this Lease for THREE (3) successive terms of FIVE (5) YEARS each, as follows:

(1)   Each of the renewal terms shall commence on the day following expiration of the preceding term.

(2)   The option may be exercised by written notice to Landlord given not less than 180 days prior to the last day of the expiring term. The giving of such notice shall be sufficient to make the Lease binding for the renewal term without further act of the parties. Landlord and Tenant shall then be bound to take the steps required in connection with the determination of rent as specified below. If Tenant shall fail to give any such notice within such one hundred eighty (180) day time limit, Tenant’s right to exercise its option shall nevertheless continue until thirty (30) days after Landlord shall have given Tenant notice of Landlord’s election to terminate such option, and Tenant may exercise such option at any time until the expiration of said thirty (30) day period. It is the intention of the parties to avoid forfeiture of Tenant’s rights to extend the term of this Lease under any of the options set forth in this Section 1.2 through inadvertent failure to give notice thereof within the time limits prescribed. During any extension of the term all Sections of this Lease will be effective, and references to term will incorporate the extensions.
 
Page 1 of 18

 
(3)   The terms and conditions of the Lease for each renewal term shall be identical with the original term except for rent and except that Tenant will no longer have any option to renew this Lease after the third successive renewal option has been exercised. Rent for a renewal term shall be the rental during the last year of the preceding original or renewal term adjusted as provided herein.

SECTION 2. RENT

2.1 BASE RENT. During the original term, Tenant shall pay to Landlord as base rent the sum of $15,967.89 per month. Rent shall commence on the Term Commencement Date. Rent shall be payable on the last day of each month in advance at such place as may be designated by Landlord.

2.2 ADDITIONAL RENT. Any and all charges that may become payable by the Tenant to the Landlord under this Lease shall be considered as ADDITIONAL RENT, including but not limited to the following: all taxes, insurance costs, utility charges and repair costs that the Tenant is required to pay by this Lease; any and all costs incurred by the Landlord in conjunction with the collection of rents and late charges or the commencement of proceedings for eviction, including reasonable attorney’s fees; late charges; and any and all damages or injuries to person or property caused by the Tenant, employees of the Lessee, or by guests or customers of the Tenant.

2.3 ESCALATION. During the initial Lease period and the option periods, the base rent provided in Section 2.1 shall be increased on the anniversary date of the Lease by a percentage equal to 75% of the percentage change in the Consumer Price Index published by the United States Bureau of Labor Statistics of the United States Department of Labor. Comparisons shall be made using the index entitled “U.S. City Average-All Items and Major Group Figures for all Urban Consumers (1982-84=100),” or on the nearest comparable data on changes in the cost of living if such index is no longer published. The increase will begin on the fifteenth day of the month of JULY, and will be based on the CPI increase during the initial year of the Lease. The first change shall be determined by comparison of the figure for JULY 15, 2009, with that of each succeeding year. In no event, however, shall base rent be reduced below that payable during the first year of this Lease. The preceding formula shall be used for each additional renewal term as appropriate.

2.4 DELETED

SECTION 3. USE OF THE PREMISES

3.1 PERMITTED USE. The Premises shall be used as a facility for brewery, winery, warehouse, office, sales and storage purposes and for no other purpose without the consent of the Landlord, which consent shall not be unreasonably withheld.

3.2 RESTRICTIONS ON USE. In connection with the use of the Premises, Tenant shall:
 
Page 2 of 18

 
(1)  Conform to all applicable laws and regulations of any public authority affecting the premises and the use, and correct at Tenant’s own expense any failure of compliance created through Tenant’s fault or by reason of Tenant’s use, but Tenant shall not be required to make any structural changes to effect such compliance, unless created by Tenant’s structural changes to the building.

(2)  Refrain from any use that would be reasonably offensive to other tenants or owners or users of neighboring premises or that would tend to create a nuisance or damage the reputation of the premises. Notwithstanding this provision, Landlord acknowledges that Tenant’s use will occasion certain odors related to brewery and winery uses, and such odors shall not violate this provision.

(3) Refrain from loading the electrical system or floors beyond the point considered safe according to a competent engineer or architect.

(4) Tenant shall not cause or permit any Hazardous Substance to be spilled, leaked, disposed of, or otherwise released on or under the premises in violation of any applicable law. Tenant may use or otherwise handle on the Premises only those Hazardous Substances typically used or sold in the prudent and safe operation of the business specified in Section 3.1. Tenant may store such Hazardous Substances on the Premises only in quantities necessary to satisfy Tenant’s reasonably anticipated needs. Tenant shall comply with all Environmental Laws and exercise the highest degree of care in the use, handling, and storage of Hazardous Substances and shall take all practicable measures to minimize the quantity and toxicity of Hazardous Substances used, handled, or stored on the Premises. Upon the expiration or termination of this Lease, Tenant shall remove all of the Hazardous Substances from the Premises except those placed there by Landlord, or which are otherwise the primary responsibility of Landlord. The term “Environmental Laws” shall mean any applicable federal, state or local statute, regulation or ordinance or any applicable judicial or other governmental order pertaining to the protection of health, safety or the environment. The term “Hazardous Substance” shall mean any hazardous, toxic, infectious or radioactive substance, waste, and material as defined or listed by any Environmental Law and shall include, without limitation, petroleum oil and its fractions.

(5) Landlord warrants that it has no knowledge of the presence of any regulated or environmentally Hazardous Substances in, on or within reasonable proximity to the Premises, nor of any existing violations of any laws, rules, regulations or ordinances, including without limitation, any Environmental Laws against or upon the Premises.

(6) Tenant shall indemnify, defend and hold Landlord harmless from all claims, demands, liabilities, costs, expenses, damages, and fines of any nature arising directly or indirectly from or as a result of the presence or existence of contamination upon the Premises as a result of the activities of Tenant or its sub lessees or assignees, or by the failure of Tenant or its sub lessees or assignees to comply with any and all Environmental Laws. The forgoing indemnification shall survive the termination of expiration of this Lease.

(7) Landlord shall indemnify, defend and hold Tenant harmless from all claims, demands, liabilities, costs, expenses, damages, and fines of any nature arising directly or indirectly from or as a result of the presence or existence of contamination upon the Premises as a result of the activities of the Landlord, prior tenants, owner or operators of the Premises, or by the failure of Landlord to comply with any and all Environmental Laws, except those caused or created by Tenant. The foregoing indemnification shall survive the termination or expiration of this Lease.
 
Page 3 of 18

 
SECTION 4. REPAIRS AND MAINTENANCE

4.1 LANDLORD’S OBLIGATIONS. The following shall be the responsibility of Landlord:

(1) Except as provided herein, Landlord shall keep the following in good order, condition and repair: the foundations, exterior walls and roof of the Premises. Landlord shall not be obligated to maintain or repair windows, doors, plate glass or the interior surfaces of exterior walls. Landlord shall commence to make repairs within ten (10) days after receipt of written notice from Tenant of the need for such repairs, and thereafter pursue such repairs to completion. Landlord shall diligently pursue to completion the performance of all repairs or maintenance that are the responsibility of Landlord under the Lease.

(2) Landlord is providing the building in its current condition “As Is” except for latent defects which require repair as provided above. Landlord shall not be required to correct structural defects caused by Tenant’s remodel of the structure for Tenant’s uses.

(3)           Landlord shall be responsible for all repairs and maintenance to all roofs for all parts of the structures that exist on the leased premises at the time of the execution of this Lease.

4.2 TENTANT’S OBLIGATIONS. The following shall be the responsibility of Tenant:

(1) All other repairs to the premises which Landlord is not required to make under Section 4.1.

(2) Tenant shall have no obligation to maintain any portion of the premises it does not occupy or for which the occupant does not pay Tenant rent. Tenant shall have no maintenance obligations until the rent commencement date.

4.3 LANDLORD’S INTERFERENCE WITH TENANT. In performing any repairs, replacements, alterations, or other work performed on or around the premises, Landlord shall not cause unreasonable interference with use of the Premises by Tenant. In determining whether Landlord has unreasonably interfered, the court shall consider, among other factors, the nature of the repair, other alternatives for completing the repair, the cost of the other repair alternatives, and what caused the need for repairs. If Landlord unreasonably interferes with Tenant’s use of Premises while performing repairs, replacements, alterations, or other work around the premises, the Tenant may abate rent for that period, after delivering to Landlord five (5) days written notice citing the condition which Tenant claims unreasonably interferes with its use of the premises. Tenant may not abate rent if Landlord remedies the condition within a five (5) day period. Nothing shall prevent Landlord from declaring Tenant in default if Landlord does not, in fact, unreasonably interfere with the Tenant’s use and occupancy of the Premises.

4.4 REIMBURSEMENT FOR REPAIRS ASSUMED. If either party fails or refuses to make repairs that are required by this Section 4, the other party may make the repairs and charge the actual costs of repairs to the first party. Such expenditures by Landlord shall be reimbursed by Tenant on demand together with interest at the rate of 8% per annum from the date of expenditure by Landlord. Such expenditures by Tenant may be deducted from rent and other payments subsequently becoming due or, at Tenant’s election, collected directly from Landlord with interest at a rate of 8% per annum until paid. Except in an emergency creating an immediate risk of personal injury or property damage, neither party may perform repairs which are the obligation of the other party and charge the other party for the resulting expense unless at least ten (10) days before work is commenced, the defaulting party is given notice in writing outlining with reasonable particularity the repairs required, and such party fails within that time to initiate such repairs in good faith.
 
Page 4 of 18

 
4.5 INSPECTION OF PREMISES. Landlord shall have the right to inspect the Premises at any reasonable time or times to determine the necessity of repair. Whether or not such inspection is made, the duty of Landlord to make repairs shall not mature until a reasonable time after Landlord has received from Tenant written notice of the repairs that are required. Landlord may not inspect such portion of the Premises as are subject to “bond room” requirements without a representative of Tenant present.

SECTION 5. ALTERATIONS

5.1 ALTERATIONS PROHIBITED. Tenant shall make no improvements or alterations on the Premises of any kind without first obtaining Landlord’s written consent, which consent shall not be unreasonably withheld. All alterations shall be made in a good and workmanlike manner, and in compliance with applicable laws and building codes. As used herein, “alterations” includes the installation of computer and telecommunications wiring, cables and conduit that require structural changes to the building.

5.2 OWNERSHIP AND REMOVAL OF ALTERATIONS. Except as provided in Section 15.2 or otherwise all improvements and alterations performed on the Premises by either Landlord or Tenant shall be the property of Landlord when installed. Improvements and alterations installed by Tenant shall, at Landlord’s option, be removed by Tenant and the premises restored, provided, however that Tenant need not remove the structural alterations agreed to by Landlord, and Landlord specifically conditions its approval of the alterations upon their removal at the end of the Lease term. Landlord agrees that the roof height need not be restored at surrender of the Premises.

SECTION 6. INSURANCE

6.1 LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a policy of commercial general liability insurance (sometimes known as broad form comprehensive general liability insurance) insuring Tenant against liability for bodily injury, property damage (including loss of property) and personal injury arising out of operation, use or occupancy of the Premises. Tenant shall name Landlord as an additional insured under such policy. The initial amount of insurance shall be Two-Million Dollars ($2,000,000) per occurrence and shall be subject to periodic increase by Landlord based on inflation, increased liability awards, recommendation of Landlord’s professional insurance advisors and other relevant factors. The liability insurance obtained by Tenant under this paragraph 6.1 shall (i) be primary and non-contributing; (ii) contain cross-liability endorsements; and (iii) insure Landlord against Tenant’s performance of its indemnity obligations herein, if the matters giving arise to the indemnity result from the negligence of the Tenant. The amount and coverage of such insurance shall not limit Tenant’s liability nor relieve Tenant of any other obligation under this Lease. Landlord shall also obtain comprehensive public liability insurance in an amount and with coverage determined by Landlord insuring Landlord against liability arising out of ownership, operation, use or occupancy of the Premises but in no event less than $1,000,000.00 per occurrence. The policy obtained by Landlord shall not be contributory and shall not provide primary insurance.
 
Page 5 of 18
 
6.2 PROPERTY INSURANCE. During the Lease Term, Landlord shall maintain policies of insurance covering loss of or damage to the Premises in the full amount of its replacement value. Such policy shall contain an Inflation Guard Endorsement and shall provide protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended perils (all risk), sprinkler leakage and any other perils which Landlord deems reasonably necessary. Landlord shall have the right to obtain flood and earthquake insurance if reasonably necessary in his judgment. Landlord shall not obtain insurance for Tenant’s fixtures or equipment or building improvements installed by Tenant on the Premises. During the Lease Term, Landlord shall also maintain a rental income insurance policy, with loss payable to Landlord, in an amount equal to one year’s Base Rent, plus estimated real property taxes and insurance premiums. Landlord shall provide Tenant with a copy of any insurance policy obtained pursuant to paragraph 6.1 or 6.2. Tenant shall not do or permit anything to be done which invalidates any insurance policy.

6.3 PAYMENT OF PREMIUMS. Tenant shall pay all premiums for the insurance policies described in Paragraphs 6.1 and 6.2 (whether obtained by Landlord or Tenant) within fifteen (15) days after Tenant’s receipt of a copy of the premium statement or other evidence of the amount due, except Landlord shall pay all premiums for non-primary comprehensive public liability insurance which Landlord elects to obtain as provided in Paragraph 6.1. If insurance policies maintained by Landlord cover improvements on real property other than the Premises, Landlord shall deliver to Tenant a statement of the premium applicable to the Premises showing in reasonable detail how Tenant’s prorated share of the premium was computed. If the Lease Term expires before the expiration of an insurance policy maintained by Landlord, Tenant shall be liable for only Tenant’s prorated share of the insurance premiums. Before the Commencement Date, Tenant shall deliver to Landlord a copy of any policy of insurance which tenant is required to maintain under this Section 6. At least thirty (30) days prior to the expiration of any such policy, Tenant shall deliver to Landlord a renewal of such policy. As an alternative to providing a policy of insurance, Tenant shall have the right to provide Landlord a certificate of insurance, executed by an authorized officer of the insurance company, showing that the insurance which Tenant is required to maintain under this Section 6 is in full force and effect and containing such other information which Landlord reasonably requires.

6.4 GENERAL INSURANCE PROVISIONS

(1) Any insurance which Tenant is required to maintain under this Lease shall include a provision which requires the insurance carrier to give Landlord not less than thirty (30) days written notice prior to any cancellation or modification of such coverage.

(2) If Tenant fails to deliver any policy, certificate or renewal to Landlord required under this Lease within the prescribed time period or if any such policy is canceled or modified during the Lease Term without Landlord’s consent, Landlord following fifteen (15) days written notice to tenant of such event and Tenant’s failure to cure within that fifteen-day period, may obtain such insurance within fifteen (15) days after receipt of a statement that indicates the cost of such insurance.

(3) Tenant shall maintain all insurance required under this Lease with companies holding a “General Policy Rating” of A-12 or better, as set forth in the most current issue of “Best Key Rating Guide.” Landlord and Tenant acknowledge the insurance markets are rapidly changing and that insurance in the form and amounts described in this Section 4.04 may not be available in the future. Tenant acknowledges that the insurance described in this Section 6 is for the primary benefit of Landlord. If at any time during the Lease Term, Tenant is unable to maintain the insurance required under the Lease, Tenant shall nevertheless maintain insurance coverage which is customary and commercially reasonable in the insurance industry for Tenant’s type of business, as that coverage may change from time to time. Landlord makes no representations as to the adequacy of such insurance to protect Landlord’s or Tenant’s interests. Therefore, Tenant shall obtain any such additional property or liability insurance which Tenant deems necessary to protect Landlord and Tenant.
 
Page 6 of 18
 
(4) Unless prohibited under any applicable insurance policies maintained, Landlord and Tenant each hereby waive and release any and all rights of recovery against each other, or against the officers, employees, agents or representative of the other, for loss of or damage to its property or the property of others under its control, if such loss or damage is covered by any insurance policy in force (whether or not described in this Lease) at the time of such loss or damage. The release and waiver contained in this section is intended to release and waive the liability of each party for the consequences of its negligent acts or omissions. Upon obtaining the required polices of insurance, Landlord and Tenant shall give notice to the insurance carriers of this mutual waiver of subrogation.

(5) Landlord shall abide by conditions 1-4 with regard to any insurance policy Landlord is required to maintain under the terms of this Lease.

SECTION 7. TAXES; UTILITIES

7.1 PROPERY TAXES. Tenant shall pay as due all real property taxes and special assessments levied against the Premises. As used herein, real property taxes includes any fee or charge relating to the ownership, use, or rental of the Premises, other than taxes on the net income of Landlord or Tenant and excluding estate, gift inheritance and franchise taxes of Landlord.

7.2 CONTEST OF TAXES. Tenant shall be permitted to contest the amount of any tax or assessment as long as such contest is conducted in a manner that does not cause any risk that Landlord’s interest in the Premises will be foreclosed for nonpayment. Landlord shall cooperate in any reasonable manner with such contest by Tenant.

7.3 PRORATION OF TAXES. Tenant’s share of real property taxes and assessments for the years in which this Lease commences or terminates shall be prorated based on the portion of the tax year that this Lease is in effect.

7.4 NEW CHARGES OR FEES. If a new charge or fee relating to the ownership or use of the premises or the receipt of rental therefrom or in lieu of property taxes is assessed or imposed, then, to the extent permitted by law, Tenant shall pay such charge or fee. Tenant, however, shall have no obligation to pay any income, profits, or franchise tax levied on the net income derived by Landlord from this Lease.

7.5 PAYMENT OF UTILITIES CHARGES. Tenant shall pay when due all charges for services and utilities in connection with the use, occupancy, operation, and maintenance of the Premises, including (but not limited to) charges for fuel, water, gas, electricity, sewage disposal, power, refrigeration, air conditioning, telephone, and janitorial services. If any utility services are provided by or though Landlord, charges to Tenant shall be comparable with prevailing rates for comparable services.
 
Page 7 of 18
 
7.6 INTERRUPTION OF ESSENTIAL SERVICES. In the event of an interruption of any essential service (“essential services” shall be defined as gas, electricity, water or sewer), Landlord shall use reasonable diligence to restore such service. If there is an interruption in any essential service to the Premises and such interruption is not the result of the negligence or willful misconduct of the
Tenant, its agents, employees, invitees, visitors, sublessees, or assigns, and such interruption continues for more than five (5) days after receipt by Landlord of written notice from Tenant, Tenant shall be entitled to an abatement of all rent and other sums due hereunder with respect to that portion of the Premises rendered unusable by Tenant until such time as such essential service is restored to an extent that such portion is again rendered usable by Tenant. In addition to the foregoing, Tenant shall have the right to terminate this Lease by giving written notice to Landlord in the event there is an interruption in any essential service that has not been cured within thirty (30) days following the date of the first occurrence of such interruption, ten (10) days notice of termination is given to Landlord, and the essential service has not been restored prior to the date for termination given in the notice.

SECTION 8. DAMAGE AND DESTRUCTION

8.1 PARTIAL DAMAGE. If the Premises are partly damaged and Section 8.2 does not apply, the Premises shall be repaired by Landlord at Landlord’s expense. Repairs shall be accomplished with all reasonable dispatch subject to interruptions and delays from labor disputes and matters beyond the control of Landlord and shall be performed in accordance with the provisions of Section 4.3.

8.2 DESTRUCTION. If the Premises are destroyed or damaged such that the cost of repair exceeds 50% of the value of the structure before the damage or such that the damage renders a substantial section of the structure untenantable, either party may elect to terminate the Lease as of the date of the damage or destruction by notice given to the other in writing not more than 45 days following the date of damage. In such event, all rights and obligations of the parties shall cease as of the date of termination, and Tenant shall be entitled to the reimbursement of any prepaid amount paid by Tenant and attributable to the anticipated term. If neither party elects to terminate, Landlord shall proceed to restore the Premises to substantially the same form as prior to the damage or destruction. Work shall be commenced as soon as reasonably possible and thereafter shall proceed without interruption except for work stoppages on account of labor disputes and matters beyond Landlord’s reasonable control, and be completed within ninety (90) days thereafter. If the Landlord fails to complete repairs within the time provided, Tenant may elect to terminate this Lease after thirty (30) days after Tenant’s notice to terminate is delivered to Landlord. Nevertheless, this Lease shall not terminate if Landlord substantially completes the repairs and delivers occupancy to Tenant within such thirty (30) day notice period.

8.3 RENT ABATEMENT. Rent shall be abated during the repair of any damage to the extent the premises are untenantable.

8.4 DAMAGE LATE IN TERM. If damage or destruction to which Section 8.2 would apply occurs within one year before the end of the then-current Lease term, Tenant may elect to terminate the Lease by written notice to Landlord given within 30 days after the date of the damage.

SECTION 9. EMINENT DOMAIN
 
Page 8 of 18

 
9.1 PARTIAL TAKING. If a portion of the Premises is condemned and Section 9.2 does not apply, the Lease shall continue on the following terms:

(1) Except as otherwise provided, Landlord shall be entitled to all of the proceeds of condemnation, and Tenant shall have no claim against Landlord as a result of the condemnation.

(2) Landlord shall proceed as soon as reasonably possible to make such repairs and alterations to the Premises as are necessary to restore the remaining Premises to a condition as comparable as reasonably practicable to that existing at the time of the condemnation. If condemnation occurs and this Lease is not terminated, restoration work shall be commenced as soon as reasonably possible and thereafter shall proceed without interruption except for work stoppages on account of labor disputes and matters beyond Landlord’s reasonable control, and be completed within ninety (90) days thereafter. If the Landlord fails to complete restoration within the time provided, Tenant may elect to terminate this Lease after thirty (30) days after Tenant’s notice to terminate is delivered to Landlord. Nevertheless, this Lease shall not terminate if Landlord substantially completes the restoration and delivers occupancy to tenant within the thirty (30) day notice period.

(3) After the date on which title vests in the condemning authority or an earlier date on which alterations or repairs are commenced by Landlord to restore the balance of the Premises in anticipation of taking, the rent shall be reduced in proportion to the reduction in value of the Premises as an economic unit on account of the partial taking. If the parties are unable to agree on the amount of the reduction of rent, each shall appoint one appraiser, and each appraiser shall appoint a third appraiser, and the appraisers shall determine the rental value.

(4) If a portion of Landlord’s property not included in the Premises is taken, and severance damages are awarded on account of the Premises, or an award is made for detriment to the Premises as a result of activity by a public body not involving a physical taking of any portion of the Premises, this shall be regarded as a partial condemnation to which Section 9.1(1) and 9.1(3)apply, and the rent shall be reduced to the extent of reduction in rental value, if any, of the Premises as though a portion had been physically taken.

9.2 TOTAL TAKING. If a condemning authority takes all of the Premises or a portion sufficient to render the remaining premises reasonably unsuitable for the use that Tenant was then making of the premises (including access and parking), the Lease shall terminate as of the date the title vests in the condemning authorities. Such termination shall have the same effect as a termination under Section 8.2.

9.3 COMPENSATION. Any compensation awarded due to any condemnation whether for the whole or a part of the Premises, shall be apportioned between the parties according to applicable law. Nothing contained herein shall preclude Tenant from prosecuting any claim against the condemning authority in any such condemnation proceedings or the cost of its moving expenses, loss of business, or depreciation to, damage to, cost of removal of, or the value of its trade fixtures, equipment, furniture and other personal property included in such taking. If this Lease is terminated in such taking, Tenant shall have no claim against Landlord on account of termination.

9.4 SALE IN LIEU OF CONDEMNATION. Sale of all or part of the premises to a purchaser with the power of eminent domain in the face of a threat or probability of the exercise of the power shall be treated for the purposes of this Section 9 as a taking by condemnation.
 
Page 9 of 18
 
SECTION 10. LIABILITY AND INDEMNITY

10.1 LIENS. The provisions of subparagraph (1) and subparagraph (2) which immediately follow, shall only apply to such claims as arise from work, services or materials furnished at the request of Tenant.

(1) Except with respect to activities for which Landlord is responsible, Tenant shall pay as due all claims for work done on and for services rendered or material furnished to the Premises, and shall keep the Premises free from any liens. If Tenant fails to pay any such claims or to discharge any lien, Landlord may do so and collect the cost as additional rent. Any amount so added shall bear interest at the rate of 8% per annum from the date expended by Landlord and shall be payable on demand. Such action by Landlord shall not constitute a waiver of any right or remedy which Landlord may have on account of Tenant’s default.

(2) Tenant may withhold payment of any claim in connection with a good-faith dispute over the obligation to pay, as long as Landlord’s property interests are not jeopardized. If a lien is filed as a result of nonpayment, Tenant shall, within 10 days after knowledge of the filing, secure the discharge of the lien or deposit with Landlord cash or sufficient corporate surety bond or other surety satisfactory to Landlord in an amount sufficient to discharge the lien plus any costs, attorney fees, and other charges that could accrue as a result of a foreclosure or sale under the lien.

10.2 TENANT’S INDEMNITY. Tenant shall indemnify Landlord against and hold Landlord harmless from any and all costs, claims or liability arising from: (a) Tenant’s use of the Premises; (b) the conduct of Tenant’s business or anything else done or permitted by Tenant, its agents, employees or invitees to be done in or about the Premises, including any contamination of the Premises or any other property resulting from the presence or use of Hazardous Material caused or permitted by Tenant; (c) any breach or default in the performance of Tenant’s obligations under the Lease; (d) any misrepresentation of breach of warranty by Tenant under this Lease; or (e) other acts or omissions of Tenant, its agents, employees or invitees. Tenant shall defend Landlord against any such cost, claim or liability at Tenant’s expense with counsel reasonably acceptable to Landlord. As a material part of the consideration to Landlord, Tenant assumes all risk of damage to property or injury to person in or about the Premises arising from any cause, and Tenant hereby waives all claims in respect thereof against Landlord, except for any claim arising out of Landlord’s negligence or willful misconduct. As used in this section, the term “Tenant” shall include Tenant’s employees, agents, contractors, invitees, sublessees, and assigns if applicable.

10.3 LANDLORD’S INDEMNITY. Landlord shall defend Tenant against any uninsured cost, claim or liability at Landlord’s expense with counsel reasonably acceptable to Tenant, or at Tenant’s election and if allowed by Landlord’s insurer, Landlord shall reimburse Tenant for any legal fees or costs incurred by Tenant arising out of Landlord’s gross negligence or willful misconduct related to the Premises of this Lease. As used in this section, the term “Landlord” shall include Landlord’s employees, agents, contractors, invitees, sublessees and assigns if applicable.

SECTION 11. QUIET ENJOYMENT; MORTGAGE PRIORITY

11.1 LANDLORD’S WARRANTY. Landlord warrants that it is the owner of the Premises and has the right to lease them free of all encumbrances except those set forth on this attached schedule entitled “Exceptions to Title”. Subject to these exceptions, Landlord will defend Tenant’s right to quiet enjoyment of the Premises from the lawful claims of all persons during the Lease term.
 
Page 10 of 18
 
11.2 SUBORNDINATION, NON-DISTURBANCE AND ATTORNMENT. This Lease shall be subject and subordinate to the lien and security interest of any mortgage or deed of trust now or hereafter placed so as to encumber the Leased Premises; provided, however, that as an express condition to any such subordination by Tenant, the mortgagee or beneficiary under such mortgage or deed of trust must agree in writing with Tenant that, in the event of a foreclosure sale or deed in lieu of foreclosure (i) Tenant’s rights under the Lease will be recognized and (ii) Tenant’s possession of the Leased premises will not be disturbed provided Tenant is not then in default under this Lease. Subject to the foregoing, Tenant shall, upon request, attorn to any person or entity succeeding to the interest of Landlord by foreclosure or otherwise. With respect to any mortgage or deed of trust currently encumbering the Leased Premises as of the commencement of this Lease, Landlord must secure form the mortgagee or beneficiary thereunder an agreement in favor of Tenant in a form and substance acceptable to Tenant and containing those terms set out in (i) and (ii) of this section above.

11.3 ESTOPPEL CERTIFICATE. Either party will, within 20 days after notice from the other, execute and deliver to the other party a certificate stating whether or not this Lease has been modified and is in full force and effect and specifying any modification or alleged breaches by the other party. The certificate shall also state the amount of monthly base rent, the dates to which rent has been paid in advance, and the amount of any security deposit or prepaid rent. Failure to deliver the certificate within the specified time shall be conclusive upon the party from whom the certificate was requested that the Lease is in full force and effect and has not been modified except as represented in the notice requesting the certificate.

11.4 WAIVER OF LANDLORD’S LIEN. From time to time, some or all of Tenant’s Premises may be financed by or owned by someone other than Tenant. To the extent that any of Tenant’s property is financed or owned by someone other then Tenant or Tenant’s Affiliate, Landlord agrees that such property is not Landlord’s property no matter how the same is affixed to the Premises or used by Tenant and agrees to recognize the rights of the lender, owner, secured creditor or lessor (“Secured Party”) of Tenant’s property. Landlord hereby waives any claim arising by way of any Landlord’s lien (whether created by statute or by contract or otherwise) with respect to the interest of any Secured Party in Tenant’s property (“Landlord’s Lien Waiver”). If such confirmation is required by Tenant or Secured Party, Landlord agrees to execute and deliver Landlord’s Lien Waiver within fifteen days from Tenant’s or Secured Party’s request therefor or Landlord will have conclusively been deemed to have granted confirmation of Landlord’s Lien Waiver thereafter and Landlord agrees that Tenant and Secured party may thereafter rely thereon and Landlord shall be estopped from raising any claim or lien on Tenant’s property for which the Landlord’s Lien Waiver was requested.

11.5 FINANCIAL INFORMATION. Tenant shall provide financial information reasonably required by Landlord to allow Landlord to finance or refinance the Premises. Tenant shall meet this requirement if it provides to Landlord its most recently prepared annual financial report to shareholders, provided it is not more than one year old, together with any quarterly reports which update the annual financial report.

SECTION 12. ASSIGNMENT AND SUBLETTING
 
Page 11 of 18

 
Tenant may not assign this Lease or sublet the Leased Premises or any portion thereof without  the written consent of Landlord, which consent shall not be unreasonably withheld, to any person or entity which controls, is controlled by, or is under common control with Tenant, or to any person or entity, joint business or joint operation resulting from a merger, consolidation or agreement with Tenant, or to any person or entity that acquires substantially all the assets of Tenant as a going concern (collectively, an “Affiliate”); provided, however, that the Affiliate assumes in writing all of Tenant’s obligations under the Lease and provided further that Tenant shall remain primarily liable under this Lease.

It is further understood that Tenant may be periodically offering for sale shares of ownership or similar interests in its corporation or a corporation with which it may merge or consolidate on a public or private basis for the purposes of expanding, capitalizing and or financing Tenant’s business and no prohibitions or conditions on assignment or subletting shall apply to such activities.

Tenant shall be permitted to grant subleases as to minor portions of the Premises to consultants or other providing services or support necessary to the development and operation of Tenant’s continuing business at the Premises with the written consent of Landlord, which consent shall not be unreasonably withheld. For the purpose of this section, a minor portion of the premises shall not exceed twenty-five percent (25%) of the premises in total sublet space.

Except as provided above, Tenant may not assign or sublet to another user (the “Assignee”) the Premises or this Lease except with the written consent of Landlord, which consent shall not be unreasonably withheld. The Landlord may consider, among other factors, the following in deciding whether the intended use of the proposed Assignee is consistent with this Lease and other surrounding uses and available services; the experience and capability of the proposed Assignee for the intended business use of the property; and whether the Landlord’s lender will allow the assignment.

Tenant may also sublet to current occupants of the building after the first year anniversary of the rent commencement date, on terms mutually agreed between Tenant and the proposed subtenant.

Landlord shall have the right to transfer, assign and convey, in whole or part, any or all of the right, title and interest to the Premises provided such transferee or assignee shall be bound by the terms, covenants and agreements herein contained, and expressly assumes and agrees in writing to perform the covenants and agreements of Landlord herein contained.

SECTION 13. DEFAULT

The following shall be events of default:

13.1 DEFAULT IN RENT. Failure of Tenant to pay any rent or other charge within 10 days after written notice from Landlord; provided, however, that Landlord shall not be obligated to give notice that rent is due more than twice in any calendar year. After the second written notice in any calendar year, Tenant shall be in default without further written notice.

13.2 DEFAULT IN OTHER COVENANTS. Failure of Tenant to comply with any term or condition or to fulfill any obligation of the Lease (other than the payment of rent or other charges) within 30 days after written notice by Landlord specifying the nature of the default with reasonable particularity; provided, however, that if the default is of a nature  that it cannot be completely remedied within the 30-day period, this provision shall be complied with if Tenant begins correction of the default within the 30-day period and thereafter proceeds with reasonable diligence and in good faith to effect the remedy as soon as practicable.
 
Page 12 of 18

 
13.3 INSOVLENCY. An assignment by Tenant for the benefit of creditors; the filing by Tenant of a voluntary petition in bankruptcy; an adjudication that Tenant is bankrupt or the appointment of a receiver of the properties of Tenant; the filing of any involuntary petition of bankruptcy and failure of Tenant to secure a dismissal of the petition within 30 days after filing; attachment for the levying of execution on the Leasehold interest and failure of Tenant to secure discharge of the attachment or release of the levy of execution within 30 days shall constitute a default. If Tenant consists of two or more individuals or business entities, the events of default specified in this Section 13.3 shall apply to each individual unless within 10 days after an event of default occurs, the remaining individuals produce evidence satisfactory to Landlord that they have unconditionally acquired the interest of the one causing the default. If the Lease has been assigned, the events of default so specified shall apply only with respect to the one then exercising the rights of Tenant under the Lease.

SECTION 14. REMEDIES OF DEFAULT

14.1 TERMINATION. In the event of a default, the Lease may be terminated at the option of Landlord by written notice to Tenant. Whether or not the Lease is terminated by the election of Landlord or otherwise, Landlord shall be entitled to recover damages from Tenant for the default, and Landlord may reenter, take possession of the premises, and remove any persons or property by legal action or by self-help with the use of reasonable force and without liability for damages and without having accepted a surrender.

14.2 RELETTING. Following re-entry or abandonment, Landlord may relet the Premises, and in that connection, may make any suitable alterations or refurbish the Premises, or both, or change the character or use of the Premises, but Landlord shall not be required to relet: (i) for any use or purpose other than that specified in the Lease, or (ii) for any use or purpose which Landlord may reasonably consider injurious to the Premises, or (iii) to any tenant that Landlord may reasonably consider objectionable. Landlord may relet all or part of the Premises, alone or in conjunction with other properties, for a term longer or shorter than the term of this Lease, upon any reasonable terms and conditions, including the granting of some rent-free occupancy or other rent concession.

14.3 DAMAGES. In the event of termination or retaking of possession following default, Landlord shall be entitled to recover immediately, without waiting until the due date of any future rent or until the date fixed for expiration of the Lease term, the following amounts as damages:

(1) The loss of rental from the date of default until a new tenant is, or with the exercise of reasonable efforts could have been, secured and paying out.

(2) The reasonable costs of reentry and reletting including, without limitation, the cost of any cleanup, refurbishing, removal of Tenant’s property and fixtures, costs incurred under Section 14.5, or any other expense occasioned by Tenant’s default, including but not limited to, any remodeling or repair costs, attorney fees, court costs, broker commissions, and advertising costs.

(3) Any excess of the value of the rent and all of Tenant’s other obligations under this Lease over the reasonable expected return from the premises from the period commencing on the earlier of the date of trial or the date the premises are relet, and continuing through the end of the term. The present value of future amounts will be computed using a discount rate equal to the prime loan rate of major Oregon banks in effect on the date of trail.
 
Page 13 of 18

 
14.4 RIGHT TO SUE MORE THAN ONCE. Landlord may sue periodically to recover damages during the period corresponding to the remainder of the Lease term, and no action for damages shall bar a later action for damages subsequently accruing.

14.5 LANDLORD’S RIGHT TO CURE DEFAULTS. If Tenant fails to perform any obligation under this Lease, Landlord shall have the option to do so after 30 days’ written notice to Tenant. All of Landlord’s expenditures to correct the default shall be reimbursed by Tenant on demand with interest at the rate of 8% per annum from the date of expenditure by Landlord. Such action by Landlord shall not waive any other remedies available to Landlord because of the default.

14.6 REMEDIES CUMULATIVE. The foregoing remedies shall be in addition to and shall not exclude any other remedy available to Landlord under applicable law.

SECTION 15. SURRENDER AT EXPIRATION

15.1 CONDITION OF PREMISES. Upon expiration of the Lease term or earlier termination on account of default, Tenant shall deliver all keys to Landlord and surrender the Premises in first-class condition and broom clean, ordinary wear and tear excepted. Alterations constructed by Tenant with permission from Landlord shall not be removed or restored to the original condition unless the terms of permission for the alteration so require. Tenant’s obligations under this section shall be subordinate to the provisions of Section 8 relating to destruction and Section 9 relating to eminent domain.

15.2 FIXTURES.

(1) All fixtures placed upon the Premises during the Term, other than Tenant’s trade fixtures, shall, at Landlord’s option, become the property of Landlord. If Landlord so elects, Tenant shall remove any or all fixtures that would otherwise remain the property of Landlord, and shall repair any physical damage resulting from the removal. If Tenant fails to remove such fixtures, Landlord may do so and charge the cost to Tenant with interest at the legal rate from the date of expenditure.

(2) Prior to expiration or other termination of the Lease term, Tenant shall remove all furnishings, furniture, and trade fixtures that remain its property. If Tenant fails to do so, Landlord may provide notice in writing to Tenant to remove said property within 20 days, and if Tenant fails to remove said property within 20 days, this shall constitute an abandonment of the property. Landlord may elect to retain the abandoned property, and all rights of Tenant with respect to said property shall cease; or the Landlord may elect to require Tenant to remove said property, Landlord may effect a removal and place the property in public storage for Tenant’s account. Tenant shall be liable to Landlord for the cost of removal, transportation to storage, and storage, with interest at the legal rate on all such expenses from the date of expenditure by Landlord.

(3) Notwithstanding any other provision of this Lease, Tenant shall have the right to place its trade fixtures and other equipment at the Premises and such shall be and remain the property of Tenant at all times. Tenant shall have the right to remove such trade fixtures and equipment upon the termination or expiration of this Lease provided that Tenant is not in default and that Tenant shall repair any damage to the Premises caused by such removal.

Page 14 of 18
 
15.3 HOLDOVER.

(1) If Tenant does not vacate the Premises at the time required, Landlord shall have the option to treat Tenant as a tenant from month-to-month, subject to all of the provisions of this Lease except the provisions for term and renewal and at a rental rate equal to rent last paid by Tenant during the original term, adjusted by any escalation provision contained in this Lease, or to eject Tenant from the Premises and recover damages caused by wrongful holdover. Failure of Tenant to remove fixtures, furniture, furnishings, or trade fixtures that Tenant is required to remove under this Lease shall constitute a failure to vacate to which this section shall apply if the property not removed will substantially interfere with occupancy of the Premises by another tenant or with occupancy by Landlord for any purpose including preparation for a new tenant.

(2) If a month-to-month tenancy results from a holdover by Tenant under this Section 15.3, the tenancy shall be terminable at the end of any monthly rental period on written notice from Landlord given not less than 10 days prior to the termination date which shall be specified in the notice. Tenant waives any notice that would otherwise be provided by law with respect to a month-to-month tenancy.

SECTION 16. LANDLORD’S DEFAULT.

Except where the provisions of this Lease grant Tenant an express exclusive remedy, if Landlord shall fail to perform or observe any covenant, term, provision or condition of this Lease and such default should continue beyond a period of ten (10) days as to a monetary default or thirty (30) days (or such longer period as is reasonably necessary to remedy a default provided Landlord shall continuously and diligently pursue such remedy at all times until such default is cured, or in the event of any emergency such shorter reasonable time period as warranted by the nature of the emergency, but in no event shall such shorter time period be less than forty-eight hours) as to a non-monetary default, after which, in each instance, receipt for a written notice (the “Notice”) thereof is given by Tenant to Landlord, then in any such event Tenant, upon expiration of the applicable grace period, shall have the right (a) to cure such default, and Landlord shall reimburse Tenant on demand for all sums expended in so curing the default plus interest thereon at the rate of eight percent (8%) per annum until paid (and if not paid by Landlord on demand, Tenant may offset such amount due from the rent all other sums due hereunder until paid) and (b) to commence such actions at law or in equity to which Tenant may be entitled.

SECTION 17. MISCELLANEOUS

17.1 NONWAIVER. Waiver by either party of strict performance of any provision of this Lease shall not be a waiver of or prejudice the party’s right to require strict performance of the same provision in the future or of any other provision.

17.2 ATTORNEY FEES. If suit or action is instituted in connection with any controversy arising out of this Lease, the prevailing party shall be entitled to recover in addition to costs such sum as the court may adjudge reasonable as attorney fees at trial, on petition for review, and on appeal.

17.3 NOTICES. Any notice required or permitted under this Lease shall be given when actually delivered by overnight courier or telecopy or 48 hours after deposited in United States mail as certified mail addressed to the address first given in this Lease or to such other address as may be specified from time to time by either of the parties in writing.
 
Page 15 of 18

 
17.4 SUCCESSION. Subject to the above-stated limitations on transfer of Tenant’s interest, this Lease shall be binding on and inure to the benefit of the parties and their respective successors and assigns.

17.5 RECORDATION. This Lease may be recorded at the option of Tenant, provided that Tenant pays the cost of recording a memorandum of the Lease.

17.6 ENTRY FOR INSPECTION. Landlord shall have the right to enter upon the Premises at any time upon reasonable advance notice to determine Tenant’s compliance with this Lease, to make necessary repairs to the building or to the Premises, or in the last 6 months of the term show the Premises to any prospective Tenant or purchaser, and in addition shall have the right, at any time during the last two months of the Lease, to place and maintain upon the premises notices for leasing or selling of the Premises. Landlord shall comply with all “bond room” restrictions in exercising its right of entry.

17.7 INTEREST ON RENT AND OTHER CHARGES. Any rent or other payment required of Tenant by this Lease shall, if not paid within 10 days after it is due, bear interest at the rate of 8% per annum (but not in any event at a rate greater than the maximum rate of interest permitted by law) from the due date until paid.

17.8 PRORATION OF RENT. In the event of commencement or termination of this Lease at a time other than the beginning or end of one of the specified rental periods, then the rent shall be prorated as of the date of commencement or termination, and in the event of termination for reasons other than default, all prepaid rent shall be refunded to Tenant or paid on its account.

17.9 TIME OF ESSENCE. Time is of the essence of the performance of each of Tenant's obligations under this Lease.

17.10 PARKING. Tenant may improve and stripe the parking areas around the building at its cost and expense. For the first year after the rent commencement date of this lease, Tenant shall be entitled to use eighty-two percent (82%) of the spaces created and may designate certain spaces for its exclusive use.

17.11 SIGNAGE. Tenant may erect such signs as seems to it appropriate, provided, however, that all such signs shall comply with all laws, regulations and ordinances.

17.12 APPROVALS. It is specifically understood and agreed that as regards any approvals or matters to be performed to the satisfaction of a party or only with a party's consent, that party shall not unreasonably withhold or delay its approval or indication of satisfaction or consent unless specifically otherwise provided herein.

17.13 DUTY OF GOOD FAITH. Landlord and Tenant shall have at all times a right and duty to act reasonably and in good faith and mitigate any damages or claims arising out of this Lease or in connection with the use, condition or occupancy of the Premises or an occurrence of a default in any terms of this Lease. The party claiming a lack of good faith or failure to mitigate shall have the burden to prove such a claim.

SECTION 18. RIGHT OF FIRST REFUSAL
 
Page 16 of 18

 
Landlord agrees not to sell, transfer, exchange, grant an option to purchase, lease (except following default by Tenant), or otherwise dispose of the Premises or any part of, or interest in, the Premises without first offering the Premises to Tenant on the terms and conditions set forth in any proposed contract or agreement with a third party (hereinafter referred to as “Offer”). The term “sell” includes ground lease of the Premises with primary renewal terms of more than 15 years in the aggregate.

Within 10 days of receiving an offer, Landlord shall provide Notice to Tenant of the Offer; said Notice shall contain the terms of the Offer. When Tenant receives the Notice and a copy of the Offer, Tenant shall have the prior and preferential right to purchase the Premises (or the part of or interest in the Premises covered by the Offer, as the case may be) at the same price and on the same terms and conditions as are contained in the Offer, except that if Tenant exercises the right of first refusal by electing to purchase the Premises, then (1) the closing of the transaction contemplated by the Offer shall take place no earlier than 90 days after the date that Tenant elects to exercise the right of first refusal, and (2) Tenant shall receive a credit against the sale price of the Premises in an amount equal to any brokerage commission that Landlord may have selling the Premises to Tenant rather than the Third-Party Offeror.

Tenant shall have 45 days from the date Tenant receives the Notice to Tenant of the Offer to notify Landlord whether Tenant elects to purchase the Premises pursuant to the terms of the Offer. If Tenant elects to exercise its right to purchase the Premises, then, in addition to giving Landlord written notice of its election within the 45-day period, Tenant also shall tender an amount equal to the earnest money deposit, if any, specified in the Offer, which will be held and used in accordance with the terms of the Offer.

If Tenant fails to timely exercise its right to purchase the Premises within the 45-day period, and for any reason Landlord shall not sell or convey the Premises to the Third-Party Offeror on the terms contained in the Offer within six months of Tenant's election not to purchase, then Landlord must resubmit the Offer as well as any other Offer to Tenant before selling the Premises, and such Offers shall be subject to Tenants' right of first refusal under this Lease.



LANDLORD

Stewart's Shops Corp.


By: ______________________________________
     Authorized Agent


TENANT

Releta Brewery Company, LLC


By: _______________________________________
      Authorized Agent
 
Page 17 of 18
 
Schedule “A”

All that tract or parcel of land situate in the City of Saratoga Springs, Saratoga County, N.Y.S., bounded and described as follows:

Beginning at a point on the northerly boundary of Excelsior Avenue at the southwesterly corner of lands now or formerly of Efnor and Evelyn VanDerwerker as recorded in the Saratoga County Clerk’s Office in Liber 584 of Deeds, Page 208, being the southeast corner of the lot herein described. Thence along the northerly line of Excelsior Avenue, S 87°59’35” W. 385.07 feet to a point and N 89°42’24” W. 128.88 feet to a point. Thence through the lands of the grantor, N 25°17’00” E. 261.25 feet to a point and N 01°85’59” W. 138.82 feet to a point. Thence along the southerly line of New York State Route 50, the following three courses: S 71°33’00” E. 33.00 feet to a point; N 88°04’00” E. 206.52 feet to a point; N 82°45’00” E. 159.00 feet to a point. Thence along the westerly line of lands of said VanDerwerker S 01°35’59” E. 378.90 feet to the point of beginning. Containing 3.663 acres of land.


Page 18 of 18
 EX-31.1 3 v185349_ex31-1.htm Unassociated Document
CERTIFICATIONS
 
I, Yashpal Singh, certify that:
 
 
1.
I have reviewed this quarterly report on Form 10-Q of Mendocino Brewing Company, Inc.;
 
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
 
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
       
Dated:  May 17, 2010    
 
 /s/ Yashpal Singh  
   
Yashpal Singh
  
    Chief Executive Officer  
       
 
 
 
 
 
 EX-31.2 4 v185349_ex31-2.htm Unassociated Document
 
CERTIFICATIONS
 
I, Mahadevan Narayanan, certify that:
 
 
1.
I have reviewed this quarterly report on Form 10-Q of Mendocino Brewing Company, Inc.;
 
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
 
 
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
 
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
 
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
       
Dated:  May 17, 2010        
 
 /s/ Mahadevan Narayanan  
    Mahadevan Narayanan  
    Chief Financial Officer  
       
 
 
 
 
 
 
 EX-32.1 5 v185349_ex32-1.htm Unassociated Document
CERTIFICATION PURSUANT TO TITLE 18, UNITED STATES CODE,
 
SECTION 1350
 
In connection with the Quarterly Report of Mendocino Brewing Company, Inc. (the "Company") on Form 10-Q for the quarterly period ended March 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Yashpal Singh, Chief Executive Officer of the Company, certify, pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1)  
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
 
(2)  
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
 
 
       
Dated:  May 17, 2010    
 
 /s/ Yashpal Singh  
   
Yashpal Singh
  
    Title: Chief Executive Officer  
       
 
 
 
 

 
 EX-32.2 6 v185349_ex32-2.htm Unassociated Document
CERTIFICATION PURSUANT TO TITLE 18, UNITED STATES CODE,
 
SECTION 1350
 
In connection with the Quarterly Report of Mendocino Brewing Company, Inc. (the "Company") on Form 10-Q for the quarterly period ended March 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Mahadevan Narayanan, Chief Financial Officer of the Company, certify, pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1)  
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
 
(2)  
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
 
 
       
Dated:  May 17, 2010        
 
 /s/ Mahadevan Narayanan  
    Mahadevan Narayanan  
    Title: Chief Financial Officer  
       
 
 
 
 

 

 -----END PRIVACY-ENHANCED MESSAGE-----