July 18, 2005
8712.008
VIA MAIL & FAX 202-942-9648
- ---------------------------
Mr. George F. Ohsiek, Jr.
Branch Chief
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: MENDOCINO BREWING COMPANY, INC.
FORM 10-K FOR FISCAL YEAR ENDED
DECEMBER 31, 2004
FILED MAY 13, 2005
FORMS 10-Q FOR FISCAL QUARTER ENDED
FILE NO. 001-13636
Dear Mr. Ohsiek:
We have been asked by Mendocino Brewing Company, Inc. (the "Company") to
respond on its behalf to the items included in your letter of comments dated
July 7, 2005.
We have used our best efforts to provide the following responses to your
request as accurately and expeditiously as possible. We have also attached a
statement of the Company's President, Yashpal Singh, which includes certain
representations of the Company as requested in your letter. My direct line is
415-772-5761; please contact me at your convenience, so that we may discuss
these responses and how best to proceed.
FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2004
CONSOLIDATED BALANCE SHEETS, PAGE F-2
1. Please tell us your basis in GAAP for classifying as non-current the
subordinated notes due to related party that mature in August 2005. We
note your disclosure that the notes are classified as long-term because
they are subordinated in right to other long-term debt outstanding;
however, we do not believe that this alone
Mr. George F. Ohsiek, Jr.
July 18, 2005
Page 2
is sufficient justification for classifying as non-current notes that
become payable within one year of the balance sheet date. Please advise.
United Breweries of America, Inc. ("UBA") provided Mendocino Brewing
Company, Inc. (the "Company") with funds that are evidenced by convertible notes
issued to UBA. The total amount owed to UBA, including interest accrued as of
December 31, 2004, was $2,010,100.
The Company also has a real estate loan of $2,299,400 from Savings Bank
of Mendocino County ("SBMC") that matures in 2012, and a $2 million revolving
credit facility from BFI Business Finance ("BFI") that matures in May 2006.
UBA entered into subordination agreements with both of SBMC and BFI,
which are attached hereto (each, a "Subordination Agreement"). The Subordination
Agreement with SBMC provides that payments on the debt owed by the Company to
UBA can be made only on "indefeasible payment or satisfaction in full" of the
amount due SMBC. Additionally, under the Subordination Agreement between BFI and
UBA, UBA agreed not to "demand, accept or receive" any payment from the Company
"until all indebtedness of Debtor (MBC) to BFI has been paid in full".
Based on this fact pattern, the Company referred to guidance in
Accounting Research Bulletin (ARB) 43. Chapter 3, paragraph 7, of ARB 43 states
"... other liabilities whose regular and ordinary liquidation is expected to
occur within a relatively short period of time, usually twelve months, are also
intended for inclusion, such as short-term debts arising from the acquisition of
capital assets, serial maturities of long-term obligations, amounts required to
be expended within one year under sinking fund provisions, and agency
obligations arising from the collection or acceptance of cash or other assets
for the account of third persons. The current liability classification is also
intended to include obligations that, BY THEIR TERMS, (emphasis ours) are due on
demand or will be due on demand within one year (or operating cycle, if longer)
from the balance sheet date, even though liquidation may not be expected within
that period."
While the Company's debt to UBA is scheduled to mature within the next
12 months, it will not require the use of working capital because, by the terms
of the Subordination Agreements, payments, to UBA will be subsequent to payment
in full of both the BFI debt (due in May 2006) and the SBMC debt (due in 2012).
Based on the terms of the Subordination Agreements as set forth above,
the Company has classified the debt owed to UBA as a long term liability. The
Mr. George F. Ohsiek, Jr.
July 18, 2005
Page 3
Company will provide a complete disclosure of the basis of the classification in
future filings.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME, PAGE F-3
2. Please tell us your basis for classifying your legal dispute settlement
as a non-operating expense. In this regard, we note that unless Rule
5-03.9 of Regulation S-X expressly permits classification of an item as
non-operating, the presumption is that the item should be classified as
an operating item. Thus, absent compelling evidence that your legal
dispute was unrelated to transactions made during the ordinary course of
your operations, we believe the settlement expense should be classified
in operating income. If you continue to believe that your current income
statement classification is appropriate, please advise us in detail as
to the basis for your position. Otherwise please tell us how you intend
to revise your filing accordingly.
It is customary in the industry that during a change of distributorship,
the new distributor pay the old distributor for developing the territory.
Normally the payment occurs outside of the Company and the Company is not
involved in the determination of the amount payable. These transactions do not
occur during the normal course of the Company's operations and are highly
exceptional. The Company does not receive any revenues in association with the
creation of new distribution arrangements.
Effective March 28, 2003, the Company terminated a distribution
agreement with the House of Daniels, Inc., dba Golden Gate Distributing Company
("GGD"), in accordance with the provisions of the agreement, and appointed two
new distributors to service the territory covered by GGD. Because of the ongoing
litigation between MBC and GGD, instead of making a payment directly to GGD, the
two new distributors paid $683,600 to the Company for the `goodwill' developed
by GGD. Since these payments were ultimately payable to GGD, the Company
classified the funds received as a liability pending settlement of the dispute.
The dispute was settled in November 2004. The result of the settlement was that
the Company was to pay GGD $900,000 over a period of time. The Company
classified the difference between the $900,000 payable to GGD and the amount
received from the new distributors as a non operating expense.
To support this position, the Company followed the guidance in Concept
Statement 6, paragraph 82 to 86. Those paragraphs discuss gains and losses, and
how losses are decreases in equity from peripheral or incidental transactions of
the company. Paragraph 86 states "GAINS AND LOSSES MAY ALSO BE DESCRIBED OR
CLASSIFIED AS "OPERATING" OR "NONOPERATING," DEPENDING ON THEIR RELATION TO AN
ENTITY'S MAJOR ONGOING OR CENTRAL OPERATIONS".
Mr. George F. Ohsiek, Jr.
July 18, 2005
Page 4
The Company also reviewed the requirements of S-X Rule 5-03.9, pursuant
to which it was to separately state in the statement of operations material
miscellaneous income deductions, and to clearly indicate the nature of the
transaction.
The Company considered the legal dispute settlement to be a decrease in
equity that was not related to its ongoing operations as it was incidental to a
changing of distributors that generally has no cost to the Company. As such, the
Company considered the classification of the legal settlement in the statement
of operations to be appropriate.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, PAGE F-6
NOTE 1 -- DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES, PAGE F-6
CONCENTRATION OF CREDIT RISKS, PAGE F-6
3. You indicate that certain of your cash is restricted for use as
collateral for a note payable. Please tell us where this restricted cash
is presented on your balance sheet and in your statement of cash flows.
In this connection, please note that restricted cash should be presented
apart from cash and cash equivalents on the face of the balance sheet
and likewise should not be included in the cash and cash equivalents
total in the statement of cash flows. If you now believe that your
financial statement presentation of restricted cash is inappropriate,
please tell us how you plan to revise your financial statements
accordingly.
The restricted cash is included in the cash and cash equivalents on the
balance sheet as well as on the statement of cash flows, because the Company
negotiated the release of the restrictions on the cash, which was formerly held
as collateral, in April 2005. This event, which occurred subsequent to December
31, 2004, provided additional evidence with respect to the restriction and
therefore the Company decided it was appropriate to show the cash as
unrestricted as of December 31, 2004. The Company inadvertently failed to update
the disclosure.
REVENUE RECOGNITION, PAGE F-7
4. Please disclose whether you offer sales incentives or rebates, pay
slotting fees, engage in cooperative advertising programs, have buydown
programs, or make other payments to resellers or customers. Also
disclose your accounting policy for each of these types of arrangements,
as applicable, including the statement of operations line item that each
type of arrangement is included in. For each type of arrangement treated
as an expense rather than as a reduction of
Mr. George F. Ohsiek, Jr.
July 18, 2005
Page 5
revenues, please tell us how this type of arrangement meets the
requirements in EITF 01-9. Please also discuss in MD&A any significant
estimates resulting from these arrangements.
The Company offers sales incentives and rebates, and engages in
cooperative promotions. The Company follows an accounting policy that meets with
the requirements of EITF 01-9, and all of such arrangements are shown as a
reduction of revenue. Such arrangements reduced revenues in 2004 by $756,600.
The Company will include this accounting policy footnote in all future filings.
ITEM 9A. CONTROLS AND PROCEDURES, PAGE 28
5. Please revise your disclosures regarding your principal executive and
financial officers' conclusion as to the effectiveness of your
disclosure controls and procedures to ensure it encompasses the entire
definition of disclosure controls and procedures in Exchange Act Rules
13a-15(e) and 15d-15(e)_ Your current disclosure does not achieve this
objective. Also confirm to us that your disclosures regarding the
effectiveness of your disclosure controls and procedures are still
accurate considering the entire definition of disclosure controls and
procedures, or otherwise amend this Form 10-K and/or your March 31, 2005
Form 10-Q accordingly.
The Company confirms the effectiveness of its disclosure controls and
procedures considering the entire definition of disclosure controls and
procedures set forth in the Exchange Act Rules 13a-15(e) and 15d-15(e). The
Company will make appropriate disclosures in its future filings.
6. You state that there were no "significant changes" in your "internal
controls" or in other factors that could "significantly affect" these
controls "subsequent to the date of the evaluation thereof" However,
Item 308(c) of Regulation S-K requires that you disclose ANY CHANGE in
your "internal control over financial reporting" identified in
connection with the evaluation required by paragraph (d) of Exchange Act
Rules 13a-15 or 15d-15 THAT OCCURRED DURING THE MOST RECENT FISCAL
QUARTER that has "materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting." Please revise your disclosure accordingly. Please also
confirm to us that there were no changes in your internal control over
financial reporting during the quarters ended December 31, 2004 and
March 31, 2005, or otherwise amend your filings to disclose the changes.
The Company confirms there were no changes in its internal controls that
occurred
during the quarters ending December 31, 2004 or March 31, 2005. The Company will
revise its disclosures accordingly in its future filings.
FORM 10-Q FOR FISCAL QUARTER ENDED MARCH 31, 2005
ITEM 4. CONTROLS AND PROCEDURES, PAGE 21
7. We note that your certifying officers disclose their conclusions as to
the effectiveness of your disclosure controls and procedures "during the
period of time covered by this report." However, Item 307 of Regulation
S-K requires that your certifying officers disclose their conclusions
regarding the effectiveness of your disclosure controls and procedures
"as of the end of the period covered by the report." See also paragraph
4(b) of Exhibits 31.1 and 31.2. Please revise your filings accordingly.
Also confirm to us that your certifying officers concluded that your
disclosure controls and procedures were effective as of the end of the
period covered by the report, or otherwise amend your Form 10-Q
accordingly.
The Company confirms that its disclosure controls and procedures were effective
as of the end of the period covered by its quarterly report for the quarter
ended March 31, 2005. The Company will make appropriate disclosures in its
future filings.
Sincerely,
Sara Finigan
Cc: Yashpal Singh
STATEMENT OF PRESIDENT OF
MENDOCINO BREWING COMPANY, INC.
As President of Mendocino Brewing Company, Inc. (the "Company"), in
connection with the receipt of that certain letter of comment from George F.
Ohsiek, Jr., of the United States Securities and Exchange Commission (the
"Commission"), dated July 7, 2005, I hereby make the following statements on
behalf of the Company: The Company acknowledges and agrees that:
(1) The Company is responsible for the adequacy and accuracy of the
disclosure made in its filings under the Securities Exchange Act
of 1934, as amended, (the "Filings");
(2) Staff comments on the Filings or changes to disclosures
contained in any Filings in response to staff comments do not
foreclose the Commission from taking any action with respect to
the Filings; and
(3) The Company may not assert staff comments to the Filings as a
defense in any proceeding initiated by the Commission or any
person under the federal securities laws of the United States.
MENDOCINO BREWING COMPANY, INC.
Dated: July 15, 2005 /s/ Yashpal Singh
----------------------------------------
Yashpal Singh, President and CEO
SUBORDINATION AGREEMENT
MENDOCINO BREWING COMPANY, INC.
("Debtor")
THIS SUBORDINATION AGREEMENT is made this 21st day of APRIL, 2005, by
and between BFI BUSINESS FINANCE, a California corporation ("BFI"), whose
address is 1655 The Alameda, San Jose, California. 95126, and UNITED BREWERIES
OF AMERICA INC., a Delaware corporation ("Creditor") whose signature and address
is set forth below.
WHEREAS, Debtor is indebted to Creditor in connection with a number of
convertible promissory notes as of the date hereof in the approximate aggregate
principal sum of One Million Nine Hundred Fifteen Thousand Three Hundred Seventy
and 95/100 Dollars ($1,915,370.95) (this amount, plus any other sums that
Creditor now or in the future is owed by Debtor or is paid by Creditor to any
third party based on any guaranty signed by Creditor guaranteeing debt owed by
Debtor any such third party plus any interest, fees, legal fees and costs is
hereinafter collectively referred to as the ("Creditor Indebtedness").:
WHEREAS, Debtor has requested BFI to provide credit to Debtor pursuant
to the terms of the Loan And Security Agreement (the "BFI Agreement") between
BFI and Debtor executed or to be executed in connection herewith.
NOW, THEREFORE, to induce BFI to enter into the BFI Agreement and to
extend credit thereunder, the undersigned Creditor hereby subordinates all
Creditor Indebtedness in favor of any and all indebtedness now owed or hereafter
owing by Debtor to BFI. Creditor further agrees that it will not demand, accept
or receive from Debtor any payments of Creditor Indebtedness owing to such
Creditor until all indebtedness of Debtor to BFI has been paid in full; if any
such payments are remitted to a Creditor by Debtor, such Creditor will receive
such payments in trust for BFI and will forward the same forthwith to BFI.
Creditor hereby assigns to BFI all dividends or payments to which it is entitled
in the event of the liquidation of Debtor, either voluntarily or otherwise, to
the extent necessary to satisfy the obligations of Debtor to BFI, and Creditor
hereby constitutes and appoints BFI to be its true and lawful attorney to
collect such dividends to the extent necessary in order to enable BFI to receive
payment in full (with interest) of the indebtedness of Debtor to it, provided
that in such event BFI shall account to Creditor for any excess in dividends
received beyond the amount necessary to satisfy its claim as aforesaid. Creditor
further agrees that it has no security interest in any asset of Debtor, but if
such Creditor ever receives a lien against any asset of Debtor, it subordinates
such lien in priority to Lender and agrees not to take any action to enforce
such lien.
This Agreement has been executed as of the date set forth below.
By: /s/ Anil Pisharody _ Secretary Date: 04/21/05
------------------------------------------------ ---------------------
United Breweries of America Inc. ("CREDITOR")
Address : 2400, Bridgeway, Sausalito, CA 94965
Debtor acknowledges receipt of a copy of this Agreement, and agrees to withhold
payment to each Creditor that is a signatory hereto in conformity with this
Agreement.
MENDOCINO BREWING COMPANY, INC. ("DEBTOR")
By: /s/ Yashpal Singh Date: 05/05/05
------------------------------------------------ ---------------------
Its: President & CEO
SUBORDINATION AGREEMENT
-----------------------
December 21, 1998
Savings Bank of Mendocino, Inc.
P.0. Box 3600
Ukiah, California 95482
Mendocino Brewing Company, Inc., a California corporation ("BORROWER"),
is presently indebted to the undersigned. United Breweries of America Inc., a
Delaware corporation ("CREDITOR"), in the current principal amount not in excess
of Nine Hundred Seventy-Five Thousand Four Hundred Eighty-Seven Dollars and
88/100 ($975,487.88) under the terms of certain indebtedness convertible for
common stock of Borrower reflected on the books of Borrower (the "SUBORDINATED
AGREEMENTS"). Creditor understands that the Savings Bank of Mendocino, Inc., a
California corporation ("LENDER"), is providing and has agreed to continue to
provide certain financing to Borrower pursuant to that certain Business Loan
Agreement and that certain Commercial Security Agreement, each dated as of
September 25, 1996 (collectively, the "LOAN AGREEMENTS") among Borrower and
Lender, as the same may be amended, modified, supplemented or renewed from time
to time (the Loan Agreements, together with all other instruments and documents
delivered by Borrower to Lender and all other financing agreements now or
hereafter existing between Lender and Borrower, and all amendments,
modifications, and supplements to any one or more of the foregoing, and together
with all renewals, extensions and restatements of any one or more of the
foregoing. are hereinafter collectively called the "SENIOR LOAN DOCUMENTS"). The
proceeds of the financing arrangements have been and will continue to be made
available to Borrower to provide working capital for Borrower's business as
otherwise permitted under the Loan Agreements. Therefore, Creditor agrees to the
following terms and conditions:
1. Creditor hereby agrees to subordinate, and does hereby
subordinate, (a) payment by Borrower of all or any part of Borrower's
obligations, liabilities and indebtedness which may now or hereafter be owing by
Borrower to Creditor, including, without limitation, the outstanding balance of
principal and accrued interest from time to time owing by Borrower to Creditor
pursuant to the Subordinated Agreements or otherwise and all costs and expenses
(including attorneys' fees) owing by Borrower to Creditor (all of the
obligations, liabilities and indebtedness described or to which reference is
made in this clause (a) being hereinafter called the "SUBORDINATED DEBT") to the
indefeasible payment or satisfaction in full of the Senior Debt (as defined
below), and (b) all security interests, mortgages and liens now or hereafter
securing the Subordinated Debt to all security interests, mortgages and liens
now or hereafter securing the Senior Debt. For purposes hereof, "SENIOR DEBT"
means all obligations now or hereafter owing by Borrower pursuant to the Senior
Loan Documents, including, without limitation (i) principal and interest on
loans, advances, accommodations or other extensions of credit by you or any one
or more of your affiliates now or hereafter made pursuant to the Senior Loan
Documents and howsoever evidenced to or on behalf of Borrower (including the
Borrower operating as Debtor or Debtor-in-Possession under the U.S. Bankruptcy
Code), (ii) amounts owing by reason of
guarantees by you or any one or more of your affiliates pursuant to the Senior
Loan Documents of any of Borrower's indebtedness to others unrelated to you,
(iii) interest on the amounts referred to in clauses (i) and (ii) (including any
such interest accruing subsequent to the filing by or against the Company of any
proceeding brought under Chapter 11 or 7 of the Bankruptcy Code, but only to the
extent such interest is not disallowed in Bankruptcy. (iv) accommodation
charges, facility fees, account servicing fees, unused line fees and any other
fees owing to you under or pursuant to the Senior Loan Documents, (v) attorneys'
fees and expenses incurred by you in connection with the Senior Loan Documents,
and (vi) any extension, renewal or refinancing of such Senior Debt, accrued
interest, attorneys' fees and expenses incurred by you in enforcing your rights
in the event of default by Borrower under its obligations to you, (vii) all
other indebtedness for which Borrower is now or at any time hereafter liable to
Lender in any manner, whether primarily or secondarily, absolutely or
contingently, directly or indirectly, jointly, severally or jointly and
severally, and whether matured or unmatured, including all indebtedness arising
directly out of transactions between the Borrower and Lender or acquired by
Lender outright, conditionally or as collateral security from another person or
entity, and (viii) all of Borrower's Obligations, as that term is defined in the
Loan Agreements (and, in the case of all of the foregoing, any and all renewals
and extensions of all or any part thereof). Regardless of whether a default or
an event of default (however defined) exists under any one or more of the
Subordinated Agreements, Creditor further agrees not to (i) accept, retain,
request or take any security for the Subordinated Debt without your prior
written consent, (ii) amend or modify the Subordinated Agreements, or increase
any of the Subordinated Debt, without your prior consent. (iii) accept payment
of, demand payment of. sue for or receive all or any part of the Subordinated
Debt without your prior written consent, or (iv) take any action to enforce its
rights in any collateral securing payment thereof, unless or until all Senior
Debt shall have been indefeasibly paid or satisfied in full.
Notwithstanding the foregoing, nothing in this Agreement shall prohibit
Creditor from (i) lending additional amounts to Borrower provided that all such
amounts are (A) considered to be a part of the Subordinated Debt, and (B) do not
exceed $2,000,000 in aggregate at any time, or (ii) converting all or any part
of the outstanding Subordinated Debt owed by Borrower to Creditor into common
stock of Borrower at a rate of not less than one share of common stock for each
One Dollar and Fifty Cents ($1.50) of Subordinated Debt. If Borrower receives a
request from Creditor to repay all or any part of the principal amount of the
Subordinated Debt, Borrower shall forward such notice to Lender together with a
request for the written consent of Lender to repay such requested amount to
Creditor. Borrower shall only pay to Creditor such principal amount of the
Subordinated Debt as Lender may, in its sole discretion, approve.
Notwithstanding anything to the contrary in this Agreement. Borrower may
make regularly scheduled payments of interest on the outstanding principal
amount of the Subordinated Debt owed to Creditor at a rate of one and one-half
percent (l1/2%) over the prime rate as offered from time to time by the Bank of
America in San Francisco, California, provided that no Event of Default (as
defined in the Loan Agreements) has occurred or will occur as a result of any
payment to Creditor.
2
2. Upon default in the payment of all or any portion of the Senior
Debt at maturity, by lapse of time, acceleration or otherwise and written notice
thereof from the Lender to the Creditor (a "Payment Default"), all amounts due
in respect of such Senior Debt shall first be paid in full in cash before any
payment is made by Borrower or any person acting on behalf of Borrower on
account of any Subordinated Debt. Upon a distribution of the assets or
readjustment of the indebtedness of Borrower by reason of liquidation,
composition, Bankruptcy, arrangement, receivership, assignment for the benefit
of creditors or any other action or proceeding involving the readjustments of
all or any of the debts of Borrower, or the application of the assets of
Borrower to the payment or liquidation thereof, Creditor acknowledges that the
payment and satisfaction of the Senior Debt and the Senior Loan Documents shall
have priority over the indefeasible payment and satisfaction of the Subordinated
Debt and the Subordinated Agreements. If Borrower shall become subject to a
proceeding under the United States Bankruptcy Code and you shall desire to
permit the use of cash collateral by Borrower or to provide financing to
Borrower under either Section 363 or 364 of the United States Bankruptcy Code,
with or without obtaining a priority lien under Section 364(d) thereof, Creditor
hereby agrees as follows: (a) adequate notice to Creditor shall have been given
for such financing if Creditor receives notice thereof at least two (2) business
days prior to the entry of the order approving such financing; and (b) no
objection will be raised by Creditor to any such financing on the grounds of
failure to provide "adequate protection" of Creditor's junior lien position, if
any, subject to your senior lien position in the property and assets of
Borrower. For purposes hereof, notice of a proposed financing or use of cash
collateral shall be deemed received by Creditor upon the sending of notice by
overnight delivery service, telecopy or hand delivery to Creditor. If Borrower
shall become subject to a proceeding under the United States Bankruptcy Code,
you are irrevocably authorized and empowered to receive and collect any and all
dividends, payments and distributions made on account of any proof of claim
relating to the Subordinated Debt in whatever form the same may be paid or
issued until the Senior Debt is paid or satisfied. If Borrower shall become
subject to a proceeding under the United States Bankruptcy Code, Creditor agrees
to file a proof of claim in respect of the Subordinated Debt and to execute and
deliver to you such assignments or other instruments as you may require to
enable you to collect all dividends, payments and distributions which may be
made at any time on account of the Subordinated Debt until the Senior Debt is
indefeasibly paid or satisfied in full.
3. Creditor shall not, without your prior consent, (i) take any
action to foreclose or otherwise enforce its liens on any of Borrower's assets,
(ii) commence or join with any other creditor or creditors of Borrower in
commencing any Bankruptcy, reorganization, receivership or insolvency proceeding
against Borrower, (iii) exercise any other rights or remedies it may have under
the Subordinated Agreements, the Uniform Commercial Code or any other applicable
law with respect to Borrower's assets, or (iv) take or permit any action
prejudicial to or inconsistent with your priority position over Creditor that is
created by this Subordination Agreement.
4. In the event Borrower defaults on its obligations to you and, as
a result, you undertake to enforce your security interests and liens. if any, in
Borrower's assets, Creditor agrees that Creditor will not hinder, delay or
otherwise prevent you from taking any and all action which you deem necessary to
enforce your security interests and liens in Borrower's assets and to realize
thereon.
3
5. If any payment on account of or any collateral for any part of
the Subordinated Debt is received by Creditor in violation of this Agreement,
such payment or collateral shall be delivered forthwith by Creditor to you for
application to the Senior Debt, in the form received except for the addition of
any endorsement or assignment necessary to effect a transfer of all rights
therein to you. You are irrevocably authorized to supply any required
endorsement or assignment which may have been omitted. Until so delivered, any
such payment or collateral required to be delivered by Creditor to Lender under
this PARAGRAPH 5 shall he held by Creditor in trust for you and shall not be
commingled with other funds or property of Creditor.
6. Creditor represents, warrants and covenants to you that:
(a) It has not relied and will not rely on any
representations or information of any nature made by or received from you
relating to Borrower in deciding to execute this Subordination Agreement;
(b) Creditor has delivered to you a true and correct copy of
the Subordinated Documents listed in EXHIBIT A hereto, and, as of the date
hereof, no documents or agreement evidencing or otherwise relating to any
Subordinated Debt exist except as set forth in EXHIBIT A hereto;
(c) Creditor is the lawful owner of the Subordinated Debt
free and clear of all liens and encumbrances, and it has not encumbered,
assigned or transferred, and agrees that it will not, without prior written
consent of Lender, encumber, assign or transfer at any time while this Agreement
remains in effect, any right, claim or interest of any kind in or to the
Subordinated Debt. Any assignment or transfer in violation of this sub-paragraph
shall be null and void; and
(d) Creditor has received all consents and approvals
required in order for it to execute and deliver this Agreement.
7. You may at any time or times, in your discretion, (i) renew,
extend or otherwise modify the rate of interest on, the time and/or terms OF
payment of, and/or any other of the terms and provisions relative to the Senior
Debt or any of the other provisions of the Loan Agreements, (ii) lend additional
monies, extend additional credit and make other financial accommodations to or
for the account of Borrower, (iii) waive or release any collateral or guaranties
which may be held as security for all or any part of the Senior Debt, and/or
(iv) renew, extend, modify, amend, supplement and/or restate any and all of your
agreements with Borrower, including the Loan Agreements, in any manner, in each
case, without necessity of consent from Creditor and without impairing or
affecting this Agreement or any of your rights hereunder. Creditor shall provide
you with copies of any modifications or amendments to the Subordinated
Agreements promptly upon the execution thereof.
8. Creditor hereby waives any rights it has or may have in the
future to require you to marshal your collateral, and agrees that you may, in
addition to your other rights hereunder, proceed against your collateral in any
order that you deem appropriate in the exercise of your absolute discretion.
Creditor also waives any right TO be subrogated to the Senior Debt unless and
until the Senior Debt is indefeasibly paid in full.
4
9. Creditor agrees that it will advise each future holder of all or
any part of the Subordinated Debt that the Subordinated Debt is subordinated to
the Senior Debt in the manner and to the extent set forth herein. To that end,
Creditor hereby agrees (and is hereby so authorized by Borrower) to endorse upon
each instrument and document evidencing all or any part of the Subordinated Debt
the following legend:
The payment of the indebtedness evidenced by this instrument is
subordinated to the payment of the "Senior Debt" defined and
described in the Subordination Agreement dated as of October 26,
1998, between United Breweries of America Inc. and the Savings
Bank of Mendocino Inc., and reference is made to such Agreement
for a full statement of the terms and conditions of such
subordination.
Debtor further agrees to indemnify Lender against any losses, damages,
costs and expenses incurred or suffered by Lender by reason of Creditor's
failure to so notify any future holder of the Subordinated Debt, or any part
thereof. Debtor hereby authorizes Lender to file such notices of record as
Lender may from time to time deem appropriate to evidence or give notice of this
Agreement.
10. Creditor agrees that it will not at any time directly or
indirectly contest the validity, perfection, priority or enforceability of any
lien, security interest, encumbrance or claim granted to you in or on the assets
of Borrower, and hereby agrees not to hinder you or take a position adverse to
you in the defense of any action contesting the validity, perfection. priority
or enforceability of any such liens, security interests, encumbrances or claims.
11. This Agreement shall he governed by the laws of the State of
California. This Agreement contains the entire agreement between Creditor and
you with respect to this subject, and may only be modified by a writing signed
by both Creditor and you.
12. Your failure to exercise any right hereunder shall not be
construed as a waiver of the right to exercise the same or any other right at
any other time and from time to time thereafter, and such rights shall be
cumulative and not exclusive.
13. The knowledge by you of any breach or other non-observance by
Creditor of the terms of this Agreement shall not constitute a waiver thereof or
of any obligations to be performed by Creditor.
14. Wherever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be prohibited by or invalid under
applicable law, such provisions shall he ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement.
15. This Agreement shall continue in full FORCE and effect until
payment in full of the Senior Debt and shall be binding upon Creditor and its
successors and permitted assigns, including, without limitation, any future
holder of all or any part of the Subordinated Debt, and shall inure to the
benefit of Lender and its successors and assigns, including, without limitation,
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any future holder of all or any part of the Senior Debt, it being expressly
acknowledged that Lender's rights under this Agreement may be assigned by Lender
in connection with any assignment or transfer of all or any portion of Senior
Debt and that each holder of any portion of the Senior Debt shall be equally and
ratably entitled to the benefits of this Agreement. References herein to
Borrower shall include any successor to, or assign of, Borrower including,
without limitation, any debtor-in-possession or trustee for Borrower in any
proceeding under the United States Bankruptcy Code.
16. This Agreement may he executed in any number of counterparts,
each of which shall be deemed to be an original hereof and submissible in
evidence and all of which together shall be deemed to be a single instrument.
17. All communications provided for in this Agreement shall he in
writing and delivered or sent by certified mail, return receipt requested, by
overnight courier or by facsimile transmission (with electronic confirmation of
receipt), confirmed by mail or courier, (i) if to you, Box 3600, Ukiah,
California 60603, Fax No. (707) 462-9222, or to such other address as you may in
writing designate, or (ii) if to the Creditor, to United Breweries of America
Inc., Three Harbor Drive, Suite 115, Sausalito, California 94965, Attn: Anil
Pisharody, Fax No.: (415) 289-1406, with a copy to: Marron o Reid LLP, 601
California Street, Suite 1200, San Francisco, California 94108, Attn: Naomi
Rustomjee, Fax No.: (415) 986-1374, or to such address as the Creditor may
designate in writing.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, Creditor has executed this Agreement as of the date
first written above.
CREDITOR:
UNITED BREWERIES OF AMERICA INC.,
a Delaware corporation
By: /s/ Anil Pisharody
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Its:
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ACCEPTED AND AGREED TO AS OF
THE DATE FIRST ABOVE WRITTEN:
SAVINGS BANK OF MENDOCINO, INC.
By: /s/ Martin J Lombardi
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Its:
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CONSENT
The undersigned, Mendocino Brewing Company. Inc., a California
corporation ("Borrower"), acknowledges receipt of a copy of the foregoing
Subordination Agreement, consents to all of the terms and conditions thereof,
and agrees that it will not pay any Subordinated Debt, except as provided
therein. In the event of any breach of the provisions of this Agreement,
Borrower agrees that, in addition to any other rights and remedies which you may
have under the documents, agreements and instruments evidencing our financing
arrangements, all of the Senior Debt shall, without notice or demand, become
immediately due and payable unless you shall otherwise elect. Borrower agrees to
mark its records to reflect the subordination of the Subordinated Debt.
MENDOCINO BREWING COMPANY, INC.,
a California corporation
By: P.A.Murali
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Its:
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EXHIBIT A
SUBORDINATED AGREEMENTS
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No documents exist. The Subordinated Debt is reflected on the books of Borrower.