Keg Management Agreement Dated Dec 2, 1996

KEG MANAGEMENT AGREEMENT


This Keg Management Agreement ("Agreement") dated effective as of December 2, 1996, is between MicroStar Keg Management, L.L.C., a Delaware Limited Liability Company whose address is 8567 154th Avenue N.E., Redmond, Washington 98052 ("MicroStar") and HERITAGE Brewing Company, whose address is 9800 Sepulveda Blvd, Los Angeles, California, 90045 (referred to herein and in the Exhibits hereto either as "Brewing Company" or "HERITAGE").


RECITATIONS AND DEFINITIONS


1. MicroStar is engaged in the logistical management of stainless steel kegs, primarily for the craft beer/micro-brewing industry and has developed proprietary concepts, arrangements and systems for the ownership, licensing of the use of, tracking and retrieval of kegs.


2. Brewing Company is engaged in the business of brewing premium and/or special quality or custom beers and desires to more efficiently service existing markets while simultaneously expanding its business in both existing and potential new market areas.


3. Brewing Company desires to utilize the services of MicroStar in order to avoid the capital outlay and manpower/administrative costs and risks associated with keg ownership, thereby enabling Brewing Company to direct additional resources to its brewing business.


4. For purposes of this Agreement the term "kegs" shall mean and refer to beer kegs which are either a) straight-sided with a single opening and an American Sankey-type neck, having a full U.S. half-barrel capacity, with chimes constructed of spring steel, within the relationship of chime thickness to sidewall thickness of .092 inches to .052 inches, which meet the "Anheuser-Busch drop test" standard, or b) kegs having a twenty (20) liter capacity that are manufactured by Spartanburg Steel Products, Inc.


In consideration of the premises and of the mutual covenants and agreements of the parties as hereinbelow set forth, the parties have agreed as follows:


SECTION 1. PROCUREMENT OF KEGS, DELIVERY, AND ACCEPTANCE.


1.1. Purchase Agreement.


a. MicroStar will acquire from Brewing Company any kegs which Brewing Company now or hereafter may own and desire to make subject to this Agreement, provided that such kegs conform to the definition of "keg" set forth in this Agreement and are of a condition and quality acceptable to MicroStar. The purchase price for any and all kegs purchased from Brewing Company shall be separately agreed upon in writing after verification of condition and quality and the quantity of kegs shall be subject to acquisition audit verification by MicroStar. The final acquisition inventory of kegs shall be approved in writing by authorized representatives of MicroStar and Brewing Company. Payment by MicroStar for the kegs so purchased from


2


Brewing Company shall be made when MicroStar has verified that such kegs may be sold and assigned to MicroStar free of any lien or encumbrance and the subject kegs have been physically marked by MicroStar with its proprietary markings, which shall be done at Brewing Company's facilities in lots no smaller than one hundred (100) kegs. Placement of physical markings shall be performed by MicroStar's field personnel as expeditiously as possible and shall be initiated no more frequently than once per month, until all kegs so sold by Brewing Company to MicroStar shall have been identified. An appropriate Bill of Sale identifying the kegs acquired by MicroStar shall be executed and delivered contemporaneously with the payment by MicroStar.


b. In the event that Brewing Company does not presently own kegs (as herein defined) or does not own a sufficient quantity of kegs to conduct and/or expand its business, or in the event that Brewing Company does not desire to subject its entire existing inventory of owned kegs to this Agreement, Brewing Company shall provide MicroStar with a projection of its anticipated keg requirements during a ninety (90) day time period commencing thirty (30) days after the effective date of this Agreement. Contemporaneously, with the furnishing of such ninety (90) day projection, Brewing Company shall submit its initial request for deliveries of kegs and MicroStar will thereupon obtain and provide the requisite quantity of kegs in accordance with the provisions of Section 2.2 hereof.


1.2. Incidents of Ownership and Control


All kegs purchased by MicroStar from Brewing Company and/or otherwise obtained and provided by MicroStar for purposes of this Agreement shall be owned and subject to the exclusive right of control and disposition of MicroStar, subject however to the rights of Brewing Company hereunder as a licensee of the right to use such kegs for the purposes and in the manner contemplated by this Agreement.


SECTION 2. LICENSE OF KEG USE


2.1 Basic Use Fee


Brewing Company shall pay a use fee of fifteen dollars ($15.00) per keg, per filling, which shall be invoiced and payable on net thirty (30) day terms for each keg delivered to the Brewing Company location(s) designated by Brewing Company. With respect to kegs so utilized by Brewing Company which are filled by Brewing Company and delivered to the wholesalers identified in Exhibit "A" hereto (whose proximity of location to Brewing Company facilitates MicroStar's retrieval administration) the use fee shall be adjusted by rebate or credit to Brewing Company in the amount of seven and 50/100ths dollars ($7.50) per keg. In the event Brewing Company currently incurs no freight expense for the return of kegs from certain wholesalers identified on Exhibit "A" and if Brewing Company further agrees to continue to directly assume all cost of freight (if any) for the return of all kegs from such specific wholesaler(s), Brewing Company may designate up to three (3) wholesalers from among those listed on Exhibit "A" with respect to whom Brewing Company will assume any and all freight expenses associated with the shipment of empty kegs from such wholesaler(s) to Brewing Company. For each full keg sold by Brewing Company to such designated local wholesaler, the applicable adjustment by rebate or credit to Brewing Company will be ten dollars ($10.00) per


KEG MANAGEMENT AGREEMENT
Page 2


3


keg (resulting in an effective use fee to Brewing Company hereunder of five dollars ($5.00) per keg). With respect to kegs used by Brewing Company in on-site pub operations, the use fee shall be five dollars ($5.00) per keg, per filling. Invoices for such fees will be based upon the monthly report of sales submitted by Brewing Company to applicable state authorities in relation to its on-site pub operations, a copy of which shall be furnished to MicroStar at the time such report is filed. The use fee is subject to an increase of up to ten percent (10%) during any given twelve (12) consecutive month time period in the event of an increase of twenty-five percent (25%) or more in national or applicable regional trucking charges incurred by MicroStar in relation to the performance of this Agreement during any such twelve (12) consecutive month time period. In the event that the use fee hereunder is increased by more than ten percent (10%) during any such twelve (12) consecutive month time period, Brewing Company shall have the right to cancel this Agreement and to purchase the kegs covered hereby in accordance with the provisions of Section 7.4 hereof.


2.2 Delivery of Kegs per Brewing Company's Requirements


Brewing Company shall notify MicroStar of Brewing Company's specific keg delivery date requirements by written notice, including facsimile transmittal or other notification arrangements approved in writing by Brewing Company and MicroStar, to be received not less than thirty (30) days prior to Brewing Company's requested delivery dates. Such notice shall include a specification of all requested keg quantities in lots of two hundred (200) or more. MicroStar will forward a written confirmation of its receipt of Brewing Company's notice of requirements by facsimile or U.S. Mail prior to the close of the business day following the date of MicroStar's receipt of such notice. Brewing company shall use its best efforts to ensure that Brewing Company's inventory of MicroStar kegs does not exceed Brewing Company's actual thirty (30) day requirements. In the event that Brewing Company's requirements at any time or for any reason (e.g. seasonal product demand, business expansion, etc.) will exceed its most recently specified prior requirements by twenty percent (20%) or more and/or relate to deliveries to new locations of Brewing Company or wholesalers, Brewing Company shall be required to provide ninety (90) days advance written notice to MicroStar of such requirements. MicroStar shall endeavor to effectuate the delivery of the requested kegs to Brewing Company at its designated locations within the continental United States in accordance with Brewing Company's timely notification of keg requirements. Delivery shall be deemed to conform to the requirements of this Agreement if the actual time of delivery is within seventy-two (72) hours prior or subsequent to the specifically requested delivery time and the quantities so delivered are within a ten percent (10%) variance of the specifically requested quantity of kegs. In the event that MicroStar is unable to meet the foregoing requirements of a conforming delivery to Brewing Company, MicroStar shall impose no use fee with respect to any such non-conforming keg shipment.


SECTION 3. ARRANGEMENTS AND AGREEMENTS WITH WHOLESALERS


3.1. Notification and Compliance Obligations of Brewing Company


a. Brewing Company will join with MicroStar in the issuance of a notice to all wholesalers to whom Brewing Company delivers product in kegs subject to this Agreement that


KEG MANAGEMENT AGREEMENT
Page 3


4


such kegs shipped by Brewing Company are owned by MicroStar as of the effective date specified in such notice (being the date on which keg ownership was acquired by MicroStar hereunder). Such notice will further evidence the authority of MicroStar to collect and administer the deposits required to be made by wholesalers in accordance with this Agreement, to perform audits as contemplated by this Agreement, and to retrieve all kegs delivered to the wholesaler. The form of notice of terms and conditions applicable to wholesalers is attached hereto as Exhibit "B" and is intended to apprise wholesalers of the rights and responsibilities of MicroStar pursuant to this agreement and to express and evidence the agreement of wholesalers to the specified terms and conditions applicable to wholesalers.


Brewing Company will require in pertinent negotiations and agreements with its wholesalers that all wholesalers agree to remit to MicroStar a security deposit based upon the amount of fifteen dollars ($15.00) per keg, to be billed by and paid to MicroStar to cover the loss (based on a charge of one hundred twenty-five dollars ($125.00) per keg) of any keg owned by MicroStar which cannot be located by such wholesaler. As set forth in the form of notice of terms and conditions attached as Exhibit "B", wholesalers shall be required to acknowledge that periodic charges to and withdrawals from the security deposit will be made by MicroStar for kegs which cannot be located and that credit memos will be issued whenever kegs are returned and whenever kegs previously classified as lost are located. Wholesalers will be invoiced in the amount of $125.00 as a "loss" call whenever any loss is charged to the deposit and will receive a credit memo and refund of a previously billed lost keg charge whenever such "lost" keg for which a loss charge was made is located and returned.


b. Pursuant to the notice of terms and conditions to wholesalers, all wholesalers shall be required to provide a monthly written report of movement of MicroStar kegs in a form prescribed by MicroStar, including inventory by brewer (including Brewing Company and any other brewers contracting with MicroStar who deliver product to the affected wholesaler), empty kegs on hand and kegs in the retail system. Wholesalers shall also agree to respond to weekly verbal inquiries by MicroStar representatives concerning the extent of empty MicroStar kegs in the wholesaler's system. MicroStar shall be authorized to conduct periodic audits of the wholesaler's inventory of MicroStar kegs, including kegs in the retail system, which audits will be performed either quarterly or semi-annually, depending upon the extent of the wholesaler's inventory and any discrepancies ascertained as a result of prior audits, etc.


c. In the event that a wholesaler to whom Brewing Company delivers product fails to remit the security deposit of fifteen dollars ($15.00) per keg to MicroStar within ninety (90) days after MicroStar's date of invoice for such deposit, then Brewing Company agrees to promptly issue Brewing Company's own invoice to the affected wholesaler and to use reasonable efforts to collect the applicable deposit and remit the same to MicroStar.


SECTION 4. TERM AND EXCLUSIVITY OF AGREEMENT


4.1. Term of Agreement


KEG MANAGEMENT AGREEMENT
Page 4


5


This Agreement shall be for an initial term of five (5) years. Upon the expiration of the initial term the parties agree to negotiate in good faith in an effort to conclude mutually acceptable terms for continuation of the arrangements effectuated by this Agreement.


4.2 Exclusivity of Arrangements


Except in the instance of Brewing Company's retention of any pre-existing owned keg inventory for its own local market use, during the initial and any extended term of this Agreement, Brewing Company shall use MicroStar as the exclusive source of all beer kegs utilized in its brewing operation. Without limitation of the foregoing, Brewing Company agrees that during the term of this agreement or any extension hereof, Brewing Company shall not conclude or enter into any agreement or understanding with any third-party regarding sale of any of its Sankey kegs or regarding the purchase, lease or licensing of any kegs (whether of the Sankey type or otherwise) for use in Brewing Company's business.


SECTION 5: CLEANING OF KEGS


5.1. Cleaning Responsibilities of Brewing Company


Brewing Company acknowledges the responsibility to clean all kegs delivered to Brewing Company by MicroStar in accordance with the minimum washing standards for either a sterilizing sequence (steam) or a sanitizing sequence (oxine) and to implement the quality control checks prescribed by MicroStar, as specifically set forth in Exhibit "C" hereto.


SECTION 6: INFORMATION AND RECORDS/ACCOUNTING PROCEDURES


6.1. Responsibilities of Brewing Company


During the term of this Agreement, Brewing Company shall provide MicroStar with copies of all bills of lading from all of its brewery locations for all draft beer shipments to wholesalers within twenty-four (24) hours of the time of shipment. Additionally, Brewing Company shall maintain accurate records reflecting monthly beginning and ending inventories of kegs, keg locations and verification of deliveries of kegs from MicroStar to Brewing Company and of all deliveries to wholesalers, and shall provide copies of such records to MicroStar on a monthly basis. Brewing Company agrees to report all requisite information on such forms as MicroStar may from time-to-time prescribe and furnish for such purposes.


Brewing Company shall not utilize any MicroStar-owned kegs in its operations which are not specifically subject to this agreement. Brewing Company shall be charged the sum of one hundred twenty-five dollars ($125.00) per keg for any keg subject to this agreement which an audit substantiates to have been lost while under Brewing Company's control and the sum of five hundred dollars ($500.00) per keg per occurrence in the event of any instances of unauthorized use of MicroStar kegs in Brewing Company's operations which are not subject to this agreement.


6.2. Responsibilities of MicroStar


KEG MANAGEMENT AGREEMENT
Page 5


6


MicroStar shall provide to Brewing Company such information and records as may be appropriate to substantiate all use fees, and all charges and credits associated with the deposit arrange ...