Exhibit 10.39
SETTLEMENT AND RELEASE AGREEMENT
This Settlement and Release Agreement (“Agreement”) is between Portland Brewing
Company (“PBC”), Pyramid Breweries, Inc. (“PMID”) and The United States
Department of the Treasury- Alcohol and Tobacco Tax and Trade Bureau (“TTB”).
Recitals
     A. TTB recently conducted audits of PMID and PBC. In connection with the
audits, TTB asserted that all beer produced at 2730 Northwest 31st Avenue,
Portland, Oregon during the period January 1, 2005 through May 31, 2006 was
attributable to and produced by PMID. Consequently, the TTB has concluded that,
during the period January 1, 2005 through May 31, 2006 (the “Audit Period”), PBC
overpaid federal excise taxes on beer produced at the Oregon Brewery under
BR-OR-POR-2, and that PMID has underpaid federal excise taxes under
BR-OR-PYR-15000. A Notice of Proposed Assessment advising of tax and interest
due in the amount of $2,145,259.33 was issued to PMID (the “Assessment”). The
management letter directed to PBC stated that PBC had overpaid federal excise
taxes during the same period in the principal amount of $1,011,067.50 (the
“Overpayments”).
     B. PMID and PBC have agreed that PBC will request that TTB administratively
apply the principal amount of the Overpayments and any interest accrued thereon
to reduce the Assessment.
     C. After administrative application of the Overpayments to the Assessment,
the remaining principal amount of excise taxes that TTB has asserted that PMID
still owes for the period covered by the audit is $1,134,191.83.
     D. TTB and PMID have entered into an Offer-in-Compromise agreement pursuant
to which PMID will pay to TTB $700,000 in full satisfaction of the Assessment
and the independent assessment related to PMID’s alleged failure to pay proper
excise taxes at its Berkeley, California brewery, BR-CA-PYR-1, during the Audit
Period, and TTB will release PMID for any excise tax liability, and any civil or
criminal penalties under the Federal Alcohol Administration Act that are known
or reasonably knowable to TTB.
     E. By letter dated September 28, 2006 PMID gave notice of intent to
terminate the contract brewing arrangement between PBC and PMID. TTB, PBC and
PMID will cooperate with respect to state and federal licensure, approvals and
other regulatory matters until such time as PMID has such federal and state
licenses and approvals as it deems necessary to conduct its business. The period
between the end of the Audit Period and PBC’s delivery of a Notice of
Discontinuance pursuant to 27 CFR 25.85 will be referred to herein as the
“Transition Period.”
     F. TTB, PMID and PBC wish to enter into this Agreement to evidence the
application of the Overpayments and the release of PBC from any excise tax
liability, and any civil or criminal penalties under the Federal Alcohol
Administration Act for the Audit Period and the Transition Period.

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Agreement
SECTION 1 APPLICATION OF OVERPAYMENTS

  1.1.   Application of Overpayments. TTB will apply the full amount of the
Overpayments and any interest due thereon to the amount set forth in the
Assessment. PBC will not be required to file a Claim for Refund (including but
not limited to amended excise tax returns) or any other application with TTB in
order to obtain the administrative application of the Overpayment to the
Assessment.     1.2.   Relinquishment of Remedy. Upon the application of the
Overpayments to the Assessments as set forth in Section 1.1 above, PBC
relinquishes any right it may have to make a claim under IRC Section 6511(a) or
otherwise apply for a credit or refund of the Overpayments and any interest
thereon.

SECTION 2 TRANSITION

  2.1.   PMID Applications. During the Transition Period, PMID will pursue all
required licenses and approvals from TTB and all state and local regulatory
authorities to allow PMID to conduct its business as the sole brewer operating
at 2730 NW 31st Ave., Portland, Oregon (the “Premises”). During the Transition
Period, TTB will cooperate with PMID’s efforts to obtain all necessary licenses
and approvals (Certificates of Label Approval, Formulas, etc.) and will not use
the lack of such approvals during the Transition Period to interfere with PMID’s
continued operations so long as PMID continues in good faith to pursue all
required licenses and approvals.     2.2.   Notice of Issuance. Within 5
business days of the final issuance of all licenses and approvals that PMID
deems necessary to conduct its business at the Premises, PMID will deliver to
PBC and TTB written notice that such licenses and approvals have been obtained.
    2.3.   Notice of Discontinuance. Within 5 business days of PBC’s receipt of
PMID’s notice under Section 2.2, PBC will submit to TTB a Notice of
Discontinuance on Form 5130.10 pursuant to 27 CFR 25.85 in relation to PBC’s
activities at the Premises (“Notice of Discontinuance”). Upon TTB’s approval of
the Notice of Discontinuance, PBC will file a Final Report on Form 5130.9
(“Final Report”).     2.4.   Close Out Investigation. TTB reserves the right to
conduct a final close out investigation of PBC’s operations at the Premises
after receipt of the Notice of Discontinuance and Final Report.     2.5.  
Continuing Covenant. PBC covenants that it will retain in its records production
and excise tax payment documentation for the Audit Period for a period of three
years after the date of this Agreement.

    SECTION 3 RELEASE OF PORTLAND BREWING COMPANY

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  3.1.   Release of PBC. Effective upon execution of this Agreement, TTB forever
releases, discharges and acquits PBC from any excise tax liability for the Audit
Period and the Transition Period and any civil or criminal penalties to the
extent of TTB’s authority to release claims under 26 USC 7121, 26 USC 7122, 27
CFR 70.482 and 27 CFR 70.483 for any alleged civil, criminal, administrative,
compliance, or other violations during the Audit Period and the Transition
Period based on the circumstances known or knowable to TTB as of the date of
this Agreement. This release is intended to release PBC to the full extent that
PMID is released under the Offer-in-Compromise Agreement between TTB and PMID.  
  3.2.   Limitation. Nothing in this Section 3 shall be construed as a release
by TTB of any violations relating to consumer safety arising from the Federal
Food, Drug & Cosmetics Act and related statutes during the Audit Period or
Transition Period.

SECTION 4 GENERAL

  4.1.   Binding Effect. This Agreement is binding on the parties and their
respective heirs, personal representatives, successors, and permitted assigns,
and will inure to their respective benefits.     4.2.   Further Assurances. The
parties will sign other documents and take other actions reasonably necessary to
further effect and evidence the agreements set forth in this Agreement.     4.3.
  Entire Agreement. This Agreement and the Offer-In-Compromise contain the
entire understanding of the parties regarding the subject matter of this
Agreement and supersede all prior and contemporaneous negotiations and
agreements, whether written or oral, between the parties with respect to the
subject matter of this Agreement.     4.4.   Signatures. This Agreement may be
signed in counterparts. A fax transmission of a signature page will be
considered an original signature page. At the request of a party, the other
party will confirm a fax-transmitted signature page by delivering an original
signature page to the requesting party.

[signature page to follow]

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Dated effective: November 10, 2006

     
 
  Portland Brewing Company
 
   
 
  /s/ R. Scott MacTarnahan
 
   
 
  By: R. Scott MacTarnahan
 
  Its: President
 
   
 
  Pyramid Breweries, Inc.
 
   
 
  /s/ Michael O’Brien, CFO, Pyramid Breweries, Inc.
 
   
 
  For: Scott Barnum
 
  Its: President
 
   
 
  Alcohol and Tobacco Tax and Trade Bureau
 
 

 
 
   

         
 
  By:    
 
       
 
  Its:    
 
       

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