-----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, KNaRHKZT7Pli2uugA6vT6NxlvVfGORp06rmypVjwVITRE8k2M/f/2/t3Qt8netO1 BBjEndJhgziqxj6VbLnxzQ== 0000892569-97-000066.txt : 19970114 0000892569-97-000066.hdr.sgml : 19970114 ACCESSION NUMBER: 0000892569-97-000066 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 29 FILED AS OF DATE: 19970113 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEVERAGE WORKS INC CENTRAL INDEX KEY: 0001009589 STANDARD INDUSTRIAL CLASSIFICATION: MALT BEVERAGES [2082] IRS NUMBER: 954550937 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-11789 FILM NUMBER: 97504589 BUSINESS ADDRESS: STREET 1: 2431 WEST COAST HIGHWAY STREET 2: SUITE 204 CITY: NEWPORT BEACH STATE: CA ZIP: 92663 BUSINESS PHONE: 3106425643 MAIL ADDRESS: STREET 1: 9800 S SEPULVEDA BLVD STREET 2: SUITE 720 CITY: LOS ANGELES STATE: CA ZIP: 90045 SB-2/A 1 AMENDMENT NO. 2 AS FILED JANUARY 13, 1997 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 13, 1997 REGISTRATION NO. 333-11789 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 AMENDMENT NO. 2 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 BEVERAGE WORKS, INC. (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) CALIFORNIA 2000 95-4550937 (STATE OF JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
9800 SOUTH SEPULVEDA BLVD., SUITE 720 LOS ANGELES, CALIFORNIA 90045 (310) 642-5643 (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES) LYLE MAUL 9800 SOUTH SEPULVEDA BLVD., SUITE 720 LOS ANGELES, CALIFORNIA 90045 (310) 642-5643 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) COPIES TO: CHARLES J. HECHT, ESQ. RICHARD F. DAHLSON, ESQ. HECHT & STECKMAN, P.C. JACKSON & WALKER, L.L.P. 60 EAST 42ND STREET, SUITE 5101 901 MAIN STREET, SUITE 6000 NEW YORK, NEW YORK 10165-5101 DALLAS, TEXAS 75202-3797
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. CALCULATION OF AMENDED REGISTRATION FEE - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------- PROPOSED PROPOSED MAXIMUM MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED(1) PER SECURITY(2) OFFERING PRICE FEE - --------------------------------------------------------------------------------------------------------------------------- Common Stock, no par value(3)............................. 1,725,000 $ 6.00 $ 10,350,000 $ 3,568.97 - --------------------------------------------------------------------------------------------------------------------------- Class A Warrants to purchase Common Stock(4).............. 1,725,000 $ 0.15 $ 258,750 $ 89.22 - --------------------------------------------------------------------------------------------------------------------------- Common Stock, no par value, underlying Class A Warrants... 1,725,000 $ 6.00 $ 10,350,000 $ 3,568.97 - --------------------------------------------------------------------------------------------------------------------------- Common Stock, no par value, offered by Selling Securityholders......................................... 728,229 $ 6.00 $ 4,369,374 $ 1,506.68 - --------------------------------------------------------------------------------------------------------------------------- Common Stock, no par value, underlying Class E Warrants offered by Selling Securityholders...................... 892,000 $ 6.00 $ 5,352,000 $ 1,715.17 - --------------------------------------------------------------------------------------------------------------------------- Common Stock, no par value, underlying Class B Warrants offered by Selling Securityholders...................... 70,000 $ 6.00 $ 420,000 $ 144.83 - --------------------------------------------------------------------------------------------------------------------------- Common Stock, no par value, in Representative's Purchase Option.................................................. 150,000 $ 7.20 $ 1,080,000 $ 372.41 - --------------------------------------------------------------------------------------------------------------------------- Representative's Warrants in Representative's Purchase Option.................................................. 150,000 $ 0.18 $ 27,000 $ 9.31 - --------------------------------------------------------------------------------------------------------------------------- Common Stock, no par value, underlying Warrants in Representative's Purchase Option........................ 150,000 $ 7.20 $ 1,080,000 $ 372.41 - --------------------------------------------------------------------------------------------------------------------------- Total...................................................................................... $ 33,260,129 $ 11,347.91 - --------------------------------------------------------------------------------------------------------------------------- Amount previously paid...................................................................................... $ 17,252.48 - --------------------------------------------------------------------------------------------------------------------------- Amount due.................................................................................................. $ 0.00 - --------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------
(1) Pursuant to Rule 416 under the Securities Act of 1933, this Registration Statement covers such additional indeterminate number of shares of Common Stock as may be issued by reason of adjustments in the number of shares of Common Stock pursuant to anti-dilution provisions contained in the Representative's Purchase Option and the Class A Warrant, Class B Warrant and Class E Warrant Agreements. (2) Estimated for purposes of computing the registration fee in accordance with Rule 457(c) and Rule 457(g) under the Securities Act of 1933. (3) Includes 225,000 shares of Common Stock issuable pursuant to the Representative's over-allotment option. (4) Includes 225,000 Class A Warrants issuable pursuant to the Representative's over-allotment option. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 CROSS REFERENCE TABLE
ITEM INFORMATION REQUIRED IN PROSPECTUS LOCATION OR CAPTION NO. UNDER FORM SB-2 IN PROSPECTUS - ---- ------------------------------------------- ------------------------------------------- 1 Front of Registration Statement and Outside Front Cover Page of Prospectus........... Outside Front Cover Page 2 Inside Front and Outside Back Cover Pages of Prospectus............................ Inside Front Cover Page; Outside Back Cover Page 3 Summary Information and Risk Factors....... "Prospectus Summary"; "Risk Factors" 4 Use of Proceeds............................ "Use of Proceeds" 5 Determination of Offering Price............ "Underwriting" 6 Dilution................................... "Dilution" 7 Selling Security Holders................... Alternate Pages 8 Plan of Distribution....................... "Underwriting" 9 Legal Proceedings.......................... "Business -- Legal Proceedings" 10 Directors, Executive Officers, Promoters and Control Persons...................... "Management" 11 Security Ownership of Certain Beneficial Owners and Management.................... "Principal Stockholders" 12 Description of Securities.................. "Description of Securities" 13 Interest of Named Experts and Counsel...... "Experts" 14 Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. "Undertakings" (Part II) 15 Organization within Last Five Years........ "Management -- Certain Transactions" 16 Description of Business.................... "Business" 17 Management's Discussion and Analysis or Plan of Operations....................... "Management's Discussion and Analysis of Financial Condition and Results of Operations"; "Business -- Plan of Operation/Business Strategy" 18 Description of Property.................... "Business -- Properties" 19 Certain Relationships and Related Transactions............................. "Management -- Certain Transactions" 20 Market for Common Equity and Related Stockholder Matters...................... "Risk Factors -- Shares Available for Future Sale; -- Dividend Policy"; "Description of Securities -- Dividends" 21 Executive Compensation..................... "Management -- Executive Compensation" 22 Financial Statements....................... "Selected Financial Data"; "Financial Statements" 23 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure............................... Not Applicable
3 EXPLANATORY NOTE This Registration Statement covers the registration of (i) 1,500,000 shares of Common Stock and 1,500,000 Class A Warrants ("Class A Warrants") to be offered by the Company, plus 225,000 shares of Common Stock and 225,000 Class A Warrants available from the Company pursuant to the Underwriters' over-allotment option (the "Offering"); (ii) 1,500,000 shares of Common Stock, plus 225,000 shares of Common Stock pursuant to the Underwriters' over-allotment option, issuable upon exercise of the Class A Warrants ("Class A Warrant Shares"); (iii) 892,000 shares of Common Stock issuable upon exercise of the Class E Warrants issued by the Company originally in October 1995 as amended December 1996 ("Class E Warrant Shares"); (v) 728,229 shares of Common Stock previously issued by the Company ("Issued Shares"); (vi) 70,000 shares of Common Stock issuable upon exercise of Class B Warrants issued by the Company in April 1996 and December 1996 ("Class B Warrant Shares"). The Issued Shares (the "Selling Shareholders"), the Class E Warrant Shares (the "Class E Warrantholders"), the Class B Warrant Shares (the "Class B Warrantholders") are being offered by certain holders of such securities (collectively the "Selling Securityholders") and not for the account of the Company. See "Underwriting." Following the Prospectus included in this Registration Statement are certain pages of the Prospectus relating to the Issued Shares, the Class E Warrant Shares, the Class B Warrant Shares, including alternate front and back cover pages, an alternate "The Offering" section of the "Prospectus Summary," and sections entitled "Concurrent Sales by Company" and "Selling Securityholders." All other sections of the Prospectus for this Offering, other than "Underwriting," are used in the Prospectus relating to the Issued Shares, the Class E Warrant Shares and Class B Warrant Shares. All references in this Prospectus to the "Offering" or "this Offering" will be changed to the "Company Offering" in the Prospectus relating to the Issued Shares, the Class E Warrant Shares, and the Class B Warrant Shares. In addition, cross-references in this Prospectus shall be adjusted to refer to the appropriate alternate Prospectus pages. 4 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION DATED JANUARY 13, 1997 1,500,000 SHARES OF COMMON STOCK 1,500,000 CLASS A WARRANTS BEVERAGE WORKS, INC. Beverage Works, Inc., a California corporation ("Company"), is offering ("Offering") 1,500,000 shares ("Shares") of its common stock, no par value ("Common Stock") and 1,500,000 Class A Warrants. See "Description of Securities." The Shares and Class A Warrants are purchased separately and will be transferable immediately following completion of this Offering. Each Class A Warrant entitles the holder to purchase one share of the Company's Common Stock at an exercise price of $6.00, subject to adjustment during the five-year period commencing from the date of this Prospectus. At any time that the Class A Warrants are exercisable, the Class A Warrants are also subject to redemption by the Company on not less than 30 days notice at $0.05 per Class A Warrant, provided the closing bid price of the Common Stock (or the average of the last reported sales price if the Common Stock is traded on a national securities exchange) exceeds $12.00 per share (200% of the Shares' offering price) for ten consecutive trading days ending within five days prior to the date on which notice is sent. This Prospectus also relates to the shares of Common Stock issuable upon exercise of the Class A Warrants. See "Description of Securities." Prior to the Offering, there has been no public market for the Common Stock or the Class A Warrants of the Company. The price and other terms of the Offering have been determined by negotiation between the Company and First London Securities Corporation, as Representative of the Underwriters. See "Underwriting." THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AND "DILUTION." THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- ESTIMATED UNDERWRITING MAXIMUM DISCOUNTS AND PROCEEDS TO PRICE TO PUBLIC COMMISSIONS(2) COMPANY(3) - ------------------------------------------------------------------------------------------------ Per Share................................. $6.00 $0.60 $5.40 - ------------------------------------------------------------------------------------------------ Per Warrant............................... $0.15 $0.015 $0.135 - ------------------------------------------------------------------------------------------------ Total(1).................................. $9,225,000 $922,500 $8,302,500
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company has granted to the Representative a 30-day option to purchase up to 225,000 additional Shares and 225,000 additional Class A Warrants solely to cover over-allotments, if any. If the Representative exercises its option in full, the Price to Public will total $10,608,750, Underwriting Discounts and Commissions will be $1,060,875 and Proceeds to Company will be $9,547,875 (before deduction of expenses -- see Note (3) below). See "Underwriting." (2) The Company has agreed to pay the Representative a non-accountable expense allowance equal to 3% of the gross proceeds of the Offering to the Company. The Company has also sold to the Representative an option to purchase 150,000 shares of Common Stock at $7.20 per share and 150,000 warrants to purchase Common Stock at $7.20 per share exercisable for a period of four years commencing one year from the date of this Prospectus ("Representative's Purchase Option"). The Company has agreed to indemnify the Underwriters for certain liabilities, including liabilities under the Securities Act of 1933, as amended ("1933 Act"). See "Underwriting." (3) Before deduction of expenses payable by the Company estimated at $756,002. The Shares and Class A Warrants are offered by the several Underwriters named herein when, as and if delivered to and accepted by the Underwriters and subject to their right to reject any order in whole or in part. It is expected that delivery of certificates representing the Shares and Class A Warrants will be made against payment therefor on or about , 1997. ------------------------ FIRST LONDON SECURITIES CORPORATION The date of this Prospectus is , 1997 5 The Company is not a reporting company under the Securities Exchange Act of 1934. The Company intends to furnish its stockholders with annual reports containing financial statements audited by independent certified public accountants and such other reports as the Company deems appropriate. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 6 PROSPECTUS SUMMARY The following summary is qualified in its entirety and should be read in conjunction with the more detailed information and Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, all share and financial information in this Prospectus assumes no exercise of the Representative's over-allotment option to purchase up to 225,000 shares of Common Stock and 225,000 Class A Warrants, no exercise of any warrants or options previously issued by the Company or the Class A Warrants made in this Offering, no exercise of the Representative's Purchase Option to purchase up to 150,000 shares of Common Stock and 150,000 warrants and no exercise of stock options by employees and others to purchase up to 2,433,500 shares of Common Stock. See "Business," "Management -- Executive Compensation," "Description of Securities," "Management -- Incentive Stock Option Plan," "Management -- Nonqualified Stock Option Plan," "Management -- Director Compensation" and "Underwriting." THE COMPANY Beverage Works, Inc. ("the Company") was formed on August 2, 1995 as a California corporation, for the purpose of creating a multi-brand, multi-regional specialty beer company that is capable of assuming a leadership role in the increasingly consolidating, competitive craft brewing industry. Craft breweries are mostly small to medium sized independent brewing companies that generally use only traditional brewing processes and ingredients. These include regional specialty brewers, microbrewers and brewpub restaurants. The Company's growth strategy is distinctly different from most other companies in the craft brewing industry that have recently raised capital through initial public offerings. Rather than allocating resources and capital towards the development or improvement of a single local or regional brand and brewing facility, the Company's growth strategy focuses on acquiring a variety of existing regional brands with growth potential and existing production capacity, and/or entering strategic alliances with key industry players. The Company plans to allocate resources towards creating operating efficiencies by consolidating production capacity, sales and marketing operations, distribution channels, and effective multi-brand management. Thus the Company expects to achieve competitive strength and operating efficiencies in line with leaders in the craft brew industry, and use its capital to spur revenue growth by effectively marketing its portfolio of existing and new products and services in targeted local and regional markets nationwide. Where appropriate to its strategy, the Company will acquire and operate other specialty beverage companies and brewpub restaurants. See "Business -- Plan of Operation/Business Strategy." The Company has acquired one Southern California-based craft brewery and, as soon as practicable after the date of this Prospectus, the Company will have consummated the acquisition of an additional Southern California-based craft brewery and entered into a partnership with one Northern California-based brewery (the "Breweries"). The Company will market a total of 26 beer brands, a number of which have won awards, utilizing a combined brewing capacity among the Breweries of approximately 82,000 barrels per year. In addition, the Company will operate as a contract brewery for a number of brands owned by other brewers. See "Business -- Products" and "-- Breweries." The Company has acquired, in a stock for stock transaction, approximately 95% of the outstanding capital stock of Heritage Brewing Company ("Heritage" or "HBC") of Lake Elsinore, California, for 142,276 of the Company's Common Stock. See "Business -- Breweries -- Heritage Brewing Company." The Company has also entered into an agreement to acquire all of the outstanding capital stock of Orange Empire Brewing Company ("OEBC"), the parent of Riverside Brewing Company ("Riverside" or "RBC") of Riverside, California, effective upon the close of this Offering. RBC operates both a brewpub restaurant with a 5,000 barrel per year capacity, and a separate 35,000 barrel per year brewery. Under the terms of the Share Purchase Agreement, the Company will issue to the shareholders of OEBC 141,063 shares of Common Stock and, if certain operating criteria are obtained, an additional 155,000 shares of Common Stock. The Company has also entered into a Debt Exchange Agreement with certain debtholders of OEBC which provides that such debtholders agree to cancel approximately $644,000 of debt owned to them by OEBC in return for $301,000 cash, 24,125 shares of the Company's Common Stock and 50,000 warrants. The Company will issue, concurrently with the closing of the OEBC acquisition, 27,618 shares of Common Stock to two 3 7 former shareholders of OEBC for assuming $220,940 of the principal amount of a loan to OEBC by Riverside National Bank. The Company and OEBC will assume the balance of the loan in the approximate amount of $313,000. See "Business -- Breweries -- Riverside Brewing Company." BWI-St. Stan's, Inc. ("BWISS"), a wholly owned subsidiary of the Company, has entered into a partnership agreement with Prost Partners, L.P. ("Prost") forming BWI-Prost Partners (the "Partnership"), to own and operate St. Stan's Brewing Company ("St. Stan's") of Modesto, California. BWISS will own 51% of the capital and profits interest in the Partnership and will effectively control the business of the Partnership. As its capital contribution, BWISS will assume approximately $1,128,000 of the debt of Prost and contribute approximately $1,167,000 cash over the next 36 months. This cash contribution will be distributed to Prost. Prost will contribute all of its assets, including all of the operating assets of St. Stan's. The Company anticipates advancing $100,000 to $250,000 over the next twelve months to the Partnership for working capital and marketing. See "Use of Proceeds." Over the next three years, BWISS has the option to acquire Prost's interest in the Partnership by paying $2,205,000 plus any unpaid required capital contributions. See "Risk Factors -- St. Stan's Brewing Company Partnership" and "Business -- Breweries -- St. Stan's Brewing Company." Initially, the Company's profitability will be adversely affected as the result of its acquisition and financing strategies. The Company has incurred, and will continue to incur, substantial expense pursuant to its acquisition strategy. Until the consummation of the acquisition and partnership agreements concurrent with this Offering, the Company has limited influence on the operations of these companies, and is restricted in achieving certain operating efficiencies and income growth. Furthermore, until such time that a certain number of craft breweries have been acquired or joint ventured and functioning according to the Company's operating performance standards and consolidation and marketing strategies, the Company's profitability will be adversely affected. 4 8 THE OFFERING Securities Offered............... 1,500,000 shares of Common Stock, no par value (the "Shares") and 1,500,000 Class A Warrants to purchase Common Stock at an exercise price of $6.00 subject to adjustment. See "Description of Securities." Price per Share.................. $6.00 Price per Class A Warrant........ $0.15 Common Stock Outstanding Prior to the Offering(1)................ 1,670,453 Shares Class A Warrants Outstanding Prior to the Offering.......... None Common Stock to be Outstanding upon Completion of the Offering(1)(2)................... 3,170,453 Shares Class A Warrants to be Outstanding Upon Completion of the Offering......................... 1,500,000 Class A Warrants Use of Proceeds.................. Acquisition of Riverside Brewing Company, Formation of St. Stan's Partnership; Expansion of product lines; Marketing and sales; Repayment of notes and other indebtedness; Acquisition of capital equipment; Costs of consolidation of operations; Working capital. See "Use of Proceeds." Proposed Nasdaq Common Stock Symbol......................... Proposed Nasdaq Class A Warrant Symbol................. - --------------- (1) Includes 141,063 shares of Common Stock to be issued as soon as practical after this Offering to shareholders of OEBC pursuant to the Share Purchase Agreement, 10,000 shares of Common Stock to be issued under the Brewpub Management Agreement, 24,125 shares of Common Stock to be issued pursuant to the Debt Exchange Agreement, 60,000 shares of Common Stock to be issued to Brewery Leasing Company pursuant to the equipment lease agreement amendment and brewing equipment consulting agreement, and 27,618 shares of Common Stock to be issued to certain former OEBC shareholders to assume a portion of the Riverside National Bank Loan. Excludes up to 155,000 shares of Common Stock to be issued to shareholders of OEBC under the earnout provisions of the Share Purchase Agreement See "Business -- Breweries -- Riverside Brewing Company." Includes 30,000 shares of Common Stock to be issued pursuant to the tentative settlement agreement with Tamkin Capital Partners. See "Business -- Legal Proceedings." (2) Excludes 225,000 shares and 225,000 Class A Warrants issuable pursuant to the Underwriter's over-allotment option. See "Underwriting." 5 9 SUMMARY OF HISTORICAL AND PRO FORMA FINANCIAL INFORMATION The following summary of financial data is derived from and should be read in conjunction with the historical and pro forma financial statements of the Company, Orange Empire Brewing Company and the St. Stan's Brewery and Brewpub Operations, as listed on the "Index to Financial Statements" included elsewhere in this Prospectus. See also "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
HISTORICAL ---------------------------------------- PRO FORMA AUGUST 2, 1995 TO ----------------------------------- DECEMBER 31, NINE YEAR ENDED 1995 MONTHS ENDED DECEMBER 31, ----------------- SEPTEMBER 30, 1996 1995 ------------------ ------------ NINE (UNAUDITED) (UNAUDITED) MONTHS ENDED SEPTEMBER 30, 1996 ------------------ (UNAUDITED) STATEMENT OF OPERATIONS DATA: Net sales................... $ 195,552 $ 44,810 $ 3,903,084 $ 4,975,962 ========== ========== ========== ========== Net loss.................... $ (2,273,654) $ (548,761) $ (3,835,098) $ (2,496,317) ========== ========== ========== ========== Net loss per share.......... $ (0.85) $ (0.23) $ (1.13) $ (0.82) ========== ========== ========== ========== Common shares and equivalents outstanding... 2,687,359 2,362,806 3,384,390 3,059,837 ========== ========== ========== ==========
HISTORICAL ----------------------------------- PRO FORMA DECEMBER 31, ------------------ 1995 SEPTEMBER 30, 1996 ------------ ------------------ SEPTEMBER 30, 1996 (UNAUDITED) ------------------ (UNAUDITED) Working capital (deficiency)............... $ (1,573,444) $ 814,541 $ 3,637,337 Total assets............................... 2,473,429 2,665,591 14,124,210 Total liabilities.......................... 2,699,011 1,086,850 5,915,414 Stockholders' equity (capital deficiency) (225,582) 1,578,741 8,208,796
6 10 RISK FACTORS INVESTMENT IN THE COMPANY IS HIGHLY SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PRIOR TO THE PURCHASE OF ANY OF THE SECURITIES OFFERED HEREBY, A PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING THE FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED ELSEWHERE HEREIN: Absence of Combined Operating History and Future Combined Operating Results. The Company has acquired one of the Breweries, and, simultaneously with the completion of the Offering, the Company will consummate and finalize the transactions with the other two Breweries. Although each of the Breweries has been in business for some time, the Company has no operating history and there can be no assurance that the Company will be able to successfully integrate the Breweries, operations or assets of the Breweries, or of any other businesses it may subsequently acquire. See "Business -- Breweries." Furthermore, results of operations of the Breweries for the year ended December 31, 1995 and the nine-months ended September 30, 1996, which are reflected in the historical and pro forma financial statements included elsewhere herein, will likely significantly change as the Breweries are integrated into the Company's strategy. There can be no assurance that the actual results of operations will not reflect adverse developments in revenues, expenses or net loss of any of the Breweries. There can be no assurance that, following any transaction, the Company will be able to operate the Breweries or future brewery joint ventures or acquisitions on a profitable basis. Determination of Offering Price. The public offering prices of the Shares and Class A Warrants have been determined by negotiation between the Company and the Representative and is not necessarily related to the Company's asset value, net worth or other established criteria of value. See "Underwriting." No Prior Trading Market. Prior to this Offering, there has been no public market for the Company's Common Stock or Class A Warrants and there can be no assurance that an active market will develop or be sustained. The Company believes factors such as announcements of financial condition, liquidity, results of operations and new products by the Company and its competitors may cause the market price of the Common Stock and Class A Warrants to fluctuate, perhaps substantially. In addition, in recent years the stock market in general, and the securities of first time public issuers in particular, have experienced extreme price fluctuations. These broad market and industry fluctuations may adversely affect the market price of the Company's Common Stock and Class A Warrants. Ability to Manage Growth; Expansion Into New Markets. The Company's future success will depend in part on its ability to manage potentially rapid growth as it attempts to increase its production capacity and broaden distribution of its products to new markets. In attempting to expand distribution, the Company will be required to establish and manage relationships with distributors, retailers and consumers in numerous new markets. Consumer tastes may vary from market to market and, therefore, there can be no assurance that the Company will be successful in entering new markets or in maintaining its share of existing markets. Continued expansion of the Company's business will require recruiting and hiring several additional key employees, such as sales, brewery and brewpub managers, and will require further upgrading of the Company's information systems. There can be no assurance that the Company will be able to hire such persons when needed or on favorable terms, that any such new employees will be successfully assimilated into the Company's management, or that any such information systems upgrade would be successfully accomplished. Increased Competition for Specialty Beers. The beer industry is highly competitive. Although there is an overall trend of declining beer sales in the United States, domestic sales of craft beers have increased at an average annual rate of 39% from 1990 through 1994, and in 1995 sales for the U.S. craft-brewing industry grew by 50% (The New Brewer, May-June, 1996). The Company expects competition in the craft segment of the beer industry to increase as new craft brewers emerge and existing craft brewers expand their capacity. In addition, the large national domestic brewers are expected to increase efforts to position products in the craft brew category. Although the sale and consumption of craft brewed beer has increased dramatically in recent years, there can be no assurance that the demand for craft brewed beer will continue to grow at present rates or at all. Many of the Company's competitors, including national and regional domestic brewers, foreign brewers 7 11 and more established craft and microbrewers, have greater financial, production, distribution and marketing resources than the Company. Acquisitions; Need for Capital; Construction of New Regional Breweries. The Company's expansion strategy involves acquisitions, strategic alliances and internal growth. There can be no assurance that suitable acquisition candidates will be found, that acquisitions will be consummated on favorable terms or that any such acquisitions will be successfully integrated into the Company's operations. The Company intends to finance future acquisitions, if any, by using cash and debt or equity securities, including shares of its Common Stock. The Company will need additional debt or equity financing to implement its acquisition strategy. There can be no assurance that the Company will be able to obtain financing for such purposes on terms acceptable to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business -- Plan of Operation/Business Strategy." Successful expansion of the Company's production capacity will require careful management of various factors associated with the construction of new, or the expansion of existing, facilities, including site selection, local land use requirements, adequacy of municipal infrastructure, environmental uncertainties, possible cost estimation errors or overruns, construction delays, the availability or cost of financing and other factors, many of which are beyond the Company's control. The Company believes it will also be faced with various organizational challenges typically associated with commissioning new brewing facilities and increasing production to maximum designed capacity levels, as well as the challenges of establishing and maintaining management control over numerous geographically separated facilities. St. Stan's Brewing Company Partnership. BWI-St. Stan's, Inc. ("BWISS"), a wholly-owned subsidiary of the Company has entered into a partnership agreement with Prost Partners, L.P. ("Prost") doing business as St. Stan's Brewing Company to form the partnership BWI-Prost Partners ("Partnership"). In addition to the initial capital contribution to the Partnership, which includes assumption of approximately $1,128,000 of Prost's debt, BWISS is required to contribute to the Partnership approximately $1,167,000 over the next 36 months. In the event BWISS fails to make such payments, Prost may acquire BWISS' interest in the Partnership based on (i) the fair market value of the Partnership's tangible assets plus (ii) the Partnership's modified net income for the preceding twelve months multiplied by three less (iii) accrued and contingent liabilities. This amount would likely be substantially less than the amount contributed by BWISS. BWISS may buy-out Prost's interest in the Partnership by paying $2,205,000 within three years, plus any of the approximately $1,167,000 required additional capital contribution not made at the date of the buy-out ("Option"). If BWISS does not exercise the Option within three years, Prost has the first right to acquire BWISS's interest in the Partnership based on the fair market value of the Partnership's net assets. If Prost does not exercise its right of first refusal, BWISS shall have the right to buy-out Prost on the same terms. If neither Prost or BWISS exercises its right to buy-out the other partner, the Partnership shall be dissolved. There can be no assurance that the Company or BWISS will be able to make the Option payment or otherwise acquire Prost's interest in the Partnership. In such case, the assets of the Partnership will be liquidated, which BWISS may or may not desire, or be in the financial position, to purchase, and the return to BWISS will likely be substantially less than its contribution. In addition, the Partnership will obtain nearly all of its future working capital from BWISS, unless generated from the Partnership's sales. Prost has limited financial resources to provide the Partnership with meaningful working capital. The Partnership agreement provides for either partner to loan money to the Partnership. However, repayment of such loans shall be made only from the assets of the Partnership and the lending partner may not seek repayment from the other partner. As such, repayment of any advance made by BWISS to the Partnership, which Management anticipates will be between $100,000 and $250,000 over the next twelve months, is subject to the Partnership's assets exceeding its other liabilities. See "Business -- Breweries -- St. Stan's Brewing Company." Product Liability Risk. The Company's operations are subject to certain hazards and liability risks faced by all brewers, such as potential contamination of ingredients or products by bacteria or other external agents that may be wrongfully or accidentally introduced into products or packaging. The occurrence of such a problem could result in a costly product recall and serious damage to the Company's reputation for product 8 12 quality. There is no assurance that any such contamination will not occur and, if it does, the Company's business will likely be materially and adversely affected. Although the Breweries have product liability insurance, such insurance may not fully cover losses that may be incurred from such contamination and may have a material adverse effect on the Company because of the potential impact on market share and other factors. The Company's operations are also subject to certain injury and liability risks normally associated with the operation and possible malfunction of brewing and other equipment. Although the Company maintains insurance against certain risks under various general liability and product liability insurance policies, there can be no assurance that the Company's insurance will be adequate. Government Regulation; Taxation. The manufacture and sale of alcoholic beverages is regulated by both federal and state authorities. Brewery, wholesale and retail operations require various federal, state and local licenses, permits and approvals. Violation of such regulations can result in the loss or revocation of existing licenses. The loss or revocation of any existing licenses, permits or approvals, failure to obtain any additional or new licenses, permits or approvals or the failure to obtain approval for the transfer of any existing permits or licenses could have a material adverse effect on the ability of the Company to conduct its business. Because of the many and various state and federal licensing and permitting requirements, there is a risk that one or more regulatory authorities could determine that the Company has not complied with applicable licensing or permitting regulations or does not maintain the approvals necessary for it to conduct business within their jurisdictions. There can be no assurance that any such regulatory action would not have a material adverse effect upon the Company or its operating results. Congress and many state legislatures are considering various proposals to impose additional excise taxes on the production and sale of alcoholic beverages including beer. Any increase in the taxes imposed on beer can be expected to have an adverse impact on overall sales of such products. Each of the Breweries enjoy the benefit of the small brewers exemption from the $18 per barrel federal excise tax. See "Business -- Taxation." There is no assurance that federal regulators will not consider the Company as a single brewer and that it will not lose the small brewers exemption. Public Attitudes. The alcoholic beverage industry has become the subject of considerable societal and political attention in recent years due to increasing public concern over alcohol-related social problems, including drunk driving, underage drinking, and health consequences from the misuse of alcohol, including alcoholism. As an outgrowth of these concerns, the possibility exists that advertising by beer producers could be restricted, that additional cautionary labeling or packaging requirements might be imposed, or that there may be renewed efforts to impose increased excise or other taxes on beer sold in the United States. If beer consumption in general were to come into disfavor among domestic consumers, or if the domestic beer industry were subjected to significant additional governmental regulations, the Company's business could be materially adversely affected. Dependence on Management. The Company is dependent on the efforts of its management. See "Management." The Company intends to obtain key person life insurance, in an amount of $1 million each, covering its chief executive officer and chief financial officer. However, the Company cannot determine if, and there is no assurance that, such coverage, if available, would be sufficient to offset the financial loss to the Company in the event of the loss of such officers. History of Losses, Going Concern Considerations. The Company, since its inception, and its acquisition target, Orange Empire Brewing Company and its proposed partner, Prost Partners, L.P., doing business as St. Stan's Brewing Company, have, and continue to incur, substantial losses from operations. The report of the Company's certified public accountants includes an explanatory paragraph which expresses substantial doubt concerning the Company's and Orange Empire Brewing Company's ability to continue as a going concern. Management's plans are described elsewhere in this prospectus. See "Managements Discussion and Analysis of Financial Condition and Results of Operations." There are no assurances that Management's plans can be effected within a reasonable period of time. Dependence on Distributors. The Company sells its products to independent distributors for distribution to retailers and ultimately consumers. Sustained growth will require it to maintain such relationships and possibly enter into agreements with additional distributors. See "Business -- Distribution." No assurance can be given that the Company will be able to maintain or secure additional distributors on terms favorable to the 9 13 Company. The Company has distribution agreements with several distributors, including significant relationships with Southern Wine and Spirits of America, Inc. and Wine Warehouse. The loss of either or both as distributors would have a material adverse effect on the Company's ability to bring its products to market in California and therefore adversely effect its sales and results of operations. The Company's distribution agreements are generally terminable by the distributor on short notice. While these distribution agreements contain provisions regarding the Company's enforcement and termination rights, some state laws prohibit the Company from exercising these contractual rights. The Company's ability to maintain existing distribution agreements or enter new distribution agreements may be adversely affected by the fact that many distributors are reliant on one of the major beer producers for a large percentage of their revenue and, therefore, may be influenced by such producers to restrict distribution of the Company's products. Shares Eligible For Future Sale. The 1,500,000 Shares and 1,500,000 Class A Warrants being sold in the Offering (without giving effect to any exercise of the over-allotment option) will be freely tradeable unless acquired by affiliates of the Company. The market price of the Common Stock and Class A Warrants could be adversely affected by the sale of substantial amounts of Common Stock in the public market following this Offering. Of the Company's 3,170,453 shares of Common Stock that will be outstanding upon completion of this Offering, 942,224 shares are "restricted securities" under Rule 144 promulgated under the Securities Act of 1933, as amended (the "Securities Act"). Ordinarily, under Rule 144, a person who has held restricted securities for a period of two years may, every three months, sell in ordinary brokerage transactions or in transactions directly with a market maker an amount equal to the greater of one percent of the Company's then-outstanding Common Stock or the average weekly trading volume during the four calendar weeks prior to such sale. Rule 144 also permits the sale of shares without any quantity limitations by a person who is not an affiliate of the Company and has satisfied a three-year holding period. Of the 942,224 restricted shares, officers and directors hold an aggregate of 365,213 shares. Of the remaining restricted securities, 135,000 shares have demand registration rights which grant the holders the right to demand the Company to register these shares (thereby making such shares eligible for sale) within days of the date of this Prospectus, and shares will be eligible for sale under Rule 144 within days from the date of this Prospectus. Sale of Common Stock pursuant to Rule 144 or subsequently registered under the Securities Act may have a depressive effect on the market price of the Common Stock. The Company has reserved 2,433,500 shares of Common Stock for issuance to key employees and officers, pursuant to the Company's Nonqualified Stock Option Plan and Incentive Stock Option Plan, and options for 933,500 and 1,091,000, respectively, of such shares are granted as of the date of this Prospectus. See "Management -- Nonqualified Stock Option Plan" and " -- Incentive Stock Option Plan." The Company has further reserved 892,000 shares of Common Stock issuable upon exercise of the Class E Warrants, 70,000 shares of Common Stock issuable upon exercise of the Class B Warrants, 300,000 shares of Common Stock issuable upon exercise of the Representative's Purchase Option and Warrant, 80,583 shares of Common Stock issuable upon exercise of other outstanding options and warrants, and 155,000 shares for issuance to certain former stockholders of OEBC, subject to Riverside Brewing Company's achievement of certain financial goals. Other than the Company's Class A Warrants, and Class E Warrants and Class H Warrants, substantially all of these options and warrants have an exercise price that is substantially less than the offering price of the shares in this Offering. The existence of such options and warrants may hinder future equity financing by the Company. Further, the holders of such warrants and options may exercise them at a time when the Company would otherwise be able to obtain additional equity capital on terms more favorable to the Company. The 892,000 shares of Common Stock issuable upon exercise of the Class E Warrants and 70,000 shares of Common Stock issuable upon exercise of the Class B Warrants which are registered along with the Offering may not be sold or otherwise disposed of for 180 days after the effective date of the registration statement without the prior written consent of the Representative. Upon expiration of this period or if consent is given, such shares shall be freely transferable. See "Description of Securities" and "Underwriting." Holders of 728,229 shares of Common Stock (approximately 23% of the shares of Common Stock to be outstanding immediately following completion of this Offering or 21% if the over-allotment option is exercised in full) which are registered along with this Offering have agreed with the Company and the Representative 10 14 not to sell or otherwise dispose of any such shares of Common Stock for a period ranging from sixty days to thirteen months after the date of this Prospectus without the prior written consent of the Representative. Upon expiration of this period or if consent is given, such shares shall be freely transferable and may be sold. See "Description of Securities -- Registration Rights." The Company expects that it will issue shares of Common Stock and warrants to purchase Common Stock in connection with future acquisitions. Such shares of Common Stock, including shares issuable upon exercise of warrants, will become eligible for sale in the public market from time to time in the future. See "Business-Plan of Operation/Business Strategy -- Acquisitions." Dividend Policy. The Company has never paid dividends and does not anticipate paying dividends in the foreseeable future. See "Description of Securities -- Dividends." Preferred Stock Authorized. The Company's Articles of Incorporation authorizes the issuance of 5,000,000 shares of preferred stock which rights, preferences and privileges are to be determined by the Company's Board of Directors. Although the Company has no intention at the present to issue any preferred stock, the Company may issue and sell preferred stock which will likely have dividend, distribution and liquidation preferences senior to common shareholders and voting rights which may dilute the common shareholder voting rights. See "Description of Securities -- Preferred Stock." Effect of Anti-Takeover Provisions. Certain provisions of the Company's Articles of Incorporation, By-Laws and certain executive employment agreements could, together or separately, discourage potential acquisition proposals, delay or prevent a change in control of the Company, and limit the price that certain investors might be willing to pay in the future for the Company's Common Stock. In addition, the provisions of certain executive employment agreements and stock option agreements may result in economic benefits to the holders thereof upon the occurrence of a change in control. See "Management -- Employment Agreements," " -- Nonqualified Stock Option Plan," and " -- Incentive Stock Option Plan." Part of Net Proceeds From This Offering Not Specifically Allocated. Approximately 24% of the net proceeds which are to be derived from this Offering are allocated to working capital reserves, and their uses have not been specifically identified by Management. These proceeds will be applied to cover negative cash flow from operations and as business exigencies arise, none of which Management may presently anticipate. Decisions as to the application of these funds will be made without shareholder input; thus, investors in this offering will be entrusting this portion of their funds to Management without any commitment as to their use. See "Use of Proceeds." Business and Revenues of Company are Seasonal in Nature. The Company's business is seasonal in nature and is subject to economic fluctuations. As a result of this seasonality, the Breweries have historically reported lower sales and larger losses in the first and second quarters and higher sales and smaller losses in the third and fourth quarters. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Inability to Exercise Class A Warrants May Result In Loss of Value In Class A Warrants. The Company must have an effective registration statement on file with the Commission before any Class A Warrant may be exercised or redeemed. It is possible that the Company may be unable to cause a registration statement covering the Common Stock underlying the Class A Warrants to be effective. It is also possible that the Class A Warrants could be acquired by persons residing in states where the Company is unable to qualify the Common Stock underlying the Class A Warrants for sale. In either event the Class A Warrants may expire unexercised, which would result in the holders losing all of the value of the Class A Warrants. See "Description of Securities -- Class A Warrants." Immediate and Substantial Dilution Will Be Suffered By Investors In This Offering. Purchasers of Shares will suffer an immediate, substantial dilution of approximately 77% in the net tangible book value of their shares of Common Stock since the purchase price of the Shares substantially exceeds the current tangible book value per share of Common Stock. See "Dilution." Disclosure Relating to Penny Stocks. The Securities may be subject to the "penny stock rules" adopted pursuant to Section 15(g) of the Securities Exchange Act of 1934. The "penny stock rules" apply to companies whose common stock trades at less than $5.00 per share or which have a tangible net worth of less 11 15 than $5,000,000 ($2,000,000 if the Company has been operating for three or more years). Such rules require, among other things, that brokers who trade "penny stock" to persons other than "established customers" complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade "penny stocks" because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. Limited Protection For Intangible Assets; Realization of Goodwill. The Company and the Breweries have trademarks and tradenames registered with the Federal Patent and Trademark Office and/or California Secretary of State, including "Beverage Works" and "St. Stan's" tradenames and several of the Breweries' beers' tradenames. Although the Company is unaware of claims or potential claims by third parties as to the use of such names, there is no assurance that such claims may not be made in the future or that such claims will not be successful. The Company has limited protection for its other intangible assets. Thus, the Company is relying upon common law protection for those assets. There is no assurance the Company would be successful in any suit to protect its intangible assets. Any loss of the exclusive right to the use of these assets would result in increased competition to the Company and have a negative effect on cash flows and revenues. See "Business -- Trademarks." In addition, the Company will have substantial goodwill relating to its acquisition of Orange Empire Brewing Company and future acquisitions. There can be no assurances that the Company will be able to realize such goodwill through future operations. Potential "Dram Shop" Liability. Some states have enacted "dram shop" laws and legislation which impose criminal and civil liability on licensed alcoholic beverage servers for injuries or damages caused by their negligent service of alcoholic beverages to a visibly intoxicated person or to a minor, if such service is the proximate cause of the injury or damage and such injury or damage is reasonably foreseeable. California has enacted legislation granting broad immunity to servers of alcoholic beverages from civil liability, except for the sale of alcoholic beverages to minors, but does not extend such immunity to criminal liability. While the Company maintains liquor liability insurance as part of its comprehensive general liability insurance which management believes is adequate to protect against such liability, there can be no assurance that the Company will not be subject to a judgment or fine in excess of such insurance coverage or that it will be able to continue to maintain such insurance coverage at reasonable costs or at all. The imposition of a judgment or fine substantially in excess of the Company's insurance coverage would have a material adverse effect on the Company. Similarly, the failure of the Company to obtain and maintain insurance coverage could also materially and adversely affect the Company. See "Business -- Regulation." 12 16 CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1996, (i) on a historical basis (unaudited) and (ii) on a pro forma condensed consolidated basis (unaudited) to reflect: (A) the Offering (based on an initial Offering price of $6.00 per Share of Common Stock and $0.15 per Class A Warrant), (B) the issuance of 141,063 shares of Common Stock to acquire OEBC (which includes the assumption of certain indebtedness) valued at $719,421, and the related payment of $301,000 in cash and the issuance of 51,743 shares of Common Stock in satisfaction of $795,133 of OEBC indebtedness, the issuance of 20,000 shares pursuant to an OEBC related management and an OEBC related consulting agreement, and the issuance of 50,000 shares of Common Stock to reduce $500,000 in principal on an OEBC capital lease due a related party, (C) the assumption of $668,927 and the related partial repayment of $168,927 of certain notes payable, the assumption and full repayment of notes payable to related parties totaling $459,120, and to establish minority interest of $304,116 and a distribution payable of $1,166,953 in connection with the consummation of BWI-Prost Partners Partnership Agreement, (D) the establishment of $750,000 and repayment of $1,250,000 of bridge notes used for working capital purposes, (E) the establishment and repayment of $175,000 of a note payable to a related party used for working capital purposes, (F) the establishment and repayment of advances up to $150,000 from a related party used for working capital purposes, (G) the issuance of 60,000 shares of Common Stock under a consulting agreement, (H) the issuance of 30,000 shares relating to a legal settlement, (I) the retirement of 1,160,216 shares of Common Stock, and (J) the issuance of 20,000 shares of Common Stock related to a bridge note extension. The information set forth in the following table should be read in conjunction with the historical and pro forma financial statements and notes thereto, listed on the "Index to Financial Statements" elsewhere in this Prospectus and the discussion set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations."
SEPTEMBER 30, 1996 ------------------------ ACTUAL AS ADJUSTED ---------- ----------- Short-term debt...................................................... $ 640,133 $ 628,837 ========= ========== Long-term obligations................................................ $ 363,089 $ 2,567,704 ---------- ----------- Minority interest.................................................... -- 304,116 ---------- ----------- Stockholders' equity: Preferred Stock, no par value; 5,000,000 shares authorized; no shares issued or outstanding.................................... -- -- Common Stock, no par value; 20,000,000 shares authorized; 2,457,863 shares issued and outstanding (and 3,170,453 shares as adjusted)(1)........................... 2,596,833 12,110,640 Accumulated deficit................................................ (2,822,415) (3,901,844) ---------- ----------- Net stockholders' equity................................... (225,582) 8,208,796 ---------- ----------- Total capitalization....................................... $ 137,507 $11,080,616 ========= ==========
- --------------- (1) Excludes 1,500,000 shares of Common Stock reserved for future issuance under the Company's Incentive Stock Option Plan. See "Management -- Incentive Stock Option Plan." Excludes 933,500 shares of Common Stock reserved for future issuance under the Company's Non-Qualified Stock Option Plan. See "Management -- Nonqualified Stock Option Plan." Excludes 155,000 shares of Common Stock reserved for future issuance under the earnout provisions and 50,000 shares of Common Stock reserved for issuance under exercise of warrants in the debt repayment provisions in the acquisition of Orange Empire Brewing Company. See "Business -- Breweries -- Riverside Brewing Company." Excludes 892,000 13 17 shares of Common Stock reserved for issuance under the Class E Warrant Agreement, 15,583 shares of Common Stock reserved for issuance under the Class C Warrant Agreement, 70,000 shares of Common Stock reserved for issuance under the Class B Warrant Agreement, 15,000 shares of Common Stock reserve for issuance under the Class H Warrant Agreement, 100,000 shares of Common Stock reserved for issuance under the Directors' Compensation Plan, and 1,500,000 shares of Common Stock reserved for issuance under the Class A Warrants included in this Offering. See "Description of Securities" and "Management -- Director Compensation." Also excludes up to 225,000 shares and 225,000 shares reserved for issuance under the warrants under the Underwriter overallotment and 300,000 shares for issuance under the Representative's Purchase Option. Excludes retirement of 1,160,216 shares of Common Stock on November 22, 1996. See "Underwriting." 14 18 DILUTION The unaudited net tangible book deficiency of the Company on a historical cost basis as of September 30, 1996 was approximately $(903,547), or $(0.37) per share of Common Stock. Net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by the number of shares of Common Stock then outstanding. After giving effect to (A) the sale by the Company of the 1,500,000 shares of Common Stock offered by the Company herein (after deduction of underwriting discounts and commissions, and estimated offering expenses payable by the Company), (B) the issuance of 141,063 shares of Common Stock to acquire OEBC, the issuance of 51,743 shares of Common Stock in satisfaction of $494,133 of OEBC indebtedness and the issuance of 20,000 shares pursuant to an OEBC related management and an OEBC related consulting agreement, (C) the issuance of 60,000 shares of Common Stock pursuant to a consulting agreement, (D) the issuance of 50,000 shares of Common Stock in connection with the $500,000 reduction to a capital lease obligation due to a related party (E) the issuance of 30,000 shares of Common Stock in connection with a legal settlement, (F) the issuance of 20,000 shares of Common Stock in connection with the extension of a bridge note, and (G) the retirement of 1,160,216 shares of Common Stock. The Company's pro forma tangible book value at September 30, 1996 would have been $4,349,167 (which consists of pro forma stockholders' equity of $8,208,796 less goodwill and other intangible assets of $3,859,629), or $1.37 per share of Common Stock. This represents an immediate increase in net tangible book value of $1.74 per share to existing stockholders and an immediate dilution of $4.63 per share (or 77%) to the new public investors. The following table illustrates the per share dilution: Initial public offering price per share.................................... $ 6.00 Net tangible book value per share before offering........................ $ (0.37) Increase in net tangible book value per share attributable to new investors............................................................. 1.74 ----- Pro forma net tangible book value per share after offering................. 1.37 ----- Dilution per share to new public investors................................. $ 4.63 =====
The following table summarizes, on a pro forma basis as of September 30, 1996, the difference between the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by the existing and other stockholders and by new public investors purchasing shares in this Offering (before deduction of underwriting discounts and commissions and estimated offering expense payable by the Company):
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE -------------------- --------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- --------- Existing stockholders........................ 2,457,863 77.5% $ 2,771,520 20.2% $1.13 New public investors......................... 1,500,000 47.3 9,000,000 65.6 6.00 Stockholders as a result of acquisition and debt reduction............................. 192,806 6.1 983,311 7.1 5.10 Other........................................ 180,000 5.7 972,000 7.1 5.40 Retirement of Common Stock................... (1,160,216) (36.6) -- -- -- --------- ----- ----------- ----- Total...................................... 3,170,453 100.0% $13,726,831 100.0% ========= ===== =========== =====
The foregoing computations exclude the proceeds expected to be received from the sale of the 1,500,000 Class A Warrants and assume no exercise of stock options or warrants after September 30, 1996. Accordingly it excludes 1,500,000 shares of Common Stock reserved for future issuance under the Company's Incentive Stock Option Plan. See "Management -- Incentive Stock Option Plan." Excludes 933,500 shares of Common Stock reserved for future issuance under the Company's Non-Qualified Stock Option Plan. See "Management -- Nonqualified Stock Option Plan." Excludes 155,000 shares of Common Stock reserved for future issuance under the earnout provisions, and 50,000 shares of Common Stock reserved for the exercise of the Class D Warrants under the debt repayment provisions under the acquisition of Orange Empire Brewing Company. See "Business -- Breweries." Excludes 892,000 shares of Common Stock reserved for issuance upon exercise of the Class E Warrants, 15,583 shares of Common Stock reserved for issuance upon exercise of 15 19 the Class C Warrants, 70,000 shares of Common Stock reserved for issuance upon exercise of the Class B Warrants, 300,000 shares reserved for issuance upon exercise of the Representative's Purchase Option, 15,000 shares of Common Stock reserved for issuance upon exercise of the Class H Warrants, 100,000 shares of Common Stock reserved for issuance under the Directors' Compensation Plan, and 1,500,000 shares of common stock reserved for issuance upon exercise of the Class A Warrants included in this Offering. See "Description of Securities" and "Management -- Director Compensation." Also excludes up to 225,000 shares and 225,000 shares of Common Stock reserved for issuance upon exercise of the Class A Warrants reserved for issuance under the Representative's overallotment. See "Underwriting." Assuming the exercise of all options and warrants to purchase an aggregate of 1,863,500 shares of Common Stock, granted and/or issued to directors, officers, promoters and affiliates which have an average exercise price of $5.15, the Company's pro forma tangible book value at September 30, 1996 would have been $13,946,017, or $2.77 per share. This would represent an immediate increase in the net tangible book value of $1.40 per share to the new public investors. The dilution per share to new public investors, before assuming the issuance of such options and warrants, and after assuming such issuance, is $4.63 and $3.23, respectively. 16 20 USE OF PROCEEDS The net proceeds of this offering, after deduction of underwriting commissions and offering expenses, will be approximately $7,546,498. The Company expects to apply the net proceeds of the offering as follows:
AMOUNT PERCENT ---------- ------- BWI-Prost Partners Partnership(1)........................... $ 628,000 8% Riverside Acquisition(2).................................... 451,000 6 Sales and Marketing(3)...................................... 1,500,000 20 Notes Payable(4)............................................ 1,250,000 17 Short-Term Line of Credit(5)................................ 175,000 2 Property and Equipment(6)................................... 250,000 3 Acquisitions and New Products(7)............................ 1,000,000 13 Accounts Payable(8)......................................... 500,000 7 Consolidation of Operations(9).............................. 30,000 -- Working Capital............................................. 1,762,498 24 ---------- ---- Total............................................. $7,546,498 100% ========== ====
The Company anticipates that the proceeds of this offering will be sufficient to finance its working capital requirements for at least 12 months following this offering. Pending application, the net proceeds will be invested in deposits with banks, investment grade securities and short-term income producing investments, including U.S. Treasury securities and other money market instruments. In the event of the exercise of the Representative's over-allotment option, the net proceeds from such exercise will also be applied to working capital. - --------------- (1) See "Business -- Breweries-St. Stan's Brewing Company." Approximately $169,000 will be used to pay a portion of the Owens Financial Note down to a principal balance of $500,000 in accordance with the agreement with Owens Financial to refinance such note. Approximately $459,000 will be paid to Romy Angle as repayment of advances made by her to Prost Partners. At the consummation of the BWI-Prost Partners Partnership, Ms. Angle will become the Company's Purchasing and Restaurant Manager. (2) See "Business -- Breweries -- Riverside Brewing Company." Up to $150,000 of non-interest bearing advances will be repaid to Michael Hagerman, a former shareholder of RBC, for working capital provided to RBC and $301,000 will be paid to Orange Empire Brewing Company debtholders as part of refinancing approximately $644,000 of Orange Empire debts. (3) The net proceeds allocated to marketing and sales are expected to be applied towards the promotion of the Breweries' main brands in their respective key markets over the next 18 months. The proceeds are intended to be applied to product development, market research, point of sale materials, event participation and sponsorships, paid media advertising, post-offs, distributor incentive programs and sales person incentive programs. (4) The Company is obligated under a secured bridge note in the aggregate principal amount of $500,000. The note accrues interest on the principal amount at the rate of eighteen percent (18%) per annum and matures on April 15, 1997. The Company is also obligated to pay $250,000 from the issuance of a note at 12% interest per annum in December 1996. The proceeds from these notes were used for working capital purposes. Up to an additional $500,000 in bridge loans are expected to be provided through January 1997, accruing interest at 12% to 18% and to be repaid from proceeds of the IPO. The primary use of these additional funds is $300,000 for working capital purposes and $200,000 to pay half of the legal settlement on the Tamkin Capital Partners law suit. (5) Up to $175,000 will be paid to Brewery Leasing Company, a company controlled by Michael Hagerman, under a line of credit with the Company. The line of credit, the proceeds of which are to be used for the Company's working capital needs, provides for interest at 11% with a maturity date of June 30, 1997. (6) The net proceeds allocated to property and equipment purchases in the next 18 months are expected to be applied towards the expansion and improvement of the Company's brewing capacity. 17 21 (7) The Company plans for the expansion of the Company's product lines and activities by one or more means, including internal development, joint ventures, strategic alliances, and acquisition of product lines or complementary businesses. See "Business -- Plan of Operations/Business Strategy." (8) This includes approximately $500,000 to pay-off existing current and past due accounts payable. (9) The Company intends to move the Heritage Brewing Company operations to the Riverside Brewing Company location during the first six months of 1997. The Heritage Brewing Company facility lease expires in April of 1997, and the lease for additional storage is on a month to month lease. It is anticipated that the Company will incur minimal costs relating to the removal, transportation and installation of the equipment. 18 22 SELECTED FINANCIAL DATA The following selected financial data is derived from and should be read in conjunction with the historical and pro forma financial statements of the Company and its subsidiary HBC, OEBC and its subsidiary RBC, which operates a brewery and a brewpub, and St. Stan's, as listed on the "Index to Financial Statements" included elsewhere in this Prospectus. The historical statement of operations data for the period August 2, 1995 to December 31, 1995, and the balance sheet data as of December 31, 1995, are derived from the consolidated financial statements of the Company which have been audited by Corbin & Wertz, independent certified public accountants, whose report thereon is included elsewhere herein. The historical statements of operations data for the nine months ended September 30, 1996, and the historical balance sheet data as of September 30, 1996 are unaudited, and have been derived from the Company's books and records. Such unaudited data has been prepared on the same basis as the audited financial data and, in the opinion of management, reflects all adjustments (consisting only of normally recurring adjustments) which are necessary for a fair presentation in accordance with Generally Accepted Accounting Principles. The operating data is derived from unaudited information maintained by the Company. The results of operations for the nine months ended September 30, 1996 are not necessarily indicative of results to be expected for any future periods. The unaudited pro forma statements of operations data for the year ended December 31, 1995 and the nine months ended September 30, 1996, and the pro forma balance sheet data as of September 30, 1996 is presented, giving effect to the following: (1) The consummation of the Beverage Works, Inc. proposed Initial Public Offering and the application of the proceeds therefrom as described in "Use of Proceeds." (2) The consummation of the Beverage Works, Inc. and Orange Empire Brewing Company Share Purchase Agreement and related agreements. (3) The consummation of the BWI-Prost Partners Contribution and Partnership Agreements and related agreements. The unaudited pro forma balance sheet data has been prepared as though the transactions and arrangements described above had taken effect on September 30, 1996, and the unaudited pro forma statements of operations data have been prepared as though the transactions and arrangements had taken effect at the beginning of each period presented. In management's opinion, all adjustments have been made necessary to reflect the effects of the consummation of the Initial Public Offering and the application of the proceeds therefrom, the consummation of the Beverage Works, Inc. and Orange Empire Brewing Company Share Purchase Agreement and related agreements, and the consummation of the BWI-Prost Partners Contribution and Partnership Agreements and related agreements. The unaudited pro forma financial data does not purport to be indicative of the financial condition or results of operations of the Company that would have been obtained for the periods presented had the transactions and arrangements taken effect on the assumed dates, nor does it purport to represent the financial condition or results of operations of the Company for any future period. 19 23
HISTORICAL ------------------------------------ PRO FORMA AUGUST 2, 1995 TO ------------------------------- DECEMBER 31, NINE MONTHS 1995(1) ENDED ----------------- SEPTEMBER 30, 1996 NINE MONTHS -------------- ENDED (UNAUDITED) SEPTEMBER 30, 1996 -------------- YEAR ENDED DECEMBER 31, (UNAUDITED) 1995 ------------ (UNAUDITED) STATEMENT OF OPERATIONS DATA: Net sales.......................... $ 195,552 $ 44,810 $ 3,903,084 $ 4,975,962 Cost of sales...................... 421,158 81,627 3,063,902 3,814,479 ---------- ---------- ---------- ---------- Gross profit..................... (225,606) (36,817) 839,182 1,161,483 Selling, general and administrative expenses......................... 1,443,607 491,330 3,781,913 3,543,436 Provision for legal settlements.... 571,000 -- 737,000 -- ---------- ---------- ---------- ---------- Operating loss................... (2,240,213) (528,147) (3,679,730) (2,381,953) Interest and other expenses, net... 76,960 28,320 409,139 402,661 Minority interest in loss of consolidated partnership......... -- -- (116,940) (104,552) ---------- ---------- ---------- ---------- Loss before income tax benefit..... (2,317,173) (556,467) (3,970,929) (2,680,062) Income tax benefit................. 43,519 7,706 135,830 183,745 ---------- ---------- ---------- ---------- Net loss........................... $ (2,273,654) $ (548,761) $ (3,835,098) $ (2,496,317) ========== ========== ========== ========== Net loss per common share.......... $ (0.85) $ (0.23) $ (1.13) $ (0.82) ========== ========== ========== ========== Common shares and equivalents outstanding...................... 2,687,359 2,362,806 3,384,390 3,059,837 ========== ========== ========== ========== OPERATING DATA (IN BARRELS): Barrels shipped(2)................. 1,715 392 10,127 12,684 ========== ========== ========== ========== Production capacity, end of period(3)........................ 12,000 6,500 82,000 76,500 ========== ========== ========== ==========
HISTORICAL ------------------------------- PRO FORMA DECEMBER 31, -------------- 1995 SEPTEMBER 30, ------------ 1996 -------------- SEPTEMBER 30, (UNAUDITED) 1996 -------------- (UNAUDITED) BALANCE SHEET DATA (END OF PERIOD): Current assets......................... $ 424,726 $1,121,377 $ 5,221,042 Working capital (deficiency)........... (1,573,444) 814,541 3,637,337 Property and equipment................. 1,335,939 1,296,434 4,996,282 Total assets........................... 2,473,429 2,665,591 14,124,210 Current liabilities.................... 1,998,170 306,836 1,583,705 Total liabilities...................... 2,699,011 1,086,850 5,915,414 Stockholders' equity (capital deficiency).......................... (225,582) 1,578,741 8,208,796
- --------------- (1) The Company was incorporated August 2, 1995 and acquired Heritage on November 8, 1995. The historical statement of operations for 1995 reflects the operations of the Company and Heritage for the periods beginning August 2, 1995 and November 8, 1995, respectively. (2) A barrel is equivalent to 31 gallons, two American kegs, or 13.8 cases of twenty-four 12-ounce bottles of beer. (3) Based on the Company's estimate of the Breweries' production capacity, as of the end of such period. The Company's estimate of production capacity should not be considered indicative of actual production 20 24 levels for any period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Breweries' capacity or output is derived from a combination of equipment, in particular the breweries' brewhouse, fermentation tanks and packaging line. The capacity also depends on the type of brews produced, some of which require a longer fermentation period than others. St. Stan's and RBC operate breweries that can potentially support an output of approximately 30,000 and 35,000 barrels per year, respectively, but their fermentation capacity varies. RBC's brewpub operates at approximately 5,000 barrels per year. Some capital improvements will be made to expand fermentation upon the close of the Offering. See "Use of Proceeds." Heritage's capacity has increased from approximately 6,500 barrels per year to approximately 12,000 barrels per year by adding additional fermentation tanks and other support equipment to the existing equipment. See also "Business -- Brewing Facilities." 21 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company was founded for the purpose of creating a multi-brand, multi-regional specialty beer company, capable of assuming a leadership role in the craft brewing industry. The Company's growth strategy is distinctly different from most other companies in the craft brewing industry, as it does not allocate resources and capital towards the development or improvement of a single local or regional brand and brewing facility, but focuses on acquiring a variety of existing regional brands with growth potential and existing production capacity, and/or entering strategic alliances with key industry players. According to the Institute for Brewing Studies, The New Brewer, May-June 1995 issue, the craft brewing industry has grown 30% to 50% annually since 1988, and is expected to grow in excess of 30% annually. The craft beer market is very fragmented and distribution channels are getting crowded from the proliferation of brands. The large craft brewers are becoming increasingly dominant and Budweiser, Miller and Coors have all recently introduced product entries, and are focussing their main brand advertising campaigns to appeal to craft brew consumers. The Company believes that craft brewing is entering a phase of development characterized increasingly by consolidation. This requires increased marketing and selling skills, operating efficiencies, and integrated production as well as appropriate distribution capabilities and access to capital to enable the craft brewers to effectively compete with the dominant companies in this industry. Management of the Company intends to acquire and/or joint venture with craft brewers with promising brands and strategically located craft breweries and brewpub restaurants. This should enable the Company to obtain operating efficiencies and competitive strength by consolidating production capacity, sales and marketing operations, distribution channels, and effective multi-brand management. The Company has been funded, to date, with a private placement of $1,654,984 at $4.00 per common share, an 18% bridge loan of $500,000 to be repaid from proceeds of the proposed Offering, a $150,000 private placement of equity units at $5.00 per equivalent share, a 12% $250,000 bridge loan to be repaid from proceeds of the proposed offering, a variable rate (not to exceed 11% per annum) $175,000 line of credit with a related party, and up to $500,000 in additional bridge loans which are expected to close in January 1997, to be repaid from proceeds of the proposed offering. The Company has insufficient capital and inadequate cash flows from operations to continue as an operating entity without additional working capital in the immediate future and will not be able to implement its plan without completing this Offering. Initially, the Company's profitability will be adversely affected by its growth and financing strategies. The Company has incurred, and will continue to incur, substantial expenses pursuant to its growth strategy. Until the consummation of the acquisition and partnership agreements which are expected to occur concurrent with this Offering, the Company has limited influence on the operations of these companies, and is restricted in achieving certain operating efficiencies and reducing losses from operations. Furthermore, until such time that a certain number of craft breweries have been acquired or joint ventured and are functioning according to the Company's operating performance standards, consolidation and marketing strategies, the Company's operations will be adversely affected. The Company's initial proposed acquisition, partnership and operating agreements are primarily with smaller breweries that have not been operating profitably and in all likelihood could not operate profitably without operating efficiencies, financial, distribution and marketing assistance. The Company will need to spend substantial funds on sales and marketing in order to increase sales volume and enhance the distribution channels. It will also need to invest in brewing facilities, equipment and improvements in order to consolidate and increase production capacity, reduce operating costs and improve operating efficiencies. Management of the Company currently has sales and marketing skills, as well as substantial distribution contacts. Upon the completion of the proposed Offering, management believes they will have the capital necessary to offer financial assistance for marketing and advertising, expanding of distribution channels, and for capital improvements to enable the combined companies to achieve lower operating costs and to improve operating efficiencies. 22 26 Pro forma financial information is presented for the year ended December 31, 1995 and the nine months ended September 30, 1996, both of which are unaudited. Consolidated information for the Company is presented only on a historical basis and cannot be compared for the period August 2, 1995 to December 31, 1995 and for the nine months ended September 30, 1996, as the Company was only established in August, 1995. The financial data and analysis pertaining to its proposed acquisition of OEBC and partnership with St. Stan's Brewery and Brewpub operations are presented, comparing December 31, 1994 with December 31, 1995, and the nine months ending September 30, 1995 with the same period ended September 30, 1996. The proposed acquisition of OEBC and the proposed partnership with St. Stan's will be accounted for upon the consummation of the transactions. Accordingly, the operating results of the companies will be consolidated and reported on a prospective basis from the date of closing. The discussions of the proforma financial information are for analytical purposes only, and do not purport to represent the actual financial reporting of the combined companies upon the closing of the proposed transactions. PROFORMA RESULTS OF OPERATIONS The following tables set forth the unaudited proforma condensed consolidated results of operations for the periods indicated as a percentage of net sales. Such information includes the accounts of the Company, its subsidiary HBC, OEBC and its subsidiary RBC, and St. Stan's as if the acquisition, the partnership and Offering were consummated during the beginning of the respective periods. Such information is not necessarily indicative of the results which may have been achieved had the transactions been consummated at the beginning of such periods. Such information is as follows: PERCENTAGE OF SALES NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
ORANGE BEVERAGE EMPIRE ST. STAN'S PROFORMA WORKS BREWERY BREWERY ADJUSTMENTS(1) PROFORMA TOTAL -------- ------- ---------- -------------- -------------- Net Sales................................ 100.0% 100.0% 100.0% 100.0% Cost of Sales............................ 215.4 70.3 72.9 78.5 Gross Profit............................. (115.4) 29.7 27.1 21.5 Selling, General and Administrative...... 738.2 46.3 29.9 96.9 Provision for Settlements................ 292.0 7.0 -- 18.9 Interest and Other (Income) Expense...... 39.4 9.6 5.9 10.5 Minority Interest in loss of consolidated Partnership............................ -- -- -- (3.0) Tax Benefit.............................. (22.3) -- -- (3.5) ------- ----- ----- ----- Net Loss................................. (1,162.7)% (33.2)% (8.7)% (98.3)% ======= ===== ===== =====
- --------------- (1) Refer to Unaudited Proforma Condensed Consolidated Statement of Operations. 23 27 PERCENTAGE OF SALES YEAR ENDED DECEMBER 31, 1995 (UNAUDITED)
ORANGE BEVERAGE EMPIRE ST. STAN'S PROFORMA WORKS BREWERY BREWERY ADJUSTMENTS(1) PROFORMA TOTAL -------- ------- ---------- -------------- -------------- Net Sales................................ 100.0% 100.0% 100.0% 100.0% Cost of Sales............................ 182.2 71.4 68.8 76.7 Gross Profit............................. (82.2) 28.6 31.2 23.3 Selling, General and Administrative...... 1,096.4 38.8 28.8 71.2 Interest................................. 63.2 6.4 4.8 8.1 Other (Income) Expense................... -- -- -- -- Minority Interest in Loss of Consolidated Partnership............................ -- -- -- (2.1) Tax Benefit.............................. (17.2) .1 -- (3.7) -------- ----- ----- ----- Net Loss................................. (1,224.6)% (16.7)% (2.4)% (50.2)% ======== ===== ===== =====
- --------------- (1) Refer to Unaudited Proforma Condensed Consolidated Statement of Operations. Sales: The unaudited pro forma sales for the first nine months of 1996 totaled $3,903,084, which is a slight increase over the comparable period for 1995; however, there are no assurances that the companies will actually have higher sales in 1996 than in 1995 as management does not believe that the companies have sufficient working capital to sustain operations without financial assistance from the Company's proposed Offering or other sources. Cost of Sales: The unaudited pro forma cost of sales of 76.7% and 78.5% of net sales for the year ending December 31, 1995 and the nine months ended September 30, 1996, respectively, were above industry levels for breweries of this size. The Company estimates that it must lower cost of sales to approximately 67% of net sales in order to be competitive. The Company believes that it can substantially reduce cost of sales through consolidation of operations, centralized purchasing, improved quality control, increased plant utilization and greater automation. The Company has already initiated this process by combining certain operations of HBC. The Company will also lower cost of sales as a percentage of net sales by increasing sales through expansion of existing and new brands, contract brewing agreements and acquisitions. Even if the Company is successful in lowering cost of sales, it can not accurately forecast the potential effect of competitive pressures on pricing which could have the effect of lowering the gross profit and possibly offsetting all or a portion of the cost savings realized, if any. There are no assurances that management's plans to reduce their cost of sales will be successful. Selling, General and Administrative Expenses: Unaudited pro forma selling, general and administrative expenses for the year ended December 31, 1995 were 71.2% of net sales and for the nine months ended September 30, 1996 was 96.9% of net sales which is high in comparison to the industry leaders that range from 16% to 45%. Selling, general and administrative expenses include $723,019 of costs, detailed below, indirectly associated with the acquisitions and public offering process. Adjusting for these costs would lower selling, general and administrative expense to 78.4% of net sales before factoring in savings that will be gained from consolidation of duplicate functions. These indirect acquisition and public offering process related costs for the Company include $268,444 in professional fees, $32,000 for a loss on an investment in Seaborn Beverages Corporation, $50,000 in bonuses related to obtaining the Hussong's license, $377,500 of costs incurred through the issuance of 70,000 shares of common stock in connection with a one year consulting agreement providing financial advisory services and a one year consulting agreement providing assistance for the acquisition and disposition of brewing equipment and $262,392 of compensation through the issuance of 65,598 shares of common stock to Heritage officers and former shareholders. Additionally, the Company's selling, general and administrative expenses for the nine months ended September 30, 1996 included substantial costs associated with the administration of these companies on a decentralized basis. 24 28 Selling, general and administrative expenses are also adversely affected as the result of additional noncash charges of $264,256 for goodwill amortization expense on the OEBC acquisition and $16,500 in amortization expense for St. Stan's formation costs. The Company expects an increase in selling, general and administrative expense, primarily marketing and advertising, in terms of actual dollars over time but a decrease in such expenses as a percent of net sales. Certain incentive compensation will be paid when the Company achieves profitability and, accordingly, management compensation is expected to decrease in total dollars, as well as a percentage of sales in the next twelve months. Provision for Settlements: Unaudited pro forma provision for settlements consists of a provision of $571,000 for settlement of the Tamkin lawsuit as discussed under "Legal Proceedings," and $166,000, of which $136,000 relates to a shareholder dispute, for settlement of claims against OEBC. In total, these charges were 18.9% of net sales. Interest and Other Expenses (Income): Unaudited pro forma interest and other expenses are 10.5% of net sales primarily as a result of interest paid on bridge notes on common stock and warrants issued in connection with a bridge note. Net Loss: The unaudited pro forma net loss of $2,496,317 and $3,835,098 or 50.2% of net sales for the year ending December 31, 1995 and 98.3% for the nine months ended September 30, 1996, respectively, is attributable to a number of important factors as described above. Almost 50% of the nine-month pro forma net loss can be attributed to legal settlements, consulting fees, legal and accounting fees, which were incurred in preparation of becoming a public company and establishing an infrastructure necessary for expansion of operations; however, the Company still incurred a substantial pro forma net loss from operations for the nine months ended September 30, 1996 of approximately $2,066,000 after adjusting for depreciation and amortization of approximately $645,000 and other noncash expenses aggregating approximately $1,124,000. HISTORICAL RESULTS OF OPERATIONS -- BEVERAGE WORKS, INC. AND SUBSIDIARY The following tables set forth for the periods indicated certain items included in the Company's historical consolidated statements of operations as a percentage of net sales. The Company's consolidated statements of operations on a historical basis include financial data for Beverage Works, Inc., excluding proposed acquisitions, but, including operations for Heritage for the period November 8, 1995 (acquisition date) and thereafter.
PERCENTAGE OF NET SALES --------------------------------------- AUGUST 2, 1995 TO DECEMBER 31, 1995 NINE MONTHS ENDED ----------------- SEPTEMBER 30, 1996 ----------------- (UNAUDITED) Net Sales.......................................... 100.0% 100.0% Cost of Sales...................................... 215.4 182.2 ------ -------- Gross Profit....................................... (115.4) (82.2) Selling, General and Administrative................ 738.2 1,096.4 Provision for Settlement........................... 292.0 -- Interest........................................... 39.4 63.2 Benefit for Income Taxes........................... (22.3) (17.2) ------ -------- Net Loss........................................... (1,162.7)% (1,224.6)% ====== ========
Sales: Net sales of $44,810 for the period August 2, 1995 to December 31, 1995 only reflect sales for HBC beginning from the November 8, 1995 acquisition date; BWI had no sales. Net sales of $195,552 for the nine-month period ending September 30, 1996 were adversely affected as a result of construction interruptions associated with improving and expanding the brewery and certain quality control problems resulting from these activities. As a result of these quality control problems, HBC had to temporarily discontinue the production "Red Pig" for its largest contract brewing customer resulting in a $30,000 write down of accounts receivable due to spoilage. Sales of the Mulligan and Red Fox brands decreased as HBC did not have 25 29 sufficient funds to participate in the distributor and retail sales and promotional programs at acceptable levels. The Company made a decision in early 1995 to stop actively marketing these brands until they could be repackaged and properly marketed which is planned for early 1997. In September 1996, the Company reported its first sales of the Hussong's products, which although insignificant through such date, are expected to increase significantly over the next twelve (12) months. Cost of Sales: Cost of sales were $421,158 or 215.4% of net sales for the nine month period ending September 30, 1996. Cost of sales was adversely affected as a result of production inefficiencies caused by construction at HBC and reduced sales volume. Accordingly, the Company was unable to absorb the fixed costs of HBC's production facility. Depreciation expense for nine months ended September 30, 1996 included in cost of sales amounted to approximately $168,000. The Company has decided to consolidate HBC operations into the OEBC operations in order to improve operating efficiencies and lower production costs. The consolidation process will commence once the acquisition of OEBC is completed at an estimated cost of $30,000. The HBC facility lease expires in April 1997 and the lease for offsite storage is on a month-to-month arrangement. The positive effect of consolidating the operations can be evidenced by the following costs that are expected to be eliminated. The actual costs for the nine-month period, where appropriate, were annualized for the purposes of this analysis. Workman's Compensation Insurance -- $500, liability insurance -- $4,508, rent -- $45,260, property taxes -- $1,743, temporary help -- $2,833, payroll and related taxes -- $29,700 for a total savings of $84,544 annually. The savings does not account for potential savings in purchasing and other economies of scale gained through a more efficient brewery. There are no assurances that such costs can be eliminated by management or that the Company will achieve savings through purchasing and other economies of scale. Selling, General and Administrative Expense: Selling, general and administrative expenses were $1,443,607 or 738.2% of net sales for the nine month period ending September 30, 1996. However, a substantial amount of the expenses were nonrecurring expenses associated with the acquisitions and public offering process. Specifically, included in selling, general and administrative were $513,909 in professional fees primarily for legal, accounting and director fees pertaining to the acquisition and public offering process; $201,000 for losses on two investments, $50,000 in bonuses related to the Hussong's license; and approximately $30,000 in travel, telephone and miscellaneous office cost. Based on this analysis the recurring Operating Expenses for the nine month period ending September 30, 1996 are $607,698. Provision for Settlement: Provision for settlement represents a provision of $571,000 for settlement of the Tamkin lawsuit as discussed under "Legal Proceedings." PERIOD TO PERIOD COMPARISON OF RESULTS -- ORANGE EMPIRE BREWING COMPANY (RIVERSIDE BREWING COMPANY) The following table sets forth certain items included in OEBC's statements of operations as a percentage of net sales:
PERCENTAGE OF NET SALES ----------------------------------------- NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, ----------------- ----------------- 1995 1996 1994 1995 ----- ----- ----- ----- (UNAUDITED) Net sales............................................. 100.0% 100.0% 100.0% 100.0% Cost of sales......................................... 63.2 70.3 74.4 71.4 ----- ----- ----- ----- Gross profit.......................................... 36.8 29.7 25.6 28.6 Selling, general and administrative................... 42.4 53.3 45.2 38.8 Interest.............................................. 7.0 9.0 6.9 6.8 Other (income) expense................................ (0.3) 0.6 .3 (.4) Income Taxes provision................................ .1 0 .1 .1 ----- ----- ----- ----- Net Loss.............................................. (12.4)% (33.2)% (26.9)% (16.7)% ===== ===== ===== =====
26 30 NINE MONTHS ENDED SEPTEMBER 30, 1995 AND NINE MONTHS ENDED SEPTEMBER 30, 1996 -- ORANGE EMPIRE BREWING COMPANY (RIVERSIDE BREWING COMPANY) Sales: Sales, net of excise taxes, increased 30.6% from $1,816,276 for the nine months ended September 30, 1995 to $2,372,629 for the nine months ended September 30, 1996. Excise taxes for the nine months ended September 30, 1995 were $72,252 compared to $45,837 for the comparable period in 1996. The increase in sales can be primarily attributed to increased shipments of bottled product from the brewery division and to a lesser extent from increased sales at the brewpub. The brewery went through a major expansion that was completed in the fourth quarter of 1995, which increased brewery capacity and enabled OEBC to pursue additional business. Sales increased substantially during the first seven months of 1996, as a result of OEBC obtaining several new large accounts in California and expanding shipment to a number of other states. OEBC had a number of quality control problems, distribution and customer relations problems and lacked adequate working capital to support the marketing and sales programs required by the new accounts. As a result, OEBC lost a substantial portion of this new business and will need additional working capital and new personnel, both of which the acquisition is intended to provide. Gross Profit: Gross profit increased by $37,413 from $667,890 for the nine-month period ending September 30, 1995 to $705,303 for the nine-month period ending April 30, 1996. However, as a percentage of sales gross profit decreased 7.1% from 36.8% for the nine-month period ending September 30, 1995 to 29.7% for the nine-month period ending September 30, 1996. The decrease in gross profit as a percentage of sales is primarily attributable to production inefficiencies, distributor discounts, and increases in freight associated with shipping product to other states. In addition, competition caused management to lower the per unit sale prices in order to increase its market share. With the decline in business and the fixed cost associated with running the expanded brewery, OEBC actually had a negative gross profit in August and September. Selling, General and Administrative Expenses: Selling, general and administrative expenses increased in actual dollars, and as a percentage of net sales for the comparable periods. Selling, general and administrative expenses increased by $495,179 from $769,884 for the nine-month period ending September 30, 1995 to $1,265,063 for the nine-month period ending September 30, 1996. Selling, general and administrative expenses increased 10.9% as a percentage of sales from 42.4% for the nine-month period ending September 30, 1995 to 53.3% for the nine-month period ending September 30, 1996. Selling, general and administrative expenses increased primarily as a result of supporting the 30.6% increase in sales. Selling, general and administrative expenses increased as the result of non-recurring accounting and legal cost associated with the acquisition and as the result of increased lease expense, rent expense and interest expense. As part of the acquisition terms, the lease and interest expenses are being reduced. Interest: Interest expense increased by 65.6% from $127,784 for the nine-month period ending September 30, 1995 to $211,671 for the nine-month period ending September 30, 1996. Interest expense increased primarily as the result of interest charges associated with increased equipment leases and notes payable to related parties. Net Loss: The net loss increased in actual dollars, and as a percentage of net sales for the comparable periods. The net loss increased $562,462 from $(224,832) for the nine-month period ending September 30, 1995 to $(787,294) for the nine-month period ending September 30, 1996. The net loss increased as a percentage of sales by 20.8% from 12.4% for the nine-month period ending September 30, 1995 to 33.2% for the nine-month period ending September 30, 1996. YEARS ENDED DECEMBER 31, 1995 AND 1994 -- ORANGE EMPIRE BREWING COMPANY (RIVERSIDE BREWING COMPANY) Sales: Net sales increased by $1,175,507 or 85.3% from $1,378,470 (net of $21,045 in excise taxes) for 1994 to $2,553,977 (net of $52,596 in excise taxes) for 1995. The increase in sales can be primarily attributed to increased shipments of bottled product from the brewery division and to a lesser extent from increased sales at the brewpub. Distribution was expanded not only in California with the appointment of Wine Warehouse as distributor for California, but distribution was also expanded into approximately 27 other states. 27 31 Gross Profits: Gross Profit increased in terms of dollars and as a percentage of net sales for the comparable periods. Gross profit increased 106.6% from $353,279 in 1994 to $729,912 in 1995. Gross profit increased 3.0% as a percentage of sales from 25.6% in 1994 to 28.6% in 1995. Gross profit improved as a result of the Company's ability to cover fixed overhead through increased sales. Selling, General and Administrative Expenses: Selling, general and administrative expenses increased, in actual dollars, but decreased as a percentage of sales for the comparable periods. Selling, general and administrative expenses increased 58.7% from $624,209 in 1994 to $990,701 in 1995. However, as a percentage of sales decreased 6.4% from 45.3% in 1994 to 38.8% in 1995. The increase is primarily attributable to the 85.3% increase in sales. The decrease and a percentage of sales is primarily attributable to the fact that some selling, general and administrative expenses are relatively fixed and did not increase proportionately with increase in sales. Interest Expense: Interest expense increased 83% or $78,408 from $94,516 in 1994 to $172,924 in 1995. The increase is primarily the result of leasing (at approximately 14% per annum) additional brewing equipment for the brewery which commenced operation in its expanded facility in October 1995. Income Tax Provision: OEBC has a $1,600 provision for income taxes in both 1994 and 1995 related to California minimum state taxes. OEBC has substantial net operating loss carryforwards, the use of which will be limited in future periods pursuant to the provisions of the Tax Reform Act of 1986. does not expect to pay regular income taxes for the foreseeable future. A valuation allowance for such net operating losses has been recorded, therefore, no benefit for income taxes has been reflected in operations. Net Loss: The net loss increased 14.6% or $54,363, from 1994 to 1995, but decreased as a percentage of sales by 10.2% from 26.9% in 1994 to 16.7% in 1995. PERIOD TO PERIOD COMPARISON OF RESULTS -- ST. STAN'S BREWERY AND BREWPUB OPERATIONS The following table sets forth certain items included in the St. Stan's Brewery and Brewpub statements of operations as a percentage of net sales: PERCENTAGE OF NET SALES
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, ----------------- ----------------- 1995 1996 1994 1995 ----- ----- ----- ----- (UNAUDITED) Net sales............................................. 100.0% 100.0% 100.0% 100.0% Cost of sales......................................... 66.8 72.9 72.7 68.8 ----- ----- ----- ----- Gross profit.......................................... 33.2 27.1 27.3 31.2 Selling, general and administrative................... 27.1 29.9 27.4 28.8 ----- ----- ----- ----- Income (loss) from operations......................... 6.1 (2.8) (.1) 2.4 Interest.............................................. 5.0 5.9 5.5 4.8 ----- ----- ----- ----- Net income (loss)..................................... 1.1% (8.7)% (5.6)% (2.4)% ===== ===== ===== =====
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND NINE MONTHS ENDED SEPTEMBER 30, 1996 -- ST. STAN'S BREWERY AND BREWPUB OPERATIONS Sales: Net sales decreased by 8.4% from $1,529,253 for the nine month period ending September 30, 1995 to $1,401,453 for the nine month period ending September 30, 1996. Sales declined as the result of the loss of certain key distributors and the inefficiencies created by transferring business to replacement distributors, competitive pressures and insufficient working capital to fund marketing and selling programs. Insufficient working capital prevented St. Stan's from initiating the marketing, sales and promotional activities required by their distributors and chain accounts, resulting in these distributors paying more attention to better financed brands and causing the discontinuation of St. Stan's products at a number of retail accounts. Between June and September of 1996, six of St. Stan's key distributors, all Budweiser Distributors, decided to discontinue distributing any craft brews other than the products from Red Hook Brewery, a 28 32 company in which Anheuser Busch (Budweiser) has a 25% ownership interest. This caused St. Stan's and other craft brewers to seek replacement distributors. This process and the inefficiencies resulting from such a significant transfer, resulted in loss of accounts and sales volume, in spite of identified demand for St. Stan's products at account and consumer level. To date, St. Stan's has not been able to recover from these distributor changes, as it has lacked the working capital and effective marketing programs needed to promote its brands and get significant attention from its new distributors, retail accounts and consumers. The Company has introduced St. Stan's to Southern Wine & Spirits ("SWS"), whose distribution and sales organization covers all of California, for the purpose of exploring the opportunity of SWS distributing St. Stan's throughout California. Due to the nature of SWS's operations, its substantial retail account base and its relationship with Beverage Works, this could have a substantial positive effect on St. Stan's sales in 1997. Sales declined at the brewpub/restaurant approximately $46,000 or 7.6% for the first nine months of 1996, when compared to the similar period in 1995. The primary reason was increased competition from several restaurants and two multi-tap brewpubs, and the lack of an effective marketing program for the brewpub. Gross Profit: Gross profits decreased by 25.4% from $508,240 for the nine months ended September 30, 1995 to $379,104 for the nine months ended September 30, 1996. Gross profit decreased in terms of actual dollars and as a percentage of sales primarily as the result of competitive pressures that required St. Stan's to lower prices to distributors faster than St. Stan's could lower production costs and increase sales. Selling, General and Administrative Expenses: Selling, general and administrative expenses increased less than 1.0% from $415,163 or 27.1% of sales for the nine months ended September 30, 1995 to $418,706 or 29.9% of sales for the nine months ended September 30, 1996. Selling, general and administrative expenses remained basically the same as St. Stan's was forced to scale back in most areas and try to allocate more funds for sales and marketing activities. St. Stan's was unable to generate sufficient working capital and unable to re- allocate enough funds to marketing and sales to counter competitive pressures and grow the brands. Interest: Interest expense increased 8.6% from $76,028 for the nine months ended September 30, 1995 to $82,597 for the nine months ended September 30, 1996. Such increase is due to an increase in related party notes payable. Net Income (Loss): Net income was $17,049 or 1.1% of net sales for the nine months ended September 30, 1995 versus a net loss of $(122,199) or (8.7)% of net sales for the period ended September 30, 1996. Overall competition has significantly affected margins, and coupled with increased selling and interest costs, caused the St. Stan's to incur a loss in 1996. YEARS ENDED DECEMBER 31, 1995 AND 1994 -- ST. STAN'S BREWERY AND BREWPUB OPERATIONS Sales: Volume increased by 7.3% from $1,891,554 in 1994 to $2,029,424 in 1995. The increase in sales was primarily attributable to the introduction of new products. Gross Profit: Gross profit increased by 22.4% from $517,236 or 27.3% in 1994 to $633,207 or 31.2% in 1995. The improvement in gross profit is primarily attributable to price increases in 1995, improved operating efficiencies and lower costs of raw materials. Selling, General and Administrative Expenses: Selling, general and administrative expenses increased by 12.5% from $518,763 or 27.4% in 1994 to $583,568 or 28.8% in 1995. In general, this increase can be attributed primarily to an increase in sales, marketing and promotional activities. Interest: Interest expense decreased by 5.7% from $104,351 in 1994 to $98,398 in 1995. Net Income (Loss): The net loss decreased by 53.9% from $105,878 or 5.6% of sales in 1994 to $48,759 or 2.4% of sales. 29 33 LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has funded operations primarily from the private placement of common stock grossing approximately $1,655,000 in one offering and $150,000 in another, netting approximately $1,569,000 million after costs of the offerings, and $750,000 in two debt financings of $500,000 and $250,000 as of December 20, 1996 to be repaid from proceeds from the Offering. The Company has also secured a $175,000 line of credit from a related party of OEBC. Through December 20, 1996, the Company has borrowed $121,941 on such line of credit. The Company intends to close up to an additional $500,000 in debt in January 1997 to be repaid from proceeds of the proposed Offering. The Company's operations have used substantial cash in the November 8, to December 31, 1995, post acquisition period and for the nine month period ending September 30, 1996. The Company has insufficient capital to fund cash used in operations to enable the Company to continue as going concern without additional working capital in the immediate future and cannot implement its strategy to lower cost of sales on a percent of sales basis, initiate its sales and marketing plans or its growth strategy without completing the planned Offering. Initially, the Company's profitability will be adversely affected as the result of its growth strategy. The Company has incurred, and will continue to incur, substantial expense pursuant to its growth strategy which includes expanded marketing and advertising expenses, as well as legal and accounting expenses pursuant to its planned expansion through strategic alliances and acquisitions. Until the consummation of the acquisition and partnership agreements concurrent with this Offering, the Company has limited influence on the operations of these companies, and is restricted in achieving certain operating efficiencies and income growth. Furthermore, until such time that a certain number of craft breweries have been acquired or joint ventured, and functioning according to the Company's operating performance standards, and consolidation and marketing strategies, the Company's profitability will be adversely affected. The Company's initial acquisitions and operating agreements are primarily with smaller breweries that have not been operating profitably, and in all likelihood, could not operate profitably without operating efficiencies, financial, sales and marketing assistance. Furthermore, the Company will need to spend substantial funds on sales and marketing in order to increase sales volume. It will also need to invest in brewing facilities, equipment and improvements in order to increase production capacity and reduce production costs and improve operating efficiencies. Management plans to centralize purchasing to reduce costs of materials on a per-unit basis. Management also intends to consolidate its operations in Lake Elsinore, California with Riverside, California operations during 1997 in an effort to reduce its operating expenses. Management has estimated that such cost will be $30,000. (See "Use of Proceeds"). There are no assurances that management's plans will be implemented in a manner which will attain profitable operations after the consummation of the Offering. The Company's reciprocal marketing and production agreement with Chicago Brewing Company should have a limited positive effect on the Company's cash flow, but is important strategically as it enables the Company to produce and market incremental business from existing wholesale and contract-brew accounts, and enhance its competitive position in the craft brewing industry. Under this agreement, the Company currently produces Red Pig for Cabo Distributing Company's East Coast accounts at the Chicago Brewing Company facility. The Company's production agreement with Minnesota Brewing Company should have a positive effect on cash flow as it does not require the Company to incur any additional capital or production related expenditures. Under this agreement, the Company will package, store and sell Humpback Ale (draught only, approximately 500 kegs per month) to SWS. The Company currently has approximately $100,000 cash on hand, a credit facility for $175,000 with approximately $50,000 credit available. However, the Company has insufficient cash flow to remain current with certain trade vendors for a prolonged period of time as a result of launching its Hussong's brands in September 1996, and costs incurred with its acquisition and arrangements and its Offering. The Company expects to receive approximately $7.5 million from the Offering, net of expenses, of which $3.5 million is contractually committed to or is expected to be utilized almost immediately and specifically for 30 34 the payment of a legal settlement ($200,000), paydown of accounts payable ($500,000), costs associated with consolidating operations ($30,000), repayment of bridge ($1,250,000) and short-term debt obligations ($175,000), and cash outlays associated with acquiring new property and equipment ($250,000) and with completing the acquisition and partnership ($1,079,000). See "Use of Proceeds." The Company is expected to have a current ratio of approximately 3 to 1 immediately after the public offering. The remaining net proceeds of $4.0 million refers to the following line items in the use of proceeds that will be expended over the 12 to 18 month period following the Offering, including marketing and sales ($1,500,000), acquisitions and new products ($1,000,000) and working capital ($1,562,498). Even though the Company has plans to improve cash flows through increased sales and reductions in cost of sales through improved operating efficiencies (of which there are no assurance), it does not expect to have positive cash flows until at least the fourth quarter of 1997 or early 1998. The craft brew industry is seasonal with sales lower in the first and second calendar quarters and higher in the third and fourth calendar quarters. The Company also anticipates spending substantially on sales and marketing, with planned expenditures for the first 18 months after the offering totaling approximately $1.5 million. The Company will also invest approximately $250,000 to increase production capacity, quality control and consolidate and standardize brewing operations. The Company will also seek additional acquisition candidates to expand its product lines, at an estimated cost of $1.0 million. Management intends to compliment its product line expansion through the issuance of its common stock. General and administrative costs will increase as a result of new expenses associated with operating as a public company, and legal and accounting costs involved with subsequent acquisitions. The Company will try to utilize debt and equipment financing as may be available to the Company to extend working capital. Since the Company cannot forecast with certainty the cost associated with implementing its growth strategy, management intends to maintain as much flexibility as reasonably possible in regards to managing capital expenditures and operations, so as to more effectively manage cash. The Company believes that the net proceeds from this Offering, after taking into consideration its use of a portion of such net proceeds for debt reductions (including accounts payable) and Partnership contributions totaling $3,004,000, will be sufficient to support the Company's capital expenditures, expansion of product lines and working capital requirements for the next 12 months. However, the craft brew industry is undergoing significant changes and management can make no assurance that they will be able to implement marketing and sales changes, consolidate operations or improve operating efficiencies fast enough in the face of increased competitive pressures. Management must stabilize operations and improve cash flows adequately to remain a viable entity. Furthermore, the Company cannot make any assurance that it will be able to acquire additional breweries or brands at reasonable prices or terms. If the Company cannot implement its growth strategy in a timely manner, then there can be no assurance that additional capital will be available, or that such financing will be available on terms favorable to the Company or its shareholders. To the extent the Company raises additional capital by issuing equity or convertible debt securities, ownership dilutions to the Company's shareholders may result. In the event that adequate funds are not available, the Company's business may be adversely affected. 31 35 BUSINESS The Company was formed on August 2, 1995 as a California corporation, for the purpose of creating a multi-brand, multi-regional specialty beer company, capable of assuming a leadership role in the craft brewing industry. The Company's growth strategy is distinctly different from most other companies in the craft brewing industry, as it does not allocate resources and capital towards the development or improvement of a single local or regional brand and brewing facility, but focuses on acquiring a variety of existing regional brands with growth potential and existing production capacity, and/or entering strategic alliances with key industry players. The Company plans to allocate resources towards creating operating efficiencies by consolidating production capacity, sales and marketing operations, distribution channels, and effective multi-brand management. Thus the Company expects to achieve operating efficiencies, and plans to use its capital to spur revenue growth by effectively marketing its portfolio of existing and new products and services in targeted local and regional markets nationwide. The Company has acquired Heritage Brewing Company of Lake Elsinore, California ("Heritage" or "HBC"), and as soon as practicable after the date of this Prospectus will have acquired Orange Empire Brewing Company ("OEBC"), the parent of Riverside Brewing Company of Riverside, California ("Riverside" or "RBC"), which operates a brewpub-restaurant and a separate craft brewery and have become a majority partner with Prost Partners L.P. ("Prost") in BWI-Prost Partners, doing business as St. Stan's Brewing Company of Modesto, California ("St. Stan's"), operating a brewpub restaurant and a brewery (collectively the "Breweries"). BREWERIES Heritage Brewing Company On November 8, 1995, the Company acquired approximately 95% of all of the issued and outstanding shares of common stock of Heritage in exchange for 142,276 shares of the Company's Common Stock. Heritage shareholders are permitted to call their Heritage stock in the event the Company does not complete a public offering of securities raising gross proceeds of at least $5,000,000 prior to March 31, 1997 or if the Company has not funded at least $500,000 of interim financing during the period November 4, 1996 through January 10, 1997. The exercise of the call option requires Heritage to repay all monies advanced by the Company for payments of its Small Business Administration loan and Liberty National Bank loan, and advances for brewery capital equipment and leasehold improvements. Repayment shall be made in a note which is payable without interest over 36 months. Heritage shall return all shares of the Company's common stock initially issued to its former shareholders. The completion of this Offering terminates Heritage's shareholders' call option. Heritage was established in 1989 as one of the first microbrewers in California. Heritage's brands are Red Fox Ale and Mulligan. Heritage also currently acts as a contract brewer for other craft brands, such as Catalina Ale, Airship, Rodeo Colt, and Belmont Brewing Co. Heritage also obtained the license rights for Hussong's Cerveza, which was successfully launched by the Company in September 1996. Heritage has a brewery in Lake Elsinore, California in a building containing approximately 5,400 square feet with a warehouse of 4,000 square feet located across the street. The brewery's production capacity was recently expanded to 12,000 barrels per year, which was financed by the Company with the proceeds of its November 1995 private placement. The annual rent for the brewery facility, which expires in March, 1998, is currently $39,600, and the warehouse is leased month to month at $1,200 per month. After the consummation of the Offering or the expiration of its lease, the Company intends to consolidate the Heritage production facility into the Riverside facility. Riverside Brewing Company The Company has agreed to acquire all of the outstanding shares of OEBC, the parent of RBC. The closing of the sale is expected to occur as soon as practicable following the closing of this Offering. In exchange for the OEBC shares, the Company will issue 141,063 shares of its common stock to OEBC shareholders. In addition, certain non-management shareholders of OEBC will receive an additional 155,000 32 36 shares of the Company's Common Stock based on a specified number of barrels of beer produced and sold by OEBC ("Earnout Shares"). For each barrel of beer over 7,000 that the OEBC produces, ships and sells from the closing date of the acquisition through December 31, 1998, the Company will issue an additional four Earnout Shares up to a maximum of 120,000 Earnout Shares. If OEBC produces, ships and sells 40,000 or more barrels of beer during that same period, then those shareholders will receive an additional 35,000 Earnout Shares. The Company has agreed to provide up to 80 percent of the current potential maximum capacity (i.e., 24,000 barrels out of a 35,000 barrel capacity) per year for production of the OEBC products to meet the Earnout Shares criteria. In the event that such product is not produced because of capacity constraints at the OEBC facilities and additional capacity cannot be provided elsewhere, then the number of barrels required for OEBC to produce, ship and sell in order for the shareholders to be entitled to receive any or all of the Earnout Shares shall be adjusted in good faith by the Company and the OEBC shareholders. The number of shares issued to the OEBC shareholders will be increased (or decreased) dollar for dollar by the amount by which the net book value of OEBC on the closing date is greater (or less) than a deficit of $1,411,542 (the OEBC April 30, 1996 unaudited shareholders deficit of $911,542 plus $500,000) based on a share price of $8.00 per share. Based on the September 30, 1996 unaudited OEBC consolidated financial statements included elsewhere herein, Management does not believe shares issued will be adjusted upward under this provision. At the closing of the OEBC acquisition, Brewery Leasing Company, a company wholly-owned by Michael Hagerman, a director and principal shareholder of OEBC, has agreed to amend the terms of certain equipment leases it currently has with OEBC in exchange for 50,000 shares of the Company's Common Stock. The amendments include (i) reducing the effective interest rate of the equipment leases to 10%, (ii) reducing the lease obligation by $500,000, (iii) granting the Company the option to purchase the leased equipment for $1.00 upon the expiration of such leases, and (iv) increasing the lease obligation $61,950 for delinquent lease payments through December 1995. Also, concurrently with the closing of the OEBC acquisition, Michael Hagerman and Norman Kretschmar agree to assume $220,941 of the principal amount of a loan to OEBC by Riverside National Bank, which has agreed to release OEBC from that portion of the loan. The Company and OEBC will assume the balance of the loan in the amount of $312,552. To induce Messrs. Hagerman and Kretschmar to assume that portion of the loan, the Company has agreed to issue a total of 27,618 shares of Common Stock. The Company has also entered into a Debt Exchange Agreement whereby the certain debtholders of OEBC have agreed to forgive approximately $644,000 of loans to OEBC. In return the debtholders will receive a total of $301,000 in cash and 24,125 shares of the Company's Common Stock and Class D Warrants to acquire up to a maximum of 50,000 shares of the Company's Common Stock at an exercise price of $5.00 per share. Assuming the acquisition of OEBC is consummated, the Company has agreed to repay Mike Hagerman $175,000 for advances Mr. Hagerman made to OEBC to finance working capital. These advances are to be repaid out of the proceeds of this Offering. Any additional advances currently totalling approximately $121,941 will be repaid by the Company after 30 months from the close of this Offering. The Company has also entered into a two year consulting agreement with Brewery Leasing Company, whereby Brewery Leasing Company will provide the Company advisory services on the brewery equipment and assist on the disposition and acquisition of brewery equipment. Brewery Leasing Company will receive 10,000 shares of the Company's Common Stock over the term of this consulting agreement. This consulting agreement is effective on the close of the OEBC acquisition. The Company has entered into a Brewpub Management Agreement with Mike Hagerman and Norman Kretschmar. Messrs. Hagerman and Kretschmar have agreed to manage the Riverside Brewing Company brewpub over the next two years and have agreed to guarantee the brewpub's cashflow to at least break even during that period. In return, the Company will issue a total of 10,000 shares of its Common Stock to Messrs. Hagerman and Kretschmar. RBC, which started in 1993 as a brewpub and restaurant with a production capacity of 1,500 barrels a year, is located in the historic Mission Inn district of Riverside, California. RBC then began to sell a full line of specialty craft beers outside its brewpub. In October 1995, RBC began additional production in a new 33 37 18,000 square feet leased facility, independent of its brewing facilities at the pub, which has an initial production capacity of 35,000 barrels per year and can be expanded to 80,000 barrels per year. RBC currently brews five styles of draft beer. Its beers have won numerous awards in local, state, national and international competitions. The brewpub restaurant produces its products in draught only, mostly for on-site sales from its 5,000 barrel annual capacity brewery. The brewery sells its products in draught and bottled package (both 12-oz. and 22-oz. bottles). The majority of RBC beers are sold in California. To a limited extent, its beers are sold in 27 other states and Japan. In addition, the brewery produces private label brands for the Claim Jumper restaurant chain and the Rusty Pelican Chain, both in California. RBC has also entered into contract brewing agreements with various companies, including La Jolla Brewing Company of California, Water Street Brewing Company of Texas, Copperhead Brewing Company of California, and Rodeo Colt of California. RBC also produces Humpback Ale (draft only), in a joint venture operation with Minnesota Brewing Company, for Southern Wine and Spirits of California. St. Stan's Brewing Company BWI-St. Stan's, Inc. ("BWISS") a wholly-owned subsidiary of the Company, has entered into a partnership agreement with Prost Partners, L.P. ("Prost") doing business as St. Stan's Brewing Company to form BWI-Prost Partners ("Partnership"), which closes upon the consummation of this Offering. BWISS and Prost will share profits, losses, distributions, and capital 51% and 49% respectively, except that Prost will receive priority distributions of $2,500 quarterly to meet certain minimum financial obligations. The Partnership will be managed by a five member committee, three of whom are appointed by BWISS. Prost is contributing to the Partnership all of its assets, which is the St. Stan's Brewing Company operations, and the Partnership will assume the St. Stan's operating obligations. In addition, the Partnership will assume two demand notes executed by Prost totaling $459,120 owed to Romy Angle, who is an officer and a controlling shareholder of Stanislaus Brewing Company, Inc. ("Stanislaus"), Prost's general partner, and, as of the close of this Offering, the Purchasing Manager of the Company. As part of BWISS' initial capital contribution, BWISS will pay these notes owed to Ms. Angle upon the consummation of this Offering. The Partnership will also assume the note owed to Owens Financial Group ("Owens Note") in the principal amount of $668,927. The note is secured by the Partnership's fixed assets and ground lease for the Partnership's building. As part of BWISS' initial capital contribution, BWISS will assume the Owens Note. The Company has obtained written assurance from Owens Financial Group to amend, after a principal reduction payment of $168,927, the terms of the Owens Note to allow for principal and interest payable to be based on a 15 year amortization period, the extension of the maturity date to five years at a variable interest rate ranging from 11% to 16% per annum and for prepayment without penalty. The Partnership is not assuming Prost's obligations to Stanislaus. In addition to the initial capital contribution to the Partnership, BWISS is required to contribute to the Partnership $1,166,953 payable quarterly over 18 months commencing 18 months after the consummation of this Offering. In the event BWISS fails to make such payments, Prost may acquire BWISS's interest in the Partnership over four years based on (i) the fair market value of the Partnership's tangible assets plus (ii) the Partnership's net income before interest, taxes, depreciation and amortization for the preceding twelve months multiplied by three less (iii) accrued and contingent liabilities. This amount will likely be substantially less than the amount paid by BWISS. BWISS may buy-out Prost's interest in the Partnership by paying $2,205,000 within three years, plus that portion of the required capital contribution not made as of the date of the buy-out (the "Option"). By making such payment, BWISS will acquire all of Prost's interest in the Partnership. If BWISS fails to exercise the Option within three years, Prost has the initial right to acquire BWISS's interest in the Partnership based on the fair market value of the Partnership's assets, tangible and intangible, less accrued liabilities. If Prost does not exercise its right, BWISS has the right to buy-out Prost on the same terms. If neither Prost or BWISS exercises its right to buy-out the other party, the Partnership shall be dissolved. See "Risk Factors -- St. Stan's Brewing Company Partnership." 34 38 St. Stan's was the first "altbier" brewery in the United States. Altbiers are made in the old German pre-1700's tradition, before lager beers. Thus the name "alt" (old/old fashioned) beer. The difference between altbier and lager beer is that altbier has a cold storage period in the fermentation tanks, and unlike a lager, uses a top fermenting yeast, rather than a bottom fermenting yeast. The result is a beer that generally is perceived as smoother than British or American style brews. Since this style of beer was not found in the United States, St. Stan's was developed to fill this niche. The majority of St. Stan's sales are in Northern California. The brewery will be owned by the Partnership, is subject to a ground lease and is located in a custom-built facility in the downtown area of Modesto, California. The brewery was completed in October 1990 and is part of a 14,500 sq. ft. facility which includes a brewpub and gift shop. The two-story pub facility has a contemporary European appearance with classic European touches. Seating is more than 300, including a biergarten and pub. The brewery currently has an annual capacity of approximately 30,000 barrels per year. St. Stan's currently sells its products in kegs and in twelve ounce bottles. It produces four beer types on a regular basis and produces several seasonal and specialty brews from time to time. St. Stan's will be involved in the production and sale of Hussong's Cerveza for the Northern California and North-West markets under an agreement with Heritage starting January 1, 1997. RECIPROCAL PRODUCTION AND MARKETING AGREEMENTS The Company has entered a reciprocal marketing and production agreement with Chicago Brewing Company ("CBC"). CBC operates a 30,000 barrel per year brewery in Chicago, Illinois. Under the agreement, the Company can cause production of its own brands and contract brews destined for Mid-West and East Coast markets at CBC. The Company has entered an agreement with Minnesota Brewing Company ("MBC") for the joint production and packaging of Humpback Ale, a brand owned by Southern Wine and Spirits of California, one of the Company's primary distributors. INDUSTRY BACKGROUND The terms micro brew, craft brew and specialty brew are used interchangeably by consumers and within the industry to describe the products made by small, independent brewers, who generally use only traditional brewing processes and ingredients. Craft brewers include contract brewers which use third party's brewing facilities), regional specialty brewers, microbrewers and brewpub/restaurants. Craft beers are full-flavored beers brewed with quality hops, malted barley, yeast and water, without adjuncts such as rice, corn, stabilizers or water dilution. The craft beer market is still very small in the context of the overall U.S. beer industry. In 1995, this segment accounted for approximately 2% of domestic beer sales. However, the category has become one of the fastest growing niche markets in the U.S. beverage industry. According to a recent publication of the Institute for Brewing Studies (May-June 1996 issue of The New Brewer), since 1988, craft beer shipments have grown 30%-50% annually, while total domestic beer industry shipments have basically remained flat. The rapid growth of the craft brewing industry is related to an increased consumer awareness of and demand for high quality, high end and high priced consumer food products in general, and consumers' discovery and continued education of more traditional, fresh brewed, full flavored and premium priced beers. Prior to prohibition, the U.S. beer industry consisted of hundreds of small breweries that brewed distinctive, full flavored beers, delivered fresh to local markets. Following prohibition, U.S. brewers have narrowed production to lighter, milder beers, to appeal to the broadest market segment. These beers use lower cost ingredients and can be mass produced, while taking advantage of economies of scale in production and marketing. Competition among the industrial brewers has been primarily through costly mass advertising and pricing, rather than through flavor and quality. Mass production has coincided with industry consolidation. At present, more than 75% of domestic beer shipments are controlled by three major brewers. Since the early eighties, domestic per capita beer consumption has declined. At the same time, consumers increasingly focussed their consumption on more flavorful beer. Initially this demand was met by beers imported from Europe, Canada and Mexico. However, in the late 1980's, as state laws began to allow 35 39 pubs and restaurants to brew and sell beer on premise, a number of domestic specialty brewers began to offer a variety of more flavorful, traditionally brewed beers. In response to consumer demand, the number of craft brewed beers has increased in the last five years. Certain craft brewers have quickly grown from microbreweries into regional craft breweries, some with operations in multiple locations. Contract brewers, such as Samuel Adams and Pete's Wicked Ale, have taken advantage of this growing demand by retaining industrial brewers to perform contract brewing at otherwise under-utilized brewing facilities. At present, there are more than 800 craft breweries in the U.S. In addition, the major brewers have introduced their own fuller flavored specialty beers, and have acquired or established partnerships with existing craft brewers. PLAN OF OPERATION/BUSINESS STRATEGY Industry forecasts (according to the Institute for Brewing Studies, The New Brewer, May-June 1996 issue) report continuing rapid growth of the craft brewing industry in excess of 30% annually. The craft beer market is very fragmented, and distribution channels are getting crowded from the proliferation of brands. The large craft brewers are becoming increasingly dominant and Budweiser, Miller and Coors have all recently introduced product entries, and are focussing their main brand advertising campaigns to appeal to craft brew consumers. The Company believes that craft brewing is entering a phase of development, characterized increasingly by consolidation requiring marketing and sales resources, operating efficiencies, integrated production and appropriate distribution capabilities and access to capital to enable the craft brewers to effectively compete with the dominant companies in this industry. The Company plans to position itself as an industry leader in the craft brewing industry with regional strongholds and nationwide access to the major markets, through a combination of acquisitions, strategic alliances, brand strategies, high profile introduction of new products, and consolidation of brewing, sales and marketing, distribution and administrative operations. The Company plans to utilize the proceeds from this Offering to spur revenue growth by effectively marketing its portfolio of products and services in local and regional markets nationwide. There is no assurance, however, that the Company's strategy will be successful. Acquisitions The Company's initial acquisition strategy focused on smaller, undercapitalized craft breweries located in or close to craft brew growth markets, with proven, award winning products and a potential to expand their market share and gain strong regional and/or national distribution. A second phase of the Company's acquisition and joint venture strategy will focus on acquiring medium sized regional craft breweries (25,000 to 50,000 barrels annually). The Company believes that it will become increasingly difficult for these breweries to successfully compete independently in an increasingly consolidating, competitive market. The Company's strategy is designed to acquire and provide such companies with the resources and tools needed to professionally and rapidly improve operating efficiencies and expand their businesses. Factors critical to implement the Company's acquisition strategy are discussed below: Capital: The craft brew industry has always been capital intensive in terms of equipment and has now become capital intensive for marketing and sales as well. The dual strain of these capital requirements prevents many of the craft breweries from achieving their true growth potential in an increasingly competitive industry. The ability of the Company to successfully implement its business strategy is dependent on the Company obtaining the necessary capital to increase production, improve quality, lower production cost, implement the necessary management and operating systems and provide the professional marketing programs that are essential to gaining and maintaining strong sales and distribution networks. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Operating Efficiencies: An essential element of competing successfully in a high growth, consolidating industry is the ability to constantly improve operating efficiencies at a faster rate than competitive pressures lower margins. A fundamental aspect of the Company's strategy is to realize these operating efficiencies, while preserving the traditional aspects of craft brewing. 36 40 Standardized Production and Centralized Purchasing. The Company plans to aggressively consolidate brewing operations where appropriate, and standardize production methods and equipment throughout its breweries while setting the highest quality assurance standards, implementing cost efficient production techniques, optimizing production utilization and gaining savings through centralized purchasing and centralized production planning. Centralized Accounting & Administration. The Company expects to realize significant manpower savings and efficiencies by centralizing all accounting, order processing, inventory management, scheduling, legal, compliance, licensing and M.I.S. functions and activities. The Company is centralizing its accounting department in charge of all its functions, and its customer service department in charge of order processing, inventory management, scheduling and shipping. Centralized Sales, Marketing Planning and Support. The Company expects to benefit from available resources, efficiencies and cost savings in the field of sales, sales management, brand management, marketing, planning, advertising and promotion. The Company's sales and marketing department coordinates all field sales marketing planning, product development and ATF and ABC compliance activities for all brands. It manages point of sale materials development, purchasing and inventory, events planning, distributor incentive programs, promotion and advertising campaign development and scheduling. Distribution Network: Combined, the Breweries utilize more than 100 distributors in 35 states. With some of these distributors, the Breweries have a multi-faceted relationship which may include several of the Company's brands, private label and contract brewing. The Company's consolidated sales force is organized to properly service and support these distributors, promote the Breweries' products, make joint retail account calls and be involved in events and promotions in the distributors' territories. Management: The Company has assembled a management team skilled in managing entrepreneurial growth companies and consumer food products marketing. The Breweries provide additional brewing and brewpub restaurant expertise and sales manpower. The Company has started the process of coordinating sales and marketing, brewpub restaurant management, production and administrative activities of the Breweries in anticipation of the closing of the transactions. Brewing Capacity Expansion The Company plans to substantially increase combined brewing and bottling capacity within the first 18 months after the close of this Offering, up to approximately 150,000 barrels per year. In the twelve month period following thereafter, the Company plans to increase its production capacity up to 240,000 barrels per year. The increases in capacity assume the acquisition of additional breweries and the availability of capital, of which no assurances can be provided. Key to the Company's short to medium term strategy is to significantly increase its regional brewing operations in Southern California, and to expand its operations into the Mid-West and the South-East United States. As a first step to improving its Southern California operating efficiency, the Company is considering plans to integrate Heritage's brewing operation and Riverside's brewery into a single, highly efficient, state-of-the-art facility, while keeping capital expenditures at a minimum. The Company plans to become a low cost operator through the implementation of uniform operating systems, economies of scale, and creating a truly integrated nationwide multi-location operation. The Company plans to aggressively standardize and increase overall production capacity while setting the highest possible quality assurance standards, implementing cost efficient production techniques, and optimizing production utilization. Implementing these plans depend on the availability of capital. The Company utilizes sterile filtration in all its breweries. The Company plans to utilize flash pasteurisation, tunnel pasteurisation or other methods to provide additional assurances for product stability and extended shelf life under extreme distribution and storage conditions. 37 41 Marketing Strategies The Company plans to utilize its resources and capital to spur revenue growth by effectively marketing its portfolio of existing and new products and services in targeted local and regional markets nationwide. The Company's marketing and marketing communication strategies focus on developing strong local brand awareness and following of the Company's brands at distributor, retail account and consumer level, in particular in those markets in which the Breweries currently are located. The Company wants to emphasize the advantage of consuming fresh locally produced beer over beer imported from out-of-state utilizing the Breweries and the brewpub restaurants as "anchors". At the same time it plans to utilize its multi-location brewing capacity and comprehensive distribution network to establish a nationwide presence for some of its brands; and grow its contract brew business from medium sized contract brewers, thus optimizing the Company's competitive position and use of brewing capacity. Products/New Products The Company is involved in the ongoing development of unique quality brews aimed at high growth niche market segments. It utilizes the combined experience of its marketing staff and eight experienced and acclaimed brewmasters whose brews have won numerous awards. PRODUCTS The Company, upon the closing of the Offering, will market a total of 26 different beers on a regular basis. Although most of these brews are sold year-round, some are seasonal. All of the Company's beers are hand-crafted in 100 to 200 barrel batches using traditional European brewing methods. The Breweries brew their beers using only high quality hops, malted barley, wheat, rye and other natural ingredients, and do not use any corn, rice, syrups or other adjuncts. In addition to its own brands, the Breweries operate as contract breweries for various contract brew brands, and produce private label contract brews for several well-known restaurant chains such as Claim Jumper and Rusty Pelican, both of which are in California. All brews are marketed on the basis of quality, freshness and unique, distinctive flavor profiles. Riverside Brewing Company Golden Spike Pilsner: A European style pilsner, with a hoppy aroma and a dry crisp Czech hop flavor and long dry hop aftertaste (Bronze Certificate-1996 California State Fair, World Champion-1995 World Beer Championships, Gold Medal-1995 Colorado State Fair, Silver Medal-1995 California State Fair, Silver- 1995 California State Fair, Silver-1995 Karnival of Beers, Bronze Medal-1993 Great American Beer Festival). Pullman Pale Ale: A deep gold, pleasantly hopped ale with a malty aroma and unique flavor (Silver Medal-1996 World Beer Championships, Silver Medal-1996 World Beer Cup, Silver Certificate-1996 California State Fair, Gold Medal-1995 California Beer Festival, Gold Medal-1995 Karnival of Beers, Silver Medal-1995 World Beer Championships, Silver Medal-1995 Great American Beer Festival). Victoria Avenue Amber Ale: Deep amber colored (Scottish) ale with a malt aroma and a medium dry malt aftertaste, made with English Goldings hops (Bronze Medal-1996 World Beer Championships, Gold Medal-1995 California State Fair, Silver Medal-1995 Karnival of Beers, Silver Medal-1995 Colorado State fair, Bronze Medal-1995 California Beer festival, Bronze Medal-1995 World Beer Championships, Gold Medal-1994 Great American Beer Festival). Raincross Cream Ale: A beautiful gold-colored brew with a well-hopped aroma and flavor (World Champion-1995 World Beer Championships, Silver Medal-1996 World Beer Championships, Bronze Certificate-1996 California State Fair, Silver Medal-1995 California Beer Festival, Gold Medal-1995 California State Fair, Bronze Medal-1995 Colorado State Fair). 38 42 7th Street Stout: A sophisticated, deep brown stout with a very pleasant aftertaste (Silver Medal-1996 World Beer Championships, Gold Medal-1995 Karnival of Beers, Bronze Medal-1994 Great American Beer Festival). #119 Maybock: A traditional, malty maybock with slightly more hop flavor (Bronze Medal-1996 World Beer Championships, Silver Certificate-1996 California State Fair, Bronze-1996 BTI). #119 Seasonal: (Silver Medal-1996 World Beer Championships). St. Stan's Brewing Co. St. Stan's Red Sky Ale: This red-hued pale ale with a medium body is St. Stan's top selling brew (Silver Medal-1996 World Beer Championships, Gold Medal-1994 Malt Advocate, Silver Medal-1994, Wine Enthusiast). St. Stan's Amber Alt: An amber colored, smooth beer made in the "Altbier" style of Dusseldorf, Germany (Silver Medal-1996 World Beer Championships, Silver Medal-1995 World Beer Championships, Bronze Medal-1987 Great American Beer Festival). St. Stan's Dark Alt: A dark colored brew with a chocolate roasted malt flavor, made in the "Altbier" style of Dusseldorf, Germany (Gold Medal-1995 World Beer Championships, Bronze Medal-1993 Karnival of Beers). St. Stan's Whistlestop Ale: A light and clean traditional British Pale Ale with a golden straw color (Bronze Award-1996 Wine Journal). St. Stan's Fest Beer: A copper colored winter brew (Silver Medal-1994 Karnival of Beers, Gold Medal-1991 Beer Connoisseur Guide). St. Stan's Graffiti Wheat: A light and slightly hazy, refreshing and fruity summer wheat brew, with a unique "American Graffiti" marketing theme. Heritage Brewing Company Hussong's Cerveza Extra: Hussong's (produced under license of Hussong's Cantina in Ensenada, Mexico) is a uniquely positioned lifestyle type of specialty beer. The Hussong's product line include two beer types: Hussong's Extra, a high-end, light, crisp Mexican Style beer, and Hussong's Cerveza Negra: A very smooth, deep amber ale. Mulligan: An easy to drink, light colored brew with a crisp, well-hopped aroma and flavor. Red Fox: A robust, flavorful, classic American pale ale, generously dry hopped (Bronze Medal-1993 Great American Beer Festival). Contract Brews/Private Label Brands/Other Claimjumper Honey Blond Ale: Private label brew for Claimjumper restaurants, brewed at Riverside. Claimjumper Original Red Ale: Private label brew for Claimjumper restaurants, brewed at Riverside. (Silver Medal-1996 World Beer Championships). Red Pig Ale: Contract brew for Cabo Distributing, California, brewed at Heritage, Riverside and Chicago. Humpback Ale (draft only): Contract brew for Southern Wine and Spirits of Southern California, packaged at Riverside in a joint production agreement with Minnesota Brewing Company. Copperhead Ale: Contract brew for Copperhead Brewing Co. brewed at Riverside. La Jolla Red Roost Ale: Contract brew for La Jolla Brewing Co. brewed at Riverside. 39 43 Rowdy's Perfect Ale: Contract brew for Waterstreet Brewing Co. brewed at Riverside. BREWING FACILITIES Heritage Brewing Company, Lake Elsinore, California Heritage operates a 12,000 barrels per year brewery in a 5,400 square feet brewing facility and 4,000 square feet warehouse in Lake Elsinore, California. The brewery has a 50 barrel brewhouse and twelve 50 barrel fermentation tanks. The brewery has a 120 bottles per minute bottling line for 12 ounce and 22 ounce bottles and a kegging line that can clean and fill 15 kegs per hour. Riverside Brewing Company, Riverside, California The brewpub is located in a leased, 75 year old brick building in the historic Mission Inn district of Riverside, California. The production capacity of the brewpub facility is 5,000 barrels per year. The brewpub has a 14 barrel brewhouse, four 14-barrel fermentation tanks, twelve 7 barrel bright beer tanks and other brewing equipment. It has no bottling line. The brewpub consists of a bar area that seats 175, a restaurant that seats 148, and outside seating locations that seat 220. The brewpub mainly serves its own brews and features a variety of food items on its menu. From time to time the brewpub features live music or other events such as cigar and beer tasting nights. The brewpub employs 30 full time and 40 part time staff, including a full-time brewmaster. The brewery is located in an industrial park in Riverside in a 18,000 square feet leased facility which has an initial production capacity of up to 35,000 barrels per year which can be expanded to 80,000 barrels per year. The brewery has a 50-barrel capacity brewhouse and ten 100-barrel fermentation tanks. The brewery has a bottling line with a throughput of approximately 160 bottles per minute, with the ability to produce both 22-fluid oz. and 12-fluid oz. bottles. The brewery's kegging line can clean and fill approximately 30 kegs per hour. The Company had purchased tunnel pasteurization equipment, which was initially planned for installation at Heritage, but which can be put to use more effectively at Riverside's operation. The pasteurizer has an initial capacity of 60 bottlers per minute at a rate of 12 pasteurization units, and can be upgraded to 120 or 180 bottles per minute. St. Stan's Brewing Company, Modesto, California St. Stan's is located in a custom-built facility in the downtown area of Modesto, California. The facility was completed in October 1990 and is part of a 14,500 sq. ft. which includes the brewery, a brewpub and gift shop. The brewery currently has an annual capacity of approximately 30,000 barrels per year. The brewery has a 60-barrel capacity brewhouse and eight 120-barrel fermentation tanks and certain other equipment. The divisions's kegging machine is staff built and has a production capacity of approximately 30 kegs per hour. Its bottling line has throughput of approximately 180 bottles per minute. The brewery can be expanded to an annual capacity of approximately 50,000 barrels through the addition of fermentation tanks, but would require expansion into the brewpub area or the installation of external insulated fermentation tanks. The two-story brewpub has a contemporary European appearance, and has a combined seating of approximately 300 in its restaurant and bar area. The brewpub mainly serves beers brewed in the brewery and features a variety of food items on its menu. From time to time the brewpub features live music. The brewpub employs 28 full time and part time staff. The brewpub and brewery share management, administrative and office resources. BREWING OPERATIONS Brewing Ingredients The Company's beers are made only from four natural ingredients: malted barley, hops, yeast, and water. The most commonly used source of sugars for beer fermentation is provided by barley grain. The grain contains complex sugars which, after processed in the malting plant, provide the simple sugars for 40 44 fermentation. The barley variety used by the Company is two-row which provides fewer undesirable components than the six-row varieties used by many large US breweries. Selected world class hops, including many European varieties, provide bitterness, aromatics and flavor. Yeast is a single-celled organism whose metabolism converts sugar into alcohol and carbon dioxide. The yeast ferments the sugar water, known as "wort," which is derived from the malted barley. Malting The maltster steeps the barley grain in water to induce a controlled germination followed by air drying and in some cases roasting via kilning. This process, known as "malting", prepares the malt, through the creation of enzymes, so that upon mashing, simple sugars are easily obtained from the complex sugars. The malting process also imparts color and flavor characteristics to the grain. The malted barley, referred to as "malt" is then sold to the brewery. Mash/Lautering The purpose of the mashing process is to create food for the yeast. Various roasted and non-roasted malts are milled, and mixed with hot water in the mash tun. Mashing is performed at either a constant temperature, or a series of rising temperatures, depending on the brewing equipment, the raw materials being used and the type of beer being brewed. During the mash, the complex carbohydrates are converted into fermentable sugars. Enzymes, created in the malting process, facilitate this conversion. The mash is then rinsed either in the lauter tun or the mash tun to produce the wort which is high in fermentable sugars. The mash system variables are controlled to determine the composition of the wort and, ultimately, the taste and type of beer being brewed. Brew Kettle Boiling Before entering fermentation, the wort flows into a brew kettle to be boiled, concentrated and clarified. Hops are added during the boil to impart bitterness, aroma and flavor balance. The specific mixture of hops and the timing of their addition is critical to produce the desired type beer. The Company selects its hops from specific growing areas around the world and from among a number of specific varieties cultivated within those growing areas. Fermentation After the boil, the wort is strained, cooled, aerated and then transferred to the fermentation cellar. Here a controlled amount of a proprietary yeast strain, at a selected temperature, is added ("pitched") to create fermentation. Some of the carbon dioxide is recaptured and absorbed back into the beer, providing a natural source of carbonation. The yeast may be either saccharomyces carlsbergensis (used in lager beers) or saccharomyces cervisiae (used in alts, ales, porters and stouts). Primary fermentation can take up to five days during which time the yeast multiplies a number of time by "budding". At the end of fermentation, a quantity of yeast is removed and stored for re-pitching. At the conclusion of the fermentation, the beer is usually transferred to another tank. The selection of krausening and/or lagering storage processes is an important choice of the brewer as it determines the length of time required to produce each batch of beer and therefore, the capacity of a brewery as well as the cost of producing the beer. Krausening is a process which adds about one week to the normal brewing cycle and is an important step in producing quality beers. Many of the Company's beers undergo the kruasening process. During Krausening, a small portion of young, still actively fermenting beer and yeast is added to a tank of beer at the end of primary fermentation to produce a second fermentation. Krausening produces a smoother, balanced beer flavor and body. The carbon dioxide is produced is allowed to naturally carbonate the beer. 41 45 Lagering is a process, used with beers fermented with bottom yeasts, during which the temperature of the beer is slowly reduced. This helps reduce harsh flavor products resulting from this type of yeast, as well as clarifying and mellowing the beer. Lagering may take from one week to several months. Maturation/Finishing After fermentation, the beer is cooled for several days while the beer is clarified and full flavor develops. Depending on the style of product, the fully conditioned beer may be filtered for clarity and/or carbonated for bottling or keg racking. Filtration removes unwanted protein, yeast and bacteria. At this point, the beer is in its peak condition and ready for bottling or keg racking. The entire brewing process of ales, from mashing through filtration, is typically completed in 10 to 17 days, depending on the formulation and style of the product being brewed. For lager beers the period ranges from one to six months. Quality Control The Company currently monitors its beer production with in-house analytical and micro biological tests. These tests monitor product quality, retail shelf stability, CO(2), color and bitterness, oxidation, yeast condition and unwanted bacteria. The Company also utilizes independent laboratories for further product analysis. Kegging and Bottling The Company packages its craft beers in both bottles and kegs. The packaging of beer is mechanically complex requiring the beer be handled under pressure, with minimal loss of its carbonation, while being sanitary packaged into a variety of packages, some with specific labeling for various states. The Company has a variety of options for packaging its bottle and keg configurations. SUPPLIERS The Company deals with a variety of suppliers for the sourcing and purchasing of raw materials for the Breweries. Two suppliers accounted for approximately 60.0% (unaudited) of product purchases for the nine months ended September 30, 1996. No one supplier accounts for 10% or more of total accounts payable at September 30, 1996 (unaudited). St. Stan's purchased certain products from two companies which accounted for approximately 27.3% and 12.0% of total purchases in 1995, and 26.0% and 11.3% of total purchases in 1994. Purchases from these suppliers during the nine-month periods ended September 30, 1996 and 1995 totaled approximately 47.4% (unaudited) and 38.8% (unaudited), respectively. Riverside purchased certain products from two companies which accounted for approximately 31.0% (unaudited) and 57.0% (unaudited) of consolidated purchases for the nine months ended September 30, 1996 and 1995, respectively. One company accounted for approximately 40.0% and 38.0% of product purchases for the years ended December 31, 1995 and 1994, respectively. No one vendor made up 10% or more of accounts payable as of September 30, 1996. Accounts payable to one company accounted for 26.0% as of December 31, 1995. Management believes that the loss of any major supplier would not have a material adverse effect on the Company. DISTRIBUTION The Breweries' products are currently distributed through a network of independent beer and liquor wholesale distributors. These products are generally sold in bottles and kegs to restaurants, brewpubs, bars and taverns, as well as in bottles to supermarkets, warehouse clubs, convenience stores and liquor stores. The Company's distribution strategy is to select its distributors on the basis of who it believes is best able to promote a variety if not all of the Company's products in a given market. In each of its targeted markets, the Company selects its distributors based on certain criteria, including: (i) market strength measured in terms of financial resources and number and size of accounts served, (ii) commitment to expend resources to educate consumers and retailers about the high quality and unique tastes of craft beer, (iii) ability to properly execute marketing and promotions programs, and (iv) reputation for customer service, including the ability to frequently service retail accounts, rotate stock to maintain freshness, monitor tap lines and beer storage. Distributors selected to date include distributors whose primary products are produced by Anheuser-Busch, 42 46 Miller and Coors and wine and spirits makers. The Company spends considerable time and effort to establish, maintain and support its relationship with distributors. The Company also offers its products directly to consumers at the Company's brewpub-restaurants in Modesto and Riverside, California. The Company demonstrates its commitment to the Breweries' independent distributors in many ways, including its refusal to sell directly to retail accounts within the appointed distributors' territories and, where permitted by law, involving distributors' sales representatives in the Company's distributor incentive programs. Each of the Breweries' distribution agreements appoints the distributor as the exclusive distributor for one or more of the Breweries' products in a specific geographic area, subject in certain cases to the Breweries' rights to engage in certain limited retailing activities. The distribution agreements provide that payment shall be made in full not less than 30 days after the date of delivery. The distribution agreements also provide for general cooperation among the distributors and the Breweries' in marketing, merchandising and promotional efforts. These distribution agreements may be terminated by either party 30 or 60 days after written notice of dissatisfaction with performance specifying the grounds for such dissatisfaction if the specified deficiencies have not been cured by the end of the 30 or 60-day period. In some states, the terms of the Breweries' contracts with its distributors may be affected by laws that restrict enforceability of some contract terms, especially those related to the Breweries' right to terminate the services of its distributors. At the time of this offering, the Breweries' products are not necessarily distributed through the same wholesale distributors in certain markets. Riverside has appointed 40 distributors in 28 states. St. Stan's has appointed 35 distributors in 19 states. The Company may consolidate distribution of the Breweries' brands through the same distributors in certain markets if efficiencies and marketing advantages can be obtained. Such plans may be subjected to or constrained by state regulations. Four distributors accounted for 27.0%, 17.0%, 24.0% and 11.0% of Heritage net sales (unaudited), respectively, for the nine-month period ended September 30, 1996. Two distributors accounted for 57.0% and 35.0% of the accounts receivable balance (unaudited), respectively, as of September 30, 1996. For St. Stan's, five distributors accounted for 35.4% and 28.9% of sales, of which one distributor accounted for 10.1% of 1995 sales, during the years ended December 31, 1995 and 1994, respectively. For the nine months ended September 30, 1996 (unaudited), one distributor accounted for 10.0% of sales. No distributor accounted for more than 10% of sales during the nine-month period ended September 30, 1995 (unaudited). Five distributors accounted for 69.5% of the accounts receivable balance at December 31, 1995, of which one distributor accounted for 33.6%. No distributors accounted for more than 10.0% of the accounts receivable balance at September 30, 1996 and 1995 (unaudited). For Riverside, one distributor accounted for approximately 25.0% (unaudited) of consolidated net sales for the nine months ended September 30, 1996. No one distributor accounted for 10.0% or more of consolidated net sales for the nine months ended September 30, 1995 (unaudited). One distributor accounted for approximately 12.0% of consolidated net sales for the year ended December 31, 1995 and one distributor accounted for approximately 18.0% of net sales for the year ended December 31, 1994. Four distributors accounted for 38.0%, 22.0%, 14.0% and 14.0%, respectively, of the accounts receivable balance at September 30, 1996 (unaudited). Four distributors accounted for 23.0%, 18.0%, 18.0% and 16.0% respectively, of the accounts receivable balance at December 31, 1995. SALES AND MARKETING Marketing Strategies The Company plans to spur revenue growth by effectively marketing its portfolio of existing and new products and services in targeted local and regional markets nationwide. Its marketing and marketing communication strategies focus on developing strong local brand awareness and consumer following for the Company's brands and brewpub restaurants at distributor, retail and consumer levels, in particular in those markets in which the Breweries are currently located, while assisting further volume throughput, broader account penetration and encouraging an increased level of trial purchases. The Company wants to emphasize 43 47 the advantage of consuming fresh locally produced beer over beer imported from out-of-state, utilizing its breweries and its brewpub restaurants to gain additional corporate and brand recognition. At the same time it plans to utilize its multi-location brewing capacity and comprehensive distribution network to establish a nationwide presence for some of its brands. The Company also plans to grow its contract brew business from medium sized contract brewers to optimize Company's competitive position and utilization of brewing capacity and resources. This will be achieved through effective regional communications campaigns, retail and distributor incentive programs. The Company has prepared such programs for all of its main brands, scheduled for implementation throughout the first and second quarter of 1997. Advertising & Promotion The Company has allocated approximately $1.5 million from the proceeds of the Offering towards product development, market research, point of sale materials, promotion and paid advertising, to be spent over the next 18 months. See "Use of Proceeds." The Company has retained the creative services of Paragon Design, a well respected creative agency known for its marketing communication programs for clients that include Disney Consumer Products, MCA/Universal Entertainment (Jurassic Park, Apollo 13), Mattel Toys, Baskin Robbins, L.A. Gear, AirTouch, Nextel and others. Paragon has been assigned with formulating brand strategies, creative campaigns, new packaging designs, market research and creating a corporate identity program for the Company and the Breweries. Pricing Craft beers generally sell at a price premium relative to domestic industrial beers, with retail prices for craft beers typically ranging from $4.99 to $7.99 per six pack of 12 ounce bottles versus approximately $2.99 to $3.99 for industrial beers. This price premium provides generally higher profit margins for the distributors and retailers that offer craft beers. The Company believes that distributors and retailers are eager to increase their sales of higher margin craft beers as industrial brewers continue to wage price wars to gain market share in this flat growth segment thereby decreasing distributor's margins. To further increase retail product sales, the Company periodically offers "post-offs," or price discounts to its distributors. Distributors and retailers often participate in these price discounts. New Products Key to the Company's success is the ongoing development of unique quality brews for high growth market segments. It utilizes the combined experience of its marketing staff and its brewmasters whose brews have won numerous awards. Among other market segments, the Company plans to focus on small batch, high margin brews. Contract Brews The Breweries close proximity to key markets positions the Company to improve utilization of its current and future brewing capacity and generate additional income by expanding its already strong contract brewing and private label business. The Company is currently having discussions with several potential contract brew customers. International Operations The Company is having discussions with N.V. Pauwels, owned by one of the Company's overseas investors, a Belgian corporation operating in the field of consumer food products manufacturing, marketing and distribution, regarding the possible import, manufacture and distribution of the Company's products in Europe. 44 48 COMPETITION The craft-brewed and high-end segments in the U.S. beer market are highly competitive due to continuing proliferation of microbrewers and contract brewers, the recent introduction of fuller flavored beers by national brewers, efforts by other microbrewers to expand their production capacities and a general surplus of under-utilized domestic brewing capacity, which facilitates existing contract brewer expansion and the entry of new contract brewers. Recent growth in the sales of craft-brewed beers are expected to increase competition and, as a result, prices and market share of the Company's products may fluctuate and possibly decline. Direct competitors of the Company include all large contract brewers, regional brewers and local micro brewers. Indirect competitors include the major national mass producers such as Anheuser Busch, Inc. and Adolph Coors Brewing. The national brewers, recognizing the significant growth potential and the slight but growing shift in market share from national mass-produced beers to craft brews, have made significant investment in the craft brew industry. The Company expects that certain of the major national brewers, with their greater financial resources and established national distribution networks, will seek further participation in the continuing growth of the craft beer segment through investments in, or formation of distribution alliances with, craft brewers. The increasing participation of the major national brewers will likely increase competition for market share and increase price competition within the craft beer segment. Many of the Company's competitors in the craft beer segment have greater financial and other resources than the than the Company. See "Risk Factors -- Increased Competition for Specialty Beers." The Company's products also compete generally with other alcoholic beverages including other segments of the beer industry and low alcohol products. The Company competes with other beer and beverage companies not only for consumer acceptance and loyalty but also for shelf and tap space in retail establishments and for marketing focus by the Company's distributors and their accounts, all of which also distribute and sell other craft brews, beers and alcoholic beverage products. The Company also competes against producers of imported beers. Although imported beers currently account for a much greater share of the U.S. beer market than craft beers, the Company believes that local craft brewers possess some competitive advantages over certain importers, including lower shipping and no importation costs, proximity to and familiarity with local consumers, a higher degree of product freshness, eligibility for lower federal excise taxes and freedom from currency fluctuations. The principal methods of competition in the craft-brewed segment of the beer industry include product quality and taste, brand advertising, trade and consumer promotions, pricing, packaging and the development of new products. The Company believes that its competitive position is enhanced by its dedication to product quality and its ability to deliver fresh product brewed locally in multiple markets, lower production and transportation costs resulting from operating efficiencies, innovative marketing and advertising methods, a broad and diverse product/brand lineup, new product launches and award winning quality brews. REGULATION The manufacture and sale of alcoholic beverages is a highly regulated and taxed business. The Company's operations may be subject to more restrictive regulations and increased taxation by federal, state and local governmental entities than are those of non-alcohol related businesses. Federal, state and local laws and regulations govern the production and distribution of beer. These laws and regulations govern permitting, licensing, trade practices, labeling, advertising, marketing, distributor relationships and related matters. Federal, state and local governmental entities also levy various taxes, license fees and other similar charges and may require bonds to ensure compliance with applicable laws and regulations. Failure by the Company to comply with applicable federal, state or local laws and regulations could result in penalties, fees, suspension or revocation of permits, licenses or approvals. There can be no assurances that other or more restrictive laws or regulations will not be enacted in the future. See "Risk Factors -- Government Regulation; Taxation." The Breweries produce beer and sell it to distributors or retailers and to consumers at its brewpub restaurants. Brewery, wholesale and retail operations require various federal, state and local licenses, permits and approvals. In addition, some states prohibit wholesalers and/or retailers from holding an interest in any 45 49 supplier such as the Company and the Breweries. Violation of such regulations can result in the loss or revocation of existing licenses by the wholesaler, retailer and/or the supplier. The loss or revocation of any existing licenses, permits or approvals, failure to obtain any additional or new licenses, permits or approvals or the failure to obtain approval for the transfer of any existing permits or licenses could have a material adverse effect on the ability of the Company to conduct its business. On the federal level, brewers are required to file with the Bureau of Alcohol, Tobacco and Firearms ("ATF") an amended Brewer's Notice every time there is a material change in the brewing process or brewing equipment, change in the brewery's location, change in the brewery's management or a material change in the brewery's ownership. Brewers must seek ATF approval of an amended Brewer's Notice prior to the change taking place. The Company's operations are subject to audit and inspection by ATF at any time. On the state and local level, some jurisdictions merely require notice of any material change in the operations, management or ownership of a permittee or licensee. Some jurisdictions require advance approvals and require that new licenses, permits or approvals must be applied for and obtained in the event of a change in the management or ownership of the permittee or licensee. State and local laws and regulations governing the sale of beer within a particular state by an out-of-state brewer or wholesaler vary from locale to locale. ATF permits and brewer's registrations can be suspended, revoked or otherwise adversely affected for failure to pay tax, to keep proper accounts, to pay fees, to bond premises, to abide by federal alcoholic beverage production and distribution regulations and to notify ATF of any change (as described above), or if holders of 10% or more of the Company's equity securities are found to be of questionable character. Permits, licenses and approvals from state regulatory agencies can be revoked for many of the same reasons. Because of the many and various state and federal licensing and permitting requirements, there is a risk that one or more regulatory authorities could determine that the Company has not complied with applicable licensing or permitting regulations or does not maintain the approvals necessary for it to conduct business within their jurisdictions. There can be no assurance that any such regulatory action would not have a material adverse effect upon the Company or its operating results. TAXATION The federal government and each of the states levy excise taxes on alcoholic beverages, including beer. For brewers producing no more than 2,000,000 barrels of beer per calendar year, the federal excise tax in $7.00 per barrel on the first 60,000 barrels of beer removed for consumption or sale during a calendar year, and $18.00 per barrel for each barrel in excess of 60,000. For brewers producing more than 2,000,000 barrels of beer in a calendar year, the federal excise tax is $18.00 per barrel. None of the breweries currently produces more than 60,000 barrels per year. Individual states also impose excise taxes on alcoholic beverages in varying amounts, which have also been subject to change. The state excise taxes are usually paid by the Company's distributors. Congress and state legislatures routinely consider various proposals to impose additional excise taxes on the production and distribution of alcoholic beverages, including beer, in connection with various governmental budget balancing or funding proposals. Further increases in excise taxes on beer, if enacted, could result in a general reduction of malt beverage sales and adversely effect the Company's performance. TRADEMARKS The Company and the Breweries have obtained or applied for U.S. Trademark Registrations for the names of several of its products, and in some cases for most of its logo designs. The Company regards its trademarks as having substantial value and as being an important factor in the marketing of its products. The Company is not aware of any infringing uses that could materially affect its current business of any prior claim to the trademarks that would prevent the Company from using such trademarks in its business. The Company's policy is to pursue registration of its marks whenever possible and to oppose vigorously any infringements of its marks. 46 50 EMPLOYEES The Company and its subsidiaries will employ 135 employees after the closing of the Offering, including 26 in brewery operations, 98 in the brewpub-restaurants, 4 in administration and 8 in sales and marketing. These include all employees of St. Stan's, of which the Company owns 51% in a joint-venture. None of the Company's employees is represented by a labor union. The Company has experienced no work stoppages and believes that its employee relations are good. PROPERTIES The St. Stan's Brewery and Brewpub is located at 821 L Street in Modesto, California. The 14,500 square foot building was constructed in 1991. The building is subject to a 50-year ground lease which expires in 2038, at which time the building and ground lease revert back to the lessor. The ground lease, which was originally entered into between the lessor and Stanislaus Brewing Company, Inc., was subleased to Prost Partners. The sublease includes base rent increases over the term of the lease at the lesser of (1) the percentage change that occurs in the Consumer Price Index or (b) five percent (5%). In addition to base rent increases, appraisals are required at scheduled dates. The minimum annual rental payments, after a land appraisal, shall be based on no less than 12% of the appraisal amount. In addition to the base rental payments, the sublease agreement requires the payment of the real property taxes and insurance costs. The monthly rental under the ground lease and sublease is $4,250. The Riverside Brewing Company brewery is located in an industrial park, in Riverside, California. The brewery occupies five suites of approximately 26,000 square feet. The total monthly rent is $9,889.00. The Riverside Brewing Company pays an additional 18% of the common area operating expenses. The leases expire March 31, 1998. The brewery leases are in the name of John Barnicoat, the former president of Orange Empire Brewing Company, who has assigned these leases to the Riverside Brewing Company. The Riverside Brewing Company brewpub is located in Riverside, California's Mission Inn District. The brewpub occupies approximately 5,000 square feet. The total monthly rent is $6,365.40. This lease expires August 2003. In addition, the Riverside Brewing Company leases substantially all of its equipment and other personal property under a capital lease with a related party expiring through August 2003. Heritage's Brewery is located in Lake Elsinore, California. Total monthly rent is $2,170. The lease expires in 1997. The Company does not intend to renew the lease. The Company's principal executive offices are located at 9800 South Sepulveda Boulevard, Suite. 720, Los Angeles, California. The monthly rent is $1,280, on a month-to-month lease and includes: maintenance, security, cleaning, utilities and office equipment. The Company subleases this office from The Deretin Group, an entity wholly owned by Lyle Maul an executive officer and director of the Company. The company's other executive office is located in Newport Beach at 200 Newport Center Drive, Suite. 205, Newport Beach, California. The monthly rent payment is $900 and the term is for three years. ENVIRONMENTAL REGULATIONS AND OPERATING CONSIDERATIONS The Company's brewing operations are subject to a variety of extensive and changing federal, state and local environmental laws, regulations and ordinances that govern activities or operations that may have adverse effects on human health or the environment. Such laws, regulations ordinances may impose liability for the cost of remediating, and for certain damages resulting from, sites of past releases of hazardous materials. The Company believes that it currently conducts, and in the past has conducted, its activities and operations in substantial compliance with applicable environmental laws, and believes that costs arising from existing environmental laws will not have a material adverse effect on the Company's financial condition or results of operations. There can be no assurance, however, that environmental laws will not become more stringent in the future or that the Company will not incur costs in the future in order to comply with such laws. The Company's operations are subject to certain hazards and liability risks faced by all brewers, such as potential contamination of ingredients or products by bacteria or other external agents that may be wrongfully 47 51 or accidentally introduced into products or packaging. See "Business -- Brewing Operations." The occurrence of such a problem could result in a costly product recall and serious damage to the Company's reputation for product quality, as well as claims for product liability which may negatively impact the Company. The Company maintains insurance which the Company believes is sufficient to cover any liability claims which might result from a contamination problem in its products, but which may not cover any damage to the Company's reputation. See "Risk Factors -- Product Liability Risk." LEGAL PROCEEDINGS The Company and its subsidiaries are not currently involved in any material pending legal proceedings, and the Company is not aware of any material legal proceedings threatened against it, other than discussed below. Tamkin Capital Partners ("Tamkin") has filed a suit in Los Angeles County Superior Court alleging that it has been damaged by the Company negotiating and entering the acquisition agreement with Riverside and the partnership agreement with St. Stan's in violation of a confidentiality agreement and letter agreement dated January 18, 1996 and January 16, 1996, respectively. The confidentiality agreement provided that the Company would not negotiate with these companies while these companies were under letters of intent with Tamkin. Management has reached a tentative settlement with Tamkin whereby the Company will pay $400,000 in cash and will issue 30,000 shares of its common stock. The Company is expected to pay $200,000 upon the execution of a settlement agreement, $150,000 upon the close of the Offering and $50,000 13 months from January 1, 1997. The 30,000 shares of common stock have demand registration rights 180 days after the effective date of the Offering. Riverside Brewing Company has been threatened with litigation where the plaintiff is claiming damages against Riverside in the amount of $130,000. Controlling principals of OEBC, RBC's parent corporation, have agreed to indemnify the Company for any loss, if any, incurred by RBC arising out of this threatened litigation. 48 52 MANAGEMENT DIRECTORS AND OFFICERS The directors(*) and officers of the Company are:
NAME AGE POSITION - ---------------------------- ---- --------------------------------------------------- Lyle R. Maul................ 44 President, Chief Executive Officer and Chairman of the Board of Directors Frederik G.M. Rodenhuis..... 41 Executive Vice President and Acting Chief Financial Officer Janet Lee Johns............. 47 Secretary Garith Helm................. 53 Vice President of Brewing Operations Kathleen Burke.............. 43 Vice President -- Sales John Stoner................. 38 Vice President of New Breweries and Director Jim S. McClusky............. 39 Director Robert Hutchison............ 44 Director
- --------------- * The Company's bylaws provide that the authorized number of directors shall be no fewer than five (5) nor more than nine (9). The present number of authorized directors is six (6), which may be changed within the limits specified above by either the board of directors or by the shareholders. If the number of directors is increased, the board may fill such vacancy. The Representative has the right to appoint one member to the board of directors. The Representative has not yet appointed such person to the board. Directors are elected at the annual shareholders meeting. Each director's term will expire at the next shareholder meeting scheduled for May 1997. MANAGEMENT BIOGRAPHIES Lyle R. Maul, Chairman, President and Chief Executive Officer. Mr. Maul has been the Company's Chief Executive Officer and Chairman of the Board of Directors since January 1997. Prior to that, Mr. Maul was the Company's Chief Financial Officer since November 1995 and Chief Operations Officer since September 1996. From October 1990 to April 1996, Mr. Maul was the President of Deretin Enterprises, Inc. also known as The Deretin Group after January 1995, a business consulting firm with clients in the following industries, among others: consumer products, publishing, microcomputer products, communications, and real estate development. Mr. Maul is a co-founder and former Executive Vice President Finance of Government Technology Services, Inc., which was listed as the fifth fastest growing private company in the U.S. until it went public. It is now the leading reseller of microcomputer equipment to the federal government. Prior to this, Mr. Maul was a principal and Chief Financial Officer of Softeam, Inc., a leading distributor of microcomputer products. Mr. Maul has been directly involved with over ten entrepreneurial ventures and has extensive experience with equity and debt financings for small businesses. Mr. Maul has a bachelors degree in business administration and a masters degree in entrepreneurship and venture management from the University of Southern California. Mr. Maul is also a co-author of The Entrepreneur's Road Map to Success -- a winner of the Benjamin Franklin Award as the Best Business/Career Book. Frederik G.M. Rodenhuis, Executive Vice President and Acting Chief Financial Officer. Prior to becoming the Executive Vice President in January 1997, Mr. Rodenhuis was the Chief Executive Officer and Chairman of the Board of Directors of the Company since November 1995. Mr. Rodenhuis is considered the driving force behind the formulation and implementation of the Company's strategic plans, including capitalization, key acquisitions, industry alliances, and long term product, marketing & distribution strategies. From June 1993 to October 1995, Mr. Rodenhuis was the chief executive officer of Seaborn Beverages Company. From April 1991 to September 1992, he was Director International Marketing Development for Original New York Seltzer, and was responsible for international and domestic marketing and sales policies. From June 1989 to April 1991, Mr. Rodenhuis was President of Interex Corp., a United States subsidiary of KLM Royal Dutch Airlines, engaged in the specialty freight business. From 1987 to 1989, he was Director of Corporate Marketing of Burlington Air Express. Mr. Rodenhuis has a law degree and a masters degree in 49 53 business administration from Erasmus University, The Netherlands. Mr. Rodenhuis brings a wealth of domestic and international experience in strategic product development, marketing and sales management and corporate administration. Mr. Rodenhuis has conducted business in key markets worldwide, speaks several foreign languages and has made numerous media appearances nationwide. Mr. Rodenhuis has advised the Company that in 1994 and 1995, during his tenure at Seaborn Beverages Company, he forwent salary and expense payments and dedicated his personal resources and assets to cover payment obligations of that company. In March of 1995, he was forced to seek Chapter 13 reorganization bankruptcy protection against forced collection of some of these obligations and a personal indebtedness resulting from these commitments. Seaborn Beverages Company filed for bankruptcy in May 1996. Garith Helm, Vice President of Brewing Operations. Mr. Helm will oversee all brewing production and quality control. Mr. Helm co-founded St. Stan's Brewing Company along with Romy Angle in 1984. He designed and constructed the company's first brewery and designed and coordinated the construction of the current 50,000 barrel capacity brewery and pub. He currently teaches Practical Brewing and Applications, a certified 180 hour course, at California State University, Turlock. Since 1984, Mr. Helm has been the Chief Executive Officer and brewmaster for Stanislaus Brewing Company and has provided the direction for the growth of that company. His brewing education was acquired at the University of California Davis, in brewing science and as a practical home brewer from 1975 to 1984. From 1979 to 1989, Mr. Helm was employed by Lawrence Livermore National Laboratory, first as an Engineer then as Engineering Manager responsible for thirty-one research support engineers. From 1982 to 1988, he was resource Manager in the Engineering Department with direct responsibility for developing and managing a $51 million budget funding 600 full-time employees. Additional responsibilities were supervising all engineering facilities, and manpower allocations for 3,000 mechanical and electronic engineering employees. As one of six members of the Engineering Executive Committee, he developed policy on broad issues affecting the laboratory and was Chief of Staff to the Associate Director for Engineering. From 1969 to 1979, Mr. Helm was a lecturer at California State University Stanislaus in the Physics Department and was also the Electronics Design Department Manager. From 1969 to 1972, he was a part-time lecturer in the Electronics Department at Modesto Junior College. Mr. Helm received his bachelor degree in physics in 1975. Kathleen Burke, Vice President -- Sales. Ms. Burke has been the Vice President -- Sales for the Company since December 1995. From 1993 to 1995, Ms. Burke was Vice-President of Sales of Seaborn Beverages Co. From 1987 to 1993 she was Vice President of Sales for Southern California for Original New York Seltzer. Ms. Burke has obtained a Bachelor's Degree of Arts at Mt. Saint Mary's College and a California Teaching Credential. Ms. Burke brings a wealth of distributor and their account sales and sales management experience to the Company. John Stoner, Vice President of New Breweries. Mr. Stoner, the Company's Chief Operations Officer from October 1995 to June 1996, is the chief executive officer of Heritage Brewing Company, which he co-founded in September 1989. From 1981 to 1989, he was employed with Rockwell International being appointed Manager of Operations. Mr. Stoner has a bachelor's degree in finance management and operations and a masters degree in business administration from California State University Long Beach. Janet Lee Johns, Secretary. Ms. Johns has been the Company's secretary since January 1997. Since January 1993, she has been the secretary of Orange Empire Brewing Company and since June, 1996 she has been the chief financial officer of Orange Empire Brewing Company. From March 1986 to December 1992, she was an insurance agent for Talbot Insurance Agency. Mr. Jim S. McCluskey, Director. Mr. McCluskey has been Southern California State Manager for Domec Importers, Inc. since May of 1996. Between 1989 and 1996, Mr. McCluskey was Specialty Brands Manager and Division Manager for Jim Beam Brands Company. Prior thereto, Mr. McCluskey worked for E&J Gallo Winery, the Seagram Wine Company and Christian Brothers Sales Company and brings 15 years of alcoholic beverage expertise, in particular the field of distribution and brand management. Mr. McCluskey obtained a Bachelor's Degree in Business Administration from California State University Long Beach. Robert H. Hutchison, Director. Mr. Hutchison is a partner in the public accounting firm of Belden-Hutchison & Co. in Costa Mesa, California. He graduated from the University of Southern California 50 54 in 1975 with a degree in business with an accounting emphasis. Mr. Hutchison spent four years with Arthur Andersen & Company in the audit division obtaining a variety of experience dealing with larger corporations. Since 1979, he has worked in both public accounting and private industry gaining expertise in the tax accounting and management areas of small to medium size businesses. Mr. Hutchison joined his current firm in 1987. He is licensed in California and his home state of Oregon. He is a member of the American Institute of Certified Public Accountants. SIGNIFICANT EMPLOYEES Mark Mericle, Operations Manager. Mr. Mericle is the other co-founder of Heritage Brewing Company and is responsible for the brewing operations of Heritage. From 1981 to 1989, he was employed with Rockwell International. Mr. Mericle has a bachelor's degree in communications from California State University Fullerton and has studied at the Institute for Brewing Studies. EXECUTIVE COMPENSATION Compensation of Executive Officers. The following table sets forth the cash compensation paid by the Company to its President and Chief Executive Officer and its other officers for services rendered during the fiscal year ended December 31, 1996. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ------------ AWARDS ------------ ANNUAL COMPENSATION SECURITIES ------------------------------- UNDERLYING ALL OTHER ANNUAL OPTIONS/ OTHER NAME AND POSITION YEAR SALARY BONUS COMPENSATION SARS COMPENSATION(1) - ---------------------------------------------- ---- -------- ----- ------------ ------------ --------------- Lyle R. Maul.................................. 1996 $ 75,000 $ 0 $5,000 682,491 $ -- President and Chief Executive Officer Frederik G.M. Rodenhuis....................... 1996 120,000 0 6,000 682,491 -- Executive Vice President Kathleen Burke................................ 1996 75,000 0 5,500 111,350 -- Vice President -- Sales John Stoner................................... 1996 75,000 0 5,000 113,584 123,032 Vice President of New Breweries Mark Mericle.................................. 1996 75,000 0 5,000 113,584 123,028 Operations Manager
- --------------- (1) Messrs. Stoner and Mericle received 24,508 and 24,507 shares of Common Stock, respectively, valued at $4.00 per share as consideration for consulting services provided to the Company and $25,000 each as a one time cash bonus in connection with obtaining the rights to produce and market Hussong's products in the western United States. 51 55 OPTIONS GRANT TABLE COMMON STOCK OPTIONS GRANTED IN FISCAL YEAR 1996*
% OF TOTAL OPTIONS NUMBER OF SHARES OF GRANTED TO COMMON STOCK EMPLOYEES AND EXERCISE UNDERLYING OTHERS IN FISCAL PRICE EXPIRATION NAME OPTIONS GRANTED YEAR 1995 PER SHARE DATE - ------------------------------------------ ------------------- ------------------ --------- ---------- Lyle R. Maul.............................. 682,491 33.7 * 9/3/06 Chief Executive Officer and President Frederik G. M. Rodenhuis.................. 682,491 33.7% * 9/3/06 Executive Vice President Kathleen Burke............................ 111,350 5.5 * 9/3/06 Vice President-Sales John Stoner............................... 113,584 5.6 * 9/3/06 Vice President of New Breweries Mark Mericle.............................. 113,584 5.6 * 9/3/06 Operations Manager
- --------------- * The figures in this table describe the total number of options granted under the Company's Nonqualified Stock Option Plan and Incentive Stock Option Plan in fiscal year 1996. See "Management -- Nonqualified Stock Option Plan" and "Incentive Stock Option Plan." Messrs. Rodenhuis and Maul were each granted 382,491 options (or 41% each of the total granted) under the Nonqualified Stock Option Plan exercisable at $5.10 per share and 300,000 options (or 27.4% each of the total granted) under the Incentive Stock Option Plan exercisable at $5.20 per share. Ms. Burke was granted 41,350 options (or 4% of the total granted) under the Nonqualified Stock Option Plan exercisable at $5.10 per share and 70,000 options (or 6.4% of the total granted) under the Incentive Stock Option Plan exercisable at $5.20 per share. Messrs. Stoner and Mericle were each granted 63,584 options (or 7% each of the total granted) under the Nonqualified Stock Option Plan exercisable at $5.10 per share and 50,000 options (or 4.6% each of the total granted) under the Incentive Stock Option Plan exercisable at $5.20 per share. EMPLOYMENT AGREEMENTS The Company has an employment agreement with Lyle R. Maul, pursuant to which Mr. Maul is to serve as Chief Executive Officer and President. The employment agreement, which becomes effective on the close of the Offering, provides for a minimum base salary of $150,000 per annum, a $500 monthly car allowance, which increases $50 annually, health insurance premiums for family members, personal professional fees in 1997 of $2,500 increasing to $5,000 annually, life insurance premiums for the benefit of Mr. Maul's beneficiaries premiums increasing to $5,000 annually, $500 nonaccountable monthly expense allowance, and such other benefits available to other Company employees. Although Mr. Maul presently devotes, and is required under the employment agreement to devote, his full business time to the Company, his employment agreement permits him to engage in other business activities that are not competitive with the business of the Company and that do not materially interfere with his performance of his duties and responsibilities to the Company. The Company has an employment agreement with Frederik G.M. Rodenhuis, pursuant to which Mr. Rodenhuis is to serve as Executive Vice President of the Company for four years. The employment agreement, which becomes effective on the close of the Offering, provides for a minimum base salary of $152,000 per annum, a $500 monthly car allowance, which increases $50 annually, health insurance premiums for family members, personal professional fees in 1997 of $2,500 increasing to $5,000 annually, life insurance premiums for the benefit of Mr. Rodenhuis' beneficiaries increasing to $5,000 annually, $600 nonaccountable monthly expense allowance, and such other benefits available to other Company employees. Although Mr. Rodenhuis presently devotes, and is required under the employment agreement to devote, his full business time to the Company, his employment agreement permits him to engage in other business activities that are 52 56 not competitive with the business of the Company and that do not materially interfere with his performance of his duties and responsibilities to the Company. Each of Mr. Maul's and Mr. Rodenhuis' employment agreements grant to the subject employee the right to receive his salary and benefits through the scheduled expiration date of such employment agreement in the event that the Company terminates such individual's employment other than "for cause." The Company also has employment agreements with other officers and significant employees of the Company. Mr. Stoner's employment agreement provides for a base salary of $75,000 per annum. Ms. Burke's employment agreement provides for a base salary of $75,000 per annum. Mr. Mericle's employment agreement provides for a base salary of $75,000 per annum. Mr. Helm's employment agreement is for three years at a base salary of $75,000 per annum. Ms. Angle's employment agreement is for three years and provides for a base salary of $70,000 per annum. Each of these employment agreements provides for benefits comparable to those provided to other Company employees, and $500 monthly car allowance. Mr. Maul will receive a cash bonus of $10,000 upon the close of this Offering if it closes prior to March 31, 1997. Mr. Maul will also be entitled to a $10,000 bonus, up to a maximum of $20,000, for each acquisition or joint venture completed or approved by the Company's Board of Directors prior to March 31, 1997. INCENTIVE STOCK OPTION PLAN Effective August 26, 1996, the Incentive Stock Option Plan (the "Incentive Stock Option Plan") was adopted by the Company. A total of 1,500,000 authorized but unissued shares of Common Stock are reserved for issuance under the Incentive Stock Option Plan. As of the date of this Prospectus, options to purchase 1,091,000 shares of Common Stock have been granted to certain employees and consultants of the Company. The purpose of the Incentive Stock Option Plan is to attract and retain employees (including officers) of the Company (including its subsidiaries) and other affiliates (if any) of the Company and provide such people with additional incentives by increasing their equity ownership in the Company. Options granted under the Incentive Stock Option Plan are intended to qualify as incentive options under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or be non-qualified. The Incentive Stock Option Plan is intended to satisfy the conditions of Section 16 of the Exchange Act pursuant to Rule 16b-3 promulgated thereunder ("Rule 16b-3"). The Incentive Stock Option Plan is administered by a committee of the Company's Board of Directors comprised of directors who are disinterested within the meaning of Rule 16b-3. Subject to the terms of the Incentive Stock Option Plan, the committee administering the plan has the sole authority and discretion to grant options, construe the terms of the plan and make all other determinations and take all other action with respect to the Incentive Stock Option Plan. Options are exercisable during the period specified by the committee administering the Incentive Stock Option Plan, except that options become immediately exercisable in the event of a change in control of the Company. See "Risk Factors -- Effect of Anti-Takeover Provisions." The grants made as of the date of this Prospectus provide that options will become exercisable over a four-year period, 25% each year at $5.20 per share. No option is exercisable more than 10 years from the date of grant (or such other period as may be required by the Code) or after the option holder leaves the Company's employ (other than by reason of death or disability). Options are non-transferable, except by will or the laws of intestate succession or pursuant to a qualified domestic relations order. Shares underlying options that terminate unexercised are available for reissuance under the Incentive Stock Option Plan. The per share exercise price of options granted under the Incentive Stock Option Plan will be determined by the committee of the Board of Directors administering the Incentive Stock Option Plan, except that incentive stock options may not be exercised for less than 100% of the fair market value of a share of the Company's Common Stock on the date of grant. NONQUALIFIED STOCK OPTION PLAN Effective August 26, 1996, the 1996 Nonqualified Stock Option Plan (the "Nonqualified Plan") was adopted by the Company. A total of 933,500 authorized but unissued shares of Common Stock are reserved for issuance under the Nonqualified Plan. On September 3, 1996, options to purchase 933,500 shares of 53 57 Common Stock have been granted to certain employees of the Company. The purpose of the Nonqualified Plan is to retain certain key employees (including officers) of the Company and provide such people with additional incentives by increasing their equity ownership in the Company. Options granted under the Nonqualified Plan are not intended to qualify as incentive options under Section 422 of the Code. The Plan is intended to satisfy the conditions of Rule 16b-3. The Nonqualified Plan is administered by a committee of the Company's Board of Directors comprised of directors who are disinterested within the meaning of Rule 16b-3. Subject to the terms of the Nonqualified Plan, the committee administering the plan has the sole authority and discretion to grant options, construe the terms of the plan and make all other determinations and take all other action with respect to the Nonqualified Plan. Options are exercisable during the period specified by the committee administering the Nonqualified Plan, except that options become immediately exercisable in the event of a change in control of the Company. See "Risk Factors -- Effect of Anti-Takeover Provisions." Each grantee of options under the Nonqualified Plan may exercise such options at $5.10 per share four years after the date of grant. However options become exercisable earlier if the Company meets certain earnings criteria. One third of the options granted become exercisable if the Company's modified net income (net income before interest, income taxes, depreciation, and amortization and excluding certain other gains or losses not in the ordinary course of business) for any fiscal year exceeds $1,000,000, two-third of the options become exercisable if modified net income exceeds $2,000,000 for any fiscal year, and all of the options are exercisable if modified net income exceeds $3,000,000 for any fiscal year. No option is exercisable more than 10 years from the date of grant or after the option holder leaves the Company's employ (other than by reason of death or disability). Options are non-transferable, except by will or the laws of intestate succession or pursuant to a qualified domestic relations order. Shares underlying options that terminate unexercised are available for reissuance under the Nonqualified Plan. The per share exercise price of options granted under the Nonqualified Plan are determined by the committee of the Board of Directors administering the Nonqualified Plan. INCENTIVE COMPENSATION PLAN The Company adopted a cash incentive bonus compensation plan, the 1996 Incentive Compensation Plan, (the "Incentive Plan"). The Incentive Plan is intended to promote the interests of the Corporation and its shareholders by providing eligible employees with the opportunity to earn incentive compensation that is linked to the financial performance of the Corporation. The Incentive Plan is intended to qualify as performance based compensation under Section 162(m) of the Code. The Incentive Plan is administered by the regularly appointed compensation committee of the Board, which shall have at least two (2) members and no member of the Board may serve on the Committee unless such person is an "outside director" within the meaning of Section 162(m)(4)(C)(i) of the Code. The Incentive Plan provides that qualifying employees may receive as a cash bonus an amount equal to the Company's modified earnings, calculated before interest, taxes, depreciation and amortization ("Modified EBITDA"), for a particular fiscal year. The total cash bonus that the Incentive Plan provides is 8.45% of Modified EBITDA up to $4,000,000 for such fiscal year and 12.45% of Modified EBITDA if Modified EBITDA exceeds $4,000,000 for such fiscal year. DIRECTOR COMPENSATION The Company's Directors' Compensation Plan ("Directors' Plan"), which was adopted by the Board of Directors in January 1997 provides that, effective upon the close of this Offering, each outside director is to receive cash compensation in the amount of $1,250 per quarter. In addition, each outside director will receive 1,250 warrants per quarter to acquire the Company's Common Stock exercisable at $5.20 per share. The Company has reserved 100,000 shares of Common Stock for issuance under the Directors' Plan. In addition, each outside director will be reimbursed for travel expenses related to board meetings and other pre-approved Company business expenses. 54 58 CERTAIN TRANSACTIONS The Company has agreed to pay Lyle Maul, the Company's President and Chief Executive Officer, the amount of $82,745 to reimburse Mr. Maul for various expenses incurred on behalf of the Company, including travel, delivery services and telephone costs, and $3,000 for furniture and computer equipment contributed to the Company. These costs incurred by Mr. Maul on the Company's behalf were accrued for in the Company's financial statements in the same period such expenses were incurred. The cost of such furniture and computer equipment to Mr. Maul was approximately $7,500. Mr. Maul is repaid the principal amount in monthly installments equal to three percent ($3%) of the Company's net monthly sales. Mr. Maul to date has been paid approximately $3,700. PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the shares of Common Stock as of the date of this Prospectus by (i) each person who is known by the Company to be the beneficial owner of more than five percent (5%) of the issued and outstanding shares of Common Stock, (ii) each of the Company's directors and executive officers and (iii) all directors and executive officers as a group.
PERCENT OWNED ------------------------------ BEFORE AFTER NAME AND ADDRESS NUMBER OF SHARES(1) OFFERING(2) OFFERING(2)(3) - ------------------------------------------------ ------------------- ----------- -------------- Guy Schebovitz(4)............................... 178,684 10.71% 5.64% Frederik G.M. Rodenhuis(5)...................... 112,479 6.74 3.55 Patrick and Lee Miller(6)....................... 100,000 5.99 3.16 Gerald Cochran(7)............................... 100,000 5.99 3.16 Johan Vets(8)................................... 99,996 5.99 3.16 Robert E. Reale(9).............................. 85,720 5.14 2.71 Lyle R. Maul(10)................................ 68,406 4.10 2.16 John Stoner(11)................................. 62,785 3.76 1.98 All executive officers and directors as a 243,643 14.60 7.69 group.........................................
- --------------- (1) Except as indicated in the footnotes to this table, to the knowledge of the Company, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, except to the extent authority is shared by spouses under applicable law. (2) Includes 141,063 shares of Common Stock which are to be issued to the former of OEBC shareholders in accordance with the Share Purchase Agreement, 24,125 shares of Common Stock to be issued to the OEBC debtholders in accordance with the Debt Exchange Agreement, 10,000 shares of Common Stock to be issued pursuant to the Brewpub Management Agreement, 60,000 shares of Common Stock to be issued to Brewery Leasing Company pursuant to the equipment lease agreement and the brewery equipment consulting agreement and 27,618 shares to be issued to certain former OEBC shareholders for assuming a portion of OEBC bank debt. Does not include 155,000 shares of Common Stock which may be issued pursuant to the former OEBC shareholders pursuant to the earnout provisions of the Share Purchase Agreement see "Business -- Breweries -- Riverside Brewing Company." Includes 30,000 shares of Common Stock to be issued pursuant to the tentative settlement agreement with Tankin Capital Partners. See "Business -- Legal Proceedings." Does not include 2,433,500 shares of Common Stock issuable upon exercise of authorized options granted under the Company's stock option plans or shares of Common Stock issuable upon exercise of other outstanding warrants or options. See "Management -- Incentive Stock Option Plan," "-- Nonqualified Stock Option Plan," "Description of Securities" and "Management -- Director Compensation." (3) Does not include 1,500,000 shares of Common Stock issuable upon exercise of the Class A Warrants, 225,000 shares of Common Stock pursuant to the Underwriter's over-allotment option, 225,000 shares of Common Stock issuable upon exercise of the Class A Warrants pursuant to the Underwriter's over- 55 59 allotment option, or 300,000 shares of Common Stock issuable upon exercise of the Representative's Purchase Option and Warrants. See "Description of Securities" and "Underwriting." (4) Mr. Schebovitz' address is 931 East 77th Street, 2nd Floor, Brooklyn, New York 11236. (5) Mr. Rodenhuis' address is 9800 S. Sepulveda Boulevard, Suite 720, Los Angeles, California 90045. This figure includes the proportional number of shares held by Manhattan Enterprises, Inc., which is the owner of 55,369 shares. Mr. Rodenhuis is the beneficial owner of 89.8% of Manhattan Enterprises, Inc. (6) The Millers' address is 1300 W. Garmon Road, SW, Atlanta, Georgia 30327. (7) Dr. Cochran's address is 400 Horton Road, SW, Rainsville, Alabama 35986. (8) Mr. Vets' address is 39 Graaf de Granvellelaan, 2650 Edegem, Belgium, 6,250 of the 99,996 shares are owned by Group Nollet-Vets, of which Mr. Vets is a principal. (9) Mr. Reale's address is 6501 5th Avenue, Brooklyn, New York 11220. (10) Mr. Maul's address is 9800 S. Sepulveda Boulevard, Suite 720, Los Angeles, California 90045. This figure includes the proportional number of shares held by Manhattan Enterprises, Inc., which is the owner of 55,369 shares. Mr. Maul is the beneficial owner of 10.2% of Manhattan Enterprises, Inc. (11) Mr. Stoner's address is 9800 S. Sepulveda Boulevard, Suite 720, Los Angeles, California 90045. 56 60 DESCRIPTION OF SECURITIES COMMON STOCK The Company is authorized to issue 20,000,000 shares of Common Stock, no par value, of which, as of the date of this Prospectus, 1,670,453 shares were issued and outstanding, which includes shares issued under the Orange Empire Brewing Company acquisition. Holders of shares of Common Stock are entitled to one vote per share on all matters to be voted upon by the stockholders generally. The approval of proposals submitted to stockholders at a meeting other than for the election of directors requires the favorable vote of a majority of the shares voting, except in the case of certain fundamental matters (such as certain amendments to the Articles of Incorporation, and certain mergers and reorganizations), in which cases California law and the Company's By-laws require the favorable vote of at least two-thirds of all outstanding shares. Stockholders are entitled to receive such dividends as may be declared form time to time by the Board of Directors out of funds legally available therefor, and in the event of liquidation, dissolution or winding up of the Company to share ratably in all assets remaining after payment of liabilities. The holders of shares of Common Stock have no preemptive or subscription rights. Holders of shares of Common Stock may cumulate their votes for electing directors if candidates' names are placed in nomination prior to commencement of voting and a holder has given notice at the meeting, before voting has begun of the holders intent to cumulate votes. All shares of Common Stock sold in this offering will be, when issued, fully paid and nonassessable. PREFERRED STOCK The Board of Directors of the Company is authorized, subject to certain limitations prescribed by applicable law, from time to time to issue up to an aggregate of 5,000,000 shares of Preferred Stock in one or more series and to fix or alter the designations, the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, in each case without further vote or action by the stockholders. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders and may adversely affect the voting and other rights of the holders of Common Stock. The issuance of Preferred Stock with voting and conversion rights may adversely affect the voting power of the holders of Common Stock, including the loss of voting control to others. At present, the Company has no plans to issue any of the Preferred Stock. REGISTRATION RIGHTS The Company has outstanding 728,229 shares of common stock with certain registration rights. These shares are being registered along with this Offering subject to certain lock-up provisions. These lock-up provisions may be waived with the prior written consent of the Representative. 65,000 shares will become freely tradeable 60 days after the date of the registration statement of which this Prospectus is a part, 40,000 shares will become freely tradeable 90 days after the date of the registration statement, 10,000 shares will become freely tradeable 120 days after the date of the registration statement, 30,000 shares will become freely tradeable 150 days after the date of the registration statement, 92,484 shares will become freely tradeable one year after the date of the registration statement, and 486,745 shares will become freely tradeable 13 months after the closing date of this Offering. Of the 486,745 shares being registered subject to the 13 month lockup, 4,000 of the shares are owned by Kathleen Burke, the Company's Vice President -- Sales. The Company has also granted certain registration rights to holders of Class B Warrants and Class E Warrants. The 70,000 shares of Common Stock issuable upon exercise of the Class B Warrants at $4.75 and the 892,000 shares of Common Stock issuable upon exercise of the Class E Warrants at $6.30 per share are being registered along with this Offering. However, such shares may not be sold for a period of 180 days after the effective date of the registration statement without the prior written consent of the Representative. The Company has also granted demand registration rights to certain shareholders which provides that such holders may demand 180 days after the effective date of the registration statement that the Company seek to register up to 135,000 shares of Common Stock. See "Risk Factors -- Shares Eligible for Future Sale." 57 61 WARRANTS Class A Warrants. Each Class A Warrant entitles the holder to purchase, at a price of $6.00, one share of Common Stock for a period of five years commencing on the date of this Prospectus unless redeemed by the Company prior to such expiration date. The exercise price of the Class A Warrants and the number of shares of Common Stock or other securities or property to be obtained upon exercise of the Class A Warrants, are subject to adjustment under certain circumstances, including, issuance by the Company of any shares of its Common Stock as a dividend, or subdivision or combination of the Company's outstanding shares of Common Stock into a greater or lesser number of shares. Reference is hereby made to the complete text of the form of Class A Warrant Agreement filed as an exhibit to the Registration Statement of which this Prospectus forms a part. The Class A Warrants are redeemable by the Company for $0.05 per Class A Warrant, upon 30 days' prior written notice, if the market price of the Common Stock equals or exceeds $12.00 per share. In the event that the Company gives notice of its intention to redeem the Class A Warrants, holders would be forced to exercise their Class A Warrants or accept the redemption price. For purposes of redemption, market price means (i) the average closing bid price for any 10 consecutive trading days within a period of 30 consecutive trading days, ending within five days of the date of the notice of redemption, of the Common Stock as reported by Nasdaq or (ii) the average of the last reported sale price for the 10 consecutive business days ending within five days of the date of the notice of redemption, on the primary exchange on which the Common Stock is traded, if the Common Stock is traded on a national securities exchange. The Class A Warrants may be exercised by filling out and signing the appropriate notice of exercise form attached to the Class A Warrant and mailing or delivering it (together with the Class A Warrant) to American Stock Transfer & Trust Company of New York, New York, the Warrant Agent, in time to reach the Warrant Agent prior to the time fixed for termination or redemption of the Class A Warrants, accompanied by payment of the full warrant exercise price. The holders of the Class A Warrants are not entitled to vote, receive dividends, or exercise any of the rights of the holders of shares of Common Stock for any purpose until the Class A Warrants have been duly exercised and payment of the Class A Warrant exercise price has been made. Although it is anticipated that the Class A Warrants will commence trading on Nasdaq following the issuance of such Class A Warrants, there can be no assurance that a trading market for the Class A Warrants will ever develop. For the life of the Class A Warrants, the holders are given the opportunity to profit from the rise, if any, in the market price of the Common Stock at the expense of the remaining holders of the Common Stock. However, during the outstanding period of the Class A Warrants, the Company might be deprived of favorable opportunities to secure additional equity capital for its business, since holders of Class A Warrants may be expected to exercise their Class A Warrants at a time when the Company would be able to obtain equity capital by a public sale of new securities on terms more favorable than those provided in the Class A Warrants. Class B Warrants. As part of the Company's May 1996 bridge loan (See "Description of Securities -- Bridge Notes.") the Company issued Class B Warrants entitling the holder thereof to purchase, at any time through April 20, 1999, up to 70,000 shares of Common Stock at an exercise price of $4.75 per share, subject to adjustment upon the occurrence of any stock dividends, stock splits, combinations of shares or reclassification of the Common Stock, or upon any consolidation or merger of the Company with or into another corporation. The shares of Common Stock issuable upon exercise of the Class B Warrants were registered in this Offering, subject to a 180 day lockup. Class C Warrants. The Company issued to Hecht & Steckman, P.C., legal counsel to the Company, warrants to purchase up to 15,583 shares of the Company's Common Stock at any time through October 31, 2002 at the exercise price of $4.50 per share. The exercise price and the number of shares of Common Stock purchasable upon exercise of the Class C Warrants are subject to adjustment upon the occurrence of certain events, including stock dividends, stock splits, combinations or reclassification of the Common Stock or sale by the Company of shares of Common Stock (or other securities convertible into or exercisable for Common Stock) at a price per share or share equivalent below the greater of the then-applicable exercise price of the 58 62 Class C Warrants or the then-current market price of the Common Stock. These warrants and the common stock issuable upon exercise of the warrants are "restricted securities" under Rule 144. Class D Warrants. As part of the Company's acquisition of Orange Empire Brewing Company warrants to purchase up to 50,000 shares of the Company's Common Stock were issued to debtholders of Orange Empire Brewing Company. The Class D warrants may be exercised at any time at $5.00 per share through the period ending three (3) years after the close of this Offering. The exercise price and the number of shares of Common Stock purchasable upon exercise of the Class D Warrants are subject to adjustment upon the occurrence of certain events, including stock dividends, stock splits, combinations or reclassification of the Common Stock. These warrants and the common stock issuable upon exercise of the warrants are "restricted securities" under Rule 144. Class E Warrants. There are currently issued and outstanding warrants issued in connection with the Company's initial financing in 1995, entitling the holders to purchase an aggregate of 892,000 shares of Common Stock, subject to adjustment in certain circumstances (the "Class E Warrants"). Each Class E Warrant entitles the holder thereof to purchase, at any time through the period ending five years after December 18, 1996, one share of Common Stock at a price per share of the lower of 105% of the offering price of the Shares in the Offering or $8.25, subject to adjustment in accordance with the anti-dilution and other provisions referred to below. The Class E Warrants may be exercised at any time in whole or in part at the applicable exercise price until the date of expiration. No fractional shares will be issued upon the exercise of the Class E Warrants. At any time that the Class E Warrants are exercisable, the Class E Warrants are also subject to redemption by the Company on not less than 30 days notice at $0.01 per Class E Warrant, provided the average closing bid price (or the average of the last reported sale price if the Common Stock is traded on a national securities exchange) of the Company's Common Stock for any ten (10) consecutive trading days exceeds 200% of the exercise price. The exercise price and the number of shares of Common Stock purchasable upon the exercise of the Class E Warrants are subject to adjustment upon the occurrence of certain events, including stock dividends, stock splits, combinations or reclassification of the Common Stock. Additionally, an adjustment would be made in the case of a reclassification or exchange of Common Stock, consolidation or merger of the Company with or into another corporation, or sale of all or substantially all of the assets of the Company, in order to enable Class E Warrant holders to acquire the kind and number of shares of stock or other securities or property receivable in such event by a holder of that number of shares of Common Stock that would have been issued upon exercise of the Class E Warrant immediately prior to such event. No adjustment to the exercise price of the shares subject to the Class E Warrants will be made for dividends (other than stock dividends), if any, paid on the Common Stock or for securities issued pursuant to the Company's stock option plans or other employee benefit plans of the Company, or upon exercise of the Class E Warrants or any other options or warrants. Class H Warrants. The Company issued warrants to purchase 15,000 shares of the Company's Common Stock in a private placement to accredited investors. The Class H Warrants may be exercised at any time at $7.00 per share through the period ending September 10, 2001. The exercise price and the number of shares of Common Stock purchasable upon exercise of the Class H Warrants are subject to adjustment upon the occurrence of certain events, including stock dividends, stock splits, combinations or reclassification of the Common Stock. The adjustment provisions of the Class H Warrants are otherwise substantially equivalent to the adjustment provisions for the Class A Warrants, as described immediately above. These warrants and the Common Stock issuable upon exercise of the warrants are "restricted securities" under Rule 144. Directors' Warrants. As part of the Directors' Compensation Plan, warrants to purchase up to 100,000 shares of the Company's Common Stock are reserved for future issuance to the Company's non-employee directors ("Directors' Warrants"). The Directors' Warrants may be exercised at any time after issuance at $5.20 per share through the period ending three (3) years after issuance. The Directors' Compensation Plan becomes effective after the completion of the Offering and no Directors' Warrants have been issued as of the date of this Prospectus. The exercise price and the number of shares of Common Stock purchasable upon exercise of the Directors' Warrants are subject to adjustment upon the occurrence of certain events, including 59 63 stock dividends, stock splits, combinations or reclassification of the Common Stock. These warrants and the common stock issuable upon exercise of the Directors' Warrants are "restricted securities" under Rule 144. See "Management -- Director Compensation." REPRESENTATIVE PURCHASE OPTION For nominal consideration, the Company has granted to the Representative of the Underwriters the Representative's Purchase Option which allows the Representative to acquire 150,000 shares of Common Stock at $7.20 per share and 150,000 common stock purchase warrants at the price of $0.18 per share. See "Underwriting." The Representative's Purchase Option entitle the holders to purchase an aggregate of 150,000 shares of Common Stock, subject to adjustment in certain circumstances. The Representative's Purchase Option entitles the holders to purchase an aggregate of 150,000 warrants at any time one year after exercise of the Representative's Purchase Option through the date five years from the date of the Prospectus, one share of Common Stock at a price of $7.20 per share, subject to adjustment in accordance with the anti-dilution and other provisions referred to below. The warrants underlying the Representative's Purchase Option shall have generally the same terms and conditions as provided in the Class A Warrants except that the warrants underlying the Representative's Purchase Option shall not be subject to redemption. The Representative's Purchase Option may be exercised at any time in whole or in part at the applicable exercise price until the date of expiration. No fractional shares will be issued upon the exercise of the Representative's Purchase Option. The exercise price and the number of shares of Common Stock purchasable upon exercise of the Representative's Purchase Option, and the exercise price and the number of shares of Common Stock purchasable upon exercise of the warrants underlying the Representative's Purchase Option, are subject to adjustment upon the occurrence of certain events, including stock dividends, stock splits, combinations or reclassification of the Company's Common Stock. See "Underwriting." BRIDGE NOTES In May 1996, the Company issued a $500,000 principal amount note secured by the Company's assets due on the earlier of the completion of any equity public offering which results in the Company receiving gross proceeds of $6 million or more, on April 15, 1997. Under the terms of this note and an extension agreement, the investor received 20,000 shares of Common Stock and 70,000 Class B Warrants. The shares of Common Stock underlying the Class B Warrants are being registered along with this Offering subject to a lock-up period of 180 days following the effective date of the Registration Statement for this Offering. The note bears interest at the rate of 18.0% per annum. The Bridge Note will be repaid in full out of the net proceeds of this Offering. See "Use of Proceeds." In December, 1996, the Company issued a $250,000 unsecured promissory note to Patrick Miller, a shareholder of the Company. The note, which pays simple interest at 12% per annum, matures on the earlier of (i) closing of a public offering by the Company with aggregate gross proceeds of no less than $6,000,000, or (ii) September 1, 1997. Interest is payable at maturity. The note will be repaid in full out of the proceeds of this Offering. See "Use of Proceeds." DIVIDENDS The Company has never paid and does not anticipate the payment of cash dividends on its Common Stock in the foreseeable future. TRANSFER AGENT The Transfer Agent and Warrant Agent for the Company's Common Stock and Class A Warrants is American Stock Transfer & Trust Company. 60 64 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below, for whom First London Securities Corporation is acting as Representative, have severally agreed to purchase from the Company an aggregate of 1,500,000 Shares of Common Stock ("Shares") and 1,500,000 Class A Warrants (collectively the "Securities"). The number of Shares and Class A Warrants which each Underwriter has agreed to purchase is set forth opposite its name.
NUMBER OF NUMBER OF UNDERWRITER SHARES WARRANTS -------------------------------------------- --------- --------- First London Securities Corporation......... --------- --------- TOTAL............................. 1,500,000 1,500,000 ======== ========
The Securities are offered by the Underwriters subject to prior sale, when, as and if delivered to and accepted by the Underwriters and subject to approval of certain legal matters by counsel and certain other conditions. The Underwriters are committed to purchase all Securities offered by this Prospectus, if any are purchased. The Company has been advised by the Representative that the Underwriters propose initially to offer the Securities offered hereby to the public at the offering price set forth on the cover page of this Prospectus. The Representative has advised the Company that the Underwriters propose to offer the Securities through members of the National Association of Securities Dealers, Inc. ("NASD"), and may allow a concession, in their discretion, to certain dealers who are members of the NASD and who agree to sell the Securities in conformity with the NASD Conduct Rules. Such concessions shall not exceed the amount of the underwriting discount that the Underwriters are to receive. The Company has granted to the Representative options, exercisable for 30 days from the date of this Prospectus, to purchase up to an additional 225,000 Shares and an additional 225,000 Class A Warrants at the public offering price less the underwriting discount set forth on the cover page of this Prospectus (the "Over-Allotment Option"). The Representative may exercise this option solely to cover over-allotments in the sale of the Securities being offered by this Prospectus. Officers and directors of the Company may introduce the Representative to persons to consider this offering and purchase Securities either through the Representative, other Underwriters, or through participating dealers. In this connection, officers and directors will not receive any commissions or any other compensation. The Company has agreed to pay the Representative a commission of ten percent (10%) of the gross proceeds of the offering (the "Underwriting Discount"), including the gross proceeds from the sale of the Over-Allotment Option, if exercised. In addition, the Company has agreed to pay to the Representative a non-accountable expense allowance of three percent (3%) of the gross proceeds of this Offering, including proceeds from any Securities purchased pursuant to the Over-Allotment Option. The Representative's expenses in excess of the non-accountable expense allowance will be paid by the Representative. To the extent that the expenses of the Representative are less than the amount of the non-accountable expense allowance received, such excess shall be deemed to be additional compensation to the Representative. The Representative has informed the Company that it does not expect sales to discretionary accounts to exceed five (5%) of the total number of Securities offered by the Company hereby. The Representative shall have a preferential right for a period of one year from this Offering to represent the Company in any private or public offering of the Company's securities. 61 65 The Company will pay the Representative a fee of five (5%) percent of the aggregate exercise price of each Class A Warrant exercised commencing one year after the Effective Date, provided: (i) the market price of the common stock on the date of exercise was greater than the exercise price on that date, (ii) exercise of the Class A Warrant was solicited by a member of the NASD, (iii) the Class A Warrant was not held in a discretionary account, (iv) disclosure of compensation was made both at the time of the Offering and the exercise of the Class A Warrant, and (v) the solicitation and the exercise of the Class A Warrant was not in violation of Rule 10b-6 of the Securities Exchange Act of 1934. Prior to the date of this Prospectus, the Company's officers and directors have agreed in writing not to sell, assign or transfer any of the Company's securities beneficially owned by them without the Representative's prior written consent for a period of twenty four (24) months from the Effective Date. Furthermore, all sales of the Company's securities owned by the officers and directors are required to be effected only through the Representative. The Representative may designate a member of the Company's Board of Directors and to appoint one person to act as an observer at the Company's Board of Directors' meeting for three years. Prior to the Offering, there has been no public market for the Shares of Common Stock or Class A Warrants of the Company. Consequently, the initial public offering price for the Securities, and the terms of the Class A Warrants (including the exercise price of the Warrants), have been determined by negotiation between the Company and the Representative. Among the factors considered in determining the public offering price were the history of, and the prospect for, the Company's business, an assessment of the Company's management, its past and present operations, the Company's development and the general condition of the securities market at the time of the offering. The initial public offering price does not necessarily bear any relationship to the Company's assets, book value, earnings or other established criterion of value. Such price is subject to change as a result of market conditions and other factors, and no assurance can be given that a public market for the Shares and/or Class A Warrants will develop after the close of the Offering, or if a public market in fact develops, that such public market will be sustained, or that the Shares and/or Class A Warrants can be resold at any time at the offering or any other price. See "Risk Factors." Certain transactions between third parties as discussed below may be deemed by prospective investors to reflect the value of the Company. In determining the price of the Shares and Class A Warrants offered in this Offering, the Company and the Representative did not consider these transactions as factors. On November 22, 1996, Adam Wachtel, a former director of the Company sold 182,484 shares of Common Stock to an investor for $250,000, or $1.37 per share. These shares have registration rights which provide for the sale of such shares as follows: 30,000 shares are freely tradeable 60 days after the effective date of the registration statement to which this Prospectus is a part, 30,000 shares after 90 days, 30,000 shares after 150 days and 92,484 shares after one year. Simultaneous which this transaction, Mr. Wachtel retired 1,160,216 shares of Common Stock, all of the remaining shares owned by Mr. Wachtel, to the Company in return for general releases from the Company and certain other shareholders. On May 16, 1996, Imafina, S.A. sold 100,000 warrants to purchase the Company's Common Stock for $8.25 per share at $3.00 per warrant to Patrik and Lee Miller. On December 10, 1996, Imafina S.A. transferred 400,000 additional warrants to the Millers for $4,000 as part of a settlement and general release of the original warrant sale agreement. After the transfer of these warrants, Imafina, S.A. agreed to retire 2,110,000 warrants to the Company. The remaining outstanding 892,000 warrants were exchanged by the $8.25 warrantholders in return for 892,000 Class E Warrants. At the closing of the Offering, the Company will issue to the Representative and/or persons related to the Representative, for nominal consideration, Representative's Purchase Option to purchase up to 150,000 shares and 150,000 warrants. The Representative's Purchase Option will be exercisable for a five year period commencing one year from the effective date of the Registration Statement. The initial exercise price of each share shall be $7.20 per share (120% of the public offering price). The initial exercise price of each warrant shall be $7.20 per warrant (120% of the public offering price). Each warrant will be exercisable for a five (5) year period commencing one year from the date of this Prospectus to purchase one share of Common Stock at an exercise price of $7.20 per share of Common Stock. The Representative's Purchase Option will not be transferable for one year from the date of this Prospectus, except (i) to officers of the Representative, other Underwriters, and members of the selling group and officers and partners thereof; (ii) by will; or (iii) by operation of law. 62 66 The Representative's Purchase Option contains provisions providing for appropriate adjustment in the event of any merger, consolidation, recapitalization, reclassification, stock dividend, stock split or similar transaction. The Representative's Purchase Option contains net issuance provisions permitting the holders thereof to elect to exercise the Representative's Purchase Option in whole or in part and instruct the Company to withhold from the securities issuable upon exercise, a number of securities, valued at the current fair market value on the date of exercise, to pay the exercise price. Such net exercise provision has the effect of requiring the Company to issue shares of Common Stock without a corresponding increase in capital. A net exercise of the Representative's Purchase Option will have the same dilutive effect on the interests of the Company's shareholders as will a cash exercise. The Representative's Purchase Option does not entitle the holders thereof to any rights as a shareholder of the Company until such Representative's Purchase Option is exercised and shares of Common Stock are purchased thereunder. The Representative's Purchase Option and the securities issuable thereunder may not be offered for sale except in compliance with the applicable provisions of the Securities Act of 1933. The Company has agreed that if it shall cause a post-effective amendment, a new registration statement, or similar offering document to be filed with the Commission, the holders shall have the right, for seven years from the date of this Prospectus, to include in such registration statement or offering statement the Representative's Purchase Option and/or the securities issuable upon its exercise at no expense to the holders. Additionally, the Company has agreed that, upon request by the holders of 50% or more of the Representative's Purchase Option during the period commencing one year from the date of this Prospectus and expiring four years thereafter, the Company will, under certain circumstances, register the Representative's Purchase Option and/or any of the securities issuable upon its exercise. The Company has also agreed that if the Company participates in any merger, consolidation or other such transactions which the Representative has brought to the Company during a period of five years after the closing of this Offering, and which is consummated after the closing of this Offering (including an acquisition of assets or stock for which it pays, in whole or in part, with Shares or other securities), then the Company will pay for the Representative's services in an amount equal to 5% of up to one million dollars of value paid or received in the transaction, 4% of the next million dollars of such value, 3% of the next million dollars of such value, 2% of the next million dollars of such value and 1% of the next million dollars and all of such value above $4,000,000. The Company has agreed to indemnify the Underwriters against any costs or liabilities incurred by the Underwriters by reasons of misstatements or omissions to state material facts in connection with the statements made in the Registration Statement and the Prospectus. The Underwriters have in turn agreed to indemnify the Company against any liabilities by reason of misstatements or omissions to state material facts in connection with the statements made in the Prospectus, based on information relating to the Underwriters and furnished in writing by the Underwriters. To the extent that this section may purport to provide exculpation from possible liabilities arising from the federal securities laws, in the opinion of the Commission, such indemnification is contrary to public policy and therefore unenforceable. The foregoing is a summary of the principal terms of the agreements described above and does not purport to be complete. Reference is made to copies of each such agreement which are filed as exhibits to the Registration Statement. See "Additional Information." LEGAL MATTERS The law firm of Hecht & Steckman, P.C., New York, New York, has acted as counsel for the Company in connection with this offering and has rendered its opinion to the Company on the legality of the securities covered in this Prospectus. Hecht & Steckman, P.C. acquired 14,000 shares of Common Stock and a warrant to purchase 15,583 shares of Common Stock at the exercise price of $4.50 per share. The firm of Jackson & Walker, L.L.P., Dallas, Texas, has acted as counsel for the Underwriters in connection with certain legal matters relating to this Offering. 63 67 EXPERTS The 1995 and 1994 historical financial statements of the Company, Orange Empire Brewing Company and the St. Stan's Brewing & Brewpub Operations as listed on "Index to Financial Statements" and as included elsewhere in this Prospectus, have been audited by Corbin & Wertz, independent public accountants, and are included herein in reliance upon the authority of said firm as experts in giving said reports. Reference is made to said reports for the Company and Orange Empire Brewing Company which include an explanatory paragraph which states that there is substantial doubt about the Company's and Orange Empire Brewing Company's ability to continue as a going concern. Furthermore, reference is made to said report for the St. Stan's Brewery and Brewpub Operations which includes an explanatory paragraph which identifies a substantial need for ongoing financial support. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission, a registration statement on Form SB-2 under the 1933 Act with respect to the Shares and Class A Warrants being offered hereby and shares of the Company's Common Stock being offered by certain selling securityholders. This Prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. For further information with respect to the Company and the Shares and Class A Warrants being offered hereby, and shares of the Company's Common Stock being offered by selling securityholders, reference is hereby made to such registration statement and the exhibits and schedules thereto, which may be inspected without charge at the Commission's offices and copies of all or any part of which may be obtained from such offices upon payment of prescribed fees. Statements contained in the Prospectus regarding the provisions of documents filed with such registration statement as exhibits are necessarily summaries of such documents, and each such statement is qualified in all respects by reference to the copy of the applicable document filed with the Commission. 64 68 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ------------ BEVERAGE WORKS, INC. AND SUBSIDIARY, PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Introduction To Unaudited Pro Forma Condensed Consolidated Financial Statements................................................................ F-3 Pro Forma Condensed Consolidated Balance Sheet As Of September 30, 1996 (Unaudited)............................................................... F-4 Pro Forma Condensed Consolidated Balance Sheet, Summary of Pro Forma Adjustments (Unaudited)................................................... F-5 to F-8 Pro Forma Condensed Consolidated Statement Of Operations For The Nine Months Ended September 30, 1996 (Unaudited)...................................... F-9 Pro Forma Condensed Consolidated Statement Of Operations For The Year Ended December 31, 1995 (Unaudited)............................................. F-10 Pro Forma Condensed Consolidated Statement Of Operations, Summary Of Pro Forma Adjustments (Unaudited)............................................. F-11 to F-12 Notes to Pro Forma Condensed Consolidated Financial Statements (Unaudited)... F-13 to F-27 BEVERAGE WORKS, INC. AND SUBSIDIARY, HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS Independent Auditor's Report................................................. F-28 Consolidated Balance Sheets As Of September 30, 1996 (Unaudited) and December 31, 1995......................................................... F-29 Consolidated Statements Of Operations For The Nine Months Ended September 30, 1996 (Unaudited), and For The Period From Incorporation (August 2, 1995) To September 30, 1995 (unaudited), and for the period from Incorporation (August 2, 1995) to December 31, 1995..................................... F-30 Consolidated Statements Of Stockholders' Equity For The Nine Months Ended September 30, 1996 (Unaudited) and For The Period From Incorporation (August 2, 1995) To December 31, 1995..................................... F-31 Consolidated Statements Of Cash Flows For The Nine Months Ended September 30, 1996 (Unaudited), and For The Period From Incorporation (August 2, 1995) To September 30, 1995 (unaudited), and for the period from Incorporation (August 2, 1995) to December 31, 1995..................................... F-32 to F-33 Notes to Consolidated Financial Statements................................... F-34 to F-59 ST. STAN'S BREWERY AND BREWPUB OPERATIONS Independent Auditors' Report................................................. F-60 Historical Statements of Assets and Liabilities To Be Contributed to BWI -- Prost Partners General Partnership As Of September 30, 1996 (Unaudited) and December 31, 1995......................................................... F-61 Historical Statements Of Historical Operations Of Assets and Liabilities To Be Contributed to BWI -- Prost Partners General Partnership For The Nine Months Ended September 30, 1996 (Unaudited) and 1995 (Unaudited), and For The Years Ended December 31, 1995 and 1994................................ F-62 Historical Statements Of Changes In Equity Of Assets and Liabilities To Be Contributed to BWI -- Prost Partners General Partnership For The Nine Months Ended September 30, 1996 (Unaudited), and For The Years Ended December 31, 1995 and 1994................................................ F-63 Historical Statements Of Cash Flows Of Assets and Liabilities To Be Contributed to BWI -- Prost Partners General Partnership For The Nine Months Ended September 30, 1996 (Unaudited) and 1995 (Unaudited), and For The Years Ended December 31, 1995 and 1994................................ F-64
F-1 69
PAGE ------------ Notes To Historical Financial Statements Of Assets and Liabilities To Be Contributed To BWI -- Prost Partners General Partnership.................. F-65 to F-75 ORANGE EMPIRE BREWING COMPANY AND SUBSIDIARY Independent Auditors' Report................................................. F-76 Consolidated Balance Sheets As Of September 30, 1996 (Unaudited) and December 31, 1995......................................................... F-77 Consolidated Statements Of Operations For The Nine Months Ended September 30, 1996 (Unaudited) and 1995 (Unaudited), and For The Years Ended December 31, 1995 and 1994......................................................... F-78 Consolidated Statements Of Stockholders' Equity (Capital Deficiency) For The Nine Months Ended September 30, 1996 (Unaudited) and For The Years Ended December 31, 1995 and 1994................................................ F-79 Consolidated Statements of Cash Flows For The Nine Months Ended September 30, 1996 (Unaudited) and 1995 (Unaudited), and For The Years Ended December 31, 1995 and 1994......................................................... F-80 to F-81 Notes To Consolidated Financial Statements................................... F-82 to F-96
F-2 70 BEVERAGE WORKS, INC. INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma condensed consolidated information as of and for the nine months ended September 30, 1996, and for the year ended December 31, 1995, is based on the historical financial statements of Beverage Works, Inc., and Subsidiary, Orange Empire Brewing Company and Subsidiary, and the St. Stan's Brewery and Brewpub Operations. The unaudited pro forma condensed consolidated financial information has given effect to the following: (1) The consummation of the Beverage Works, Inc. proposed Initial Public Offering and the application of the proceeds therefrom as described in "Use of Proceeds". (2) The consummation of the proposed Beverage Works, Inc. and Orange Empire Brewing Company Share Purchase Agreement, and related agreements. (3) The consummation of the proposed BWI-Prost Partners Contribution and Partnership Agreements, and related agreements. The unaudited pro forma condensed consolidated balance sheet has been prepared as though the transactions and arrangements described above had taken effect on September 30, 1996, and the unaudited pro forma condensed consolidated statements of operations have been prepared as though the transactions and arrangements had taken effect at the beginning of each period presented. The unaudited pro forma information should be read in conjunction with the notes related thereto and the historical financial statements of the Beverage Works, Inc. and Subsidiary, Orange Empire Brewing Company and Subsidiary, and the St. Stan's Brewery and Brewpub Operations, which are included elsewhere in this registration statement. In management's opinion, all adjustments have been made necessary to reflect the effects of the consummation of the proposed initial public offering and the application of the proceeds therefrom, the consummation of the proposed Beverage Works, Inc. and Orange Empire Brewing Company Share Purchase Agreement, and the consummation of the proposed BWI-Prost Partners Contribution and Partnership Agreements. The unaudited proforma condensed consolidated financial information does not purport to be indicative of the consolidated financial condition or results of operations of the Company that would have been obtained for the periods presented had the transactions and arrangements taken effect on the assumed dates, nor does it purport to represent the consolidated financial position or results of operations of the Company for any future period. F-3 71 BEVERAGE WORKS, INC. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1996 (UNAUDITED)
ST. STAN'S BEVERAGE ORANGE BREWERY AND PRO FORMA WORKS, EMPIRE BREWPUB PRO FORMA SEPTEMBER 30, INC. BREWING CO. OPERATIONS SUBTOTAL ADJUSTMENTS REF 1996 ---------- ----------- ----------- ---------- ----------- ---- ------------- ASSETS Cash and cash equivalents (Notes 1, 2, 3, 4, 5, 8 and 10)................... $ 159,716 $ 33,419 $ 26,223 $ 219,358 $ 4,132,485 (a) $ 4,351,843 Accounts receivable, net............... 40,992 45,326 110,456 196,774 -- 196,774 Inventories............................ 171,451 233,868 194,262 599,581 -- 599,581 Prepaid expenses and other (Note 2).... 52,567 17,629 22,359 92,555 (19,711) (b) 72,844 ---------- ---------- ---------- ---------- ---------- ----------- Total current assets.......... 424,726 330,242 353,300 1,108,268 4,112,774 5,221,042 Property and equipment, net (Notes 2 and 3)............................... 1,335,939 1,328,422 2,373,283 5,037,644 (41,362) (c) 4,996,282 Goodwill and other intangible assets (Notes 1 and 2)...................... 191,619 -- -- 191,619 3,633,410 (d) 3,825,029 Investments in and advances to affiliates (Notes 2 and 9)...................... 206,511 55,475 -- 261,986 (261,986) (e) -- Deferred offering costs (Notes 1 and 2)................................... 300,034 -- -- 300,034 (300,034) (f) -- Other assets (Notes 2 and 4)........... 14,600 21,710 25,547 61,857 20,000 (g) 81,857 ---------- ---------- ---------- ---------- ---------- ----------- $2,473,429 $1,735,849 $2,752,130 $6,961,408 $ 7,162,802 $14,124,210 ========== ========== ========== ========== ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) Accounts payable and accrued expenses (Notes 2, 5, 8 and 9)................ $1,257,530 $ 612,167 $ 153,014 $2,022,711 $(1,250,532) (h) $ 772,179 Notes payable (Note 4)................. 546,237 171,698 25,534 743,469 (507,777) (i) 235,692 Capital lease due to related party (Note 8)............................. -- 143,498 -- 143,498 76,587 (j) 220,085 Notes payable to related parties (Note 5)................................... 93,896 668,297 459,120 1,221,313 (1,048,253) (k) 173,060 Due to affiliate (Note 9).............. 42,500 -- -- 42,500 (42,500) (l) -- Deferred income taxes (Note 2)......... 58,007 -- -- 58,007 124,682 (m) 182,689 ---------- ---------- ---------- ---------- ---------- ----------- Total current liabilities..... 1,998,170 1,595,660 637,668 4,231,498 (2,647,793) 1,583,705 Notes payable, net of current portion (Note 4)............................. 363,089 394,581 643,393 1,401,063 (382,091) (n) 1,018,972 Capital lease, net of current portion.............................. -- 29,955 -- 29,955 -- 29,955 Capital lease due to related party, net of current portion (Note 8).......... -- 866,461 -- 866,461 (514,637) (o) 351,824 Deferred income taxes, net of current portion (Note 2)..................... 337,752 -- -- 337,752 1,122,137 (p) 1,459,889 Distribution payable (Notes 6 and 7)... -- -- -- -- 1,166,953 (q) 1,166,953 Minority Interest (Notes 6 and 7)...... -- -- -- -- 304,116 (r) 304,116 ---------- ---------- ---------- ---------- ---------- ----------- Total liabilities............. 2,699,011 2,886,657 1,281,061 6,866,729 (951,315) 5,915,414 Total stockholders' equity (capital deficiency) (Notes 1, 2, 4, 5, 7, 8 and 10).... (225,582) (1,150,808) 1,471,069 94,679 8,114,117 (s) 8,208,796 ---------- ---------- ---------- ---------- ---------- ----------- $2,473,429 $1,735,849 $2,752,130 $6,961,408 $ 7,162,802 $14,124,210 ========== ========== ========== ========== ========== ===========
See Accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements F-4 72 BEVERAGE WORKS, INC. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET SUMMARY OF PRO FORMA ADJUSTMENTS (UNAUDITED)
AS OF SEPTEMBER 30, REFERENCE ADJUSTMENT 1996 --------- -------------------------------------------------- ------------- ASSETS Cash and cash equivalents (a) Net proceeds from BWI initial public offering, net of deferred offering costs (see Notes 1 and 2).............................................. $ 7,846,532 Payment of costs incurred in connection with the consolidation of operations (see Note 1)........ (30,000) Paydown of accounts payable from IPO proceeds (see Note 2)......................................... (500,000) Purchases of property and equipment from IPO proceeds (see Note 3)........................... (250,000) Paydown of St. Stan's note payable by BWISS (see Note 4)......................................... (168,927) Payment of loan costs associated with paydown of St. Stan's note payable (See Note 4)............ (20,000) Repayment of bridge note payable from IPO proceeds (see Note 4).................................... (500,000) Payment of St. Stan's notes payable to related parties (see Note 5)............................ (459,120) Paydown of OEBC notes payable to related parties, plus accrued interest (see Note 5).............. (301,000) Repayment of notes payable to related party from IPO proceeds (see Note 5)....................... (175,000) Payment of consulting fees (see Note 8)........... (10,000) Payment of legal settlement (see Note 8).......... (400,000) Repayment of additional bridge notes payable from IPO proceeds (see Note 10)...................... (750,000) Repayment of advances from related party from IPO proceeds (see Note 10).......................... (150,000) ---------- 4,132,485 ---------- Prepaid expenses and (b) Write-off of deferred financing costs (see Note other 2).............................................. (19,711) ---------- INCREASE IN CURRENT ASSETS............................................................... 4,112,774 ---------- Property and equipment, (c) Adjustment to machinery and equipment to fair net value in connection with the acquisition of OEBC (see Note 2).................................... (291,362) Purchases of property and equipment from IPO proceeds (see Note 3)........................... 250,000 ---------- (41,362) ----------
F-5 73 BEVERAGE WORKS, INC. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET SUMMARY OF PRO FORMA ADJUSTMENTS -- (CONTINUED) (UNAUDITED)
AS OF SEPTEMBER 30, REFERENCE ADJUSTMENT 1996 --------- -------------------------------------------------- ------------- Goodwill and other (d) Goodwill from acquisition of OEBC (See Notes 1 and intangible assets 2).............................................. 3,408,410 Costs related to the acquisition of OEBC; costs classified as OEBC Goodwill (see Notes 1 and 2).............................................. 42,023 Costs related to the formation of BWI-Prost Partnership (see Note 2)........................ 11,265 Reclassification of investments in affiliates to intangible assets; costs classified as OEBC Goodwill (see Notes 1 and 2).................... 72,977 Reclassification of investments in affiliates to intangible assets; BWI-Prost Partnership Formation costs (see Note 2).................... 98,735 ------------- 3,633,410 ------------- Investments in and (e) Reclassification of investments in affiliates to advances to affiliates intangible assets (see Note 2).................. (72,977) Reclassification of investments in affiliates to intangible assets (see Note 2).................. (98,735) Eliminate intercompany activity between OEBC and BWI (see Note 9)................................ (90,274) ------------- (261,986) ------------- Deferred offering costs (f) Reclassification of deferred offering costs (see Notes 1 and 2).................................. (300,034) ------------- Other assets (g) Establish deferred loan costs (see Note 4)........ 20,000 ------------- INCREASE IN TOTAL ASSETS................................................................. $ 7,162,802 ========== LIABILITIES AND EQUITY Accounts payable and (h) Paydown of accounts payable from IPO proceeds (see accrued expenses Note 2)......................................... $ (500,000) Repayment of OEBC accrued interest on notes payable to related parties (see Note 5)......... (69,808) Payment of legal settlement (see Note 8).......... (571,000) Effect of renegotiation of capital lease due to related party (see Note 8)...................... (61,950) Eliminate intercompany activity between OEBC and BWI (see Note 9)................................ (47,774) ------------- (1,250,532) ------------- Notes payable (i) Paydown of BWISS note (see Note 4)................ (7,777) Repayment of bridge note payable from IPO proceeds (see Note 4).................................... (500,000) Establishment and repayment of additional bridge notes payable (see Note 10)..................... -- ------------- (507,777) -------------
F-6 74 BEVERAGE WORKS, INC. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET SUMMARY OF PRO FORMA ADJUSTMENTS -- (CONTINUED) (UNAUDITED)
AS OF SEPTEMBER 30, REFERENCE ADJUSTMENT 1996 ---------- -------------------------------------------------- ------------- Capital lease due to (j) Effect of renegotiation of capital leases due to related party related party (see Note 8)...................... 76,587 ---------- Notes payable to related (k) Repayment of OEBC notes payable to related parties parties (see Note 5).................................... (574,192) Repayment of St. Stan's note payable to related party (see Note 5).............................. (459,120) Repayment of BWI notes payable to related parties (see Note 5).................................... (14,941) Establishment and repayment of BWI related party advances (see Note 5)........................... -- ---------- (1,048,253) ---------- Due to affiliate (l) Eliminate intercompany activity between OEBC and BWI (see Note 9)................................ (42,500) ---------- Deferred income taxes (m) Establish current portion of deferred tax liability from tax-free acquisition of OEBC (see Note 2)......................................... 124,682 ---------- DECREASE IN TOTAL CURRENT LIABILITIES.................................................... (2,647,793) ---------- Notes payable, net of (n) Paydown of BWISS note payable (see Note 4)........ (161,150) current portion Debt assumed by related parties in connection with OEBC debt exchange agreement (see Note 4)....... (220,941) ---------- (382,091) ---------- Capital lease due to (o) Effect of renegotiation of capital lease due to related party, net of related party (see Note 8)...................... (514,637) current portion ---------- Deferred income taxes, (p) Establish deferred tax liability, net of current net of current portion portion, from tax-free acquisition of OEBC (see Note 2)......................................... 1,122,137 ---------- Distribution payable (q) Establish distribution payable to minority interest partners (see Notes 6 and 7)........... 1,166,953 ---------- Minority interest (r) Establish historical minority interest in BWI-Prost Partners (see Note 7)................. 1,471,069 Establish distribution payable to minority interest partners (see Notes 6 and 7)........... (1,166,953) ---------- 304,116 ---------- DECREASE IN TOTAL LIABILITIES............................................................ (951,315) ----------
F-7 75 BEVERAGE WORKS, INC. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET SUMMARY OF PRO FORMA ADJUSTMENTS -- (CONTINUED) (UNAUDITED)
AS OF SEPTEMBER 30, REFERENCE ADJUSTMENT 1996 --------- -------------------------------------------------- ------------- Stockholders' equity (s) Net proceeds from BWI initial public offering, net (capital deficiency) of deferred offering costs of $300,034 (See Notes 1 and 2).................................. 7,546,498 Issuance of common stock in connection with OEBC Exchange Agreement (see Note 1)................. 719,421 Reversal of historical OEBC capital deficiency (see Note 1).................................... 1,150,808 Costs incurred in connection with the consolidation of operations (see Note 1)........ (30,000) Costs related to formation of BWI-Prost Partnership (see Note 2)........................ 11,265 Costs related to the acquisition of OEBC (see Note 2).............................................. 42,023 Write-off of deferred financing costs (see Note 2).............................................. (19,711) Issuance of common stock in connection with OEBC debt exchange agreement (see Note 4)............ 140,850 Extraordinary gain in connection with the OEBC debt exchange agreement (see Note 4)............ 80,091 Establish BWI notes payable to related parties used for working capital purposes (see Note 5).............................................. (160,059) Issuance of common stock in connection with repayment of OEBC notes payable to related parties (see Note 5)............................ 123,038 Extraordinary gain in connection with repayment of OEBC notes payable to related parties (see Note 5).............................................. 219,962 Establish historical minority interest in BWI-Prost Partners (see Note 7)................. (1,471,069) Issuance of common stock in connection with renegotiation of capital lease due related party (Note 8)........................................ 255,000 Extraordinary gain in connection with the renegotiation of capital lease due related party (Note 8)........................................ 245,000 Consulting fees paid (see Note 8)................. (10,000) Issuance of stock in connection with legal settlement (see Note 8) 171,000 Establish BWI notes payable used for working capital purposes (see Note 10).................. (750,000) Establish unused portion BWI related party advances used for working capital purposes (see Note 10)........................................ (150,000) ---------- 8,114,117 ---------- INCREASE IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY).................................... $ 7,162,802 ==========
See Accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements F-8 76 BEVERAGE WORKS, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
ST. STAN'S BEVERAGE ORANGE BREWERY AND PRO FORMA WORKS, EMPIRE BREW PUB PRO FORMA SEPTEMBER 30, INC. BREWING CO. OPERATIONS SUBTOTAL ADJUSTMENTS REF 1996 ----------- ----------- ----------- ----------- ----------- --- ------------- Net sales (Note 2 and 9)............ $ 195,552 $ 2,372,629 $ 1,401,453 $ 3,969,634 $ (66,550) (a) $ 3,903,084 Cost of sales (Notes 2, 3 and 9).... 421,158 1,667,326 1,022,349 3,110,833 (46,931) (b) 3,063,902 ----------- ---------- ---------- ----------- --------- ----------- Gross profit...................... (225,606) 705,303 379,104 858,801 (19,619) 839,182 Selling, general and administrative expenses (Notes 2, 8 and 9)....... 1,443,607 1,099,063 418,706 2,961,376 820,537 (c) 3,781,913 Provision for settlements........... 571,000 166,000 -- 737,000 -- 737,000 ----------- ---------- ---------- ----------- --------- ----------- Operating loss...................... (2,240,213) (559,760) (39,602) (2,839,575) (840,156) (3,679,731) Interest and other expenses, net (Notes 2, 4, 5, 6, 8 and 10)...... 76,960 226,334 82,597 385,891 22,248 (d) 408,139 Minority interest in loss of partnership (Note 7).............. -- -- -- -- (116,942) (e) (116,942) ----------- ---------- ---------- ----------- --------- ----------- Loss before income tax benefit...... (2,317,173) (786,094) (122,199) (3,225,466) (745,462) (3,970,928) Income tax (expense) benefit (Notes 1 and 2).......................... 43,519 (1,200) -- 42,319 93,511 (f) 135,830 ----------- ---------- ---------- ----------- --------- ----------- Net loss............................ $(2,273,654) $ (787,294) $ (122,199) $(3,183,147) $(651,951) $ (3,835,098) =========== ========== ========== =========== ========= =========== Net loss per share.................. $ (1.13) =========== Common shares and equivalents outstanding (Note 2).............. 3,384,390 ===========
See Accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements F-9 77 BEVERAGE WORKS, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (UNAUDITED)
ST. STAN'S BEVERAGE ORANGE BREWERY AND PRO FORMA WORKS, EMPIRE BREW PUB PRO FORMA DECEMBER 31, INC. BREWING CO. OPERATIONS SUBTOTAL ADJUSTMENTS REF 1995 --------- ----------- ----------- ----------- ----------- --- ------------ Net sales (Note 2 and 9)............ $ 44,810 $ 2,553,977 $ 2,029,424 $ 4,628,211 $ 347,751 (a) $ 4,975,962 Cost of sales (Notes 2, 3 and 9).... 81,627 1,824,065 1,396,217 3,301,909 512,570 (b) 3,814,479 --------- ---------- ---------- ---------- --------- ---------- Gross profit...................... (36,817) 729,912 633,207 1,326,302 (164,819) 1,161,483 Selling, general and administrative expenses (Notes 2, 8 and 9)....... 491,330 990,701 583,568 2,065,599 1,477,837 (c) 3,543,436 --------- ---------- ---------- ---------- --------- ---------- Operating profit (loss)............. (528,147) (260,789) 49,639 (739,297) (1,642,656) (2,381,953) Interest and other expenses (Notes 2, 4, 5, 6, 8 and 10)............. 28,320 163,169 98,398 289,887 112,774 (d) 402,661 Minority interest in loss of partnership (Note 7).............. -- -- -- -- (104,552) (e) (104,552) --------- ---------- ---------- ---------- --------- ---------- Loss before income tax benefit...... (556,467) (423,958) (48,759) (1,029,184) (1,650,878) (2,680,062) Income tax (expense) benefit (Notes 1 and 2)................... 7,706 (1,600) -- 6,106 177,639 (f) 183,745 --------- ---------- ---------- ---------- --------- ---------- Net loss............................ $(548,761) $ (425,558) $ (48,759) $(1,023,078) $(1,473,239) $ (2,496,317) ========= ========== ========== ========== ========= ========== Net loss per share.................. $ (0.82) ========== Common shares and equivalents outstanding (Note 2).............. 3,059,837 ==========
See Accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements F-10 78 BEVERAGE WORKS, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS SUMMARY OF PRO FORMA ADJUSTMENTS (UNAUDITED)
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, REFERENCE ADJUSTMENT 1996 1995 --------- -------------------------------------------------- ------------- ------------ Net sales (a) Revenues of Heritage prior to November 8, 1995 (date of acquisition) (see Note 2).............. $ -- $ 347,751 Eliminate intercompany activity (see Note 9)...... (66,550) -- --------- ----------- (66,550) 347,751 --------- ----------- Cost of sales (b) Cost of sales of Heritage prior to November 8, 1995 (date of acquisition) (see Note 2)......... -- 448,379 Reduction to depreciation for adjustment to fair value of OEBC property and equipment, net (see Note 2)......................................... (31,217) (41,623) Additional depreciation related to assets under capital lease (see Note 2)...................... -- 70,100 Additional depreciation related to capital expenditures from IPO proceeds (see Note 3)..... 26,786 35,714 Eliminate intercompany activity (see Note 9)...... (42,500) -- --------- ----------- (46,931) 512,570 --------- ----------- DECREASE IN GROSS PROFIT................................................................. (19,619) (164,819) --------- ----------- Selling, general and (c) Estimated incremental BWI selling, general and administrative expenses administrative expenses and actual Heritage selling, general and administrative expenses (see Note 2).................................... 261,581 700,496 Amortization of OEBC goodwill (see Note 2)........ 264,256 352,341 Amortization of St. Stan's formation costs (see Note 2)......................................... 16,500 22,000 Shares and warrants issued for consulting services (see Note 8).................................... 283,125 377,500 Issuance of stock for brewpub management services (see Note 8).................................... 19,125 25,500 Eliminate intercompany activity (see Note 9)...... (24,050) -- --------- ----------- 820,537 1,477,837 --------- ----------- INCREASE TO OPERATING LOSS............................................................... (840,154) (1,642,655) --------- ----------- Interest and other (d) Write-off of deferred financing costs (see Note expenses 2).............................................. 19,711 -- (income), net Reduction of historical interest expense due to OEBC debt exchange agreement (see Note 4)....... (16,571) (22,094) Reduction of historical interest due to paydown of St. Stan's notes payable (see Note 4)........... (15,265) (17,426) Amortization of St. Stan's deferred loan costs (see Note 4).................................... 3,000 4,000 Reduction of historical interest expense due to repayment of OEBC notes payable to related parties (see Note 5)......................................... (54,790) (59,786) Reduction of historical interest expense due to repayment of St. Stan's notes payable to related party (see Note 5).............................. (24,800) (26,658) Interest expense related to warrants issued in connection with the extension of the April 1996 Bridge Note (see Notes 4 and 10)................ 24,938 33,250
F-11 79 BEVERAGE WORKS, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS SUMMARY OF PRO FORMA ADJUSTMENTS -- (CONTINUED) (UNAUDITED)
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, REFERENCE ADJUSTMENT 1996 1995 --------- -------------------------------------------------- ------------- ------------ Interest expense related to common stock issued in connection with the extension of the April 1996 Bridge Note (see Notes 4 and 10)................ 85,500 114,000 Interest expense related to OEBC debt exchange warrants (see Note 5)........................... 3,750 5,000 Interest expense on Distribution Payable (Note 6).............................................. 87,521 116,695 Reduction to interest expense due to OEBC related party lease amendment (see Note 8).............. (90,746) (34,207) --------- ----------- 22,248 112,774 --------- ----------- Minority interest in loss (e) Reflect minority interest in net loss of St. of partnership Stan's (see Note 7)............................. (59,878) (23,892) Reflect minority interest in pro forma adjustments related to St. Stan's (see Note 7).............. (57,064) (80,660) --------- ----------- (116,942) (104,552) --------- ----------- INCREASE TO NET LOSS BEFORE INCOME TAX BENEFIT........................................... (745,462) (1,650,877) Income tax benefit (f) Income tax benefit attributable to nondeductible amortization of OEBC goodwill (see Note 2)...... 93,511 124,682 Income tax benefit attributable to nondeductible depreciation of the fixed asset step-up and nondeductible goodwill recorded in connection with the Heritage acquisition (see Note 2)...... -- 52,957 --------- ----------- 93,511 177,639 --------- ----------- INCREASE TO NET LOSS..................................................................... $(651,950) $ (1,473,239) ========= ===========
See Accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements F-12 80 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- PROPOSED INITIAL PUBLIC OFFERING, ACQUISITION AND JOINT VENTURE Proposed Initial Public Offering Beverage Works, Inc. ("BWI" or the "Company") intends to file a registration statement on Form SB-2 with the Securities and Exchange Commission (the "Commission") of 1,500,000 shares of common stock at an estimated offering price of $6.00 per share, and warrants to purchase 1,500,000 shares of common stock exercisable at $6.00 per share at an estimated offering price of $0.15 per warrant. The letter of intent (see below) provides for an overallotment of units to be offered not to exceed 15% of the proposed offering. Total estimated gross proceeds from the proposed offering, excluding the underwriter's overallotment, is $9,225,000. In connection with the proposed initial public offering (the "IPO"), the Company received a letter of intent on a proposed "firm commitment" basis with an underwriter, whereby for services rendered in connection with the proposed IPO, the underwriter will receive a commission of 10% of the gross proceeds, and assuming the underwriter does not exercise its overallotment option, such fees and costs will be $922,500, plus an additional 3% for nonaccountable expenses, amounting to $276,750. As of September 30, 1996, BWI had incurred $300,034 of costs related to the proposed IPO. Such costs are reflected as deferred offering costs on the historical BWI condensed consolidated balance sheet (see Note 2). BWI estimates that it will incur an additional $179,218 of costs related to this proposed offering, excluding the underwriters fees and expenses. Assumed net cash proceeds, excluding the underwriters overallotment provision, included in the accompanying unaudited pro forma condensed consolidated balance sheet related to the proposed IPO totals $7,846,532 and $7,546,498 (after giving effect to the $300,034 of deferred offering costs at September 30, 1996). Orange Empire Brewing Company Exchange Agreement On September 11, 1996, the Company entered into a proposed stock-for-stock exchange (the "Exchange Agreement") with Orange Empire Brewing Company ("OEBC") contingent upon the successful consummation of the proposed IPO (see below). Pursuant to the Exchange Agreement, BWI is to issue 141,063 shares of its common stock in exchange for all of the outstanding shares of OEBC. Such shares have been valued at $719,421, or $5.10 per share, based on the estimated IPO price per share of $6.00 (see Note 2). Due to certain transferability restrictions under Rule 144 of the Securities Act of 1933, the valuation of the common stock of BWI to be issued reflects a discount of 15%. The common stock of BWI to be issued in the exchange is subject to adjustment (based on the change in net assets of OEBC, as defined). Management has estimated direct acquisition costs to be $115,000. Assuming the Exchange Agreement was consummated on September 30, 1996, the purchase price, plus the net liabilities assumed over the fair value of the assets acquired, is estimated at $3,523,410 as follows: Purchase price........................................ $ 834,421 ---------- Fair value of assets to be acquired (see Note 2)...... 1,444,487 Less -- Liabilities assumed, including deferred tax liability of $1,246,819............................. (4,133,476) ---------- Excess liabilities assumed............................ (2,688,989) ---------- Goodwill.............................................. $ 3,523,410 ==========
Management of BWI and OEBC intend for the Exchange Agreement to be a statutory tax-free exchange under the Internal Revenue Code. Accordingly, in accordance with Statement of Financial Accounting Standards No. 109, a deferred tax liability has been reflected in the accompanying unaudited pro forma F-13 81 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE 1 -- PROPOSED INITIAL PUBLIC OFFERING, ACQUISITION AND JOINT VENTURE -- (CONTINUED) condensed consolidated balance sheet as of September 30, 1996 for goodwill which is not expected to be deductible for Federal and state tax reporting purposes. In addition, up to 155,000 additional shares of the Company's common stock may be issued if OEBC reaches certain production levels, as defined. Pursuant to the Exchange Agreement, the exchange is to occur concurrently with the consummation (the "Closing Date") of the Company's proposed IPO. If for any reason the proposed IPO does not occur on or before March 31, 1997, or the proposed IPO does not raise aggregate proceeds of $6,000,000, either party may unilaterally terminate the Exchange Agreement. Should such additional shares of the Company's common stock be issued, the value of such shares will be deemed additional purchase consideration. Accordingly, such will be deemed additional goodwill at the time the contingency is achieved. The effects of this contingent consideration are not reflected in the accompanying unaudited pro forma condensed consolidated financial statements. BWI -- Prost Partner's Agreement On December 17, 1996, the Company's wholly-owned subsidiary, BWI -St. Stan's Inc. ("BWISS") entered into a partnership agreement with Prost Partners Limited Partnership (dba St. Stan's Brewing Company -- "St. Stan's"), named BWI-Prost Partners (the "Partnership"). Pursuant to the terms of the BWI-Prost Partners partnership agreement (the "Partnership Agreement"), St. Stan's has agreed to contribute substantially all of its assets, net of certain liabilities, to the Partnership for a 49% minority interest in the Partnership. BWISS has agreed to contribute $2,295,000 to the Partnership for a 51% controlling interest in the Partnership. The BWISS consideration is to be tendered in cash commencing 18 months from the consummation of the proposed IPO and the assumption and partial repayment of certain debt (see Notes 4, 5 and 6) at the date of contribution, the "Contribution Date", the date of the successful consummation of the proposed IPO of BWI's common stock, occurring on or before March 31, 1997, realizing minimum gross proceeds of at least $8,000,000. Also see Note 9 in the Notes to the St. Stan's Brewery and Brewpub Operations Financial Statements which represent the Historical Financial Statements of Assets and Liabilities to be Contributed to BWI -- Prost Partners General Partnership, included elsewhere in this registration statement, for discussion regarding the timing and nature of contributions. Heritage Brewing Company During 1997, BWI intends to combine the operations of Heritage Brewing Company with the operations of Riverside Brewing Company. The combined operations are to be located at Riverside Brewing Company. The Heritage Brewing Company facility lease expires in April 1997, and the storage lease is on a month-to-month basis. In connection with the combining of operations, BWI anticipates it will incur certain costs for the removal, transportation and installation of equipment estimated at $30,000. Included in the accompanying unaudited pro forma condensed consolidated balance sheet is an adjustment to reflect the payment of such costs (shown as a reduction to equity). No adjustment has been made to the unaudited pro forma condensed consolidated statements of operations as such costs are non recurring in nature. NOTE 2 -- PRINCIPLES OF ACCOUNTING FOR CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS Basis of Presentation The accompanying unaudited pro forma condensed consolidated financial statements include the effects of the proposed IPO, and the accounts of the Company and the accounts of the entities which, in management's opinion, are probable of being acquired by or joint ventured with the Company (see Note 1). F-14 82 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE 2 -- PRINCIPLES OF ACCOUNTING FOR CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED) The accompanying unaudited pro forma condensed consolidated balance sheet is presented as if the transactions had been effected as of September 30, 1996, and the accompanying unaudited pro forma condensed consolidated statements of operations are presented as if the transactions had been effected at the beginning of each period presented. The unaudited pro forma condensed consolidated financial statements have been prepared for analysis purposes only, and do not purport to be indicative of what the actual consolidated financial condition of the Company would have been at September 30, 1996, and the actual results of operations of the Company would have been for the nine months ended September 30, 1996 and the year ended December 31, 1995, nor does it purport to represent the future consolidated financial position or results of operations of the Company. Principles of Consolidation The historical consolidated financial statements include the accounts of BWI and its substantially-owned subsidiary, Heritage Brewing Company ("Heritage"). The accounts of BWI have been included in the historical consolidated financial statements beginning August 2, 1995 (date of incorporation). The accounts of Heritage have been included in the historical consolidated financial statements beginning November 8, 1995 (date of acquisition). The historical consolidated operations of BWI and of Heritage do not include a full year of activity for 1995. Accordingly, management estimated certain expenses for BWI on an ongoing basis, and adjusted the historical accounts for Heritage based on the actual results of operations of Heritage for the period January 1, 1995 to November 8, 1995. For the nine months ended September 30, 1996, an increase totaling $261,581 was made to selling, general and administrative expense in the accompanying unaudited pro forma condensed consolidated statement of operations to effect expected incremental salaries of BWI estimated at $186,581 and certain expected ongoing expenses of BWI associated with conducting business as a public entity estimated at $75,000 (insurance, public relations, etc.). For the year ended December 31, 1995, the accompanying unaudited pro forma condensed consolidated statements of operations have been adjusted to reflect management's estimates of certain ongoing general and administrative expenses for BWI and the actual results of operations for Heritage as follows:
BWI HERITAGE COMBINED -------- --------- --------- Net sales.................................................. $ -- $(347,751) $(347,751) Cost of sales.............................................. -- 448,379 448,379 Selling, general and administrative expenses............... 577,820 122,676 700,496 Interest................................................... -- -- -- Income tax benefit......................................... -- (52,957) (52,957) -------- --------- --------- Increase to net loss....................................... $577,820 $ 170,347 $ 748,167 ======== ========= =========
The net adjustment to BWI for the year ended December 31, 1995, represents the effect of the expected incremental salaries and operating expenses of $477,820 and other incremental operating expenses aggregating approximately $100,000 (for insurance, public relations, etc.). The adjustments to Heritage for the year ended December 31, 1995, represent the actual sales, cost of sales and selling, general and administrative expenses for Heritage for the period January 1, 1995 to November 8, 1995, adjusted for depreciation of assets adjusted to fair value, and the related tax effects, recorded in connection with the stock-for-stock exchange as discussed F-15 83 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE 2 -- PRINCIPLES OF ACCOUNTING FOR CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED) above and in Note 1 to the Consolidated Financial Statements of Beverage Works, Inc. and Subsidiary included elsewhere in this registration statement. The historical consolidated financial statements also include the accounts of OEBC and its wholly-owned subsidiary, Riverside Brewing Company, and the assets and liabilities expected to be contributed to the Partnership by St. Stan's, and the operations related thereto. All significant intercompany accounts have been eliminated in the pro forma consolidation. Cash and Cash Equivalents Management intends to invest the proceeds from the IPO in highly liquid instruments with maturities of 90 days or less. The estimated increase to cash balances which are expected to arise from the IPO (see Note 1) is estimated at $4,132,485. Management expects that such unused cash balances will be invested in interest bearing accounts. The accompanying unaudited pro forma condensed consolidated statements of operations do not include adjustments for any interest that would be earned. Property and Equipment In connection with the OEBC Exchange Agreement (see Note 1), certain machinery and equipment (see Note 3) was reduced by $291,362 to reflect its fair market value. In connection with this property adjustment, depreciation and amortization expense was reduced $31,217 and $41,623 for the nine months ended September 30, 1996 and the year ended December 31, 1995, respectively. Such reduction is reflected in cost of sales in the accompanying unaudited pro forma condensed consolidated statements of operations. A substantial portion of the assets of OEBC under capital leases (see Note 3) were placed into service in late 1995. As a result, cost of sales in the accompanying unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 1995 has been increased by $70,100 to reflect depreciation of such assets for a full twelve-month period. Goodwill and Other Intangible Assets Goodwill Goodwill of $3,523,410 (including $115,000 of estimated OEBC acquisition costs discussed below) has been estimated in connection with the OEBC Exchange Agreement (see Notes 1 and 2), assuming the exchange was consummated on September 30, 1996, and is expected to be amortized on a straight-line basis over a period of 10 years. Amortization of OEBC goodwill has been included in the accompanying unaudited pro forma condensed consolidated statements of operations amounting to $264,255 and $352,341 for the nine months ended September 30, 1996 and the year ended December 31, 1995, respectively. Such amortization is reflected as an increase to selling, general and administrative expenses. The Company will assess the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted cash flows. The amount of goodwill impairment, if any, will be measured based on projected undiscounted cash flows and will be charged to operations in the period in which goodwill impairment is determined by management. The methodology that management is expected to use to project results of operations will be based on a five-year trend line of expected cash flows. F-16 84 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE 2 -- PRINCIPLES OF ACCOUNTING FOR CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED) OEBC Acquisition Costs The Company has incurred $72,977 through September 30, 1996 of costs consisting primarily of legal and accounting fees, which are directly related to the Exchange Agreement. Such costs have been reflected as investments in and advances to affiliates in the accompanying unaudited pro forma condensed consolidated balance sheet at September 30, 1996. The Company anticipates to incur additional acquisition costs of $42,023, totaling $115,000, which is considered additional consideration towards the purchase price of OEBC. Such amounts have been considered in goodwill as discussed above. Partnership Formation Costs The Company has incurred $98,735 through September 30, 1996 of costs consisting primarily of legal and accounting fees, which are directly related to the formation of the Partnership. Such costs have been reflected as investments in and advances to affiliates on the accompanying unaudited pro forma condensed consolidated balance sheet at September 30, 1996. Management expects to incur additional formation costs of $11,265. Partnership formation costs will be amortized over a period of five (5) years. Accordingly, selling, general and administrative expenses have been increased by $16,500 and $22,000 in the unaudited pro forma condensed consolidated statements of operations for the nine months ended September 30, 1996 and the year ended December 31, 1995, respectively. Deferred Financing Costs Deferred financing costs, included in prepaid and other current assets, arose from the issuance of BWI warrants to purchase common stock, as well as cash paid for loan fees, which represent interest costs associated with a bridge financing which was funded in May 1996. The remaining unamortized balance of such costs, totaling $19,711 at September 30, 1996, have been written off and reflected as a reduction to prepaid and other current assets and stockholders' equity in the accompanying unaudited pro forma condensed consolidated balance sheet. An increase to interest expense has been made in the accompanying unaudited pro forma condensed consolidated statements of operations for the nine months ended September 30, 1996 to reflect such write-off. Also see Note 10 for additional warrants and common stock issued in connection with such bridge financing. Deferred Offering Costs Deferred offering costs represent costs associated with BWI's proposed IPO (see Note 1). Such costs, totaling $300,034 at September 30, 1996, have been netted against the assumed IPO proceeds and reflected as a reduction to equity on the accompanying unaudited pro forma condensed consolidated balance sheet. Accounts Payable Accounts payable generally represent amounts due vendors in the normal course of business. Management is expected to use $500,000 from proceeds of the proposed IPO (see Note 1) to reduce past due accounts and contractual commitments. Accordingly, accounts payable and cash have been reduced in the accompanying unaudited pro forma condensed consolidated balance sheet. F-17 85 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE 2 -- PRINCIPLES OF ACCOUNTING FOR CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED) Per Share Information Pro forma net loss per share is computed by dividing the pro forma net loss by the sum of the historical number of shares of common stock and common stock equivalents outstanding during the respective periods, common stock expected to be issued in the proposed IPO (excluding the underwriters' overallotment) and common stock expected to be issued in connection with the proposed OEBC acquisition and BWI-Prost Partners joint venture (see Note 1). Common stock equivalents include common shares issuable upon the exercise of the Company's stock options and warrants. Pursuant to the Securities and Exchange Commission (the "Commission"), Staff Accounting Bulletin No. 83, common shares issued for consideration below an assumed IPO price (estimated at $6.00 per share as discussed in Note 1) have been considered outstanding for all periods presented, and common stock purchase options and warrants granted with exercise prices below the IPO price during the twelve-month period preceding the date of the initial filing of the registration statement have been included in the calculation of the common shares outstanding, using the treasury stock method, as if they were outstanding for all periods presented, including loss years where the impact is anti-dilutive. Such calculation had been adjusted for the effect of the shares and warrants which have been retired subsequent to September 30, 1996. See discussion in the notes to the Historical Financial Statements of the Company included elsewhere in the Registration Statement. Income Taxes In connection with the OEBC Exchange Agreement (see Note 1), management established a deferred income tax liability totaling $1,246,819, of which $124,682 is classified as a current liability in the accompanying unaudited pro forma condensed consolidated balance sheet, which is attributable to goodwill which is not expected to be deductible for Federal and state income tax reporting. Management believes the acquisition of OEBC will qualify as a statutory tax-free exchange under the Internal Revenue Code. In connection with the nondeductible amortization of goodwill relating to the acquisition of Heritage and OEBC, as discussed in Notes 1 and 2, and the depreciation related to the acquisition of Heritage (please refer to the historical financial statements of BWI), an adjustment to record the related deferred tax benefit amounting to $93,511 and $124,682 for the nine months ended September 30, 1996 and the year ended December 31, 1995, respectively, has been reflected in the accompanying unaudited pro forma condensed consolidated statements of operations. NOTE 3 -- PROPERTY AND EQUIPMENT, NET Property and equipment, as adjusted, in the accompanying unaudited pro forma condensed consolidated balance sheet consists of the following as of September 30, 1996: Machinery and equipment................................................. $ 2,930,791 Building and leasehold improvements..................................... 2,280,920 Equipment under capital lease........................................... 915,254 Furniture and equipment................................................. 13,859 ---------- 6,140,824 Less accumulated depreciation and amortization.......................... (1,144,542) ---------- $ 4,996,282 ==========
F-18 86 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE 3 -- PROPERTY AND EQUIPMENT, NET -- (CONTINUED) Management expects to expand its brewing capacity in excess of current capacity and that of its proposed acquisition and joint venture. Accordingly, management expects to use approximately $250,000 of its IPO proceeds for purchases of equipment. The Company reflected a reduction to cash and a corresponding increase to property and equipment in the accompanying unaudited pro forma condensed consolidated balance sheet. In connection therewith, depreciation expense in the accompanying unaudited pro forma condensed statements of operations was increased by $26,786 and $35,714 for the nine months ended September 30, 1996 and the year ended December 31, 1995, respectively. NOTE 4 -- NOTES PAYABLE OEBC Note Payable to Bank In connection with the OEBC Exchange Agreement and concurrent with the Closing Date, a note payable, which aggregated approximately $533,493 at September 30, 1996, will be divided into two notes. The predecessor stockholders will assume a note totaling $220,941 without further obligation to OEBC, and the remaining principal balance of the note totaling $312,552 will be paid to the bank by OEBC. In consideration for assuming a portion of the OEBC's debt obligations, the stockholders will be issued 27,618 shares of BWI common stock valued at $140,850 using 85% of the estimated IPO price per share of $6.00 (see Note 2). Due to transferability restrictions under Commission Rule 144 of the 1933 Act, the valuation reflects a discount of 15%. If on January 1, 1999, the per share market value of BWI common stock is less than $6.00, the Company will issue to such stockholders an additional 9,227 shares of its common stock. Included in the accompanying unaudited pro forma condensed consolidated balance sheet is a reduction to notes payable of $220,941, and an increase in stockholders' equity of $140,850. The difference of $80,091, deemed to be an extraordinary gain, has also been reflected as a reduction to equity (see Notes 1 and 2). No adjustment has been reflected in the accompanying unaudited pro forma condensed consolidated statement of operations for the nine months ended September 30, 1996, as such gain is non-recurring in nature. In connection therewith, interest expense in the accompanying unaudited pro forma condensed consolidated statements of operations was reduced by $16,571 and $22,094 for the nine months ended September 30, 1996 and the year ended December 31, 1995, respectively. BWISS New Note Payable BWISS has obtained a commitment letter from a lender to refinance a note with a balance of $668,927 at September 30, 1996 that BWISS is to assume from the Partnership on the Contribution Date. The lender requires a principal reduction payment be made such that the outstanding balance of the note will be $500,000. Accordingly, the accompanying unaudited pro forma condensed consolidated balance sheet reflects a reduction of $168,927 to cash and a corresponding reduction to notes payable. In connection therewith, interest expense in the accompanying unaudited pro forma condensed consolidated statements of operations was reduced by $15,265 and $17,426 for the nine months ended September 30, 1996 and the year ended December 31, 1995, respectively. BWISS will be charged $20,000 for loan fees by the lender upon the assumption. Accordingly, the accompanying unaudited pro forma condensed consolidated balance sheet reflects the payment of such costs as a reduction to cash and an increase to other assets. The accompanying unaudited pro forma condensed consolidated statements of operations have been adjusted to reflect the amortization of such costs totaling $3,000 and $4,000 for the nine months ended September 30, 1996 and the year ended December 31, 1996, respectively. F-19 87 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE 4 -- NOTES PAYABLE -- (CONTINUED) Bridge Note In April 1996, the Company entered into an agreement whereby the Company issued a $500,000 promissory note (the "Bridge Note"), bearing interest at 18% per annum (such note was funded in May 1996). Interest is payable monthly. On December 19, 1996, such Bridge Note was extended to mature the earlier of the closing of the proposed IPO (see discussion below) or April 15, 1997 (see Note 10). The Bridge Note is secured by the assets of BWI. As of September 30, 1996, $500,000 was outstanding under the terms of this financing. The accompanying unaudited pro forma condensed consolidated balance sheet as of September 30, 1996 reflects the repayment of the Bridge Note from the proceeds of the IPO. Notes payable, as adjusted, in the accompanying unaudited pro forma condensed consolidated balance sheet consist of the following as of September 30, 1996: BWI note payable to bank, bearing interest at prime, plus 2.75% per annum (11.50% at September 30, 1996), payable in monthly principal and interest installments of $6,286, due May 4, 2004, secured by substantially all assets of Heritage and personal guarantees of certain officers and former stockholders of Heritage. ......................... $ 385,800 BWI note payable to bank, bearing interest at prime, plus 2.529% per annum (11.279% at September 30, 1996), payable in monthly principal and interest installments of $1,148, due August 1, 1998, secured by substantially all assets of Heritage, and personal guarantees of certain officers and former stockholders of Heritage. ................. 23,526 OEBC note payable to bank, expected to bear interest at prime plus 1.75% per annum (10.50% at September 30, 1996), expected to be payable in monthly installments of principal and interest of approximately $14,311, expected to be due December 1, 1998, secured by substantially all of the assets of OEBC. ............................................ 312,552 BWISS note payable to a lending institution, expected to bear interest at 11% per annum, expected to be payable in monthly installments of principal and interest of $5,683, expected to be due December 31, 2001 (assuming a closing date of the IPO of December 31, 1996), secured by substantially all of the assets of the Partnership. ................... 500,000 Unsecured demand notes with vendors, generally bearing interest at 11% per annum, payable in monthly payments of principal and interest through May 1997. ..................................................... 32,786 ---------- 1,254,664 Less current portion..................................................... (235,692) ---------- $1,018,972 ==========
F-20 88 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE 4 -- NOTES PAYABLE -- (CONTINUED) Future annual principal installments of notes payable, as adjusted, as of September 30, 1996 are expected to be as follows:
YEARS ENDING SEPTEMBER 30, ----------------------------------------------------------------- 1997........................................................ $ 235,692 1998........................................................ 201,552 1999........................................................ 199,235 2000........................................................ 184,298 2001........................................................ 25,202 Thereafter.................................................. 408,685 ---------- $1,254,664 ==========
See Note 10 for discussion related to additional financings. NOTE 5 -- NOTES PAYABLE TO RELATED PARTIES OEBC Note Payable to Stockholder In connection with the OEBC Exchange Agreement, BWI entered into an agreement whereby BWI is obligated to repay $644,000 of indebtedness due to certain related parties, consisting of $574,192 of principal and $69,808 of accrued interest as of September 30, 1996. Upon the consummation of the proposed IPO (see Note 1), such indebtedness is to be satisfied as follows: (1) $301,000 is to be paid in cash, and (2) $343,000 is to be refinanced with a new non-interest bearing promissory note which matures in 90 days, payable in 24,125 shares of the Company's common stock and 50,000 warrants to purchase shares of the Company's common stock at an exercise price of $5.00 per share, subject to adjustment, as defined. Included in the accompanying unaudited pro forma condensed consolidated balance sheet is a decrease of $301,000 to cash, a decrease of $231,192 to notes payable to related parties and a decrease of $69,808 to accounts payable and accrued expenses, which have been made to reflect the cash paydown of the notes payable to the OEBC stockholders. Also included in the accompanying unaudited pro forma condensed consolidated balance sheet is a decrease of $343,000 to notes payable to related parties and a corresponding increase in stockholders' equity, (of which $219,962 is reflected as an extraordinary gain) which have been made to reflect the repayment of the remainder of the notes payable to the OEBC stockholders. Although such repayment is scheduled to occur 90 days after the close of the proposed IPO, it has been reflected herein as it is management's intent to promptly effect such repayment. No adjustment has been made to the accompanying unaudited pro forma condensed consolidated statements of operations as such extraordinary gain is deemed nonrecurring in nature. In connection therewith, interest expense in the accompanying unaudited pro forma condensed consolidated statements of operations has been reduced by $54,790 and $59,786 for the nine months ended September 30, 1996 and the year ended December 31, 1995, respectively, to reflect the principal reductions described above. In addition, interest expense in the accompanying unaudited pro forma condensed consolidated statement of operations has been increased $3,750 and $5,000 for the nine months ended September 30, 1996 and for the year ended December 31, 1995, respectively, to reflect the difference between the exercise price of the warrants at $5.00 and the value of the underlying common stock of $5.10 which represents the estimated proposed IPO price per share of $6.00, less a 15% discount due to certain transferability restrictions under Rule 144 of the Securities Act of 1933. F-21 89 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE 5 -- NOTES PAYABLE TO RELATED PARTIES -- (CONTINUED) BWISS Notes Payable to Related Party As part of BWISS's capital contribution, as more thoroughly discussed at Note 1, BWISS is obligated to assume and repay notes payable to a related party. The balances of such notes payable total $459,120 as of September 30, 1996. Accordingly, the unaudited pro forma condensed consolidated balance sheet reflects a reduction to cash and a corresponding reduction to notes payable to related party. In connection therewith, interest expense on the accompanying pro forma condensed consolidated statements of operations was reduced $24,800 and $26,658 for the nine months ended September 30, 1996 and the year ended December 31, 1995, respectively. Related Party Financing On June 24, 1996, the Company entered into an agreement with a significant stockholder of OEBC, whereby the Company can borrow up to $175,000. Borrowings bear interest at a maximum rate of 11%, as defined, payable monthly. The principal balance, together with any unpaid interest, is due the earlier of the closing of an IPO with aggregate proceeds of no less than $10,000,000 or June 30, 1997. At September 30, 1996, BWI had $14,941 of borrowings outstanding under this agreement. The accompanying unaudited pro forma condensed consolidated balance sheet reflects the establishment of the unused portion of the credit facility totaling $160,059 and the related use of such funds for working capital purposes (a reduction to stockholders' equity), and the repayment of such amount from the proceeds of the IPO. Notes payable to related parties, as adjusted, in the accompanying unaudited pro forma condensed consolidated balance sheet consist of the following as of September 30, 1996: OEBC unsecured demand notes payable to certain officers and stockholders, interest at 7.75% per annum............................................. $ 45,981 BWI unsecured note payable to an officer, noninterest bearing, payable monthly at 3% of monthly sales, as defined.............................. 78,955 Other..................................................................... 48,124 -------- $173,060 ========
NOTE 6 -- DISTRIBUTION PAYABLE Pursuant to the BWI-Prost Partners Partnership Agreement, the Partnership is required to record a distribution payable to Prost Partners limited Partnership in an amount equal to the remaining amount of the BWISS capital contribution due the Partnership. It is estimated that $1,128,047 of the $2,295,000 capital contribution (see note 1) will be satisfied through BWISS's assumption and repayment of $459,120 of notes payable to related parties (see Note 5) and full assumption and partial repayment of $668,927 of a note payable to lender (see Note 4). Accordingly, the remaining required capital contribution of BWISS, which is estimated to be $1,166,953 at September 30, 1996, has been reflected as a decrease to minority interest and a corresponding increase to distribution payable. Please refer to the notes to the financial statements of the St. Stan's Brewery and Brewpub Operations included elsewhere in this registration statement for the payment terms related thereto. BWISS is required to pay interest to the Partnership on its unpaid capital contribution at a rate of 10% per annum, and the Partnership is required to pay Prost Partners Limited Partnership interest on the distribution payable under similar terms. In connection therewith, interest expense in the accompanying F-22 90 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE 6 -- DISTRIBUTION PAYABLE -- (CONTINUED) unaudited pro forma condensed consolidated statements of operations has been increased by $87,521 and $116,695 for the nine months ended September 30, 1996 and the year ended December 31, 1995, respectively. NOTE 7 -- MINORITY INTEREST The accompanying unaudited pro forma condensed consolidated balance sheet has been adjusted to reflect the establishment of the minority interest liability totaling $1,471,069 which corresponds with the historical book value of the net assets of the St. Stan's Brewery and Brewpub Operations, and the recordation of the $1,166,953 distribution payable (see Note 6 above). The accompanying unaudited pro forma condensed consolidated statements of operations for the nine months ended September 30, 1996 and the year ended December 31, 1995 have been adjusted to reflect the minority interest's 49% share of the historical net loss of the St. Stan's Brewery and Brewpub Operations and the pro forma adjustments related thereto. NOTE 8 -- COMMITMENTS AND CONTINGENCIES Capital Lease Agreement Amendment In connection with the OEBC Exchange Agreement (see Note 1) and concurrent with the Closing Date, a capital lease with a related party of OEBC is required to be modified for the benefit of the Company. The modifications to the capital lease obligation include a reduction in the effective interest rate to 10%, a provision that all such leased equipment may be purchased by the Company for $1 upon expiration of the lease, the inclusion in the lease obligation of all delinquent lease payments due through December 31, 1995, and a reduction of the lease obligation in the amount of $500,000 in exchange for 50,000 shares of BWI common stock. The lease payments are to be unaffected by the aforementioned modifications through December 31, 1997, at which time the reduced balance will be due over a period of five (5) years. Included in the accompanying unaudited pro forma condensed consolidated balance sheet is a reclassification from accounts payable to the long-term portion of the capital lease due to related party totaling $61,950, to reflect the inclusion of delinquent lease payments through December 31, 1995. Also, included in the accompanying unaudited pro forma condensed consolidated balance sheet is a reclassification of $76,587 to the current portion from the longterm portion of the capital lease due to related party. Also included in the accompanying unaudited pro forma condensed consolidated balance sheet is a reduction to the capital lease obligation of $500,000 and an increase to equity of $255,000 which represents the issuance of 50,000 shares of BWI common stock valued at $5.10 (the estimated IPO price per share of $6.00 less a 15% discount due to certain transferability restrictions under Rule 144 of the Securities Act of 1933). The remaining $245,000 has also been reflected as an increase to equity on the accompanying unaudited pro forma condensed balance sheet as of September 30, 1996 representing an extraordinary gain. No entry has been made to the accompanying unaudited pro forma condensed statement of operations for the nine months ended September 30, 1996 or for the year ended December 31, 1995 as such extraordinary gain is nonrecurring in nature. F-23 91 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE 8 -- ]COMMITMENTS AND CONTINGENCIES -- (CONTINUED) Future annual aggregate minimum lease payments under the capital lease due to related party, as modified in the accompanying unaudited pro forma condensed consolidated balance sheet are as follows:
YEARS ENDING SEPTEMBER 30, ------------- 1997.................................................. $ 267,372 1998.................................................. 117,112 1999.................................................. 75,401 2000.................................................. 75,401 2001.................................................. 75,401 Thereafter............................................ 100,535 ---------- 711,222 Less amounts representing interest.................... (139,313) ---------- Present value of minimum lease payments............... 571,909 Less current portion.................................. (220,085) ---------- $ 351,824 ==========
In connection therewith, interest expense in the accompanying unaudited pro forma condensed consolidated statements of operations has been reduced by $90,746 and $34,207 for the nine months ended September 30, 1996 and the year ended December 31, 1995, respectively. Management Agreements In connection with the OEBC Exchange Agreement, the Company entered into a management agreement (the "Management Agreement") with certain stockholders of OEBC whereby they are to manage and operate the brewpub operations of OEBC from the Closing Date through December 31, 1998. As compensation for such services, they are to receive 10,000 shares of the Company's common stock. Such shares are to be issued on a pro rata basis over the term of the Management Agreement, estimated at two years. In addition, the brewpub managers are obligated to the Company for quarterly cash flow deficits, if any, as defined, during the term of the Management Agreement. The Management Agreement can be terminated by mutual written consent or in the event of a breach, as defined. Selling, general and administrative expenses in the accompanying unaudited pro forma condensed consolidated statements of operations have been increased by $19,125 and $25,500 for the nine months ended September 30, 1996 and the year ended December 31, 1995, respectively, to reflect the estimated expense for such Management Agreement. Such expense represents 5,000 shares to be issued for a one year period valued at $5.10 per share (estimated IPO price per share of $6.00 less a 15% discount due to certain transferability restrictions under Rule 144 of the Securities Act of 1933). Consulting Agreements On December 28, 1996, BWI entered into a one year consulting agreement with an individual to provide financial advisory services. In connection therewith, BWI is obligated to pay $10,000 in cash and issue 60,000 shares of its common stock. Under a registration rights agreement, the Company is obligated to register 35,000 shares with in 180 days; the remaining 25,000 shares have "piggy back" registration rights under the Securities Act of 1933. Since the shares have registration rights under the Securities Act of 1933, the Board of Directors F-24 92 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE 8 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED) reflected a discount of 5% from the estimated IPO price of $6.00 per share. Accordingly, such shares have been valued at $5.70 per share. In addition, in connection with the OEBC Exchange Agreement, BWI will enter into a two-year consulting agreement with a related party for brewery advisory services and assistance with the acquisition and disposition of equipment. In connection therewith, BWI is obligated to issue 5,000 shares of its common stock at the end of each twelve-month period commencing on the Closing Date. Accordingly, such shares have been valued at $5.10 (estimated IPO price per share of $6.00 less a 15% discount due to certain transferability restrictions under Rule 144 of the Securities Act of 1933). The accompanying unaudited pro forma condensed consolidated balance sheet has been adjusted at September 30, 1996 to reflect the payment of $10,000 in cash and reduce stockholders' equity for consulting expenses. Selling, general and administrative expenses in the accompanying unaudited pro forma condensed consolidated statements of operations have been increased by $283,125 and $377,500 for the nine months ended September 30, 1996 and the year ended December 31, 1995, respectively, to reflect the estimated expense for such consulting agreements. Litigation A lawsuit was brought against BWI, certain of its officers and its former investment banker in Los Angeles Superior Court, alleging, among other things, that the Plaintiff is entitled to compensation for the proposed partnership and the proposed OEBC Exchange Agreement. Management has reached a tentative settlement with the Plaintiff whereby the Company will pay $400,000 in cash and will issue 30,000 shares of its common stock. BWI is expected to pay $200,000 upon the execution of a settlement agreement, $50,000 upon the close of the Company's proposed IPO and $150,000 13 months from January 1, 1997. The 30,000 shares of common stock will be subject to demand registration rights under the Securities Act of 1933, 180 days after the effective date of the proposed IPO. Accordingly, such shares have been valued at $5.70 per share (a discount of 5% due to transferability restrictions under the 1933 Act). At September 30, 1996, management recorded a provision for loss totaling $571,000. The accompanying unaudited pro forma condensed consolidated balance sheet as of September 30, 1996 has been adjusted to reflect the cash payment of $400,000 related to the aforementioned litigation out of estimated IPO proceeds (Note 1), an increase in stockholders' equity totaling $171,000 for the issuance of the 30,000 shares of common stock and a reduction to accounts payable totaling $571,000. NOTE 9 -- RELATED PARTY TRANSACTIONS During 1996, OEBC utilized its facilities to brew and bottle beer for BWI. OEBC billed Heritage $42,500 for such services which is included in sales of OEBC. In addition, OEBC transferred certain raw materials, at cost, totaling $12,975 to Heritage. At September 30, 1996, the intercompany receivable and payable in the accompanying unaudited pro forma condensed consolidated balance sheet of $55,475 is eliminated, and the related sales and cost of sales of OEBC totaling $42,500 is eliminated in the accompanying unaudited pro forma condensed statement of operations for the nine months ended September 30, 1996. In June 1996, in anticipation of consummating the OEBC Exchange Agreement, BWI and OEBC entered into a management agreement, whereby BWI manages and operates OEBC. As compensation for such services, BWI is to receive $6,500 per month, plus reimbursement of expenses as defined. The agreement terminates upon consummation of the proposed IPO. At September 30, 1996, and for the nine months then F-25 93 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE 9 -- RELATED PARTY TRANSACTIONS -- (CONTINUED) ended, a total of $24,050 was recorded as revenues by BWI under the terms of the agreement and, accordingly, is eliminated in consolidation. BWI has advanced approximately $10,749 to OEBC and BWISS during the through September 30, 1996, which is included in investments in and advances to affiliates. Included in the accompanying unaudited pro forma condensed consolidated balance sheet is an adjustment to eliminate intercompany obligations against receivables, aggregating $90,274 which primarily represents the results of the aforementioned. In addition, in the accompanying unaudited pro forma condensed consolidated statement of operations for the nine months ended September 30, 1996, is an adjustment to remove the effects of the aforementioned agreements. NOTE 10 -- SUBSEQUENT EVENTS Related Party Advances During the period October 1, 1996 and through the proposed Closing Date of the OEBC Exchange Agreement, OEBC is expected to receive advances from a stockholder of OEBC totaling up to $150,000 to be used for working capital purposes. Such advances, up to $150,000, are expected to be paid from proceeds to be received upon the consummation of the IPO. The accompanying unaudited pro forma condensed consolidated balance sheet reflects the establishment of the Note and the related use of such proceeds for working capital purposes (a reduction to stockholders' equity), and the repayment of such amount from the proceeds of the proposed IPO. Bridge Notes Payable On December 19, 1996, the Company and Bridge Note holder (see Note 4) agreed to extend the due date of the $500,000 note until April 15, 1997. In consideration to extend the Bridge Note, the Company issued warrants to purchase 35,000 shares of the Company's common stock. Each bridge warrant entitles the holder to purchase one share of common stock; such warrants have "piggy-back" registration rights, subject to a "lock-up" agreement at an exercise price of $4.75 for a period of three years from the date of issuance. In addition, BWI will issue 20,000 shares of its common stock with "piggy-back" registration rights, subject to a "lock-up" agreement. Included in the accompanying unaudited pro forma condensed consolidated statements of operations is an increase to interest expense of $24,938 and $33,250 for the nine months ended September 30, 1996 and December 31, 1995, respectively to reflect the difference between the exercise price of the Bridge Warrants at $4.75 and the value of the underlying common stock at $5.70 per share (estimated IPO price of $6.00 less a 5% discount due to registration rights associated with such bridge warrants). In addition, there is an increase to interest expense of $85,500 and $114,000 for the nine months ended September 30, 1996 and the year ended December 31, 1995, respectively to reflect the issuance of the 20,000 shares of BWI common stock valued at $5.70 per share (estimated IPO price of $6.00 less a 5% discount due to registration rights associated with such shares). Additional Bridge Notes On December 10, 1996, BWI received $250,000 pursuant to a 12% promissory note, principal and interest due the earlier of the IPO, with aggregate proceeds of $6,000,000 or more, or on September 1, 1997. In F-26 94 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) NOTE 10 -- SUBSEQUENT EVENTS -- (CONTINUED) addition, BWI anticipates receiving additional Bridge financing prior to the consummation of the IPO totaling $500,000. Management expects such financings will bear similar terms to the aforementioned promissory note. The accompanying unaudited pro forma condensed consolidated balance sheet has been adjusted to reflect the establishment of such financings aggregating $750,000 and the related use of proceeds for working capital purposes (a reduction to stockholders' equity), and the repayment of such amounts from the proceeds of the IPO (see Note 1). F-27 95 INDEPENDENT AUDITORS' REPORT To the Board of Directors Beverage Works, Inc. We have audited the accompanying consolidated balance sheet of Beverage Works, Inc. and subsidiary (the "Company") as of December 31, 1995, and the related consolidated statements of operations, stockholders' equity (capital deficiency) and cash flows for the period from incorporation (August 2, 1995) to December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Beverage Works, Inc. and subsidiary as of December 31, 1995, and the consolidated results of their operations and their cash flows for the period from incorporation (August 2, 1995) to December 31, 1995, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company was formed on August 2, 1995, and since such date, has incurred substantial losses from operations, has current liabilities in excess of current assets and a capital deficiency. The Company will require additional financing to fund operations, consummate its proposed acquisitions and to ultimately enable it to achieve revenues to support its cost structure. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management is currently funding operations from a private placement of its common stock and a bridge loan, and management is seeking additional capital through the issuance of its common stock in a proposed initial public offering as more fully described in Notes 2 and 11. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. CORBIN & WERTZ Irvine, California August 1, 1996, except for Note 8 as to which the date is December 10, 1996 and Note 11 as to which the date is January 7, 1997 F-28 96 BEVERAGE WORKS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS (Note 2)
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (UNAUDITED) Current assets: Cash and cash equivalents........................................ $ 159,716 $1,041,723 Accounts receivable, net of allowance for doubtful accounts of $33,000 (1996) (unaudited) and $0 (1995) (Note 5)............. 40,992 1,311 Inventories (Notes 3 and 5)...................................... 171,451 45,135 Prepaid expenses and other (Note 5).............................. 52,567 33,208 ---------- ---------- Total current assets..................................... 424,726 1,121,377 Property and equipment, net (Notes 4 and 5)........................ 1,335,939 1,296,434 Deferred licensing fees (Note 7)................................... 14,600 -- Deferred offering costs (Note 11).................................. 300,034 37,320 Investments in and advances to affiliates (Note 9)................. 206,511 -- Goodwill, net of accumulated amortization of $18,841 (1996) and $0 (1995) (Note 1).................................................. 191,619 210,460 ---------- ---------- $ 2,473,429 $2,665,591 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) Current liabilities: Accounts payable and accrued expenses............................ $ 686,530 $ 95,774 Legal settlement payable (Note 7)................................ 571,000 -- Notes payable (Note 5)........................................... 546,237 41,286 Notes payable to related parties (Note 6)........................ 93,896 109,072 Deferred income taxes (Note 10).................................. 58,007 60,704 Due to affiliate (Note 9)........................................ 42,500 -- ---------- ---------- Total current liabilities................................ 1,998,170 306,836 Notes payable, net of current portion (Note 5)..................... 363,089 398,240 Deferred income taxes, net of current portion (Note 10)............ 337,752 381,774 ---------- ---------- Total liabilities........................................ 2,699,011 1,086,850 ---------- ---------- Commitments and contingencies (Notes 7 and 9) Stockholders' equity (capital deficiency) (Notes 8 and 11): Preferred stock, no par value; 5,000,000 shares authorized, no shares issued and outstanding; liquidation value of $.001 per share......................................................... -- -- Common stock, no par value; 20,000,000 shares authorized; 2,457,863 (1996) (unaudited) and 2,341,363 (1995) shares issued and outstanding........................................ 2,596,833 2,127,502 Accumulated deficit.............................................. (2,822,415) (548,761) ---------- ---------- Total stockholders' equity (capital deficiency).......... (225,582) 1,578,741 ---------- ---------- $ 2,473,429 $2,665,591 ========== ==========
See independent auditors' report and accompanying notes to consolidated financial statements F-29 97 BEVERAGE WORKS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
THE PERIOD FROM THE PERIOD INCORPORATION FROM INCORPORATION (AUGUST 2, 1995) TO (AUGUST 2, 1995) TO SEPTEMBER 30, DECEMBER 31, 1995 1995 ------------------- THE NINE ------------------- MONTHS ENDED SEPTEMBER 30, (UNAUDITED) 1996 ------------- (UNAUDITED) Sales (Note 7)............................. $ 208,034 $ -- $ 48,395 Less excise taxes (12,482) -- (3,585) ----------- -------- ---------- Net sales................................ 195,552 -- 44,810 Cost of sales.............................. 421,158 -- 81,627 ----------- -------- ---------- Gross profit (loss)...................... (225,606) -- (36,817) ----------- -------- ---------- Operating expenses: Salaries and wages (Note 8).............. 379,017 -- 295,336 Professional fees (Note 8)............... 513,909 -- 78,516 Other general and administrative (Notes 7, 8 and 9)........................... 502,819 4,793 108,445 Marketing and selling.................... 47,862 -- 9,033 Provision for legal settlement (Note 7).................................... 571,000 -- -- ----------- -------- ---------- Total operating expenses......... 2,014,607 4,793 491,330 ----------- -------- ---------- Loss from operations....................... (2,240,213) (4,793) (528,147) Interest expense (Notes 5, 6 and 8)........ 76,960 -- 28,320 ----------- -------- ---------- Loss before benefit for income taxes....... (2,317,173) (4,793) (556,467) Benefit for income taxes (Note 10)......... 43,519 -- 7,706 ----------- -------- ---------- Net loss................................... $ (2,273,654) $(4,793) $ (548,761) =========== ======== ========== Net loss per common share.................. $ (0.85) $ -- $ (0.23) =========== ======== ========== Common shares and equivalents outstanding (Notes 2 and 11)......................... 2,687,359 245,310 2,362,806 =========== ======== ==========
See independent auditors' report and accompanying notes to consolidated financial statements F-30 98 BEVERAGE WORKS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995
COMMON STOCK ------------------------ ACCUMULATED SHARES AMOUNT DEFICIT TOTAL --------- ---------- ----------- ----------- Issuance of common stock for cash at $0.01 per share in connection with incorporation (August 2, 1995) (Note 8)..................................... 245,310 $ 2,453 $ -- $ 2,453 Issuance of common stock for cash at $0.05 per share in October 1995 (Note 8)..................................... 1,549,100 77,455 -- 77,455 Issuance of warrants to purchase common stock, at an exercise price of $8.25 per share, for cash in October 1995 (Note 8)............................... -- 28,100 -- 28,100 Issuance of common stock valued at $4.00 per share in connection with the stock-for-stock exchange on November 8, 1995 (Notes 1 and 8)................... 142,276 569,104 -- 569,104 Issuance of common stock valued at $4.00 per share for services rendered (Note 8)..................................... 49,015 196,060 -- 196,060 Issuance of common stock valued at $4.00 per share for interest (Note 8)........ 5,333 21,332 -- 21,332 Issuance of common stock valued at $4.00 per share for services rendered (Note 8)..................................... 16,583 66,332 -- 66,332 Issuance of common stock purchase units for cash at $4.00 per share, net of offering costs of $168,318 (Note 8).... 333,746 1,166,666 -- 1,166,666 Net loss................................. -- -- (548,761) (548,761) --------- ---------- --------- ---------- Balances, December 31, 1995.............. 2,341,363 2,127,502 (548,761) 1,578,741 Issuance of common stock for cash at $4.00 per share, net of offering costs of $42,720 (Note 8).................... 80,000 277,280 -- 277,280 Issuance of common stock valued at $5.20 per share pursuant to a license agreement (Notes 7 and 8).............. 6,500 33,800 -- 33,800 Issuance of Bridge Warrants to purchase 35,000 shares of common stock, at an exercise price of $4.75 per share, valued at $.95 per share, representing interest (Notes 5 and 8)............... -- 33,250 -- 33,250 Issuance of common stock purchase units for cash at $5.00 per equivalent share, net of offering costs of $24,999 (Note 8)..................................... 30,000 125,001 -- 125,001 Net loss................................. -- -- (2,273,654) (2,273,654) --------- ---------- --------- ---------- Balances, September 30, 1996 (unaudited)............................ 2,457,863 $2,596,833 $(2,822,415) $ (225,582) ========= ========== ========= ==========
See independent auditors' report and accompanying notes to consolidated financial statements. F-31 99 BEVERAGE WORKS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
THE PERIOD FROM THE NINE INCORPORATION THE PERIOD FROM MONTHS ENDED (AUGUST 2, 1995) TO INCORPORATION SEPTEMBER 30, SEPTEMBER 30, (AUGUST 2, 1995) TO 1996 1995 DECEMBER 31, 1995 ------------- ------------------- ------------------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss................................................ $(2,273,654) $(4,793) $ (548,761) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................ 302,260 -- 30,282 Provision for loss on accounts receivable............ 33,000 -- -- Common stock issued for services rendered (Note 8)... -- -- 262,392 Common stock issued to related parties for interest (Notes 5 and 8).................................... -- -- 21,332 Changes in operating assets and liabilities, net of acquired company: Accounts receivable.................................. (72,681) -- -- Inventories.......................................... (126,316) -- -- Prepaid expenses and other........................... 352 (2,630) (18,715) Accounts payable and accrued expenses................ 590,756 2,100 37,216 Accrued legal settlement (Note 7).................... 571,000 -- -- Deferred income taxes................................ (46,719) -- (7,706) ----------- ------- ---------- Net cash used in operating activities................... (1,022,002) (5,323) (223,960) ----------- ------- ---------- Cash flows from investing activities: Cash of acquired company received in connection with stock-for-stock exchange (Note 1).................... -- -- 5,952 License acquisition fee (Note 7)........................ (30,000) -- -- Investments in and advances to affiliates (Note 9)...... (206,511) -- -- Purchases of property and equipment..................... (200,185) -- (86,117) ----------- ------- ---------- Net cash used by investing activities................... (436,696) -- (80,165) ----------- ------- ---------- Cash flows from financing activities: Due to affiliate (Note 9)............................... 42,500 -- -- Proceeds from issuance of common stock (Note 8)......... 402,281 -- 1,245,996 Proceeds from issuance of common stock purchase warrants (Note 8)............................................. -- -- 28,100 Deferred offering costs (Note 8)........................ (262,714) -- (37,320) Deferred financing costs (Note 5)....................... (60,000) -- -- Proceeds from issuance of notes payable (Note 5)............................................. 500,000 -- -- Proceeds from issuance of notes payable to related parties (Note 6)..................................... 14,941 5,323 109,072 Payments on notes payable (Note 5)...................... (30,200) -- -- Payments on notes payable to related parties (Note 6)... (30,117) -- -- ----------- ------- ---------- Net cash provided by financing activities............... 576,691 5,323 1,345,848 ----------- ------- ---------- Net change in cash and cash equivalents................... (882,007) -- 1,041,723 Cash and cash equivalents, beginning of period............ 1,041,723 -- -- ----------- ------- ---------- Cash and cash equivalents, end of period.................. $ 159,716 $ -- $ 1,041,723 =========== ======= ========== Supplemental disclosure of cash flow information -- Cash paid during the period for: Interest............................................. $ 47,523 $ -- $ 2,771 =========== ======= ========== Income taxes......................................... $ 1,600 $ -- $ 800 =========== ======= ==========
See independent auditors' report and accompanying notes to consolidated financial statements F-32 100 BEVERAGE WORKS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED) Supplemental disclosure of noncash investing and financing activities: September 30, 1996 (unaudited) The Company issued 6,500 shares of common stock valued at $33,800 pursuant to license agreement (see Notes 7 and 8). The Company issued Bridge Warrants to acquire 35,000 shares of the Company's common stock valued at $33,250 for deferred financing costs (see Notes 5 and 8). December 31, 1995 The Company issued 5,333 shares of common stock valued at $21,332 for interest to related parties (see Note 8). The Company issued 65,598 shares of common stock valued at $262,392 for services rendered (see Note 8). As discussed in Note 1, on November 8, 1995, the Company entered into a stock-for-stock exchange. Pursuant to the terms of the stock-for-stock exchange, liabilities were assumed as follows: Fair value of assets acquired............................................ $1,433,766 Value of stock given as consideration.................................... (569,104) ---------- Liabilities assumed.................................................... $ 864,662 ==========
See independent auditors' report and accompanying notes to consolidated financial statements F-33 101 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 NOTE 1 -- ORGANIZATION Beverage Works, Inc. ("BWI"), a California corporation incorporated on August 2, 1995, was formed to acquire interests in various craft brewing and beverage operations. On November 8, 1995, BWI entered into a stock-for-stock exchange with Heritage Brewing Company, Inc. ("Heritage") intended to qualify as a statutory tax-free exchange under the Internal Revenue Code. Heritage is a microbrewery in the business of manufacturing and distributing various distinctive beers throughout the Western United States. Pursuant to the acquisition, BWI issued 142,276 shares of its common stock in exchange for approximately 95% of the outstanding shares of Heritage. BWI has offered 7,724 shares to the minority interest stockholders of Heritage. To date, such minority stockholders have not tendered their shares. The arrangement allows for the former stockholders of Heritage to effect a "Call" provision. The Call provision allows the stockholders to rescind the acquisition should BWI not consummate its proposed initial public offering (the "IPO") by March 31, 1997 with gross proceeds of at least $5,000,000 or if the Company has not funded at least $500,000 of interim financing during the period November 4, 1996 through January 10, 1997. In the event the proposed IPO is not consummated by June 30, 1997, and the Call holders effect to exchange their BWI shares for their shares of Heritage, amounts advanced to Heritage for working capital and capital improvements will be payable to BWI in 36 equal monthly noninterest bearing installments. The acquisition has been accounted for under the purchase method of accounting as management believes the proposed IPO is probable of being consummated. The purchase price was $569,104, plus acquisition costs of $18,480. The price was based on the number of shares issued at $4.00 per share. The price per share was based on the price received by the Company in its first private placement which occurred shortly after the acquisition (see Note 8). The minority interest relating to the remaining stockholders of Heritage was not recorded as the amount was not considered significant. The excess of purchase price over the fair value of the net assets acquired (goodwill) as a result of this transaction was $210,460 (see Note 2). Unaudited proforma revenues, net loss and net loss per share of BWI, assuming the acquisition was consummated January 1, 1995, for the year ended December 31, 1995, are as follows: Revenues............................................... $ 392,561 ========== Net loss............................................... $(623,926) ========== Net loss per share..................................... $ (0.20) ==========
The unaudited proforma information above is not necessarily indicative of the actual results which may have occurred had the acquisition been consummated on January 1, 1995. The historical audited condensed results of operations of Heritage for the ten month and eight day period ended November 8, 1995 are as follows: Revenues............................................... $ 347,751 Costs.................................................. (484,097) ---------- Net loss............................................... $(136,346) ==========
As discussed in Note 11, on September 11, 1996, BWI entered into a stock-for-stock exchange, as amended on January 7, 1997, (the "Exchange Agreement") with Orange Empire Brewing Company ("OEBC"), a California corporation. Additional agreements were entered into along with the execution of the Exchange Agreement. In anticipation of the proposed IPO, an agreement with BWI to actively manage OEBC's operations was consummated (see Note 7). See Note 11 for further discussion of the Exchange Agreement and related agreements which may have a significant effect on the consolidated financial position and results of operations of the Company. F-34 102 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 1 -- ORGANIZATION -- (CONTINUED) On June 25, 1996, BWI formed a wholly-owned subsidiary, BWI - St. Stan's, Inc. ("BWISS"). On December 17, 1996, Prost Partners Limited Partnership (a California limited partnership) ("St. Stan's"), a craft brewing company located in Modesto, California, formed a California general partnership with BWISS, BWI-Prost Partners (the "Partnership"). Pursuant to the terms of the BWI-Prost Partners partnership agreement (the "Partnership Agreement"), St. Stan's has agreed to contribute substantially all of its assets, net of certain liabilities, to the Partnership for a 49% minority interest in the Partnership. BWISS has agreed to contribute $2,295,000 to the Partnership for a 51% controlling interest in the Partnership. The BWISS consideration is to be tendered in cash commencing 18 months from the proposed IPO, and the assumption of certain debt on the contribution date, the "Contribution Date", the date of the successful consummation of the proposed IPO of BWI's common stock, occurring on or before March 31, 1997, realizing minimum proceeds of at least $8,000,000 (before any deductions, including, but not limited to, underwriters' compensation and expenses). See Note 11 for further discussion of the terms of the Partnership Agreement which may have a significant effect on the consolidated financial position and results of operations of the Company. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business. As reflected in the accompanying consolidated financial statements, BWI incurred net losses of $2,273,654 (unaudited) and $548,761, for the nine months ended September 30, 1996 and for the period from incorporation (August 2, 1995) to December 31, 1995, respectively. In addition, at September 30, 1996, BWI has current liabilities in excess of current assets of $1,573,444 (unaudited) and a capital deficiency of $225,582 (unaudited). BWI will require significant capital to fund operations, to consummate its proposed acquisition and joint venture (Note 11) and to enable it to achieve revenues to support its cost structure. These factors, among others, raise substantial doubt about BWI's ability to continue as a going concern. BWI has funded operations from two private placements of equity securities (see Note 8) and two private bridge financings (see Notes 5 and 11). BWI plans to effect the proposed IPO to raise additional capital, certain of which, if the proposed IPO is successful and the proposed acquisitions are consummated, the proceeds will be used to close the proposed acquisition and Partnership (Note 11), to reduce BWI's indebtedness and to fund working capital requirements. Management also plans to reduce BWI's costs on a per unit basis through increased plant utilization and through combined purchases with the brewing facilities acquired, or to be acquired, by BWI. Management also plans to implement a marketing plan which is expected to substantially increase BWI's revenues sufficient to meet BWI's proposed cost structure. There are no assurances that management's plans can be effected, which includes the consummation of the proposed IPO in a timely manner. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Principles of Consolidation The accompanying consolidated financial statements include the accounts of BWI and its substantially-owned subsidiary, Heritage Brewing Company (collectively the "Company"). The accounts of Heritage have been included in the accompanying consolidated financial statements beginning November 8, 1995. All significant intercompany transactions and balances have been eliminated in consolidation. F-35 103 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Parent Only Financial Information Beverage Works, Inc., parent only condensed financial information consists of the following: FINANCIAL POSITION ASSETS
SEPTEMBER DECEMBER 30, 31, 1996 1995 ------------ ------------ (UNAUDITED) Current assets: Cash............................................................ $ 140,000 $ 1,035,771 Other current assets............................................ 22,829 2,715 ------------ ----------- Total current assets......................................... 162,829 1,038,486 Property and equipment, net....................................... 16,196 5,312 Investments....................................................... 189,327 478,480 Advances to affiliates............................................ 766,415 193,573 Deferred offering costs........................................... 300,034 37,320 Other............................................................. 39,645 -- ------------ ----------- $ 1,474,446 $ 1,753,171 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) Liabilities: Accounts payable and accrued expenses........................... $ 535,132 $ 65,358 Accrued legal settlement........................................ 571,000 -- Bridge note payable............................................. 500,000 -- Notes payable to related party.................................. 93,896 109,072 ------------ ----------- 1,700,028 174,430 Stockholders' equity (capital deficiency)......................... (225,582) 1,578,741 ------------ ----------- $ 1,474,446 $ 1,753,171 ============ ===========
F-36 104 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Parent Only Financial Information -- (Continued): RESULTS OF OPERATIONS
NINE AUGUST 2, MONTHS ENDED 1995 TO SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------ ------------ (UNAUDITED) Net revenues (Note 7)............................................. $ 24,050 $ -- Cost of revenues.................................................. -- -- ------------ ----------- Gross profit................................................. 24,050 -- Selling, general and administrative expenses...................... 1,246,210 417,600 Provision for legal settlement (Note 7)........................... 571,000 -- ------------ ----------- Loss from operations......................................... (1,793,160) (417,600) Equity in loss of subsidiary...................................... 438,808 131,161 Interest expense, net............................................. 41,686 -- ------------ ----------- Net loss.......................................................... $(2,273,654) $ (548,761) ============ ===========
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities at the date of the financial statements. Certain estimates made by management also effect the reported amounts of revenues and expenses during the reported periods. Actual results could materially differ from those estimates. Significant estimates made by management include the provision for loss on accounts receivable, the net realizability of inventory, and the evaluation of the potential impairment of property and equipment and goodwill. Fair Value of Financial Instruments The consolidated financial statements contain financial instruments whereby the fair market value of the financial instruments could be different than those recorded on a historical basis in the accompanying consolidated financial statements. The Company's financial instruments consist of cash, accounts receivable, investments in and advances to affiliates, accounts payable, notes payable and notes payable to related parties. The carrying amounts of the Company's financial instruments generally approximate their fair values at September 30, 1996 (unaudited) and December 31, 1995. In the case of the investments in and advances to affiliates (Note 9) and the notes payable to related parties (see Note 6), it was not practical to determine fair values due to the lack of a market for such financial instruments. Concentration of Credit Risk The Company, at times, maintains cash balances at certain financial institutions in excess of the federally insured deposits. The Company sells its products to independent distributors for distribution to retailers. The Company extends credit to its distributors and performs periodic credit evaluations of such customers. The Company F-37 105 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) does not obtain collateral to secure its accounts receivable. The Company periodically evaluates its accounts receivable for collectibility and provides a reserve for losses resulting therefrom. Four customers accounted for sales ranging from 11% to 27% of total sales (unaudited) for the nine-month period ended September 30, 1996. Such concentrations were similar during the period from November 8, 1995 (date of acquisition of Heritage) to December 31, 1995. Two vendors of the raw material used in its brewing process supplied materials representing 17% and 43% of total purchases for the nine-month period ended September 30, 1996 (unaudited). Such concentrations were similar for the period from incorporation (August 2, 1995) to December 31, 1995. Risks and Uncertainties Licenses and Permits The brewery and wholesale operations require various Federal, state and local licenses and permits. Brewers are required to file with the Federal Bureau of Alcohol, Tobacco and Firearms (the "BATF"). The California Department of Alcoholic Beverage Control (the "ABC") requires that companies file and maintain licenses, permits or approvals for the production and sale of alcoholic beverages. Other state and local laws and regulations governing the sale of alcoholic beverages within a particular state by an out-of-state brewer or wholesaler vary by state and locality. The Company's brewery operations are subject to audit and inspection by the BATF and ABC at any time. Because of the various state and Federal licensing and permitting requirements, there is a risk that one or more regulatory authorities could determine that the Company has not complied with applicable licensing or permitting regulations or does not maintain the approvals necessary for it to conduct business within their jurisdictions. Regulatory actions could have a material adverse effect on the Company's financial position and its operating results. Dependence on Distributors The Company sells its products to independent distributors for distribution to retailers and ultimately consumers. Sustained growth will require it to maintain such relationships and possibly enter into agreements with additional distributors. No assurance can be given that the Company will be able to maintain or secure additional distributors on terms favorable to the Company. The Company has certain significant distribution relationships. The loss of one or more of these distributors would have a material adverse effect on the Company's ability to bring its products to market and, therefore, adversely effect its sales and results of operations. The Company's distribution agreements are generally terminable by the distributor on short notice. While these distribution agreements contain provisions regarding the Company's enforcement and termination rights, some state laws prohibit the Company from exercising these contractual rights. The Company's ability to maintain existing distribution agreements or enter new distribution agreements may be adversely affected by the fact that many distributors are reliant on one of the major beer producers for a large percentage of their revenue and, therefore, they may be influenced by such producers. Potential "Dram Shop" Liability Some states have enacted "dram shop" laws and legislation which impose criminal and civil liability on licensed alcoholic beverage servers for injuries or damages caused by their negligent service of alcoholic beverages to a visibly intoxicated person or to a minor, if such service is the proximate cause of the injury or damage and such injury or damage is reasonably foreseeable. California has enacted legislation granting broad F-38 106 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) immunity to servers of alcoholic beverages from civil liability, except for the sale of alcoholic beverages to minors. While the Company maintains liquor liability insurance as part of its comprehensive general liability insurance which management believes is adequate to protect against such liability, there can be no assurance that the Company will not be subject to a judgment or fine in excess of such insurance coverage or that it will be able to continue to maintain such insurance coverage at reasonable costs or at all. The imposition of a judgment or fine substantially in excess of the Company's insurance coverage would have a material adverse effect on the Company. Similarly, the failure of the Company to obtain and maintain insurance coverage could also materially and adversely affect the Company. Regulation The manufacture and sale of alcoholic beverages is a highly regulated and taxed business. The Company's operations may be subject to more restrictive regulations and increased taxation by Federal, state and local governmental entities than are those of non-alcohol related businesses. Federal, state and local laws and regulations govern the production and distribution of beer. These laws and regulations govern permitting, licensing, trade practices, labeling, advertising, marketing, distributor relationships and related matters. Federal, state and local governmental entities also levy various taxes, license fees and other similar charges and may require bonds to ensure compliance with applicable laws and regulations. Failure by the Company to comply with applicable Federal, state or local laws and regulations could result in penalties, fees, suspension or revocation of permits, licenses or approvals. There can be no assurances that other or more restrictive laws or regulations will not enacted in the future. Trademarks The Company and the Breweries have obtained or applied for U.S. Trademark Registrations for the names of several of its products, and in some cases for most of its logo designs. The Company regards its trademarks as having substantial value and as being an important factor in the marketing of its products. The Company is not aware of any infringing uses that could materially affect its current business of any prior claim to the trademarks that would prevent the Company from using such trademarks in its business. The Company's policy is to pursue registration of its marks whenever possible and to oppose vigorously any infringements of its marks. Seasonality The beverage business traditionally has historically been seasonal. Typically, net sales are highest during the third and fourth calendar quarters and decline sequentially in the first and second calendar quarters. The seasonal pattern is due primarily to the increased demand for consumer beverages during the summer through the year-end holiday buying season. The Company expects its net sales and operating results to continue to reflect seasonality. Environmental Regulations and Operating Considerations The Company's brewing operations are subject to a variety of extensive and changing Federal, state and local environmental laws, regulations and ordinances that govern activities or operations that may have adverse effects on human health or the environment. Such laws, regulations and ordinances may impose liability for the cost of remediating, and for certain damages resulting from, sites of past releases of hazardous materials. The Company believes that it currently conducts, and in the past has conducted, its activities and operations in substantial compliance with applicable environmental laws, and believes that costs arising from existing F-39 107 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) environmental laws will not have a material adverse effect on the Company's financial condition or results of operations. There can be no assurance, however, that environmental laws will not become more stringent in the future or that the Company will not incur costs in the future in order to comply with such laws. The Company's operations are subject to certain hazards and liability risks faced by all brewers, such as potential contamination of ingredients or products by bacteria or other external agents that may be wrongfully or accidentally introduced into products or packaging. The occurrence of such a problem could result in a costly product recall and serious damage to the Company's reputation for product quality, as well as claims for product liability which may negatively impact the Company. The Company maintains insurance which the Company believes is sufficient to cover any liability claims which might result from a contamination problem in its products, but which may not cover any damage to the Company's reputation. Cash Equivalents The Company considers highly liquid investments with a remaining maturity of 90 days or less when purchased to be cash equivalents. Inventories Inventories, consisting primarily of raw materials and purchased products, and work in process and finished goods, are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. Deferred Financing Costs Deferred financing costs, included in prepaid expenses and other current assets, arose from loan fees paid of $60,000 and the issuance of 35,000 common stock purchase warrants valued at $33,250 which were deemed by management to represent interest costs associated with the issuance of a bridge note payable (the "Bridge Note") (Note 5). Such interest costs are currently being amortized over the nine-month period ending December 31, 1996. Amortization of such costs during the nine months ended September 30, 1996 was $73,539 (unaudited). Also see Note 5 for additional common stock and common stock purchase warrants issued in connection with this note. Deferred Offering Costs Deferred offering costs represent costs associated with the Company's private placement of common stock (Note 8) and proposed IPO (Note 11). Deferred offering costs are recorded as a reduction of proceeds received upon the close of escrow of each transaction. In May 1996, the private placement of the Company's common stock closed and, accordingly, $37,320 of such costs deferred at December 31, 1995 were recorded net of the proceeds received. In the event the proposed IPO is unsuccessful, the $300,034 of costs incurred through September 30, 1996 (unaudited), and costs to be incurred, will be charged to operations. Property and Equipment Property and equipment are stated at cost, less accumulated depreciation, and are being depreciated on a straight-line basis over their estimated useful lives, which range from five (5) to seven (7) years. Leasehold improvements are being amortized using the straight-line method over the life of the asset or the term of the lease (which expires on February 1998), whichever is shorter. F-40 108 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Major betterments and renewals are capitalized, while routine repairs and maintenance are charged to expense when incurred. Management of the Company assesses the recoverability of property and equipment by determining whether the depreciation of such assets over their remaining lives can be recovered through projected undiscounted cash flows. The amount of impairment, if any, is measured based on projected undiscounted cash flows and is charged to operations in the period in which such impairment is determined by management. To date, management has not identified an impairment of property and equipment. Management has based this assessment on the anticipated benefits to be derived from the successful completion of the Company's proposed IPO and the consummation of the Exchange Agreement and the Partnership Agreement (see Note 11). If the Company's proposed IPO is not successfully completed, the Company could be forced to liquidate its assets if it ceases to continue as a going concern. The amounts the Company would receive from a sale of its property and equipment under such circumstances could be substantially less than the carrying values reflected in the accompanying consolidated financial statements. Goodwill The excess of cost of the investment over net assets acquired (goodwill) is amortized on a straight-line basis over the expected periods to be benefitted. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted cash flows. The amount of goodwill impairment, if any, is measured based on projected undiscounted cash flows and is charged to operations in the period in which goodwill impairment is determined by management. Goodwill is amortized on the straight-line method over an expected ten (10) year life. The methodology that management uses to project results of operations is based on a five-year trend line of expected cash flows. To date, management has not identified an impairment of goodwill. Management has based this assessment on the anticipated benefits to be derived from the successful completion of its proposed IPO and the consummation of the Exchange Agreement and the Partnership Agreement (see Note 11). If the proposed IPO is not successfully completed, management may be required to charge operations for the impairment of goodwill. Deferred Licensing Fees Deferred licensing fees (see Note 7) represent amounts paid by the Company to acquire rights to use specified trademarks and tradenames for use in its craft brewing operations. Such amounts are amortized on a straight-line basis over one year. Amortization during the nine-month period ended September 30, 1996 totaled $49,200 (unaudited). Income Taxes The Company accounts for its income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement 109"). Under Statement 109, an asset and liability method is used whereby deferred tax assets and liabilities are determined based on temporary differences between bases used for financial and income tax reporting purposes. Income taxes are provided based on the enacted tax rates in effect at the time such temporary differences are expected to reverse. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize the tax assets through future operations (see Note 10). F-41 109 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Revenue Recognition Revenues from product sales are recognized upon shipment. The Company records a provision for the effect of returned products at the time the units are shipped. Historically, the Company has experienced minimal product returns. Advertising and Marketing Expense Advertising and marketing costs are expensed as incurred. Per Share Information Net loss per common share is computed by dividing the net loss by the number of shares of common stock and common stock equivalents outstanding during the respective periods. Common stock equivalents include common shares issuable upon the exercise of the Company's stock options and warrants. Pursuant to the Securities and Exchange Commission (the "Commission"), Staff Accounting Bulletin No. 83, common shares issued for consideration below an assumed proposed IPO price (estimated at $6.00 per share as discussed in Note 11) have been considered outstanding for all periods presented, and common stock purchase options and warrants granted (see Note 8) with exercise prices below the proposed IPO price during the twelve-month period preceding the date of the initial filing of the registration statement (September 12, 1996) have been included in the calculation of the common shares outstanding, using the treasury stock method, as if they were outstanding for all periods presented, including loss years where the impact is anti-dilutive. The aforementioned calculations have not been adjusted to reflect the retirement of 1,342,700 shares of common stock occurring subsequent to September 30, 1996 (see Note 8). Interim Financial Statements In the opinion of management, the accompanying unaudited consolidated financial statements of the Company include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the consolidated financial position of the Company as of September 30, 1996, and results of operations and cash flows for the nine-month period then ended. Although management believes that the disclosures of interim financial information in these financial statements are adequate to make the information presented not misleading, certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles during the interim periods have been condensed or omitted pursuant to the rules and regulations of the Commission. The unaudited results of operations for the nine-month period ended September 30, 1996 are not necessarily indicative of results of operations to be expected for the year ending December 31, 1996. F-42 110 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 3 -- INVENTORIES Inventories consist of the following:
SEPTEMBER DECEMBER 30, 31, 1996 1995 ------------ ----------- (UNAUDITED) Raw materials and purchased packaging.............. $ 101,695 $ 32,900 Work in process and finished goods................. 69,756 12,235 ---------- ---------- $ 171,451 $ 45,135 ========== ==========
NOTE 4 -- PROPERTY AND EQUIPMENT Property and equipment consist of the following:
SEPTEMBER DECEMBER 30, 31, 1996 1995 ------------ ----------- (UNAUDITED) Machinery and equipment............................ $1,450,335 $ 1,250,150 Furniture and fixtures............................. 8,446 8,446 Leasehold improvements............................. 68,120 68,120 ---------- ---------- 1,526,901 1,326,716 Less accumulated depreciation and amortization..... (190,962) (30,282) ---------- ---------- $1,335,939 $ 1,296,434 ========== ==========
F-43 111 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 5 -- NOTES PAYABLE Notes payable consist of the following:
SEPTEMBER DECEMBER 30, 31, 1996 1995 ------------ ----------- (UNAUDITED) Note payable to bank, bearing interest at prime, plus 2.75% per annum (11.50% at December 31, 1995), payable in monthly principal and interest installments of $6,286, due May 4, 2004, secured by substantially all assets of Heritage and personal guarantees of certain officers and former stockholders of Heritage.................. $ 385,800 $ 408,007 Note payable to bank, bearing interest at prime, plus 2.529% per annum (11.279% at December 31, 1995), payable in monthly principal and interest installments of $1,148, due August 1, 1998, secured by substantially all assets of Heritage, and personal guarantees of certain officers and former stockholders of Heritage.................. 23,526 31,519 Bridge Note payable to a less than 5% stockholder of the Company, bearing interest at 18% per annum, interest payable monthly, maturing the earlier of the closing of the proposed IPO or April 15, 1997, secured by all assets of BWI (see below)........................................... 500,000 -- ---------- ---------- 909,326 439,526 Less current portion............................... (546,237) (41,286) ---------- ---------- $ 363,089 $ 398,240 ========== ==========
In April 1996, in connection with the Bridge Note, the Company paid $60,000 in loan fees and issued warrants (the "Bridge Warrants") to purchase 35,000 shares of the Company's common stock. Each Bridge Warrant has registration rights and entitles the holder to purchase one share of common stock at an exercise price of $4.75 for a period of three years from the date of issuance. The registration rights provide for the underlying shares to be registered in the Company's proposed IPO, with such shares being subject to a six-month "lock-up" agreement, as defined. The Bridge Warrants are fully exercisable and expire April 20, 1999. The Bridge Warrants were valued at $0.95 per warrant (see Note 8). Such costs have been capitalized as deferred financing costs and are included in prepaid expenses and other in the accompanying consolidated balance sheet at September 30, 1996 (see Note 1). In December 1996, the Company agreed to issue an additional 35,000 Bridge Warrants with the same terms described above and 20,000 shares of its common stock. Such additional warrants and shares of common stock (which have demand registration rights effective 180 days after the close of the Company's proposed IPO) with an estimated combined value of $147,250, and will be charged to operations as interest expense from December 1, 1996 to April 15, 1997. Interest expense on the notes payable discussed herein amounted to $76,519 (unaudited) for the nine-month period ended September 30, 1996 and $6,988 for the period November 8, 1995 (date of acquisition of Heritage) to December 31, 1995. Future annual principal installments of notes payable as of December 31, 1995, which excludes the $500,000 Bridge Notes, due 1996, are as follows: F-44 112 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 5 -- NOTES PAYABLE -- (CONTINUED)
YEARS ENDING DECEMBER 31, -------------------------------------------------- 1996.............................................. $ 41,286 1997.............................................. 46,237 1998.............................................. 47,152 1999.............................................. 43,042 2000.............................................. 48,261 Thereafter........................................ 213,548 -------- $439,526 ========
See Note 11 for issuance of an additional bridge note totaling $250,000 subsequent to September 30, 1996. NOTE 6 -- NOTES PAYABLE TO RELATED PARTIES Notes payable to related parties consist of the following:
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (UNAUDITED) Two noninterest bearing unsecured demand notes payable to stockholders, paid July 1, 1996............................ $ -- $ 26,327 Noninterest bearing unsecured note payable to an officer and stockholder, payable at a rate of 3% of sales.............. 78,955 82,745 Unsecured line of credit up to a maximum of $175,000 to an affiliate of OEBC, interest at 11% per annum payable monthly, with all principal and unpaid interest due the earlier of the consummation of an IPO with gross proceeds exceeding $10,000,000 or June 30, 1997..................... 14,941 -- ------- -------- $93,896 $109,072 ======= ========
NOTE 7 -- COMMITMENTS AND CONTINGENCIES Employment Contracts The Company has entered into employment contracts with five of its employees, including three officers, which expire on various dates through May 10, 1998. Such management agreements will be canceled and replaced with new agreements upon the consummation of the proposed IPO (Note 11). The employment contracts also provide for certain expense allowances. F-45 113 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 7 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED) Future annual minimum base salaries plus allowances, and in the aggregate, consist of the following at December 31, 1995 (without taking into consideration the employment agreements effective on the consummation of the Company's proposed IPO):
YEARS ENDING DECEMBER 31, ------------- 1996.......................................... $ 451,200 1997.......................................... 451,200 1998.......................................... 203,025 ---------- $1,105,425 ==========
Also see Note 11 regarding the cancellation and replacement of employment contracts upon consummation of the proposed IPO. Incentive Compensation Plan In August 1996, the Company adopted a cash incentive bonus compensation plan, the 1996 Incentive Compensation Plan (the "Incentive Plan"). The Incentive Plan is intended to qualify as performance based compensation plan under Section 162(m) of the Internal Revenue Code. The Incentive Plan provides that qualifying employees may receive as a cash bonus an amount equal to the Company's modified earnings, calculated before interest, taxes, depreciation and amortization ("Modified EBITDA"), for a particular fiscal year. The maximum cash bonus that the Incentive Plan provides is 8.45% of Modified EBITDA up to $4,000,000 for such fiscal year and 12.45% of Modified EBITDA if Modified EBITDA exceeds $4,000,000 for such fiscal year. See Note 8 for options and warrants granted by the Board of Directors. Operating Leases The Company leases its Lake Elsinore, California facility under a noncancelable operating lease which expires February 1998. The Company previously leased its Newport Beach, California office on a month-to-month arrangement for $2,105. In November 1996, the Company entered into a new office lease arrangement for office space located in Newport Beach, California. The lease payment is $941 per month and expires November 1999. Future annual minimum lease payments at December 31, 1995 are as follows (without taking into consideration the new lease executed in November, 1996):
YEARS ENDING DECEMBER 31, ------------- 1996............................................ $26,050 1997............................................ 27,560 1998............................................ 4,630 ------- $58,240 =======
Rent expense under all operating lease agreements totaled $34,886 (unaudited) for the nine-month period ended September 30, 1996, and $10,525 for the period ended December 31, 1995. F-46 114 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 7 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED) See Note 11 for discussion regarding a month-to-month lease agreement entered into with a related party subsequent to September 30, 1996. Distributor Agreements The Company is party to certain agreements with certain distributors which grants the Company's distributors the right to sell certain products in specified territories for a period of one year. The agreements may be terminated by mutual agreement, or by written notice, subject to certain terms and fees, as defined. License Agreement In February 1996, the Company entered into a license agreement to obtain an exclusive right to manufacture, distribute and market beer products, as defined, in specified territories, as well as use trademarks and tradenames of the licensor. The term of the agreement is one year, renewable annually for a term of five years pursuant to certain minimum sales quotas set forth in the agreement. If a minimum sales volume has been met at the end of year five of the agreement, the agreement can be extended for an additional term, as defined, upon payment of a $100,000 extension fee. Pursuant to the terms of the agreement, the Company paid $25,000 in cash, issued 6,500 shares of its common stock valued at $33,800 (see Note 8) to acquire the rights under the agreement, paid certain fees and expenses totaling $5,000, and paid advance royalties of $10,000. The agreement provides for the payment of a $25,000 licensing fee upon the commencement of year two of the agreement. Such amounts, excluding the advanced royalties and the second year licensing fee, have been capitalized as deferred licensing fees in the accompanying consolidated balance sheet at September 30, 1996 (unaudited) (see Note 2); advance royalties of $10,000 are included in prepaid expenses and other current assets in such consolidated balance sheet at September 30, 1996 (unaudited). In addition, the Company is obligated to pay royalties ranging from $0.20 to $0.242 per gallon over the life of the agreement, as defined, and royalties of 10% of the gross profit from the sale of any merchandise with the licensor's tradename, as defined. Contract Brewing Agreements The Company has entered into four contract brewing agreements whereby the Company, through its subsidiaries and affiliated companies, will produce specific beer products and the counterparty will purchase such specified products, as defined. The agreements specify the prices at which such products are to be purchased, but do not specify the quantities to be produced by the Company and purchased by the counterparty. The terms of the agreements are one year, generally cancelable with 30 days notice. Management believes such contracts will be entered into from time to time with other parties in the normal course of business until such time the Company utilizes all available facilities. Management Agreement In anticipation of consummating the Exchange Agreement, effective June 10, 1996, the Company entered into a management agreement with OEBC, whereby BWI manages and operates the brewery operations of OEBC. As compensation for the management services provided, the Company is to receive $6,500 per month, plus reimbursement of expenses, as defined. The agreement terminates upon consummation of the proposed IPO. Included in investments in and advances to affiliates in the accompanying consolidated balance sheet is $24,050 (unaudited) of past due management fees at September 30, 1996. F-47 115 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 7 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED) Management fee income under this agreement totaled $24,050 (unaudited) for the nine-month period ended September 30, 1996 and is reflected in the consolidated statement of operations. Also see Note 11, for discussion regarding a management agreement effective upon consummation of the proposed IPO. Consulting Agreement On January 5, 1996, the Company entered into a design, advertising and marketing agreement. In November 1996, the Company agreed to issue qualified incentive stock options pursuant to its plan (see Note 8) to purchase 110,000 shares of common stock at an exercise price of $5.20 per share in lieu of $67,500 in fees. The value of the services which will be satisfied through the issuance of such options will be charged to operations with a corresponding credit to common stock as such services are provided. Litigation The Company and its subsidiaries are currently not involved in any material pending legal proceedings. Other than as described below, the management of the Company is not aware of any material legal proceedings threatened against it. A lawsuit was brought against the Company, certain of its officers and its former investment banker in Los Angeles Superior Court, alleging, among other things, that the Plaintiff is entitled to compensation for the proposed Partnership with St. Stan's and the proposed acquisition with OEBC. Management has reached a tentative verbal settlement with the Plaintiff whereby the Company will pay $400,000 and issue 30,000 shares of its common stock valued at $5.70 per share. The Company is expected to pay $200,000 upon the execution of the settlement agreement, $150,000 upon the close of the Company's proposed IPO and $50,000 13 months from January 1, 1997. The shares will be subject to demand registration rights 180 days after the effective date of the proposed IPO. Accordingly, management recorded a provision for loss totaling $571,000 (unaudited) in the accompanying consolidated statement of operations for the nine-month period ended September 30, 1996. Certain other claims were brought by or against the Company. In the opinion of management, the ultimate outcome of these matters will not have a material adverse effect on the Company's consolidated operations or financial position. NOTE 8 -- STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) The Company is authorized to issue up to 20,000,000 shares of common stock, no par value and up to 5,000,000 shares of preferred stock, no par value. Since the Company's incorporation, no preferred shares have been issued. The Company has issued its common stock, and common stock purchase options and warrants for cash, services rendered and interest since its inception. There is currently no significant market for trading of the Company's common stock. The Company's Board of Directors, through consensus, is responsible for assessing the estimated fair value of the shares based on relevant information available. In 1995, the Board of Directors have generally used the value of the consideration received (e.g. the private placement proceeds), or services rendered to the Company, to determine the estimated fair value of its common stock. Subsequent to the closing of the private placement, the Board of Directors determined the estimated fair value of common stock transactions using the estimated proposed IPO price per share of $6.00. In the event the securities are issued F-48 116 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 8 -- STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) -- (CONTINUED) under Commission Rule 144 of the 1933 Act, the Board of Directors reflected a discount of 15% from the estimated proposed IPO price (approximately $5.10 per share) due to the transferability restrictions. Should the shares have registration rights (demand or best efforts) under the Commission Act of 1933, the Board of Directors reflected a discount of 5% from the estimated proposed IPO price (approximately $5.70 per share). Common stock transactions since incorporation (August 2, 1995) through December 31, 1995, and during the nine-month period ended September 30, 1996 (unaudited) are as follows: On August 2, 1995 (incorporation), the Company issued 245,310 shares of common stock to its founders for cash at $0.01 per share. No compensation expense was charged to operations as the value of the shares was deemed nominal. On October 6, 1995, the Company issued 1,549,100 shares of common stock to certain investors for cash at $0.05 per share. No compensation expense was charged to operations as the value of the shares was nominal in light of the fact the Company had no material assets or operations. On November 22, 1996, the Company entered into an agreement with a holder of 1,342,700 shares of common stock of the Company (such shares were originally issued by the Company in October 1995) (the "Stock Retirement Agreement"). The Stock Retirement Agreement requires the stockholder to surrender 1,160,216 shares of common stock to the Company. In consideration for such surrender, the Company is to provide the stockholder with registration rights for the 182,484 shares not surrendered. The registration rights provide for such shares to be registered in the Company's anticipated IPO, with such shares being subject to a 12-month staggered "lock-up" agreement, as defined. On October 6, 1995, the Company sold warrants to purchase 2,810,000 shares of the Company's common stock at $8.25 per share to an investor for cash at $0.01 per share ($28,100) under the warrant agreement (also see warrants issued to purchase 192,000 shares discussed below). On December 10, 1996, the Company and the holder entered into a mutual general release agreement whereby warrants to purchase 2,110,000 were retired. The remaining warrants were modified to reduce the exercise price to the lesser of 105% of the proposed IPO price or $8.25 per share. The warrants are fully vested, expire five (5) years from the proposed IPO date and are callable by the Company at $0.01 each provided that the closing bid price of the Company's stock equals 200% of the warrant exercise price for a specified period, as defined. The shares underlying such warrants are expected to be registered in the Company's proposed IPO, subject to a 6-month "lock-up" agreement, as defined, which restricts the sale of such securities. Although the exercise price of the warrant was higher than the estimated fair value of the underlying common stock, the purchase price was deemed appropriate due to the right to purchase a significant block of common stock under the terms of the agreement. The purchase price of $28,100 was reflected in the accompanying consolidated statements of stockholders' equity (capital deficiency). On November 8, 1995, the Company issued 142,276 shares of common stock valued at an effective price of approximately $4.00 per share in connection with the Heritage acquisition (see Note 1). Such shares issued include 16,000 shares which have registration rights. On November 12, 1995, the Company issued 49,015 shares of common stock valued at $4.00 per share to two former stockholders of Heritage, one of which is an officer and director of the Company. Such individuals are considered experts in craft brewing operations and have performed certain consultations to the Company related thereto. Accordingly, the Company charged $196,060 to operations during the period ended December 31, 1995 for services rendered. F-49 117 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 8 -- STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) -- (CONTINUED) On November 12, 1995, the Company issued 5,333 shares of common stock valued at $4.00 per share for interest to two former stockholders of Heritage and current debt holders of the Company (Note 6). Accordingly, the Company charged $21,332 to operations during the period ended December 31, 1995 for interest expense. On November 15, 1995, the Company issued 16,583 shares of common stock, valued at $4.00 per share to certain parties for consulting services provided to the Company. Accordingly, the Company charged $66,332 to operations during the period ended December 31, 1995 for services rendered. On November 20, 1995, the Company engaged a placement agent to sell up to 400,000 shares of its common stock at $4.00 per share. This private placement was intended to comply with exemptions promulgated under Rule 506 of Regulation D. Such shares are expected to be registered in the Company's proposed IPO, subject to a 13-month lock-up agreement, as defined. Through December 31, 1995, the Company issued 333,746 shares of its common stock for aggregate proceeds of $1,166,666, net of offering costs of $168,318. In April 1996, the Company issued an additional 80,000 shares of common stock for aggregate proceeds of $277,280, net of offering costs of $42,720 under its private placement discussed in the preceding paragraph. On February 3, 1996, the Company issued 6,500 shares of common stock valued at $5.20 per share pursuant to the terms of a license agreement. Such shares are expected to be registered in the Company's proposed IPO, subject to a 13-month "lock-up" agreement, as defined. The shares issued were deemed consideration for acquiring its rights under the agreement and, accordingly, the Company capitalized $33,800 for such value as deferred licensing fees in the accompanying consolidated balance sheet at April 30, 1996 (see Notes 2 and 7). In April 1996, the Company issued warrants to purchase 35,000 shares of its common stock at $4.75, each full exercisable and expiring April 20, 1999. The underlying common stock has registration rights in the proposed IPO, subject to a 6-month "lock-up" agreement, as defined. The Board of Directors determined the estimated fair value to be $5.70 per share and, accordingly, $33,250 was capitalized as deferred financing cost to be amortized to interest expense over the term of the loan (Notes 2 and 5). On September 9, 1996, the Company closed a second private placement of 15,000 common stock purchase units for $150,000, net of offering costs of $24,999. Each unit consists of two shares of common stock and one common stock purchase warrant exercisable at $7.00 per share. Such shares and shares underlying the warrants are expected to be registered in the Company's proposed IPO, subject to a staggered four-month "lock-up" agreement. The warrants are immediately exercisable and expire in five years. Since incorporation, the Board of Directors approved the issuance of certain common stock purchase options and warrants at various exercise prices as deemed appropriate by the Board of Directors. In October 1995, the Board of Directors approved the grant of warrants to purchase 192,000 shares to certain investors and directors of the Company, the underlying shares of which are expected to be registered in the Company's proposed IPO, subject to a 6-month "lock-up" agreement, as defined. In December 1996, the terms of the warrants were amended. Each warrant entitles the holder to purchase one share of common stock at an exercise price of the lesser of 105% of the proposed IPO price or $8.25 per share, as amended, and is fully F-50 118 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 8 -- STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) -- (CONTINUED) vested as of the date of grant. The warrants are callable by the Company at $.01 each provided that the closing bid price of the Company's stock equals 200% of the warrant exercise price for a specified period, as defined. The exercise price substantially exceeds the estimated fair value of underlying common stock at the date of grant. Such options expire five (5) years from the proposed IPO date. In addition, the Board of Directors granted the Company's securities counsel options to purchase 15,583 shares of common stock at $4.50 per share under similar terms as described above. In August 1996, the Board of Directors adopted, subject to stockholder approval, an incentive stock option plan meeting the requirements of Section 422 of the Internal Revenue Code. The plan reserves 1,500,000 shares for issuance over a term of 10 years. The Board of Directors approved the grant of options to purchase 1,091,000 shares, exercisable at $5.20 per share (unless such options are granted to a 10% stockholder, in which case the exercise price would be no less than 110% of fair value). The options vest ratably over a period of four (4) years. No compensation expense was attributed to the options granted as the exercise price exceeded the estimated $5.10 fair value of the underlying shares. In August 1996, the Board of Directors adopted, subject to stockholder approval, a nonqualified stock option plan. The Board of Directors granted options to purchase 933,500 shares at $5.10 per share. The options vest immediately and are exercisable at the end of four (4) years, subject to an acceleration clause if certain profitability levels are achieved, as defined. The options expire in 2006. No compensation expense was attributed to the options granted as the exercise price equaled the $5.10 estimated fair value of the underlying shares. The following table summarizes activity of the common shares available for purchase, and their range of per share prices, during the period ended December 31, 1995 and the nine-month period ended September 30, 1996:
NUMBER OF PRICE SHARES PER SHARE --------- ----------- Balances at August 2, 1995.......................... -- -- Granted........................................... 3,015,583 $4.50-$8.25 Exercised......................................... -- -- Canceled.......................................... -- -- --------- ----------- Balances at December 31, 1995....................... 3,015,583 $4.50-$8.25 Granted........................................... 1,938,500 4.75- 5.20 Exercised......................................... -- -- Canceled.......................................... -- -- --------- ----------- September 30, 1996 (unaudited)...................... 4,954,083(1) $4.50-$8.25 ========= =========== Shares exercisable at September 30, 1996 (unaudited)....................................... 3,085,478(1) =========
- --------------- (1) Warrants to purchase 2,110,000 shares at $8.25 were retired in December 1996 as discussed above. The tables above have not been adjusted for such retirement. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation" ("Statement No. 123"). Statement No. 123 is primarily a disclosure standard for the Company because the Company will continue to account for employee F-51 119 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 8 -- STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) -- (CONTINUED) stock options under Accounting Principles Board Opinion No. 25. The disclosure requirements for the Company required by Statement No. 123 will be effective for the Company's 1996 financial statements. Because of a lack of a market in the Company common stock, the proforma effects on operations of the employee stock options were not determinable. NOTE 9 -- RELATED PARTY TRANSACTIONS Investments In and Advances To Affiliates Investments in and advances to affiliates consist of the following at September 30, 1996 (unaudited): Formation costs relating to the Partnership....................... $ 98,735 Acquisition costs relating to OEBC................................ 72,977 OEBC management fees receivable (see below)....................... 24,050 Advances.......................................................... 10,749 -------- $206,511 ========
The Company intends to treat the Partnership formation costs as organizational costs, to be capitalized and amortized to expense over a period of five years. The Company intends to treat the OEBC acquisition costs incurred to date as part of the overall purchase price to be paid in such acquisition. Such costs will have the effect of increasing goodwill, which will be capitalized and amortized to expense over a period of ten years. In the event that the proposed IPO is unsuccessful, such amounts will be charged to operations to the extent they are unrecoverable. Due To Affiliate During 1996, the Company utilized the brewing facilities of OEBC to brew and bottle beer for Heritage. In connection therewith, certain raw materials were purchased, at cost, from OEBC by Heritage. At September 30, 1996 (unaudited), due to affiliate in the accompanying consolidated balance sheet represents the cost to the Company for such brewing and bottling services, and inventory purchased. License Agreement In August 1995, the Company entered into a license agreement to obtain an exclusive right to sell non-alcoholic beverages in a specified territory. The president of the Company was also the former president of the non-alcoholic beverages company. The agreement is in effect until terminated by either party, as defined. The Company is obligated to pay $0.50 for every case of licensed product sold. In addition, the Board of Directors approved the acquisition of this company; however, in 1996, the Board of Directors resolved that the acquisition be postponed indefinitely. During the nine months ended September 30, 1996, the Company paid $30,000 (unaudited) to this entity which was charged to operations as the ultimate realizability of such fees, through future sales of the licensed products, was not assured. Notes Payable and Capital Leases The Company has entered into certain notes payable with related parties which are further discussed in Note 6. As discussed in Note 11, the Company will be required to assume and/or repay certain debt on behalf of or payable to persons or entities, which after the proposed IPO, will be stockholders of the Company. In F-52 120 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 9 -- RELATED PARTY TRANSACTIONS -- (CONTINUED) addition, the Company will assume a capital lease obligation from a company controlled by a significant stockholder of OEBC upon the close of the proposed IPO (Note 11). Management Agreements The Board of Directors approved a series of management agreements with certain officers and key employees for terms of generally three years (Note 7). Upon the consummation of the proposed IPO, new management agreements will be executed. See Note 11 for further discussion of these management agreements to be in effect upon the close of the proposed IPO. The Board of Directors approved certain fees for their services to the Company. In November 1995, the Board of Directors approved the payment of $25,000, per director, for future services to be rendered from January 1, 1996 to December 31, 1996. In order to reduce the Company's cash commitments, certain directors (three) agreed to waive their fees permanently. The Board of Directors has approved $50,000 (unaudited) for payments to be made to two Directors, which have been accrued in the accompanying consolidated balance sheet at September 30, 1996 and $25,000 (unaudited) has been paid by the Company to one Director at September 30, 1996. NOTE 10 -- INCOME TAXES The benefit for income taxes in the accompanying consolidated statement of operations consists of the reduction of the deferred tax liability associated with the nondeductible depreciation expense for tax reporting purposes charged to operations, using an effective tax rate of approximately 40%. A reconciliation of the benefit for income taxes to expected income tax benefit computed by applying the Federal statutory income tax rate of 34% to the loss before provision for income taxes for the period ended December 31, 1995 is as follows:
AMOUNT % --------- ----- Income tax benefit computed at Federal statutory tax rate................................................... $(189,199) (34.0)% State income taxes, net of 50% limitation on loss carryforwards.......................................... (15,757) (2.8) Expenses not deductible for income tax purposes and other.................................................. 2,920 0.1 Increase in the valuation allowance for deferred tax assets................................................. 194,330 35.3 --------- ----- Benefit for income taxes................................. $ (7,706) (1.4)% ========= =====
The components of deferred tax assets and liabilities recorded in the accompanying balance sheet at December 31, 1995 are as follows: Deferred tax asset: Net operating loss carryforwards............................... $ 214,086 Less valuation allowance....................................... (214,086) --------- $ -- ========= Deferred tax liability -- nondeductible basis of assets acquired from Heritage in tax-free exchange............................. $ 442,478 =========
The valuation allowance increased $214,086 during the period ended December 31, 1995. The deferred tax liability was established from the expected tax-free, stock-for-stock exchange with Heritage. Such amount F-53 121 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 10 -- INCOME TAXES -- (CONTINUED) represents the difference in the nondeductible tax bases of property and equipment acquired upon the acquisition. At December 31, 1995, the Company had Federal and state net operating loss carryforwards of approximately $571,188 and $331,371, respectively, available to offset future taxable Federal and state income. The federal and state carryforward amounts expire in varying amounts through 2010 and 2000, respectively. Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for federal income tax reporting purposes may be subject to annual limitations upon future stock issuances. Upon the acquisition of Heritage (Note 1), a change in ownership occurred, and accordingly, such net operating loss carryforwards will be limited as to use, annually. NOTE 11 -- SUBSEQUENT EVENTS Purchase Commitment Subsequent to September 30, 1996, the Company entered into an arrangement whereby it has committed to purchase beer kegs totaling $167,000. Keg Management Agreement Effective December 2, 1996, Heritage entered into a keg sale-lease back arrangement with a vendor. The agreement provides for the vendor to purchase kegs identified by Heritage, in increments of 100 units, at specified prices, as defined. Heritage is required to lease back such kegs from the vendor for a $5.00 to $15.00 usage fee per filling, as defined. During the term of the agreement, Heritage is required to satisfy all of its keg usage needs through the lease of such kegs from the vendor, except for usage obtained through keg inventory retained by Heritage at the inception of the agreement. The term of the agreement is for five years, terminable for cause, as specified, with 30 days written notice. Upon termination of the agreement, Heritage will be required to repurchase all kegs sold to the vendor at prices (which decline as the kegs age) which are predetermined at the original date of sale. The agreement provides that Heritage may not enter into a similar agreement with a competitor of the vendor for a period of three years from the date of termination. The Company will account for this transaction as a financing, whereby the proceeds received from the vendor for the sale of the kegs will be recorded as a liability. The usage fees will be recorded as interest expense as incurred. The repurchase obligation will be assessed quarterly; any difference between the repurchase obligation and the carrying value of the liability will be recorded through an adjustment to interest expense. Lease Agreement Effective January 1, 1997, the Company has entered into an agreement to sublease, on a month-to-month basis, office space from an officer, director and stockholder of the Company. The agreement provides for the monthly payment of $1,280. Employment Contracts As discussed in Note 7, the Company has entered into employment contracts with five of its employees, including three officers, which expire on various dates through May 10, 1998. Such management agreements will be canceled and replaced with new agreements upon the consummation of the proposed IPO. Certain of F-54 122 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 11 -- SUBSEQUENT EVENTS -- (CONTINUED) the new employment contracts provide for substantial incentive compensation if certain revenue levels are achieved, as defined. No incentive compensation has been paid through September 30, 1996. The employment contracts also provide for certain expense allowances and participation in the Company's incentive stock option plan and nonqualified stock option plan (Note 8). Future annual minimum base salaries plus allowances under new management agreements, subject to the consummation of the proposed IPO in the aggregate, consist of the following assuming the consummation of the proposed IPO is on January 1, 1997:
YEARS ENDING DECEMBER 31, ------------- 1997.................................................. $ 711,200 1998.................................................. 712,400 1999.................................................. 497,148 2000.................................................. 330,800 ---------- $2,251,548 ==========
Bridge Financing On December 10, 1996, the Company issued a $250,000 promissory note to a 7% stockholder of the Company, interest at 12% per annum, principal, together with interest, is due upon the earlier of the proposed IPO raising gross proceeds of at least $6,000,000 or September 1, 1997. Consulting Agreement On December 28, 1996, the Company entered into a consulting agreement with an individual to provide financial advisory services relating to the Company's proposed IPO for a period of one year. In connection therewith, the Company is obligated to pay $10,000 and issue 60,000 shares of its common stock. Certain of the shares (totalling 30,000) have demand registration rights effective 180 days after the close of the Company's proposed IPO. The remaining 25,000 shares are to be registered in the Company's proposed IPO, with such shares subject to a three-month "lock-up" agreement, as defined. Accordingly, such shares will be valued at $5.70 (see share valuation discussion at Note 8) and will be charged to operations during 1997. Proposed Public Offering The Company has negotiated a letter of intent on a "firm commitment" basis with an underwriter to place 1,500,000 shares of the Company's common stock at an estimated offering price of $6.00 per share and 1,500,000 Redeemable common stock purchase warrants with an exercise price of $6.00 per share for five (5) years at an estimated offering price of $0.15 per warrant. The letter of intent provides for options to be issued to the Underwriter to purchase units, payment by the Company of certain fees and expenses aggregating 13% of the gross proceeds raised in an offering, restrictions on sales by the Company and its affiliates and certain other warranties and covenants. Also, the Underwriter would be granted an option to purchase an additional 15% of the total units issued in the offering solely to cover over-allotments. In connection with the proposed IPO, the Company granted the underwriter an option to purchase (the "Purchase Option") consisting of 150,000 shares of common stock and 150,000 common stock purchase warrants (the "Representative Warrants") for 120% of the proposed IPO price (based on an assumed price F-55 123 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 11 -- SUBSEQUENT EVENTS -- (CONTINUED) per share of $6.00, the Purchase Option price would be $7.20 each). The Representative Warrants are exercisable one year after the closing date of the Company's proposed IPO. The Representative Warrants will expire five (5) years from the closing date of the proposed IPO. The Company has also agreed that if the Company participates in any merger, consolidation or other such transactions which the Underwriter has brought to the Company during a period of five years after the closing of the Offering, and which is consummated after the closing of the Offering (including an acquisition of assets or stock for which it pays, in whole or in part, with shares or other securities), then the Company will pay for the Underwriter's services in an amount equal to 5% of up to one million dollars of value paid or received in the transaction, 4% of the next million dollars of such value, 3% of the next million dollars of such value, 2% of the next million dollars of such value and 1% of the next million dollars and all of such value above $4,000,000. Transactions Proposed With Orange Empire Brewing Company Exchange Agreement With OEBC As discussed in Note 1, on September 11, 1996, as amended on January 7, 1997, the Company entered into the Exchange Agreement with OEBC. Pursuant to the Exchange Agreement, the Company is to issue 141,063 shares of its common stock, subject to adjustment (based on the change in net assets of the OEBC, as defined), in exchange for all of the outstanding shares of the OEBC. In addition, up to 155,000 additional shares of the Company's common stock may be issued, if OEBC reaches certain production levels, as defined. Pursuant to the Exchange Agreement, the exchange is to occur concurrently with the consummation (the "Closing Date") of the Company's proposed IPO. If for any reason the proposed IPO does not occur on or before March 31, 1997 or the proposed IPO does not raise in the aggregate $6,000,000, either party may unilaterally terminate the Exchange Agreement. Should such additional shares of the Company's common stock be issued, the value of such shares will be deemed additional purchase consideration. Management Agreements In connection with the Exchange Agreement, the Company entered into a management agreement (the "Management Agreement") with certain stockholders of OEBC whereby they are to manage and operate the brewpub operations of OEBC from the Closing Date through December 31, 1998. As compensation for such services, they are to receive 10,000 shares of the Company's common stock. Such shares are to be issued on a pro rata basis over the term of the Management Agreement. In addition, the brewpub managers are obligated to the Company for quarterly cash flow deficits, if any, as defined, during the term of the Management Agreement (up to a maximum deficit of $7,500 per quarter). The Management Agreement can be terminated by mutual written consent or in the event of a breach, as defined. The Company anticipates that it will value such shares at $5.10 per share (see share valuation discussion at Note 8). The value of such shares will be ratably charged by the Company to expense as the related services are performed. Also see Note 7 for discussion regarding a management agreement in effect at September 30, 1996. Consulting Agreement In connection with the Exchange Agreement, the Company will enter into a two-year consulting agreement with a significant stockholder of OEBC. The agreement requires the stockholder to provide brewery advisory services and assistance with the acquisition and disposition of equipment. For such F-56 124 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 11 -- SUBSEQUENT EVENTS -- (CONTINUED) services, the Company will issue 5,000 shares of its common stock at the end of each twelve-month period commencing on the Closing Date. The Company anticipates that it will value such shares at $5.10 per share (see share valuation discussion at Note 8). The value of such shares will be ratably charged by the Company to expense as the related services are performed. Capital Lease Agreement Amendment In connection with the Exchange Agreement and concurrent with the Closing Date, a related party is required to enter into an agreement with the Company to modify the existing terms of a capital lease obligation. In consideration for such modifications, the Company will issue the related party 50,000 shares of common stock. The modifications to the capital lease obligation are to include a reduction in the effective interest rate to 10%, a provision that all such leased equipment may be purchased by the Company for $1 upon expiration of the lease, the inclusion in the lease obligation of all delinquent lease payments due through December 31, 1995 (see Note 7), and a reduction of the lease obligation in the amount of $500,000. The dollar amount of the lease payments are to be unaffected by the aforementioned changes in terms through December 31, 1997 (monthly lease payments currently total $22,281). Effective January 1, 1998, all amounts unpaid under the current lease obligation will be consolidated into one five-year lease and the monthly payments will be revised accordingly (the anticipated lease payment effective January 1, 1998 totals $12,151). Lease payments that the lessor was to receive for the period January 1, 1996 through September 30, 1996 (which payments total $140,488) (unaudited) have been repaid through the issuance of OEBC common stock. The Company anticipates that it will value such shares at $5.10 per share (see share valuation discussion at Note 8). The total value of such shares is estimated at $255,000. The Company will recognize the estimated $245,000 difference between the carrying value of the capital lease obligation and the fair value of the common stock as an extraordinary gain in the consolidated statement of operations in the period such transaction occurs. Note Payable to Bank In connection with the Exchange Agreement and concurrent with the Closing Date, a note aggregating approximately $533,493 (unaudited) at September 30, 1996 due to a bank by OEBC are required to be divided into two notes. The stockholders will assume a note totaling $220,941 without further obligation of the Company, and the remaining principal balance of the notes (which approximates $312,552 (unaudited) at September 30, 1996), will be paid to the bank by the Company. In consideration for assuming a portion of the OEBC's debt obligations, the stockholders will be issued 27,618 shares of BWI common stock. If on January 1, 1999, the per share market value of BWI common stock is less than $6.00, the Company will issue to such stockholders an additional 9,227 shares of its common stock. The Company anticipates that it will value such shares at $5.10 per share (see share valuation discussion at Note 8). The total value of such shares is estimated at $140,850. The Company will recognize the estimated $80,091 difference between the carrying value of the debt and the fair value of the common stock as an extraordinary gain in the consolidated statement of operations in the period such transaction occurs. F-57 125 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 11 -- SUBSEQUENT EVENTS -- (CONTINUED) Notes Payable To Stockholders At September 30, 1996, OEBC has $644,000 (unaudited) of indebtedness due to certain related parties (consisting of $574,192 (unaudited) in principal and $69,808 (unaudited) in accrued interest). Upon the consummation of the proposed IPO, such indebtedness is to be satisfied as follows: (1) $301,000 is to be paid in cash, and (2) $343,000 is to be refinanced with a new non-interest bearing promissory note which will mature in 90 days, payable in cash and/or up to 24,125 shares of the Company's common stock and/or up to 50,000 warrants to purchase shares of the Company's common stock at an exercise price of $5.00 per share, based on a formula, as defined. The Company anticipates that it will value the shares and warrants at $5.10 per share (see share valuation discussion at Note 8). The Company will amortize to expense the $.10 difference (totaling $5,000) between the exercise price of the warrants and the fair value of the underlying common stock over the 90-day period. The Company will recognize the estimated $219,962 difference between the carrying value of the debt and the fair value of the common stock as an extraordinary gain in the consolidated statement of operations in the period such transaction occurs. Stockholder Advances In connection with the Exchange Agreement, the Company has agreed to use up to $150,000 of the proceeds from the proposed IPO to repay advances made by one stockholder of OEBC during the period May 1, 1996 through the Closing Date, including deferred lease payments as discussed above. At September 30, 1996, OEBC has borrowed $85,000 (unaudited) under such agreement. Agreements Not to Compete In connection with the Exchange Agreement and concurrent with the Closing Date, the Company has agreed to enter into agreements-not-to-compete with certain stockholders of OEBC for a period of three years in specified territories. Management will ascribe no value to the agreements as management believes that such agreements are not a material component to the Exchange Agreement. Transactions Proposed Prost Partners Limited Partnership BWI -- Prost Partnership Agreement On December 17, 1996, the Company formed a California general partnership with St. Stan's, BWI-Prost Partners. Pursuant to the terms of the BWI-Prost Partners partnership agreement, St. Stan's has agreed to contribute substantially all of its assets, net of certain liabilities, to the Partnership for a 49% minority interest in the Partnership. BWISS has agreed to contribute $2,295,000 to the Partnership for a 51% controlling interest in the Partnership. The BWISS consideration is to be tendered in cash commencing 18 months from the proposed IPO and the assumption of certain debt (as discussed below) on the contribution date, the "Contribution Date", the date of the successful consummation of an initial public offering (the "IPO") of BWI's common stock, occurring on or before March 31, 1997, realizing minimum proceeds of at least $8,000,000 (before any deductions, including, but not limited to, underwriters' compensation and expenses). The profits and losses of the Partnership are to be allocated based on each partner's respective ownership interest, subject to special allocations as defined. The Partnership is to be managed by a five member joint management committee (the "Committee") until dissolution of the Partnership. BWISS will maintain three of the five positions on the Committee. Substantially all management decisions of the committee are to be approved by a majority vote of the members. F-58 126 BEVERAGE WORKS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO SEPTEMBER 30, 1995 (UNAUDITED) AND FOR THE PERIOD FROM INCORPORATION (AUGUST 2, 1995) TO DECEMBER 31, 1995 -- (CONTINUED) NOTE 11 -- SUBSEQUENT EVENTS -- (CONTINUED) The Partnership Agreement contains a buy-out provision whereby BWISS, during a three year period commencing with the Contribution Date, can purchase St. Stan's 49% interest in the Partnership for $2,205,000. If BWISS does not elect to purchase such interest at the end of the third year, St. Stan's has the right to purchase BWISS's 51% interest at appraised value less all accrued Partnership liabilities, as adjusted. If St. Stan's does not elect to purchase BWISS's 51% interest, BWISS has the right to purchase St. Stan's 49% interest at appraised value less all accrued Partnership liabilities, of tangible assets plus a predetermined formula of modified earnings, as adjusted. If neither partner elects to purchase the other partner's interest, such non-purchase is deemed a liquidating event, as defined. The Partnership Agreement contains provisions (the "Breach Provisions") should either partner breach its responsibilities pursuant to the Partnership Agreement, as defined. The Breach Provisions provide that the breaching partner ceases to be a partner of the Partnership if such breach is not cured within 120 days. The breaching partner is to receive breach payments, as defined, in compensation for withdrawal from the Partnership. The BWISS Contribution In accordance with the Partnership Agreement, BWISS is required to make its $2,295,000 capital contribution through debt assumption and periodic payments as follows: (1) the full assumption and partial repayment of the note payable from the Partnership (which totals $668,927 at September 30, 1996, unaudited), (2) the full assumption and repayment of notes payable to related party from the Partnership (which total $459,120 at September 30, 1996, unaudited), (3) six cash payments of $100,000 to the Partnership, each payable 18, 21, 24, 27, 30 and 33 months from the Contribution Date, and (4) a cash payment of the remaining unpaid capital contribution, subject to adjustment as defined, 36 months from the Contribution Date, and (5) the net current asset decrease, as defined, 60 months from the Contribution Date. If the gross proceeds of the BWI proposed IPO exceed $10,000,000, BWISS is required to make a payment on its capital contribution 30 days from the Contribution Date; such payment will be equal to 10% of the gross proceeds in excess of $10,000,000, up to $300,000. In the event BWISS fails to make such payments, Prost may acquire BWISS' interest in the Partnership based on (i) the fair market value of the Partnership's tangible assets plus (ii) the Partnership's modified net income for the preceding twelve months multiplied by three less (iii) accrued and contingent liabilities. This amount would likely be for less than the amount contributed by BWISS. The unpaid portion of the BWISS capital contribution bears interest at 10% per annum, subject to adjustment as defined, payable quarterly beginning April 30, 1998. The Note Payable BWISS has obtained a commitment letter from the lender to refinance the note payable that BWISS is to assume from the Partnership on the Contribution Date (see discussion above). The lender requires a principal reduction payment be made such that the outstanding balance of the note will be $500,000. The revised note payable will bear interest at a variable rate ranging from 11% to 16% per annum, with principal and interest payable monthly based on a 15 year amortization period, with all unpaid principal and interest due in five years. Employment Agreements On the Contribution Date, the Company is to execute employment agreements with two of the officers of the general partner of Prost Partners Limited Partnership (see discussion above). F-59 127 INDEPENDENT AUDITORS' REPORT To the General Partner Prost Partners Limited Partnership To the Board of Directors Beverage Works, Inc. We have audited the accompanying historical statement of assets and liabilities (the "St. Stan's Brewery and Brewpub Operations") to be contributed to BWI-Prost Partners, a California general partnership in the process of formation, by Prost Partners Limited Partnership, a California limited partnership, as of December 31, 1995, and the related historical statements of operations of assets and liabilities to be contributed, changes in equity of assets and liabilities to be contributed, and cash flows of asset and liabilities to be contributed for each of the years in the two-year period ended December 31, 1995. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying financial statements were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission (for inclusion in the registration statement on Form SB-2 of Beverage Works, Inc. as described in Note 1), and are not intended to be a complete presentation of the financial position, results of operations or cash flows of Beverage Works, Inc. or Prost Partners Limited Partnership. In our opinion, the historical financial statements referred to above present fairly, in all material respects, the financial position of the St. Stan's Brewery and Brewpub Operations to be contributed to BWI-Prost Partners by Prost Partners Limited Partnership as of December 31, 1995, and the results of their historical operations and cash flows for each of the years in the two-year period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements, the St. Stan's Brewery and Brewpub Operations have had recurring net losses and working capital deficits. The St. Stan's Brewery and Brewpub Operations have received financial support in the form of advances from the general partner of Prost Partners Limited Partnership during the past two years to cover these recurring working capital demands. Should the St. Stan's Brewery and Brewpub Operations continue to incur losses, the general partner of Prost Partners Limited Partnership, and the general partners of BWI-Prost Partners upon the close of the Beverage Works, Inc. proposed initial public offering (Note 1), will be required to provide additional financial support. The lack of such financial support could have a material adverse effect on the financial condition and/or results of operations of the St. Stan's Brewery and Brewpub Operations. CORBIN & WERTZ Irvine, California May 31, 1996, except for Notes 1 and 9, as to which the date is December 17, 1996 F-60 128 ST. STAN'S BREWERY AND BREWPUB OPERATIONS HISTORICAL STATEMENTS OF ASSETS AND LIABILITIES TO BE CONTRIBUTED TO BWI-PROST PARTNERS GENERAL PARTNERSHIP (NOTES 1 AND 9) ASSETS (Note 5)
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (UNAUDITED) Current assets: Cash............................................................... $ 26,223 $ 68,105 Accounts receivable, less allowance for doubtful accounts of $10,000 (unaudited) (1996) and $10,000 (1995) (Note 2).......... 110,456 84,846 Inventories (Notes 2 and 3)........................................ 194,262 197,070 Prepaid expenses and other current assets.......................... 22,359 46,404 ---------- ---------- Total current assets....................................... 353,300 396,425 Property and equipment, net (Notes 2 and 4).......................... 2,373,283 2,492,400 Other assets......................................................... 25,547 14,759 ---------- ---------- $ 2,752,130 $2,903,584 ========== ========== LIABILITIES AND EQUITY Current liabilities: Accounts payable................................................... $ 92,898 $ 126,455 Accrued expenses and other current liabilities..................... 60,116 103,280 Note payable (Note 5).............................................. 25,534 21,658 Notes payable to related party (Note 6)............................ 459,120 459,120 ---------- ---------- Total current liabilities.................................. 637,668 710,513 Note payable, net of current portion (Note 5)........................ 643,393 662,803 ---------- ---------- Total liabilities.......................................... 1,281,061 1,373,316 Commitments and contingencies (Notes 7 and 9) Equity in assets and liabilities to be contributed................... 1,471,069 1,530,268 ---------- ---------- $ 2,752,130 $2,903,584 ========== ==========
See independent auditors' report and accompanying notes to financial statements F-61 129 ST. STAN'S BREWERY AND BREWPUB OPERATIONS HISTORICAL STATEMENTS OF HISTORICAL OPERATIONS OF ASSETS AND LIABILITIES TO BE CONTRIBUTED TO BWI-PROST PARTNERS GENERAL PARTNERSHIP (NOTES 1 AND 9)
FOR THE NINE MONTHS ENDED FOR THE YEARS ENDED ------------------------------ ----------------------------- SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1996 1995 1995 1994 ------------- ------------- ------------ ------------ (UNAUDITED) (UNAUDITED) Sales....................................... $ 1,473,148 $ 1,603,566 $2,128,877 $1,977,805 Less excise taxes........................... (71,695) (74,313) (99,453) (86,251) -------- -------- ---------- ---------- Net sales (Notes 2 and 8)......... 1,401,453 1,529,253 2,029,424 1,891,554 Cost of goods sold (Note 2)................. 1,022,349 1,021,013 1,396,217 1,374,318 -------- -------- ---------- ---------- Gross profit...................... 379,104 508,240 633,207 517,236 Selling, general and administrative expenses (Note 7).................................. 418,706 415,163 583,568 518,763 -------- -------- ---------- ---------- Income (loss) from operations (Note 8)...... (39,602) 93,077 49,639 (1,527) Interest (Notes 5 and 6).................... 82,597 76,028 98,398 104,351 -------- -------- ---------- ---------- Net income (loss)........................... $ (122,199) $ 17,049 $ (48,759) $ (105,878) ======== ======== ========== ==========
See independent auditors' report and accompanying notes to financial statements F-62 130 ST. STAN'S BREWERY AND BREWPUB OPERATIONS HISTORICAL STATEMENTS OF CHANGES IN EQUITY OF ASSETS AND LIABILITIES TO BE CONTRIBUTED TO BWI-PROST PARTNERS GENERAL PARTNERSHIP (NOTES 1 AND 9) FOR THE NINE-MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 Equity in assets and liabilities to be contributed, January 1, 1994.............. $1,571,269 Non-cash contributions of general partner of Prost Partners Limited Partnership (Note 7)....................................................................... 44,032 Net loss......................................................................... (105,878) ---------- Equity in assets and liabilities to be contributed, December 31, 1994............ 1,509,423 Non-cash contributions of general partner of Prost Partners Limited Partnership (Note 7)....................................................................... 69,604 Net loss......................................................................... (48,759) ---------- Equity in assets and liabilities to be contributed, December 31, 1995............ 1,530,268 Non-cash contributions of general partner of Prost Partners Limited Partnership (unaudited) (Note 7)........................................................... 63,000 Net loss (unaudited)............................................................. (122,199) ---------- Equity in assets and liabilities to be contributed, September 30, 1996 (unaudited).................................................................... $1,471,069 =========
See independent auditors' report and accompanying notes to financial statements F-63 131 ST. STAN'S BREWERY AND BREWPUB OPERATIONS HISTORICAL STATEMENTS OF CASH FLOWS OF ASSETS AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS GENERAL PARTNERSHIP (NOTES 1 AND 9)
FOR THE NINE MONTHS ENDED FOR THE YEARS ENDED ------------------------------ ----------------------------- SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1996 1995 1995 1994 ------------- ------------- ------------ ------------ (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net income (loss)...................................... $(122,199) $ 17,049 $ (48,759) $ (105,878) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization (Note 8).............. 148,627 137,250 179,926 174,502 Gain on disposition of assets....................... -- -- (1,701) -- Management fees (Note 7)............................ 63,000 61,864 69,604 19,372 Changes in operating assets and liabilities: Accounts receivable, net.......................... (25,610) (1,786) 15,397 (25,532) Inventories....................................... 2,808 (124,686) (73,643) (29,708) Prepaid expenses and other current assets......... 24,045 6,279 (12,133) (1,066) Accounts payable.................................. (33,557) 49,547 (1,773) (63,746) Accrued expenses and other current liabilities.... (43,164) (631) 8,807 21,831 -------- -------- --------- --------- Net cash provided by (used in) operating activities................................... 13,950 144,886 135,725 (10,225) -------- -------- --------- --------- Cash flows from investing activities: Proceeds from sale of equipment........................ -- -- 50,000 -- Purchases of property and equipment (Note 8)........... (22,462) (209,841) (307,560) (75,112) Other assets........................................... (17,836) (21,372) (21,765) (4,059) -------- -------- --------- --------- Net cash used in investing activities.......... (40,298) (231,213) (279,325) (79,171) -------- -------- --------- --------- Cash flows from financing activities: Payments on note payable............................... (15,534) -- (5,539) -- Net borrowings on notes payable to related party (Note 6).................................................. -- 53,595 182,212 118,692 -------- -------- --------- --------- Net cash provided by (used in) financing activities................................... (15,534) 53,595 176,673 118,692 -------- -------- --------- --------- Net increase (decrease) in cash.......................... (41,882) (32,732) 33,073 29,296 Cash, beginning of period................................ 68,105 35,032 35,032 5,736 -------- -------- --------- --------- Cash, end of period...................................... $ 26,223 $ 2,300 $ 68,105 $ 35,032 ======== ======== ========= ========= Supplemental disclosures of cash flow information -- Cash paid during the period for interest............... $ 76,500 $ 76,400 $ 105,130 $ 105,612 ======== ======== ========= =========
See Note 7 for supplemental disclosures of noncash financing activities See independent auditors' report and accompanying notes to financial statements F-64 132 ST. STAN'S BREWERY AND BREWPUB OPERATIONS NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS GENERAL PARTNERSHIP FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 NOTE 1 -- NATURE OF OPERATIONS AND BASIS OF PRESENTATION Nature of Operations Prost Partners Limited Partnership, a California limited partnership, dba St. Stan's Brewing Company ("St. Stan's") was formed on July 26, 1988 to construct and operate a brewery facility (the "Brewery") and an adjoining restaurant, pub, and beer garden (the "Brewpub") in Modesto, California. St. Stan's offered limited partnership interests to California residents who met certain suitability standards. The general partner of St. Stan's is Stanislaus Brewing Company, a California corporation. St. Stan's commenced operations on or about October 12, 1990. Beverage Works, Inc. ("BWI"), a California corporation, incorporated on August 2, 1995, was formed to acquire interests in various craft brewing operations. On June 25, 1996, BWI formed a wholly-owned subsidiary, BWI -- St. Stan's, Inc. ("BWISS"). On December 17, 1996, St. Stan's entered into a partnership agreement with BWISS named BWI-Prost Partners (the "Partnership"). Pursuant to the terms of the BWI-Prost Partners partnership agreement (the "Partnership Agreement"), St. Stan's has agreed to contribute substantially all of its assets, net of certain liabilities, to the Partnership for a 49% minority interest in the Partnership. BWISS has agreed to contribute $2,295,000 to the Partnership for a 51% controlling interest in the Partnership. The BWISS consideration is to be tendered in cash commencing 18 months from the proposed IPO and the assumption of certain debt (see Note 9) at the date of contribution, the "Contribution Date", the date of the successful consummation of a proposed initial public offering (the "IPO") of BWI's common stock, occurring on or before March 31, 1997, realizing minimum gross proceeds of at least $8,000,000 (before any deductions, including, but not limited to, underwriters' compensation and expenses). See Note 9 for further discussion of the terms of the Partnership Agreement which have a significant effect on the accompanying historical financial statements. Basis of Presentation The accompanying historical financial statements include the assets and liabilities to be contributed to the Partnership by St. Stan's, and the related historical operations and cash flows thereof (the "St. Stan's Brewery and Brewpub Operations"). In management's opinion, these historical financial statements include the assets and liabilities, the revenues and expenses, and the cash flows directly identifiable with the assets and liabilities to be contributed by St. Stan's to the Partnership. The financial statements are not intended to represent the historical assets and liabilities and historical operations and cash flows of St. Stan's, the Partnership or BWI. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could materially differ from those estimates. Fair Value of Financial Instruments These historical financial statements contain financial instruments whereby the fair market value of the financial instruments could be different than that recorded on a historical basis on the accompanying historical financial statements. The financial instruments consist of cash, accounts receivable, accounts payable, notes F-65 133 ST. STAN'S BREWERY AND BREWPUB OPERATIONS NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS GENERAL PARTNERSHIP FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) payable and notes payable to related party. The carrying amounts of the St. Stan's Brewery and Brewpub Operations' financial instruments generally approximate their fair values at September 30, 1996 (unaudited) and December 31, 1995. In the case of the notes payable to related party (see Note 6), it was not practical to determine fair values due to the lack of a market for such financial instruments. Concentrations of Credit Risk The customers of the Brewery operations generally consist of distributors who resell St. Stan's Brewery and Brewpub Operations products domestically. The St. Stan's Brewery and Brewpub Operations extends credit to its Brewery customers and performs periodic credit evaluations of such customers. Management of the St. Stan's Brewery and Brewpub Operations do not obtain collateral to secure its accounts receivable. The Company maintains an allowance for doubtful accounts. Management determines the adequacy of the allowance based on a period review and evaluation of aged accounts receivable. Sales generated from one customer during the nine-month period ended September 30, 1996 (unaudited) and the year ended December 31, 1995 totaled approximately $140,400 and $205,700, respectively, or 10% and 10.1% of net sales for such periods. At September 30, 1996 (unaudited) and December 31, 1995, amounts due from this customer included in accounts receivable totaled approximately $24,700 and $31,300, respectively. At September 30, 1996 (unaudited) and December 31, 1995, accounts receivable related to another customer totaled approximately $33,200 and $15,500, respectively. No customer accounted for more than 10% of net sales during the nine-month period ended September 30, 1995 (unaudited) and the year ended December 31, 1994. St. Stan's purchases a substantial portion of its inventory (see Note 3) from two suppliers. Purchases from these suppliers during the years ended December 31, 1995 and 1994 totaled approximately $389,400 and $332,100, respectively, or 39.3% and 37.2% of total purchases for such periods. Purchases from these suppliers during the nine-month periods ended September 30, 1996 and 1995 (unaudited) totaled approximately $289,300 and $298,500, respectively, or 47.4% and 38.8% of total purchases for such periods. At September 30, 1996 (unaudited) and December 31, 1995, amounts due to these suppliers included in accounts payable totaled approximately $50,200 and $68,800, respectively. If the relationships between St. Stan's and these suppliers were altered, the future results of St. Stan's Brewery and Brewpub Operations could be impacted. Risks and Uncertainties Financial Support The St. Stan's Brewery and Brewpub Operations have had recurring net losses and working capital deficits. The St. Stan's Brewery and Brewpub Operations have received financial support in the form of advances (see Note 6) from the general partner of Prost Partners Limited partnership during the past two years to cover these recurring working capital demands. Should the St. Stan's Brewery and Brewpub Operations continue to incur losses, the general partner of Prost Partners Limited Partnership, and the general partners of BWI-Prost Partners upon the close of the BWI proposed IPO (see Note 9), will be required to provide additional financial support. The lack of such financial support could have a material adverse effect on the financial condition and/or results of operations of the St. Stan's Brewery and Brewpub Operations. F-66 134 ST. STAN'S BREWERY AND BREWPUB OPERATIONS NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS GENERAL PARTNERSHIP FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Licenses and Permits Brewery (wholesale) and Brewpub (retail) operations require various Federal, state and local licenses and permits. Brewers are required to file with the Federal Bureau of Alcohol, Tobacco and Firearms (the "BATF"). The California Department of Alcoholic Beverage Control (the "ABC") requires that companies file and maintain licenses, permits or approvals for the production and sale of alcoholic beverages. Other state and local laws and regulations governing the sale of alcoholic beverages within a particular state by an out-of-state brewer or wholesaler vary by state and locality. The St. Stan's Brewery and Brewpub Operations are subject to audit and inspection by the BATF and ABC at any time. Should the proposed IPO and proposed joint venture be consummated, management of the Partnership must apply for a change in the Brewery's and Brewpub's management, and for a change in the Brewery's ownership with Federal and state agencies. Because of the many and various Federal and state licensing and permitting requirements, there is a risk that one or more regulatory authorities may not approve such changes in management and/or ownership, or determine the predecessor partnership and/or management had not complied with applicable licensing or permitting regulations. Should St. Stan's, or subsequently the Partnership, not maintain the approvals necessary for it to conduct business, there could be a material adverse effect on the financial condition and/or operations of the St. Stan's Brewery and Brewpub Operations. Dependence on Distributors The St. Stan's Brewery & Brewpub Operations sells its products to independent distributors for distribution to retailers and ultimately consumers. Sustained growth will require it to maintain such relationships and possibly enter into agreements with additional distributors. No assurance can be given that the St. Stan's Brewery & Brewpub Operations will be able to maintain or secure additional distributors on terms favorable to the St. Stan's Brewery & Brewpub Operations. The St. Stan's Brewery & Brewpub Operations has certain significant distribution relationships. The loss of one or more of these distributors would have a material adverse effect on the St. Stan's Brewery & Brewpub Operations ability to bring its products to market and therefore adversely effect its sales and results of operations. The St. Stan's Brewery & Brewpub Operations distribution agreements are generally terminable by the distributor on short notice. While these distribution agreements contain provisions regarding the St. Stan's Brewery & Brewpub Operations enforcement and termination rights, some state laws prohibit the St. Stan's Brewery & Brewpub Operations from exercising these contractual rights. The St. Stan's Brewery & Brewpub Operations ability to maintain existing distribution agreements or enter new distribution agreements may be adversely affected by the fact that many distributors are reliant on one of the major beer producers for a large percentage of their revenue and, therefore, they may be influenced by such producers. Potential "Dram Shop" Liability Some states have enacted "dram shop" laws and legislation which impose criminal and civil liability on licensed alcoholic beverage servers for injuries or damages caused by their negligent service of alcoholic beverages to a visibly intoxicated person or to a minor, if such service is the proximate cause of the injury or damage and such injury or damage is reasonably foreseeable. California has enacted legislation granting broad immunity to servers of alcoholic beverages from civil liability, except for the sale of alcoholic beverages to minors. While the St. Stan's Brewery & Brewpub Operations maintains liquor liability insurance as part of its comprehensive general liability insurance which management believes is adequate to protect against such liability, there can be no assurance that the St. Stan's Brewery & Brewpub Operations will not be subject to a judgment or fine in excess of such insurance coverage or that it will be able to continue to maintain such F-67 135 ST. STAN'S BREWERY AND BREWPUB OPERATIONS NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS GENERAL PARTNERSHIP FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) insurance coverage at reasonable costs or at all. The imposition of a judgment or fine substantially in excess of the St. Stan's Brewery & Brewpub Operations insurance coverage would have a material adverse effect on the St. Stan's Brewery & Brewpub Operations. Similarly, the failure of the St. Stan's Brewery & Brewpub Operations to obtain and maintain insurance coverage could also materially and adversely affect the St. Stan's Brewery & Brewpub Operations. Regulation The manufacture and sale of alcoholic beverages is a highly regulated and taxed business. The St. Stan's Brewery & Brewpub Operations may be subject to more restrictive regulations and increased taxation by Federal, state and local governmental entities than are those of non-alcohol related businesses. Federal, state and local laws and regulations govern the production and distribution of beer. These laws and regulations govern permitting, licensing, trade practices, labeling, advertising, marketing, distributor relationships and related matters. Federal, state and local governmental entities also levy various taxes, license fees and other similar charges and may require bonds to ensure compliance with applicable laws and regulations. Failure by the St. Stan's Brewery & Brewpub Operations to comply with applicable Federal, state or local laws and regulations could result in penalties, fees, suspension or revocation of permits, licenses or approvals. There can be no assurances that other or more restrictive laws or regulations will not enacted in the future. Trademarks The St. Stan's Brewery & Brewpub Operations and the Breweries has obtained or applied for U.S. Trademark Registrations for the names of several of its products, and in some cases for most of its logo designs. The St. Stan's Brewery & Brewpub Operations regards its trademarks as having substantial value and as being an important factor in the marketing of its products. The St. Stan's Brewery & Brewpub Operations is not aware of any infringing uses that could materially affect its current business of any prior claim to the trademarks that would prevent the St. Stan's Brewery & Brewpub Operations from using such trademarks in its business. The St. Stan's Brewery & Brewpub Operations policy is to pursue registration of its marks whenever possible and to oppose vigorously any infringements of its marks. Seasonality The beverage business traditionally has been seasonal. Typically, net sales are highest during the third and fourth calendar quarters and decline in the first and second calendar quarters. The seasonal pattern is due primarily to the increased demand for consumer beverages during the summer months through the holiday buying season. The management of St. Stan's Brewing and Brewpub Operations expects its net sales and operating results to continue to reflect this seasonality. Environmental Regulations and Operating Considerations The Brewery operations are subject to a variety of extensive and changing Federal, state and local environmental laws, regulations and ordinances that govern activities or operations that may have adverse effects on human health or the environment. Such laws, regulations and ordinances may impose liability for the cost of remediating, and for certain damages resulting from, sites of past releases of hazardous materials. Management of the St. Stan's Brewery and Brewpub Operations believes that it currently conducts, and in the past has conducted, its activities and operations in substantial compliance with applicable environmental laws, and believes that costs arising from existing environmental laws will not have a material adverse effect on the financial condition or results of operations. There can be no assurance, however, that environmental laws will F-68 136 ST. STAN'S BREWERY AND BREWPUB OPERATIONS NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS GENERAL PARTNERSHIP FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) not become more stringent in the future or that the St. Stan's Brewery and Brewpub Operations will not incur costs in the future in order to comply with such laws. The St. Stan's Brewery and Brewpub Operations are subject to certain hazards and liability risks faced by all brewers, such as potential contamination of ingredients or products by bacteria or other external agents that may be wrongfully or accidentally introduced into products or packaging. The occurrence of such a problem could result in a costly product recall and serious damage to the St. Stan's Brewery & Brewpub Operations reputation for product quality, as well as claims for product liability which may negatively impact the St. Stan's Brewery & Brewpub Operations. The management of the St. Stan's Brewery & Brewpub Operations maintains insurance which the Company believes is sufficient to cover any liability claims which might result from a contamination problem in its products, but which may not cover any damage to its reputation. Inventories Inventories, consisting of raw materials and purchased products, work in process, and finished goods, are stated at the lower of cost or market (see Note 3). Cost is determined by the first-in, first-out method of accounting. Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation, and are being depreciated using the straightline method over their estimated useful lives, which generally range from 5 to 40 years. Major betterments and renewals are capitalized, while routine repairs and maintenance costs are charged to expense when incurred. Useful lives for property and equipment are as follows: Equipment, furniture, and fixtures..................................... 5 to 10 years Building and improvements (Note 6)..................................... 40 years
Management of the St. Stan's Brewery and Brewpub Operations assesses the recoverability of property and equipment by determining whether the depreciation of such assets over their remaining lives can be recovered through projected undiscounted cash flows. The amount of impairment, if any, is measured based on projected undiscounted cash flows and is charged to operations in the period in which such impairment is determined by management. To date, management has not identified an impairment of property and equipment. Income Taxes The Partnership should not be, and St. Stan's currently is not subject to, income taxes. However, income or losses of the partnership will be included in the tax returns of the partners. Accordingly, no provision for income taxes is made in the accompanying financial statements. Revenue Recognition Brewery revenues are recognized at the time of shipment. St. Stan's Brewery and Brewpub Operations records a provision for the effect of returned products at the time the units are shipped. Revenues in connection with Brewpub operations are recognized at the time the food and beverage sales are made. F-69 137 ST. STAN'S BREWERY AND BREWPUB OPERATIONS NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS GENERAL PARTNERSHIP FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Advertising and Marketing Costs Advertising and marketing costs are expensed as incurred. Interim Accounting Policy In the opinion of the management of St. Stan's and BWISS, the accompanying unaudited financial statements of the St. Stan's Brewery and Brewpub Operations include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the historical financial position and results of operations and cash flows as of September 30, 1996, and for the nine-month period ended September 30, 1996 and 1995. Although the management of St. Stan's and BWISS believes that the disclosures regarding interim financial information in these historical financial statements are adequate to make the information presented not misleading, certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Unaudited historical results of operations for the nine-month period ended September 30, 1996 are not necessarily indicative of results of operations to be expected for the year ending December 31, 1996. NOTE 3 -- INVENTORIES The following is a summary of inventories:
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (UNAUDITED) Raw materials and purchased products................................................. $ 102,530 $124,772 Work in process............................................ 13,935 18,480 Finished goods............................................. 77,797 53,818 -------- -------- $ 194,262 $197,070 ======== ========
NOTE 4 -- PROPERTY AND EQUIPMENT, NET The following is a summary of property and equipment, at cost, less accumulated depreciation:
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (UNAUDITED) Buildings and improvements................................. $ 1,867,917 $1,867,917 Equipment, furniture, and fixtures......................... 1,458,946 1,436,484 ----------- ----------- 3,326,863 3,304,401 Less accumulated depreciation.............................. (953,580) (812,001) ----------- ----------- $ 2,373,283 $2,492,400 =========== ===========
F-70 138 ST. STAN'S BREWERY AND BREWPUB OPERATIONS NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS GENERAL PARTNERSHIP FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 5 -- NOTE PAYABLE The following is a summary of the note payable:
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (UNAUDITED) Note payable to a lending institution, principal and interest payable in equal monthly installments of $8,155, with the remaining principal and interest due November 30, 1997, interest at 11% per annum, collateralized by St. Stan's assets and personally guaranteed by officers of the general partner of St. Stan's (Note 1)............ $ 668,927 $ 684,461 Less current portion....................................... (25,534) (21,658) --------- --------- $ 643,393 $ 662,803 ========= =========
Interest expense approximated $56,000 (unaudited) and $57,100 (unaudited) for the nine-month preiod ended September 30, 1996 and 1995, respectively, and $71,740 and $87,347 for the years ended December 31, 1995 and 1994, respectively. Future annual principal installments of this note payable as of December 31, 1995 are as follows:
YEARS ENDING DECEMBER 31, - ------------ 1996............................................... $ 21,658 1997............................................... 662,803 -------- Total.............................................. $684,461 ========
See Note 9 for discussion regarding the planned assumption and partial repayment of the note payable by BWISS on the Contribution Date. NOTE 6 -- NOTES PAYABLE TO RELATED PARTY The following is a summary of notes payable to related party:
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (UNAUDITED) Unsecured note payable to the general partner of St. Stan's, payable in monthly installments of interest only at 8% per annum, due on the earlier of demand or December 31, 1996................................................. $ 282,751 $281,956 Unsecured note payable to the general partner of St. Stan's, payable in monthly installments of principal and interest of $1,213, interest at a certain bank's reference rate plus 2.35% (8.3% at September 30, 1996, unaudited, and 8.6% at December 31, 1995), due on the earlier of demand or December 31, 1996................... 176,369 177,164 -------- -------- $ 459,120 $459,120 ======== ========
F-71 139 ST. STAN'S BREWERY AND BREWPUB OPERATIONS NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS GENERAL PARTNERSHIP FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 6 -- NOTES PAYABLE TO RELATED PARTY -- (CONTINUED) Interest incurred totaled $26,658 and $17,004 for the years ended December 31, 1995 and 1994, respectively, and $24,800 (unaudited) and $16,600 (unaudited) for the nine-month period ended September 30, 1996 and 1995, respectively. See Note 9 for discussion regarding the planned assumption and repayment of the notes payable to related party by BWISS on the Contribution Date. NOTE 7 -- COMMITMENTS AND CONTINGENCIES Operating Lease St. Stan's Brewery and Brewpub Operations sublease its land under a 50 year operating lease expiring on June 5, 2038. The sublease includes base rent increases over the term of the lease at the lesser of (a) the percentage change that occurs in the Consumer Price Index or (b) five percent (5%). In addition to base rent increases, appraisals are required at scheduled dates. The minimum annual rental payments, after a land appraisal, shall be based on no less than twelve percent (12%) of the appraisal amount (assuming an undeveloped land value). The total amount of the base rental payments is being charged to expense as incurred over the term of the lease. In addition to the base rental payments, the sublease agreement requires the payment of the real property taxes and insurance costs. The Partnership is expected to assume this land sublease. The Partnership is not expected to assume other significant operating leases or rental commitments from St. Stan's. Future annual minimum rental payments, excluding annual increases in base rents, under this operating lease as of December 31, 1995 are as follows:
YEARS ENDING DECEMBER 31, - ------------ 1996............................................. $ 51,000 1997............................................. 51,000 1998............................................. 51,000 1999............................................. 51,000 2000............................................. 51,000 Thereafter....................................... 1,908,930 ---------- $2,163,930 =========
Rent expense under the ground lease totaled $38,430 (unaudited) and $38,250 (unaudited) for the nine-month periods ended September 30, 1996 and 1995, respectively, and $51,000 and $53,738 for the years ended December 31, 1995 and 1994, respectively (see Notes 2 and 5). Management Agreements Under the St. Stan's partnership agreement, the general partner is to be paid $84,000, annually, for management of the partnership. At September 30, 1996, all such amounts have not been paid (except for $83,000) and the obligation related thereto is not to be assumed by the Partnership. The accompanying historical statements of operations reflect the management fee expense pursuant to said management contract. F-72 140 ST. STAN'S BREWERY AND BREWPUB OPERATIONS NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS GENERAL PARTNERSHIP FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 7 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED) The unpaid management fees payable have been reflected as non-cash contributions in the accompanying statements of changes in equity. See Note 9 for discussion regarding the employment agreements to be entered into on the Contribution Date. Distributor Agreements St. Stan's is party to certain agreements with its various distributors. In general, such agreements grant St. Stan's distributors the right to sell certain products in specified territories. The agreements may be terminated by either party if concerns or deficiencies, as defined, are not satisfied within 30 days. NOTE 8 -- SEGMENT INFORMATION Business segment information as of and for the periods presented are as follows:
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED ------------------------------ ---------------------------- SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1996 1995 1995 1994 ------------- ------------- ------------ ------------ (UNAUDITED) (UNAUDITED) Net sales: Brewery.......................... $ 843,143 $ 924,572 $1,229,988 $1,024,018 Brewpub.......................... 558,310 604,681 799,436 867,536 -------- -------- ---------- ---------- Total.................... $ 1,401,453 $ 1,529,253 $2,029,424 $1,891,554 ======== ======== ========== ========== Operating profit (loss): Brewery.......................... $ 1,983 $ 94,114 $ 92,925 $ (21,606) Brewpub.......................... (41,585) (1,037) (43,286) 20,079 -------- -------- ---------- ---------- Total.................... $ (39,602) $ 93,077 $ 49,639 $ (1,527) ======== ======== ========== ========== Depreciation and amortization: Brewery.......................... $ 87,836 $ 76,216 $ 92,586 $ 96,583 Brewpub.......................... 60,791 61,034 87,340 77,919 -------- -------- ---------- ---------- Total.................... $ 148,627 $ 137,250 $ 179,926 $ 174,502 ======== ======== ========== ========== Capital expenditures: Brewery.......................... $ 22,462 $ 209,841 $ 307,560 $ 73,060 Brewpub.......................... -- -- -- 2,052 -------- -------- ---------- ---------- Total.................... $ 22,462 $ 209,841 $ 307,560 $ 75,112 ======== ======== ========== ==========
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (UNAUDITED) Identifiable property and equipment: Brewery.................................................... $ 1,487,078 $1,464,616 Brewpub.................................................... 1,839,785 1,839,785 ---------- ---------- Total.............................................. $ 3,326,863 $3,304,401 ========== ==========
F-73 141 ST. STAN'S BREWERY AND BREWPUB OPERATIONS NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS GENERAL PARTNERSHIP FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 8 -- SEGMENT INFORMATION -- (CONTINUED) In the determination of identifiable property and equipment, management specifically identified all Brewpub and Brewery property and equipment except for the buildings and improvements (see Note 4). Management allocated 70% and 30% of the buildings and improvements to the Brewpub and Brewery, respectively. NOTE 9 -- SUBSEQUENT EVENTS The Partnership Agreement On December 17, 1996, St. Stan's formed a California general partnership with BWISS named BWI-Prost Partners. Pursuant to the terms of the BWI-Prost Partners partnership agreement, St. Stan's has agreed to contribute substantially all of its assets, net of certain liabilities, to the Partnership for a 49% minority interest in the Partnership. BWISS has agreed to contribute $2,295,000 to the Partnership for a 51% controlling interest in the Partnership. The BWISS consideration is to be tendered in cash commencing 18 months from the proposed IPO and the assumption of certain debt (as discussed below) at the date of contribution, the "Contribution Date", the date of the successful consummation of a proposed initial public offering of BWI's common stock, occurring on or before March 31, 1997, realizing minimum proceeds of at least $8,000,000 (before any deductions, including, but not limited to, underwriters' compensation and expenses). The profits and losses of the Partnership are to be allocated based on each partner's respective ownership interest, subject to special allocations as defined. The Partnership is to be managed by a five member joint management committee (the "Committee") until dissolution of the Partnership. BWISS will maintain three of the five positions on the Committee. Substantially all management decisions of the committee are to be approved by a majority vote of the members. The Partnership Agreement contains a buy-out provision whereby BWISS, during a three year period commencing with the Contribution Date, can purchase St. Stan's 49% interest in the Partnership for $2,205,000. If BWISS does not elect to purchase such interest at the end of the third year, St. Stan's has the right to purchase BWISS's 51% interest at appraised value less all accrued Partnership liabilities, as defined. If St. Stan's does not elect to purchase BWISS's 51% interest, BWISS has the right to purchase St. Stan's 49% interest at appraised value less all accrued Partnership liabilities, as defined. If neither partner elects to purchase the other partner's interest, such non-purchase is deemed a liquidating event, as defined. The Partnership Agreement contains provisions (the "Breach Provisions") should either partner breach its responsibilities pursuant to the Partnership Agreement, as defined. The Breach Provisions provide that the breaching partner ceases to be a partner of the Partnership if such breach is not cured within 120 days. The breaching partner is to receive breach payments, as defined, in consideration for withdrawal from the Partnership. The BWISS Contribution In accordance with the Partnership Agreement, BWISS is required to make its $2,295,000 capital contribution through debt assumption and periodic payments as follows: (1) the full assumption and partial repayment of the note payable from the Partnership (which totals $668,927 at September 30, 1996, unaudited -- Note 5), (2) the full assumption and repayment of the notes payable to related party from the Partnership (which total $459,120 at September 30, 1996, unaudited -- Note 6) not to exceed $460,000, F-74 142 ST. STAN'S BREWERY AND BREWPUB OPERATIONS NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS GENERAL PARTNERSHIP FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 9 -- SUBSEQUENT EVENTS -- (CONTINUED) (3) six cash payments of $100,000 to the Partnership, each payable 18, 21, 24, 27, 30 and 33 months from the Contribution Date, and (4) a cash payment of the remaining unpaid capital contribution, subject to adjustment as defined, 36 months from the Contribution Date, and (5) the net current asset decrease, as defined, 60 months from the Contribution Date. If the gross proceeds of the BWI proposed IPO exceed $10,000,000, BWISS is required to make a payment on its capital contribution 30 days from the Contribution Date; such payment will be equal to 10% of the gross proceeds in excess of $10,000,000, up to $300,000. In the event BWISS fails to make such payments, Prost may acquire BWISS' interest in the Partnership based on (i) the fair market value of the Partnership's tangible assets plus (ii) the Partnership's modified net income for the preceding twelve months multiplied by three less (iii) accrued and contingent liabilities. This amount would likely be for a sum substantially less than the amount contributed by BWISS. The unpaid portion of the BWISS capital contribution bears interest at 10% per annum, subject to adjustment as defined, payable quarterly beginning April 30, 1998. The Note Payable BWISS has obtained a commitment letter from the lender to refinance the note payable that BWISS is to assume from the Partnership on the Contribution Date (see discussion above). The lender requires a principal reduction payment be made such that the outstanding balance of the note will be $500,000. The revised note payable will bear interest at a variable rate, ranging from 11% to 16% per annum, with principal and interest payable monthly based on a 15 year amortization period, with all unpaid principal and interest due in five years. Employment Agreements On the Contribution Date, BWI is to execute employment agreements with two of the officers of the general partner of Prost Partners Limited Partnership. The agreements are for a term of three years, provide for base annual compensation aggregating $157,000, including allowances, and allow for participation in the BWI qualified incentive stock option plan. The employment agreements can be terminated by mutual consent or for cause, as defined. F-75 143 INDEPENDENT AUDITORS' REPORT To the Board of Directors Orange Empire Brewing Company To the Board of Directors Beverage Works, Inc. We have audited the accompanying consolidated balance sheet of Orange Empire Brewing Company and subsidiary (the "Company") as of December 31, 1995, and the related statements of operations, stockholders' equity (capital deficiency) and cash flows for each of the years in the two-year period ended December 31, 1995. These consolidated financial statements are the responsibility of management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orange Empire Brewing Company and subsidiary as of December 31, 1995, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1995 in conformity with generally accepted accounting principles. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has had recurring losses from operations, has current liabilities in excess of current assets and a significant capital deficiency. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The Company has, and will continue to require, significant working capital to fund operations. Management is currently funding operations through loans from certain stockholders. Management's plans with regard to these matters are also described in Note 2. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. CORBIN & WERTZ Irvine, California July 20, 1996, except for Notes 1 and 11 as to which the date is January 7, 1997 F-76 144 ORANGE EMPIRE BREWING COMPANY CONSOLIDATED BALANCE SHEETS ASSETS (Notes 2, 5, 6, 7 and 10)
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (UNAUDITED) Current assets: Cash............................................................ $ 33,419 $ 56,302 Accounts receivable, less allowance for doubtful accounts of $13,600 (unaudited) and $5,000, at September 30, 1996 and December 31, 1995, respectively.............................. 45,326 92,273 Inventories (Note 3)............................................ 233,868 231,766 Prepaid expenses and other current assets....................... 17,629 44,441 ----------- ----------- Total current assets.................................... 330,242 424,782 Property and equipment, net (Note 4).............................. 1,328,422 1,510,551 Deposits and other assets......................................... 21,710 20,679 Due from affiliate (Note 6)....................................... 55,475 -- ----------- ----------- $ 1,735,849 $ 1,956,012 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) (Notes 1 and 2) Current liabilities: Accounts payable (Note 7)....................................... $ 330,029 $ 334,780 Accrued expenses and other current liabilities (Notes 6 and 7)........................................................... 282,138 196,886 Notes payable (Note 5).......................................... 171,698 58,980 Notes payable to related parties (Notes 6 and 11)............... 668,297 767,559 Capital lease obligations to related party (Notes 7 and 11)..... 143,498 109,408 ----------- ----------- Total current liabilities............................... 1,595,660 1,467,613 Notes payable, net of current portion (Note 5).................... 394,581 211,416 Capital lease obligation (Note 7)................................. 29,955 -- Capital lease obligations to related party, net of current portion (Notes 7 and 11)................................................ 866,461 971,985 ----------- ----------- Total liabilities....................................... 2,886,657 2,651,014 ----------- ----------- Commitments and contingencies (Notes 7 and 11) Stockholders' equity (capital deficiency) (Notes 9 and 11): Common stock, Series A, no par value; 1,000,000 shares authorized, 110,000 shares issued and outstanding............ 412,500 412,500 Common stock, Series B, no par value; 1,000,000 shares authorized, 331,401 (unaudited)(1996) and 247,401 (1995) shares issued and outstanding................................ 1,399,254 1,067,766 Accumulated deficit............................................. (2,962,562) (2,175,268) ----------- ----------- Total capital deficiency................................ (1,150,808) (695,002) ----------- ----------- $ 1,735,849 $ 1,956,012 =========== ===========
See independent auditors' report and accompanying notes to these consolidated financial statements F-77 145 ORANGE EMPIRE BREWING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED FOR THE YEARS ENDED ------------------------------ --------------------------- SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1996 1995 1995 1994 ------------- ------------- ------------ ------------ (UNAUDITED) (UNAUDITED) Sales........................................ $2,444,881 $1,862,113 $2,606,573 $1,399,515 Less excise taxes............................ (72,252) (45,837) (52,596) (21,045) ---------- --------- ---------- ---------- Net sales (Notes 2 and 10)......... 2,372,629 1,816,276 2,553,977 1,378,470 Cost of sales (Notes 2 and 7)................ 1,667,326 1,148,386 1,824,065 1,025,191 ---------- --------- ---------- ---------- Gross profit....................... 705,303 667,890 729,912 353,279 Selling, general and administrative expenses (Notes 7 and 9)............................ 1,265,063 769,884 990,701 624,209 ---------- --------- ---------- ---------- Loss from operations (Note 10)............... (559,760) (101,994) (260,789) (270,930) Interest expense (Notes 5, 6 and 7).......... 211,671 127,784 172,924 94,516 Other (income) expense....................... 14,663 (6,146) (9,755) 4,149 ---------- --------- ---------- ---------- Loss before provision for income taxes....... (786,094) (223,632) (423,958) (369,595) Provision for income taxes (Notes 2 and 8)... 1,200 1,200 1,600 1,600 ---------- --------- ---------- ---------- Net loss..................................... $ (787,294) $ (224,832) $ (425,558) $ (371,195) ========== ========= ========== ========== Net loss per common share (Note 2)........... $ (2.19) $ (0.66) $ (1.24) $ (1.09) ========== ========= ========== ========== Weighted average number of common shares outstanding................................ 359,391 341,401 342,760 341,401 ========== ========= ========== ==========
See independent auditors' report and accompanying notes to these consolidated financial statements F-78 146 ORANGE EMPIRE BREWING COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
COMMON STOCK COMMON STOCK SERIES A SERIES B ------------------ -------------------- ACCUMULATED SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL ------- -------- ------- ---------- ----------- ----------- Balances -- January 1, 1994 (Note 9).................... 110,000 $412,500 231,401 $ 867,766 $(1,378,515) $ (98,249) Net loss...................... -- -- -- -- (371,195) (371,195) ------- -------- ------- ---------- ----------- ----------- Balances -- December 31, 1994........................ 110,000 412,500 231,401 867,766 (1,749,710) (469,444) Common stock issued for cash at $12.50 per share (Note 9).......................... -- -- 16,000 200,000 -- 200,000 Net loss...................... -- -- -- -- (425,558) (425,558) ------- -------- ------- ---------- ----------- ----------- Balances, December 31, 1995... 110,000 412,500 247,401 1,067,766 (2,175,268) (695,002) Common stock issued for partial repayment of amounts due to a related party at an effective price of $3.91 per share (Note 9).............. -- -- 50,000 195,488 -- 195,488 Common stock issued for stockholder settlement valued at $4.00 per share (Note 9).................... -- -- 34,000 136,000 -- 136,000 Net loss...................... -- -- -- -- (787,294) (787,294) ------- -------- ------- ---------- ----------- ----------- Balances, September 30, 1996 (Notes 9 and 11)(unaudited).............. 110,000 $412,500 331,401 $1,399,254 $(2,962,562) $(1,150,808) ======= ======== ======= ========= ========== ==========
See independent auditors' report and accompanying notes to these consolidated financial statements F-79 147 ORANGE EMPIRE BREWING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FOR THE YEARS ENDED ------------------------------ ---------------------------- SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1996 1995 1995 1994 ------------- ------------- ------------ ------------ (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss....................................... $(787,294) $(224,832) $ (425,558) $ (371,195) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............... 198,190 106,299 161,325 93,959 Provisions for losses on accounts receivable and inventory............................. 8,600 25,000 25,000 -- Loss on asset disposal...................... 16,207 -- -- -- Common stock issued for stockholder settlement (Note 9)....................... 136,000 -- -- -- Changes in operating assets and liabilities: Accounts receivable....................... 38,347 (56,390) (70,945) (25,578) Inventories............................... (2,102) (184,906) (196,985) (15,794) Prepaid expenses and other current assets................................. 26,812 43 (24,997) (8,267) Accounts payable.......................... 85,061 228,014 242,692 16,024 Accrued expenses and other current liabilities............................ 76,652 66,265 134,172 15,826 --------- --------- --------- --------- Net cash used in operating activities........................... (203,527) (40,507) (155,296) (295,025) --------- --------- --------- --------- Cash flows from investing activities: Due from affiliate............................. (55,475) -- -- -- Deposits and other assets...................... (1,031) (5,114) (11,088) (9,400) Capital expenditures........................... (11,430) (174,615) (199,216) (59,323) --------- --------- --------- --------- Net cash used in investing activities........................... (67,936) (179,729) (210,304) (68,723) --------- --------- --------- --------- Cash flows from financing activities: Issuance of common stock for cash (Note 9)..... -- -- 200,000 -- Borrowings under bank note payable (Note 5).... -- -- -- 37,500 Borrowings under notes payable from vendors, net (Note 5)................................ 32,786 -- -- -- Borrowings under notes payable to related parties (Note 6)............................ 250,076 285,806 307,714 375,099 Repayments under bank note payable (Note 5).... (31,241) (27,363) (42,081) (35,000) Payments under capital lease obligation........ (3,041) -- -- -- Payments under capital lease obligation to related party (Note 7)...................... -- (45,344) (50,868) (28,234) --------- --------- --------- --------- Net cash provided by financing activities........................... 248,580 213,099 414,765 349,365 --------- --------- --------- --------- Net increase (decrease) in cash.................. (22,883) (7,137) 49,165 (14,383) Cash at beginning of period...................... 56,302 7,137 7,137 21,520 --------- --------- --------- --------- Cash at end of period............................ $ 33,419 $ -- $ 56,302 $ 7,137 ========= ========= ========= ========= Supplemental disclosures of cash flow information Cash paid during the year for: Interest.................................. $ 70,148 $ 127,860 $ 100,223 $ 82,144 ========= ========= ========= ========= Income taxes.............................. $ 1,200 $ 1,200 $ 1,600 $ 3,200 ========= ========= ========= =========
Supplemental schedule of noncash financing and investing activities: During the nine months ended September 30, 1996 (unaudited), the Company: Purchased $41,596 (unaudited) of equipment under capital lease agreement (see Note 7). F-80 148 ORANGE EMPIRE BREWING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED) Accounts payable $42,014 (unaudited) of accrued and past due capital lease payments due to a related party (see Note 7). Refinanced certain notes payable due related parties with a note payable to a bank totaling $294,388 (unaudited) (see Note 6). Issued shares of common stock as partial repayment on amounts due to a related party totaling $195,488 (unaudited) (see Notes 6, 7 and 9). Issued shares of common stock for a stockholder settlement valued at $136,000 (unaudited) (see Note 9). During the nine months ended September 30, 1996 and 1995, the Company (returned) purchased $(20,758) (unaudited) and $629,848 (unaudited), respectively, of equipment under a capital lease agreement with a related party (see Note 7). During the years ended December 31, 1995 and 1994, the Company purchased $777,633 and $56,937, respectively, of equipment under a capital lease agreement with a related party (see Note 7). See independent auditors' report and accompanying notes to these consolidated financial statements F-81 149 ORANGE EMPIRE BREWING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED), AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 NOTE 1 -- NATURE OF OPERATIONS AND BASIS OF PRESENTATION Nature of Operations Orange Empire Brewing Company and its wholly owned subsidiary, Riverside Brewing Company (collectively the "Company"), were incorporated in the state of California on June 1, 1993 to operate a brewpub and brewery. The Company currently brews and markets six distinctive beers in 27 states. During October 1995, the Company expanded its brewing operations by leasing an additional brewery facility and its brewing equipment in Riverside, California (see Note 7). As discussed in Note 11, on September 11, 1996, the Company entered into a stock-for-stock exchange (the "Exchange Agreement") with Beverage Works, Inc. ("BWI"), a California corporation. Additional agreements were entered into concurrently with the execution of the Exchange Agreement, including an agreement with BWI to actively manage the Company's operations (see Notes 7 and 11). Basis of Presentation The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, at September 30, 1996, the Company had excess current liabilities in excess of current assets of $1,265,418 (unaudited) and a capital deficiency of $1,150,808 (unaudited). In addition, the Company has incurred net losses of 425,558 and 371,195, for the years ended December 31, 1995 and 1994, respectively, and $787,294 (unaudited) for the nine-month period ended September 30, 1996. Successful completion of its marketing program, and the transition, ultimately, to the attainment of profitable operations is dependent upon the Company obtaining adequate financing and generating sales sufficient to fund profitable operations. These factors, among other things, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans include, but are not limited to, entering into a stock-for-stock exchange whereby the Company will become a wholly-owned subsidiary of BWI (see Note 11). BWI plans to effect a proposed initial public offering ("IPO") to raise capital, certain of which, if the proposed IPO is successful and the Exchange Agreement is consummated, will be used to partially reduce the Company's indebtedness and to fund working capital requirements. Management also plans to reduce the Company's costs on a per unit basis through increased plant utilization and through combined purchases with other brewing facilities acquired, or to be acquired, by BWI. There are no assurances that management's plans will be effected, which includes the proposed IPO being consummated in a timely manner. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Principles of Consolidation The consolidated financial statements include the accounts of Orange Empire Brewing Company and its wholly-owned subsidiary Riverside Brewing Company. All significant intercompany transactions and balances have been eliminated. NOTE 2 -- SUMMARY OF SIGNIFICANT POLICIES Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities at the date of the financial statements. F-82 150 ORANGE EMPIRE BREWING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED), AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT POLICIES -- (CONTINUED) Certain estimates made by management also effect the reported amounts of revenues and expenses during the reported periods. Actual results could materially differ from those estimates. Fair Value of Financial Instruments These consolidated financial statements contain financial instruments whereby the fair market value of the financial instruments could be different than those recorded on a historical basis in the accompanying consolidated financial statements. The Company's financial instruments consist of cash, accounts receivable, accounts payable, notes payable to related parties, and notes payable and capital lease obligations. The carrying amounts of the Company's financial instruments generally approximate their fair values at September 30, 1996 (unaudited) and December 31, 1995. In the case of the notes payable to related parties (see Note 6), it was not practical to determine fair values due to the lack of a market for such financial instruments. Concentrations of Credit Risk The customers of the brewery operations consist of distributors which resell the Company's products domestically. The Company performs periodic credit evaluations of its customers and does not require collateral to secure its accounts receivable. The Company maintains an allowance for potential credit losses; such losses have historically been within management's expectations. One brewery customer accounted for approximately 25% (unaudited) of consolidated net sales for the nine months ended September 30, 1996. No one customer made up 10% or more of consolidated net sales for the nine months ended September 30, 1995 (unaudited). One brewery customer accounted for approximately 12% of consolidated net sales for the year ended December 31, 1995 and one brewery customer accounted for approximately 18% of consolidated net sales for the year ended December 31, 1994. Accounts receivable from four brewery customers totaled 38%, 22%, 14% and 14%, respectively, of accounts receivable at September 30, 1996. Accounts receivable from four brewery customers totaled 23%, 18%, 18% and 16%, respectively, of accounts receivable at December 31, 1995. The Company purchased certain products from two companies which accounted for approximately 19% (unaudited) and 12% (unaudited), and 47% (unaudited) and 10% (unaudited) of consolidated purchases for the nine months ended September 30, 1996 and 1995, respectively. One Company accounted for approximately 40% and 38% of consolidated purchases for the years ended December 31, 1995 and 1994, respectively. No one vendor made up 10% or more of accounts payable at September 30, 1996 (unaudited). Accounts payable to one company accounted for 26% of total accounts payable as of December 31, 1995. Risks and Uncertainties Licenses and Permits The brewery operations (wholesale) and the brewpub operations (retail), require various Federal, state and local licenses and permits. Brewers are required to file with the Federal Bureau of Alcohol, Tobacco and Firearms (the "BATF"). The California Department of Alcoholic Beverage Control (the "ABC") requires that companies file and maintain licenses, permits or approvals for the production and sale of alcoholic beverages. Other state and local laws and regulations governing the sale of alcoholic beverages within a particular state by an out-of-state brewer or wholesaler vary by state and locality. The Company's brewery and brewpub operations are subject to audit and inspection by the BATF and ABC at any time. F-83 151 ORANGE EMPIRE BREWING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED), AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT POLICIES -- (CONTINUED) Should the Exchange Agreement be consummated (see Notes 1 and 11), management of the Company will be required to apply for a change in the brewery's and/or the brewpub's management, and for a change in ownership with Federal and state agencies. Due to the various Federal and state licensing and permitting requirements, there is a risk that one or more regulatory authorities may not approve such changes in management and/or ownership, or may determine the predecessor managers/owners had not complied with applicable licensing or permitting regulations. Should the brewery or brewpub operations not maintain the licenses and permits necessary for it to conduct business, there could be a material adverse effect on the consolidated financial condition and/or the consolidated results of operations of the Company. Dependence on Distributors. The Company sells its products to independent distributors for distribution to retailers and ultimately consumers. Sustained growth will require it to maintain such relationships and possibly enter into agreements with additional distributors. No assurance can be given that the Company will be able to maintain or secure additional distributors on terms favorable to the Company. The Company has certain significant distribution relationships. The loss of one or more of these distributors would have a material adverse effect on the Company's ability to bring its products to market and therefore adversely effect its sales and results of operations. The Company's distribution agreements are generally terminable by the distributor on short notice. While these distribution agreements contain provisions regarding the Company's enforcement and termination rights, some state laws prohibit the Company from exercising these contractual rights. The Company's ability to maintain existing distribution agreements or enter new distribution agreements may be adversely affected by the fact that many distributors are reliant on one of the major beer producers for a large percentage of their revenue and, therefore, they may be influenced by such producers. Potential "Dram Shop" Liability. Some states have enacted "dram shop" laws and legislation which impose criminal and civil liability on licensed alcoholic beverage servers for injuries or damages caused by their negligent service of alcoholic beverages to a visibly intoxicated person or to a minor, if such service is the proximate cause of the injury or damage and such injury or damage is reasonably foreseeable. California has enacted legislation granting broad immunity to servers of alcoholic beverages from civil liability, except for the sale of alcoholic beverages to minors. While the Company maintains liquor liability insurance as part of its comprehensive general liability insurance which management believes is adequate to protect against such liability, there can be no assurance that the Company will not be subject to a judgment or fine in excess of such insurance coverage or that it will be able to continue to maintain such insurance coverage at reasonable costs or at all. The imposition of a judgment or fine substantially in excess of the Company's insurance coverage would have a material adverse effect on the Company. Similarly, the failure of the Company to obtain and maintain insurance coverage could also materially and adversely affect the Company. Regulation The manufacture and sale of alcoholic beverages is a highly regulated and taxed business. The Company's operations may be subject to more restrictive regulations and increased taxation by Federal, state and local governmental entities than are those of non-alcohol related businesses. Federal, state and local laws and regulations govern the production and distribution of beer. These laws and regulations govern permitting, licensing, trade practices, labeling, advertising, marketing, distributor relationships and related matters. Federal, state and local governmental entities also levy various taxes, license fees and other similar charges and may require bonds to ensure compliance with applicable laws and regulations. Failure by the Company to comply with applicable Federal, state or local laws and regulations could result in penalties, fees, suspension or revocation of permits, licenses or approvals. There can be no assurances that other or more restrictive laws or regulations will not enacted in the future. F-84 152 ORANGE EMPIRE BREWING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED), AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT POLICIES -- (CONTINUED) Trademarks The Company and the Breweries have obtained or applied for U.S. Trademark Registrations for the names of several of its products, and in some cases for most of its logo designs. The Company regards its trademarks as having substantial value and as being an important factor in the marketing of its products. The Company is not aware of any infringing uses that could materially affect its current business of any prior claim to the trademarks that would prevent the Company from using such trademarks in its business. The Company's policy is to pursue registration of its marks whenever possible and to oppose vigorously any infringements of its marks. Seasonality The beverage business traditionally has been seasonal. Typically, net sales are highest during the third and fourth calendar quarters and decline in the first and second calendar quarters. This pattern is due primarily to the increased amount of consumer demand for beverages during the summer months through the holiday buying season. Management of the Company expects its consolidated net sales and operating results to continue to reflect this seasonality. Environmental Regulations and Operating Considerations The Company's brewing operations are subject to a variety of extensive and changing Federal, state, and local environmental laws, regulations and ordinances that govern activities or operations that may have adverse effects on human health or the environment. Such laws, regulations and ordinances may impose liability for the cost of remediating, and for certain damages resulting from, sites of past releases of hazardous materials. The Company believes that it currently conducts, and in the past has conducted, its activities and operations in substantial compliance with applicable environmental laws, and believes that costs arising from existing environmental laws will not have a material adverse effect on the Company's financial condition or results of operations. There can be no assurance, however, that environmental laws will not become more stringent in the future or that the Company will not incur costs in the future in order to comply with such laws. The Company's operations are subject to certain hazards and liability risks faced by all brewers, such as potential contamination of ingredients or products by bacteria or other external agents that may be wrongfully or accidentally introduced into products or packaging. The occurrence of such a problem could result in a costly product recall and serious damage to the Company's reputation for product quality, as well as claims for product liability which may negatively impact the Company. The Company maintains insurance which the Company believes is sufficient to cover any liability claims which might result from a contamination problem in its products, but which may not cover any damage to the Company's reputation. Inventories Inventories, consisting of raw materials and purchased packaging, as well as certain in process and finished goods, are valued at the lower of cost (average cost method) or market (see Note 3). Property and Equipment Property and equipment, including equipment under capital leases, as amended, with a related party (see Note 7), are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets, generally ranging from three to seven years. Betterments are capitalized, while repairs and maintenance costs are charged to expense as incurred. F-85 153 ORANGE EMPIRE BREWING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED), AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT POLICIES -- (CONTINUED) Leasehold improvements are being amortized over the shorter of the lease term or the estimated useful lives of the improvements, generally ranging from three to ten years. Management of the Company assesses the recoverability of property and equipment by determining whether the depreciation of such assets over their remaining lives can be recovered through projected undiscounted cash flows. The amount of impairment, if any, is measured based on projected undiscounted cash flows and is charged to operations in the period in which such impairment is determined by management. To date, management has not identified an impairment of property and equipment. Management has based this assessment on the anticipated benefits to be derived from the successful completion of the BWI proposed IPO and the consummation of the Exchange Agreement (see Note 11). If the BWI proposed IPO is not successfully completed and/or the Exchange Agreement is not consummated, the Company could be forced to liquidate its assets if it ceases to continue as a going concern. The amounts the Company would receive from a sale of its property and equipment under such circumstances could be substantially less than the historical carrying values reflected in the accompanying consolidated financial statements. Income Taxes The Company accounts for its income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("Statement 109"). Under Statement 109, a liability method is used whereby deferred tax assets and liabilities are determined based on temporary differences between bases used for financial reporting and income tax reporting purposes. Income taxes are provided based on tax rates in effect at the time such temporary differences are expected to reverse. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize the tax assets through future operations (see Note 8). Revenue Recognition Revenues from brewery product sales are recognized upon shipment. The Company records a provision for the effect of returned products at the time the units are shipped. Historically, the Company has experienced minimal product returns. Revenues in connection with brewpub operations are recognized at the time the food and beverage sales are made. Advertising and Marketing Expense Advertising and marketing costs are expensed as incurred. Per Share Information Net loss per common share is computed by dividing net loss by the weighted average number of shares of Series A and Series B common stock outstanding during each respective period presented. During the periods presented, the Company did not have common stock equivalents outstanding (see Note 9). Interim Accounting Policy In the opinion of management, the accompanying unaudited consolidated financial statements of the Company include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the consolidated financial position of the Company as of September 30, 1996, and results of operations and cash flows as of and for the nine-month period ended September 30, 1996 and 1995. Although management believes that the disclosures regarding interim financial information in these financial statements F-86 154 ORANGE EMPIRE BREWING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED), AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT POLICIES -- (CONTINUED) are adequate to make the information presented not misleading, certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles during the interim periods have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The unaudited results of operations for the nine months ended September 30, 1996 are not necessarily indicative of results of operations to be expected for the year ending December 31, 1996. NOTE 3 -- INVENTORIES Inventories consist of the following:
DECEMBER SEPTEMBER 30, 31, 1996 1995 ------------- ---------- (UNAUDITED) Finished goods and work in process......................... $ 84,165 $ 30,616 Raw materials and purchased products....................... 149,703 201,150 ------------- ---------- $ 233,868 $ 231,766 ========== =========
NOTE 4 -- PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER SEPTEMBER 30, 31, 1996 1995 ------------- ---------- (UNAUDITED) Equipment under capital lease with a related party (Note 7)....................................................... $ 1,139,737 $1,160,495 Equipment under capital lease (Note 7)..................... 41,596 -- Equipment.................................................. 82,227 76,888 Furniture and fixtures..................................... 13,956 50,875 Leasehold improvements (Note 7)............................ 499,980 495,147 ------------- ---------- 1,777,496 1,783,405 Less accumulated depreciation and amortization............. (449,074) (272,854) ------------- ---------- $ 1,328,422 $1,510,551 ========== =========
F-87 155 ORANGE EMPIRE BREWING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED), AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 5 -- NOTES PAYABLE Notes payable consist of the following:
DECEMBER SEPTEMBER 30, 31, 1996 1995 ------------- ---------- (UNAUDITED) Note payable to bank, bearing interest at prime plus 1.75% per annum (10% at September 30, 1996), payable monthly in principal payments of $11,576 plus accrued interest, matures August 1, 2000, secured by substantially all assets of the Company and guaranteed by a former officer and certain stockholders of the Company.................. $ 533,493 $ -- Note payable to bank, bearing interest at prime plus 3% per annum (11.75% at December 31, 1995), payable monthly in principal payments of $4,916 plus accrued interest, matures May 1, 1998, secured by substantially all assets of the Company and guaranteed by a former officer and certain stockholders of the Company...................... -- 270,396 Unsecured demand notes with vendors generally bearing interest at 11% per annum, payable in aggregate monthly installments of $4,091 through February, 1997............ 32,786 -- ------------- ---------- 566,279 270,396 Less current portion....................................... (171,698) (58,980) ------------- ---------- $ 394,581 $ 211,416 ========== =========
Interest expense amounted to $28,708 (unaudited) and $18,147 (unaudited) for the nine-month period ended September 30, 1996 and 1995, respectively, and amounted to $33,515 and $29,057 for the years ended December 31, 1995 and 1994, respectively. Future annual principal installments of notes payable as of December 31, 1995 are as follows:
YEARS ENDING DECEMBER 31, - ------------ 1996............................................... $ 58,980 1997............................................... 58,960 1998............................................... 152,456 -------- $270,396 ========
See Note 6 for discussion regarding the refinance of the note payable to bank. F-88 156 ORANGE EMPIRE BREWING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED), AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 6 -- NOTES PAYABLE TO RELATED PARTIES During 1996, the Company utilized its brewing facilities to brew and bottle beer for BWI. In connection therewith, certain raw materials were purchased, at cost, from the Company by BWI. At September 30, 1996 (unaudited), due from affiliate in the accompanying consolidated balance sheet represents fees for such brewing and bottling services and inventory purchased. Due to related parties consist of the following:
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------ ----------- (UNAUDITED) Unsecured demand note payable to a former officer and current stockholder, interest at prime plus 2% per annum (10.75% at December 31, 1995).......................................... $ 80,110 $ 96,132 Unsecured demand notes payable to certain stockholders, interest at prime plus 2% per annum (10.75% at December 31, 1995), refinanced with bank note discussed below............ -- 254,364 Unsecured demand notes payable to certain officers and stockholders, interest at 7.75% per annum, partially repaid through the issuance of common stock (see Note 9)........... 458,229 335,229 Unsecured demand notes payable in default to stockholders, interest rates ranging from 8% per annum to prime plus 2% per annum (10.75% at December 31, 1995)..................... 81,834 81,834 Other......................................................... 48,124 -- -------- -------- $ 668,297 $767,559 ======== ========
On May 10, 1996, the Company entered into an agreement with a bank to refinance a note payable with the bank totaling $250,731 at the date of refinance ($270,396 at December 31, 1995 -- see Note 5) and unsecured demand notes payable to certain stockholders totaling $294,338. The new note payable totaled $545,069, payable with interest at prime plus 1.75% per annum (initial rate of 11.0%). Interest is payable monthly beginning June 1, 1996 and principal is payable in 48 installments of $11,576, beginning September 1, 1996. The new note matures August 1, 2000. The new note is secured by substantially all assets of the Company and is guaranteed by certain stockholders. See Note 11 for further discussion regarding this new note payable to bank. Interest expense on amounts payable to related parties amounted to $54,681 (unaudited) and $57,549 (unaudited) for the nine-month period ended September 30, 1996 and 1995, respectively, and amounted to $63,464 and $20,447 for the years ended December 31, 1995 and 1994, respectively. Accrued interest due on the notes payable to related parties totaled $76,387 (unaudited) and $27,995 at September 30, 1996 and December 31, 1995, respectively. Accrued interest is included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets. See Note 7 for discussion of capital lease obligations with a related party and management agreement with BWI. See Note 11 for discussion of a debt exchange agreement to be entered into upon consummation of the Exchange Agreement (see Note 1). F-89 157 ORANGE EMPIRE BREWING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED), AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 7 -- COMMITMENTS AND CONTINGENCIES Leases The Company leases its facilities and certain equipment under noncancelable operating leases which expire at various dates through August 2003. In June 1996, the Company acquired certain equipment totaling $41,596 (unaudited) under a noncancelable capital lease obligation. Such lease bears interest at 17% per annum and is due in monthly payments of $1,186 through May 2000. The Company leases certain brewing, kitchen and equipment, as well as leasehold improvements under a noncancelable capital lease obligation, as amended, with an entity controlled by a significant stockholder of the Company. Such lease has components with effective interest rates ranging from 14% to 17% per annum, payable monthly at varying amounts ranging from $193 to $10,663, scheduled to mature through 2003. Future annual aggregate minimum lease payments under noncancelable operating lease arrangements and under the capital lease obligation with a related party, as amended, as of December 31, 1995 are as follows:
YEARS ENDING CAPITAL OPERATING DECEMBER 31, LEASE LEASES ------------------------------------------------------------- ---------- -------- 1996...................................................... $ 256,114 $183,012 1997...................................................... 272,028 189,829 1998...................................................... 270,415 106,285 1999...................................................... 270,348 74,501 2000...................................................... 261,742 74,160 Thereafter................................................ 286,185 197,760 ---------- -------- 1,616,832 $825,547 ======== Less amounts representing interest........................ (535,439) ---------- Present value of minimum lease payments................... 1,081,393 Less current portion...................................... (109,408) ---------- $ 971,985 ==========
Rent expense under operating lease agreements totalled $145,374 (unaudited) and $98,163 (unaudited) for the nine-month period ended September 30, 1996 and 1995, respectively, and $130,884 and $77,457 for the years ended December 31, 1995 and 1994, respectively, and is included in selling, general and administrative expense in the accompanying consolidated statements of operations. Interest expense under the capital lease obligation, as amended, amounted to $128,282 (unaudited) and $52,088 (unaudited) for the nine-month period ended September 30, 1996 and 1995, respectively, and $75,945 and $45,012 for the years ended December 31, 1995 and 1994, respectively. As of September 30, 1996, the Company was in default on the capital lease obligation to the related party. In September 1996, $140,488 of such past due capital lease payments were repaid through the issuance of common stock (see Note 9). Past due capital lease payments totaling $61,950 (unaudited) and $42,053 as of September 30, 1996 and December 31, 1995, respectively, are included in accounts payable in the accompanying consolidated balance sheets. See Note 11 for discussion of the amendment to the capital lease to be made in conjunction with the consummation of the Exchange Agreement. F-90 158 ORANGE EMPIRE BREWING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED), AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 7 -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED) Distributor Agreements The Company is party to certain agreements with its various distributors. In general, such agreements grant the Company's distributors the right to sell certain products in specified territories. The agreements may be terminated by either party by written 30 day notice or immediately if certain conditions exist, as defined. Purchase Commitment During 1995, the Company entered into a purchase agreement with a vendor to buy specified quantities of grain to be delivered through June 1999, as defined, at fixed contract prices. The Company has terminated such agreement. The financial effect of such termination was immaterial. Management Agreements In anticipation of consummating the Exchange Agreement (see Notes 1 and 11), effective June 10, 1996, the Company entered into a management agreement with BWI, whereby BWI will manage and operate the Company. As compensation for the management services provided, BWI is to receive $6,500 per month, plus reimbursement of expenses, as defined. The agreement terminates upon consummation of the proposed BWI IPO. Included in notes payable due to related parties in the accompanying consolidated balance sheet is $24,050 of past due management fees at September 30, 1996 (unaudited). Management fee expense under this agreement totaled $24,050 for the nine-month period ended September 30, 1996 (unaudited). See Note 11 for discussion of a Brewpub management agreement to be entered into in connection with the Exchange Agreement (see Notes 1 and 11). Contingencies In January 1996, the Company entered into a settlement agreement with a stockholder whereby for past services the stockholder would retain 10,000 shares of the Company's common stock and receive $43,000 in cash. Such amounts were paid in November 1995. In May 1996, the Company received a letter from such stockholder's legal counsel demanding 13,792 additional shares be issued to the stockholder as the settlement agreement was signed without knowledge of certain material information. The Company's management believes these allegations are without merit and believes that no additional amounts are due the stockholder in cash or common stock. No provision for any additional loss has been reflected in the accompanying consolidated financial statements. A breach of contract action was filed on July 25, 1996 by a retail chain against the Company alleging damages in the amount of $64,000. In November 1996, the Company and such retail chain entered into an agreement of compromise, settlement and general release. The agreement specifies the Company will pay $30,000, payable in periodic installments of $5,000 through October 1997, as defined. Such has been included in accrued expenses and other current liabilities in the accompanying consolidated balance sheet as of September 30, 1996 (unaudited). In the ordinary course of business, there are various claims and lawsuits brought by or against the Company. In the opinion of management, the ultimate outcome of these matters will not have a material adverse effect on the Company's operations or financial position. F-91 159 ORANGE EMPIRE BREWING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED), AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 8 -- INCOME TAXES The provision for income taxes for the years ended December 31, 1995 and 1994 is comprised of minimum state taxes due to the historical losses incurred by the Company. A reconciliation of the provision for income taxes from operations with expected income tax benefit computed by applying the Federal statutory income tax rate to loss before provision for income taxes for the years ended December 31, 1995 and 1994 is as follows:
1995 1994 ------------------ ------------------ $ % $ % --------- ----- --------- ----- Income tax benefit computed at federal statutory tax rate......................... $(144,146) (34.0%) $(125,662) (34.0%) State and local tax benefit, net of reduction of loss carryforward....................... (12,930) (3.0) (11,273) (3.1) Change in valuation allowance for deferred tax assets..................................... 160,886 37.9 138,875 37.6 Other........................................ (2,210) (0.5) (340) (0.1) --------- ----- --------- ----- $ 1,600 0.4% $ 1,600 0.4% ========= ===== ========= =====
At December 31, 1995, significant components of the Company's net deferred taxes are as follows: Deferred tax assets: Net operating loss carryforwards....................................... $ 688,229 Reserves and allowances................................................ 10,035 Depreciation........................................................... 89,898 Other.................................................................. 34,674 Less valuation allowance............................................... (812,778) --------- Total deferred tax assets...................................... 10,058 Deferred tax liability -- Property, equipment and other.......................................... (10,058) --------- Deferred income taxes.......................................... $ -- =========
The net change in the total valuation allowance was an increase of $160,886 and $138,875 for the years ended December 31, 1995 and 1994, respectively. At December 31, 1995, the Company has approximately $1,857,000 and $930,000 of net operating loss carryforwards for Federal and state income tax reporting purposes, respectively, which expire through 2010. Because of the "change in ownership" provisions of the Tax Reform Act of 1986, net operating loss carryforwards will be subject to annual limitations should the Company complete its Exchange Agreement (see Notes 1 and 11). NOTE 9 -- COMMON STOCK The Company is authorized to issue up to 5,000,000 shares of common stock. Such common shares may be divided into various series. The Company is currently authorized to issued 1,000,000 shares of Series A common stock and 1,000,000 shares of Series B common stock. The rights, preferences, privileges and restrictions of the Series A common shares and the Series B common shares shall be equal and identical in all F-92 160 ORANGE EMPIRE BREWING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED), AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 9 -- COMMON STOCK -- (CONTINUED) respects except that, unless otherwise provided by law, the Company may declare dividends to holders of Series B common shares without declaring dividends to holders of Series A common shares. No dividends shall be declared on Series A common shares without also declaring like dividends on Series B common shares. Through September 30, 1996, no dividends have been declared or paid by the Company and pursuant to the California Corporations Code, dividends may not be paid with an accumulated deficit. Through January 1, 1994, the Company issued 110,000 shares of Series A common stock for compensation to officers of the Company for services provided valued at $412,500 or $3.75 per share. Such shares were valued by the Board of Directors based on cash paid for shares near the date of issuance (see below). Through January 1, 1994, the Company sold for cash at $3.75 per share, 112,824 shares of Series B common stock for an aggregate $423,102. In addition, the Company issued 118,577 shares of Series B common stock for debt and services provided valued at $444,664. In November 1995, the Company issued 16,000 shares of Series B common stock at $12.50 per share totalling $200,000. In September 1996, the Company issued an additional 34,000 shares of Series B common stock to such stockholders to effectively reduce their price per share to $4.00. The additional shares were ascribed a value of $136,000 (unaudited), or $4.00 per share. The value of such shares is included in selling, general and administrative expenses in the accompanying consolidated statement of operations for the nine-month period ended September 30, 1996. In September 1996, the Company issued 50,000 shares of Series B common stock valued at $195,488 (unaudited), or $3.91 per share, to an officer and stockholder as partial satisfaction of past due capital lease payments totaling $140,488 and partial satisfaction of a demand note totaling $55,000 (see Notes 6 and 7). F-93 161 ORANGE EMPIRE BREWING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED), AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 10 -- SEGMENT INFORMATION Business segment information as of and for the periods presented is as follows:
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED ------------------------------ ---------------------------- SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1996 1995 1995 1994 ------------- ------------- ------------ ------------ (UNAUDITED) (UNAUDITED) Sales: Brewery............................. $ 1,042,775 $ 732,528 $ 865,433 $ 252,154 Brewpub............................. 1,402,106 1,129,585 1,741,140 1,147,361 ---------- --------- ---------- ---------- Total....................... $ 2,444,881 $ 1,862,113 $2,606,573 $1,399,515 ========== ========= ========== ========== Operating loss: Brewery............................. $ (549,069) $ (8,022) $ (162,850) $ (92,469) Brewpub............................. (10,691) (93,972) (97,939) (178,461) ---------- --------- ---------- ---------- Total....................... $ (559,760) $ (101,994) $ (260,789) $ (270,930) ========== ========= ========== ========== Depreciation and amortization: Brewery............................. $ 112,706 $ 4,391 $ 49,054 $ 2,663 Brewpub............................. 85,484 101,908 112,271 91,296 ---------- --------- ---------- ---------- Total....................... $ 198,190 $ 106,299 $ 161,325 $ 93,959 ========== ========= ========== ========== Capital expenditures(1): Brewery............................. $ 10,172 $ 665,593 $ 833,785 $ 31,076 Brewpub............................. 1,258 149,276 143,064 85,184 ---------- --------- ---------- ---------- Total....................... $ 11,430 $ 814,869 $ 976,849 $ 116,260 ========== ========= ========== ==========
Identifiable property and equipment, net:
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ (UNAUDITED) Brewery.................................................... $ 697,325 $ 815,351 Brewpub.................................................... 631,097 695,200 ---------- ---------- Total............................................ $ 1,328,422 $1,510,551 ========== ==========
- --------------- (1) Includes equipment acquired under capital lease obligation with a related party (see Note 7). For the nine months ended September 30, 1996, the brewery returned certain capital lease equipment totaling $20,758. Accordingly, such returns are excluded from brewery capital expenditures. NOTE 11 -- SUBSEQUENT EVENTS Exchange Agreement With BWI On September 11, 1996, the Company entered into a stock-for-stock exchange, as amended on January 7, 1997, with Beverage Works, Inc., a California corporation. Pursuant to the Exchange Agreement, BWI is to issue 141,063 shares of its common stock, subject to adjustment (based on the change in net assets of the Company, as defined), in exchange for all of the outstanding shares of the Company. In addition, up to 155,000 additional shares of BWI common stock may be issued, if the Company reaches certain production F-94 162 ORANGE EMPIRE BREWING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED), AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 11 -- SUBSEQUENT EVENTS -- (CONTINUED) levels, as defined. Pursuant to the Exchange Agreement , the exchange is to occur concurrently with the consummation (the "Closing Date") of the BWI proposed IPO. If for any reason the proposed IPO does not occur on or before March 31, 1997 or the proposed IPO does not raise in the aggregate $6,000,000, either party may unilaterally terminate the Exchange Agreement. Should such additional shares of BWI common stock be issued, the value of such shares will be deemed additional purchase consideration. Management Agreements In connection with the Exchange Agreement, the Company will enter into a management agreement (The "Management Agreement") with certain stockholders whereby the stockholders are to manage and operate the brewpub operations of the Company from the Closing Date through December 31, 1998. As compensation for such services, the stockholders are to receive 10,000 shares of BWI common stock. Such shares are to be issued on a pro rata basis over the term of the Management Agreement. In addition, the stockholders are obligated to the Company for quarterly cash flow deficits, if any, as defined, during the term of the Management Agreement (up to a maximum deficit of $7,500 per quarter). The Management Agreement can be terminated by mutual written consent or in the event of a breach, as defined. See Note 7 for discussion of a management agreement, currently in effect, entered into in anticipation of the consummation of the Exchange Agreement. Consulting Agreement In connection with the Exchange Agreement, BWI will enter into a two-year consulting agreement with a significant stockholder of the Company. The agreement requires the stockholder to provide brewery advisory services and assistance with the acquisition and disposition of equipment. For such services, BWI will issue 5,000 shares of its common stock at the end of each twelve-month period commencing on the Closing Date. Capital Lease Agreement Amendment In connection with the Exchange Agreement and concurrent with the Closing Date, a related party is required to enter into an agreement with the Company to modify the existing terms of the capital lease obligation (see Note 7). In consideration for such modifications, the Company will issue the related party 50,000 shares of common stock. The modifications to the capital lease obligation are to include a reduction in the effective interest rate to 10%, a provision that all such leased equipment may be purchased by the Company for $1 upon expiration of the lease, the inclusion in the lease obligation of all delinquent lease payments due through December 31, 1995 (see Note 7), and a reduction of the lease obligation in the amount of $500,000. The dollar amount of the lease payments are to be unaffected by the aforementioned changes in terms through December 31, 1997 (monthly lease payments currently total $22,281). Effective January 1, 1998, all amounts unpaid under the current lease obligation will be consolidated into one five-year lease and the monthly payments will be revised accordingly (the anticipated lease payment effective January 1, 1998 totals $12,151). Lease payments that the lessor was to receive for the period January 1, 1996 through September 30, 1996 (which total $140,488) have been repaid through the issuance of common stock (see Note 9). F-95 163 ORANGE EMPIRE BREWING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED), AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 -- (CONTINUED) NOTE 11 -- SUBSEQUENT EVENTS -- (CONTINUED) Note Payable to Bank As discussed in Note 6, the Company refinanced certain notes payable to a bank and to certain stockholders aggregating approximately $545,000 (unaudited) (the "Note"). In connection with the Exchange Agreement and concurrent with the Closing Date, the Company is required to obtain the agreement of such stockholders and the bank to amend and modify the Note to have two notes. The stockholders will assume a note totaling $220,941 without further obligation of the Company, and the remaining principal balance of the Note (which approximates $312,552 (unaudited) at September 30, 1996) will be paid to the bank by the Company. In consideration for assuming a portion of the Company's debt obligations, the stockholders will be issued 27,618 shares of BWI common stock. If on January 1, 1999, the per share market value of BWI common stock is less than $6.00, BWI will issue to such stockholders an additional 9,227 shares of BWI common stock. Notes Payable To Stockholders At September 30, 1996, certain of the Company's related party debt totals $644,000 (unaudited) (consisting of $574,192 (unaudited) in principal and $69,808 (unaudited) in accrued interest -- Note 6). Upon the consummation of the proposed IPO, such indebtedness is to be satisfied as follows: (1) $301,000 is to be paid in cash, and (2) $343,000 is to be refinanced with a new non-interest bearing promissory note which will mature in 90 days, payable in cash and/or up to 24,125 shares of BWI stock and/or up to 50,000 warrants to purchase shares of BWI stock at an exercise price of $5.00 per share, based on a formula, as defined. Stockholder Advances In connection with the Exchange Agreement, BWI agreed to use up to $150,000 of the proceeds from the proposed IPO to repay advances made by one stockholder of the Company during the period May 1, 1996 through the Closing Date, including deferred lease payments as discussed above. At September 30, 1996 (unaudited), the Company has borrowed $85,000 under such agreement. Agreements Not to Compete In connection with the Exchange Agreement and concurrent with the Closing Date, BWI has agreed to enter into agreements-not-to-compete with certain stockholders of the Company for a period of three years in specified territories. Management will ascribe no value to the agreements as management believes that such agreements are not a material component to the Exchange Agreement. F-96 164 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING HEREIN CONTAINED, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO BUY ANY SECURITY OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES, OR AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OF SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS HEREIN SET FORTH SINCE THE DATE HEREOF. ------------------------ TABLE OF CONTENTS Prospectus Summary..................... 3 Risk Factors........................... 7 Capitalization......................... 13 Dilution............................... 15 Use of Proceeds........................ 17 Selected Financial Data................ 19 Management's Discussion and Analysis... 22 Business............................... 32 Management............................. 50 Principal Stockholders................. 56 Description of Securities.............. 58 Underwriting........................... 62 Legal Matters.......................... 64 Experts................................ 64 Additional Information................. 64 Index to Financial Statements.......... F-1
------------------------ UNTIL , 1997 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 1,500,000 SHARES OF COMMON STOCK 1,500,000 CLASS A WARRANTS BEVERAGE WORKS, INC. ------------------------------ PROSPECTUS ------------------------------ FIRST LONDON SECURITIES CORPORATION , 1997 - ------------------------------------------------------ - ------------------------------------------------------ 165 ALTERNATE PAGE SUBJECTION TO COMPLETION DATED , 1997 PROSPECTUS BEVERAGE WORKS, INC. 728,229 SHARES OF COMMON STOCK 892,000 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF CLASS E WARRANTS 70,000 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF CLASS B WARRANTS This Prospectus relates to the offering by certain selling securityholders (the "Selling Shareholders") of 728,229 shares of Common Stock, no par value, (the "Shares") of Beverage Works, Inc., a California corporation (the "Company"). This Prospectus also relates to the offering by certain selling securityholders (the "Selling Class E Warrantholders") of 892,000 shares of Common Stock issuable upon exercise of 892,000 Class E Warrants ("Class E Warrant Shares"). This Prospectus also relates to the offering by certain selling securityholders (the "Selling Class B Warrantholders") of 70,000 shares of Common Stock issuable upon exercise of 70,000 Class B Warrants ("Class B Warrant Shares"). (The Selling Shareholders, the Selling Class E Warrantholders and, the Selling Class B Warrantholders are collectively referred to as Selling Securityholders.) The Shares, Class E Warrant Shares and Class B Warrant Shares offered hereby may be sold from time to time by the Selling Securityholders, or by transferees, on or after the date of this Prospectus, subject to contractual restrictions discussed below. The Selling Shareholders may not sell or otherwise dispose of their Shares for a period ranging from sixty days to thirteen months after the effective date of the registration statement to which this Prospectus is a part without the prior written consent of First London Securities Corporation as representative of the several underwriters of the Company Offering (the "Representative"). The Selling Class E Warrantholders and Selling Class B Warrantholders may not sell or otherwise dispose of their Shares for a period of 180 days after the effective date of the registration statement to which this Prospectus is a part without the prior written consent of the Representative. See "Risk Factors -- Shares Available for Future Sale" and "Description of Securities," No underwriting arrangements have been entered into by the Selling Securityholders. The distribution of the Shares, Class E Warrant Shares and Class B Warrant Shares (collectively the "Selling Securities") by the Selling Securityholders may be effected from time to time in transactions on the Nasdaq Small Cap Market System, in negotiated transactions, through the writing of options on the Selling Securities, or a combination of such methods of sale, at fixed prices that may be changed, at market prices prevailing at the time of sale, at prices related to such prevailing market prices, or at negotiated prices. The Selling Securityholders may effect such transactions by the sale of the Selling Securities to or through broker-dealers, and such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Securityholders and/or the purchasers of the Selling Securities for whom such broker-dealers may act as agent or to whom they may sell as principal, or both. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the Selling Securityholders in connection with sales of the Selling Securities. The Selling Securityholders and intermediaries through whom the Selling Securities are sold may be deemed "underwriters" within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities offered and any profits realized or commissions received may be deemed underwriting compensation. Other than the exercise price payable upon exercise of the Class E Warrants and Class B Warrants, the Company will not receive any proceeds from sales of the Selling Securities. A registration statement under the Securities Act has been filed with the Securities and Exchange Commission with respect to an underwritten public offering on behalf of the Company of 1,500,000 shares of Common Stock and 1,500,000 Class A Warrants plus up to 225,000 shares of Common Stock and 225,000 Class A Warrants which may be offered by the Company pursuant to the exercise of the Underwriters' over-allotment option (the "Company Offering"). See "Concurrent Sales By Company." THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 166 ALTERNATE PAGE THE OFFERING Securities Offered......... 728,229 shares of Common Stock, no par value; 892,000 shares of Common Stock issuable upon exercise of the Class E Warrants; 70,000 shares of Common Stock issuable upon exercise of the Class B Warrants. See "Risk Factors -- Shares Available for Future Sale" and "Description of Securities." No underwriting arrangements have been entered into by the Selling Securityholders. Common Stock Outstanding after the Company Offering (1)(2)............ 4,132,453 shares Shares of Common Stock to be Outstanding After this Offering(1)(2)............. 4,132,453 shares Use of Proceeds............ Other than the exercise price payable upon exercise of the Class E Warrants and Class B Warrants, the Company will not receive any proceeds from the sale of the Selling Securities. See "Use of Proceeds." Nasdaq Common Stock Trading Symbol................... . - --------------- (1) Does not include (i) 1,500,000 shares of Common Stock issuable at $6.00 per share upon exercise of the 1,500,000 Class A Warrants offered by the Company in its initial public offering, plus 225,000 Class A Warrants which may be offered pursuant to the underwriter's over-allotment option, (ii) 2,433,500 shares of Common Stock issuable upon exercise of outstanding options granted under the Company's stock option plans, (iii) the 300,000 shares of Common Stock upon exercise of the Representative's Purchase Option (iv) 80,583 shares of Common Stock issuable upon exercise of other outstanding options and warrants and (v) 100,000 shares of Common Stock issuable upon exercise of the Directors' warrants. See "Description of Securities". Includes 141,063 shares of Common Stock which are to be issued to the former OEBC shareholders in accordance with the Share Purchase Agreement, 27,618 shares of Common Stock to be issued to certain former OEBC shareholders for assuming a portion of OEBC bank debt. 24,125 shares of Common Stock to be issued to the OEBC debtholders in accordance with the Debt Exchange Agreement, 10,000 shares of Common Stock to be issued pursuant to the Brewpub Management Agreement, 60,000 shares of Common Stock to be issued to Brewery Leasing Company pursuant to the amendment to the equipment lease agreement and the brewery equipment consulting agreement. Excludes 155,000 shares of Common Stock which may be issued to the former OEBC shareholders pursuant to the earnout provisions of the Share Purchase Agreement. See "Business -- Breweries -- Riverside Brewing Company". Includes 30,000 shares of Common Stock to be issued to Tankin Capital Partners pursuant to the tentative settlement agreement. See "Business -- Legal Proceedings". (2) Assumes exercise of the 892,000 Class E Warrants and exercise of the 70,000 Class B Warrants. 167 ALTERNATE PAGE CONCURRENT SALES BY COMPANY A registration statement under the Securities Act of 1933, as amended (the "Act"), has been filed by the Company with the Securities and Exchange Commission with respect to an underwritten public offering by the Company of 1,500,000 shares of Common Stock and 1,500,000 Class A Warrants, plus 225,000 shares of Common Stock and 225,000 Class A Warrants which may be offered pursuant to exercise of the Underwriters' over-allotment option. Concurrent sales of securities by the Company would likely have an adverse effect on the market price of the Common Stock. The Selling Securities are subject to contractual restrictions upon resale with the representative of the Underwriters. See "Risk Factors -- Shares Available for Future Sale" and "Description of Securities." 168 ALTERNATE PAGE SELLING SECURITYHOLDERS The following table sets forth the name of each person who is a Selling Securityholder, the number of Shares and other shares of Common Stock beneficially owned by each Selling Shareholder's account and the number of shares of Common Stock such Shareholder will own after the completion of this Offering assuming all Shares are sold. Certain of the listed persons currently have or have had a position, office or other material relationship with the Company or any predecessor in the past three years. See "Management." For each Selling Securityholder, the figure in each column represents number and percentage ownership of the total number of shares of Common Stock owned assuming all Class B Warrants and Class E Warrants are exercised.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING AFTER OFFERING --------------------------- ------------------------------ NAME SHARES(1) PERCENTAGE(2) SHARES(3) PERCENTAGE(2)(4) - --------------------------------------- --------- ------------- --------- ---------------- Kathleen Burke(5)...................... 62,758 2.38% 58,758 1.52% c/o Beverage Works, Inc. 9800 S. Sepulveda Blvd. Ste 720 Los Angeles, CA 90045 Stefdan, Ltd.(6)....................... 83,000 3.15% 0 0 c/o Steven M. Scarano Scarano & Lipton 333 Earle Ovington Blvd. Ste 102 Mitchell Field, NY 11553 Bob Molinaro........................... 666 <1% 0 0 1854 Pt. Taggart Newport Beach, CA 92660 Kevin McCarthy(7)...................... 6,000 <1% 0 0 209 John Street Manhattan Beach, CA 90266 Jack Stoner(8)......................... 13,598 <1% 0 0 8716 Frontera Avenue Yucca Valley, CA 92284 John & Terri Langhans.................. 14,691 <1% 10,289 <1% 5712 Horsham Ave Westminster, CA 92683 Hecht & Steckman, P.C.(9).............. 14,000 <1% 0 0 Attn: Charles J. Hecht, Esq. 60 East 42nd Street, Suite 5101 New York, NY 10165 Patrick H. Miller and.................. 600,000 22.79% 0 0 Lee M. Miller(10) 1300 W. Garmon Road, NW Atlanta, GA 30327 Gerald T. Cochran...................... 100,000 3.80% 0 0 400 Horton Road, SW Rainsville, AL 35986 Robert H. Mudd, Jr..................... 10,000 <1% 0 0 6108 Sturbridge Drive Mobile, AL 36609
169 ALTERNATE PAGE
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING AFTER OFFERING NAME SHARES(1) PERCENTAGE(2) SHARES(3) PERCENTAGE(2)(4) - --------------------------------------- --------- ------------ --------- ---------------- M Co., a partnership................... 10,000 <1% 0 0 c/o Robert H. Mudd, Jr. P.O. Box 1248 Mobile, AL 36633 Larry Murk............................. 20,000 <1% 0 0 607 Palmer Avenue Maywood, NJ 07607 Johann Vets(11)........................ 99,996 3.8% 6,250 <1% 39 Graaf de Granvellelaan 2650 Edegem Belgium Douglas Barat.......................... 10,000 <1% 0 0 317 Richmond Avenue Massapequa, NY 11758-3232 William Hess, Jr....................... 10,000 <1% 0 0 P.O. Box 15856 Asheville, NC 28813 Marcel Aronheim........................ 20,000 <1% 0 0 48 Spring Hollow Roslyn, NY 11576 Gary S. and M. Cristina Leske.......... 5,000 <1% 0 0 165 Old Field Road Setauket, NY 11733 Robert Deutsch......................... 10,000 <1% 0 0 8820 Millbrook Road Newark, IL 60541 A.C. Brown............................. 10,000 <1% 0 0 406 N. Lee Street Alexandria, VA 22314-2302 Kimberly A. Stoner(12)................. 3,333 <1% 0 0 6549 E. Camino Vista, #3 Anaheim, CA 92807 Michael Pizitz......................... 7,500 <1% 0 0 2140 11th Avenue South, Suite 318 Birmingham, AL 35205 Richard Pizitz......................... 7,500 <1% 0 0 Hidden Dunes, #1901 9815 Highway 98 West Destin, FL 32541 W.E. Stephens, Jr.(13)................. 10,000 <1% 0 0 13214 Allysum Ct. Cypress, TX 77429 Guy Schebovitz(14)..................... 178,684 6.79% 0 0 931 East 77th, 2nd Flr Brooklyn, NY 11236
170 ALTERNATE PAGE
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING AFTER OFFERING NAME SHARES(1) PERCENTAGE(2) SHARES(3) PERCENTAGE(2)(4) - --------------------------------------- --------- ------------- --------- ---------------- Imafina, S.A.(15)...................... 200,000 7.60% 0 0 c/o Mr. Hubert Hendrickx Administrateur Delegue 4, Route de Beaumont 1700 Fribourg CH Switzerland Robert E. Reale(16).................... 152,720 5.80% 78,200 1.89% 6501 5th Avenue Brooklyn, NY 11220 Robert F. Reale(17).................... 63,765 2.42% 34,515 <1% 7312 Ridge Blvd. Brooklyn, NY 11209 Bradley W. Kabbash(18)................. 70,850 2.69% 38,350 <1% 52 Thunder Mountain Road Greenwich, CT 06831 Lord Charles Spencer-Churchill(19)..... 15,000 <1% 5,000 <1% 91 Eaton Terrace London SW1Y4W, England Alan Miller(20)........................ 11,345 <1% 3,335 <1% 7007 College Blvd. Suite 260 Overland Park, KS 66209 Donald Scott(21)....................... 60,000 <1% 35,000 <1% 58 Peacock Lane Locust Valley, NY 11560 John DiNobile(22)...................... 9,520 <1% 0 0 420 Sixth Street, Apt. 7-D Brooklyn, NY 11220 Frederick Friedman(23)................. 90,000 3.42% 20,000 <1% 207 West Old Mill Road Greenwich, CT 06831
- --------------- (1) The figures in the "Shares" column are the total number of Shares, Class E Warrant Shares and Class B Warrant Shares held by such Selling Securityholder (assuming all Class E Warrants and Class B Warrants are exercised by such Selling Securityholder). Unless otherwise indicated by footnote, each figure in the "Shares" column are Shares. Unless otherwise indicated by footnote, the Shares are subject to a 13 month lock-up. Unless otherwise indicated by footnote, the Class E Warrant Shares and Class B warrant Shares are subject to a 180 day lock-up. See "Selling Securityholders -- Lock-Up Arrangements." (2) Assumes exercise of the 892,000 Class E Warrants and 70,000 Class B Warrants. Includes 141,063 shares of Common Stock which are to be issued to the former OEBC shareholders in accordance with the Share Purchase Agreement, 24,125 shares of Common Stock to be issued to the OEBC debtholders in accordance with the Debt Exchange Agreement, 10,000 shares of Common Stock to be issued pursuant to the Brewpub Management Agreement, 27,618 shares of Common Stock to be issued to certain former OEBC shareholders for assuming a portion of OEBC's bank debt, and 60,000 shares of Common Stock to be issued to Brewery Leasing Company pursuant to the amendment to the equipment lease agreement and the brewery equipment consulting agreement. Excludes 155,000 shares of Common Stock which may be issued to the former OEBC shareholders pursuant to the earnout provisions of the Share Purchase Agreement. Includes 30,000 shares of Common Stock to be issued to Tankin Capital 171 ALTERNATE PAGE Partners pursuant to the settlement agreement. Does not include (i) 2,433,500 shares of Common Stock issuable upon exercise of authorized options granted under the Company's stock option plans, or (ii) 180,583 shares of Common Stock issuable upon exercise of other outstanding options and warrants. (3) The figures in the "Shares" column are the total number of Shares, Class E Warrant Shares and Class B Warrant Shares held by such Selling Securityholder (assuming all Class E Warrants and Class B Warrants are exercised by such Selling Securityholder) after the offering by the Selling Securityholders assuming all Shares, Class E Warrant Shares and Class B Warrant Shares which were registered in this offering were sold by such Selling Securityholder. (4) Includes 1,500,000 shares of Common Stock offered by the Company in its initial public offering. Does not include (i) 1,500,000 shares of Common Stock issuable upon exercise of the 1,500,000 Class A Warrants offered by the Company in its initial public offering, (ii) 225,000 shares of Common Stock pursuant to the Underwriter's over-allotment option, (iii) 225,000 shares of Common Stock issuable upon exercise of the 225,000 Class A Warrants offered by the Company pursuant to the Underwriter's over-allotment option, and (iv) 300,000 shares of Common Stock upon exercise of the Representative's Warrant and underlying Warrants. (5) Ms. Burke is Vice President of Sales of the Company. In addition to 4,000 Shares offered hereby, beneficial ownership includes 58,758 shares of Common Stock. (6) Stefdan, Ltd., a company wholly-owned by Steven Scarano, is the beneficial owner of 33,000 Shares and 50,000 Class E Warrant Shares offered hereby. Mr. Scarano was a director of the Company at the time he received the Shares and Class E Warrants. (7) Mr. McCarthy is the beneficial owner of 4,000 Shares and 2,000 Class E Warrant Shares offered hereby. (8) Mr. Stoner is the father of John Stoner, a director and the Vice President of New Breweries of the Company. (9) Hecht & Steckman, P.C. is Company counsel. In addition to 14,000 Shares offered hereby, beneficial ownership includes 15,583 Class C Warrants. (10) The Millers are beneficial owners of 100,000 Shares and 500,000 Class E Warrant Shares offered hereby. (11) In addition to 93,746 Shares offered hereby, beneficial ownership includes 6,250 shares in the name of Group Nollett Vets, of which Mr. Vets is a principal. (12) Ms. Stoner is the wife of John Stoner, a director of the Company and Vice President of New Breweries of the Company. (13) The 10,000 Shares offered hereby are subject to a lock-up of 120 days after the effective date of the registration statement, however, 3,333 Shares are released from the lock-up in 60 days, and another 3,333 shares are released from the lock-up in 90 days. Mr. Stephens is also the beneficial owner of 5,000 Class H Warrants. (14) The 178,684 Shares offered hereby are subject to a lock-up of one year after the effective date of the registration statement, however, 26,666 Shares are released from the lock-up in 60 days, 26,666 Shares are released from the lock-up in 90 days, 6,667 Shares are released from the lock-up in 120 days, and 26,200 Shares are released from the lockup in 150 days. Mr. Schebovitz is also the beneficial owner of 10,000 Class H Warrants. (15) Imafina, S.A. is the beneficial owner of 200,000 Class E Warrant Shares offered hereby. (16) Mr. Reale is the beneficial owner 9,520 Shares and 65,000 Class E Warrants offered hereby in addition to 76,200 shares of Common Stock. The 9,520 Shares offered hereby are subject to a lock-up of 150 days after the effective date of the registration statement, however, 4,000 Shares are released from the lock-up in 60 days and 4,000 Shares are released from the lock-up in 90 days. (17) Mr. Reale is the beneficial owner 29,250 Class E Warrants offered hereby in addition to 34,515 shares of Common Stock. 172 ALTERNATE PAGE (18) Mr. Kabbash is the beneficial owner of 32,500 Class E Warrants offered hereby in addition to 38,350 shares of Common Stock. Mr. Kabbash was a director of the Company at the time he received the Class E Warrants and these additional shares. (19) Lord Spencer-Churchill is the beneficial owner of 10,000 Class E Warrant Shares offered hereby in addition to 5,000 shares of Common Stock. Lord Spencer-Churchill was a director of the Company at the time he received the Class E Warrants and these additional shares. (20) Mr. Miller is the beneficial owner 4,760 Shares and 3,250 Class E Warrant Shares offered hereby in addition to 3,335 shares of Common Stock. The 4,760 Shares offered hereby are subject to a lock-up of 150 days after the effective date of the registration statement, however, 2,000 Shares are released from the lock-up in 60 days and 2,000 Shares are released from the lock-up in 90 days. (21) Mr. Scott is the beneficial owner of 25,000 Shares offered hereby in addition to 35,000 shares of Common Stock. (22) The 9,520 Shares offered hereby are subject to a lock-up of 150 days after the effective date of the registration statement, however, 4,000 Shares are released from the lock-up in 60 days and 4,000 Shares are released from the lock-up in 90 days. (23) Mr. Friedman is the beneficial owner of 70,000 Class B Warrant Shares offered hereby in addition to 20,000 shares of Common Stock. 173 ALTERNATE PAGE LOCK-UP ARRANGEMENTS The Selling Shareholders have agreed, prior to the closing of the Company Offering, that they will not publicly sell, offer to sell, contract to offer to sell, transfer, assign or pledge any of the Shares which are being registered on their behalf by the registration statement of which this Prospectus forms a part, for a period ranging from ninety days to thirteen months after the effective date of the registration statement without the prior written consent of First London Securities Corporation, as representative of the several Underwriters ("Representative"). The Selling Class E Warrantholders and Selling Class E Warrantholders have agreed, prior to the closing of the Company Offering, that they will not publicly sell, offer to sell, contract to offer to sell, transfer, assign or pledge any of the Class E Warrant Shares and Class B Warrant Shares which are being registered on their behalf by the registration statement of which this Prospectus forms a part, for a period of 180 days after the effective date of the registration statement without the prior written consent of the Representative. See "Risk Factors -- Shares Available for Future Sale" and "Description of Securities." PLAN OF DISTRIBUTION The distribution of the Selling Securities by the Selling Securityholders may be effected from time to time in transactions on Nasdaq, in negotiated transactions, through the writing of options on the Selling Securities, or a combination of such methods of sale, at fixed prices that may be changed, at market prices prevailing at the time of the sale, at prices related to such prevailing market prices, or at negotiated prices. The Selling Securityholders may effect such transactions by the sale of the Selling Securities to or through broker-dealers, and such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Securityholders and/or the purchasers of the Selling Securities for whom such broker-dealers may act as agent or to whom they may sell as principal, or both. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the Selling Securityholders in connection with sales of the Selling Securities. No underwriting arrangements have been entered into by the Selling Securityholders. The Selling Securityholders and intermediaries through whom the Selling Securities are sold may be deemed "underwriters" within the meaning of the Securities Act with respect to the securities offered and any profits realized or commissions received may be deemed underwriting compensation. 174 ALTERNATE PAGE - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING HEREIN CONTAINED, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO BUY ANY SECURITY OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES, OR AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OF SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE FACTS HEREIN SET FORTH SINCE THE DATE HEREOF. ------------------------ TABLE OF CONTENTS Prospectus Summary..................... Risk Factors........................... Capitalization......................... Dilution............................... Use of Proceeds........................ Selected Financial Data................ Management's Discussion and Analysis... Business............................... Management............................. Principal Stockholders and Selling Securityholders...................... Description of Securities.............. Concurrent Sales by Company............ Legal Matters.......................... Experts................................ Additional Information................. Index to Financial Statements..........
------------------------ UNTIL , 1997 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 728,229 SHARES OF COMMON STOCK 892,000 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF CLASS E WARRANTS 70,000 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF CLASS B WARRANTS BEVERAGE WORKS, INC. ------------------------------ PROSPECTUS ------------------------------ , 1997 - ------------------------------------------------------ - ------------------------------------------------------ 175 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. CALIFORNIA STATUTES Section 317 of the California General Corporation Law, as amended, provides for the indemnification of the Company's officers, directors, employees and agents under certain circumstances as follows: (a) For the purposes of this section, "agent" means any person who is or was a director, officer, employee or other agent of corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the corporation or of another enterprise at the request of the predecessor corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and "expenses" includes without limitation attorneys' fees and any expenses of establishing a right to indemnification under subdivision (d) or paragraph (4) of subdivision (e). (b) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the corporation to procure a judgment in its favor) by reason of the fact that the person is or was an agent of the corporation, against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with the proceeding if that person acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of the person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction, or upon a please of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of the corporation or that the person had reasonable cause to believe that the person's conduct was unlawful. (c) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was an agent of the corporation, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of the action if the person acted in good faith, in a manner the person believed to be in the best interests of the corporation and its shareholders. No indemnification shall be made under this subdivision for any of the following: (1) In respect of any claim, issue or matter as to which the person shall have been adjudged to be liable to the corporation in the performance of that person's duty to the corporation and its shareholders, unless and only to the extent that the court in which the proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine. (2) Of amounts paid in settling or otherwise disposing of a pending action without court approval. (3) Of expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval. (d) To the extent that an agent of a corporation has been successful on the merits in defense of any proceeding referred to in subdivision (b) or (c) or in defense of any claim, issue, or matter therein, the II-1 176 agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith. (e) Except as provided in subdivision (d), any indemnification under this section shall be made by the corporation only if authorized in the specific case, upon a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in subdivision (b) or (c), by any of the following: (1) A majority vote of a quorum consisting of directors who are not parties to such proceeding. (2) If such a quorum of directors is not obtainable, by independent legal counsel in a written opinion. (3) Approval of the shareholders (Section 153), with the shares owned by the person to be indemnified not being entitled to vote thereon. (4) The court in which the proceeding is or was pending upon application made by the corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not the application by the agent, attorney or other person is opposed by the corporation. (f) Expenses incurred in defending any proceeding may be advanced by the corporation prior to the final disposition of the proceeding upon receipt of an undertaking by or on behalf of the agent to repay that amount if it shall be determined ultimately that the agent is not entitled to be indemnified as authorized in this section. The provisions of subdivision (a) of Section 315 do not apply to advances made pursuant to this subdivision. (g) The indemnification authorized by this section shall not be deemed exclusive of any additional rights to indemnification for breach of duty to the corporation and its shareholders while acting in the capacity of a director or officer of the corporation to the extent the additional rights to indemnification are authorized in an article provision adopted pursuant to paragraph (11) of subdivision (1) of Section 204. The indemnification provided by this section for acts, omissions, or transactions while acting in the capacity of, or while serving as, a director or officer of the corporation but not involving breach of duty to the corporation and its shareholders shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any by-law, agreement, vote of shareholders or disinterested directors, or otherwise, to the extent the additional rights to indemnification are authorized in the articles of the corporation. An article provision authorizing indemnification "in excess of that otherwise permitted by Section 317" or "to the fullest extent permissible under California law" or the substantial equivalent thereof shall be construed to be both a provision for additional indemnification for breach of duty to the corporation and its shareholders as referred to in, and with the limitations required by, paragraph (11) of subdivision (a) of Section 204 and a provision for additional indemnification as referred to in the second sentence of this subdivision. The rights to indemnity hereunder shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of the person. Nothing contained in this section shall affect any right to indemnification to which persons other than the directors and officers may be entitled by contract or otherwise. (h) No indemnification or advance shall be made under this section, except as provided in subdivision (d) or paragraph (4) of subdivision (e), in any circumstance where it appears: (1) That it would be inconsistent with a provision of the articles, by-laws, a resolution of the shareholders, or an agreement in effect at the time of the accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification. (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. II-2 177 (i) A corporation shall have power to purchase and maintain insurance on behalf of any agent of the corporation against any liability asserted against or incurred by the agent in that capacity or arising out of the agent's status as such whether or not the corporation would have the power to indemnify the agent against that liability under this section. The fact that a corporation owns all or a portion of the shares of the company issuing a policy of insurance shall not render this subdivision inapplicable if either of the following conditions are satisfied: (1) if the articles authorize indemnification in excess of that authorized in this section and the insurance provided by this subdivision is limited as indemnification is required to be limited by paragraph (11) of subdivision (1) of Section 204; or (2)(A) the company issuing the insurance policy is organized, licensed, and operated in a manner that complies with the insurance laws and regulations applicable to its jurisdiction of organization, (B) the company issuing the policy provides procedures for processing claims that do not permit that company to be subject to the direct control of the corporation that purchased that policy, and (C) the policy issued provides for some manner of risk sharing between the issuer and purchaser of the policy, on one hand, and some unaffiliated person or persons, on the other, such as by providing for more than one unaffiliated owner of the company issuing the policy or by providing that a portion of the coverage furnished will be obtained from some unaffiliated insurer or reinsurer. (j) This section does not apply to any proceeding against any trustee, investment manager, or other fiduciary of an employee benefit plan in that person's capacity as such, even though the person may also be an agent as defined in subdivision (a) of the employer corporation. A corporation shall have power to indemnify such a trustee, investment manager, or other fiduciary to the extent permitted by subdivision (f) of Section 207. ARTICLES OF INCORPORATION The Company's Articles of Incorporation provides for the indemnification of the Company's directors under certain circumstances as follows: PART IV LIMITATION OF LIABILITY The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. PART V INDEMNIFICATION OF AGENTS This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the Corporations Code) for breach of duty to the corporation and its stockholders through bylaw provisions or through agreements with the agents, or both, in excess of the indemnification otherwise permitted by Section 317 of the Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 the Corporations Code. BY-LAWS The Company's By-Laws provide for the indemnification of the Company's directors, officers, employees, or agents under certain circumstances as follows: II-3 178 ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS SECTION 1. AGENTS, PROCEEDINGS, AND EXPENSES. For the purposes of this Article, "agent" means any person who is or was a director, officer, employee, or other agent of this corporation, or who is or was serving at the request of this corporation as a director, officer, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or who was a director, officer, employee, or agent of a foreign or domestic corporation that was a predecessor corporation of this corporation or of another enterprise at the request of such predecessor corporation; "proceeding" means any threatened, pending, or completed action or proceeding, whether civil, criminal, administrative, or investigative; and "expenses" includes, without limitation, attorney fees and any expenses of establishing a right to indemnification under Section 4 or Section 5(d) of this Article VI. SECTION 2. ACTIONS OTHER THAN BY THE CORPORATION. This corporation shall have the power to indemnify any person who was or is a party, or is threatened to be made a party, to any proceeding (other than an action by or in the right of this corporation to procure a judgment in its favor) by reason of the fact that such person is or was an agent of this corporation, against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with such proceeding if that person acted in good faith and in a manner that the person reasonably believed to be in the best interests of this corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of that person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner that the person reasonably believed to be in the best interests of this corporation or that the person had reasonable cause to believe that the person's conduct was not unlawful. SECTION 3. ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. This corporation shall have the power to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending, or completed action by or in the right of this corporation to procure a judgment in its favor by reason of the fact that such person is or was an agent of this corporation, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of that action, if such person acted in good faith, in a manner such person believed to be in the best interests of this corporation and its shareholders. No indemnification shall be made under this Section 3 for the following: (a) With respect to any claim, issue, or matter on which such person has been adjudged to be liable to this corporation in the performance of such person's duty to the corporation and its shareholders, unless and only to the extent that the court in which such proceeding is or was pending shall determine on application that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine; (b) Amounts paid in settling or otherwise disposing of a pending action without court approval; or (c) Expenses incurred in defending a pending action that is settled or otherwise disposed of without court approval. SECTION 4. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of this corporation has been successful on the merits in defense of any proceeding referred to in Section 2 or 3 of this Article VI, or in defense of any claim, issue, or matter II-4 179 therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith. SECTION 5. REQUIRED APPROVAL. Except as provided in Section 4 of this Article VI, any indemnification under this Section shall be made by the corporation only if authorized in the specific case, after a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in Section 2 or 3 by one of the following: (a) A majority vote of a quorum consisting of directors who are not parties to such proceeding; (b) Independent legal counsel in a written opinion if a quorum of directors who are not parties to such a proceeding is not available; (c) (i) The affirmative vote of a majority of shares of this corporation entitled to vote represented at a duly held meeting at which a quorum is present; or (ii) the written consent of holders of a majority of the outstanding shares entitled to vote (for purposes of this subsection 5(c), the shares owned by the person to be indemnified shall not be considered outstanding or entitled to vote thereon); or (d) The court in which the proceeding is or was pending, on application made by this corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not such application by the agent, attorney, or other person is opposed by this corporation. SECTION 6. ADVANCE OF EXPENSES. Expenses incurred in defending any proceeding may be advanced by the corporation before the final disposition of such proceeding on receipt of an undertaking by or on behalf of the agent to repay such amounts if it shall be determined ultimately that the agent is not entitled to be indemnified as authorized in this Article VI. SECTION 7. OTHER CONTRACTUAL RIGHTS. The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent such additional rights to indemnification are authorized in the articles of the corporation. Nothing in this section shall affect any right to indemnification to which persons other than such directors and officers may be entitled by contract or otherwise. SECTION 8. LIMITATIONS. No indemnification or advance shall be made under this Article VI, except as provided in Section 4 or Section 5(d), in any circumstance if it appears: (a) That it would be inconsistent with a provision of the articles, bylaws, a resolution of the shareholders, or an agreement in effect at the time of the accrual of the alleged cause of action asserted in the proceeding in which expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving settlement. SECTION 9. INSURANCE. This corporation may purchase and maintain insurance on behalf of any agent of the corporation insuring against any liability asserted against or incurred by the agent in that capacity or arising out of the II-5 180 agent's status as such, whether or not this corporation would have the power to indemnify the agent against that liability under the provisions of this Article VI. Notwithstanding the foregoing, if this corporation owns all or a portion of the shares of the company issuing the policy of insurance, the insuring company and/or the policy shall meet the conditions set forth in section 317(i) of the Corporations Code. SECTION 10. FIDUCIARIES OF CORPORATE EMPLOYEE BENEFIT PLAN. This Article VI does not apply to any proceeding against any trustee, investment manager, or other fiduciary of an employee benefit plan in that person's capacity as such, even though that person may also be an agent of the corporation. The corporation shall have the power to indemnify, and to purchase and maintain insurance on behalf of any such trustee, investment manager, or other fiduciary of any benefit plan for any or all of the directors, officers, and employees of the corporation or any of its subsidiary or affiliated corporations. SECTION 11. SURVIVAL OF RIGHTS. The rights provided by this Article VI shall continue for a person who has ceased to be an agent and shall inure to the benefit of the heirs, executors, and administrators of such person. SECTION 12. EFFECT OF AMENDMENT. Any amendment, repeal, or modification of this Article VI shall not adversely affect an agent's right or protection existing at the time of such amendment, repeal, or modification. SECTION 13. SETTLEMENT OF CLAIMS. The corporation shall not be liable to indemnify any agent under this Article VI for (a) any amounts paid in settlement of any action or claim effected without the corporation's written consent, which consent shall not be unreasonably withheld, or (b) any judicial award, if the corporation was not given a reasonable and timely opportunity to participate, at its expense, in the defense of such action. SECTION 14. SUBROGATION. In the event of payment under this Article VI, the corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the agent, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents as may be necessary to enable the corporation effectively to bring suit to enforce such rights. SECTION 15. NO DUPLICATION OF PAYMENTS. The corporation shall not be liable under this Article VI to make any payment in connection with any claim made against the agent to the extent the agent has otherwise actually received payment, whether under a policy of insurance, agreement, vote, or otherwise, of the amounts otherwise indemnifiable under this Article. WRITTEN AGREEMENTS The Company has entered into written agreements with each of its officers and directors, including Frederik G.M. Rodenhuis and Lyle R. Maul, pursuant to which the Company is required to indemnify each person under circumstances and to the extent generally equivalent to those which are permissible under the Company's By-Laws. II-6 181 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses in connection with the offering are as follows:
ITEM AMOUNT* ------------------------------------------------------------------ -------- Securities and Exchange Commission Registration Fee............... $ 17,252 National Association of Securities Dealers, Inc. and Blue Sky Registration Fees............................................... 25,000 Accounting Fees and Expenses...................................... 167,000 Legal Fees and Expenses........................................... 120,000 Printing, Design and Advertising.................................. 100,000 Underwriters' Non-Accountable Expense Allowance................... 276,750 Miscellaneous..................................................... 50,000 -------- Total........................................................... 756,002 ========
- --------------- * Estimated ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. Within the last three (3) years, the Company has issued the following securities which were not registered under the Securities Act of 1933. On August 2, 1995, the date of incorporation, the Company authorized the issuance of 245,310 shares of Common Stock to its founders for $0.01 per share. The shares were issued in reliance on the exemption from registration under Section 4(2) of the 1933 Act. On October 6, 1995, the Company authorized the issuance of 192,400 shares of its common stock and 190,000 warrants to purchase shares of the Company's Common Stock, exercisable at $8.25 per share. The gross proceeds realized from the issuance was $76,756. 2,810,000 warrants to were issued to Imafina, S.A., a Swiss money management firm. The gross proceeds realized from the sale was $28,000. Imafina, S.A. sold 100,000 warrants to one of the Company's existing shareholders. The Company authorized the issuance of 1,342,700 shares of its common stock to Adam Wachtel. The gross proceeds realized from the sale was $67,135. On November 22, 1996, Mr. Wachtel sold 182,484 shares to a third party in reliance on Sections 4(1) and 4(2) of the 1933 Act. Mr. Wachtel returned 1,160,216 shares to the Company and such shares were retired. These issuances were made in reliance on the exemption from registration under Section 4(2) of the 1933 Act. On October 31, 1995, the Company issued 14,000 shares of its Common Stock and 15,583 warrants to purchase shares of the Company's Common Stock exercisable at $4.50 per share to Hecht & Steckman, P.C., counsel to the Company. The gross proceeds realized from the sale was $140.00. This issuance was made in reliance on the exemption from registration under Section 4(2) of the 1933 Act. On November 8, 1995, the Company acquired Heritage Brewing Company in a stock-for-stock exchange. The Company acquired 94.85% of all of the outstanding voting capital stock of Heritage in exchange for 142,276 shares of the Company's Common Stock. The Heritage shareholders have an option to call the Heritage stock if the Company does not close a public offering of the Company's common stock realizing gross proceeds of at least $5,000,000 by March 31, 1997. The issuance was made in reliance on the exemption from registration under Section 3(a)(9) of the 1933 Act. On November 12, 1995, the Company authorized the issuance of 49,015 shares of its Common Stock to John Stoner and Mark Mericle as consideration for consulting services provided to the Company. The Company also issued 5,333 shares to Jack Stoner and Edward Hansen to reduce notes owed by Heritage. The shares were issued in reliance on the exemption from registration under Section 4(2) of the 1933 Act. On November 15, 1995, the Company authorized the issuance of 16,583 shares to certain parties for consulting services previously rendered to the Company and advances made to the Company at its pre- II-7 182 formation stages in the total amount of $57,034. On January , 1997, the Company authorized the issuance of 2,000 $8.25 warrants to Kevin McCarthy which was to have been issued November 15, 1995. The issuance was made in reliance on the exemption from registration under Section 4(2) of the 1933 Act. On November 20, 1995, the Company made a nonpublic offer of 400,000 shares of Common Stock at the price of $4.00 per share. These offers and sales were conducted by an NASD member firm in consideration for payment of commission of 9%, plus 3% nonaccountable expense allowance, of the gross proceeds. On August 28, 1996, the Company authorized the acceptance of additional subscriptions of 15,000 causing the total number of shares issued in the private placement to be 413,746. The 413,746 shares in the private placement were sold to fourteen (14) investors realizing gross proceeds, before deducting for commissions and expenses of $1,654,984. The private placement was made in reliance on the exemption from registration afforded by Rule 506 of Regulation D promulgated under the 1933 Act. On January 22, 1996, the Company authorized the issuance of 6,500 shares of its Common Stock to C.A. Wittwer & Associates and its designees as part of the consideration for the license agreements between Heritage Brewing Company, a subsidiary of the Company, and C.A. Wittwer & Associates. Heritage and the Company have executed an agreement whereby the Company has the right to assume the contract upon the close of a public offering by the Company realizing gross proceeds of at least $5,000,000 on or before December 31, 1995. The sale was made in reliance on the exemption from registration afforded by Section 4(2) of the 1933 Act. On May 20, 1996, the Company issued a $500,000 promissory note, secured by all equipment, inventory and accounts receivable of the Company, and warrants to Frederick Friedman. The note, which pays simple interest at 18% per annum, mature on the earlier of (i) closing of a public offering by the Company with aggregate gross proceeds of no less than $6,000,000, or (ii) December 31, 1996. Interest is payable monthly until the principal is paid in full. The purchaser of the note was also granted 35,000 Class B Warrants, which are registered in this Offering, to purchase shares of the Company's Common Stock. If the Company does not close a public offering by December 31, 1996, the purchaser is entitled to an additional 35,000 warrants on the same terms and conditions. The sale was made in reliance on the exemption from registration afforded by Section 4(2) of the 1933 Act. On December , 1996, the Company issued 20,000 shares of Common Stock to Mr. Friedman as consideration for extending the maturity date of the note to April 15, 1997. The Company also issued the additional 35,000 Class B Warrants as provided under the note. The Company received no cash or other property for the issuance of the shares or additional Class B Warrants. The Common Stock issuable upon exercise of the Class B Warrants are being registered in this offering subject to a 180 day lock-up. The issuance was made in reliance on the exemption from registration afforded by Section 4(2) of the 1933 Act. On August 5, 1996, the Company made a nonpublic offer of 32,500 units, each unit consisting of two shares of the Corporation's common stock and one Class H Warrant at the price of $10.00 per unit. These offers and sales were conducted by an NASD member firm in consideration for payment of commission of 10% of the gross proceeds. The offer closed after 15,000 units were subscribed by two (2) investors realizing gross proceeds, before deducting for commissions and expenses of $150,000. The private placement was made in reliance on the exemption from registration afforded by Rule 506 of Regulation D promulgated under the 1933 Act. On September 11, 1996, the Company entered into a Share Purchase Agreement with the shareholders of Orange Empire Brewing Company ("OEBC"), the parent of Riverside Brewing Company. Under the terms of the Share Purchase Agreement, as amended by the Amendment Agreement dated January 7, 1997, the Company will issue up to 141,063 shares of its Common Stock for all of the voting capital stock of OEBC. The Company will also issue 27,618 shares to shareholders of Orange Empire for assuming certain Orange Empire debts and up to 155,000 shares based on Orange Empire meeting certain production levels. On September 10, 1996, the Company entered into a Debt Exchange Agreement, which provides that the Company will issue 24,125 shares of its Common Stock to certain holders of OEBC's debts in return for extinguishing such debt. On September 10, 1996, the Company and two individuals, Mike Hagerman and Norman Kretschmar, two principals of OEBC, entered into the Brewpub Management Agreement, whereby the two individuals will operate the brewpub. Under the Brewpub Management Agreement, the Company will also issue 10,000 shares II-8 183 to these individuals. The Share Purchase Agreement, Debt Exchange Agreement, and Brewpub Management Agreement each provide that these respective transactions will close on the closing of a public offering by the Company of the Company's Common Stock realizing gross proceeds of at least $6,000,000. The issuance of shares of Common Stock under the Share Purchase Agreement, Debt Exchange Agreement and Brewpub Management Agreement was made in reliance on the exemption from registration afforded by Rule 506 of Regulation D promulgated under the 1933 Act. On December 10, 1996, the Company sold a $250,000 unsecured promissory note to Patrick Miller, a shareholder of the Company. The note, which pays simple interest at 12% per annum, matures on the earlier of (i) closing of a public offering by the Company with aggregate gross proceeds of no less than $6,000,000, or (ii) September 1, 1997. Interest is payable at maturity. The sale was made in reliance on the exemption from registration afforded by Section 4(2) of the 1933 Act. On December 28, 1996, the Company issued 60,000 shares of its Common Stock to Donald Scott under the terms of a consulting agreement with Mr. Scott. The Company received no cash or property for the shares. The shares were issued in reliance on the exemption from registration under Section 4(2) of the 1933 Act. 25,000 of the shares are being registered in this offering subject to a 90 day lock-up. Mr. Scott has been granted demand registration rights for the remaining 35,000 which allow Mr. Scott to demand the Company file a registration statement within 180 days from the effective date of this Registration Statement and use reasonable good faith efforts to cause such registration statement become effective. The Company had reasonable grounds to believe, prior to accepting the subscription of each purchaser under all offers and sales under this Item 26 based in part on subscription agreements or investment letters executed by the purchasers, that the purchasers were purchasing for investment and not with a view to distribution. Other than in connection with the private placements of common stock on November 20, 1995 and August 8, 1996, there were no broker-dealers involved in any of the transactions listed above. ITEM 27. EXHIBITS.
EXHIBIT NUMBER DESCRIPTION ------ -------------------------------------------------------------------------- 1.1 [Form of] Underwriting Agreement(3) 1.2 [Form of] Agreement Among Underwriters(3) 1.3 [Form of] Selected Dealers Agreement(3) 2.1 Agreement and Plan of Reorganization dated November 8, 1995 between the Company and Heritage Brewing Company, a California corporation, and exhibits thereto(1)(4) 2.2 Agreement of Partnership and Contribution Agreement dated December 17, 1996 between Prost Partners, L.P., a California limited partnership, and BWI-St. Stan's, Inc., a California corporation, a wholly-owned subsidiary of the Company(1)(4) 2.3 Share Purchase Agreement dated September 10, 1996, and the Amendment Agreement dated January 7, 1997, between Orange Empire Brewing Company, Inc., a California corporation and the Company and exhibits thereto(1)(4) 2.4 Debt Exchange Agreement Orange Empire Brewing Company, et al, and the Company dated September 11, 1996.(1) 3.1 Amended and Restated Articles of Incorporation of the Company(1) 3.2 By-Laws of the Company(1) 4.1 Specimen of Common Stock Certificate* 4.2 Warrant Agreement(3) 4.3 Class B Warrant Agreement(1) 4.4 [No Exhibit] 4.5 [No Exhibit] 4.6 [No Exhibit] 4.7 [No Exhibit] 4.8 [No Exhibit]
II-9 184
EXHIBIT NUMBER DESCRIPTION ------ -------------------------------------------------------------------------- 4.9 $500,000 Note Agreement and Promissory Note dated May 7, 1996 between the Company and Frederick Friedman(1) 4.10 Owens Financial Note(1) 4.11 Class E Warrant Agreement(3) 4.12 Registration Rights Agreement -- Class E Warrants(3) 4.13 Registration Rights Agreement -- Class B Warrants(3) 4.14 $500,000 Note Exchange Agreement and Revised Promissory Note dated December 19, 1996(3) 4.15 Representative's Warrant Agreement(3) 5.1 Opinion of Hecht & Steckman, P.C. re: legality of shares* 10.1 $445,000 Small Business Administration Loan dated November 10, 1993 between Heritage and Liberty National Bank(3) 10.2 Equipment Lease Agreement dated December 20, 1993, as amended, between Riverside Brewing Company and Brewery Leasing Company(3) 10.3 Ground Lease Agreement dated June 6, 1988 between Randall and Susan Steele and Stanislaus Brewing Company, Inc., as amended(3) 10.4 Riverside Brewing Company Brewery Lease with Hunsaker-Hunter dated April 1, 1995(1) 10.5 Riverside Brewing Company Brewery Lease with Hunsaker-Hunter dated December 6, 1995(1) 10.6 Riverside Brewing Company Brewpub Lease with Kowashoji USA, Inc. dated March 31, 1993(1) 10.7 Lease between Heritage Brewing Company and Central Business Park Investors -- 89 dated November 3, 1993(1)(4) 10.8 Employment Agreement between the Company and Frederik G.M. Rodenhuis dated December 31, 1996(1)(4) 10.9 Employment Agreement between the Company and Lyle R. Maul dated December 31, 1996(1)(4) 10.10 Employment Agreement between the Company and John Stoner(1) 10.11 Employment Agreement between the Company and Kathy Burke(1) 10.12 Employment Agreement between the Company and Garith Helm(1) 10.13 Distributorship Agreement dated August 20, 1996 between the Company and Southern Wine and Spirits(1) 10.14 Distributorship Agreement dated June 6, 1995 between Riverside Brewing Company and Wine Warehouse* 10.15 Distributorship Agreement dated August 1, 1996 between the Company and Cabo Distributing Company, Inc.(1) 10.16 1996 Nonqualified Stock Option Plan(1) 10.17 1996 Incentive Stock Option Plan(1) 10.18 Incentive Compensation Plan(3) 10.19 Hussong's License Agreement dated February 3, 1996 between Heritage Brewing Company and C.A. Wittwer & Associates(1) 10.20 Reciprocal Production and Marketing Agreement dated August 1, 1996 between the Company and Chicago Brewing Company* 10.21 Management Agreement between Riverside Brewing Company and the Company dated July 19, 1996(1) 10.22 [No Exhibit]
II-10 185
EXHIBIT NUMBER DESCRIPTION ------ -------------------------------------------------------------------------- 10.23 Keg Management Agreement dated December 2, 1996 between Heritage Brewing Company and MicroStar Keg Management, L.L.C.(3) 10.24 Office Lease dated November 22, 1996 between Edwards Theatres Circuit, Inc. and Beverage Works, Inc.(3) 10.25 Sublease Agreement dated January 1, 1997 between The Deretin Group and Beverage Works, Inc.(3) 10.26 Non-Employee Director Compensation Plan and Directors' Warrant Agreement(3) 11. Computation of Earnings (Loss) Per Share(3) 21.1 List of Subsidiaries(1) 23.1 Consent of Hecht & Steckman, P.C.* 23.2 Consent of Corbin & Wertz(3) 23.3 Consent of Corbin & Wertz(3) 23.4 Consent of Corbin & Wertz(3) 27.1 Financial Data Schedule(3)
- --------------- * To be filed by amendment. (1) Filed as part of the original filing of the registration statement on September 11, 1996. (2) Filed as part of this Amendment No. 1 to the registration statement on September 12, 1996. (3) Filed as part of this Amendment No. 2 to the registration statement on January 13, 1997. (4) Exhibit previously filed amended in Amendment No. 2 to the registration statement filed January 13, 1997. ITEM 28. UNDERTAKINGS. A. The undersigned registrant hereby undertakes (a) to file during any period in which offers or sales of the securities are being made, a post-effective amendment to this registration statement including any prospectus required by Section 10(a)(3) of the Securities Act of 1933, reflecting any facts or events arising after the effective date of the registration statement (or most recent post-effective amendment) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement, and including any material information with respect to the plan of distribution not previously disclosed or any material change to such information set forth in the registration statement. The undersigned registrant further undertakes that, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant further undertakes to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. B. The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. C. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-11 186 D. For determining any liability under the Securities Act of 1933, the registrant shall treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective. For determining any liability under the Securities Act of 1933, the registrant shall treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. II-12 187 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and has authorized this Amendment No. 2 to this registration statement to be signed on its behalf by the undersigned, in the City of Los Angeles, State of California, on January 10, 1997. BEVERAGE WORKS, INC., a California corporation By: /s/ LYLE R. MAUL ------------------------------------ Lyle R. Maul Chief Executive Officer In accordance with the requirements of the Securities Act of 1933, this Amendment No. 1 to this registration statement was signed by the following persons in the capacities and on the dates stated.
SIGNATURE TITLE DATE - ------------------------------------- ------------------------------------- ----------------- /s/ LYLE R. MAUL Chief Executive Officer, President January 10, 1997 - ------------------------------------- and Director Lyle R. Maul /s/ FREDERIK G.M. RODENHUIS Executive Vice President, Acting January 10, 1997 - ------------------------------------- Chief Financial Officer and Director Frederik G.M. Rodenhuis
II-13 188 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------ -------------------------------------------------------------------------- 1.1 [Form of] Underwriting Agreement(3) 1.2 [Form of] Agreement Among Underwriters(3) 1.3 [Form of] Selected Dealers Agreement(3) 2.1 Agreement and Plan of Reorganization dated November 8, 1995 between the Company and Heritage Brewing Company, a California corporation, and exhibits thereto(1)(4) 2.2 Agreement of Partnership and Contribution Agreement dated December 17, 1996 between Prost Partners, L.P., a California limited partnership, and BWI-St. Stan's, Inc., a California corporation, a wholly-owned subsidiary of the Company(1)(4) 2.3 Share Purchase Agreement dated September 10, 1996 between Orange Empire Brewing Company, Inc., a California corporation and the Company, the Amendment Agreement dated January 7, 1997, and exhibits thereto(1)(4) 2.4 Debt Exchange Agreement Orange Empire Brewing Company, et al, and the Company dated September 11, 1996.(1) 3.1 Amended and Restated Articles of Incorporation of the Company(1) 3.2 By-Laws of the Company(1) 4.1 Specimen of Common Stock Certificate* 4.2 Warrant Agreement(3) 4.3 Class B Warrant Agreement(1) 4.4 [No Exhibit] 4.5 [No Exhibit] 4.6 [No Exhibit] 4.7 [No Exhibit] 4.8 [No Exhibit] 4.9 $500,000 Note Agreement and Promissory Note dated May 7, 1996 between the Company and Frederick Friedman(1) 4.10 Owens Financial Note(1) 4.11 Class E Warrant Agreement(3) 4.12 Registration Rights Agreement -- Class E Warrants(3) 4.13 Registration Rights Agreement -- Class B Warrants(3) 4.14 $500,000 Note Exchange Agreement and Revised Promissory Note dated December 19, 1996(3) 4.15 Representative's Warrant Agreement(3) 5.1 Opinion of Hecht & Steckman, P.C. re: legality of shares* 10.1 $445,000 Small Business Administration Loan dated November 10, 1993 between Heritage and Liberty National Bank(3) 10.2 Equipment Lease Agreement dated December 20, 1993, as amended, between Riverside Brewing Company and Brewery Leasing Company(3) 10.3 Ground Lease Agreement dated June 6, 1988 between Randall and Susan Steele and Stanislaus Brewing Company, Inc., as amended(3) 10.4 Riverside Brewing Company Brewery Lease with Hunsaker-Hunter dated April 1, 1995(1)
189
EXHIBIT NUMBER DESCRIPTION ------ -------------------------------------------------------------------------- 10.5 Riverside Brewing Company Brewery Lease with Hunsaker-Hunter dated December 6, 1995(1) 10.6 Riverside Brewing Company Brewpub Lease with Kowashoji USA, Inc. dated March 31, 1993(1) 10.7 Lease between Heritage Brewing Company and Central Business Park Investors -- 89 dated November 3, 1993(1)(4) 10.8 Employment Agreement between the Company and Frederik G.M. Rodenhuis dated December 31, 1996(1)(4) 10.9 Employment Agreement between the Company and Lyle R. Maul dated December 31, 1996(1)(4) 10.10 Employment Agreement between the Company and John Stoner(1) 10.11 Employment Agreement between the Company and Kathy Burke(1) 10.12 Employment Agreement between the Company and Garith Helm(1) 10.13 Distributorship Agreement dated August 20, 1996 between the Company and Southern Wine and Spirits(1) 10.14 Distributorship Agreement dated June 6, 1995 between Riverside Brewing Company and Wine Warehouse* 10.15 Distributorship Agreement dated August 1, 1996 between the Company and Cabo Distributing Company, Inc.(1) 10.16 1996 Nonqualified Stock Option Plan(1) 10.17 1996 Incentive Stock Option Plan(1) 10.18 Incentive Compensation Plan(3) 10.19 Hussong's License Agreement dated February 3, 1996 between Heritage Brewing Company and C.A. Wittwer & Associates(1) 10.20 Reciprocal Production and Marketing Agreement dated August 1, 1996 between the Company and Chicago Brewing Company* 10.21 Management Agreement between Riverside Brewing Company and the Company dated July 19, 1996(1) 10.22 [No Exhibit] 10.23 Keg Management Agreement dated December 2, 1996 between Heritage Brewing Company and MicroStar Keg Management, L.L.C.(3) 10.24 Office Lease dated November 22, 1996 between Edwards Theatres Circuit, Inc. and Beverage Works, Inc.(3) 10.25 Sublease Agreement dated January 1, 1997 between The Deretin Group and Beverage Works, Inc.(3) 10.26 Non-Employee Director Compensation Plan and Directors' Warrant Agreement(3) 11. Computation of Earnings (Loss) Per Share(3) 21.1 List of Subsidiaries(1)
190
EXHIBIT NUMBER DESCRIPTION ------ -------------------------------------------------------------------------- 23.1 Consent of Hecht & Steckman, P.C.* 23.2 Consent of Corbin & Wertz(3) 23.3 Consent of Corbin & Wertz(3) 23.4 Consent of Corbin & Wertz(3) 27.1 Financial Data Schedule(3)
- --------------- * To be filed by amendment. (1) Filed as part of the original filing of the registration statement on September 11, 1996. (2) Filed as part of Amendment No. 1 to the registration statement on September 12, 1996. (3) Filed as part of this Amendment No. 2 to the registration statement on January 13, 1997. (4) Exhibit previously filed amended in Amendment No. 2 to the registration statement filed January 13, 1997. EX-1.1 2 [FORM OF] UNDERWRITING AGREEMENT 1 Exhibit 1.1 BEVERAGE WORKS, INC. 1,500,000 SHARES OF COMMON STOCK AND 1,500,000 REDEEMABLE CLASS A COMMON STOCK PURCHASE WARRANTS UNDERWRITING AGREEMENT Dallas, Texas _________ , 1997 First London Securities Corporation 2600 State Street Dallas, Texas 75204 Gentlemen: BEVERAGE WORKS, INC. (the "Company"), on the basis of the representations, warranties, covenants and conditions contained herein, hereby proposes to issue and sell to such Underwriters as named in Schedule A (the "Underwriters") to this Underwriting Agreement (the "Agreement"), for whom First London Securities Corporation is acting as the representative (the "Representative"), pursuant to the terms of this Agreement, on a "firm commitment" basis, 1,500,000 shares of Common Stock (the "Shares") at $____ per Share and 1,500,000 Redeemable Class A Common Stock Purchase Warrants (the "Warrants") at $____ per Warrant. The Shares and the Warrants are collectively referred to as the "Securities". Each Warrant is exercisable to purchase one (1) share of Common Stock (the "Common Stock") at the Initial Public Offering Price per share at any time during the period between the Effective Date and five (5) years from the Effective Date. The date upon which the Securities and Exchange Commission ("Commission") shall declare the registration statement of the Company effective shall be the "Effective Date". The Warrants are subject to redemption under certain circumstances. In addition, the Company proposes to grant to the Underwriters (or, at the option of the Representative, to the Representative, individually) the option referred to in Section 2(b) to purchase all or any part of an aggregate of 225,000 additional Shares and/or 225,000 additional Warrants (the "Option Securities"). You have advised the Company that you and the other Underwriters desire to purchase, severally, the Securities, and that you have been authorized by the Underwriters to execute this Agreement on their behalf. The Company confirms the agreements made by it with respect to the purchase of the Securities by the several Underwriters on whose behalf you are signing this Agreement, as follows: 1 2 1. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with each of the Underwriters as of the Effective Date (as defined above), the Closing Date (as hereinafter defined) and the Option Closing Date (as hereinafter defined) that: (a) A registration statement (File No. 333-11789) on Form SB-2 relating to the public offering of the Securities, including a preliminary form of the prospectus, copies of which have heretofore been delivered to you, has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules and Regulations") of the Commission thereunder, and has been filed with the Commission under the Act. The Company has prepared in the same manner and proposes to file, prior to the Effective Date of such registration statement, an additional amendment or amendments to such registration statement, including a final form of Prospectus, copies of which shall be delivered to you. "Preliminary Prospectus" shall mean each prospectus filed pursuant to the Rules and Regulations under the Act prior to the Effective Date. The registration statement (including all financial schedules and exhibits) as amended at the time it becomes effective and the final prospectus included therein are respectively referred to as the "Registration Statement" and the "Prospectus", except that (i) if the prospectus first filed by the Company pursuant to Rule 424(b) of the Rules and Regulations shall differ from said prospectus as then amended, the term "Prospectus" shall mean the prospectus first filed pursuant to Rule 424(b), and (ii) if such registration statement or prospectus is amended or such prospectus is supplemented, after the effective date of such registration statement and prior to the Option Closing Date (as hereinafter defined) , the terms "Registration Statement" and "Prospectus" shall include such registration statement and prospectus as so amended, and the term "Prospectus" shall include the prospectus as so supplemented, or both, as the case may be. (b) At the Effective Date and at all times subsequent thereto up to the Option Closing Date, if any, and during such longer period as the Prospectus may be required to be delivered in connection with sales by the Underwriters or Selected Dealers: (i) the Registration Statement and Prospectus will in all respects conform to the requirements of the Act and the Rules and Regulations; and (ii) neither the Registration Statement nor the Prospectus will include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make statements therein, in light of the circumstances under which they are made, not misleading; provided, however, that the Company makes no representations, warranties or agreement as to information contained in or omitted from the Registration Statement or Prospectus in reliance upon, and in conformity with, written information furnished to the Company by the Underwriters specifically for use in the preparation thereof. It is understood that the statements set forth in the Prospectus with respect to stabilization, under the heading "Underwriting" and regarding the identity of counsel to the Underwriters under the heading "Legal Matters" constitute the only information furnished in writing by the Underwriters for inclusion in the Prospectus. 2 3 (c) Each of the Company and each subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with full power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus and is duly qualified to do business as a foreign corporation and is in good standing in all other jurisdictions in which the nature of its business or the character or location of its properties requires such qualification, except where failure to so qualify will not materially affect the Company's business, properties or financial condition. (d) The authorized, issued and outstanding securities of the Company as of the date of the Prospectus is as set forth in the Prospectus under "Capitalization"; all of the issued and outstanding securities of the Company have been, or will be when issued as set forth in the Prospectus, duly authorized, validly issued and fully paid and non-assessable; the issuances and sales of all such securities complied in all material respects with applicable Federal and state securities laws; the holders thereof have no rights of rescission against the Company with respect thereto, and are not subject to personal liability by reason of being such holders; none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company; except as set forth in the Prospectus, no options, warrants or other rights to purchase, agreements or other obligations to issue, or agreements or other rights to convert any obligation into, any securities of the Company have been granted or entered into by the Company; and all of the securities of the Company, issued and to be issued as set forth in the Registration Statement, conform to all statements relating thereto contained in the Registration Statement and Prospectus. (e) The Shares are duly authorized, and when issued, delivered and paid for pursuant to this Agreement, will be duly authorized, validly issued, fully paid and non-assessable and free of preemptive rights of any security holder of the Company. Neither the filing of the Registration Statement nor the offering or sale of the Securities as contemplated in this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any securities of the Company, except as described in the Registration Statement and Prospectus. The Warrants have been duly authorized and, when issued, delivered and paid for pursuant to this Agreement, will have been duly authorized, issued and delivered and will constitute valid and legally binding obligations of the Company enforceable in accordance with their terms and entitled to the benefits provided by the warrant agreement pursuant to which such Warrants are to be issued (the "Warrant Agreement"), which will be substantially in the form filed as an exhibit to the Registration Statement. The shares of Common Stock issuable upon exercise of the Warrants have been reserved for issuance and when issued in accordance with the terms of the Warrants and Warrant Agreement, will be duly and validly authorized, validly issued, fully paid and non-assessable, free of preemptive rights and no personal liability will attach to the ownership thereof. The Warrant exercise period and the Warrant exercise price may not be changed or revised by the Company without the prior written consent of the Representative. The Warrant Agreement has been duly authorized and, when executed and 3 4 delivered pursuant to this Agreement will constitute the valid and legally binding obligation of the Company enforceable in accordance with its terms. The Common Stock Representative Warrants, the Warrant Representative Warrants, the Underlying Warrants, the shares of Common Stock issuable upon exercise of the Common Stock Representative Warrants, and the shares of Common Stock issuable upon exercise of the Underlying Warrants (all as defined in the Representative's Warrant Agreement described in Section 12 herein), have been duly authorized and, when issued, delivered and paid for, will be validly issued, fully paid, non-assessable, free of preemptive rights and no personal liability will attach to the ownership thereof, and will constitute valid and legally binding obligations of the Company enforceable in accordance with their terms and entitled to the benefits provided by the Representative's Warrant Agreement. (f) This Agreement, the Warrant Agreement, the Merger and Acquisition Agreement (the "M/A Agreement") and the Representative's Warrant Agreement have been duly and validly authorized, executed and delivered by the Company, and assuming due execution of this Agreement by the other party hereto, constitute valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency or other laws affecting the rights of creditors generally. The Company has full power and lawful authority to authorize, issue and sell the Securities to be sold by it hereunder on the terms and conditions set forth herein, and no consent, approval, authorization or other order of any third party or any governmental authority is required in connection with such authorization, execution and delivery or with the authorization, issuance and sale of the Securities or the securities to be issued pursuant to the Representative's Warrant Agreement, except such as may be required under the Act or state securities laws, or as otherwise have been obtained. (g) Except as described in the Prospectus, neither the Company nor any subsidiary is in material violation, breach of or default under, and consummation of the transactions herein contemplated and the fulfillment of the terms of this Agreement will not conflict with, or result in a breach of, or constitute a material default under, or result in the creation or imposition of any lien, charge or encumbrance upon any of the property or assets of the Company or each subsidiary or any of the terms or provisions of any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or each subsidiary is a party or by which the Company or each subsidiary may be bound or to which any of the property or assets of the Company or each subsidiary is subject, nor will such action result in any material violation of the provisions of the articles of incorporation or bylaws as amended of the Company or each subsidiary, or any statute or any order, rule or regulation applicable to the Company or subsidiary of any court or of any regulatory authority or other governmental body having jurisdiction over the Company or each subsidiary. 4 5 (h) Subject to the qualifications stated in the Prospectus, the Company and each subsidiary have good and marketable title to all properties and assets described in the Prospectus as owned by each of them, free and clear of all liens, charges, encumbrances or restrictions, except such as are not materially significant or important in relation to its business; all of the material leases and subleases under which the Company or each subsidiary is the lessor or sublessor of properties or assets or under which the Company or each subsidiary holds properties or assets as lessee or sublessee as described in the Prospectus are in full force and effect, and, except as described in the Prospectus, neither the Company nor each subsidiary is in default in any material respect with respect to any of the terms or provisions of any of such leases or subleases, and no claim has been asserted by anyone, adverse to rights of the Company or each subsidiary as lessor, sublessor, lessee, or sublessee under any of the leases or subleases mentioned above, or affecting or questioning the right of the Company or each subsidiary to continued possession of the leased or subleased premises or assets under any such lease or sublease except as described or referred to in the Prospectus; and the Company and each subsidiary owns or leases all such properties described in the Prospectus as are necessary to its operations as now conducted and, except as otherwise stated in the Prospectus, as proposed to be conducted as set forth in the Prospectus. (i) CORBIN & WERTZ, who have given their report on certain financial statements filed and to be filed with the Commission as part of the Registration Statement, and which are included in the Prospectus, are with respect to the Company, independent public accountants as required by the Act and the Rules and Regulations. (j) The financial statements and schedules, together with related notes, set forth in the Prospectus and the Registration Statement present fairly the financial position and results of operations and changes in financial position of the Company on the basis stated in the Registration Statement, at the respective dates and for the respective periods to which they apply. Said statements and related notes and schedules have been prepared in accordance with generally accepted accounting principles applied on a basis which is consistent during the periods involved. The Company's internal accounting controls and procedures are sufficient to cause the Company and each subsidiary to prepare financial statements which comply in all material respects with generally accepted accounting principles applied on a basis which is consistent during the periods involved. During the preceding five (5) year period, nothing has been brought to the attention of the Company's management that would result in any reportable condition relating to the Company's internal accounting procedures, weaknesses or controls. (k) Subsequent to the respective dates as of which information is set forth in the Registration Statement and the Prospectus and to and including the Option Closing Date, except as set forth in or contemplated by the Registration Statement and the Prospectus, (i) neither the Company nor any subsidiary has incurred and will not have incurred any material liabilities or obligations, direct or contingent, and has not entered into and will not have entered into any material transactions other than in the ordinary course of business and/or as contemplated in the Registration Statement and the Prospectus; (ii) neither the Company nor any subsidiary has and will not have paid or declared any dividends or have made any other distribution on its capital stock; (iii) there has not been any change in the capital stock of, or any incurrence of long-term 5 6 debt by, the Company or any subsidiary; (iv) neither the Company nor any subsidiary has issued any options, warrants or other rights to purchase the capital stock of the Company or any subsidiary; and (v) there has not been and will not have been any material adverse change in the business, financial condition or results of operations of the Company or any subsidiary, or in the book value of the assets of the Company or any subsidiary, arising for any reason whatsoever. (1) Except as set forth in the Prospectus, there is not pending or, to the knowledge of the Company or any subsidiary, threatened, any material action, suit, proceeding, inquiry, arbitration or investigation against the Company or any subsidiary, or any of the officers or directors of the Company or any subsidiary, or any material action, suit, proceeding, inquiry, arbitration, or investigation, which might result in any material adverse change in the condition (financial or other), business prospects, net worth, or properties of the Company or any subsidiary. (m) Except as disclosed in the Prospectus, each of the Company and each subsidiary has filed all necessary federal, state and foreign income and franchise tax returns and has paid all taxes shown as due thereon; and there is no tax deficiency which has been or to the knowledge of the Company might be asserted against the Company or any subsidiary that has not been provided for in the financial statements. (n) Except as set forth in the Prospectus, each of the Company and each subsidiary has sufficient licenses, permits and other governmental authorizations currently required for the conduct of its business or the ownership of its property as described in the Prospectus and is in all material respects in compliance therewith and owns or possesses adequate right to use all material patents, patent applications, trademarks, service marks, trade-names, trademark registrations, service mark registrations, copyrights, and licenses necessary for the conduct of such business and has not received any notice of conflict, with the asserted rights of others in respect thereof. To the best of the Company's knowledge, none of the activities or business of the Company or any subsidiary are in violation of, or cause the Company or any subsidiary to violate, any law, rule, regulation or order of the United States, any state, county or locality, or of any agency or body of the United States or of any state, county or locality, the violation of which would have a material adverse impact upon the condition (financial or otherwise), business, property, prospective results of operations, or net worth of the Company and any subsidiary. (o) Neither the Company nor any subsidiary has, directly or indirectly, at any time (i) made any contributions to any candidate for political office, or failed to disclose fully any such contribution, in violation of law or (ii) made any payment to any state, federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments or contributions required or allowed by applicable law. 6 7 (p) On the Closing Dates (herein defined) all transfer or other taxes (including franchise, capital stock or other tax, other than income taxes, imposed by any jurisdiction) if any, which are required to be paid in connection with the sale and transfer of the Securities to the several Underwriters hereunder will have been fully paid or provided for by the Company and all laws imposing such taxes will have been fully complied with. (q) All contracts and other documents which are required to be described in or filed as exhibits to the Registration Statement have been so described and/or filed. (r) Except as described in the Registration Statement and Prospectus, no holders of Common Stock or of any other securities of the Company have the right to include such Common Stock or other securities in the Registration Statement and Prospectus. (s) Except as set forth in or contemplated by the Registration Statement and the Prospectus, neither the Company nor any subsidiary has any material contingent liabilities. (t) The Company has no subsidiary corporations except as disclosed in the Registration Statement and Prospectus, nor has it any equity interest in any partnership, joint venture, association or other entity except as disclosed in the Registration Statement or Prospectus. Except as described in the Registration Statement and Prospectus, the Company owns all of the outstanding securities of each of its subsidiaries. (u) The Commission has not issued an order preventing or suspending the use of any Preliminary Prospectus with respect to the offer and sale of the Securities and each Preliminary Prospectus, as of its date, has conformed fully in all material respects with the requirements of the Act and the Rules and Regulations and did not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading. (v) Neither the Company, nor, to the Company's knowledge, any of its officers, directors, employees or stockholders, have taken or will take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any of the securities of the Company. (w) Item 26 of Part II of the Registration Statement accurately discloses all unregistered securities sold by the Company within the three year period prior to the date as of which information is presented in the Registration Statement. All of such securities were sold in transactions which were exempt from the registration provisions of the Act and not in violation of Section 5 thereof. (x) Other than as set forth in the Prospectus, the Company has not entered into any agreement pursuant to which any person is entitled, either directly or indirectly, to compensation from the Company for services as a finder in connection with the proposed offering, and the Company agrees to indemnify and hold harmless the Underwriters against any losses, claims, damages or liabilities, joint or several, which shall include, but not be limited to, all costs to defend against any such claim, so long as such claim arises out of agreements made or allegedly 7 8 made by the Company. (y) Based upon written representations received by the Company, no officer, director or five percent (5%) or greater stockholder of the Company or any subsidiary has any direct or indirect affiliation or association with any member of the National Association of Securities Dealers, Inc. ("NASD"), except as disclosed to the Representative in writing, and no beneficial owner of the Company's unregistered securities has any direct or indirect affiliation or association with any NASD member except as disclosed to the Representative in writing. The Company will advise the Representative and the NASD if any five percent (5%) or greater share-holder of the Company or any subsidiary is or becomes an affiliate or associated person of an NASD member participating in the distribution. (z) The Company and each subsidiary is in compliance in all material respects with all federal, state and local laws and regulations respecting the employment of its employees and employment practices, terms and conditions of employment and wages and hours relating thereto. There are no pending investigations involving the Company or any subsidiary by the U.S. Department of Labor, or any other governmental agency responsible for the enforcement of such federal, state or local laws and regulations. There is no unfair labor practice charge or complaint against the Company or any subsidiary pending before the National Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage pending or to the knowledge of the Company, threatened against or involving the Company or any subsidiary or any predecessor entity. No question concerning representation exists respecting the employees of the Company or any subsidiary and no collective bargaining agreement or modification thereof is currently being negotiated by the Company or any subsidiary. No grievance or arbitration proceeding is pending under any expired or existing collective bargaining agreements of the Company or any subsidiary, if any. (aa) Neither the Company nor any subsidiary maintains, sponsors nor contributes to, nor is it required to contribute to, any program or arrangement that is an "employee pension benefit plan" an "employee welfare benefit plan", or a "multi-employer plan" as such terms are defined in Sections 3(2), 3(i) and 3(37), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). Neither the Company nor any subsidiary maintained or contributed to a defined benefit plan, as defined in Section 3(35) of ERISA. (ab) Based upon written representations received from the officers and directors of the Company and each subsidiary, except as disclosed in the Prospectus, during the past five years, none of the officers or directors of the Company or any subsidiary have been: (1) Subject of a petition under the Federal bankruptcy laws or any state insolvency law filed by or against them, or by a receiver, fiscal agent or similar officer appointed by a court for their business or property, or any partnership in which either or them was a general partner at or within two years before the time of such filing, or any corporation or business association of which either of them was an executive officer at or within two years before the time of 8 9 such filing; (2) Convicted in a criminal proceeding or a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) The subject of any order, judgment, or decree not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining either of them from, or otherwise limiting, any of the following activities: (i) acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with any such activity; (ii) engaging in any type of business practice; or (iii) engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities law or Federal Commodity laws. (4) The subject of any order, judgment or decree, not subsequently reversed, suspended or vacated of any Federal or State authority barring, suspending or otherwise limiting for more than sixty (60) days either of their right to engage in any activity described in paragraph (3)(i) above, or be associated with persons engaged in any such activity; (5) Found by any court of competent jurisdiction in a civil action or by the Securities and Exchange Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended or vacated; or (6) Found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal Commodities Law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated. (ac) Based upon written representations received from the officers and directors of the 9 10 Company, each of the officers and directors of the Company has reviewed the sections in the Prospectus relating to their biographical data and equity ownership position in the Company, and all information contained therein is true and accurate. 2. Purchase, Delivery and Sale of the Securities. (a) Subject to the terms and conditions of this Agreement and upon the basis of the representations, warranties and agreements herein contained, the Company hereby agrees to issue and sell to the Underwriters an aggregate of 1,500,000 Shares at $____ per Share and 1,500,000 Warrants at $____ per Warrant, (the public offering price less ten percent (10%)), at the place and time hereinafter specified, in accordance with the number of Shares and/or Warrants set forth opposite the names of the Underwriters in Schedule A attached hereto plus any additional Securities which such Underwriters may become obligated to purchase pursuant to the provisions of Section 9 hereof. The Securities shall consist of 1,500,000 Shares and 1,500,000 Warrants to be purchased from the Company, and the price at which the Underwriters shall sell the Securities to the public shall be $__.00 per Share and $____ per Warrant. Delivery of the Securities against payment therefor shall take place at the offices of First London Securities Corporation, 2600 State Street, Dallas, Texas 75204 (or at such other place as may be designated by the Representative) at 10:00 a.m., Eastern Time, on such date after the Effective date as the Representative shall designate, but not later than ten (10) business days (holidays excepted) following the first date that any of the Securities are released to you, such time and date of payment and delivery for the Securities being herein called the "Closing Date". (b) In addition, subject to the terms and conditions of this Agreement, and upon the basis of the representations, warranties and agreements herein contained, the Company hereby grants the "Option" to the Underwriters (or, at the option of the Representative, to the Representative, individually) to purchase all or any part of an aggregate of an additional 225,000 Shares and 225,000 Warrants at the same price per Share and Warrant as the Underwriters shall pay for the Securities being sold pursuant to the provisions of subsection (a) of this Section 2 (such additional Securities being referred to herein as the "Option Securities"). This Option may be exercised within 30 days after the Effective Date upon notice by the Underwriters (or the Representative, individually) to the Company advising as to the amount of Option Securities as to which the Option is being exercised, the names and denominations in which the certificates for such Option Securities are to be registered and the time and date when such certificates are to be delivered. Such time and date shall be determined by the Underwriters (or the Representative, individually) but shall not be later than ten (10) full business days after the exercise of the Option, nor in any event prior to the Closing Date, and such time and date is referred to herein as the "Option Closing Date". Delivery of the Option Securities against payment therefor shall take place at the offices of the Representative. The Option granted hereunder may be exercised only to cover over allotments in the sale by the Underwriters of the Securities referred to in subsection (a) above. In the event the Company declares or pays a dividend or distribution on its Common Stock, whether in the form of cash, shares of Common Stock or any other consideration, prior to the Option Closing Date, such dividend or distribution shall also be paid on the Option Closing Date. 10 11 (c) The Company will make the certificates for the Securities to be sold hereunder available to you for inspection at least two (2) full business days prior to the Closing Date and the Option closing date at the offices of the Representative, and such certificates shall be registered in such names and denominations as you may request. Time shall be of the essence and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Company to each Underwriter. Definitive certificates in negotiable form for the Securities to be purchased by the Underwriters hereunder will be delivered by the Company to you for the accounts of the several Underwriters against payment of the respective purchase prices by the several Underwriters, by certified or bank cashier's checks in New York Clearing House funds, payable to the order of the Company or by wire transfer in New York Clearing House funds. In addition, in the event the Underwriters (or the Representative, individually) exercises the Option to purchase from the Company all or any portion of the Option Securities pursuant to the provisions of subsection (b) above, payment for such Securities shall be made payable in New York Clearing House funds at the offices of the Representative, or by wire transfer, at the time and date of delivery of such Securities as required by the provisions of subsection (b) above, against receipt of the certificates for such Securities by the Representative for the respective accounts of the several Underwriters registered in such names and in such denominations as the Representative may request. It is understood that the Representative, individually and not as Representative of the several Underwriters, may (but shall not be obligated to) make any and all payments required pursuant to this Section 2 on behalf of any Underwriters whose check or checks shall not have been received by the Representative at the time of delivery of the Securities to be purchased by such Underwriter or Underwriters. Any such payment by the Representative shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. It is also understood that the Representative individually, rather than all of the Underwriters, may (but shall not be obligated to) purchase the Option Securities referred to in subsection (b) of this Section 2, but only to cover over allotments. It is understood that the several Underwriters propose to offer the Securities to be purchased hereunder to the public upon the terms and conditions set forth in the Registration Statement, after the Registration Statement is declared effective by the Commission. 11 12 3. Covenants of the Company. The Company covenants and agrees with the several Underwriters that: (a) The Company, upon notification from the Commission that the Registration Statement has become effective, will so advise you and will not at any time, whether before or after the Effective Date, file any amendment to the Registration Statement or supplement to the Prospectus of which you shall not previously been advised and furnished with a copy or to which you or your counsel shall have objected in writing, acting reasonably, or which is not in compliance with the Act and the Rules and Regulations. At any time prior to the later of (i) the completion by the Underwriters of the distribution of the Securities as contemplated hereby; or (ii) 25 days after the date on which the Registration Statement shall have become or been declared effective, the Company will prepare and file with the Commission, promptly upon your request, any amendments or supplements to the Registration Statement or Prospectus which may be necessary or advisable in connection with the distribution of the Securities and as mutually agreed by the Company and the Representative. After the Effective Date and as soon as the Company is advised thereof, the Company will advise you, and confirm the advice in writing, of the receipt of any comments of the Commission, of the effectiveness of any post-effective amendment to the Registration Statement, of the filing of any supplement to the Prospectus or any amended Prospectus, of any request made by the Commission for amendment of the Registration Statement or for supplementing of the Prospectus or for additional information with respect thereto, of the issuance by the Commission or any state or regulatory body of any stop order or other order suspending the effectiveness of the Registration Statement or any order preventing or suspending the use of any Preliminary Prospectus, or of the suspension of the qualification of the Securities for offering in any jurisdiction, or of the institution of any proceedings for any of such purposes, and will use its best efforts to prevent the issuance of any such order, and, if issued, to obtain as soon as possible the lifting thereof. The Company has caused to be delivered to you copies of each Preliminary Prospectus and Definitive Prospectus, and the Company has consented and hereby consents to the use of such copies for the purposes permitted by the Act. The Company authorizes the Underwriters and Selected Dealers to use the Prospectus in connection with the sale of the Securities for such period as in the opinion of counsel to the Underwriters the use thereof is required to comply with the applicable provisions of the Act and the Rules and Regulations. In case of the happening, at any time within such period as a Prospectus is required under the Act to be delivered in connection with sales by the Underwriters or Selected Dealers, of any event of which the Company has knowledge and which materially affects the Company or the securities of the Company, or which in the opinion of counsel for the Company or counsel for the Underwriters, should be set forth in an amendment to the Registration Statement or a supplement to the Prospectus, in order to make the statements therein not then misleading, in light of the circumstances existing at the time the Prospectus is required to be delivered to a purchaser of the Securities, or in case it shall be necessary to amend or supplement the Prospectus to comply with law or with the Act and the Rules and Regulations, the Company will notify you promptly and forthwith prepare and furnish to you copies of such amended Prospectus or of such supplement 12 13 to be attached to the Prospectus, in such quantities as you may reasonably request, in order that the Prospectus, as so amended or supplemented, will not contain any untrue statement of a material fact or omit to state any material facts necessary in order to make the statements in the Prospectus, in the light of the circumstances under which they are made, not misleading. The preparation and furnishing of any such amendment or supplement to the Registration Statement or amended Prospectus or supplement to be attached to the Prospectus shall be without expense to the Underwriters. The Company will comply with the Act, the Rules and Regulations thereunder, the Securities Exchange Act of 1934 (the "1934 Act"), and the rules and regulations thereunder in connection with the offering and issuance of the Securities. (b) The Company will act in good faith and use its best efforts and cooperate with you and your counsel to qualify to register the Securities for sale under the securities or "blue sky" laws of such jurisdictions as the Representative may designate and will make such applications and furnish such information as may be required for that purpose and to comply with such laws, provided the Company shall not be required to qualify as a foreign corporation or a dealer in securities or to execute a general consent to service of process in any jurisdiction in any action other than one arising out of the offering or sale of the Securities. The Company will, from time to time, prepare and file such statements and reports as are or may be required to continue such qualification in effect for so long a period as the Underwriters may reasonably request. (c) If the sale of the Securities provided for herein is not consummated, the Company shall pay all costs and expenses incident to the performance of the Company's obligations hereunder, including, but not limited to, all such expenses itemized in Section 8(a) and 8(c) hereof, and the out-of-pocket expenses of the Representative, if the offering for any reason is terminated. For the purposes of this sub-paragraph, the Representative shall be deemed to have assumed such expenses when they are billed or incurred, regardless of whether such expenses have been paid. The Representative shall not be responsible for any expenses of the Company or others, or for any charges or claims relative to the proposed public offering whether or not consummated. (d) The Company will deliver to you at or before the Closing Date two signed copies of the Registration Statement, including all financial statements and exhibits filed therewith, and of each amendment or supplement thereto. The Company will deliver to or upon the order of the several Underwriters, from time to time until the Effective Date of the Registration Statement, as many copies of any Preliminary Prospectus filed with the Commission prior to the Effective Date of the Registration Statement as the Underwriters may reasonably request. The Company will deliver to the Underwriters on the Effective Date of the Registration Statement and thereafter for so long as a Prospectus is required to be delivered under the Act, from time to time, as many copies of the Prospectus, in final form, or as thereafter amended or supplemented as the several Underwriters may from time to time reasonably request. (e) For so long as the Company is a reporting company under either Section 12 or 15 13 14 of the 1934 Act, the Company, at its expense, will furnish to the Representative during the period ending five (5) years from the Effective Date, (i) as soon as practicable after the end of each fiscal year, a balance sheet of the Company and any of its subsidiaries as at the end of such fiscal year, together with statements of income, surplus and cash flow of the Company and any subsidiaries for such fiscal year, all in reasonable detail and accompanied by a copy of the certificate or report thereon of independent accountants; (ii) as soon as they are available, a copy of all reports (financial or other) mailed to security holders; (iii) as soon as they are available, a copy of all non-confidential documents, including annual reports, periodic reports and financial statements, furnished to or filed with the Commission under the Act and the 1934 Act; (iv) copies of each press release, news item and article with respect to the Company's affairs released by the Company; and (v) such other information as you may from time to time reasonably request. (f) In the event the Company has an active subsidiary or subsidiaries, such financial statements referred to in subsection (e) above will be on a consolidated basis to the extent the accounts of the Company and its subsidiary or subsidiaries are consolidated in reports furnished to its stockholders generally. (g) The Company will make generally available to its stockholders and to the registered holders of its Warrants and deliver to you as soon as it is practicable, but in no event later than the first day of the sixteenth full calendar month following the Effective Date, an earnings statement (which need not be audited) covering a period of at least twelve consecutive months beginning with the Effective Date of the Registration Statement, which shall satisfy the requirements of Section 11(a) of the Act. (h) On the Closing Date, the Company shall have taken the necessary action to become a reporting company under Section 12 of the 1934 Act, and the Company will make all filings required to, and will have obtained approval for, the listing of the Shares and Warrants on The NASDAQ Small Cap Market, and will use its best efforts to maintain such listing for at least seven (7) years from the date of this Agreement. (i) For such period as the Company's securities are registered under the 1934 Act, the Company will hold an annual meeting of stockholders for the election of Directors within 180 days after the end of each of the Company's fiscal years and, within 150 days after the end of each of the Company's fiscal years will provide the Company's stockholders with the audited financial statements of the Company as of the end of the fiscal year just completed prior thereto. Such financial statements shall be those required by Rule 14a-3 under the 1934 Act and shall be included in an annual report pursuant to the requirements of such Rule. (j) The Company will apply the net proceeds from the sale of the Securities substantially in accordance with its statement under the caption "Use of Proceeds" in the Prospectus, and will file such reports with the Commission with respect to the sale of the Securities and the application of the proceeds therefrom as may be required by Sections 12, 13 and/or 15 of the 1934 Act and pursuant to Rule 463 under the Act. 14 15 (k) The Company will, promptly upon your request, prepare and file with the Commission any amendments or supplements to the Registration Statement, Preliminary Prospectus or Prospectus and take any other action, which in the reasonable opinion of counsel to the Underwriters and the Company may be reasonably necessary or advisable in connection with the distribution of the Securities and will use its best efforts to cause the same to become effective as promptly as possible. (l) On the Closing Date the Company shall execute and deliver to you the Representative's Warrant Agreement. The Representative's Warrant Agreement and Warrant Certificates will be substantially in the form of the Representative's Warrant Agreement and warrant certificates filed, as an exhibit to the Registration Statement. (m) The Company will reserve and keep available for issuance that maximum number of its authorized but unissued securities which are issuable upon exercise of the Representative's Warrants outstanding from time to time. (n) Except as otherwise provided in the alternate Prospectus pages in the Registration Statement, all beneficial owners of the Company's securities who are officers or directors of the Company (including Warrants, Options and Common Stock of the Company), as of the Effective Date, shall agree in writing, in a form satisfactory to the Representative, not to sell, transfer or otherwise dispose of any of such securities or underlying securities for a period of twenty-four (24) months from the Effective Date, or any longer period required by any State, without the prior written consent of the Representative. All sales of the Company's securities by officers and/or directors of the Company shall be effected through the Representative. (o) The Company shall pay to the Representative a fee of five (5%) percent of the aggregate exercise price of each Class A Warrant exercised commencing one year after the Effective Date, provided: (i) the market price of the common stock on the date of exercise was greater than the exercise price on that date, (ii) exercise of the Class A Warrant was solicited by a member of the NASD, (iii) the Class A Warrant was not held in a discretionary account, (iv) disclosure of compensation was made both at the time of the Offering and the exercise of the Class A Warrant, and (v) the solicitation and the exercise of the Class A Warrant was not in violation of Rule 10b-6 of the Securities Exchange Act of 1934. The Company will obtain, on or before the Closing Date, key person life insurance on the life of Lyle Maul in an amount of not less than $1,000,000, and will use its best efforts to maintain such insurance for a period of at least five (5) years from the Effective Date. (p) Prior to the Closing Date, the Company shall at its own expense, undertake to list the Company's securities in the appropriate recognized securities manual or manuals published by Standard & Poor's Corporation and such other manuals as the Representative may designate, such listings to contain the information required by such manuals and the Uniform Securities Act. The Company hereby agrees to use its best efforts to maintain such listing for a period of not less than five (5) years. The Company shall take such action as may be reasonably requested by the Representative to obtain a secondary market trading exemption in such states as may be reasonably requested by the Representative. (q) During the one hundred eighty (180) day period commencing on the Closing Date, the Company will not, without the prior written consent of the Representative, grant options or warrants to purchase the Company's Common Stock at a price less than the initial per share public offering price. (r) During the twelve month period commencing on the closing Date, the Company 15 16 will not, without the prior written consent of the Representative, issue any additional securities of the Company. (s) Prior to the Closing Date, neither the Company nor any subsidiary will issue, directly or indirectly, without your prior consent, any press release or other communication or hold any press conference with respect to the Company or its activities or the offering of the Securities other than routine customary advertising of the Company's products and services, and except as required by any applicable law or the directives of any relevant regulatory authority in any relevant jurisdiction. (t) [Reserved] (u) The Company shall employ the services of a firm of independent certified public accountants in connection with the preparation of the financial statements to be included in any registration statement or similar disclosure document to be filed by the Company hereunder, or any amendment or supplement thereto. For a period of five (5) years from the Effective Date, the Company, at its expense, shall cause its regularly engaged independent certified public accountants to review (but not audit) the Company's financial statements for each of the first three (3) fiscal quarters prior to the announcement of quarterly financial information, the filing of the Company's quarterly report and the filing of quarterly financial information to stockholders. (v) The Company shall retain American Stock Transfer & Trust Company as the transfer agent for the securities of the Company, or such other transfer agent as you may agree to in writing. In addition, the Company shall direct such transfer agent to furnish the Representative with daily transfer sheets as to each of the Company's securities as prepared by the Company's transfer agent and copies of lists of stockholders and warrantholders as reasonably requested by the Underwriter, for a five (5) year period commencing from the Closing Date. (w) The Company shall cause the Depository Trust Company, or such other depository of the Company's securities, to deliver a "special security position report" to the Representative on a daily and weekly basis at the expense of the Company, for a five (5) year period from the Effective Date. (w) Following the Effective Date, the Company shall, at its sole cost and expense, prepare and file such Blue Sky applications with such jurisdictions as the Representative shall designate and the Company may reasonably agree. 16 17 (x) The Representative shall have a right of first refusal to represent the Company in any public or private offering of the Company's securities for a full year period commencing on the closing Date. (y) On the Effective Date and for a period of three (3) years thereafter, the Company's Board of Directors shall consist of a minimum of five (5) persons, two (2) of whom shall be independent and not otherwise affiliated with the Company or associated with any of the Company's affiliates. The Representative shall have the right to nominate one member of the Board of Directors. The Representative shall have the opportunity to invite an observer to attend Board of Directors meetings of the Company at the expense of the Company. (z) On the Closing Date, the Company shall execute and deliver to you a non-exclusive M/A Agreement with the Representative in a form satisfactory to the Representative, providing: (1) that the Representative will be paid a finder's fee, of from five percent (5%) of the first $1,000,000 ranging in $1,000,000 increments down to one percent (1%) of the excess, if any, over $4,000,000 of the consideration involved in any transaction introduced in writing by the Representative (including mergers, acquisitions, joint ventures, and any other business for the Company introduced by the Representative) consummated by the Company, as an "Introduced, Consummated Transaction", by which the Representative introduced the other party to the Company during a period ending five (5) years from the date of the M/A Agreement; and (2) that any such finder's fee due to the Representative will be paid in cash or stock as mutually agreed at the closing of the particular Introduced, Consummated Transaction for which the finder's fee is due. (z) After the Closing Date, the Company shall prepare and publish "tombstone" advertisements of at least 5 x 5 inches in publications to be designated by the Representative at a total cost not to exceed $20,000. (aa) For such period as any Warrants are outstanding, the Company shall use its best efforts to cause post-effective amendments to the Registration Statement or a new Registration Statement to become effective in compliance with the Act and without any lapse of time between the effectiveness of any such post-effective amendments and cause a copy of each Prospectus, as then amended, to be delivered to each holder of record of a Warrant and to furnish to each of the Underwriters and each dealer as many copies of each such Prospectus as such Underwriter or such dealer may reasonably request. Such post-effective amendments or new Registration Statements shall also register the Representative's Warrants and all the securities underlying the Representative's Warrants. The Company shall not call for redemption of any of the Warrants unless a Registration Statement covering the securities underlying the Warrants or Representative Warrants has been declared effective by the Commission and remains current at least until the date fixed for redemption. In addition, the Warrants or Representative Warrants shall not be 17 18 redeemable during the first year after the Effective Date without the written consent of the Representative. (ab) Until such time as the securities of the Company are listed or quoted on either the New York Stock Exchange or the American Stock Exchange, the Company shall engage the Company's legal counsel to deliver to the Representative a written opinion detailing those states in which the Shares and Warrants of the Company may be traded in non-issuer transactions under the Blue Sky laws of the fifty states ("Secondary Market Trading Opinion"). The initial Secondary Market Trading opinion shall be delivered to the Representative on the Effective Date, and the Company shall continue to update such opinion and deliver same to the Representative on a timely basis, but in any event at the beginning of each fiscal quarter, for a five (5) year period, if required. (ac) As promptly as practicable after the Closing Date, the Company will prepare, at its own expense, hard cover "bound volumes" relating to the offering, and will distribute such volumes to the individuals designated by the Representative or counsel to the Representative. 4. Conditions of Underwriters, Obligations. The obligations of the several Underwriters to purchase and pay for the Securities which they have agreed to purchase hereunder from the Company are subject, as of the date hereof and as of the Closing Date and the Option Closing Date, to the continuing accuracy of, and compliance with, the representations and warranties of the Company herein, to the accuracy of statements of officers of the Company made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder, and to the following conditions: (a) (i) The Registration Statement shall have become effective not later than 5:00 p.m., Eastern Time, on the date of this Agreement, or at such later time or on such later date as you may agree to in writing; (ii) at or prior to the Closing Date or Option Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been issued by the Commission and no proceeding for that purpose shall have been initiated or pending, or shall be threatened, or to the knowledge of the Company, contemplated by the Commission; (iii) no stop order suspending the effectiveness of the qualification or registration of the Securities under the securities or "blue sky" laws of any jurisdiction (whether or not a jurisdiction which you shall have specified) shall be threatened or to the knowledge of the Company contemplated by the authorities of any such jurisdiction or shall have been issued and in effect; (iv) any request for additional information on the part of the Commission or any such authorities shall have been complied with to the satisfaction of the Commission and any such authorities, and to the satisfaction of counsel to the Underwriters; and (v) after the date hereof no amendment or supplement to the Registration Statement or the Prospectus shall have been filed unless a copy thereof was first submitted to the Underwriters and the Underwriters did not object thereto. (b) At the Closing Date, since the respective dates as of which information is presented in the Registration Statement and the Prospectus, (i) there shall not have been any material change in the capital stock or other securities of the Company or any subsidiary or any material adverse change in the long-term debt of the Company or any subsidiary except as set 18 19 forth in or contemplated by the Registration Statement, (ii) there shall not have been any material adverse change in the general affairs, business, properties, condition (financial or otherwise), management, or results of operations of the Company or any subsidiary, whether or not arising from transactions in the ordinary course of business, in each case other than as set forth in or contemplated by the Registration Statement or Prospectus; (iii) neither the Company nor any subsidiary shall have sustained any material interference with its business or properties from fire, explosion, flood or other casualty, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree, which is not set forth in the Registration Statement and Prospectus; and (iv) the Registration Statement and the Prospectus and any amendments or supplements thereto shall contain all statements which are required to be stated therein in accordance with the Act and the Rules and Regulations, and shall in all material respects conform to the requirements thereof, and neither the Registration Statement nor the Prospectus nor any amendment or supplement thereto shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstance under which they are made, not misleading. (c) Except as set forth in the Prospectus, there is not pending or, to the knowledge of the Company or any subsidiary, threatened, any material action, suit, proceeding, inquiry, arbitration or investigation against the Company or any subsidiary, or any of the officers or directors of the Company or any subsidiary, or any material action, suit, proceeding, inquiry, arbitration, or investigation, which might result in any material adverse change in the condition (financial or other), business prospects, net worth, or properties of the Company or any subsidiary. (d) Each of the representations and warranties of the Company contained herein shall be true and correct as of this date and at the Closing Date as if made at the Closing Date, and all covenants and agreements herein contained to be performed on the part of the Company and all conditions herein contained to be fulfilled or complied with by the Company at or prior to the Closing Date and Option Closing Date shall have been duly performed, fulfilled or complied with. (e) At each Closing Date, you shall have received the opinion, together with copies of such opinion for each of the other several Underwriters, dated as of each Closing Date, from Hecht & Steckman, P.C., counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, to the effect that: (i) the Company and each subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, with full corporate power and authority to own its properties and conduct its business as described in the Registration Statement and Prospectus and is duly qualified or licensed to do business as a foreign corporation and is in good standing in each other jurisdiction in which the ownership or leasing of its properties or conduct of its business requires such qualification except for jurisdictions in which the failure to so qualify would not have a material adverse effect on the Company and each subsidiary as a 19 20 whole; (ii) the authorized capitalization of the Company is as set forth under "Capitalization" in the Prospectus; all shares of the Company's outstanding stock and other securities requiring authorization for issuance by the Company's Board of Directors have been duly authorized, validly issued, are fully paid and non-assessable and conform to the description thereof contained in the Prospectus; the outstanding shares of Common Stock of the Company and other securities have not been issued in violation of the preemptive rights of any shareholder and the shareholders of the Company do not have any preemptive rights or, to such counsel's knowledge, other rights to subscribe for or to purchase securities of the Company, nor, to such counsel's knowledge, are there any restrictions upon the voting or transfer of any of the securities of the Company, except as disclosed in the Prospectus; the Common Stock, the Shares, the Warrants, and the securities contained in the Representative's Warrant Agreement conform to the respective descriptions thereof contained in the Prospectus; the Common Stock, the Shares, the Warrants, the shares of Common Stock to be issued upon exercise of the Warrants and the securities contained in the Representative's Warrant Agreement, have been duly authorized and, when issued, delivered and paid for, will be duly authorized, validly issued, fully paid, non-assessable, free of preemptive rights and no personal liability will attach to the ownership thereof; all prior sales by the Company of the Company's securities have been made in compliance with or under an exemption from registration under the Act and applicable state securities laws and no shareholders of the Company have any rescission rights against the Company with respect to the Company's securities; a sufficient number of shares of Common Stock has been reserved for issuance upon exercise of the Warrants and the Representative's Warrants, and to the best of such counsel's knowledge, neither the filing of the Registration Statement nor the offering or sale of the Securities as contemplated by this Agreement gives rise to any registration rights or other rights, other than those which have been waived or satisfied or described in the Registration Statement; (iii) this Agreement, the Representative's Warrant Agreement, the Warrant Agreement, and the M/A Agreement have been duly and validly authorized, executed and delivered by the Company and, assuming the due authorization, execution and delivery of this Agreement by the Representative, are the valid and legally binding obligations of the Company, enforceable in accordance with their terms, except (a) as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization or similar laws from time to time in effect which effect creditors, rights generally; and (b) no opinion is expressed as to the enforceability of the indemnity provisions or the contribution provisions contained in this Agreement; (iv) the certificates evidencing the outstanding securities of the Company, the Shares, the Common Stock and the Warrants are in valid and proper legal form; (v) to the best of such counsel's knowledge, except as set forth in the Prospectus, there is not pending or, to the knowledge of the Company, threatened, any 20 21 material action, suit, proceeding, inquiry, arbitration or investigation against the Company or any subsidiary or any of the officers of directors of the Company or any subsidiary, nor any material action, suit, proceeding, inquiry, arbitration, or investigation, which might materially and adversely affect the condition (financial or otherwise), business prospects, net worth, or properties of the Company or any subsidiary; (vi) the execution and delivery of this Agreement, the Representative's Warrant Agreement, the Warrant Agreement and the M/A Agreement, and the incurrence of the obligations herein and therein set forth and the consummation of the transactions herein or therein contemplated, will not result in a violation of, or constitute a default under (a) the Articles of Incorporation or By-Laws of the Company and each subsidiary; (b) to the best of such counsel's knowledge, any material obligations, agreement, covenant or condition contained in any bond, debenture, note or other evidence of indebtedness or in any contract, indenture, mortgage, loan agreement, lease, joint venture or other agreement or instrument to which the Company or any subsidiary is a party or by which it or any of its properties is bound; or (c) to the best of such counsel's knowledge, any material order, rule, regulation, writ, injunction, or decree of any government, governmental instrumentality or court, domestic or foreign; (vii) the Registration Statement has become effective under the Act, and to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for that purpose have been instituted or are pending before, or threatened by, the Commission; the Registration Statement and the Prospectus (except for the financial statements and other financial data contained therein, or omitted therefrom, as to which such counsel need express no opinion) comply as to form in all material respects with the applicable requirements of the Act and the Rules and Regulations; and (viii) no authorization, approval, consent, or license of any governmental or regulatory authority or agency is necessary in connection with the authorization, issuance, transfer, sale or delivery of the Securities by the Company, in connection with the execution, delivery and performance of this Agreement by the Company or in connection with the taking of any action contemplated herein, or the issuance of the Representative's Warrants or the Securities underlying the Representative's Warrants, other than registrations or qualifications of the Securities under applicable state or foreign securities or Blue Sky laws and registration under the Act. Such opinion shall also cover such matters incident to the transactions contemplated hereby as the Underwriter or counsel for the Underwriter shall reasonably request. In rendering such opinion, such counsel may rely upon certificates of any officer of the Company or public officials as to matters of fact; and may rely as to all matters of law, upon opinions of counsel satisfactory to you and counsel to the Underwriters. The opinion of such counsel to the Company shall state that the opinion of any such other counsel is in form satisfactory to such counsel and that the Representative and they are justified in relying thereon. 21 22 Such counsel shall also include a statement to the effect that such counsel has participated in the preparation of the Registration Statement and the Prospectus and nothing has come to the attention of such counsel to lead such counsel to believe that the Registration Statement or any amendment thereto at the time it became effective contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading or that the Prospectus or any supplement thereto contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make statements therein, in light of the circumstances under which they are made, not misleading (except, in the case of both the Registration Statement and any amendment thereto and the Prospectus and any supplement thereto, for the financial statements, notes thereto and other financial information and statistical data contained therein, as to which such counsel need express no opinion). (f) You and the several Underwriters shall have received on each Closing Date a certificate dated as of each Closing Date, signed by the Chief Executive Officer and the Chief Financial officer of the Company and such other officers of the Company as the Underwriters may request, certifying that: (i) No Order suspending the effectiveness of the Registration Statement or stop order regarding the sale of the Securities in effect and no proceedings for such purpose are pending or are, to their knowledge, threatened by the Commission; (ii) They do not know of any litigation instituted or, to their knowledge, threatened against the Company or any subsidiary or any officer or director of the Company or any subsidiary of a character required to be disclosed in the Registration Statement which is not disclosed therein; they do not know of any contracts which are required to be summarized in the Prospectus which are not so summarized; and they do not know of any material contracts required to be filed as exhibits to the Registration Statement which are not so filed; (iii) They have each carefully examined the Registration Statement and the Prospectus and, to the best of their knowledge, neither the Registration Statement nor the Prospectus nor any amendment or supplement to either of the foregoing contains an untrue statement of any material fact or omits to state any material fact required to be stated therein or necessary to make the statement therein, in light of the circumstances under which they are made, not misleading; and since the Effective Date, to the best of their knowledge, there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been so set forth; (iv) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any material adverse change in the condition of the Company or any subsidiary, financial or otherwise, or in 22 23 the results of its operations, except as reflected in or contemplated by the Registration Statement and the Prospectus and except as so reflected or contemplated since such date, there has not been any material transaction entered into by the Company or any subsidiary; (v) The representations and warranties set forth in this Agreement are true and correct in all material respects and the Company has complied with all of its agreements herein contained; (vi) Neither the Company nor any subsidiary is delinquent in the filing of any federal, state and municipal tax return or the payment of any federal, state or municipal taxes; they know of no proposed re-determination or reassessment of taxes, adverse to the Company or any subsidiary, and the Company and each subsidiary has paid or provided by adequate reserves for all known tax liabilities; (vii) They know of no material obligation or liability of the Company or any subsidiary, contingent or otherwise, not disclosed in the Registration Statement and Prospectus; (viii) This Agreement, the Representative's Warrant Agreement, the Warrant Agreement, and the M/A Agreement, the consummation of the transactions herein of therein contemplated, and the fulfillment of the terms hereof or thereof, will not result in a breach by the Company of any terms of, or constitute a default under, its Articles of Incorporation or By-Laws, any indenture, mortgage, lease, deed or trust, bank loan or credit agreement or any other material agreement or undertaking of the Company or any subsidiary including, by way of specification but not by way of limitation, any agreement or instrument to which the Company or any subsidiary is now a party or pursuant to which the Company or any subsidiary has acquired any right and/or obligations by succession or otherwise; (ix) The financial statements and schedules filed with and as part of the Registration Statement present fairly the financial position of the Company as of the dates thereof all in conformity with generally accepted principles of accounting applied on a consistent basis throughout the periods involved. Since the respective dates of such financial statements, there have been no material adverse change in the condition or general affairs of the Company, financial or otherwise, other than as referred to in the Prospectus; (x) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, except as may otherwise be indicated therein, neither the Company nor any subsidiary has, prior to the Closing Date, either (i) issued any securities or incurred any material liability or obligation, direct or contingent, for borrowed money, or (ii) entered into any material transaction other than in the ordinary course of business. The Company has not declared, paid or made any dividend or distribution of any kind on its capital stock; 23 24 (xi) Based upon written representation from the officers and directors of the Company and each subsidiary they have reviewed the sections in the Prospectus relating to their biographical data and equity ownership position in the Company, and all information contained therein is true and accurate; and (xii) Based upon written representation from the officers and directors of the Company and each subsidiary except as disclosed in the Prospectus, during the past five years, they have not been: (1) Subject of a petition under the Federal bankruptcy laws or any state insolvency law filed by or against them, or by a receiver, fiscal agent or similar officer appointed by a court for their business or property, or any partnership in which either or them was a general partner at or within two years before the time of such filing, or any corporation or business association of which either of them was an executive officer at or within two years before the time of such filing; (2) Convicted in a criminal proceeding or a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) The subject of any order, judgment, or decree not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining either of them from, or otherwise limiting, any of the following activities: (i) acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with any such activity; (ii) engaging in any type of business practice; or (iii) engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities law or Federal Commodity laws. (4) The subject of any order, judgment or decree, not subsequently reversed, suspended or vacated of any Federal or State authority barring, 24 25 suspending or otherwise limiting for more than sixty (60) days either of their right to engage in any activity described in paragraph (3) (i) above, or be associated with persons engaged in any such activity; (5) Found by any court of competent jurisdiction in a civil action or by the Securities and Exchange Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended or vacated; or (6) Found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal Commodities Law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated. (g) The Underwriters shall have received from CORBIN & WERTZ, independent auditors to the Company, certificates or letters, one dated and delivered on the Effective Date and one dated and delivered on the Closing Date, in form and substance satisfactory to the Underwriters, stating, that: (i) they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable Rules and Regulations; (ii) the financial statements and the schedules included in the Registration Statement and the Prospectus were examined by them and, in their opinion, comply as to form in all material respects with the applicable accounting requirements of the Act, the Rules and Regulations and instructions of the Commission with respect to Registration Statements on Form SB-2; (iii) on the basis of inquiries and procedures conducted by them (not constituting an examination in accordance with generally accepted auditing standards) , including a reading of the latest available unaudited interim financial statements or other financial information of the Company (with an indication of the date of the latest available unaudited interim financial statements), inquiries of officers of the Company who have responsibility for financial and accounting matters, review of minutes of all meetings of the shareholders and the Board of Directors of the Company and other specified inquiries and procedures, nothing has come to their attention as a result of the foregoing inquiries and procedures that causes them to believe that: (a) during the period from (and including) the date of the financial statements in the Registration Statement and the Prospectus to a specified date not more than five days prior to the date of such letters, there has been any change in the Common Stock, long-term debt or other securities of the Company (except as specifically contemplated in the Registration Statement and Prospectus) or any material decreases in net current assets, net assets, shareholder's equity, working 25 26 capital or in any other item appearing in the Company's financial statements as to which the Underwriters may request advice, in each case as compared with amounts shown in the balance sheet as of the date of the financial statement in the Prospectus, except in each case for changes, increases or decreases which the Prospectus discloses have occurred or will occur; (b) during the period from (and including) the date of the financial statements in the Registration Statement and the Prospectus to such specified date there was any material decrease in revenues or in the total or per share amounts of income or loss before extraordinary items or net income or loss, or any other material change in such other items appearing in the Company's financial statements as to which the Underwriters may request advice, in each case as compared with the fiscal period ended as of the date of the financial statement in the Prospectus, except in each case for increases, changes or decreases which the Prospectus discloses have occurred or will occur; (c) the unaudited interim financial statements of the Company appearing in the Registration Statement and the Prospectus (if any) do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations or are not fairly presented in conformity with generally accepted accounting principles and practices on a basis substantially consistent with the audited financial statements included in the Registration Statements or the Prospectus. (iv) they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings, statements and other financial information pertaining to the Company set forth in the Prospectus in each case to the extent that such amounts, numbers, percentages, statements and information may be derived from the general accounting records, including work sheets, of the Company and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter and found them to be in agreement; and (v) they have not during the immediately preceding five (5) year period brought to the attention of the Company's management any reportable condition related to the Company's internal accounting procedures, weaknesses and/or controls. Such letters shall also set forth such other information as may be requested by counsel for the Underwriters. Any changes, increases or decreases in the items set forth in such letters which, in the judgment of the several Underwriters, are materially adverse with respect to the financial position or results of operations of the Company shall be deemed to constitute a failure of the Company to comply with the conditions of the obligations to the several Underwriters hereunder. 26 27 (h) Upon exercise of the Option provided for in Section 2(b) hereof, the obligation of the several Underwriters (or, at its option, the Representative, individually) to purchase and pay for the Option Securities referred to therein will be subject (as of the date hereof and as of the Option Closing Date) to the following additional conditions: (i) The Registration Statement shall remain effective at the Option Closing Date, and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending, or, to your knowledge or the knowledge of the Company, shall be contemplated by the Commission, and any reasonable request on the part of the Commission for additional information shall have been complied with to the satisfaction of counsel to the Underwriters. (ii) At the Option Closing Date, there shall have been delivered to you the signed opinion from Hecht & Steckman, P.C., counsel for the Company, dated as of the Option Closing Date, in form and substance satisfactory to counsel to the Underwriters, which opinion shall be substantially the same in scope and substance as the opinion furnished to you at the Closing Date pursuant to Section 4 (e) hereof, except that such opinion, where appropriate, shall cover the Option Securities. (iii) At the Option Closing Date, there shall have been delivered to you a certificate of the Chief Executive Officer and Chief Financial Officer of the Company, dated the Option Closing Date, in form and substance satisfactory to counsel to the Underwriters, substantially the same in scope and substance as the certificate furnished to you at the Closing Date pursuant to Section 4(f) hereof. (iv) At the Option Closing Date, there shall have been delivered to you a letter in form and substance satisfactory to you from CORBIN & WERTZ, independent auditors to the Company, dated the Option Closing Date and addressed to the several Underwriters confirming the information in their letter referred to in Section 4(g) hereof and stating that nothing has come to their attention during the period from the ending date of their review referred to in said letter to a date not more than five business days prior to the Option Closing Date, which would require any change in said letter if it were required to be dated the Option Closing Date. (v) All proceedings taken at or prior to the Option Closing Date in connection with the sale and issuance of the Option Securities shall be satisfactory in form and substance to the Underwriters, and the Underwriters and counsel to the Underwriters shall have been furnished with all such documents, certificates, and opinions as you may request in connection with this transaction in order to evidence the accuracy and completeness of any of the representations, warranties or statements of the Company or its compliance with any of the covenants or conditions contained herein. 27 28 (i) No action shall have been taken by the Commission or the NASD, the effect of which would make it improper, at any time prior to the Closing Date, for members of the NASD to execute transactions (as principal or agent) in the Common Stock and no proceedings for the taking of such action shall have been instituted or shall be pending, or, to the knowledge of the several Underwriters or the Company, shall be contemplated by the Commission or the NASD. The Company represents that at the date hereof it has no knowledge that any such action is in fact contemplated by the Commission or the NASD. The Company shall advise the Representative of any NASD affiliations of any of its officers, directors, or stockholders or their affiliates in accordance with paragraph 1(y) of this Agreement. (j) At the Effective Date, you shall have received from counsel to the Company, dated as of the Effective Date, in form and substance satisfactory to counsel for the Underwriter, a written Secondary Market Trading Opinion detailing those states in which the Shares and Warrants may be traded in non-issuer transactions under the Blue Sky laws of the fifty (50) states after the Effective Date, in accordance with paragraph 3(ab) of this Agreement. (k) The authorization and issuance of the Securities and delivery thereof, the Registration Statement, the Prospectus, and all corporate proceedings incident thereto shall be satisfactory in all respects to counsel for the several Underwriters, and such counsel shall be furnished with such documents, certificates and opinions as they may reasonably request to enable them to pass upon the matters referred to in this sub-paragraph. (l) Prior to the Effective Date, the Representative shall have received clearance from the NASD as to the amount of compensation allowable or payable to the Representative, as described in the Registration Statement. (m) If any of the conditions herein provided for in this Section shall not have been fulfilled as of the date indicated, this Agreement and all obligations of the several Underwriters under this Agreement may be canceled at, or at any time prior to, the Closing Date and/or the Option Closing Date by the Representative and/or the Underwriters notifying the Company of such cancellation in writing or by telegram at or prior to the applicable Closing Date. Any such cancellation shall be without liability of the several Underwriters to the Company. 5. Conditions of the Obligations of the Company. The obligation of the Company to sell and deliver the Securities is subject to the following conditions: (i) The Registration Statement shall have become effective not later than 5:00 p.m., Eastern Time, on the date of this Agreement, or on such later time or date as the Company and the Representative may agree in writing; and (ii) At the Closing Date and the Option Closing Date, no stop orders suspending the effectiveness of the Registration Statement shall have been issued under the Act or any proceedings therefore initiated or threatened by the Commission. If the conditions to the obligations of the Company provided for in this Section have been 28 29 fulfilled on the Closing Date but are not fulfilled after the Closing Date and prior to the Option Closing Date, then only the obligation of the Company to sell and deliver the Securities on exercise of the Option provided for in Section 2(b) hereof shall be affected. 6. Indemnification. (a) The Company indemnifies and holds harmless each Underwriter and each person, if any, who controls the Underwriter within the meaning of the Act against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include but not be limited to, all reasonable costs of defense and investigation and all attorneys' fees), to which the Underwriter or such controlling person may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in (i) the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, (ii) any blue sky application or other document executed by the Company specifically for that purpose or based upon written information furnished by the Company and filed in any state or other jurisdiction in order to qualify any or all of the Securities under the securities laws thereof (any such application, document or information being hereinafter called a "Blue Sky Application"), or arise out of or are based upon the omission or alleged omission to state in the Registration Statement, any Preliminary Prospectus, Prospectus, or any amendment or supplement thereto, or in any Blue Sky Application, a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such cases to the extent, but only to the extent, that any such losses, claim, damages or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Underwriters specifically for use in the preparation of the Registration Statement or any such amendment or supplement thereof or any such Blue Sky Application or any such Preliminary Prospectus or the Prospectus or any such amendment or supplement thereto. Notwithstanding the foregoing, the Company shall have no liability under this section if such untrue statement or omission made in a Preliminary Prospectus is cured in the Prospectus and the Prospectus is not delivered to the person or persons alleging the liability upon which indemnification is being sought. This indemnity will be in addition to any liability which the Company may otherwise have. (b) Each Underwriter, severally, but not jointly, indemnifies and holds harmless the Company, each of its directors, each nominee (if any) for director named in the Prospectus, each of its officers who have signed the Registration Statement, and each person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such director, nominee, officer or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements 29 30 therein not misleading, in each case to the extent, but only to the extent, that such untrue statements or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished to the Company by you or by any Underwriter through you specifically for use in the preparation thereof. Notwithstanding the foregoing, the Underwriters shall have no liability under this Section if such untrue statement or omission made in a Preliminary Prospectus is cured in the Prospectus and the Prospectus is not delivered to the person or persons alleging the liability upon which indemnification is being sought through no fault of the Underwriter. This indemnity agreement will be in addition to any liability which the Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify in writing the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section . In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, subject to the provisions herein stated, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that if the indemnified party is an Underwriter or a person who controls such Underwriter within the meaning of the Act, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party or (ii) the named parties to any such action (including any impleaded parties) include both the Underwriter or such controlling person and the indemnifying party and in the reasonable judgment of the Representative, it is advisable for the Representative or such Underwriters or controlling persons to be represented by separate counsel (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Underwriter or such controlling person, it being understood, however, that the indemnifying party shall not, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys for all such Underwriters and controlling persons, which firm shall be designated in writing by you). No settlement of any action against an indemnified party shall be made without the consent of the indemnifying party, which shall not be unreasonably withheld in light of all factors of importance to such indemnifying party. 30 31 7. Contribution. In order to provide for just and equitable contribution under the Act in any case in which (i) each Underwriter makes claim for indemnification pursuant to Section 6 hereof but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case, notwithstanding the fact that the express provisions of Section 6 provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any Underwriter, then the Company and each person who controls the Company, in the aggregate, and any such Underwriter shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all reasonable costs of defense and investigation and all reasonable attorneys, fees) in either such case (after contribution from others) in such proportions that all such Underwriters are responsible in the aggregate for that portion of such losses, claims, damages or liabilities represented by the percentage that the underwriting discount per Share appearing on the cover page of the Prospectus bears to the public offering price appearing thereon, and the Company shall be responsible for the remaining portion, provided, however, that (a) if such allocation is not permitted by applicable law then the relative fault of the Company and the Underwriter and controlling persons, in the aggregate, in connection with the statements or omissions which resulted in such damages and other relevant equitable considerations shall also be considered. The relative fault shall be determined by reference to, among other things, whether in the case of an untrue statement of a material fact or the omission to state a material fact, such statement or omission relates to information supplied by the Company, or the Underwriter and the parties, relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Company and the Underwriters agree that it would not be just and equitable if the respective obligations of the Company and the Underwriters to contribute pursuant to this Section 7 were to be determined by pro rata or per capita allocation of the aggregate damages (even if the Underwriters and their controlling persons in the aggregate were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the first sentence of this Section; and (b) that the contribution of each contributing Underwriter shall not be in excess of its proportionate share (based on the ratio of the number of Securities purchased by such Underwriter to the number of Securities purchased by all contributing Underwriters) of the portion of such losses, claims, damages or liabilities for which the Underwriters are responsible. No person ultimately determined to be guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is nor ultimately determined to be guilty of such fraudulent misrepresentation. As used in this paragraph, the term "Underwriter" includes any officer, director, or other person who controls the Underwriter within the meaning of Section 15 of the Act, and the word "Company" includes any officer, director, or person who controls the Company within the meaning of Section 15 of the Act. If the full amount of the contribution specified in this paragraph is not permitted by law, then the Underwriter and each person who controls the Underwriter shall be entitled to contribution from the Company, its officers, directors and controlling persons to the full extent permitted by law. This foregoing agreement shall in no way affect the contribution liabilities of any persons having liability under Section 11 of the Act other than the Company and the Underwriter. No contribution shall be requested with regard to the settlement of any matter from any party who did not consent to the 31 32 settlement; provided, however, that such consent shall not be unreasonably withheld in light of all factors of importance to such party. 8. Costs and Expenses. (a) Whether or not this Agreement becomes effective or the sale of the Securities to the Underwriters is consummated, the Company will pay all costs and expenses incident to the performance of this Agreement by the Company including but not limited to the fees and expenses of counsel to the Company and of the Company's accountants; the costs and expenses incident to the preparation, printing, filing and distribution under the Act of the Registration Statement (including the financial statements therein and all amendments and exhibits thereto), Preliminary Prospectus and the Prospectus, as amended or supplemented; the fee of the NASD in connection with the filing required by the NASD relating to the offering of the Securities contemplated hereby; all state filing fees, expenses and disbursements and legal fees of counsel to the Company who shall serve as Blue Sky counsel to the Company in connection with the filing of applications to register the Securities under the state securities or blue sky laws; the cost of printing and furnishing to the several Underwriters copies of the Registration Statement, each Preliminary Prospectus, the Prospectus, this Agreement, the Selected Dealers Agreement, the Agreement Among Underwriters, Underwriters Questionnaire, Underwriters Power of Attorney and the Blue Sky Memorandum; the cost of printing the certificates evidencing the securities comprising the Securities; the cost of preparing and delivering to the Underwriters and its counsel bound volumes containing copies of all documents and appropriate correspondence filed with or received from the Commission and the NASD and all closing documents; and the fees and disbursements of the transfer agent for the Company's securities. The Company shall pay any and all taxes (including any original issue, transfer, franchise, capital stock or other tax imposed by any jurisdiction) on sales to the Underwriters hereunder. The Company will also pay all costs and expenses incident to the furnishing of any amended Prospectus or of any supplement to be attached to the Prospectus. The Company shall also engage the Company's counsel to provide the Representative with a written Secondary Market Trading Opinion in accordance with paragraphs 3(ab) and 4(j) of this Agreement. (b) In addition to the foregoing expenses, the Company shall at the Closing Date pay to the Representative a non-accountable expense allowance equal to three percent (3%) of the gross proceeds received from the sale of the Securities, of which an advance of $10,000 has been paid to date. In the event the over allotment option is exercised, the Company shall pay to the Representative at the Option Closing Date an additional amount equal to three percent (3%) of the gross proceeds received upon exercise of the over allotment option. 32 33 (c) Other than as disclosed in the Registration Statement, no person is entitled either directly or indirectly to compensation from the Company, from the Representative or from any other person for services as a finder in connection with the proposed offering, and the Company agrees to indemnify and hold harmless the Representative and the other Underwriters against any losses, claims, damages or liabilities, joint or several which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys, fees, to which the Representative or such other Underwriter may become subject insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon the. claim of any person (other than an employee of the party claiming indemnity) or entity that he or it is entitled to a finder's fee in connection with the proposed offering by reason of such person's or entity's influence or prior contact with the indemnifying party. 9. Substitution of Underwriters. If any of the Underwriters shall for any reason not permitted hereunder cancel their obligations to purchase the Securities hereunder, or shall fail to take up and pay for the number of Securities set forth opposite their respective names in Schedule A hereto upon tender of such Securities in accordance with the terms hereof, then: (a) If the aggregate number of Securities which such Underwriter or Underwriters agreed but failed to purchase does not exceed ten percent (10%) of the total number of Securities, the other Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Securities which such defaulting Underwriter or Underwriters agreed but failed to purchase. (b) If any Underwriter or Underwriters so default and the agreed number of Securities with respect to which such default or defaults occurs is more than ten percent (10%) of the total number of Securities, the remaining Underwriters shall have the right to take up and pay for (in such proportion as may be agreed upon among them) the Securities which the defaulting Underwriter or Underwriters agreed but failed to purchase. If such remaining Underwriters do not, at the Closing Date, take up and pay for the Securities which the defaulting Underwriter or Underwriters agreed but failed to purchase, the time for delivery of the Securities shall be extended to the next business day to allow the several Underwriters the privilege of substituting within twenty-four hours (including non-business hours) another Underwriter or Underwriters satisfactory to the Company. If no such Underwriter or Underwriters shall have been substituted as aforesaid, within such twenty-four period, the time of delivery of the Securities may, at the option of the Company, be again extended to the next following business day, if necessary, to allow the Company the privilege of finding within twenty-four hours (including non-business hours) another Underwriter or Underwriters to purchase the Securities which the defaulting Underwriter or Underwriters agreed but failed to purchase. If it shall be arranged for the remaining Underwriters or substituted Underwriters to take up the Securities of the defaulting Underwriter or Underwriters as provided in this Section, (i) the Company or the Representative shall have the right to postpone the time of delivery for a period of not more than seven (7) business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement or supplements to the Prospectus which may thereby be made necessary; and (ii) the respective numbers of 33 34 Securities to be purchased by the remaining Underwriters or substituted Underwriters shall be taken at the basis of the underwriting obligation for all purposes of this Agreement. If in the event of a default by one or more Underwriters and the remaining Underwriters shall not take up and pay for all the Securities agreed to be purchased by the defaulting Underwriters or substitute another Underwriter or Underwriters as aforesaid, and the Company shall not find or shall not elect to seek another Underwriter or Underwriters for such Securities as aforesaid, then this Agreement shall terminate. If, following exercise of the Option provided in Section 2(b) hereof, any Underwriter or Underwriters shall for any reason not permitted hereunder cancel their obligations to purchase Option Securities at the Option Closing Date, or shall fail to take up and pay for the number of Option Securities, which they become obligated to purchase at the Option Closing Date upon tender of such Option Securities in accordance with the terms hereof, then the remaining Underwriters or substituted Underwriters may take up and pay for the Option Securities of the defaulting Underwriters in the manner provided in Section 9(b) hereof. If the remaining Underwriters or substituted Underwriters shall not take up and pay for all Option Securities, the Underwriters shall be entitled to purchase the number of Option Securities for which there is no default or, at their election, the option shall terminate, the exercise thereof shall be of no effect. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. In the event of termination, there shall be no liability on the part of any non-defaulting Underwriter to the Company, provided that the provisions of this Section 9 shall not in any event affect the liability of any defaulting Underwriter to the Company arising out of such default. 10. Effective Date. The Agreement shall become effective upon its execution except that you may, at your option, delay its effectiveness until 11:00 a.m., Eastern time, on the first full business day following the effective date of the Registration Statement, or at such earlier time after the effective date of the Registration Statement as you in your discretion shall first commence the public offering by the Underwriters of any of the Securities. The time of the public offering shall mean the time after the effectiveness of the Registration Statement when the Securities are first generally offered by you to the other Underwriters and Selected Dealers. This Agreement may be terminated by you at any time before it becomes effective as provided above, except that Sections 3(c), 6, 7, 8, 13, 14, 15, 16, 17 and 18 shall remain in effect notwithstanding such termination. 11. Termination. (a) This Agreement, except for Sections 3(c), 6, 7, 8, 13, 14, 15 i 16 f 17, and 18 hereof, may be terminated at any time prior to the Closing Date, and the Option referred to in Section 2(b) hereof, if exercised, may be canceled at any time prior to the Option Closing Date, by you if in your judgment it is impracticable to offer for sale or to enforce contracts made by the Underwriters for the resale of the Securities agreed to be purchased hereunder by reason of: (i) the Company having sustained a material adverse loss, whether or not insured, by reason of fire, earthquake, flood, accident or other calamity, or from any labor dispute or court or government action, order or decree; (ii) trading in securities on the New 34 35 York Stock Exchange or the American Stock Exchange having been suspended or limited; (iii) material governmental restrictions having been imposed on trading in securities generally (not in force and effect on the date hereof); (iv) a banking moratorium having been declared by Federal or New York or Florida state authorities; (v) an outbreak of major international hostilities or other national or international calamity having occurred; (vi) the passage by the Congress of the United States or by any state legislative body of similar impact, of any act or measure, or the adoption of any orders, rules or regulations by any governmental body or any authoritative accounting institute or board, or any governmental executive, which is reasonably believed likely by the Representative to have a material adverse impact on the business, financial condition or financial statements of the Company or the market for the securities offered hereby; (vii) any material adverse change in the financial or securities markets beyond normal market fluctuations having occurred since the date of this Agreement; (viii) any material adverse change having occurred, since the respective dates as of which information is given in the Registration Statement and Prospectus, in the earnings, business prospects or general condition of the Company, financial or otherwise, whether or not arising in the ordinary course of business; (ix) a pending or threatened legal or governmental proceeding or action relating generally to the Company's business, or a notification having been received by the Company of the threat of any such proceeding or action, which could, in the reasonable judgment of the Representative, materially adversely affect the Company; (x) except as contemplated by the Prospectus, the Company is merged or consolidated into or acquired by another company or group or there exists a binding legal commitment for the foregoing or any other material change of ownership or control occurs; or (xi) the Company shall not have complied in all material respects with any term, condition or provisions on their part to be performed, complied with or fulfilled (including but not limited to those set forth in this Agreement) within the respective times therein provided. (b) If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section, the Company shall be promptly notified by you, by telephone, telegram or facsimile, confirmed by letter. 12. Representative's Warrant Agreement. At the Closing Date, the Company will issue to the Representative and/or persons related to the Representative, for an aggregate purchase price of $100, and upon the terms and conditions set forth in the form of Representative's Warrant Agreement annexed as an exhibit to the Registration Statement, Representative Warrants to purchase up to an aggregate of 150,000 Shares and 150,000 Warrants, in such denominations as the Representative shall designate. In the event of conflict in the terms of this Agreement and the Representative's Warrant Agreement, the language of the form of Representative's Warrant Agreement shall control. 13. Representations, Warranties and Agreements to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company and its principal officers, where appropriate, and the Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Underwriters, the Company or any of its officers or directors or any controlling person and will survive delivery of and payment for the Securities and the termination of this Agreement. 35 36 14. Notice. All communications hereunder will be in writing and, except as otherwise expressly provided herein, will be mailed, delivered or telegraphed and confirmed: If to the Underwriters: Douglas Nichols, President First London Securities Corporation 2600 State Street Dallas, Texas 75204 Copy to: Richard F. Dahlson Jackson & Walker, LLP 901 Main Street, Suite 6000 Dallas, Texas 75202-3797 If to the Company: Lyle Maul, President BEVERAGE WORKS, INC. 9800 South Sepulveda Blvd., Suite 720 Los Angeles, CA 90045 Copy to: Charles Hecht Hecht & Steckman, P.C. 60 East 42nd Street, Suite 5101 New York, NY 10165-5101 15. Parties in Interest. This Agreement herein set forth is made solely for the benefit of the several Underwriters, the Company and, to the extent expressed, any person controlling the Company or of the Underwriters, and directors of the Company, nominees for directors (if any) named in the Prospectus, its officers who have signed the Registration Statement, and their respective executors, administrators, successors, assigns and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" shall not include any purchaser of the Securities, as such purchaser, from the several Underwriters. All of the obligations of the Underwriters hereunder are several and not joint. 16. Applicable Law. This Agreement shall be governed and construed in accordance with the laws of the State of Texas applicable to contracts made and to be performed entirely within the State of Texas. The parties agree that any action brought by any party against another party in connection with any rights or obligations arising out of this Agreement shall be instituted properly in a federal or state court of competent jurisdiction with venue only in the State District Court of Dallas County, Texas or the United States District Court for the Northern District of Texas. A party to this Agreement named as a Defendant in any action brought in connection with this Agreement in any court outside of the above named designated county or district shall have the right to have the venue of said action changed to the above designated county or district or, if necessary, have the case dismissed, requiring the other party to refile such action in an appropriate court in the above designated county or federal district. 36 37 17. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counter-parts shall together constitute but one and the same instrument. 18. Entire Agreement. This Agreement and the agreements referred to within this Agreement constitute the entire agreement of the parties, and supersedes all prior agreement, understanding, negotiations and discussions, whether written or oral, of the parties hereto. 19. Representative as Underwriter. In the event the Representative acts as the sole Underwriter ("Underwriter") in connection with the underwriting of the securities being offered pursuant to the Registration Statement, all references to the Representative in this Agreement shall be replaced by reference to the "Underwriter", and (i) any consents required to be obtained from the Representative shall be required to be obtained solely from the Underwriter; (ii) all compensation to be received by the Representative shall instead be received by the Underwriter; and (iii) the provisions of section nine (9) of this Agreement shall not apply. If the foregoing is in accordance with your understanding of our agreement, kindly sign and return this Agreement, whereupon it will become a binding Agreement between the Company and the several Underwriters in accordance with its terms. Very truly yours, BEVERAGE WORKS, INC. BY:___________________________________________ Lyle Maul, President The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. FIRST LONDON SECURITIES CORPORATION BY:___________________________________________ Douglas Nichols, President For itself and as Representative of the several Underwriters 37 38 SCHEDULE A TO THE UNDERWRITING AGREEMENT
UNDERWRITER SHARES - ----------- ------ First London Securities Corporation............................. --------- 1,500,000
UNDERWRITER WARRANTS - ----------- -------- First London Securities Corporation............................. 1,500,000 ---------
38 EX-1.2 3 [FORM OF] AGREEMENT AMONG UNDERWRITERS 1 Exhibit 1.2 BEVERAGE WORKS, INC. 1,500,000 Shares of Common Stock and 1,500,000 Common Stock Purchase Warrants AGREEMENT AMONG UNDERWRITERS Dallas, Texas ___________, 1997 First London Securities Corporation 2600 State Street Dallas, Texas 75204 Dear Sirs: 1. Underwriting Agreement. We understand that BEVERAGE WORKS, INC. (the "Company"), proposes to enter into an underwriting agreement attached hereto as Exhibit A (the "Underwriting Agreement") with First London Securities Corporation (the "Representative") and the other underwriters named in Schedule A to the Underwriting Agreement (the "Underwriters"), acting severally and not jointly, with respect to the purchase of an aggregate of 1,500,000 Shares of Common Stock (the "Shares") and 1,500,000 Redeemable Class A Common Stock Purchase Warrants (the "Warrants"). The Shares and Warrants are hereinafter also referred to collectively as the "Securities". The Securities and the terms under which they are to be offered for sale by the several Underwriters are more particularly described in the Registration Statement, Underwriting Agreement and Prospectus. Unless the context indicates otherwise, the term Securities shall also include an additional 225,000 Shares and an additional 225,000 Warrants (the "Option Securities"), all or any part of which the Representative and/or the Underwriters are entitled to purchase from the Company upon exercise of the Representative's over-allotment option referred to in Section 2(b) of the Underwriting Agreement. This is to confirm that we agree to purchase, in accordance with the terms hereof and of the Underwriting Agreement, the number of Securities set forth opposite our name in Schedule A, plus such number of Securities, if any, which we may become obligated to purchase pursuant to Section 2(b) of the Underwriting Agreement and Section 4 hereof ("our Securities"). The ratio which the number of our Securities bears to the total number of Securities purchased pursuant to the Underwriting Agreement is herein called "our underwriting proportion". 2. Registration Statement and Prospectus. We have heretofore received and examined a copy of the registration statement, as amended to the date hereof, and the related 1 2 prospectus in respect of the Securities, as filed with the Securities and Exchange Commission. The registration statement as amended at the time it becomes effective, including financial statements and exhibits, is hereafter referred to as the "Registration Statement", and the prospectus in the form first filed with the Securities and Exchange Commission pursuant to its Rule 424(b) after the Registration Statement becomes effective is referred to as the "Prospectus". We confirm that the information furnished to you by us for use in the Registration Statement and in the Prospectus is correct and is not misleading insofar as it relates to us. We consent to being named as an Underwriter in such Registration Statement and we are willing to accept our responsibilities under the Securities Act of 1933 (the "Act"), as a result thereof. We confirm that we have authorized you to advise the Company on our behalf (a) as to the statements to be included in any preliminary prospectus and in the Prospectus under the heading "Underwriting" insofar as they relate to us and (b) that there is no other information about us required to be stated in the Registration Statement or Prospectus. We further confirm that, upon request by you as Representative, we have furnished a copy of any amended preliminary prospectus to each person to whom we have furnished a copy of any previous prospectus, and we confirm that we have delivered, and we agree that we will deliver, all preliminary and final Prospectuses required for compliance with the provisions of Rule 15c2-8 under the Securities Exchange Act of 1934 (the "1934 Act"). 3. Authority of the Representative. We authorize you, acting as Representative of the Underwriters, to execute and deliver on our behalf, the Underwriting Agreement, and to agree to any variation of its terms (except as to the purchase price and the number of our Securities) which, in your judgment, is not a variation which materially and adversely affects our rights and obligations. We also authorize you, in your discretion and on our behalf, with approval of counsel for the Underwriters, to approve the Prospectus and to approve of, or object to, any further amendments to the Registration Statement, or amendments or supplements to the Prospectus. We further authorize you to exercise all the authority and discretion vested in the Underwriters and in you by the provisions of the Underwriting Agreement and to take all such action as you in your discretion may believe desirable to carry out the provisions of the Underwriting Agreement and of this Agreement including the extension of any date specified in the Underwriting Agreement, the exercise of any right of cancellation or termination and to determine all matters relating to the public advertisement of the Securities; provided, however, that, except with the consent of Underwriters who shall have agreed to purchase in the aggregate 50% or more of the Securities, no extension of the time by which the Registration Statement is to become effective as provided in the Underwriting Agreement shall be for a period in excess of two business days. We authorize you to take such action as in your discretion may be necessary or desirable to effect the sale and distribution of the Securities, including, without limiting the generality of the foregoing, the right to determine the terms of any proposed offering, the concession to Selected Dealers (as hereinafter defined) and the reallowance, if any, to other dealers and the right to make the judgments provided for in the Underwriting Agreement. 2 3 4. Authority of Representative as to Defaulting Underwriters. Until the termination of this Agreement, we authorize you to arrange for the purchase by other persons, who may include you or any of the other Underwriters, of any Securities not taken up by any defaulting Underwriter. In the event that such arrangements are made, the respective amounts of the Securities to be purchased by the non-defaulting Underwriters and by such other person or persons, if any, shall be taken as the basis for all rights and obligations hereunder; but this shall not in any way affect the liability of any defaulting Underwriter to the other Underwriters for damages resulting from its default, nor shall any such default relieve any other Underwriter of any of its obligations hereunder or under the Underwriting Agreement except as herein or therein provided. In the event of default by one or more Underwriters in respect of their obligations (a) under the Underwriting Agreement to purchase the Securities agreed to be purchased by them thereunder, (b) under this Agreement to take up and pay for any Securities purchased or (c) to deliver any Securities sold or over-allotted by you for the respective accounts of the Underwriters pursuant to this Agreement, or to bear their respective share of expenses or liabilities pursuant to this Agreement, and to the extent that arrangements shall not have been made by you for any persons to assume the obligations of such defaulting Underwriter or Underwriters, we agree to assume our proportionate share of the obligations of each defaulting Underwriter (subject in the case of clause (a) above to the limitations contained in the Underwriting Agreement) without relieving any such defaulting Underwriter of its liability therefor. 5. Offering of Securities. We understand that you will notify us when the public offering of the Securities is to be made and of the initial public offering price. We hereby authorize you to fix the concession to dealers and the reallowance to dealers and in your sole discretion after the public offering to change the public offering price, the concession and the reallowance. The offering price at any time in effect is hereinafter referred to as the "public offering price". We agree that we will not offer any of the Securities for sale at a price other than the public offering price or allow any discount therefrom except as herein otherwise specifically provided. We agree that public advertisement of the offering shall be made by you on behalf of the Underwriters on such date as you shall determine. We have not advertised the offering and will not do so until after such date. We understand that any advertisement we may then make will be on our own responsibility and at our own expense. We authorize you to reserve and offer for sale to institutions and other retail purchasers and to dealers (the "Selected Dealers") to be selected by you (such dealers may include any Underwriter ) such of our Securities as you in your sole discretion shall determine. Any such offering to Selected Dealers may be made pursuant to a Selling Agreement, in the form attached hereto as Exhibits, or otherwise, as you may determine. The form of Selling Agreement attached hereto as Exhibit B is satisfactory to us. We authorize you to make purchases and sales of the Securities from or to any Selected 3 4 Dealers or Underwriters at the public offering price less all or any part of the concession and, with your consent, any Underwriter may make purchases or sales of the Securities from or to any Selected Dealer or Underwriter at the public offering price less all or any of the concession. We understand that you will notify each Underwriter promptly upon the release of the Securities for public offering as to the amount of Securities reserved for sale to Selected Dealers and retail purchasers. Securities not so reserved may be sold by each Underwriter for its own account, except that from time to time you may, in your discretion, add to the Securities reserved for sale to Selected Dealers and retail Purchasers any an Underwriter remaining unsold. We agree to notify you from time to time upon request of the amount of our Securities retained by us remaining unsold. If all the Securities reserved for offering to Selected Dealers and retail Purchasers are not promptly sold by you, any Underwriter may from time to time, with your consent, obtain a release of all or any Securities of such Underwriter then remaining unsold and Securities so released shall thereafter be deemed not to have been reserved. Securities of any Underwriter so reserved which remain unsold, or, if sold, have not been paid for at any time prior to the termination of this Agreement may, in your discretion or upon the request of such Underwriter, be delivered to such Underwriter for carrying purposes only, but such Securities shall remain subject to redelivery to you upon demand for disposition by you until this Agreement is terminated. We agree that in connection with sales and offers to sell the Securities, if any, made by us outside the United States or its territories or possessions, (a) we will furnish to each person to whom any such offer or sale is made such Prospectus, advertisement or other offering document containing information relating to the Securities or the Company as may be required under the laws, of the jurisdiction in which such offer or sale is made and (b) we will furnish to each person to whom any such offer is made a copy of the then current Preliminary Prospectus and to each person to whom any such sale is made a copy of the Prospectus referred to in the Underwriting Agreement (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto). Any Prospectus, advertisement or other offering document (other than any such preliminary prospectus or Prospectus) furnished by us to any person in accordance with the preceding sentence and all such additional offering material, if any, as we may furnish to any person (i) shall comply in all respects with the laws of the jurisdiction in which it is so furnished, (ii) shall be prepared and so furnished at our sole risk and expense, and, (iii) shall not contain information relating to the Securities or the Company which is inconsistent in any respect with information contained in the then current preliminary prospectus or in the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) as the case may be. We recognize the importance of a broad distribution of the Securities among bona fide investors and we agree to use our best efforts to obtain such broad distribution and to that end, to the extent we deem practicable, to give priority to small orders. We agree that we will not sell to any account over which we exercised discretionary authority any of the Securities which we have agreed to purchase pursuant to the Underwriting Agreement. 4 5 6. Compensation to Representative. We authorize you to charge to our account, as compensation for your services as Representative in connection with this offering, including the purchase from the Company of the Securities and the management the offering, an amount equal to ____ per Share and/or $ ____ per Warrant in respect to each of our Securities. 7. Payment and Delivery. At or about 9:00 a.m., Eastern Time, on the Closing Dates (including the first Closing Date and any Option Closing Date, as defined in the Underwriting Agreement), we agree to deliver to you at your office by wire transfer to the account of the Representative or by a certified or official bank check payable in New York Clearing House funds to your order in an amount equal to the initial public offering price, less the concession to the Selected Dealers in respect of that portion of our Securities which has been retained by or released to us for direct sales. In the event that our funds are not received by you when required, you are authorized, in your discretion, but shall not be obligated, to make payment for our account pursuant to the Underwriting Agreement by advancing your own funds. Any such payment by you shall not relieve us from any of our obligations hereunder or under the Underwriting Agreement. We authorize you to hold and deliver against payment any of our Securities which have been sold or reserved for sale to Selected Dealers or retail purchasers. Any of our Securities not sold or reserved by you as aforesaid, will be available for delivery to us at your office as soon as practicable after such Securities have been delivered to you. Upon the termination of this Agreement, or prior thereto at your discretion, you will deliver to us any of our Securities reserved by you for sale to Selected Dealers or retail purchasers but not sold and paid for against payment by us of an amount equal to the initial public offering price of such Securities, less the concession to the Selected Dealers in respect thereof. 8. Authority to Borrow. We authorize you to arrange loans for our account and to execute and deliver any notes or other instruments in connection therewith, and to pledge as security therefor all or any part of our Securities, as you may deem necessary or advisable to carry out the purchase, carrying and distribution of the Securities, and to advance your own funds, charging current interest rates. 9. Over-allotment; Stabilization. We authorize you, for the account of each Underwriter, prior to the termination of this Agreement, and for such longer period as may be necessary to cover any short position incurred for the accounts of the several Underwriters pursuant to this Agreement, (a) to over-allot in arranging for sales of Securities to Selected Dealers and others and, if necessary, to purchase Securities (whether pursuant to exercise of the option set forth in Section 2(b) of the Underwriting Agreement or otherwise) at such prices as you may determine for the purpose of covering such over-allotments, and (b) for the purpose of stabilizing the market in the Securities, to make purchases and sales of Securities on the open market or otherwise, for long or short account, on a when-issued basis or otherwise, at such 5 6 prices, in such amounts and in such manner as you may determine provided, however, that at no time shall our net commitment, either for long or short account, under this Section exceed 15% of the amount of our Securities. Such purchases, sales and over-allotments shall be made for the respective accounts of the several Underwriters as nearly as practicable to their respective underwriting proportions. We agree to take up on demand at cost any Securities so purchased for our account and deliver on demand any Securities so sold or over-allotted for our account. We authorize you to sell for the account of the Underwriters any Securities purchased pursuant to this Section, upon such terms as you may deem advisable, and any Underwriter, including yourselves, may purchase such Securities. You are authorized to charge the respective accounts of the Underwriters with broker's commissions or dealer's mark-up on purchases and sales effected by you. If pursuant to the provisions of the preceding paragraph and prior to the termination of this Agreement (or prior to such earlier date as you may have determined) you purchase or contract to purchase for the account of any Underwriter in the open market or otherwise any Securities which were retained by, or released to, us for direct sale, or any Securities which may have been issued in exchange for such Securities, we authorize you either to charge our account with an amount equal to the concession to Selected Dealers with respect thereto, which amount shall be credited against the cost of such Securities, or to require us to repurchase such Securities at a price equal to the total cost of such purchase, including transfer taxes and broker's commissions or dealer's markup, if any. In lieu of such action you may, in your discretion, sell for our account the Securities so purchased and debit or credit our account for the loss or profit resulting from such sale. You will notify us promptly if and when you engage in any stabilization transaction pursuant to this Section or otherwise and will notify us of the date of termination of stabilization. We agree to file with you any reports required of us including "Not as Manager" reports pursuant to Rule 17a-2 under the 1934 Act not later than five business days following the date u-con which stabilization was terminated, and we authorize you to file on our behalf with the Securities and Exchange Commission any reports required by such Rule. 10. Limitation on Transactions by Underwriters. Except as permitted by you, we will not during the term of this Agreement bid for, purchase, sell or attempt to induce others to purchase or sell, directly or indirectly, any Securities other than (i) as provided in the Underwriting Agreement and in this agreement, (ii) purchases from or sales to dealers of the Securities at the public offering price less all or any part of the reallowance to dealers or (iii) purchases or sales by us of any Securities as broker or unsolicited orders for the account of others. We represent that we have not participated in any transaction prohibited by the preceding paragraph and that we have at all times complied with the provisions of Rule 10b-6 and Rule 10b-6A under the 1934 Act applicable to this offering. We may, with your prior consent, make purchases of the Securities from and sales to other Underwriters at the public offering price, less all or any part of the concession to dealers. 6 7 11. Allocation and Payment of Expenses. We understand that all expenses of a general nature incurred by you, as Representative, in connection with the purchase, carrying, marketing and sale of the Securities shall be borne by the Underwriters in accordance with their respective share of the underwriting obligations. We authorize you to charge our account with our share, based on our underwriting obligation, of the aforesaid expenses including all transfer taxes paid of our behalf on sales or transfers made for our account. As promptly as possible after the termination of this Agreement, the accounts arising pursuant hereto shall be settled and paid. Your ascertainment of all expenses and the apportionment thereof shall be conclusive. Notwithstanding any settlement or settlements hereunder, we will remain liable for our share of all expenses and liabilities which may be incurred by or the accounts of the Underwriters, including any expenses and liabilities referred to in Sections 13 and 14 hereof, which shall be determined as provided in this Section. 12. Termination. Unless this Agreement or any provision hereof is earlier terminated by you and except for provisions herein that contemplate obligations surviving the termination hereof as noted in the next paragraph, this Agreement will terminate at the close of business on the 45th day after the date hereof, but in your discretion may be extended by you for a further period not exceeding 30 days with the consent of the Underwriters who have agreed to purchase in the aggregate 50% or more of the Securities. No termination or suspension pursuant to this Section shall affect your authority to cover any short position under this Agreement. Upon termination of this Agreement, all authorizations, rights and obligations hereunder shall cease, except (i) the mutual obligations to settle accounts under Section 11, our obligation to pay any transfer taxes which may be assessed and paid on account of any sales thereunder for our account, (ii) our obligation with respect to purchases which may be made by you from time to time thereafter to cover any short position incurred under this Agreement, (iv) the provisions of Sections 13 and 14 and (v) the obligations of any defaulting Underwriter, all of which shall continue until fully discharged. 13. Liability of Representative and Underwriters. Neither as Representative nor individually shall you be under any liability whatsoever to any other Underwriter nor shall you be under any liability in respect of any matters connected herewith or action taken by you pursuant hereto, except for the obligations expressly assumed by you in this Agreement. You shall be under no liability for or in respect of the value for the Securities or the of the form thereof, the Registration Statement, the Prospectus, or agreements or other instruments executed by the Company or others; or for or in respect of the delivery of the Securities; or for the performance by the Company or others of any agreement on its or their part. 7 8 Nothing herein contained shall constitute the several Underwriters an association, or partners with us or with each other, or, except as herein expressly provided, render any Underwriter liable for the obligation of any other Underwriter. The rights, obligations and liabilities of each of the Underwriters are several, in accordance with their respective obligations, and not joint. Notwithstanding any settlement of accounts under this Agreement, we agree to pay our underwriting proportion of the amount of any claim demand or liability which may be asserted against and discharged by the Underwriters or any of them, based on the claim that the Underwriters constitute an association, unincorporated business or other entity, and also to pay our underwriting proportion of expenses approved by you incurred by the Underwriters, or any of them, in contesting any such claims, demands or liabilities. If the Underwriters shall be deemed to constitute a partnership for income tax purposes, it is the intent of each Underwriter to be excluded from the application of Subchapter K, Chapter 1, Subtitle A of the Internal Revenue Code of 1954, as amended. Each Underwriter elects to be so excluded and agrees not to take any position inconsistent with such election. Each Underwriter authorizes you, in your discretion, to execute and file on behalf of the Underwriters such evidence of election as may be required by the Internal Revenue Service. 14. Indemnification and Future Claims. (a) We agree to indemnify and hold harmless you and each other Underwriter, and each person, if any, who controls you and such other Underwriter within the meaning of Section 15 of the Securities Act of 1933, and to reimburse their expenses, to the extent and upon the terms that we agree to indemnify and hold harmless the Company and to reimburse expenses as set forth in the Underwriting Agreement. Our indemnity agreement set forth in this Section remain in full force and effect regardless of any investigation made by or on behalf of such other Underwriter or controlling person and shall survive the delivery of and payment for the Securities and the termination of this Agreement. (b) In the event that at any time any claim or claims shall be asserted against you, as Representative, or otherwise involving the Underwriters generally, relating to the Registration Statement or any Preliminary Prospectus or the Prospectus, as such may be from time to time amended or supplemented, the public offering of the Securities or any of the transactions contemplated by this Agreement, we authorize you to take such other action as you shall deem necessary or desirable under the circumstances, including settlement of any such claim or claims if such course of action shall be recommended by counsel retained by you. We agree to pay to you on request, our underwriting proportion of all expenses incurred by you (including, but not limited to, disbursements and fees of counsel so retained) in investigating and defending against such claim or claims and cur underwriting proportion of any liability incurred by you in respect of such claim or claims, whether such liability shall be the result of a judgment or as a result of any such settlement. 15. Title to Securities. The Securities purchased by, or on behalf of, the respective Underwriters shall remain the property of such Underwriters until sold, and title to any such Securities shall not in any event pass to the Representative by virtue of any of the provisions of this Agreement. 8 9 16. Blue Sky Matters. It is understood that you assume no responsibility with respect to the right of any Underwriter or other person to offer or to sell Securities in any jurisdiction, not withstanding any information which you may furnish as to the jurisdictions under the securities laws of which it is believed the Securities may be sold. 17. Applicable Law. This Agreement will be governed by and construed in accordance with the laws of the State of Texas. 18. Capital Requirements. We confirm that the incurrence by us of our obligation under this Agreement and under the Underwriting Agreement will not place us in violation of the net capital requirements of Rule 15c3-1 under the 1934 Act or of any applicable rules relating to capital requirements of any securities exchange to which we are subject. 19. Miscellaneous. Any notice from you to us shall be deemed to have been duly given if telefaxed, telephoned or telegraphed, and confirmed by mail to us at the address set forth in the Underwriters Questionnaire furnished by us to you. Any notice from us to you shall be deemed to have been duly given if telefaxed or telegraphed, and confirmed by mail to you at 2600 State Street, Dallas, Texas 75204. We understand that you are a member in good standing of the National Association of Securities Dealers, Inc. ("NASD") We hereby confirm that we are actually engaged in the investment banking or securities business and are either (i) a member in good standing of the NASD or (ii) a dealer with its principal place of business located outside the United States, its territories and its possession and not registered as a broker or dealer under the 1934 Act who agrees not to make any sales within the United States, its territories or its possessions or to persons who are nationals thereof or residents therein (except that we may participate in sales to Selected Dealers and others under Section 5 of this Agreement). We hereby agree that if we are members of the NASD, we will comply with all of the provisions of the NASD Conduct Rules. If we are a foreign dealer, we agree to comply with Rule 2740 of the NASD Conduct Rules. If we are a foreign dealer and not a member of the NASD, we agree to comply with the NASD's interpretation with respect to free-riding and withholding, as though we were a member of the NASD, with the provisions of Rules 2730 and 2750 of the NASD Conduct Rules, and to comply with Rule 2420 of the NASD Conduct Rules as that applies to a non-member foreign dealer. In connection with sales and offers to sell Securities made by us outside the United States, its territories and possessions (i) we will either furnish to each person to whom any such sale or offer is made a copy of the then current Preliminary Prospectus or the Prospectus, as the case may be, or inform such person that such Preliminary Prospectus or Prospectus will be available upon request, and (ii) we will furnish to each person to whom any such sale or offer is made such Prospectus, advertisement or other offering document containing information relating to the Securities or the Company as may be required under the law of the jurisdiction in which such sale or offer is made. Any Prospectus, advertisement or other offering document furnished by us to any person in accordance with the preceding sentence and any such additional offering material as we may furnish to any person (i) shall comply in all respects with the law of the jurisdiction in which it is so furnished, (ii) shall be prepared and so furnished at our sole risk and 9 10 expenses and (iii) shall not contain information relating to the Securities or the Company which is inconsistent in any respect with the information contained in the then current preliminary Prospectus or in the Prospectus, as the case may be. We understand that, in consideration of your services in connection with the public offering of the Securities, the Company has agreed with you individually, and not as Representative of the Underwriters (a) to sell to you the Representative's Warrants referred to in the Underwriting Agreement for the sum of $100; (b) to pay to you a non-accountable expense allowance referred to in the Underwriting Agreement; (c) to pay you a financial advisory fee referred to in the Underwriting Agreement; and (d) to enter into the Merger and Acquisition Agreement (the "M/A Agreement") referred to in the Underwriting Agreement. In addition, you may, at your sole discretion, elect to exercise the over-allotment option individually. We confirm to you that we shall make no claim to the Representative's Warrants (or any offering of the Company's securities related thereto, or any right to participate in any capacity in any offering resulting therefrom), any rights related thereto, the Company's securities underlying the Representative's Warrants, the non-accountable expense allowance, the financial advisory fee, or, to the over-allotment option to the extent you elect to exercise such option individually, or the M/A Agreement. You confirm to us that we shall have no obligation or liabilities with respect to the purchase of the Representative's Warrants, the exercise thereof, the Company's securities underlying the Representative's Warrants (or any offering of the Company's securities related thereto, unless we shall subsequently agree to become an underwriter for, or otherwise participate in any such offering) or the non-accountable expense allowance, the financial advisory agreement, the M/A Agreement, or, the over-allotment option, to the extent you elect to exercise such option individually. Please confirm that the foregoing correctly states the understanding between us by signing and returning to us a counterpart hereof. Very truly yours, By: ------------------------------- (Attorney-in-fact for each of the several Underwriters named in Schedule A to the attached Underwriting Agreement.) Confirmed as of the date first above written: FIRST LONDON SECURITIES CORPORATION By: -------------------------------------- Douglas Nichols, President 10 11 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby irrevocably constitute and appoint Douglas Nichols and/or First London Securities Corporation, the true and lawful agent and attorney-in-fact of the undersigned with respect to all matters arising in connection with the undersigned's acting as one of the Underwriters of the proposed offering of an aggregate of 1,500,000 Shares of Common Stock and 1,500,000 Common Stock Purchase Warrants of BEVERAGE WORKS, INC. (such securities being more fully described in the Registration Statement No. 333-11789 filed by BEVERAGE WORKS, INC. pursuant to the Securities Act of 1933) with full power and authority to execute and deliver for and on behalf of the undersigned all such agreements, consents and documents in connection therewith as said agent and attorney-in-fact may deem advisable. The undersigned hereby gives to said agent and attorney-in-fact full power and authority to act in the premises, including, but not limited to, the power an authority to execute and deliver an Agreement Among Underwriters relating to such financing, to agree to increase or decrease the size of the offering to an amount as shall be approved by First London Securities Corporation, as Representative of the Underwriters, and to appoint a substitute or substitutes to act hereunder with the same power and authority as said agent and attorney-in-fact would have if personally acting. The undersigned hereby ratifies and confirms all that said agent and attorney-in-fact, or any substitute or substitutes, may do by virtue hereof. WITNESS the due execution hereof at _________________________________ ______________________________________________________________________________ (Street) (City) this _______ day of ___________________ , 1997. _____________________________ Firm Name BY: _________________________ Witness Partner, Officer or Sole Proprietor (indicate which) 11 12 CORPORATE ACKNOWLEDGEMENT STATE OF ) ) ss.: COUNTY OF ) On this _______ day of _______________, 1996, before me personally came ________________________, to me know, who being by me duly sworn, deposes and say that he resides at No. _____________________: that he is the ___________ of ____________, the aforementioned corporation, which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; and that it was so affixed by order the Board of Directors of said corporation; and that he signed his name thereto by like order. ______________________ Notary Public PARTNERSHIP ACKNOWLEDGEMENT STATE OF ) ) ss.: COUNTY OF ) On this _______ day of ___________, 1996, before me personally personally came _________________________________, one of the members of the firm of _____________________________________________, to me known and known to me to be the individual who executed the foregoing instrument and acknowledged that he executed, and was duly authorized to execute, the same as and for the act and deed of said firm. ______________________ Notary Public ______________________ Unless prior to 5:00 p.m. Eastern Time, on the date immediately preceding the proposed public offering date, the Syndicate Department of First London Securities Corporation, 2600 State Street, Dallas, Texas 75204 receives a telegram or letter from you revoking the Power of Attorney, the power and authority granted by such Power of Attorney may be exercised in accordance with the terms thereof. 12 EX-1.3 4 [FORM OF] SELECTED DEALERS AGREEMENT 1 Exhibit 1.3. BEVERAGE WORKS, INC. 1,500,000 Shares of Common Stock and 1,500,000 Common Stock Purchase Warrants SELECTED DEALER AGREEMENT Dallas, Texas _______________1997 Gentlemen: 1. First London Securities Corporation (the "Representative,,) and the other Underwriters named in the Prospectus (collectively the "Underwriters") , acting through us as the Representative, are severally offering for sale an aggregate of 1,500,000 Shares of Common Stock (the "Shares") and 1,500,000 Warrants (the "Warrants") (collectively the "Firm Securities") of BEVERAGE WORKS, INC. (the "Company") , which we have agreed to purchase from the Company, and which are more particularly described in the Registration Statement, Underwriting Agreement and Prospectus. In addition, the several Underwriters have been granted an option to purchase from the Company up to an additional 225,000 Shares and an additional 225,000 Warrants (the "Option Securities") to cover over-allotments in connection with the sale of the Firm Securities. The Firm Securities and any Option Securities purchased are herein called the "Securities". The Securities and the terms under which they are to be offered for sale by the several Underwriters are more particularly described in the Prospectus. 2. The Securities are to be offered to the public by the several Underwriters at the price per Share and price per Warrant set forth on the cover page of the Prospectus (the "Public Offering Price" 11) , in accordance with the terms of offering set forth in the Prospectus. 3. Some or all of the several Underwriters are severally offering, subject to the terms and conditions hereof, a portion of the Securities for sale to certain dealers who are actually engaged in the investment banking or securities business and who are either (a) members in good standing of the National Association of Securities Dealers, Inc. (the "NASD"), or (b) dealers with their principal places of business located outside the United States, its territories and its possessions and not registered as brokers or dealers under the Securities Exchange Act of 1934, as amended (the "111934 Act"), who have agreed not to make any sales within the United States, its territories or its possessions or to persons who are nationals thereof or residents therein (such dealers who shall agree to sell Securities hereunder being herein called "Selected 1 2 Dealers") at the public offering price, less a selling concession (which may be changed) of not in excess of $_______ per Share and/or $________ per Warrant payable as hereinafter provided, out of which concession an amount not exceeding $_________ per Share and/or $__________ per Warrant may be reallowed by Selected Dealers to members of the NASD or foreign dealers qualified as aforesaid. The Selected Dealers who are members of the NASD agree to comply with all of the provisions of the NASD Conduct Rules. Foreign Selected Dealers agree to comply with the provisions of Rule 2740 of the NASD Conduct Rules, and, if any such dealer is a foreign dealer and not a member of the NASD, such Selected Dealer also agrees to comply with the NASD's Interpretation with Respect to Free-Riding and Withholding, and to comply, as though it were a member of the NASD, with the provisions of Rules 2730 and 2750 of the NASD Conduct Rules, and to comply with Rule 2420 of the NASD Conduct Rules as that Rule applies to non-member foreign dealers. Some or all of the Underwriters may be included among the Selected Dealers. Each of the Underwriters has agreed that, during the term of this Agreement, it will be governed by the terms and conditions hereof whether or not such Underwriter is included among the Selected Dealers. 4. First London Securities Corporation shall act as Representative on behalf of the Underwriters and shall have full authority to take such action as we may deem advisable in respect to all matters pertaining to the public offering of the Securities. 5. If you desire to act as a Selected Dealer, and purchase any of the Securities, your application should reach us promptly by telefax or telegraph at the offices of First London Securities Corporation, 2600 State Street, Dallas, Texas 75204. We reserve the right to reject subscriptions in whole or in part, to make allotments, and to close the subscription books at any time without notice. The Securities allotted to you will be confirmed, subject to the terms and conditions of this Agreement. 6. The privilege of subscribing for the Securities is extended to you only on behalf of such of the Underwriters, if any, as may lawfully sell the Securities to Selected Dealers in your state or other applicable jurisdiction. 7. Any Securities to be purchased by you under the terms of this Agreement may be immediately reoffered to the public in accordance with the terms of offering as set forth herein and in the Prospectus, subject to the securities or Blue Sky laws of the various states or other jurisdictions. You agree to pay us on demand for the accounts of the several Underwriters an amount equal to the Selected Dealer concession as to any Securities purchased by you hereunder which, prior to the completion of the public offering as defined in paragraph 8 below, we may purchase or contract to purchase for the account of any Underwriter and, in addition, we may charge you with any broker's commission and transfer tax paid in connection with such purchase or contract to purchase. Certificates for Securities delivered on such repurchases need not be the identical certificates originally purchased. You agree to advise us from time to time, upon request, of the number of Securities 2 3 purchased by you hereunder and remaining unsold at the time of such request, and, if in our opinion any such Securities shall be needed to make delivery of the Securities sold or over-allotted for the account of one or more of the Underwriters, you will, forthwith upon our request, grant to us for the account or accounts of such Underwriter or Underwriters the right, exercisable promptly after receipt of notice from you that such right has been granted, to purchase, at the Public Offering Price less the selling concession or such part thereof as we shall determine, such number of Securities owned by you as shall have been specified in our request. No expenses shall be charged to Selected Dealers. A single transfer tax, if payable, upon the sale of the Securities by the respective Underwriters to you will be paid when such Securities are delivered to you. However, you shall pay any transfer tax on sales of Securities by you and you shall pay your proportionate share of any transfer tax (other than the single transfer tax described above) in the event that any such tax shall from time to time be assessed against you and other Selected Dealers as a group or otherwise. Neither you nor any other person is or has been authorized to give any information or to make any representation in connection with the sale of the Securities other than as contained in the Prospectus. 8. The first three paragraphs of Section 7 hereof will terminate when we shall have determined that the public offering of the Securities has been completed and upon telefax notice to you of such termination, but, if not theretofore terminated, they will terminate at the close of business on the 30th full business day after the date hereof; provided, however, that we shall have the right to extend such provisions for a further period or periods, not exceeding an additional 30 days in the aggregate upon telefax notice to you. 9. For the purpose of stabilizing the market in the Securities, we have been authorized to make purchases and sales of the Securities of the Company, in the open market or otherwise, for long or short account, and, in arranging for sales, to over-allot. 10. On becoming a Selected Dealer, and in offering and selling the Securities, you agree to comply with all the applicable requirements of the Securities Act of 1933, as amended (the "111933 Act"), and the 1934 Act. You confirm that you are familiar with Rule 15c2-8 under the 1934 Act relating to the distribution of preliminary and final prospectuses for securities of an issuer (whether or not the issuer is subject to the reporting requirements of Section 13 or 15(d) of the 1934 Act) and confirm that you have complied and will comply therewith. We hereby confirm that we will make available to you such number of copies of the Prospectus (as amended or supplemented) as you may reasonably request for the purposes contemplated by the 1933 Act or the 1934 Act, or the rules and regulations thereunder. 11. Upon request, you will be informed as to the states and other jurisdictions in which we have been advised that the Securities are qualified for sale under the respective securities or Blue Sky laws of such states and other jurisdictions, but neither we nor any of the Underwriters assume any obligation or responsibility as to the right of any Selected Dealer to sell 3 4 the Securities in any state or other jurisdiction or as to the eligibility of the Securities for sale therein. We will, if requested, file a Further State Notice in respect of the Securities pursuant to Article 23-A of the General Business Law of the State of New York. 12. No Selected Dealer is authorized to act as our agent or as agent for the Underwriters, or otherwise to act on our behalf or on behalf of the Underwriters, in offering or selling the Securities to the public or otherwise or to furnish any information or make any representation except as contained in the Prospectus. 13. Nothing will constitute the Selected Dealers an association or other separate entity or partners with the Underwriters, or with each other, but you will be responsible for your share of any liability or expense based on any claim to the contrary. We and the several Underwriters shall not be under any liability for or in respect of value, validity or form of the Securities, or the delivery of the certificates for the Securities, or the performance by anyone of any agreement on its part, or the qualification of the Securities for sale under the laws of any jurisdiction, or for or in respect of any other matter relating to this Agreement, except for lack of good faith and for obligations expressly assumed by us or by the Underwriters in this Agreement and no obligation on our part shall be implied herefrom. The foregoing provisions shall not be deemed a waiver of any liability imposed under the 1933 Act. 14. Payment for the Securities sold to you hereunder is to be made at the Public Offering Price less the above-mentioned selling concession on such time and date as we may advise, at the office of First London Securities Corporation, 2600 State Street, Dallas, Texas 75204, by wire transfer to the account of the Representative or by a certified or official bank check in current New York Clearing House funds, payable to the order of First London Securities Corporation, as Representative, against delivery of certificates for the Securities so purchased. If such payment is not made at such time, you agree to pay us interest on such funds at the prevailing broker's loan rate. 15. Notices to us should be addressed to us at the offices of First London Securities Corporation, 2600 State Street, Dallas, Texas 75204, Attention: Douglas Nichols. Notices to you shall be deemed to have been duly given if telephoned, telefaxed, telegraphed or mailed to you at the address to which this letter is addressed. 16. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida without giving effect to the choice of law or conflicts of law principles thereof. 17. If you desire to purchase any Securities and act as a Selected Dealer, please confirm your application by signing and returning to us your confirmation on the duplicate copy of this letter enclosed herewith, even though you may have previously advised us thereof by telephone or telegraph. Our signature hereon may be by facsimile. Very truly yours, 4 5 FIRST LONDON SECURITIES CORPORATION As Representative of the Several Underwriters BY: --------------------------------------- Authorized Officer 5 6 Douglas Nichols, President First London Securities Corporation 2600 State Street Dallas, Texas 75204 We hereby subscribe for _____________ Shares and/or __________ Warrants of BEVERAGE WORKS, INC. in accordance with the terms and conditions stated in the foregoing Selected Dealers Agreement and letter. We hereby acknowledge receipt of the Prospectus referred to in the Selected Dealers Agreement and letter. We further state that in purchasing said Shares and/or Warrants we have relied upon said Prospectus and upon no other statement whatsoever, whether written or oral. We confirm that we are a dealer actually engaged in the investment banking or securities business and that we are either (i) a member in good standing of the National Association of Securities Dealers, Inc. ("NASD"); or (ii) a dealer with its principal place of business located outside the United States, its territories and its possessions and not registered as a broker or dealer under the Securities Exchange Act of 1934, as amended, who hereby agrees not to make any sales within the United States, its territories or its possessions or to persons who are nationals thereof or residents therein. As a member of the NASD, we hereby agree to comply with all of the provisions of NASD Conduct Rules. If we are a foreign Selected Dealer, we agree to comply with the provisions of Rule 2740 of the Conduct Rules, and if we are a foreign dealer and not a member of the NASD, we agree to comply with the NASD's interpretation with respect to free-riding and withholding, and agree to comply, as though we were a member of the NASD, with provisions of Rules 2730 and 2750 of such Conduct Rules, and to comply with Rule 2420 thereof, as that Rule applies to non-member foreign dealers. Firm: __________________________ By: ______________________ (Name and Position) Address: _________________________________ _________________________________ Telephone No.: _________________________________ Dated: _____________, 1997 6 EX-2.1 5 AGREEMENT AND PLAN OF REORGANIZATION 1 EXHIBIT 2.1 AGREEMENT AND PLAN OF REORGANIZATION AGREEMENT AND PLAN OF REORGANIZATION, dated as of November 8, 1995, by and among BEVERAGE WORKS, INC., a California corporation ("BrewCo"), HERITAGE BREWING COMPANY, INC., a California corporation ("Heritage") (BrewCo and Heritage being hereinafter collectively referred to as the "Constituent Corporations") and the persons whose signatures appear on the signature page of this Plan of Reorganization ("Selling Shareholders"). RECITALS A. The Boards of Directors of BrewCo and Heritage have approved the acquisition of up to 388,020 shares of Heritage, which are all of the outstanding shares of Heritage, by BrewCo for up to 150,000 shares of its common stock. B. For federal income tax purposes, it is intended that the stock-for-stock exchange shall qualify as a reorganization within the meaning of Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended (the "Code"). C. Each of the parties to this Agreement desires to make certain representations, warranties and agreements in connection with the exchange and also to prescribe various conditions thereto. AGREEMENT THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE I EXCHANGE OF SHARES 1.1. RATIO OF EXCHANGE. Pursuant to this Agreement, each issued and outstanding share of common stock of Heritage ("Heritage Common Stock") shall be exchanged, and become exchangeable, for 0.3866 shares of validly issued, fully paid and nonassessable common stock, without par value, of BrewCo ("BrewCo Common Stock"). 2 1.2 EXCHANGE OF COMPANY CAPITAL STOCK CERTIFICATES. a. On or prior to the Closing Date, BrewCo shall deposit with the Closing Agent the certificates representing shares of BrewCo Common Stock required to effect the exchange referred to in Section 1.2.c. b. On or prior to the Closing Date, each holder of a certificate which immediately prior to the Closing Date represented outstanding shares of Heritage Common Stock, shall deposit with the Closing Agent the certificates representing shares of Heritage Common Stock required to effect the exchange referred to in Section 1.2.c. c. Selling Shareholders shall be entitled to receive a certificate or certificates representing the number of shares of BrewCo Common Stock into which such holder's shares of Heritage Common Stock were converted pursuant to Section 1.1. BrewCo shall be entitled to receive the certificates representing the number of shares of Heritage Common Stock, in the ratio specified in Section 1.1. 1.3 CLOSING. The closing (the "Closing") of the transactions contemplated by this Agreement shall take place at the offices of BrewCo's counsel, Hecht, Margolin & Steckman, P.C., 60 East 42nd Street, Suite 5101, New York, New York 10165 (the "Closing Agent") at 10:00 AM, local time, on November 22, 1995, or at such other time and place and on such other date as BrewCo and Heritage shall agree (the "Closing Date"). 1.4 MINIMUM NUMBER OF OUTSTANDING SHARES. This Agreement shall not become effective unless Selling Shareholders holding at least ninety percent (90%) of the outstanding stock of Heritage enter into this Agreement. ARTICLE II FURTHER AGREEMENTS 2.1 EMPLOYMENT AGREEMENT. Prior to or at the Closing, BrewCo and John Stoner and Mark Mericle shall execute employment agreements (the "Employment Agreements"). The Employment Agreements shall be substantially in the form attached as Exhibit A hereto, with such additional terms and conditions as may be mutually agreed to by the various parties thereto. 2.2 CONTINUITY OF INTEREST AGREEMENT. On the date hereof, Controlling Shareholders (as that term is defined in the Continuity 2 3 of Interest Agreement) and BrewCo shall execute a continuity of interest agreement ("Continuity of Interest Agreement") substantially in the form attached as Exhibit B hereto. 2.3 CALL OPTION AGREEMENT. Prior to or at the Closing, BrewCo shall grant a call option to Heritage's Shareholders ("Call Option") substantially in the form attached as Exhibit C hereto. ARTICLE III REPRESENTATIONS AND WARRANTIES 3.1 GENERAL STATEMENT. The parties make the representations and warranties to each other which are set forth in this Article III. The survival of all such representations and warranties shall be in accordance with Section 7.1 hereof. 3.2 REPRESENTATIONS AND WARRANTIES OF BREWCO. BrewCo represents and warrants to Heritage, as of the date hereof and as of the Closing Date, as follows: a. BrewCo is a California corporation in good standing. b. BrewCo is authorized to execute this Agreement. c. No governmental consent is required for BrewCo to execute this Agreement. 3.3 REPRESENTATIONS AND WARRANTIES OF HERITAGE. Heritage represents and warrants to BrewCo as of the date hereof and at the Closing Date, except as disclosed in Schedule A annexed hereto, as follows: a. Heritage is a California corporation in good standing. b. Heritage is registered to do business in all jurisdictions required to operate its business. c. Heritage's authorized and issued capital stock is 388,020 common shares, no par value, and that Heritage has no other equity securities issued or outstanding or required to be issued. d. No governmental consent is required for Heritage to execute this Agreement, except for approvals of the change of directors and change of ownership by the Small Business Administration, Bureau of Alcohol Tobacco and Firearms and the State of California Department of Alcohol Beverage Control. e. Heritage is authorized to execute this Agreement. 3 4 f. Execution would not cause a conflict with or default under any other agreements to which Heritage or its shareholders are a party. g. Heritage warrants that its financial statements, attached hereto as Exhibit D, are complete and accurate. h. Heritage warrants that it has no undisclosed liabilities. i. With respect to Taxes (as defined below): (i) Heritage has filed, within the time and in the manner prescribed by law, all returns, declarations, reports, estimates, information returns and statements ("Returns") required to be filed under federal, state, local or any foreign laws by Heritage, and all such Returns are true, correct and complete in all material respects. (ii) Heritage has within the time and in the manner prescribed by law, paid all Taxes (as defined below) that are due and payable. (iii) Heritage has established on its respective books and records reserves (to be specifically designated as an increase to current liabilities) that are adequate for the payment of all Taxes not yet due and payable. (iv) There are no liens for Taxes upon the assets of Heritage. (v) No deficiency for any Taxes has been proposed, asserted or assessed against Heritage or any of its subsidiaries which has not been resolved and paid in full. (vi) There are no outstanding waivers or comparable consents regarding the application of the statute of limitations with respect to any Taxes or Returns that have been given by Heritage or any of its subsidiaries. (vii) No federal, state, local or foreign audits or other administrative proceedings or court proceedings are presently pending with regard to any Taxes or Returns. (viii) For purposes of this Agreement, "Taxes" shall mean all taxes, charges, fees, levies or other assessments of whatever kind or nature, including, without limitation, all net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, excise, estimated, severance, stamp, occupancy or 4 5 property taxes, customs duties, fees, assessments or charges of any kind whatsoever (together with any interest and any penalties, additions to tax or additional amounts) imposed by any taxing authority (domestic or foreign) upon or payable by Heritage. j. Heritage is not presently in litigation or subject to any claims, except as disclosed in Schedule A annexed hereto. k. Heritage has good and valid title to all assets identified in the financial statements, which are not subject to any liens except as disclosed in Schedule A annexed hereto. 3.4 REPRESENTATIONS AND WARRANTIES OF SELLING SHAREHOLDERS. Each Selling Shareholder represents and warrants severally, and not jointly, that: a. The Heritage Common Stock to be delivered to BrewCo by such Selling Shareholder is free from claims, liens, or other encumbrances. b. Such Selling Shareholder has the unqualified right to transfer the Heritage Common Stock to BrewCo. c. All legends on the share certificates of the Heritage Common Stock to be delivered by such Selling Shareholder, other than the legend imposed under the Securities Act of 1933, have been lawfully removed or that the transfer to BrewCo under the terms of this Plan of Reorganization are in compliance with such legends. ARTICLE IV COVENANTS 4.1 CONDUCT OF BUSINESS OF HERITAGE. Heritage agrees from the date hereof: a. To provide BrewCo access to Heritage's books and facilities. b. To not issue or redeem stock, incur debt or pay or declare dividends without the approval of BrewCo. c. To not declare or pay bonuses or incur or pay any other extraordinary item. d. To otherwise conduct its business consistent with past 5 6 practice. 4.2 FINANCIAL STATEMENTS. Heritage must furnish regular financial statements to BrewCo and such further information as BrewCo reasonably requests. 4.4 APPROVAL OF SHAREHOLDERS. Heritage shall recommend to its shareholders approval of this Agreement and mail to its shareholders a transmittal letter in form and substance reasonably satisfactory to BrewCo to be used by such shareholders in forwarding their certificates for surrender and exchange. 4.5 THIRD PARTY CONSENTS. Each party to this Agreement shall use its best efforts to obtain, as soon as reasonably practicable, all permits, authorizations, consents, waivers and approvals from third parties or governmental authorities necessary to consummate this Agreement and the transactions contemplated hereby or thereby. ARTICLE V CONDITIONS TO CLOSING 5.1 CONDITIONS TO EACH PARTY'S OBLIGATION. The respective obligations of each party shall be subject to the fulfillment of all of the following conditions precedent at or prior to the Closing Date: a. No statute or regulation enacted which would prevent consummation of this Agreement. b. All governmental consents and approvals required to consummate this Agreement have been obtained. 5.2 CONDITIONS TO OBLIGATIONS OF HERITAGE AND SELLING SHAREHOLDERS. The obligations of Heritage and Selling Shareholders are subject to fulfillment of all of the following conditions precedent at or prior to the Closing Date: a. Representations and warranties made by BrewCo are true. b. All obligations of BrewCo under this Agreement have been performed. c. The Employment Agreements, substantially in the form attached hereto as Exhibit A, shall be executed by BrewCo. d. The Continuity of Interest Agreement in substantially the form attached hereto as Exhibit B shall be executed by BrewCo. 6 7 e. The Call Option in substantially the form attached hereto as Exhibit C shall be executed by BrewCo. 5.3 CONDITIONS TO OBLIGATIONS OF BREWCO. The obligations of BrewCo are subject to the fulfillment of all of the following conditions precedent at or prior to the Closing Date: a. Representations and warranties made by Heritage and Selling Shareholders are true. b. All obligations of Heritage and Selling Shareholders under this Agreement have been performed. c. The Employment Agreements, substantially in the form attached hereto as Exhibit A, shall be executed by Controlling Shareholders. d. The Continuity of Interest Agreement in substantially the form attached hereto as Exhibit B, shall be fully executed and shall be in full force and effect. ARTICLE VI INDEMNIFICATION 6.1 HERITAGE AND CONTROLLING SHAREHOLDER INDEMNIFICATION COVENANTS. John Stoner and Mark Mericle ("Controlling Shareholders") and Heritage shall indemnify, save and keep BrewCo and its affiliates, successors and permitted assigns (the "BrewCo Indemnitees"), harmless against and from all liability, demands, claims, actions or causes of action, assessments, losses, fines, penalties, costs, damages and expenses, including reasonable attorneys' fees, disbursements and expenses (collectively, "Damages"), sustained or incurred by any of the BrewCo Indemnitees as a result of, arising out of or by virtue of any misrepresentation, breach of any warranty or representation, or non-fulfillment of any agreement or covenant on the part of Heritage, whether contained in this Agreement or any exhibit or schedule hereto or thereto or any written statement or certificate furnished or to be furnished to BrewCo pursuant hereto or in any closing document delivered by Heritage to BrewCo in connection herewith. Controlling Shareholders shall not be liable for a claim of Damages (under this Section 6.1) which is less than $50,000, nor shall Controlling Shareholders be liable for a claim or claims of Damages to the extent such claim or claims exceeds the Controlling Shareholders' value in their BrewCo Common Stock, whether acquired pursuant to this Agreement or otherwise. Controlling Shareholders' obligations under this Section 6.1, and any other liability hereunder, shall terminate two years from the date hereof. 7 8 6.2 SELLING SHAREHOLDER INDEMNIFICATION COVENANTS. Each Selling Shareholder shall indemnify, save and keep the BrewCo Indemnitees, as defined in Section 6.1, harmless against and from all Damages, as defined in Section 6.1, sustained or incurred by any of the BrewCo Indemnitees as a result of any warranty or representation, or non-fulfillment of any agreement or covenant on the part of such Selling Shareholder, whether contained in this Agreement or any exhibit or schedule hereto or thereto, or any written statement or certificate furnished or to be furnished to BrewCo pursuant hereto or in any closing documents delivered by such Selling Shareholder to BrewCo in connection herewith. Each Selling Shareholder's liability under this Section 6.2, or otherwise under this Agreement, shall terminate two years from the date hereof. ARTICLE VII MISCELLANEOUS 7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations, warranties, covenants and agreements made by any party in this Agreement or pursuant hereto shall survive the Agreement and Plan of Reorganization. All claims made by BrewCo by virtue of any such representations, warranties, covenants and agreements shall be made under, and subject to the limitations set forth in, Article III hereof. 7.2 NOTICES. All notices required or permitted to be given hereunder shall be in writing and shall be deemed given when delivered in person or sent by confirmed facsimile, or when received if given by Federal Express or other nationally recognized overnight courier service, or five (5) business days after being deposited in the United States mail, postage prepaid, registered or certified mail, addressed to the applicable party as follows: BEVERAGE WORKS, INC. HERITAGE BREWING COMPANY, INC. 9800 Sepulveda Blvd. 571-C Crane Street Suite 720 Lake Elsinore, CA 92530 Los Angeles, CA 90045 (310) 568-4077 (fax) Notices to any Selling Shareholder shall sent to such address as set forth next to such Selling Shareholder's name on the signature page herein. 7.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties. 7.4 NON-WAIVER. Failure of a party to insist upon performance of 8 9 terms, covenants or conditions shall not be construed as a subsequent waiver of any such terms, covenants, conditions. 7.5 COUNTERPARTS. This Agreement may be executed in any number of counterparts with the same effect as if all of the parties had signed the same document. All counterparts shall be construed together and shall constitute one agreement. 7.6 SEVERABILITY. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity or legality of the remainder of this Agreement. 7.7 GOVERNING LAW. The laws of the State of California shall govern the validity of this Agreement and the construction of its terms. 7.8 BINDING EFFECT; BENEFIT. Except as otherwise provided in this Agreement, every covenant, term, and provision of this Agreement shall be binding upon and inure to the benefit of the parties and their respective heirs, legatees, legal representatives, successors, transferees, and assigns. 7.9 ASSIGNABILITY. This Agreement shall not be assignable by either party without prior written consent of other party. IN WITNESS WHEREOF, the parties have executed this Agreement and Plan of Reorganization on the date first above written. BEVERAGE WORKS, INC. By: /s/ FREDERIK G.M. RODENHUIS ---------------------------- Frederik G.M. Rodenhuis President HERITAGE BREWING COMPANY, INC. By: /s/ JOHN STONER ---------------------------- John Stoner President SELLING SHAREHOLDERS: Number of Heritage Name Address Shares Owned /s/ MARK B. MERICLE 82,508 - --------------------------- ----------------------- --------------------- Mark B. Mericle 9 10 /s/ JOHN G. STONER 115,512 - ----------------------------- --------------------- --------------------- John G. Stoner /s/ JACK STONER 30,000 - ----------------------------- --------------------- --------------------- Jack Stoner /s/ PATRICIA STONER - ----------------------------- --------------------- --------------------- Patricia Stoner /s/ JOHN LANGHAS 38,000 - ----------------------------- --------------------- --------------------- John Langhas /s/ TERRI LANGHAS - ----------------------------- --------------------- --------------------- Terri Langhas /s/ J. LELAND MOTHERSHEAD III 10,000 - ----------------------------- --------------------- --------------------- J. Leland Mothershead III /s/ JOHN L. MOTHERSHEAD IV 7,000 - ----------------------------- --------------------- --------------------- John L. Mothershead IV /s/ BENJAMIN HO 10,000 - ----------------------------- --------------------- --------------------- Benjamin Ho /s/ CHARLES NOFFLETT 5,000 - ----------------------------- --------------------- --------------------- Charles Nofflett /s/ CHARLES NOFFLETT 5,000 - ----------------------------- --------------------- --------------------- Adam Nofflett /s/ STEVEN LEWKOWITZ 5,000 - ----------------------------- --------------------- --------------------- Steven Lewkowitz - ----------------------------- --------------------- --------------------- Hein Vinh Phan /s/ DONALD LEA 5,000 - ----------------------------- --------------------- --------------------- Donald Lea /s/ FAY LEA - ----------------------------- --------------------- --------------------- Fay Lea - ----------------------------- --------------------- --------------------- Jeff S. Mericle /s/ ANDREW S. MEYER 5,000 - ----------------------------- --------------------- --------------------- Andrew S. Meyer - ----------------------------- --------------------- --------------------- Gordon J. Kuhlman 10 11 /s/ GEORGE A. SEDIA 5,000 - ----------------------------- --------------------- --------------------- George A. Sedia /s/ ARTHUR R. CATHEY 5,000 - ----------------------------- --------------------- --------------------- Arthur R. Cathey /s/ DANIEL D. ALUSTIZA 5,000 - ----------------------------- --------------------- --------------------- Daniel D. Alustiza /s/ MARK WILLBURGER 4,000 - ----------------------------- --------------------- --------------------- Mark Willburger /s/ KATHRYN WILLBURGER - ----------------------------- --------------------- --------------------- Kathryn Willburger - ----------------------------- --------------------- --------------------- Edward D. Sybesma, Jr.; APC Employees Pension Plan Trust /s/ DAVID WALSER 31,000 - ----------------------------- --------------------- --------------------- David Walser 11 12 SCHEDULE A 12 13 EXHIBIT B CONTINUITY OF INTEREST AGREEMENT BEVERAGE WORKS, INC. a California corporation ("BrewCo") and the undersigned shareholders ("Controlling Shareholders") of HERITAGE BREWING COMPANY, INC., a California corporation ("Heritage"), hereby enter into this Agreement on November 8, 1995 for the purposes hereinafter set forth. WHEREAS, BrewCo, Heritage and Heritage's Shareholders entered into an Agreement and Plan of Reorganization dated as of November 8, 1995 (the "Plan of Reorganization"); and WHEREAS, the BrewCo, Controlling Shareholders and Heritage are willing to consummate the Plan of Reorganization only if such transaction will qualify as a tax free reorganization under Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"); NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS: 1. The Controlling Shareholders represent and warrant that they have, and as of the Closing Date will have, no present plan, intention or arrangement to sell, transfer or otherwise dispose of the shares of BrewCo Common Stock to be received in the Plan of Reorganization that would reduce former Heritage shareholders' ownership of BrewCo Common Stock to a number of shares having a value, as of the Closing Date, of less than fifty percent (50%) of the value of all of the issued and outstanding capital stock of Heritage immediately prior to the Closing Date. 2. The Controlling Shareholders represent that as of the date hereof they own more than fifty percent (50%) of the outstanding shares of Heritage Common Stock. 3. The Controlling Shareholders agree that prior to the Closing Date, they will not sell, transfer or otherwise dispose of any Heritage Common Stock. 4. The Controlling Shareholders agree that, for a period of one year after the Closing Date (the "Post-Closing Continuity Period"), they will not sell, transfer or otherwise dispose of an aggregate number of shares of BrewCo Common Stock having a value, as of the date of the Closing Date, of more than fifty percent (50%) of the value of all of the issued and outstanding capital stock of Heritage immediately prior to the Closing Date. 5. The Controlling Shareholders shall deliver written notice to BrewCo within ten days after disposing of any shares of BrewCo 14 Common Stock during the Post-Closing Continuity Period (as permitted by paragraph 4), stating the number of shares disposed of and the manner of disposition. 6. This Agreement shall be binding upon and shall be enforceable against the successors and assigns of BrewCo. 7. This Agreement shall not be modified, amended, altered or supplemented except by a written agreement executed by all of the parties hereto. 8. In the event of the termination of the Plan of Reorganization, this Agreement shall terminate. 9. This Agreement may be executed in two or more counterparts, each of which together shall constitute one and the same document. This Agreement constitutes the entire agreement among the Parties with respect to the subject matter hereof. The terms used herein have the same meaning as defined in the Plan of Reorganization unless otherwise stated. IN WITNESS WHEREOF, the parties hereto have caused this Continuity of Interest Agreement to be duly executed on the date first set forth above. BEVERAGE WORKS, INC. By: /s/ FREDERIK G.M. RODENHUIS --------------------------- Frederik G.M. Rodenhuis President CONTROLLING SHAREHOLDERS By: /s/ JOHN G. STONER --------------------------- John G. Stoner By: /s/ MARK B. MERICLE --------------------------- Mark B. Mericle -2- EX-2.2 6 AGREEMENT OF PARTNERSHIP AND CONTRIBUTION AGMT. 1 EXHIBIT 2.2 AGREEMENT OF PARTNERSHIP OF BWI-PROST PARTNERS, A CALIFORNIA PARTNERSHIP 2 TABLE OF CONTENTS Page SECTION 1 - THE PARTNERSHIP 1.1 FORMATION................................................. 1 1.2 NAME...................................................... 1 1.3 PURPOSE................................................... 1 1.4 PLACE OF BUSINESS......................................... 2 1.5 TERM...................................................... 2 1.6 STATUTORY COMPLIANCE...................................... 2 1.7 TITLE TO PROPERTY......................................... 2 1.8 PAYMENTS OF INDIVIDUAL OBLIGATIONS........................ 2 1.9 INDEPENDENT ACTIVITIES; TRANSACTIONS WITH AFFILIATES...... 2 1.10 DEFINITIONS............................................... 3 SECTION 2 - PARTNERS' CAPITAL CONTRIBUTIONS 2.1 INITIAL CAPITAL CONTRIBUTIONS............................ 12 2.2 ADDITION CAPITAL CONTRIBUTIONS........................... 12 2.3 LOANS BY PARTNERS TO THE PARTNERSHIP..................... 14 2.4 OTHER MATTERS............................................ 14 SECTION 3 - ALLOCATIONS 3.1 PROFITS.................................................. 14 3.2 LOSSES................................................... 15 3.3 SPECIAL ALLOCATIONS...................................... 15 3.4 CURATIVE ALLOCATIONS..................................... 16 3.5 OTHER ALLOCATION RULES................................... 16 3.6 TAX ALLOCATIONS: CODE SECTION 704(C).................... 17 SECTION 4 - DISTRIBUTIONS 4.1 DISTRIBUTIONS............................................ 17 4.2 AMOUNTS WITHHELD......................................... 19 SECTION 5 - MANAGEMENT AND OPERATIONS 5.1 JOINT MANAGEMENT COMMITTEE............................... 20 5.2 AUTHORITY OF JOINT MANAGEMENT COMMITTEE.................. 20 5.3 MEETINGS................................................. 22 5.4 DUTIES................................................... 22 5.5 RULES AND PROCEDURES..................................... 22 5.6 DUTY OF CARE............................................. 22 5.7 DEADLOCK BREAKING........................................ 22 SECTION 6 - INDEMNIFICATION OF PARTNERS 6.1 GENERAL.................................................. 22 i 3 Page 6.2 ENVIRONMENTAL............................................ 22 6.3 PARTNERSHIP EXPENSES..................................... 23 6.4 LIMITATIONS.............................................. 23 SECTION 7 - REPRESENTATIONS AND WARRANTIES 7.1 PROST.................................................... 23 7.2 BWISS.................................................... 24 SECTION 8 - ACCOUNTING, BOOKS AND RECORDS 8.1 ACCOUNTING, BOOKS AND RECORDS............................ 25 8.2 REPORTS.................................................. 25 8.3 TAX RETURNS; INFORMATION................................. 26 8.4 SPECIAL BASIS ADJUSTMENT................................. 26 8.5 TAX MATTERS PARTNER...................................... 26 SECTION 9 - AMENDMENTS; MEETINGS 9.1 AMENDMENTS............................................... 26 SECTION 10 - TRANSFER OF INTERESTS 10.1 RESTRICTIONS ON TRANSFER................................. 27 10.2 RIGHT OF FIRST REFUSAL................................... 27 10.3 PERMITTED TRANSFERS...................................... 27 10.4 GENERAL TRANSFER PROVISIONS.............................. 27 10.5 TAX ALLOCATIONS AND CASH DISTRIBUTION.................... 28 10.6 COMPLIANCE............................................... 28 SECTION 11 - WITHDRAWALS; ACTION FOR PARTITION; BREACHES 11.1 WAIVER OF PARTITION...................................... 28 11.2 COVENANT NOT TO WITHDRAW OR DISSOLVE..................... 29 11.3 CONSEQUENCES OF VIOLATION OF COVENANTS................... 29 11.4 BREACH PAYMENTS.......................................... 30 11.5 NO BONDING............................................... 30 11.6 NET EQUITY............................................... 30 SECTION 12 - BUY-OUT 12.1 BUY-OUT PROVISION........................................ 31 12.2 NONSOLICITATION.......................................... 31 12.3 HIRING OF BWISS' EMPLOYEES............................... 32 12.4 NONDISCLOSURE OF CONFIDENTIAL INFORMATION................ 32 12.5 INTELLECTUAL PROPERTY RIGHTS............................. 33 12.6 PARTNERSHIP MATERIALS.................................... 33 ii 4 Page SECTION 13 - DISSOLUTION AND WINDING UP 13.1 LIQUIDATING EVENTS....................................... 34 13.2 WINDING UP............................................... 34 13.3 COMPLIANCE WITH CERTAIN REQUIREMENTS OF REGULATIONS;..... 35 13.4 DEEMED DISTRIBUTION AND RECONTRIBUTION................... 35 13.5 RIGHTS OF PARTNERS....................................... 36 13.6 NOTICE OF DISSOLUTION.................................... 36 13.7 RIGHT OF FIRST REFUSAL................................... 36 SECTION 14 - MISCELLANEOUS 14.1 NOTICES.................................................. 39 14.2 BINDING EFFECT........................................... 39 14.3 CONSTRUCTION............................................. 39 14.4 SEVERABILITY............................................. 39 14.5 INCORPORATION BY REFERENCE............................... 39 14.6 FURTHER ACTION........................................... 39 14.7 GOVERNING LAW............................................ 39 14.8 COUNTERPART EXECUTION.................................... 39 14.9 ARBITRATION.............................................. 40 14.10 ATTORNEYS' FEES.......................................... 40 iii 5 This AGREEMENT OF PARTNERSHIP OF BWI-PROST PARTNERS, a California partnership, ("Agreement") is entered into and shall be effective as of the Contribution Date (as defined in Section 1.7 of the Contribution Agreement attached hereto as Exhibit A) by and among Prost Partners, L.P. ("Prost") and BWI-St. Stan's, Inc., pursuant to the provisions of the California Uniform Partnership Act, on the following terms and conditions: WHEREAS, Prost currently owns and operates a brewery and brewpub located in Modesto, California doing business as St. Stan's Brewing Company, and Beverage Works, Inc. ("BWI"), which owns all of the outstanding shares of BWI-St. Stan's, Inc. ("BWISS"), is seeking to acquire or enter into partnership arrangements with at least two other breweries in the United States, which are anticipated to be consummated upon the closing of an initial public offering of BWI common shares; and WHEREAS, Prost and BWI have skills, proprietary technologies and know-how in producing, marketing, distributing and selling craft beers and other beverages, which could be used to develop novel and cost-competitive products and processes; and WHEREAS, the parties hereto desire to create a partnership for the purpose of developing their technologies and skills and producing such products and processes. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in consideration of the mutual promises set forth herein and intending to be legally bound, the parties hereto do hereby agree as follows: SECTION 1 THE PARTNERSHIP 1.1 FORMATION. The Partnership is hereby formed as a California general partnership effective as of the Contribution Date pursuant to, in accordance with, and for purposes of, the provisions of the Act. 1.2 NAME. The name of the Partnership shall be BWI-Prost Partners and all business of the Partnership shall be conducted in such name. The Partnership shall hold all of its property in the name of the Partnership and not in the name of any Partner. 1.3 PURPOSE. (a) The business of the Partnership is (i) developing, promoting, producing, distributing and selling St. Stan's Brewing Company products, and (ii) cooperating with BWI and its subsidiaries and partners in the developing, promoting, producing, distributing and selling of those entities' products. (b) The Partnership shall be a partnership only for the purpose specified in this Section 1.3. Except as otherwise provided in this Agreement, the Partnership shall not engage in any other activity or business and no Partner shall have any authority to hold itself out as a general agent of another Partner in any other business or activity. 6 1.4 PLACE OF BUSINESS. The principal place of business of the Partnership shall be at 821 L Street, Modesto, California, or at such other place within or without the State of California as may be determined by the Joint Management Committee. 1.5 TERM. The term of the Partnership shall commence on the Contribution Date as defined in Section 1.7 of the Contribution Agreement and shall continue until the winding up and liquidation of the Partnership and its business is completed following a "Liquidating Event," as provided in Section 13 hereof. 1.6 STATUTORY COMPLIANCE. The Partnership shall exist under and be governed by, and this Agreement shall be construed in accordance with, the applicable laws of the State of California. The Partners shall make all filings and disclosures required by, and shall otherwise comply with, all such laws. The Partners shall execute and file in the appropriate records any assumed or fictitious name certificates and other documents and instruments as may be necessary or appropriate with respect to the formation of, and conduct of business by, the Partnership. 1.7 TITLE TO PROPERTY. All real and personal property owned by the Partnership shall be owned by the Partnership as an entity and no Partner shall have any ownership interest in such property in its individual name or right, and each Partners's interest in the Partnership shall be personal property for all purposes. Except as otherwise provided in this Agreement, the Partnership shall hold all of its real and personal property in the name of the Partnership and not in the name of any Partner. 1.8 PAYMENTS OF INDIVIDUAL OBLIGATIONS. The Partnership's credit and assets shall be used solely for the benefit of the Partnership, and no asset of the Partnership shall be transferred or encumbered for or in payment of any individual obligation of a Partner. 1.9 INDEPENDENT ACTIVITIES; TRANSACTIONS WITH AFFILIATES. (a) Each Partner and any of its Affiliates shall be required to devote only such time to the affairs of the Partnership as such Partner determines in its sole discretion may be necessary to manage and operate the Partnership, and each such Person, to the extent not otherwise directed by such Partner, shall be free to serve any other Person or enterprise in any capacity that it may deem appropriate in its discretion. (b) Insofar as permitted by applicable law, each Partner (acting on its own behalf) and its Affiliates may, except as otherwise set forth in this Agreement, engage in whatever activities they choose, without having or incurring any obligation to offer any interest in such activities to the Partnership or any Partner and neither this Agreement nor any activity undertaken pursuant hereto shall prevent any Partner or its Affiliates from engaging in such activities, or require any Partner to permit the Partnership or any Partner or its Affiliates to participate in any such activities, and as a material part of the consideration for the execution of this Agreement by each Partner, each Partner hereby waives, relinquishes, and renounces any such right or claim of participation. 2 of 40 7 1.10 DEFINITIONS. Capitalized words and phrases used in this Agreement have the following meanings: (a) "Act" means the California Uniform Partnership Act, as amended from time to time (or any corresponding provisions of succeeding law). (b) "Adverse Act" means, with respect to any Partner, any of the following: (i) A failure of such Partner to make any Capital Contribution required pursuant to any provision of this Agreement; (ii) A Transfer of all or any portion of such Partner's interest in the Partnership except as expressly permitted or required by this Agreement; (iii) Any termination, dissolution or liquidation of a corporation or partnership which is a Partner, or the taking of any action by its directors, majority shareholders or general partners looking to the termination, dissolution or liquidation of such Partner, unless substantially all assets of such Partner are transferred, or are to be transferred, to a Wholly Owned Affiliate of such Partner; (iv) The Bankruptcy of such Partner or the occurrence of any other event which would permit a trustee or receiver to acquire control of the affairs or assets of such Partner; or (v) A determination that such Partner has taken an action, or has failed to take an action within the scope of its duties hereunder, that results, or can reasonably be expected to result in, such Partner becoming liable to indemnify the Partnership for a material sum pursuant to any provision of this Agreement or that would justify a decree of dissolution of the Partnership under the Act. (c) "Affiliate" means, with respect to any Person, (i) any Person directly or indirectly controlling, controlled by or under common control with such Person, (ii) any Person owning or controlling ten percent (10%) or more of the outstanding voting interests of such Person, (iii) any officer, director, or general partner of such Person, or (iv) any Person who is an officer, director, general partner, trustee, or holder of ten percent (10%) or more of the voting interests of any Person described in clauses (i) through (iii) of this sentence. For purposes of this definition, the term "controls," "is controlled by," or "is under common control with" shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person or entity, whether through the ownership of voting securities, by contract or otherwise. (d) "Agreement" means this Agreement of Partnership, as amended from time to time. Words such as "herein," "hereinafter," "hereof," "hereto", and "hereunder" refer to this Agreement as a whole, unless the context otherwise requires. 3 of 40 8 (e) "Bankruptcy" means, with respect to any Person, a "Voluntary Bankruptcy" or an "Involuntary Bankruptcy." A "Voluntary Bankruptcy" means, with respect to any Person, the inability of such Person generally to pay its debts as such debts become due, or an admission in writing by such Person of its inability to pay its debts generally or a general assignment by such Person for the benefit of creditors; the filing of any petition or answer by such Person seeking to adjudicate it a bankrupt or insolvent, or seeking for itself any liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of such Person or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking, consenting to, or acquiescing in the entry of an order for relief or the appointment of a receiver, trustee, custodian, or other similar official for such Person or for any substantial part of its property; or corporate action taken by such Person to authorize any of the actions set forth above. An "Involuntary Bankruptcy" means, with respect to any Person, without the consent or acquiescence of such Person, the entering of an order for relief or approving a petition for relief or reorganization or any other petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or other similar relief under any present or future bankruptcy, insolvency or similar statute, law or regulation, or the filing of any such petition against such Person which petition shall not be dismissed within ninety (90) days, or, without the consent or acquiescence of such Person, the entering of an order appointing a trustee, custodian, receiver or liquidator of such Person or of all or any substantial part of the property of such Person which order shall not be dismissed within sixty (60) days. (f) "Business Day" means a day of the year on which banks are not required or authorized to close in Los Angeles, California. (g) "Capital Account" means, with respect to any Partner, the Capital Account maintained for such Person in accordance with the following provisions: (i) To each Person's Capital Account there shall be credited such Partner's Capital Contributions, such Partner's distributive share of Profits and any items in the nature of income or gain which are specially allocated pursuant to Section 3.3 or Section 3.4 hereof, and the amount of any Partnership liabilities assumed by such Partner or which are secured by any Property distributed to such Partner. (ii) To each Partner's Capital Account there shall be debited the amount of cash and the Gross Asset Value of any Property distributed to such Partner pursuant to any provision of this Agreement, such Partner's distributive share of Losses and any items in the nature of expenses or losses which are specially allocated pursuant to Section 3.3 or Section 3.4 hereof, and the amount of any liabilities of such Partner assumed by the Partnership or which are secured by any property contributed by such Partner to the Partnership. If a promissory note is distributed to a Partner by the Partnership that is the maker of such note, such Partner's Capital Account will be decreased with respect to such note only when there is a taxable disposition of such note by the Partner or when the Partnership make principal payments on the note. The previous sentence shall not apply if a note distributed to a Partner by the Partnership who is the maker of such note is readily tradable on an established securities market. 4 of 40 9 Furthermore, the Capital Account of a Partner whose interest in the Partnership is liquidated will be reduced to the extent of (i) the fair market value, at the time of distribution of any negotiable promissory note (of which the Partnership is the maker) that the Partnership distributes to the Partner on or after the date such Partner's interest is liquidated and within the time specified in Regulations Section 1.704-1(b)(2)(ii)(b)(2), and (ii) the fair market value, at the time of liquidation of the unsatisfied portion of any negotiable promissory note (of which the Partnership is the maker) that the Partnership previously distributed to the Partner. For purposes of the preceding sentence, the fair market value of a note will be no less than the outstanding principal balance of such note, provided that such note bears interest at a rate no less than the applicable federal rate at the time of valuation. (iii) In the event any interest in the Partnership is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest. (iv) In determining the amount of any liability for purposes of Sections 1.10(g)(i) and 1.10(g)(ii) hereof, there shall be taken into account Code Section 752(c) and any other applicable provisions of the Code and Regulations. The foregoing provisions and the other provisions of the Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b)(2)(iv), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the Joint Management Committee shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Partnership or the Partners), are computed in order to comply with such Regulations, the Joint Management Committee may make such modification, provided that it is not likely to have a material effect on the amounts distributable to any Partner pursuant to Section 13 hereof upon the dissolution of the Partnership. The Joint Management Committee also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership's balance sheet, as computed for book purposes in accordance with Regulations Section 1.704-1(b)(2)(iv)(g), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b)(2)(iv). (h) "Capital Contributions" means, with respect to any Partner, the amount of money and the initial Gross Asset Value of any property (other than money) contributed to the Partnership or the principal amount of Partnership debts assumed with respect to the Partnership interest held by such Partner pursuant to the terms of this Agreement. The principal amount of a promissory note which is not readily traded on an established securities market and which is contributed to the Partnership by the maker of the note (or by a Person related to the maker of the note within the meaning of Regulations Section 1.704-1(b)(2)(ii)(c)) shall not be included in the Capital Contribution of any Partner until the Partnership makes a taxable 5 of 40 10 disposition of the note or until (and to the extent) principal payments are made on the note, all in accordance with Regulations Section 1.704-1(b)(2)(iv)(d)(2). (i) "Code" means the Internal Revenue Code of 1986, as amended from time to time (or any corresponding provisions of succeeding law.) (j) "Debt" means (i) any indebtedness for borrowed money or deferred purchase price of property or evidenced by a note, bonds, or other instruments, (ii) obligations as lessee under capital leases, (iii) obligations secured by any mortgage, pledge, security interest, encumbrance, lien or charge of any kind existing on any asset owned or held by the Partnership whether or not the Partnership has assumed or become liable for the obligations secured thereby, (iv) any obligation under any interest rate swap agreement (the principal amount of such obligation shall be deemed to be the notional principal amount on which such swap is based), and (v) obligations under direct or indirect guarantees of (including obligations (contingent or otherwise) to assure a creditor against loss in respect of) indebtedness or obligations of the kinds referred to in clauses (i), (ii), (iii) and (iv) above, provided that Debt shall not include obligations in respect of any accounts payable that are incurred in the ordinary course of the Partnership's business and are not delinquent or are being contested in good faith by appropriate proceedings. (k) "Depreciation" means, for each Fiscal Year, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such Fiscal Year, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Fiscal Year, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such Fiscal Year bears to such beginning adjusted tax basis; provided, however, that if the adjusted basis for federal income tax purposes of an asset at the beginning of such Fiscal Year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Joint Management Committee. (l) "Environmental Laws" means any federal, state or local statute, code, ordinance, rule, regulation, permit, consent, approval, license, judgment, order, writ, judicial decision, common law rule, decree, agency interpretation, injunction or other authorization or requirement whenever promulgated, issued, or modified, including the requirement to register underground storage tanks, relating to: (i) emissions, discharges, spills, releases or threatened releases of pollutants, contaminants, Hazardous Substances (as hereinafter defined), materials containing Hazardous Substances, or hazardous or toxic materials or wastes into ambient air, surface water, groundwater, watercourses, publicly or privately owned treatment works, drains, sewer systems, wetlands, septic systems or onto land; (ii) the use, treatment, storage, disposal, handling, manufacturing, 6 of 40 11 transportation, or shipment of Hazardous Substances, materials containing Hazardous Substances or hazardous and/or toxic wastes, material, products or by-products (or of equipment or apparatus containing Hazardous Substances) as defined in or regulated under the following statutes and their implementing regulations: the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801 et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act, 42 U.S.C. Section 9601 et seq., and/or the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., each as amended from time to time; or (iii) otherwise relating to pollution or the protection of human health or the environment. (m) "Fiscal Year" means (i) the period commencing on the Contribution Date and ending on December 31, 1996, (ii) any subsequent twelve (12) month period commencing on January 1 and ending on December 31, or (iii) any portion of the period described in clause (ii) for which the Partnership is required to allocate Profits, Losses and other items of Partnership income, gain, loss or deduction pursuant to Section 3 hereof. (n) "Gross Asset Value" means, with respect to any asset, tangible or intangible, the asset's adjusted basis for federal income tax purposes, except as follows: (i) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, as determined by the Partners; (ii) The Gross Asset Values of all Partnership assets shall be adjusted to equal their respective gross fair market values, as determined by the Partners, as of the following times: (a) the acquisition of an additional interest in the Partnership by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Partnership to a Partner of more than a de minimis amount of Property as consideration for an interest in the Partnership; (c) the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); and (d) when calculating Net Equity under Section 11.6; provided, however, that adjustments pursuant to clauses (a) and (b) above shall be made only if the Partners reasonably determine that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership; (iii) The Gross Asset Value of any Partnership asset distributed to any Partner shall be adjusted to equal the gross fair market value of such asset on the date of distribution as determined by the distributee and the Partners; and (iv) The Gross Asset Values of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 7 of 40 12 1.704-1(b)(2)(iv)(m) and Sections 1.10(z)(vi) and 3.3(e) hereof; provided, however, that Gross Asset Values shall not be adjusted pursuant to this Section 1.10(n)(iv) to the extent the Partners determine that an adjustment pursuant to Section 1.10(n)(ii) hereof is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this Section 1.10(n)(iv). If the Gross Asset Value of an asset has been determined or adjusted pursuant to Section 1.10(n)(i), Section 1.10(n)(ii), or Section 1.10(n)(iv) hereof, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses. In the event that the Partners are unable to determine the gross fair market value for the purpose of determining the Gross Asset Value of any asset under this Section 1.10(n), then the gross fair market value shall be the Gross Appraised Value. (o) "Gross Appraised Value" of an asset, tangible or intangible, as of any day, shall be equal to the gross fair market value of the asset as of such day. Gross Appraised Value shall be determined as follows: (i) At any time after the thirtieth (30th) day a request is made by either Partner to determine the gross fair market value of any asset, either Partner may give notice to the other Partner that the gross fair market value is to be determined under this Section 1.10(o). Such notice shall designate the First Appraiser and the other Partner shall appoint the Second Appraiser within ten (10) Business Days of receiving such notice designating the First Appraiser. (ii) If the Second Appraiser is timely designated, the First and Second Appraisers shall meet within ten (10) days of such appointment and shall endeavor, within twenty (20) days of such appointment, to agree upon, and give written notice to the Partnership, the Partners, and the firm of independent certified public accountants regularly employed by the Partnership, of the gross fair market value of the asset (the "Appraisers' Notice"). The agreed value shall be the asset's gross fair market value. (iii) If an Appraisers' Notice is not given during such period, then at any time after such period, either the Partner who appointed the First Appraiser or the Partner who appointed the Second Appraiser, by written notice to the First Appraiser and Second Appraiser, may demand that they appoint a Third Appraiser (the "Third Appraiser"). If the First Appraiser and Second Appraiser have not either given an Appraisers' Notice or appointed the Third Appraiser (who shall have agreed to serve) by the twentieth (20th) day after such demand, either the Partner who appointed the First Appraiser or the Partner who appointed the Second Appraiser may request any judge of the Superior Court of the County of Los Angeles, State of California to appoint the Third Appraiser. After the appointment of the Third Appraiser, the gross fair market value shall be the amount included in an Appraisers' Notice subscribed to by at least two (2) of the three (3) appraisers; provided that before subscribing to a Gross Appraised Value, the Third Appraiser shall meet at least once with the First Appraiser and the Second 8 of 40 13 Appraiser to discuss in good faith the appraisal of the asset. If two (2) of the appraisers have not given an Appraisers' Notice within twenty (20) days of the appointment of the Third Appraiser, the gross fair market value of the asset shall be determined solely by the Third Appraiser, who shall give an Appraisers' Notice within thirty (30) days of his appointment. (iv) If a Second Appraiser is not timely appointed in the manner provided by this Section 1.10(o), the gross fair market value shall be determined solely by the First Appraiser who shall give an Appraisers' Notice of such gross fair market value within ten (10) days of the last day on which the Second Appraiser could have been timely designated. (v) Each appraiser appointed hereunder shall be disinterested and shall be qualified to appraise property similar to the asset. (vi) As used in this Section 1.10(o), as of any day, the "gross fair market value" of the asset means (1) the maximum amount that a single buyer would reasonably be expected to pay for the asset on such day, free and clear of all liens and encumbrances, in a single cash purchase, taking into account the current condition and use of the asset, increased by (2) the additional amount, if any, that such buyer would pay for any existing favorable financing or leases on the asset, and decreased by (3) the amount, if any, that such buyer would subtract from the unencumbered fair market value of the asset by reason of any existing unfavorable financing or leases. When determining Gross Appraised Value for purposes of Section 11.6, the Appraiser(s) under this Section 1.10(o) shall not appraise the intangible assets, but total intangible assets of the Business shall be deemed to equal (i) net income before interest, taxes, depreciation and amortization (as determined under U.S. Generally Accepted Accounting Principles) for the twelve (12) full calendar months preceding the date of the breach (ii) multiplied by three (3). (vii) The costs and expenses of the Appraisers shall be born equally by the parties.3 (p) "Nonrecourse Deductions" has the meaning set forth in Section 1.704-2(b)(1) of the Regulations. (q) "Nonrecourse Liability" has the meaning set forth in Section 1.704-2(b)(3) of the Regulations. (r) "Partner Nonrecourse Debt" has the meaning set forth in Section 1.704-2(b)(4) of the Regulations. (s) "Partner Nonrecourse Debt Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Section 1.704-2(i)(3) of the Regulations. 9 of 40 14 (t) "Partner Nonrecourse Deductions" has the meaning set forth in Sections 1.704-2(i)(1) and 1.704-2(i)(2) of the Regulations. (u) "Partners" means those entities executing this Agreement as Partners. "Partner" means any one of the Partners. (v) "Partnership" means the general partnership formed by this Agreement and the partnership continuing the business of this Partnership in the event of dissolution as herein provided. (w) "Partnership Minimum Gain" has the meaning set forth in Regulations Sections 1.704-2(b)(2) and 1.704-2(d). (x) "Percentage Interest" means, with respect to any Partner, the percentage interest set forth below such Partner's name in Section 2.1. In the event any Partnership interest is transferred in accordance with the provisions of this Agreement, the transferee of such interest shall succeed to the Percentage Interest of his transferor to the extent it relates to the transferred interest. (y) "Person" means any individual, partnership, corporation, trust, or other entity. (z) "Profits" and "Losses" means, for each Fiscal Year, an amount equal to the Partnership's taxable income or loss for such Fiscal Year, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (i) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.10(z) shall be added to such taxable income or loss; (ii) Any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.10(z) shall be subtracted from such taxable income or loss; (iii) In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to Section 1.10(n)(ii) or Section 1.10(n)(iii) hereof, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Profits or Losses; (iv) Gain or loss resulting from any disposition of Property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by 10 of 40 15 reference to the Gross Asset Value of the Property disposed of, notwithstanding that the adjusted tax basis of such Property differs from its Gross Asset Value; (v) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year, computed in accordance with Section 1.10(k) hereof; (vi) To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Partner's interest in the Partnership, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis of the asset) from the disposition of the asset and shall be taken into account for purposes of computing Profits or Losses; and (vii) Notwithstanding any other provision of this Section 1.10(z), any items which are specially allocated pursuant to Sections 3.3 and 3.4 hereof shall not be taken into account in computing Profits or Losses. The amounts of the items of Partnership income, gain, loss or deduction available to be specially allocated pursuant to Sections 3.3 and 3.4 hereof shall be determined by applying rules analogous to those set forth in Sections 1.10(z)(i) through 1.10(z)(vi) above. (aa) "Property" means all real and personal property acquired by the Partnership and any improvements thereto, and shall include both tangible and intangible property. (ab) "Regulations" means the Income Tax Regulations, including Temporary Regulations, promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). (ac) "Transfer" means, as a noun, any voluntary or involuntary transfer, sale, or other disposition and, as a verb, voluntarily or involuntarily to transfer, sell, or otherwise dispose of. (ad) "Wholly Owned Affiliate" of any Person shall mean (i) an Affiliate of such Person one hundred percent (100%) of the voting stock or beneficial ownership of which is owned directly by such Person, or by any Person who, directly or indirectly, owns one hundred percent (100%) of the voting stock or beneficial ownership of such Person, (ii) an Affiliate of such Person who, directly or indirectly, owns one hundred percent (100%) of the voting stock or beneficial ownership of such Person, and (iii) any Wholly Owned Affiliate of any Affiliate described in clause (i) or clause (ii) of this Section 1.10(ad). 11 of 40 16 SECTION 2 PARTNERS' CAPITAL CONTRIBUTIONS 2.1 INITIAL CAPITAL CONTRIBUTIONS. The names, addresses, and Percentage Interests of the Partners are as follows: BWI-ST. STAN'S, INC. PROST PARTNERS, L.P. 9800 S. Sepulveda Blvd. c/o Stanislaus Brewing Company, Inc. Suite 720 821 L Street Los Angeles, CA 90045 Modesto, CA 95354 Percentage Interest: 51.00% Percentage Interest: 49.00% The initial Capital Contributions are set forth in the Contribution Agreement attached hereto as Exhibit A. 2.2 ADDITIONAL CAPITAL CONTRIBUTIONS. (a) No Partner shall be obligated to make any additional Capital Contribution except as otherwise set forth herein. (b) BWISS shall make additional Capital Contributions to the Partnership in the total principal amount of $2,295,000 less the total amount of Assumed Debts as determined under Section 1.6 of the Contribution Agreement as at the Contribution Date. For the purpose of this Section 2.2(b), the difference shall be referred to herein as the "Periodic Capital Contribution." (i) The Periodic Capital Contribution after being reduced by the Net Current Assets Decrease (as defined herein) shall be referred to herein as the "Three Year Contribution." (ii) BWISS shall pay to the Partnership interest at the rate equal to ten percent (10%) multiplied by a fraction the numerator of which shall be equal to the Three Year Contribution and the denominator of which shall be the sum of the Three Year Contribution and the Net Current Assets Decrease. Interest will stop accruing after the Three Year Contribution has been paid. BWISS may prepay any or all of the Periodic Capital Contribution. Accrued interest shall be payable with each principal payment pursuant to the terms and schedule of Section 2.2(b)(iii). (iii) Principal payments shall be as follows: (1) $100,000 eighteen (18) months after the Contribution Date; (2) $100,000 twenty-one (21) months after the Contribution Date; 12 of 40 17 (3) $100,000 twenty-four (24) months after the Contribution Date; (4) $100,000 twenty-seven (27) months after the Contribution Date; (5) $100,000 thirty (30) months after the Contribution Date; (6) $100,000 thirty-three (33) months after the Contribution Date; (7) The principal balance of the Three Year Contribution thirty- six (36) months after the Contribution Date; (8) The Net Current Assets Decrease sixty (60) months after the Contribution Date. (iv) If the public offering contemplated under Section 8.1(a) of the Contribution Agreement results in gross proceeds in excess of $10,000,000, BWISS shall further pay down the Periodic Capital Contribution within 30 days of the Contribution Date equal to 10% of the gross proceeds raised in excess of $10,000,000 in such public offering up to a maximum of $300,000. (v) The "Net Current Assets Decrease" shall be equal to (1) the net current assets as stated in the Contributed Business Balance Sheet in accordance with Section 4.5 of the Contribution Agreement less (2) the net current assets as stated in the Closing Balance Sheet in accordance with Section 8.2 of the Contribution Agreement. For purposes of this Section 2.2(b)(v) only, the Closing Balance Sheet shall not be dated later than December 31, 1996. Net Current Assets Decrease shall be zero if the net current assets as stated in the Closing Balance Sheet is greater than the net current assets as stated in the Contributed Business Balance Sheet. Net current assets shall be defined as current assets less current liabilities. Net Current Assets Decrease shall be exclusive of any (i) advances made by BWISS or its Affiliates to Prost; (2) of the kegs acquired by BWISS or its Affiliates for the benefit of Prost to the extent the kegs are included in the current assets; and (3) any accounting changes since the date of the Contributed Business Balance Sheet. (vi) Example. Assume the Contribution Date is October 31, 1996. Assume Prost's net current assets as of April 30, 1996 are ($28,000) and net current assets as of October 31, 1996 are ($108,000). The Net Current Assets Decrease is ($80,000). Assume the Periodic Capital Contribution (after deducting the amount under Section 1.6) is $1,150,000. The Three Year Contribution equals $1,070,000. The interest rate would be 9.3% calculated as follows: 10% X ($1,070,000/$1,150,000) = 9.3%. Interest accrues on the outstanding principal balance from October 31, 1996 through October 31, 1999, payable quarterly. The first interest payment is made on April 30, 1998. Principal is 13 of 40 18 paid as follows: $100,000 April 30, 1998 $100,000 April 30, 1999 $100,000 July 31, 1998 $100,000 July 31, 1999 $100,000 October 31, 1998 $470,000 October 31, 1999 $100,000 January 31, 1999 $ 80,000 October 31, 2001
2.3 LOANS BY PARTNERS TO THE PARTNERSHIP. In the event that at least four members of the Joint Management Committee determine that the Partners' initial Capital Contributions under Section 2.1 are insufficient to meet the Partnership's costs, expenses, obligations, liabilities and charges, or to make any expenditure authorized by this Agreement, the Joint Management Committee may request the Partners to advance funds to the Partnership. The Partnership must offer both Partners equal opportunity to make loans on the same terms. All amounts so advanced shall take the form of a loan and shall bear interest at the federal funds rate plus 7%. Both Partners shall have the initial opportunity to participate in any such advance in proportion to their then Percentage Interests. Such loans shall be repayable solely out of property or assets of the Partnership, in accordance with the provisions of Section 5.2, and no Partner shall have any personal liability on account thereof, nor shall there be any recourse to such Partner's assets. 2.4 OTHER MATTERS. (a) Except as otherwise provided in this Agreement, no Partner shall demand or receive a return of its Capital Contributions or withdraw from the Partnership without the consent of all Partners. Under circumstances requiring a return of any Capital Contributions, no Partner shall have the right to receive property other than cash except as may be specifically provided herein. (b) No Partner shall receive any interest, salary, or drawing with respect to its Capital Contributions or its Capital Account or for services rendered on behalf of the Partnership or otherwise in its capacity as Partner, except as otherwise provided in this Agreement. (c) Except as otherwise provided in this Section 2 and Section 10 hereof, relating to Transfers of Partnership interests, no Person shall be admitted to the Partnership as a Partner without the unanimous consent of the Partners. SECTION 3 ALLOCATIONS 3.1 PROFITS. After giving effect to the special allocations set forth in Sections 3.3 and 3.4 hereof, Profits for any Fiscal Year shall be allocated among the Partners in proportion to their Percentage Interests. 14 of 40 19 3.2 LOSSES. After giving effect to the special allocations set forth in Sections 3.3 and 3.4 hereof, Losses for any Fiscal Year shall be allocated among the Partners in proportion to their Percentage Interests. 3.3 SPECIAL ALLOCATIONS. The following special allocations shall be made in the following order: (a) Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(f) of the Regulations, notwithstanding any other provision of this Section 3, if there is a net decrease in Partnership Minimum Gain during any Partnership Fiscal Year, each Partner shall be specially allocated items of Partnership income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, determined in accordance with Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2(f)(6) and 1.704-2(j)(2) of the Regulations. This Section 3.3(a) is intended to comply with the minimum gain chargeback requirement in Section 1.704-1(f) of the Regulations and shall be interpreted consistently therewith. (b) Partner Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-1(i)(4) of the Regulations, notwithstanding any other provision of this Section 3, if there is a net decrease in Partner Nonrecourse Debt Minimum Gain attributable to a Partner Nonrecourse Debt during any Partnership Fiscal Year, each Partner who has a share of the Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Regulations, shall be specially allocated items of Partnership income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to such Partner's share of the net decrease in Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and 1.704-2(j)(2) of the Regulations. This Section 3.3(b) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(i)(4) of the Regulations and shall be interpreted consistently therewith. (c) Nonrecourse Deductions. Nonrecourse Deductions for any Fiscal Year shall be specially allocated among the Partners in proportion to their Percentage Interests. (d) Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for any Fiscal Year shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i)(1). 15 of 40 20 (e) Code Section 754 Adjustment. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(2) or Regulations Section 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as the result of a distribution to a Partner in complete liquidation of its interest in the Partnership, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Partners in accordance with their interests in the Partnership in the event Regulations Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Partners to whom such distribution was made in the event Regulations Section 1.704-1(b)(2)(iv)(m)(4) applies. (f) Allocations Relating to Taxable Issuance of Partnership Interests. Any income, gain, loss or deduction realized as a direct or indirect result of the issuance of an interest in the Partnership to a Partner (the "Issuance Items") shall be allocated among the Partners so that, to the extent possible, the net amount of such Issuance Items, together with all other allocations under this Agreement to each Partner, shall be equal to the net amount that would have been allocated to each such Partner if the Issuance Items had not been realized. 3.4 CURATIVE ALLOCATIONS. The allocations set forth in Sections 3.3(a), 3.3(b), 3.3(c), 3.3(d) and 3.3(e) hereof (the "Regulatory Allocations") are intended to comply with certain requirements of the Regulations. It is the intent of the Partners that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Partnership income, gain, loss, or deduction pursuant to this Section 3.4. Therefore, notwithstanding any other provision of this Section 3 (other than the Regulatory Allocations), the Joint Management Committee shall make such offsetting special allocations of Partnership income, gain, loss or deduction in whatever manner it determines appropriate so that, after such offsetting allocations are made, each Partner's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Partner would have had if the Regulatory Allocations were not part of the Agreement and all Partnership items were allocated pursuant to Sections 3.1 and 3.2 hereof. In exercising its discretion under this Section 3.4, the Joint Management Committee shall take into account future Regulatory Allocations under Sections 3.3(a) and 3.3(b) that, although not yet made, are likely to offset other Regulatory Allocations previously made under Sections 3.3(c) and 3.3(d). 3.5 OTHER ALLOCATION RULES. (a) The Partners are aware of the income tax consequences of the allocations made by this Section 3 and hereby agree to be bound by the provisions of this Section 3 in reporting their shares of Partnership income and loss for income tax purposes. (b) For purposes of determining the Profits, Losses, or any other items allocable to any period, Profits, Losses, and any such other items shall be determined on a daily, monthly, or other basis, as determined by the Joint Management Committee using any 16 of 40 21 permissible method under Code Section 706 and the Regulations thereunder. (c) Solely for purposes of determining a Partner's proportionate share of the "excess nonrecourse liabilities" of the Partnership, within the meaning of Regulations Section 1.752-3(a)(3), the Partners' interests in Partnership profits are in proportion to their Percentage Interests. (d) To the extent permitted by Section 1.704-2(h)(3) of the Regulations, the Joint Management Committee shall endeavor not to treat distributions as having been made from the proceeds of a Nonrecourse Liability or a Partner Nonrecourse Debt. 3.6 TAX ALLOCATIONS: CODE SECTION 704(C). In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of the Partnership shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for federal income tax purposes and its initial Gross Asset Value. In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to Section 1.10(n)(ii) hereof, subsequent allocations of income, gain, loss, and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder. Any elections or other decisions relating to such allocations shall be made by the Joint Management Committee in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section 3.6 are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Person's Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provisions of this Agreement. SECTION 4 DISTRIBUTIONS 4.1 DISTRIBUTIONS. Except as provided in Section 13.2 hereof, all distributions shall be made in accordance with the following: (a) Subject to Section 4.1(b), distributions to the Partners by the Partnership shall be made as frequently and in such amounts as may be unanimously determined by the Partners; provided, however, that the aggregate amount of each such distribution shall be that amount which such Partners reasonably determine is not required to be retained by the Partnership to meet the reasonably foreseeable cash requirements and needs of the business of the Partnership and establish an adequate reserve for the payment of Partnership liabilities and contingencies. (b) Prost shall receive priority distributions as follows: (i) Prost shall receive quarterly distributions in the amount of $2,500; 17 of 40 22 provided Prost has a positive Capital Account immediately after such distributions; and (ii) Prost shall receive distributions from the Partnership in the total principal amount of $2,295,000 less the total amount of Assumed Debts as determined under Section 1.6 of the Contribution Agreement as at the Contribution Date. For the purpose of this Section 4.1(b)(ii), the difference shall be referred to herein as the "Periodic Distribution." (A) The Periodic Distribution after being reduced by the Net Current Assets Decrease (as defined herein) shall be referred to herein as the "Three Year Distribution." (B) Prost shall receive from the Partnership interest at the rate equal to ten percent (10%) multiplied by a fraction the numerator of which shall be equal to the Three Year Distribution and the denominator of which shall be the sum of the Three Year Distribution and the Net Current Assets Decrease. Interest will stop accruing after the Three Year Distribution has been paid. The Partnership may prepay any or all of the Periodic Distribution. Accrued interest shall be payable quarterly on the last day of January, April, July and October in each year commencing after the date the first principal payment is due under this Section 4.1(b)(ii)(C). (C) Principal payments shall be as follows: (1) $100,000 eighteen (18) months after the Contribution Date; (2) $100,000 twenty-one (21) months after the Contribution Date; (3) $100,000 twenty-four (24) months after the Contribution Date; (4) $100,000 twenty-seven (27) months after the Contribution Date; (5) $100,000 thirty (30) months after the Contribution Date; (6) $100,000 thirty-three (33) months after the Contribution Date; (7) The principal balance of the Three Year Distribution thirty-six (36) months after the Contribution Date; (8) The Net Current Assets Decrease sixty (60) months 18 of 40 23 after the Contribution Date. (iv) If the public offering contemplated under Section 8.1(a) of the Contribution Agreement results in gross proceeds in excess of $10,000,000, Prost shall receive a principal payment further paying down the Periodic Distribution within 45 days of the Contribution Date equal to 10% of the gross proceeds raised in excess of $10,000,000 in such public offering to a maximum of $300,000. (v) The "Net Current Assets Decrease" shall be equal to (1) the net current assets as stated in the Contributed Business Balance Sheet in accordance with Section 4.5 of the Contribution Agreement less (2) the net current assets as stated in the Closing Balance Sheet in accordance with Section 8.2 of the Contribution Agreement. For purposes of this Section 4.1(b)(v) only, the Closing Balance Sheet shall be dated no later than December 31, 1996. Net Current Assets Decrease shall be zero if the net current assets as stated in the Closing Balance Sheet is greater than the net current assets as stated in the Contributed Business Balance Sheet. Net current assets shall be defined as current assets less current liabilities. Net Current Assets Decrease shall be exclusive of any (i) advances made by BWISS or its Affiliates to Prost; (2) of the kegs acquired by BWISS or its Affiliates for the benefit of Prost to the extent the kegs are included in the current assets; and (3) any accounting changes since the date of the Contributed Business Balance Sheet. (c) All distributions governed by this Section 4.1 and which exceed the amounts distributed pursuant to Section 4.1(b) shall be divided among the Partners as follows: (i) First, to Partners who have "Surplus Adjusted Capital Accounts" as of the date of distribution in proportion to and to the extent of each such Partner's Surplus Adjusted Capital Account; and (ii) The balance, if any, to all Partners in proportion to their Percentage Interests. (d) The "Surplus Adjusted Capital Account" of a Partner as of the date of distribution shall be equal to the excess, if any, of its Capital Account as of such day over its "Required Capital Account" as of such day. The "Required Capital Account" of a Partner as of the date of distribution shall be an amount equal to the product of (i) the aggregate Capital Accounts of all Partners as of such day, multiplied by (ii) such Partner's Percentage Interest. 4.2 AMOUNTS WITHHELD. All amounts withheld pursuant to the Code or any provision of any state or local tax law with respect to any payment, distribution or allocation to the Partnership or the Partners shall be treated as amounts distributed to the Partners pursuant to this Section 4 for all purposes under this Agreement. The Joint Management Committee is authorized to withhold from distributions, or with respect to allocations, to the Partners and to pay over to any federal, state, or local government any amounts required to be so withheld pursuant to the Code or any provisions of any other federal, state or local law and shall allocate such amounts to the Partners with respect to which such amount was withheld. 19 of 40 24 SECTION 5 MANAGEMENT AND OPERATIONS 5.1 JOINT MANAGEMENT COMMITTEE. The Partnership shall have a joint management committee (the "Joint Management Committee") consisting of five members. Each Partner shall appoint two members of the Joint Management Committee, and the fifth member shall be appointed by BWISS, at its sole discretion, after conferring with Prost. A member of the Joint Management Committee appointed by a Partner may be removed at any time, with or without cause, by the appointing Partner. Replacement members of the Joint Management Committee shall be appointed as described above. 5.2 AUTHORITY OF JOINT MANAGEMENT COMMITTEE. (a) Except as otherwise expressly provided in this Agreement, all decisions respecting any matter set forth herein or otherwise affecting or arising out of the conduct of the business of the Partnership shall be made by the Joint Management Committee and the Joint Management Committee shall have the exclusive right and full authority to manage, conduct and operate the Partnership's business. The Joint Management Committee shall have all rights and powers provided in the Act and otherwise provided by law, except to the extent such powers may be expressly limited by this Agreement. Absent approval of both Partners, transactions between the Partnership and the Partners or the Partners' Affiliates shall be arms-length and intended to profit the Partnership. Except as otherwise expressly provided in this Agreement, the Joint Management Committee is hereby granted the right, power and authority to do on behalf of the Partnership all things which, in its sole judgment, are necessary, proper or desirable to carry out the aforementioned duties and responsibilities, including but not limited to the right, power and authority from time to time to do the following: (i) acquire by purchase, lease, or otherwise any real or personal property which may be necessary, convenient, or incidental to the accomplishment of the purposes of the Partnership; (ii) operate, maintain, finance, improve, construct, own, sell, convey, assign, and lease any real or personal property necessary, convenient, or incidental to the accomplishment of the purposes of the Partnership; (iii) borrow money and issue evidences of indebtedness necessary, convenient, or incidental to the accomplishment of the purposes of the Partnership, and secure the same by mortgage, pledge, or other lien on any Partnership Property; provided, however, the affirmative vote of four members of the Joint Management Committee shall be required to cause the Partnership to borrow money or to enter into, incur, or otherwise become liable for any other obligation if after entering into, incurring or otherwise becoming liable for such obligation, the aggregate amount of money to be paid pursuant to, or upon termination of, all such obligations shall exceed $200,000, however, approval of three members is only required for transactions in the ordinary course of business or working capital financing up to 70% of 20 of 40 25 accounts receivable and 20% of inventory under usual and customary terms and conditions; (iv) to cause to be paid all amounts due and payable by the Partnership to any person or entity; (v) to employ such agents, employees, managers, accountants, attorneys, consultants and other persons, including itself, necessary or appropriate to carry out the business and affairs of the Partnership, whether or not such any persons so employed are affiliated or related to either Partner, and to pay such fees, expenses, salaries, wages and other compensation to such persons as it shall in its sole discretion determine; (vi) to pay, extend, renew, modify, adjust, submit to arbitration, prosecute, defend or compromise, upon such terms as it may determine and upon such evidence as it may deem sufficient, any obligation, suit, liability, cause of action or claim, including taxes, either in favor of or against the Partnership; (vii) to pay any and all fees and to make any and all expenditures which it, in its sole discretion, deems necessary or appropriate in connection with the organization of the Partnership, the management of the affairs of the Partnership, and the carrying out of its obligations and responsibilities under this Agreement; (viii) to the extent that funds of the Partnership are, in the Joint Management Committee's judgment, not immediately required for the conduct of the Partnership's business, temporarily invest the excess funds in deposits or securities as determined in the good faith of the Joint Management Committee. (ix) to acquire, prosecute, maintain, protect and defend or cause to be protected and defended all patents, patent rights, tradenames, trademarks, copyrights and service marks, and all applications with respect thereto and all proprietary information which may be held by the Partnership; (x) to enter into, execute, acknowledge and deliver any and all contracts, agreements or other instruments necessary or appropriate to carry on the business of the Partnership as set forth herein; and (xi) to cause to be paid all taxes, charges and assessments that may be levied, assessed or imposed upon any of the assets of the Partnership, unless the same are contested by the Joint Management Committee on behalf of the Partnership. (b) With respect to all of its obligations, powers and responsibilities under this Agreement, the Joint Management Committee is authorized to execute and deliver, for and on behalf of the Partnership, such notes and other evidence of indebtedness, contracts, agreement, assignments, deeds, leases, loan agreements, mortgages and other security instruments and agreements as it deems proper, all on such terms and conditions as it deems proper. 21 of 40 26 5.3 MEETINGS. The Joint Management Committee shall meet at such times and from time to time as it may determine. Members of the Joint Management Committee shall receive from the Partnership reimbursement for any reasonable out-of-pocket travel expenses incurred in connection with their attendance at meetings of the Joint Management Committee. 5.4 DUTIES. The Joint Management Committee shall undertake such tasks, and have such responsibilities, as it may determine are necessary to oversee and supervise the business of the Partnership; provided, however, that the activities of the Joint Management Committee and each member thereof (acting in such capacity) shall be limited to those permitted under the Act. Except as provided otherwise in this Agreement or the Act, all approvals, disapprovals and other actions taken by the Joint Management Committee shall be authorized by a majority of the Joint Management Committee members then holding office. 5.5 RULES AND PROCEDURES. The Joint Management Committee shall have the authority to adopt rules and procedures, not inconsistent with this Agreement, relating to the conduct of its affairs. 5.6 DUTY OF CARE. The members of the Joint Management Committee shall exercise their best judgment in carrying out their functions for the Partnership. The members of the Joint Management Committee shall not be liable to any Partner for actions taken in good faith without gross negligence or a willful disregard of their duties. Each member of the Joint Management Committee shall be fully protected and justified with respect to any action or omission taken or suffered by him in good faith if such action or omission is taken or suffered in reliance upon and in accordance with the opinion or advice as to matters of law of legal counsel, or as to matters of accounting of accountants, selected by him with reasonable care. 5.7 DEADLOCK BREAKING. In the event that the Joint Management Committee is unable to vote on an issue because there is not a majority, the issue will be submitted for the determination by the Partners. SECTION 6 INDEMNIFICATION OF PARTNERS 6.1 GENERAL. The Partnership, its receiver or its trustee (in the case of its receiver or trustee, to the extent of the Property) shall indemnify, save harmless, and pay all judgments and claims against each Partner or any partners, officers or directors of such Partner relating to any liability or damage incurred by reason of any act performed or omitted to be performed by such Partner in connection with the business of the Partnership, including attorneys' fees incurred by such Partner or any partners, officers or directors of such Partner in connection with the defense of any action based on any such act or omission, which attorneys' fees may be paid as incurred, including all such liabilities under federal and state securities laws (including the Securities Act of 1933, as amended) as permitted by law. 6.2 ENVIRONMENTAL. The Partnership, its receiver, or its trustee (in the case of its 22 of 40 27 receiver or trustee, to the extent of the Property) shall indemnify and hold harmless, to the maximum extent permitted by law, each Partner from and against any and all liabilities, sums paid in settlement of claims (if such settlement is consented to by the Joint Management Committee), obligations, charges, actions (formal or informal), claims (including, without limitation, claims for personal injury under any theory or for real or personal property damage), liens, taxes, administrative proceedings, losses, damages (including, without limitation, punitive damages), penalties, fines, court costs, administrative service fees, response and remediation costs, stabilization costs, encapsulation costs, treatment, storage or disposal costs, groundwater monitoring or environmental study, sampling or monitoring costs, other causes of action, and any other costs and reasonable expenses (including, without limitation, reasonable attorneys', experts', and consultants' fees and disbursements and investigating, laboratory and data review fees) imposed upon or incurred by any Partner (whether or not indemnified against by any other party) arising from and after the date of this Agreement directly or indirectly out of: (a) the past, present, or future treatment, storage, disposal, generation, use, transport, movement, presence, release, threatened release, spill, installation, sale, emission, injection, leaching, dumping, escaping or seeping of any Hazardous Substances or material containing or alleged to contain Hazardous Substances at or from any past, present, or future properties or assets of the Partnership; and/or (b) the violation or alleged violation by the Partnership or any third party of any Environmental Laws with regard to the past, present, or future ownership, operation, use, or occupying of any property or asset of the Partnership. 6.3 PARTNERSHIP EXPENSES. The Partnership shall indemnify, save harmless, and pay all expenses, costs, or liabilities of any Partner who for the benefit of the Partnership makes any deposit, acquires any option, or makes any other similar payment or assumes any obligation in connection with any property proposed to be acquired by the Partnership and who suffers any financial loss as the result of such action. 6.4 LIMITATIONS. (a) Notwithstanding anything to the contrary in any of Sections 6.1, 6.2 and 6.3 above, no Partner shall be indemnified from any liability for fraud, bad faith, willful misconduct, or gross negligence. (b) Notwithstanding anything to the contrary in any of Sections 6.1, 6.2, and 6.3 above, in the event that any provision in any of such Sections is determined to be invalid in whole or in part, such Section shall be enforced to the maximum extent permitted by law. SECTION 7 REPRESENTATIONS AND WARRANTIES 7.1 PROST. As of the date hereof, each of the statements in this Section 7.1 shall be 23 of 40 28 a true, accurate and full disclosure of all facts relevant to the matters contained therein, and such warranties and representations shall survive the execution of this Agreement. Prost hereby represents and warrants (to the extent possible on the Contribution Date) that: (a) Prost is a duly organized limited partnership validly existing under the laws of the State of California and has the requisite power and authority to enter into and carry out the terms of this Agreement. (b) All action required to be taken by Prost and any partner thereof to consummate this Agreement has been taken and no further approval of any board, partner, court, or other body is necessary to permit Prost to consummate this Agreement. (c) To the best of its knowledge, neither the execution and delivery of this Agreement, nor the performance or the compliance with this Agreement, has resulted (or will result) in any violation of, or be in conflict with, or invalidate, cancel, or make inoperative, or interfere with, or constitute a default under, any charter, bylaw, partnership agreement, indenture, trust agreement, mortgage, deed of trust, contract, agreement, permit, judgment, decree or order, to which Prost is a party or would be bound and there is no default and no event or omission has occurred which, but for the passing of time or the giving of notice, or both, would constitute a default on the part of Prost under this Agreement or the transactions contemplated thereby. (d) To the best of its knowledge, there is no action, proceeding or investigation, pending or threatened (nor any basis therefor) which questions, directly or indirectly, the validity or enforceability of this Agreement as to Prost. (e) No representation, warranty or covenant of Prost in this Agreement, or in any document or certificate furnished or to be furnished to BWISS pursuant hereto, contains or will contain any untrue statement of material facts or omits or will omit to state material facts necessary to make the statements or facts contained therein not misleading. All such representations, warranties or statements of Prost are based, to the best of Prost's knowledge, upon current, accurate and complete information as of the time of their making, and there have been, to the best of Prost's knowledge no changes in such information subsequent thereto. 7.2 BWISS. As of the date hereof each of the statements in this Section 7.2 shall be a true, accurate and full disclosure of all facts relevant to the matter contained therein, and such warranties and representations shall survive the execution of this Agreement. BWISS hereby represents and warrants (to the extent possible on the Contribution Date) that: (a) BWISS is a duly organized corporation validly existing under the laws of the State of California and has the requisite power and authority to enter into and carry out the terms of this Agreement. (b) All corporate action required to be taken by BWISS to consummate this 24 of 40 29 Agreement has been taken and that no further approval of any board, court, or other body is necessary to permit BWISS to consummate this Agreement. (c) To the best of its knowledge, neither the execution and delivery of this Agreement, nor the performance of or the compliance with this Agreement, has resulted (or will result) in any violation of, or be in conflict with, or invalidate, cancel, or make inoperative, or interfere with, or constitute a default under any charter, bylaw, partnership agreement, trust agreement, mortgage, deed of trust, indenture, contract, agreement, permit, judgment, decree, or order, to which BWISS is a party or would be bound and there is no default and no event or omission has occurred which, but for the passing of time or the giving of notice, or both, would constitute a default on the part of BWISS under this Agreement or the transactions contemplated thereby. (d) To the best of its knowledge, there is no action, proceeding or investigation, pending or threatened (nor any basis therefor), which questions, directly or indirectly, the validity or enforceability of this Agreement as to BWISS. (e) No representation, warranty or covenant of BWISS in this Agreement, or in any document or certificate furnished or to be furnished to Prost pursuant hereto, contains or will contain any untrue statement of material facts or omits or will omit to state material facts necessary to make the statements or facts contained therein not misleading. All such representations, warranties or statements of BWISS are based, to the best of BWISS' knowledge, upon current, accurate and complete information as of the time of their making, and there have been, to the best of BWISS' knowledge, no change in such information subsequent thereto. SECTION 8 ACCOUNTING, BOOKS AND RECORDS 8.1 ACCOUNTING, BOOKS AND RECORDS. The Partnership shall maintain at its principal place of business separate books of account for the Partnership which shall show a true and accurate record of all costs and expenses incurred, all charges made, all credits made and received, and all income derived in connection with the operation of the Partnership business in accordance with U.S. Generally Accepted Accounting Principles consistently applied and, to the extent inconsistent therewith, in accordance with this Agreement. The Partnership shall prepare its operational monthly, quarterly and annual reports in accordance with U.S. Generally Accepted Accounting Principles consistently applied and shall use the accrual method of accounting for tax purposes, and shall keep its books accordingly. Each Partner shall, at its sole expense, have the right, at any time without notice to any other Partner, to examine, copy, and audit the Partnership's books and records during normal business hours. 8.2 REPORTS. (a) In General. The Joint Management Committee shall be responsible for the preparation of financial reports of the Partnership and the coordination of financial matters of 25 of 40 30 the Partnership with the Partnership's accountants. (b) Reports. Within forty (40) days after the end of each Fiscal Year and within forty (40) days after the end of any fiscal quarter, the Joint Management Committee shall cause each Partner to be furnished with a copy of the balance sheet of the Partnership as of the last day of the applicable period, a statement of income or loss for the Partnership for such period, and a statement of the Partnership's cash flow for such period prepared in accordance with U.S. Generally Accepted Accounting Principles consistently applied. Annual statements shall also include a statement of the Partners' Capital Accounts and changes therein for such Fiscal Year prepared in accordance with U.S. Generally Accepted Accounting Principles consistently applied. At the discretion of the Joint Management Committee, annual financial statements may be audited by the Partnership's accountants selected by the Joint Management Committee. Either Partner may request the Joint Management Committee cause the Partnership's accountants, who shall be selected by the Joint Management, to audit or review the annual financial statements; provided, however, that the requesting Partner shall pay the cost of such audit. 8.3 TAX RETURNS; INFORMATION. The Joint Management Committee shall cause the Partnership's accountants to prepare all income and other tax returns of the Partnership and shall cause the same to be filed in a timely manner. The Joint Management Committee shall furnish to each Partner a copy of each such return, together with any schedules or other information which each Partner may require in connection with such Partner's own tax affairs. 8.4 SPECIAL BASIS ADJUSTMENT. In connection with any Permitted Transfer of a Partnership interest, the Joint Management Committee shall cause the Partnership, at the written request of the transferor or the transferee, on behalf of the Partnership and at the time and in the manner provided in Regulations Section 1.754-1(b), to make an election to adjust the basis of the Partnership's property in the manner provided in Sections 734(b) and 743(b) of the Code, and such transferee shall pay all costs incurred by the Partnership in connection therewith, including, without limitation, reasonable attorneys' and accountants' fees. 8.5 TAX MATTERS PARTNER. BWISS is specially authorized to act as the "Tax Matters Partner" under the Code and in any similar capacity under state or local law. SECTION 9 AMENDMENTS 9.1 AMENDMENTS. Amendments to this Agreement may be proposed by any Partner. Following such proposal, the Partner shall submit to the other Partner a verbatim statement of any proposed amendment, providing that counsel for the Partnership shall have approved of the same in writing as to form. The Partner shall seek the written vote of the other Partner on the proposed amendment or shall call a meeting to vote thereon and to transact any other business that it may deem appropriate. A proposed amendment shall be adopted and be effective as an amendment hereto if it receives the affirmative vote of the other Partner. 26 of 40 31 SECTION 10 TRANSFER OF INTERESTS 10.1 RESTRICTIONS ON TRANSFER. Except as expressly provided for in this Agreement, no Partner may, without the consent of the other Partner, sell, convey, transfer, assign, mortgage, pledge, hypothecate encumber or otherwise dispose in any way (a "Transfer") all or any portion of its Partnership Interest or any interest it may have in any property of the Partnership, or withdraw or retire from the Partnership. Any such attempted Transfer, withdrawal or retirement not permitted hereunder shall be null and void. 10.2 RIGHT OF FIRST REFUSAL. If a Partner consents to a proposed Transfer or the prohibitions contained in Section 10.1 are determined by a court of competent jurisdiction to be unenforceable, then a Partner (the "Initiating Partner") desiring to Transfer its Interest shall nevertheless notify ("Offering Notice") the other Partner (the "Responding Partner") of its intention to do so. The Responding Partner shall have the right to elect to purchase from the Initiating Partner all (but not less than all) of the Interest referred to in the Offering Notice at a price to be agreed upon by the Partners for a period of 30 days after the giving of the Offering Notice by delivering in writing to the Initiating Partner notice of its intent to purchase the portion of the Interest of the Initiating Partner covered by the Offering Notice. If a purchase price cannot be agreed upon within such 30 day period, the purchase price shall be determined by a panel of three valuation consultants, one chosen by each of the Partners and the third chosen by the other valuation consultants. Within 45 days thereafter, the purchase by the Responding Partner of said Interest shall be consummated on the terms and conditions so agreed upon. If within the 30-day period during which the Responding Partner has the right to elect to purchase the Initiating Partner's Interest it does not make such election, then the Initiating Partner, within 30 days after the expiration of said 30-day period, may undertake and complete the Transfer to any Person the identity of which was disclosed in the Offering Notice. The Transfer shall not be undertaken at a lower price or upon more favorable terms than the purchase price determined as above. If the Initiating Partner receives an offer from a third party that contains terms more favorable to the terms originally offered to the Responding Partner, the Initiating Partner must offer the Responding Partner the opportunity to purchase the Initiating Partners interest on the more favorable terms offered by the third party. If the Initiating Partner does not consummate the original proposed Transfer or any subsequent modified Transfer within 60 days after the date of the Offering Notice, or within the time scheduled for closing by the purchasing Person, whichever is later, then all the restrictions of this Section 10.2 shall apply though no Offering Notice had been given. 10.3 PERMITTED TRANSFERS. A Partner shall have the right to Transfer all or a portion of its interest in the Partnership to any Person who is (1) a Wholly Owned Affiliate of such Partner, (2) any other Partner, or (3) any Person upon consent of the other Partner. 10.4 GENERAL TRANSFER PROVISIONS. All transfers shall be by instrument in form and substance satisfactory to counsel for the Partnership and shall contain an expression by the assignee of its intention to accept the assignment and to accept and adopt all of the terms and 27 of 40 32 provisions of this Agreement, as the same may have been amended, and shall provide for the payment by the assignor of all reasonable expenses incurred by the Partnership in connection with such assignment, including, without limitation, the necessary amendments to this Agreement to reflect such Transfer. The transferor shall execute and acknowledge all such instruments, in form and substance reasonably satisfactory to the Partnership's counsel, as may be necessary or desirable to effectuate such Transfer. In no event shall the Partnership dissolve or terminate upon the admission of any permitted Partner to the Partnership or upon any permitted Transfer of an interest in the Partnership by any Partner. Each Partner hereby waives its right to dissolve, liquidate or terminate the Partnership in such event. Upon completion of a Transfer in compliance with this Agreement, the transferor shall be released from all future obligations occurring under this Agreement after the date of such Transfer provided the assignee of such transferor assumes all such obligations of the transferor. However, the transferor shall remain liable for its obligations under this Agreement occurring on or prior to the date of such Transfer. Any Transfer not made in accordance with the terms of this Agreement shall be void. 10.5 TAX ALLOCATIONS AND CASH DISTRIBUTION. If an Interest is transferred, the net profits or losses allocable, and cash distributable, to the holder of such Interest for the then fiscal year shall be allocated proportionately between the transferor and the transferee based upon the number of days during such fiscal year for which each party was the owner of the transferred interest. However, if such parties agree that such net profits or losses and cash are to be allocated and distributed based upon an interim closing of the Partnership books, and such parties agree to pay all expenses incurred by the Partnership in connection therewith and so notify the Non-Transferring Partner, then all such net profits or losses and cash shall be allocated and distributed between the transferor and transferee based upon an interim closing of the Partnership's books and records. 10.6 COMPLIANCE. Notwithstanding anything to the contrary in this Agreement, at law or in equity, no Partner shall Transfer or otherwise deal with any Interest in a way that would cause a default under any material agreement to which the Partnership is a party or by which it is bound. SECTION 11 WITHDRAWALS; ACTION FOR PARTITION; BREACHES 11.1 WAIVER OF PARTITION. No Partner shall, either directly or indirectly, take any action to require partition, file a bill for Partnership accounting or appraisement of the Partnership or of any of its assets or properties or cause the sale of any Partnership property, and notwithstanding any provisions of applicable law to the contrary, each Partner (and each of its legal representatives, successors, or assigns) hereby irrevocably waives any and all rights it may have to maintain any action for partition or to compel any sale with respect to its Partnership interest, or with respect to any assets or properties of the Partnership, except as expressly provided in this Agreement. 28 of 40 33 11.2 COVENANT NOT TO WITHDRAW OR DISSOLVE. Notwithstanding any provision of the Act, each Partner hereby covenants and agrees that the Partners have entered into this Agreement based on their mutual expectation that all Partners will continue as Partners and carry out the duties and obligations undertaken by them hereunder and that, except as otherwise expressly required or permitted hereby, each Partner hereby covenants and agrees not to (a) take any action to file a certificate of dissolution or its equivalent with respect to itself, (b) take any action that would cause a Voluntary Bankruptcy of such Partner, (c) withdraw or attempt to withdraw from the Partnership, (d) exercise any power under the Act to dissolve the Partnership, (e) Transfer all or any portion of its interest in the Partnership, (f) petition for judicial dissolution of the Partnership, or (g) demand a return of such Partner's contributions or profits (or a bond or other security for the return of such contributions or profits) without the consent of the other Partner. 11.3 CONSEQUENCES OF VIOLATION OF COVENANTS. Notwithstanding anything to the contrary in the Act, if a Partner (a "Breaching Partner") attempts to (i) cause a partition in breach of Section 11.1 hereof, (ii) withdraw from the Partnership or dissolve the Partnership or take any action in breach of Section 11.2 hereof, or (iii) commit an Adverse Act and not cure such Adverse Act within 120 days, the Partnership shall continue and such Breaching Partner shall be subject to this Section 11.3. In such event, the following shall occur: (a) The Breaching Partner shall immediately cease to be a Partner and shall have no further power to act for or bind the Partnership; (b) The other Partner shall continue to have the right to possess the Partnership's property and goodwill and to conduct its business and affairs; (c) The Breaching Partner shall be liable in damages, without requirement of a prior accounting, to the Partnership for all costs and liabilities that the Partnership or any Partner may incur as a result of such breach; (d) The Partnership shall have no obligation to pay to the Breaching Partner its contributions, capital, or profits, but may, by notice to the Breaching Partner within thirty (30) days of his withdrawal, elect to make Breach Payments (as hereinafter defined) to the Breaching Partner in complete satisfaction of the Breaching Partner's interest in the Partnership; (e) If the Partnership does not elect to make Breach Payments pursuant to Section 11.3(d) hereof, the Partnership shall treat the Breaching Partner as if he were an unadmitted assignee of the interest of the Breaching Partner and shall make distributions to the Breaching Partner only of those amounts otherwise payable with respect to such interest hereunder; (f) The Partnership may apply any distributions otherwise payable with respect to such interest (including Breach Payments) to satisfy any claims it may have against the Breaching Partner; 29 of 40 34 (g) The Breaching Partner shall have no right to inspect the Partnership's books or records or obtain other information concerning the Partnership's operations, and, if the Breaching Partner is in possession of the Partnership's books and records, the Breaching Partner shall turn over the books and records to the other Partner; (h) The Breaching Partner shall continue to be liable to the Partnership for any unpaid Capital Contributions required hereunder with respect to such interest and to be jointly and severally liable with the other Partners for any debts and liabilities (whether actual or contingent, known or unknown) of the Partnership existing at the time the Breaching Partner withdraws or dissolves; and (i) Notwithstanding anything to the contrary hereinabove provided, unless the Partnership has elected to make Breach Payments to the Breaching Partner in satisfaction of its interest, the Partnership may offer and sell (on any terms that are not manifestly unreasonable) the interest of the Breaching Partner to any other Partners or other Persons on the Breaching Partner's behalf, provided that any Person acquiring such interest becomes a Partner with respect to such interest and agrees to perform the duties and obligations imposed by this Agreement on the Breaching Partner. 11.4 BREACH PAYMENTS. For purposes hereof, Breach Payments shall be made in four installments, each equal to one-fourth of the Breach Amount, payable on the next four (4) consecutive anniversaries of the breach by the Breaching Partner, with simple interest accrued from the date of such breach through the date each such installment is paid on the unpaid balance of such Breach Amount at 10 percent (10%) per annum. The Breach Amount shall be an amount equal to the greater of $1 or the Net Equity of the Breaching Partner's interest on the day of such breach, computed in accordance with Section 11.6 hereof. The Partnership may, at its sole election, prepay all or any portion of the Breach Payments or interest accrued thereon at any time without penalty. 11.5 NO BONDING. Notwithstanding anything to the contrary in the Act, the Partnership shall not be obligated to secure the value of the Breaching Partner's interest by bond or otherwise; provided, however, that if a court of competent jurisdiction determines that, in order to continue the business of the Partnership such value must be so secured, the Partnership may provide such security. If the Partnership provides such security, the Breaching Partner shall not have any right to participate in Partnership profits or distributions during the term of the Partnership, or to receive any interest on the value of such interest. For this purpose, the value of the interest of the Breaching Partner shall be the greater of $1 or the Net Equity of such interest as of the effective date of the Breaching Partner's withdrawal. 11.6 NET EQUITY. The "Net Equity" of a Breaching Partner's interest in the Partnership, as of any day, shall be the amount that would be distributed to such Partner in liquidation of the Partnership pursuant to Section 13 hereof if (1) all of the Partnership's assets were sold for their Gross Asset Values, (2) the Partnership paid its accrued, but unpaid, liabilities and established reserves for the payment of reasonably anticipated contingent or unknown liabilities, and (3) the 30 of 40 35 Partnership distributed the remaining proceeds to the Partners in liquidation, all as of such day, provided that in determining such Net Equity, no reserve for contingent or unknown liabilities shall be taken into account if such Partner (or its successor in interest) agrees to indemnify the Partnership and the other Partner for the Breaching Partner's portion of any such reserve. The Net Equity of a Partner's interest in the Partnership shall be determined, without audit or certification, from the books and records of the Partnership by the firm of independent certified public accountants regularly employed by the Partnership. The Net Equity of a Partner's interest shall be determined within thirty (30) days of the day upon which such accountants are apprised in writing of the Gross Asset Values, and the amount of such Net Equity shall be disclosed to the Partnership and each of the Partners by written notice. The Net Equity determination of such accountants shall be final and binding in the absence of a showing of gross negligence or willful misconduct. SECTION 12 BUY-OUT 12.1 BUY-OUT PROVISION. BWISS shall have the right to purchase all of Prost's interest in the Partnership as determined herein. (a) For a period ending at 11:59 P.M. P.S.T. on the date three years after the Contribution Date, BWISS may give Prost notice of BWISS' intent to exercise its buy-out right ("Election Notice"). As a result of the giving of such Election Notice under this Section 12.1(a), Prost shall be bound to sell to BWISS Prost's entire interest in the Partnership in the amount of $2,205,000 plus any distributions not made to Prost under Section 4.1(b)(ii) as of the date of the Election Notice. The effect of giving the Election Notice shall terminate any obligation the Partnership has to make any distributions to Prost. (b) The closing of the purchase and sale of the interest under Section 12.1(a) shall occur on a date and time mutually determined by the Partners, but no later than the thirtieth day following the date of the Election Notice. At the closing the Partners shall execute such documents and instruments of conveyance as may be necessary or appropriate to confirm the transactions contemplated hereby, including, without limitation, the Transfer of the Partnership interest and the assumption of the obligations with respect to the portion of the interest transferred. The reasonable costs of such Transfer and closing including, without limitation, attorneys' fees and filing fees, shall be divided equally between the Partners. (c) If BWISS does not make the Election Notice prior to the expiration of the buy-out provision pursuant to Section 12.1(a), such failure shall be deemed a Liquidating Event under Section 13.1. 12.2 NONSOLICITATION. At all times after the date of the Election Notice until the end of the fifth year following the Election Notice or BWISS Purchase Offer (under Section 13.7 (b)) ("Post BWISS Election Period"), each of Prost and Stanislaus Brewing Company, Inc. agrees that both will not (directly or indirectly) call on or solicit or divert or take away from BWISS 31 of 40 36 or its Affiliates the business of (including, without limitation, by divulging to any competitor or potential competitor of BWISS or its Affiliates the name of), any person, firm, corporation or other entity who or which at the date of the Election Notice or BWISS Purchase Offer was, or at any time during the three years preceding the Election Notice or BWISS Purchase Offer had been, a customer of the Partnership, BWISS, or BWISS' Affiliates or whose identity is known to Prost or Stanislaus Brewing Company, Inc. at the date of the Election Notice or BWISS Purchase Offer as one whom the Partnership, BWISS, or BWISS' Affiliates intends to solicit within the succeeding year. Nothing contained in this Section 12.2 shall affect or be deemed to affect in any manner any other provision of this Agreement. 12.3 HIRING OF BWISS' EMPLOYEES. During the Post BWISS Election Period, each of Prost and Stanislaus Brewing Company, Inc. agrees not to (directly or indirectly) hire or offer employment to any employee of the Partnership, BWISS, or BWISS' Affiliates whose employment is continued by the Partnership, BWISS, or BWISS' Affiliates after the Election Notice or BWISS Purchase Offer unless the Partnership, BWISS, or BWISS' Affiliates first terminates the employment of such employee. Nothing contained in this Section 12.3 shall affect or be deemed to affect in any manner any other provision of this Agreement. 12.4 NONDISCLOSURE OF CONFIDENTIAL INFORMATION. (a) At all times after the date of the Election Notice or BWISS Purchase Offer, Prost, Stanislaus Brewing Company, Inc., and their Affiliates shall keep confidential and will not directly or indirectly divulge to anyone nor use or otherwise appropriate for their own benefit, or on behalf of any other person, firm, partnership or corporation by whom any of them might subsequently be employed or otherwise associated or affiliated with, any Confidential Information (as defined herein). For this purpose, "Confidential Information" means any and all customer lists, product formulations, arrangements with distributors, marketing information or strategies, trade secrets or other confidential information of any kind, nature or description concerning any matters affecting or relating to the business of the Partnership, BWISS, or BWISS' Affiliates which derives economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use. Nothing contained in this Section 12.4(a) shall affect or be deemed to affect in any manner any other provision of this Agreement. (b) At all times after the date of the Prost Purchase Offer (under Section 13.7(a)), BWISS and its Affiliates shall keep confidential and will not directly or indirectly divulge to anyone nor use or otherwise appropriate for their own benefit, or on behalf of any other person, firm, partnership or corporation by whom any of them might subsequently be employed or otherwise associated or affiliated with, any Confidential Information (as defined herein). For this purpose, "Confidential Information" means any and all customer lists, product formulations, arrangements with distributors, marketing information or strategies, trade secrets or other confidential information of any kind, nature or description concerning any matters affecting or relating to the business of the Partnership, Prost or Prost's Affiliates which derives economic value, actual or potential, from not being generally known to the public or to other 32 of 40 37 persons who can obtain economic value from its disclosure or use. Nothing contained in this Section 12.4(b) shall affect or be deemed to affect in any manner any other provision of this Agreement. 12.5 INTELLECTUAL PROPERTY RIGHTS. (a) On and after the date of the Election Notice or BWISS Purchase Offer, all intellectual property rights, whether or not patentable or copyrightable, which (i) are made or developed with the equipment, supplies, facilities, product formulations, trade secrets, time or other assets of the Partnership or (ii) relate to the business, including anticipated research or development, of the Partnership are and shall remain the sole property of BWISS and upon request made by BWISS, Prost shall assign any and all rights, including patents and patent rights, trademark and trade dress rights Prost may have therein to BWISS. Nothing contained in this Section 12.5(a) shall affect or be deemed to affect in any manner any other provision of this Agreement. (b) On and after the date of the Prost Purchase Offer all intellectual property rights, whether or not patentable or copyrightable, which (i) are made or developed with the equipment, supplies, facilities, product formulations, trade secrets, time or other assets of the Partnership or (ii) relate to the business, including anticipated research or development, of the Partnership are and shall remain the sole property of Prost and upon request made by Prost, BWISS shall assign any and all rights, including patents and patent rights, trademark and trade dress rights BWISS may have therein to Prost. Nothing contained in this Section 12.5(b) shall affect or be deemed to affect in any manner any other provision of this Agreement. 12.6 PARTNERSHIP MATERIALS. (a) On and after the date of the Election Notice or BWISS Purchase Offer, all reports and analysis, designs, drawings, contracts, contractual arrangements, specifications, computer software, computer hardware and other equipment, computer printouts, computer disks, documents, memoranda, notebooks, correspondence, files, lists and other records, and the like, and all photocopies or other reproductions thereof, affecting or relating to the business of the Partnership shall be and remain the sole property of BWISS. Nothing contained in this Section 12.6(a) shall affect or be deemed to affect in any manner any other provision of this Agreement. (b) On and after the date of the Prost Purchase Offer all reports and analysis, designs, drawings, contracts, contractual arrangements, specifications, computer software, computer hardware and other equipment, computer printouts, computer disks, documents, memoranda, notebooks, correspondence, files, lists and other records, and the like, and all photocopies or other reproductions thereof, affecting or relating to the business of the Partnership shall be and remain the sole property of Prost. Nothing contained in this Section 12.6(b) shall affect or be deemed to affect in any manner any other provision of this Agreement. 33 of 40 38 SECTION 13 DISSOLUTION AND WINDING UP 13.1 LIQUIDATING EVENTS. The Partnership shall dissolve and commence winding up and liquidating upon the first to occur of any of the following ("Liquidating Events"): (a) December 31, 2016 (b) The sale of all or substantially all of the Property; (c) The vote of the Partners; (d) The happening of any other event that makes it unlawful or impossible to carry on the business of the Partnership; (e) Any event which causes there to be only one Partner; or (f) The failure of BWISS to make the Election Notice in accordance with Section 12.1. The Partners hereby agree that, notwithstanding any provision of the Act, the Partnership shall not dissolve prior to the occurrence of a Liquidating Event. If it is determined, by a court of competent jurisdiction, that the Partnership has dissolved prior to the occurrence of a Liquidating Event, the Partners hereby agree to continue the business of the Partnership without a winding up or liquidation. 13.2 WINDING UP. Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purpose of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Partners and no Partner shall take any action that is inconsistent with, or not necessary to or appropriate for, winding up the Partnership's business and affairs. To the extent not inconsistent with the foregoing, all covenants and obligations in this Agreement shall continue in full force and effect until such time as the Property has been distributed pursuant to this Section 13.2 and the Partnership has terminated. The Joint Management Committee shall be responsible for overseeing the winding up and liquidation of the Partnership, shall take full account of the Partnership's liabilities and Property, shall cause the Property to be liquidated as promptly as is consistent with obtaining the fair market value thereof, and shall cause the proceeds therefrom, to the extent sufficient therefor, to be applied and distributed in the following order: (a) First, to the payment and discharge of all of the Partnership's debts and liabilities to creditors other than Partners; (b) Second, to the payment and discharge of all of the Partnership's debts and liabilities to Partners; and 34 of 40 39 (c) The balance, if any, to the Partners in accordance with their Capital Accounts, after giving effect to all contributions, distributions, and allocations for all periods. The Joint Management Committee shall not receive any additional compensation for any services performed pursuant to this Section 13. Each Partner understands and agrees that by accepting the provisions of this Section 13.2 setting forth the priority of the distribution of the assets of the Partnership to be made upon its liquidation, such Partner expressly waives any right which it, as a creditor of the Partnership, might otherwise have under the Act to receive distributions of assets pari passu with the other creditors of the Partnership in connection with a distribution of assets of the Partnership in satisfaction of any liability of the Partnership, and hereby subordinates to said creditors any such right. 13.3 COMPLIANCE WITH CERTAIN REQUIREMENTS OF REGULATIONS; DEFICIT CAPITAL ACCOUNTS. In the event the Partnership is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), (a) distributions shall be made pursuant to this Section 13 to the Partners who have positive Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2), and (b) if any Partner's Capital Account has a deficit balance (after giving effect to all contributions, distributions, and allocations for all Fiscal Years, including the Fiscal Year during which such liquidation occurs), such Partner shall contribute to the capital of the Partnership the amount necessary to restore such deficit balance to zero in compliance with Regulations Section 1.704-1(b)(ii)(b)(3). In the discretion of the Joint Management Committee, a pro rata portion of the distributions that would otherwise be made to the Partners pursuant to Section 13.2(c) hereof may be: (a) distributed to a trust established for the benefit of the Partners for the purposes of liquidating Partnership assets, collecting amounts owed to the Partnership, and paying any contingent or unforeseen liabilities or obligations of the Partnership or of the Partners arising out of or in connection with the Partnership. The assets of any such trust shall be distributed to the Partners from time to time, in the reasonable discretion of the Joint Management Committee, in the same proportions as the amount distributed to such trust by the Partnership would otherwise have been distributed to the Partners pursuant to Section 13.2 hereof; or (b) withheld to provide a reasonable reserve for Partnership liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Partnership, provided that such withheld amounts shall be distributed to the Partners as soon as practicable. 13.4 DEEMED DISTRIBUTION AND RECONTRIBUTION. Notwithstanding any other provisions of this Section 13, in the event the Partnership is liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g) but no Liquidating Event has occurred, the Property shall not be liquidated, the Partnership's liabilities shall not be paid or discharged, and the Partnership's affairs shall not be wound up. Instead, the Partnership shall be deemed to have distributed the Property in kind to the Partners, who shall be deemed to have assumed and taken subject to all 35 of 40 40 Partnership liabilities, all in accordance with their respective Capital Accounts and if any Partner's Capital Account has a deficit balance (after giving effect to all contributions, distributions, and allocations for all Fiscal Years, including the Fiscal Year during which such liquidation occurs), such Partner shall contribute to the capital of the Partnership the amount necessary to restore such deficit balance to zero in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(3). Immediately thereafter, the Partners shall be deemed to have recontributed the Property in kind to the Partnership, which shall be deemed to have assumed and taken subject to all such liabilities. 13.5 RIGHTS OF PARTNERS. Except as otherwise provided in this Agreement, (a) each Partner shall look solely to the assets of the Partnership for the return of its Capital Contributions and shall have no right or power to demand or receive property other than cash from the Partnership and (b) neither Partner shall have priority over the other Partner as to the return of his Capital Contributions, distributions, or allocations. 13.6 NOTICE OF DISSOLUTION. In the event a Liquidating Event occurs or an event occurs that would, but for provisions of Section 13.1 hereof, result in a dissolution of the Partnership, the Joint Management Committee shall, within thirty (30) days thereafter, (a) provide written notice thereof to each of the Partners and to all other parties with whom the Partnership regularly conducts business (as determined in the discretion of the Joint Management Committee), and (b) publish notice of such dissolution in a newspaper of general circulation in each place in which the Partnership regularly conducts business (as determined in the discretion of the Joint Management Committee). 13.7 RIGHT OF FIRST REFUSAL. In the event BWISS fails to make the Election Notice thereby causing a Liquidating Event pursuant to Section 13.1(f), the Joint Management Committee shall not cause the winding up of the Partnership pursuant to Section 13.2 if either Partner exercises its right of first refusal pursuant to this Section 13.7. (a) Prost shall have the right to buy all of BWISS' interest in the Partnership based on the Appraised Value of the Partnership as of the date of the Liquidating Event pursuant to Section 13.1(f). Within ten (10) Business Days after receipt of the Appraisers' Notice, as defined herein, Prost may give written notice to BWISS to exercise Prost's right to acquire all of BWISS' interest in the Partnership for the purchase price equal to the Appraised Value multiplied by BWISS' Percentage Interest (the "Prost Purchase Offer"). BWISS shall be obligated to accept the Prost Purchase Offer. The closing shall take place within thirty (30) days after Prost gives written notice of the Prost Purchase Offer. The Prost Purchase Offer may, at the election of Prost, be paid at the end of one year from the date of the Prost Purchase Offer; provided, however, that (i) Prost shall grant BWISS a security interest in all existing and after acquired equipment, inventory, and tangible personal property of the Partnership and the proceeds derived from the sale thereof, (ii) Prost shall grant BWISS a security interest in all accounts receivables and proceeds, (iii) Prost shall grant BWISS a security interest on the real property located at 821 L Street, Modesto, California, (iv) Prost shall execute a promissory note providing for payment of principal and accrued interest at the end of one year from the date of 36 of 40 41 the Prost Purchase Offer at the federal applicable rate then prevailing however interest shall not accrue until 90 days after the date of the Prost Purchase Offer, and (v) Prost shall execute such additional documents as reasonably requested by BWISS to effectuate the foregoing. (b) If Prost fails to give BWISS the Prost Purchase Offer within ten (10) Business Days after receipt of the Appraisers' Notice, as defined herein, BWISS shall have the right to buy all of Prost's interest in the Partnership based on the Appraised Value of the Partnership as of the date of the Liquidating Event pursuant to Section 13.1(f). Within twenty (20) Business Days after receipt of the Appraisers' Notice, as defined herein, BWISS may give written notice to Prost to exercise BWISS' right to acquire all of Prost's interest in the Partnership for the purchase price equal to the Appraised Value multiplied by Prost's Percentage Interest (the "BWISS Purchase Offer"). Prost shall be obligated to accept the BWISS Purchase Offer. The closing shall take place within thirty (30) days after BWISS gives written notice of the BWISS Purchase Offer. The BWISS Purchase Offer may, at the election of BWISS, be paid at the end of one year from the date of the BWISS Purchase Offer; provided, however, that (i) BWISS shall grant Prost a security interest in all existing and after acquired equipment, inventory, and tangible personal property of the Partnership and the proceeds derived from the sale thereof, (ii) BWISS shall grant Prost a security interest in all accounts receivables and proceeds, (iii) BWISS shall grant Prost a security interest on the real property located at 821 L Street, Modesto, California, (iv) BWISS shall execute a promissory note providing for payment of principal and accrued interest at the end of one year from the date of the BWISS Purchase Offer at the federal applicable rate then prevailing however interest shall not accrue until 90 days after the date of the BWISS Purchase Offer, and (v) BWISS shall execute such additional documents as reasonably requested by BWISS to effectuate the foregoing. (c) If neither Partner appoints the First Appraiser within ten (10) Business Days of the Liquidating Event pursuant to Section 13.1(f), or if neither the Prost Purchase Offer or the BWISS Purchase Offer is timely made, the Joint Management Committee shall commence winding up the Partnership in accordance with Section 13. (d) The Appraised Value shall be determined as follows: (i) Within ten (10) Business Days of the Liquidating Event pursuant to Section 13.1(f), one Partner shall designate the First Appraiser and the other Partner shall appoint the Second Appraiser within ten (10) Business Days of receiving such notice designating the First Appraiser. (ii) If the Second Appraiser is timely designated, the First and Second Appraisers shall meet within ten (10) Business Days of such appointment and shall endeavor, within thirty (30) Business Days of such appointment, to agree upon, and give written notice to the Partners of the Appraised Value (the "Appraisers' Notice"). The agreed value shall be the Appraised Value. 37 of 40 42 (iii) If an Appraisers' Notice is not given during such period, then at any time after such period, either BWISS or Prost, by written notice to the First Appraiser and Second Appraiser (with a copy to the other Partner) may demand that they appoint a Third Appraiser (the "Third Appraiser"). If the First Appraiser and Second Appraiser have not either given an Appraisers' Notice or appointed the Third Appraiser (who shall have agreed to serve) by the twentieth (20th) Business Day after such demand, either BWISS or Prost may request any judge of the Superior Court of the County of Los Angeles, State of California to appoint the Third Appraiser. After the appointment of the Third Appraiser, the Appraised Value shall be the amount included in an Appraisers' Notice subscribed to by at least two (2) of the three (3) appraisers; provided that before subscribing to an Appraised Value, the Third Appraiser shall meet at least once with the First Appraiser and the Second Appraiser to discuss in good faith the appraisal of the Partnership. If two (2) of the appraisers have not given an Appraisers' Notice within twenty (20) Business Days of the appointment of the Third Appraiser, the Appraised Value shall be determined solely by the Third Appraiser, who shall give an Appraisers' Notice within thirty (30) days of his appointment. (iv) If a Second Appraiser is not timely appointed in the manner provided by this Section 13.7, the Appraised Value shall be determined solely by the First Appraiser who shall give an Appraisers' Notice of such Appraised Value within ten (10) Business Days of the last day on which the Second Appraiser could have been timely designated. (v) Each appraiser appointed hereunder shall be disinterested and shall be qualified to appraise assets similar to the Partnership's assets. (vi) As used in this Section 13.7, as of any day, the "Appraised Value" of the Partnership means the "Gross Appraised Value" less all accrued Partnership liabilities (as determined under U.S. Generally Accepted Accounting Principles) or such other wording that clarifies the fact that the appraisal will be at Gross Fair Market Value as defined in the Agreement. Either Partner exercising its right under this Section 13.7 shall execute an indemnification agreement reasonably acceptable to the other Partner's counsel obligating the buying Partner to indemnify the other Partner and its Affiliates for any obligations or expenses, including reasonable legal fees, incurred by the Partnership. (vii) The costs and expenses of the Appraisers shall be born equally by the parties. 38 of 40 43 SECTION 14 MISCELLANEOUS 14.1 NOTICES. Any notice, payment, demand, or communication required or permitted to be given by any provision of this Agreement shall be in writing and sent by overnight courier, or by telephone or facsimile, if such telephone conversation or facsimile is followed by a hard copy of the telephone conversation or facsimile communication sent by overnight courier, charges prepaid, addressed as follows or to such other address as such Person may from time to time specify by notice to the Partners: if to the Partnership, to the Partnership at the address set forth in Section 1.4 hereof; and if to a Partner, to such Partner at the address set forth in Section 2.1. Any such notice shall be deemed to be delivered, given, and received as of the date so delivered. 14.2 BINDING EFFECT. Except as otherwise provided in this Agreement, every covenant, term, and provision of this Agreement shall be binding upon and inure to the benefit of the Partners and their respective heirs, legatees, representatives, successors, transferees, and assigns. 14.3 CONSTRUCTION. Every covenant, term, and provision of this Agreement shall be construed simply according to its fair meaning and not strictly for or against any Partner. The terms of this Agreement are intended to embody the economic relationship among the Partners and shall not be subject to modification by, or be conformed with, any actions by the Internal Revenue Service except as this Agreement may be explicitly so amended and except as may relate specifically to the filing of tax returns. Section and other headings contained in this Agreement are for reference purposes only and are not intended to describe, interpret, define, or limit the scope, extent, or intent of this Agreement or any provision hereof. 14.4 SEVERABILITY. Every provision of this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity or legality of the remainder of this Agreement. 14.5 INCORPORATION BY REFERENCE. Every exhibit, schedule, and other appendix attached to this Agreement and referred to herein is not incorporated in this Agreement by reference unless this Agreement expressly otherwise provides. 14.6 FURTHER ACTION. Each Partner agrees to perform all further acts and execute, acknowledge, and deliver any documents which may be reasonably necessary, appropriate, or desirable to carry out the provisions of this Agreement. 14.7 GOVERNING LAW. The laws of the State of California shall govern the validity of this Agreement, the construction of its terms, and the interpretation of the rights and duties of the Partners. 14.8 COUNTERPART EXECUTION. This Agreement may be executed in any number of counterparts with the same effect as if all of the Partners had signed the same document. All 39 of 40 44 counterparts shall be construed together and shall constitute one agreement. 14.9 ARBITRATION. Any dispute arising under this Agreement or the transactions contemplated thereby shall be arbitrated before the American Arbitration Association at its offices located in San Francisco, California. 14.10 ATTORNEYS' FEES. If any legal action, whether in court or arbitration, arises under this Agreement or by reason of any asserted breach of it, the prevailing party shall be entitled to recover all costs and expenses, including reasonable attorneys' and expert witness fees, incurred in enforcing or attempting to enforce any of the terms, covenants or conditions. IN WITNESS WHEREOF, the parties have executed this Agreement of Partnership as of December 17, 1996. PROST PARTNERS, L.P. BWI-ST. STAN'S, INC. By: /s/ GARITH HELM By: /s/ FREDERIK G.M. RODENHUIS ------------------------------ ----------------------------------- Garith Helm, President of Frederik G.M. Rodenhuis, President and Stanislaus Brewing Company, Inc., Chief Executive Officer General Partner 40 of 40 45 CONTRIBUTION AGREEMENT BY AND AMONG PROST PARTNERS, L.P. A CALIFORNIA LIMITED PARTNERSHIP AND BWI-ST. STAN'S, INC. A CALIFORNIA CORPORATION IN THE FORMATION OF BWI-PROST PARTNERS A CALIFORNIA PARTNERSHIP 46 TABLE OF CONTENTS Page RECITALS....................................................................1 SECTION 1 - CONTRIBUTION OF ASSETS BY PARTNERS........................1 1.1 CONTRIBUTION OF THE ASSETS BY PROST..............................1 1.2 EXCLUDED ASSETS..................................................4 1.3 CONVEYANCE INSTRUMENTS...........................................5 1.4 ASSUMED LIABILITIES..............................................5 1.5 EXCLUDED LIABILITIES.............................................5 1.6 CONTRIBUTION BY BWISS............................................5 1.7 CONTRIBUTION DATE................................................6 SECTION 2 - EVENTS OCCURRING ON THE CONTRIBUTION DATE.................6 2.1 DELIVERIES BY PROST..............................................6 2.2 EFFECT OF DELIVERIES.............................................6 2.3 EFFECT OF CONTRIBUTIONS..........................................6 2.4 DELIVERIES BY BWISS..............................................6 2.5 EFFECT OF CONTRIBUTIONS..........................................7 SECTION 3 - OTHER AGREEMENTS..........................................7 3.1 OTHER AGREEMENTS.................................................7 SECTION 4 - REPRESENTATIONS AND WARRANTIES OF PROST...................7 4.1 ORGANIZATION.....................................................7 4.2 QUALIFICATION....................................................8 4.3 AUTHORITY........................................................8 4.4 NO VIOLATIONS....................................................8 4.5 FINANCIAL STATEMENTS.............................................9 4.6 ABSENCE OF CERTAIN CHANGES OR EVENTS.............................9 4.7 CERTAIN TAX MATTERS.............................................11 4.8 CONDITION OF FACILITIES.........................................11 4.9 UTILITIES; ACCESS...............................................11 4.10 CERTAIN CONDITIONS NOT PRESENT..................................11 4.11 CONDITION OF EQUIPMENT..........................................12 4.12 INVENTORY; RECEIVABLES..........................................12 4.13 TITLE TO PROPERTIES; ENCUMBRANCES...............................12 4.14 LEASES..........................................................13 4.15 PATENTS, TRADEMARKS, AND SIMILAR RIGHTS.........................13 4.16 INSURANCE.......................................................13 4.17 ERISA...........................................................14 i 47 4.18 DOCUMENTS; COMMITMENTS..........................................15 4.19 LABOR MATTERS...................................................15 4.20 PERSONNEL.......................................................16 4.21 NO BREACH.......................................................16 4.22 CONSENTS, PERMITS, ETC..........................................16 4.23 LITIGATION......................................................16 4.24 COMPLIANCE WITH APPLICABLE LAW; ADVERSE RESTRICTIONS............17 4.25 ENVIRONMENTAL PROTECTION........................................17 4.26 ASSETS NECESSARY TO BUSINESS....................................18 4.27 CUSTOMERS, DISTRIBUTORS, AND SUPPLIERS..........................18 4.28 BROKERS.........................................................18 SECTION 5 - REPRESENTATIONS AND WARRANTIES ON BWISS..................18 5.1 ORGANIZATION....................................................18 5.2 AUTHORITY.......................................................19 5.3 NO VIOLATIONS...................................................19 5.4 BROKERS.........................................................19 SECTION 6 - COVENANTS................................................20 6.1 CONDUCT OF BUSINESS OF PROST PENDING THE CONTRIBUTION DATE......20 6.2 APPROVAL OF PARTNERS............................................21 6.3 THIRD PARTY CONSENTS............................................21 6.4 EMPLOYEE MATTERS................................................22 SECTION 7 - SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION.............23 7.1 SURVIVAL; INDEMNIFICATION.......................................23 7.2 LIMITATIONS OF INDEMNIFICATION..................................24 7.3 TAX INDEMNIFICATION WITH RESPECT TO TAX LIABILITY...............24 7.4 DEFINITIONS.....................................................27 7.5 CONTROL OF LITIGATION...........................................28 7.6 TRANSFER TAXES..................................................28 7.7 COOPERATION ON TAX MATTERS......................................29 7.8 ELECTIONS.......................................................29 7.9 TAX RETURNS OF PROST............................................29 7.10 CERTAIN DISPUTES................................................30 7.11 OTHER TAX MATTERS...............................................30 SECTION 8 - CONDITIONS TO CLOSING; TERMINATION.......................30 8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE CLOSING.....30 8.2 CONDITIONS TO OBLIGATION OF BWISS TO EFFECT THE CLOSING.........31 8.3 CONDITIONS TO OBLIGATION OF PROST TO EFFECT THE TRANSACTION.....33 8.4 TERMINATION.....................................................34 8.5 BREAK UP FEES...................................................34 ii 48 SECTION 9 - MISCELLANEOUS PROVISIONS.................................34 9.1 AMENDMENT AND MODIFICATION......................................34 9.2 WAIVER OF COMPLIANCE; CONSENTS..................................34 9.3 ASSIGNMENT......................................................35 9.4 FURTHER ASSURANCES..............................................35 9.5 GOVERNING LAW...................................................35 9.6 COUNTERPARTS....................................................35 9.7 PUBLICITY.......................................................35 9.8 NOTICES.........................................................36 9.9 SPECIFIC PERFORMANCE............................................36 9.10 HEADINGS........................................................36 9.11 ENTIRE AGREEMENT................................................37 9.12 SEVERABILITY....................................................37 9.13 INCONSISTENCY OR CONFLICT.......................................37 9.14 EXHIBITS AND SCHEDULES..........................................37 9.15 ARBITRATION.....................................................37 9.16 ATTORNEYS' FEES.................................................37 iii 49 This CONTRIBUTION AGREEMENT (this "Agreement") is entered into by and between Prost Partners, L.P., a California limited partnership, and BWI-St. Stan's Inc., a California corporation in the formation of BWI-Prost Partners, a California partnership (the "Partnership"). This Agreement and the Agreement of Partnership of BWI-Prost Partners, a California partnership (the "Partnership Agreement") shall be effective as of the Contribution Date. RECITALS A. Prost Partners, L.P., a California limited partnership, (hereinafter referred to as "Prost"), owns and operates a brewery and brewpub located in Modesto, California doing business as St. Stan's Brewing Company (the "Business"). BWI-St. Stan's, Inc. (hereinafter referred to as "BWISS"), a wholly owned subsidiary of Beverage Works, Inc. (hereinafter referred to as "BWI"), desires to enter into with Prost a partnership which will own and operate the Business. B. For the purpose set forth in Section 1.3 of the Partnership Agreement, and as its Capital Contribution (as defined in Section 1.10 of the Partnership Agreement), Prost wishes to contribute the Business (except the "Excluded Assets," as defined in Section 1.2 of this Agreement) to the Partnership in exchange for which Prost shall become a Partner in the Partnership and shall receive the Percentage Interest in the Partnership specified in Section 2.1 of the Partnership Agreement. BWISS wishes to assume certain liabilities of the Business as its contribution in exchange for which BWISS shall become a Partner in the Partnership and shall receive the Percentage Interest in the Partnership specified in Section 2.1 of the Partnership Agreement. C. In order to accomplish the foregoing, simultaneously with the execution of this Agreement and the Partnership Agreement, the parties shall enter into the agreements identified in Section 3 hereof (collectively, the "Other Agreements"). D. The foregoing contributions and assumption of liabilities by the Partnership are all subject to the terms and conditions of this Agreement, the Partnership Agreement and the Other Agreements. In consideration of the foregoing and the mutual representations, warranties, covenants, and agreements herein contained, Prost and BWISS agree as follows: SECTION 1 CONTRIBUTION OF ASSETS BY PARTNERS 1.1 CONTRIBUTION OF THE ASSETS BY PROST. (a) Subject to the terms and conditions of this Agreement, on the Contribution Date, Prost hereby assigns, transfers, and delivers to the Partnership, as a contribution, free and clear of all title defects, objections, liens, pledges, claims, rights of first refusal, options, 1 of 37 50 charges, security interests, mortgages, or other encumbrances of any nature whatsoever (collectively, "Encumbrances") other than "Permitted Encumbrances" (as defined in Section 1.1(b) of this Agreement), all of the cash, assets, properties, and business (excepting only the "Excluded Assets," as defined in Section 1.2 of this Agreement) of every kind and description; wherever located; real, personal, or mixed; tangible or intangible; owned or held; or used primarily in the conduct of the Business by Prost as the same shall exist on the Contribution Date including all assets and property shown on the "Contributed Business Balance Sheet" (as defined in Section 4.5 of this Agreement) (and not disposed of in the ordinary course of business) and all assets and property thereafter acquired by Prost in respect of or used in the Business immediately prior to the Contribution Date (collectively, the "Assets"), and including, without limitation, all right, title, and interest of Prost in, to, and under: (i) Those certain parcels of land described in Schedule 1.1(a)(i) hereto (collectively, the "Fee Property") and all buildings, fixtures, and improvements erected on the Fee Property (collectively, "Improvements") (the Fee Property and Improvements hereinafter collectively referred to as the "Subject Property"); (ii) The machinery, equipment, furniture, vehicles, and other tangible property (including, without limitation, maintenance and operating supplies, fuel, and spare parts for such machinery and equipment) located on, or used at, the Subject Property or the "Excluded Facilities," as defined in Section 1.2(a)(i) of this Agreement, or otherwise used in connection with the Business (collectively, the "Equipment"); (iii) The raw materials, finished goods, work-in-process, supplies, and inventories, with respect to the Business carried on by Prost wherever located (collectively, the "Inventory"); (iv) Those patents, copyrights, trademarks, trade names, technology, know-how, processes, trade secrets, inventions, proprietary data, formulae, research and development data, computer software programs, and other intangible property (excluding the Prost name and any derivative thereof), and any applications for the same, used primarily in the portion of the Business carried on by Prost, and all goodwill associated with such intangible property (collectively, the "Intangible Property"); (v) The leases of real property (described in Schedule 1.1(a)(v)) together with all fixtures, office equipment, furnishings, furniture, and other tangible property located at such property (collectively, the "Leased Property"); (vi) All of Prost's rights, claims, credits, causes of action, or right of setoff against third parties relating to the Assets, including, without limitation, unliquidated rights under manufacturers' and vendors' warranties (collectively "Claims"); (vii) Those contracts, agreements, leases, licenses, and other instruments, arrangements, and commitments being assumed by the Partnership pursuant to Section 1.4 of 2 of 37 51 this Agreement (collectively, "Rights"); (viii) All certificates of occupancy and other transferable licenses, permits, registrations, authorizations, use agreements, orders, or approvals of governmental or quasi-governmental agencies and authorities (whether federal, state, local, municipal, or foreign) or private parties relating to the construction, use, operation, or enjoyment of the Assets (collectively, "Permits"); (ix) All accounts receivable arising out of sales of beer and other inventory sold or otherwise in the ordinary and usual course of the operation of the Business prior to the close of business on the Contribution Date (collectively, "Receivables"); (x) All transferable bonds or deposits made by Prost or its predecessors in title (or its agents) with any governmental agency or authority or with any utility company or third party relating to the construction, use, operation, or enjoyment of the Assets; (xi) All prepaid rentals and other prepaid expenses arising from payments made by Prost in the ordinary and usual course of the operation of the Business related to the Assets prior to the close of business on the Contribution Date for goods or services; (xii) Originals or copies of all books, records, files, and papers, whether in hard copy or computer format, used in the Business since inception, including without limitation, engineering information, manuals and data, sales and advertising materials, sales and purchase correspondence, lists of present and former suppliers, and personnel and employment records and, with respect to information relating to "Tax" (as defined in Section 7.4 of this Agreement), only information that is necessary for the preparation of any Tax returns to be filed by the Partnership after the Contribution Date or the determination of the Tax basis of the Assets (collectively, "Files and Records"); (xiii) All lists of present, and, to the extent available, future customers and goodwill associated with the Assets. (b) For purposes of this Agreement, "Permitted Encumbrances" shall mean (i) the "Assumed Liabilities," as defined in Section 1.4 of this Agreement; (ii) Encumbrances which, individually or in the aggregate, do not or would not have a material adverse effect on the business or financial condition of the Business taken as a whole or materially interfere with the present use of any Assets subject thereto; and (iii) easements, rights-of-way, building or use restrictions, exceptions, variances, reservations, or similar Encumbrances of record affecting, but not materially interfering with the present use of, any Subject Property. For purposes of Section 1.1(b), a "material adverse effect" shall include an individual Encumbrance exceeding the principal amount of $500, and in the aggregate, exceeding the principal amount of $2,500. 3 of 37 52 1.2 EXCLUDED ASSETS. (a) There shall be excluded from the Assets the following assets and properties of Prost which are used in connection with the Business: (i) That certain parcel of land described in Schedule 1.2(a)(i) hereto (the "Excluded Fee Property") and the buildings, fixtures, and improvements erected on the Excluded Fee Property (collectively, "Excluded Improvements") (the Excluded Fee Property and Excluded Improvements hereinafter sometimes collectively referred to as the "Excluded Facilities"); (ii) All machinery, equipment, furniture, vehicles, and other tangible property (including, without limitation, maintenance and operating supplies, fuel, and spare parts of such machinery and equipment) located on, or used at, the Excluded Facilities and the other machinery, equipment, and other tangible property described in Schedule 1.2(a)(ii) ("Other Excluded Equipment") (collectively, the "Excluded Equipment"); (iii) All of its right, title, and interest in and to all patents, copyrights, trademarks, trade names, technology, know-how, processes, trade secrets, inventions, proprietary data, and other intangible property, and any applications for the same, not used primarily in connection with the Assets and described in Schedule 1.2(a)(iii) hereto, and all goodwill associated with such intangible property (collectively, the "Excluded Intangible Property"); (iv) All of its claims against third parties relating to the "Excluded Assets," as defined in Section 1.2(b) of this Agreement, and the related unliquidated rights under manufacturers' and vendors' warranties, including all amounts representing reimbursements for items paid by it and described in Schedule 1.2(a)(iv); (v) All of its right, title, and interest in and to all Permits relating to the construction, use, operation, or enjoyment of the Excluded Assets and described in Schedule 1.2(a)(v); (vi) All of its right, title, and interest in and to all transferable bonds or deposits made by it or its predecessors in title (or its agents) with any governmental agency or authority or with any utility company or third party relating to the construction, use, operation, or enjoyment of the Excluded Assets and described in Schedule 1.2(a)(vi); and (vii) All of its right, title, and interest in and to all prepaid rentals and other prepaid expenses arising from payments made by it in the ordinary and usual course of the operation of the Business in connection with the Excluded Assets and described in Schedule 1.2(a)(vii). (b) The Excluded Facilities, Excluded Equipment, Excluded Intangible Property, and all of the rights, properties, and other assets with respect to the Business not being 4 of 37 53 contributed to the Partnership by Prost pursuant to this Agreement are herein collectively referred to as the "Excluded Assets." 1.3 CONVEYANCE INSTRUMENTS. In order to effectuate the contribution of the Assets as contemplated by Section 1.1, Prost has, or will hereafter, execute and deliver, or cause to be executed and delivered, all such documents or instruments of assignment, transfer, or conveyance, in each case dated the Contribution Date (collectively, the "Conveyance Instruments"), as the parties and their respective counsel shall reasonably deem necessary or appropriate to vest in or confirm title to the Assets to the Partnership. 1.4 ASSUMED LIABILITIES. Subject to the terms and conditions of this Agreement and of the Partnership Agreement, in reliance on the representations, warranties, covenants, and agreements of the parties contained herein, the Partnership hereby assumes and agrees to pay, discharge, or fulfill the following liabilities and obligations relating to the Business: (a) all of the liabilities and obligations in respect of the contracts, agreements, licenses, and other instruments, arrangements, and commitments listed in Schedule 1.4(a); (b) the leasehold obligations, including by assignment or sublease, in respect of the Leased Property as described in Schedule 1.4(b); and (c) the other liabilities listed in Schedule 1.4(c) (collectively, the "Assumed Liabilities"). 1.5 EXCLUDED LIABILITIES. Notwithstanding any provision of this Agreement or any Conveyance Instrument to the contrary, the Partnership is assuming only the Assumed Liabilities and is not assuming any other liability or obligation of Prost (or any predecessor owner of all or part of its business and assets) of whatever nature whether presently in existence or arising hereafter, and all such other liabilities and obligations shall be retained by and remain liabilities of Prost (all of such liabilities and obligations not being assumed hereinafter referred to as the "Excluded Liabilities") and, notwithstanding anything to the contrary in this Section 1.5, none of the following shall be "Assumed Liabilities" for purposes of this Agreement: (a) Any liability for "Tax" (as defined in Section 7.4 of this Agreement) arising from or with respect to the Assets or the operations of the Business, other than described in Section 1.5(b) hereof, which is incurred in or attributable to the "Tax Indemnification Period" (as defined in Section 7.4 of this Agreement) (the "Excluded Tax Liabilities"); or (b) Any liabilities relating to the Excluded Assets (it being understood that any Tax Liability relating to the Excluded Assets shall be an Excluded Tax Liability for purposes of this Agreement). 1.6 CONTRIBUTION BY BWISS. Subject to the terms and conditions of this Agreement, on the Contribution Date, as its contribution, BWISS, in reliance on the representations, warranties, covenants, and agreements of Prost contained herein, BWISS hereby assumes and agrees to pay, discharge, or fulfill the liabilities and obligations described in Schedule 1.6 ("Assumed Debts"). 5 of 37 54 1.7 CONTRIBUTION DATE. The Contribution Date shall immediately follow fulfillment or waiver of the conditions specified in Sections 8.1 through 8.3 hereof and provided that this Agreement has not been terminated or abandoned pursuant to Section 8.4 hereof. The parties shall use their best efforts to effectuate the Contribution Date as soon as practicable. SECTION 2 EVENTS OCCURRING ON THE CONTRIBUTION DATE 2.1 DELIVERIES BY PROST. On the Contribution Date, Prost will deliver to the Partnership the following: (a) The Conveyance Instruments to effect the contribution of the Assets to the Partnership and the assumption of the Assumed Liabilities of the Partnership, such Conveyance Instruments to be those reasonably deemed necessary by, and to be in form and substance reasonably satisfactory to, counsel to the parties; (b) All special warranty deeds and other appropriate instruments conveying to the Partnership the Subject Property; (c) All other previously undelivered items required to be delivered by Prost at or prior to the Contribution Date pursuant to the terms of this Agreement, the Partnership Agreement, and the Other Agreements. 2.2 EFFECT OF DELIVERIES. All deliveries of information and documents contemplated to be made by Prost to the Partnership pursuant to the terms of this Agreement, the Partnership Agreement, and the Other Agreements shall be deemed made to such other parties on its own behalf and on behalf of Prost's General Partner, as appropriate. 2.3 EFFECT OF CONTRIBUTIONS. In exchange for its Capital Contribution, as defined in Section 1.10 of the Partnership Agreement, (i) Prost shall become a partner in the Partnership pursuant to the terms of the Partnership Agreement; (ii) Prost will receive the Percentage Interest set forth beside its name in Section 2.1 of the Partnership Agreement; and (iii) the Capital Account of Prost will be credited with such amount as determined under this Agreement and the Partnership Agreement. 2.4 DELIVERIES BY BWISS. On the Contribution Date, BWISS will deliver to the Partnership the following: (a) Instruments necessary to effect the assumption of the liabilities and obligations reasonably deemed necessary by, and to be in form and substance reasonably satisfactory to, counsel to the parties. (b) All other previously undelivered items required to be delivered by BWISS at or prior to the Contribution Date pursuant to the terms of this Agreement, the Partnership 6 of 37 55 Agreement, and the Other Agreements. 2.5 EFFECT OF CONTRIBUTIONS. In exchange for its Capital Contribution, as defined in Section 1.10 of the Partnership Agreement, (i) BWISS shall become a partner in the Partnership pursuant to the terms of the Partnership Agreement; (ii) BWISS will receive the Percentage Interest set forth beside its name in Section 2.1 of the Partnership Agreement; and (iii) the Capital Account of BWISS will be credited with such amount as determined under this Agreement and the Partnership Agreement. The parties hereby agree that the Prost's Capital Account should be $4.5 million less the Assumed Liabilities as of the Contribution Date and less changes and adjustments, if any, required pursuant to the terms of the Agreement of Partnership of BWI/Prost Partners and the Contribution Agreement and Exhibits. SECTION 3 OTHER AGREEMENTS 3.1 OTHER AGREEMENTS. Contemporaneously with the execution of this Agreement and the Partnership Agreement or at the Contribution Date, Prost, Prost's General Partner, BWISS, BWI, and the Partnership shall enter into the following Other Agreements: (a) Employment Agreements between BWI and Garith Helm and Romy Angle substantially in the form attached as Exhibit B to the Partnership Agreement with such additional terms and conditions as may be mutually agreed to by the parties thereto to be executed at the Contribution Date. (b) Assignment Agreement substantially in the form attached as Exhibit C to the Partnership Agreement with such additional terms and conditions as may be mutually agreed to by the parties thereto to be executed at the Contribution Date. (c) Property Lease Agreement between the Partnership and Romy Angle for the use of the warehouse located at 3454 Shoemake Avenue, Modesto, substantially in the form attached as Exhibit D to the Partnership Agreement with such additional terms and conditions as may be mutually agreed to by the parties thereto to be executed at the Contribution Date. SECTION 4 REPRESENTATIONS AND WARRANTIES OF PROST 4.1 ORGANIZATION. (a) Prost is a limited partnership which is duly organized, validly existing, and in good standing under the laws of the State of California with the power and authority to own, lease, and operate its properties and to carry on its business as now being conducted. Prost's General Partner is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of California, with the corporate power and authority to own, lease, and operate its properties and to carry on its business as now being conducted. (b) The copy of the Certificate of Limited Partnership and all amendments thereto of Prost, and the Limited Partnership Agreement, as amended to date, of Prost, as 7 of 37 56 certified by the Secretary of Prost's General Partner and delivered to BWISS, copies of which are attached hereto at Schedule 4.1, are true, complete, and correct copies of the Certificate of Limited Partnership and Limited Partnership Agreement, as amended and presently in effect, of Prost. (c) The copy of the Articles of Incorporation and all amendments thereto of Prost's General Partner, and the Bylaws, as amended to date, of Prost's General Partner, as certified by its Secretary and delivered to BWISS, copies of which are attached hereto at Schedule 4.1, are true, complete, and correct copies of the Articles of Incorporation and Bylaws, as amended and presently in effect, of Prost's General Partner. 4.2 QUALIFICATION. Prost is licensed or qualified to do business and is in good standing in the jurisdictions in which it conducts its business (except where the failure to so qualify would not have a material adverse effect on the business or financial condition of the Business taken as a whole) (the "Material Jurisdictions"). Schedule 4.2 contains a complete list of all Material Jurisdictions. 4.3 AUTHORITY. Prost has the power and authority to execute and deliver this Agreement, the Partnership Agreement, and the Other Agreements and to consummate the transactions contemplated hereby and thereby. The execution and delivery by Prost of this Agreement, the Partnership Agreement, and the Other Agreements, as the case may be, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by the Board of Directors of Prost's General Partner, have been approved by the requisite vote of the shareholders of Prost's General Partner, if necessary, and have been approved by the requisite vote of the partners of Prost; no other proceedings on the part of Prost or any other person or entity, whether pursuant to the Certificate of Limited Partnership or Limited Partnership Agreement of Prost or by law or otherwise, are necessary to authorize Prost to enter into this Agreement, the Partnership Agreement, and the Other Agreements, as the case may be, or to consummate the transactions contemplated hereby and thereby; and each of this Agreement, the Partnership Agreement, and each Other Agreement will be the legal, valid, and binding obligation of Prost. 4.4 NO VIOLATIONS. Except as set forth in Schedule 4.4, neither the execution or delivery of this Agreement, the Partnership Agreement, or the Other Agreements, nor the consummation of the transactions contemplated hereby or thereby: (a) Requires any filing or registration with, or consent, authorization, approval, or Permit of, any governmental or regulatory authority on the part of Prost; (b) Violates or will violate (i) any order, writ, injunction, judgment, decree, or award of any court or governmental or regulatory authority or (ii) to the knowledge of Prost, violates or will violate any "Law," as defined in Section 4.24 of this Agreement, of any governmental or regulatory authority to which Prost or any of its respective properties or assets are subject; 8 of 37 57 (c) Violates or will violate, or conflicts with or will conflict with, any provision of, or constitutes a default under, the Certificate of Limited Partnership or the Limited Partnership Agreement of Prost; or (d) Violates or breaches or constitutes a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or give rise to a right to terminate, any mortgage, contract, agreement, deed of trust, license, lease, or other instrument, arrangement, commitment, obligation, understanding, or restriction of any kind to which Prost is a party or by which its properties may be bound. 4.5 FINANCIAL STATEMENTS. Prost has heretofore delivered to BWISS (i) the unaudited Statements of Assets and Liabilities to be Contributed to BWI-Prost Partners as of April 30, 1996 (the "Contributed Business Balance Sheet") and the unaudited related Statements of Historical Operations, Changes in Equity, and Cash Flows for the Assets and Assumed Liabilities of the Business taken as a whole for the four months ended April 30, 1996, (ii) the audited Statements of Assets and Liabilities to be Contributed to BWI-Prost Partners as of December 31, 1995, and the audited related Statements of Operations, Changes in Equity, and Cash Flow for the Assets and Assumed Liabilities of the Business taken as a whole for the year ended December 31, 1995, (iii) Statements of Assets and Liabilities to be Contributed to BWI- Prost Partners as of December 31, 1994, the audited related Statements of Historical Operations, Changes in Equity, and Cash Flows for the Assets and Assumed Liabilities of the Business taken as a whole for the year ended December 31, 1994, copies of which are annexed hereto as Schedule 4.5. The financial statements referred to in the preceding sentence are hereinafter collectively referred to as the "Prost Financial Statements." Each of Prost Financial Statements was prepared from the books and records of Prost in conformity with U.S. Generally Accepted Accounting Principles consistently applied and fairly present the financial condition and results of operations and cash flows of the Assets and Assumed Liabilities of the Business for the periods and as of the dates stated therein. 4.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since April 30, 1996, (the "Balance Sheet Date"), Prost has operated the Business in the ordinary course consistent with past practice, and the Business taken as a whole has not: (a) Suffered any material adverse change in its business or any event or condition of any character, which, individually or in the aggregate, has had or might reasonably be expected to have a material adverse effect on the business or financial condition of the Business taken as a whole; (b) Incurred any obligations or liabilities (absolute, accrued, contingent, or otherwise) or entered into any transactions, other than in the ordinary course of business; (c) Paid, discharged, or satisfied any claims, obligations, or liabilities (absolute, accrued, contingent, or otherwise), except the payment, discharge, or satisfaction in the ordinary course of business and consistent with past practice of any claims, obligations, and 9 of 37 58 liabilities (i) which are reflected or reserved against in Prost Financial Statements or (ii) which were incurred in the ordinary course of business and consistent with past practice since the Balance Sheet Date; (d) Permitted or allowed any of its properties or assets to be subjected to any Encumbrances or other liabilities and obligations, except (i) in the ordinary course of business and (ii) Permitted Encumbrances; (e) Written off as uncollectible, or canceled or waived, any accounts receivable or any portion thereof, or any debts or claims, except in the ordinary course of business and consistent with past practice; (f) Sold, conveyed, or otherwise disposed of any properties or assets, except for fair consideration in the ordinary course of business and consistent with past practice; (g) Disposed of or permitted to lapse any item of Intangible Property, or any license, Permit, or other form of authorization to use any Intangible Property; (h) Except for normal increases which are not material and are consistent with past practice, granted or agreed to grant any increase in the compensation of any Business Employee (including any such increase pursuant to any bonus, pension, profit sharing or other plan or commitment), or become a party to or instituted any new benefit programs for any Business Employee; (i) Made any capital expenditure, or commitment for a capital expenditure, for additions to property, plant, equipment, or Intangible Property, other than in the ordinary course of business; (j) Made any change in any method of accounting or accounting practice or in any Tax procedures or elections; (k) Terminated or suffered a termination of (excluding a termination in accordance with its terms) or amended, any material contract, agreement, license, or lease; (l) Declared, set aside or made any distribution, whether in cash or property or otherwise; (m) Agreed, whether in writing or otherwise, or made any arrangement, whether or not legally binding, to take any action which, if taken prior to the date hereof, would have been required to be disclosed on a Schedule to clauses (a) through (l) of this Section 4.6. For purposes of Section 4.6(a), a "material adverse change" shall be deemed to include a decrease of $200,000 or more in the net assets of the Business from the date of the Contributed Business Balance Sheet to the date of the Closing Balance Sheet. 10 of 37 59 4.7 CERTAIN TAX MATTERS. (a) Except as set forth in Schedule 4.7(a), Prost and Prost's General Partner (i) have filed or will file or furnish when due in accordance with all applicable laws all Tax returns, statements, reports, and forms (including information returns and reports) required to be filed or furnished with respect to any Pre-Contribution Tax Period (collectively, the "Returns"); (ii) have correctly reflected in all material respects on the Returns (and, as to any Returns not filed as of the date hereof, will correctly reflect) the facts regarding their respective income, business, assets, operations, activities, and status of any other information required to be shown therein; (iii) have timely paid, withheld, or made adequate provision for all Taxes shown as due and payable on the Returns that have been filed; (iv) are not subject to any liens for Taxes on their respective assets; (v) have not participated in any Tax sharing or other arrangement whereby Prost or Prost's General Partner, in determining their respective income, revenues, receipts, gain, loss, or Tax Asset, have taken into account or included any income, revenues, receipts, gain, loss, asset, liability, or Tax Assets of any other person (or vice versa); (vi) are not currently under any contractual obligation to pay the Tax obligations of, or with respect to transactions relating to, any other person or to indemnify any other person with respect to any Tax; and (vii) are not subject to any (A) claims, audits, actions, suits, proceedings, or investigations with respect to any Tax or assessment for which Prost or Prost's General Partner could be liable, which would be material, to the knowledge of the directors or officers of Prost or Prost's General Partner, and (B) requests for rulings in respect of any Tax or any proposed transaction pending before any Taxing Authority. (b) None of the directors or officers of Prost or Prost's General Partner is aware of any state of facts which could give rise to any claim, audit, action, suit, proceeding, or investigation with respect to any Tax or assessment for which Prost or Prost's General Partner could be liable and which would be material. 4.8 CONDITION OF FACILITIES. The manufacturing and other facilities included in the Assets or owned by Prost are in adequate working order for the continued conduct of the Business as it is presently conducted. 4.9 UTILITIES; ACCESS. The manufacturing and other facilities included in the Assets have water supply, storm and sanitary sewer facilities, access to telephone, gas, and electrical connections, fire protection, drainage, means of ingress and egress to and from public highways and, without limitation, other public utilities, all of which are adequate for the continued conduct of the Business as it is presently conducted. 4.10 CERTAIN CONDITIONS NOT PRESENT. (a) Except as set forth on Schedule 4.10, to the knowledge of Prost, there are no liabilities of the Business of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable, or otherwise, and there is no existing condition, situation, or set of circumstances which could reasonably be expected to result in such a liability, other than (i) 11 of 37 60 liabilities disclosed or provided for in the Contributed Business Balance Sheet; and (ii) liabilities incurred in the ordinary course of business consistent with past practice since the Balance Sheet Date, which in the aggregate are not material to the Business taken as a whole. (b) Prost has not received notice of any pending, and has no knowledge of any threatened or proposed, proceedings or governmental actions to modify the zoning classification of, or to condemn, expropriate, or otherwise take, or to purchase in lieu thereof, all or any material part of any Subject Property. (c) Prost has not received notice of any pending, and has no knowledge of any threatened or proposed, reassessments or special assessments or penalties or interest with respect to real estate taxes applicable to any Subject Property which could, in the reasonable judgment of Prost, have any material adverse effect on the business or financial condition of the Business taken as a whole. 4.11 CONDITION OF EQUIPMENT. The machinery, equipment, furniture, vehicles, and other tangible personal property of Prost which are included in the Assets are in adequate operating condition for the continued conduct of the Business as it is presently conducted. 4.12 INVENTORY; RECEIVABLES. (a) Substantially all items of Inventory are of a good and merchantable quality, usable and saleable in the ordinary course of business. The inventory set forth on the Contributed Business Balance Sheet is stated properly therein at the lower of cost or realizable market value, determined in accordance with U.S. Generally Accepted Accounting Principles consistently applied. The quantities of all items of Inventory are reasonable and warranted in the present circumstances of the Business. (b) All accounts and notes receivable relating to the Business at the Balance Sheet Date have been included in the Contributed Business Balance Sheet in accordance with U.S. Generally Accepted Accounting Principles consistently applied. Since the Balance Sheet Date, no accounts or notes receivable have been sold, transferred, or otherwise disposed of by Prost. 4.13 TITLE TO PROPERTIES; ENCUMBRANCES. (a) Prost (i) has good and marketable title to each piece of Fee Property listed in Schedule 1.1(a)(i) and to the Improvements thereon, in each case free and clear of all Encumbrances, except for permitted Encumbrances, and (ii) has title to all of the other Assets, free and clear of all Encumbrances, except for Permitted Encumbrances. As a result of the delivery to the Partnership of the Conveyance Instruments, all of the Assets are owned free and clear of all Encumbrances, except Permitted Encumbrances and encumbrances created by the Partnership (whether or not arising from the transactions contemplated hereby). 12 of 37 61 (b) Complete and accurate copies of all mortgages are listed in Schedule 4.13(b) (the "Surviving Mortgages") which heretofore have been furnished to BWISS. None of the Surviving Mortgages has been amended or modified except as indicated in Schedule 4.13(b) and the aggregate amount of all principal, interest, and other sums that is secured by each of the Surviving Mortgages as of the Contribution Date does not exceed the amount reflected in Schedule 4.13(b). (c) Prost represents that (i) all principal, interest, and other sums due and payable in accordance with the terms of the Surviving Mortgages have been paid; and (ii) Prost has not received any notice of default under any of the Surviving Mortgages, nor, to the knowledge of Prost, is any such notice pending or do reasons exist for the giving of such notice. 4.14 LEASES. Schedule 4.14 sets forth a list of each lease pursuant to which Prost leases real or personal property (collectively, the "Leases"). Prost heretofore has delivered to BWISS a true and complete copy of each such Lease. Each of the Leases is in full force and effect in accordance with its terms, no Lease has been modified or amended in writing, and Prost has not received any notice of any breach or default with respect to a Lease the consequences of which would result in such Lease being terminated by the Lessor or which, individually or in the aggregate, would have a material adverse effect on the business or financial condition of the Business taken as a whole. 4.15 PATENTS, TRADEMARKS, AND SIMILAR RIGHTS. (a) Schedule 4.15(a) contains a list of all registered Intangible Property owned by Prost and used primarily in the Business and all licenses and other agreements relating to use of any such Intangible Property by third parties in connection with any business which currently competes or, to the knowledge of Prost, is reasonably likely to compete with the Business; and Schedule 4.15(a) contains a list of all licenses and other agreements relating to Intangible Property which Prost is licensed or authorized to use by others in connection with the Business. (b) Except as set forth in Schedule 4.15(b), (i) Prost has the sole and exclusive right to use the Intangible Property which is referred to in Schedule 4.15(a), and the consummation of the transactions contemplated by this Agreement, the Partnership Agreement, and the Other Agreements will not alter or impair any such rights and will result in the Partnership having the sole and exclusive right to use all such Intangible Property used primarily in the Business; (ii) no claims have been asserted by any person or entity for the use of any such Intangible Property or challenging or questioning the validity or effectiveness of any such license or agreement, and Prost has no knowledge of any valid basis for any such claim; and (iii) to the knowledge of Prost, the use of such Intangible Property by Prost does not infringe on the rights of any person or entity. 4.16 INSURANCE. Prost has heretofore made available for inspection by BWISS a true and complete copy of all material policies of fire, liability, workers' compensation, and other forms of insurance owned or held by Prost as described in Schedule 4.16. All such policies are 13 of 37 62 in full force and effect, all premiums with respect thereto covering all periods up to and including the Contribution Date have been paid, and no notice of cancellation or termination has been received with respect to any such policy. Such policies are in such amounts and insure against such losses and risks and provide such coverage as, in the opinion of Prost, is adequate to protect the Business as it is presently conducted. 4.17 ERISA. (a) Except as described in Schedule 4.17, Prost, with respect to any Business Employee, is not a party to or participates in or has any liability with respect to (i) any "employee welfare benefit plan" or "employee pension benefit plan" (as those terms are respectively defined in Sections 3(1) and 3(2) of the Employee Retirement Income Security Act of 1974, as amended (ERISA)), including a "multiemployer plan" (as defined in Section 3(37) of ERISA); (ii) any retirement or deferred compensation plan, incentive compensation plan, stock plan, unemployment compensation plan, vacation pay, severance pay, bonus or benefit arrangement, insurance or hospitalization program, or any other material fringe benefit arrangements (herein referred to collectively as "Employee Fringe Benefit Arrangements") for any employee, which does not constitute an "employee benefit plan" (as defined in Section 3(3) of ERISA); or (iii) any written employment agreement not terminable on thirty (30) days or less written notice. (b) A true and correct copy of each of the plans, arrangements, and agreements listed in Schedule 4.17 heretofore has been supplied or made available to BWISS by Prost. A true and correct copy of the most recent annual report, actuarial report (with all attachments), summary plan description, and Internal Revenue Service determination letter with respect to each such plan or arrangement, to the extent applicable, heretofore has been supplied to BWISS by Prost, and there have been no material changes in the financial condition of any such plan from that stated in the annual report and actuarial report supplied. (c) All employee pension benefit plans listed in Schedule 4.17 which are subject to ERISA comply in form and in operation in all material respects with the applicable requirements of Section 401(a) and 501(a) of the Code. To the knowledge of Prost, no event has occurred which will or could give rise to disqualification under the Code of any such employee pension benefit plan listed in Schedule 4.17 that is subject to ERISA or to a tax under Section 511 of the Code; and no such plan which is subject to Part 3 of Subtitle B of Title 1 of ERISA has incurred any "accumulated funding deficiency." Prost has not otherwise engaged in any transaction with respect to any employee benefit plan listed in Schedule 4.17 which could result in a tax under Section 4975 of the Code. There are no prosecutions, claims, actions, suits, proceedings, or, to the knowledge of Prost, investigations (collectively, "Actions") (other than routine claims for benefits) pending or, to the knowledge of Prost, threatened against such plans or the assets of such plans, and, to the knowledge of Prost, no facts exist which could give rise to any such Actions (other than routine claims for benefits). As to any employee pension benefit plan which is listed in Schedule 4.17 and which is subject to Title IV of ERISA, there have been no "reportable events" (as described in Section 4043 of ERISA), and no steps have 14 of 37 63 been taken to terminate any such plan. All group health plans in which any Business Employees participate (including any plans of current and former affiliates of Prost which must be taken into account under Section 162(i) or Section 162(k) of the Code) have been operated in all material respects in compliance with the group health plan continuation coverage requirements of Section 162(k) of the Code to the extent such requirements are applicable. Accruals for all obligations, with respect to Business Employees under the plans, arrangements, and agreements listed in Schedule 4.17, are reflected in the Prost Financial Statements. 4.18 DOCUMENTS; COMMITMENTS. (a) Prost has delivered or made available to BWISS the following documents, each of which is true and complete: (i) Copies of all documents in Schedule 4.18(a), which is a list of every material contract, agreement, or other commitment, written or oral, to which Prost is a party or has succeeded to a party by assumption or assignment or in which it has a beneficial interest and excluding documents listed in any other Schedule hereto (any contract or agreement shall, for the purposes of this Agreement, be deemed material (A) if the Business taken as a whole is substantially dependent upon it, (B) if it involves a financial obligation of or benefit to the Business in excess of $25,000, (C) if the contract is not made in the ordinary course, or (D) if it constitutes a management contract or employment contract; and (ii) Copies of all product bulletins, technical bulletins, or other advertising or sales materials currently used in connection with the Business. (b) Prost does not have (i) any outstanding sales contracts or commitments which are reasonably expected to result in any loss to the Business upon completion of performance thereof or (ii) any outstanding bids or sales or service proposals quoting prices which are not reasonably expected to result in a profit consistent with past practice. 4.19 LABOR MATTERS. (a) Prost is not a party to or is covered by any labor agreement with any collective bargaining representative representing Business Employees. (b) To the knowledge of Prost, Prost is operating in material compliance with all applicable law respecting employment and employment practices, terms and conditions of employment, and wages and hours, and are not engaged in any unfair labor practices. (c) To the knowledge of Prost, there are no unfair labor practice complaints, labor disputes, work stoppages, or union organization efforts, or threats of the foregoing, directed against any of the operations of the Business. 15 of 37 64 4.20 PERSONNEL. Schedule 4.20 contains a true and complete list of: (a) The names, titles, annual salaries, and other compensation of each Business Employee whose annual base salary exceeds $30,000; and (b) The wage rates for nonsalaried Business Employees (by classification). (c) All bonuses or other benefits. 4.21 NO BREACH. (a) Except as set forth in Schedule 4.21, each Permit, contract, agreement, deed of trust, lease, policy, license, plan, commitment, arrangement, and understanding (whether evidenced by a written document or otherwise) referred to in this Agreement or in any Schedule hereto, under which Prost has any right, interest, or obligation (i) is in full force and effect, and (ii) is not subject to any threatened amendment, cancellation, or outstanding dispute. (b) Prost is not in breach of, and there does not exist any default or event (including the execution and delivery of this Agreement, the Partnership Agreement, and the Other Agreements and the consummation of the transactions contemplated hereby or thereby) which, with the giving of notice or the lapse of time or both, would become a breach or default, and there is no basis for any valid claim of a default in any respect, under any thereof, and Prost has used its best efforts to secure the consents (where such consents are necessary) of the other parties thereto to the consummation of the transactions contemplated by this Agreement, the Partnership Agreement, and the Other Agreements. 4.22 CONSENTS, PERMITS, ETC. Except as set forth in Schedules 4.22, or set forth in any applicable Schedule, no consent, approval, governmental filing, authorization, or Permit from any person or entity is necessary to the consummation of the transactions contemplated by this Agreement, the Partnership Agreement, or the Other Agreements. Moreover, no other consent, approval, permit, clearance, or audit is required under any federal law or the laws of the states in which any member of Prost has real property or leasehold interests in order to accomplish and complete the conveyance of real property and leasehold interests contemplated hereunder. 4.23 LITIGATION. Except as set forth in Schedule 4.23, there are no Actions pending or threatened by or against, or involving Prost or Prost's General Partner or any directors or officers thereof in their capacity as such or which question or challenge the validity of this Agreement, the Partnership Agreement, or the Other Agreements or any action taken or to be taken by Prost pursuant to this Agreement, the Partnership Agreement, or the Other Agreements or in connection with the transactions contemplated hereby or thereby, which would, if adversely decided, have a material adverse effect on the Business taken as a whole or, after the Contribution Date, on the ability of the Partnership to conduct the Business, and to the knowledge of Prost, there is no valid basis for any such Action. 16 of 37 65 4.24 COMPLIANCE WITH APPLICABLE LAW; ADVERSE RESTRICTIONS. Except as and to the extent set forth in Schedule 4.24, the operations of Prost are being conducted in material compliance with (a) all applicable Permits, orders, writs, injunctions, judgments, decrees, or awards of all courts and governmental and regulatory authorities, and (b) to the knowledge of Prost, all laws (statutory or otherwise), ordinances, rules, regulations, bylaws, and codes of all governmental and regulatory authorities, whether federal, state, or local (individually, a "Law" and collectively, "Laws"), which are applicable to the Assets of the Business (including, without limitation, those related to public or occupational safety, pollution and protection of the environment, and hazardous or other waste disposal). Except as and to the extent set forth in Schedule 4.24, Prost has not received any notification of any asserted present failure to comply with any Law, except for failures which in the aggregate are not and were not material to the conduct of the Business as a whole and which Prost has taken steps to correct or contest in good faith. 4.25 ENVIRONMENTAL PROTECTION. Except as set forth in Schedule 4.25: (a) To the knowledge of Prost, Prost has obtained all Permits relating to pollution or protection of health, safety, or the environment which are required by Law ("Environmental Permits"), including, without limitation, those regulating emissions, discharges, or releases of Hazardous Substances (as defined in CERCLA, as amended by SARA "Hazardous Waste," and "Regulated Substances" as defined by RCRA) into ambient air, surface water, groundwater, or land, or resulting treatment, storage, or disposal of Hazardous Substances. Prost has taken all actions necessary under applicable requirements of Law to register any products or materials relating to the Business, required to be registered thereunder. Prost is not aware of, nor has Prost received notice of, any events, conditions, circumstances, activities, practices, incidents, actions, or plans which Prost reasonably expects would result in a claim of liability, based on or related to alleged on-site or off-site contamination with respect to or affecting the Business and properties related thereto. To the knowledge of Prost, there is not now on or in any of the properties currently owned, leased, or rented by or otherwise used in the Business any leaking underground storage tanks or surface impoundments which, if determined by any court, governmental, or regulatory authority having jurisdiction thereof, to be in violation of any law related to public or occupational safety, pollution and protection of the environment, and hazardous waste disposal, would have a material adverse effect on the Business taken as a whole. (b) Schedule 4.25 sets forth an accurate and complete list of all currently pending Action, notices of any proposed or possible Actions, relating to environmental, health, and safety matters, including pollution and protection of the environment, and Hazardous Substances (as defined in CERCLA) related to the Business. (c) Prost is materially in compliance with all material limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules, and timetables contained in any Environmental Permits or Laws or contained in any code, order, decree, or judgment issued, entered, promulgated, or approved thereunder; 17 of 37 66 (d) Schedule 4.25 contains an accurate and complete list of all corrective actions required by governmental authorities or instances of noncompliance since January 1, 1992, under all Environmental Permits relating to the Business. 4.26 ASSETS NECESSARY TO BUSINESS. As a result of the transactions effected hereby, the Partnership (with respect to Assets owned prior to the Contribution Date by Prost) (a) will have title to, or a valid leasehold interest in, all tangible and intangible assets and properties relating to the Business; (b) will possess valid consents, authorizations, approvals, and Permits relating to the Business; and (c) will be party to all agreements, in each case necessary to permit the Partnership to continue to carry on the Business substantially as presently conducted. 4.27 CUSTOMERS, DISTRIBUTORS, AND SUPPLIERS. (a) Schedule 4.27(a) sets forth a list of the twenty (20) largest customers of the Business in the terms of revenue during the fiscal year ended December 31, 1995, showing the approximate total revenue received by Prost from each such customer during such fiscal year. (b) Schedule 4.27(b) sets forth a list of the ten (10) largest suppliers to the Business, in terms of purchases during the fiscal year ended December 31, 1995, showing the approximate total purchases by Prost from each supplier during such fiscal year. (c) Since January 1, 1996, there has not been any adverse change in the business relationship of Prost with any customer, distributor, or supplier which is material to the business or financial condition of the Business taken as a whole. 4.28 BROKERS. Prost has neither incurred nor will incur any broker's, finder's, investment banking, or similar fee in connection with this Agreement or the transactions contemplated by this Agreement. SECTION 5 REPRESENTATIONS AND WARRANTIES OF BWISS 5.1 ORGANIZATION. (a) BWISS is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of California with the power and authority to own, lease, and operate its properties and to carry on its business as now being conducted. (b) The copy of the Articles of Incorporation and all amendments thereto of BWISS, and the Bylaws, as amended to date, of BWISS, as certified by its Secretary and delivered to Prost, are true, complete, and correct copies of the Articles of Incorporation and Bylaws, as amended and presently in effect, of BWISS. Copies are attached hereto as Schedule 5.1. 18 of 37 67 5.2 AUTHORITY. BWISS has the power and authority to execute and deliver this Agreement, the Partnership Agreement, and the Other Agreements and to consummate the transactions contemplated hereby and thereby. The execution and delivery by BWISS of this Agreement, the Partnership Agreement, and the Other Agreements, as the case may be, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by the Board of Directors of BWISS and have been approved by the sole shareholder of BWISS; no other proceedings on the part of BWISS or any other person or entity, whether pursuant to the Articles of Incorporation or Bylaws of BWISS or by law or otherwise, are necessary to authorize BWISS to enter into this Agreement, the Partnership Agreement, and the Other Agreements, as the case may be, or to consummate the transactions contemplated hereby and thereby; and each of this Agreement, the Partnership Agreement; and each Other Agreement will be the legal, valid, and binding obligation of BWISS. 5.3 NO VIOLATIONS. Except as set forth in Schedule 5.3, neither the execution or delivery of this Agreement, the Partnership Agreement, or the Other Agreements, nor the consummation of the transactions contemplated hereby or thereby: (a) Requires any filing or registration with, or consent, authorization, approval, or Permit of, any governmental or regulatory authority on the part of BWISS; (b) Violates or will violate (i) any order, writ, injunction, judgment, decree, or award of any court or governmental or regulatory authority or (ii) to the knowledge of BWISS, violates or will violate any "Law," as defined in Section 4.24 of this Agreement, of any governmental or regulatory authority to which BWISS or any of its respective properties or assets are subject; (c) Violates or will violate, or conflicts with or will conflict with, any provision of, or constitutes a default under, the Articles of Incorporation or Bylaws of BWISS; or (d) Violates or breaches or constitutes a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or give rise to a right to terminate, any mortgage, contract, agreement, deed of trust, license, lease, or other instrument, arrangement, commitment, obligation, understanding, or restriction of any kind to which BWISS is a party or by which its properties may be bound. 5.4 BROKERS. BWISS has neither incurred nor will incur any broker's, finder's, investment banking, or similar fee in connection with the transactions contemplated by this Agreement. 19 of 37 68 SECTION 6 COVENANTS 6.1 CONDUCT OF BUSINESS OF PROST PENDING THE CONTRIBUTION DATE. Prost agrees that from the date hereof and prior to the Contribution Date or earlier termination of this Agreement: (a) Prost shall use its reasonable best efforts to carry on the Business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted, maintain its current Licenses and Permits, keep available the services of its present officers and key employees and preserve its relationships with customers, suppliers and others having business dealings with it to the end that its goodwill and on-going businesses shall be unimpaired at the Contribution Date, except such impairment as would not have a material adverse effect on the business, assets, operations or financial condition of Prost. Prost shall use its reasonable best efforts to (i) maintain insurance coverages and its books, accounts and records in the usual manner consistent with prior practices; (ii) comply in all material respects with all laws, ordinances and regulations of governmental entities applicable to Prost; (iii) maintain and keep its properties and equipment in good repair, working order and condition, ordinary wear and tear excepted; and (iv) perform in all material respects its obligations under all contracts and commitments to which it is a party or by which it is bound. (b) Except as required or permitted by this Agreement, Prost shall not and shall not propose to (i) amend its Certificate of Limited Partnership or Limited Partnership Agreement, or except as required by court order, hold any meeting of partners or (other than in opposition to a solicitation by a third party) solicit any partner action by written consent, (ii) issue or authorize or propose the issuance of partnership interests or any other securities; (iii) declare, set aside or make any distribution payable in cash or property or (iv) directly or indirectly redeem, purchase or otherwise acquire or agree to redeem, purchase or otherwise acquire any partnership interests of Prost. (c) Prost shall not (i) except as required or permitted by this Agreement, issue, deliver or sell or agree to issue, deliver or sell any additional interests in Prost, or rights of any kind to acquire any interests in Prost, or incur any liability in respect of (a) borrowed money, (b) capitalized lease obligations, (c) deferred purchase price of property or services (other than trade payables in the ordinary course) and (d) guarantees of any of the foregoing ("Indebtedness") (other than pursuant to existing lines of credit for use in the ordinary course of business and consistent with past practices) or any option, rights or warrants to acquire, or securities convertible into, partnership interests; (ii) except as required or permitted by this Agreement, acquire, lease or dispose or agree to acquire, lease or dispose of any capital assets or any other assets other than in the ordinary course of business; (iii) incur additional Indebtedness or encumber or grant a security interest in any asset or enter into any other transaction other than in each case in the ordinary course of business (iv) acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial equity interest in, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof; or (v) enter into any contract, agreement, commitment or 20 of 37 69 arrangement with respect to any of the foregoing. (d) Prost shall not, except as expressly permitted by this Agreement or required to comply with applicable law or this Agreement, (i) adopt, enter into, terminate or amend any bonus, profit sharing, compensation, severance, termination, stock option, pension, retirement, deferred compensation, employment or other Benefit Plan, agreement, trust, fund or other arrangement for the benefit or welfare of any director, officer or current or former employee, (ii) increase in any manner the compensation or fringe benefits of any director or officer or any employee (except, with respect to employees, for normal increases in the ordinary course of business that are consistent with past practice and that, in the aggregate, do not result in a material increase in benefits or compensation expense to Prost relative to the level in effect prior to such amendment), (iii) pay any benefit not provided under any existing plan or arrangement, (iv) grant any awards under any bonus, incentive, performance or other compensation plan or arrangement (including, without limitation, the grant of stock options, stock appreciation rights, stock based or stock related awards, performance units or restricted stock, or the removal of existing restrictions in any Benefit Plan or agreements or awards made thereunder), (v) take any action to fund or in any other way secure the payment of compensation or benefits under any employee plan, agreement, contract or arrangement other than in the ordinary course of business consistent with past practice or (vi) adopt, enter into, amend or terminate any contract, agreement, commitment or arrangement to do any of the foregoing. (e) Between the date hereof and the Contribution Date, (i) Prost shall provide BWISS within 25 days after the end of each month such financial statements as are customarily prepared by Prost on a monthly basis; (ii) Prost shall consult with BWISS on a regular basis with respect to all operating decisions which could be expected to result in a material change in the business of Prost as presently operated or which are not in the ordinary course of business; and (iii) Prost shall permit representatives of BWISS and prospective providers of information, documents, facilities and personnel as they may from time to time request. 6.2 APPROVAL OF PARTNERS. Prost shall (a) cause a meeting of its partners to be duly called and held in accordance with the laws of the State of California and Prost's certificate of limited partnership and limited partnership agreement as soon as reasonably practicable for the purpose of voting on the adoption and approval of this Agreement, the Other Agreements and the Partnership Agreement (the "Proposal"), (b) recommend to its partners approval of the Proposal, (c) use its best efforts to obtain the necessary approval of its partners, and (d) in cooperation with BWISS mail to partners a transmittal letter in form and substance reasonably satisfactory to BWISS to be used by such partners in forwarding their partnership interests certificates, if any, for surrender and exchange. Except with the prior written consent of BWISS, neither Prost nor Prost's General Partner shall distribute any materials to Prost's partners in connection with the Proposal other than such information as BWISS deems appropriate. 6.3 THIRD PARTY CONSENTS. Each party to this Agreement shall use its best efforts to obtain, as soon as reasonably practicable, all permits, authorizations, consents, waivers and 21 of 37 70 approvals from third parties or governmental authorities necessary to consummate this Agreement and the transactions contemplated hereby or thereby, including, without limitation, any permits, authorizations, consents, waivers and approvals required in connection with the Proposal. 6.4 EMPLOYEE MATTERS. (a) The Partnership shall offer employment with the Partnership to each employee of Prost engaged primarily in the Business (such employees are hereinafter referred to as the "Business Employees") who on the Contribution Date is actively employed by Prost or who was actively employed by Prost but is on authorized leave of absence, military service, or layoff with recall rights as of the Contribution Date, but shall exclude any other inactive or former Business Employee, including any person who is on short-term or long-term disability or who has terminated his or her employment, retired, or died on or before the Contribution Date. All such Business Employees who are offered employment by the Partnership and who accept such employment shall be collectively referred to as the "Transferred Employees." (b) The Partnership shall indemnify and hold Prost and its Affiliates harmless from any liability, loss, damage, or expense Prost or its Affiliates may incur as a result of any claims made subsequent to the Contribution Date relating to severance and severance claims arising with respect to any Business Employee because of the failure of the Partnership to offer such Business Employee employment in accordance with Section 6.4(a) of this Agreement. Prost shall retain all liabilities and obligations arising from the termination or severance of any Business Employee solely as a result of such Employee's failure to accept an offer of employment pursuant to Section 6.4(a) of this Agreement which is made on terms and conditions which are in accordance with the provisions of Section 6.4(d) of this Agreement. (c) Prost covenants and agrees not to solicit or hire for employment with Prost or any of its Affiliates any Transferred Employee without the consent of BWISS, such covenant and agreement to terminate two (2) years after the Contribution Date. Except as specifically provided for in this Agreement, Prost covenants and agrees to retain all responsibility and liability with respect to the vested accrued benefits (including any claims with respect to any medical benefits that were incurred but not reported prior to the Contribution Date as of the Contribution Date) of the Transferred Employees (including any beneficiary or dependent thereof) under Prost employee welfare benefit plans, employee pension benefit plans, and employee fringe benefit arrangements and any other liabilities or obligations relating to Prost employee benefits or compensation. (d) Except for persons entering into the Employment Agreements attached to the Partnership Agreement, the Partnership covenants and agrees to pay to any Transferred Employee who accepts or continues, as the case may be, at-will employment with the Partnership with a rate of base salary at least equal to such Transferred Employee's rate of base salary on the Contribution Date, and to provide such Transferred Employee with a title and responsibilities comparable to those of such Transferred Employee on the Contribution Date. 22 of 37 71 For a period of one (1) year commencing on the Contribution Date, the Partnership covenants and agrees to provide the Transferred Employees such employee welfare benefit plans, employee pension benefit plans, and employee fringe benefit arrangements which, in the aggregate, are at least as favorable as the benefits presently provided to Business Employees under the plans and arrangements listed on Schedule 4.17. SECTION 7 SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION 7.1 SURVIVAL; INDEMNIFICATION. (a) The covenants, agreements, representations, and warranties of the parties hereto contained herein or in any certificate or other writing delivered pursuant hereto or in connection herewith shall survive the Contribution Date until December 31, 2001, except that (i) any covenants, agreements, representations, or warranties relating to Tax matters shall extend until the expiration of the applicable statutory period of limitations (giving effect to any waiver or extension thereof) and (ii) the indemnity provisions set forth in Sections 7.1(b)(ii), 7.1(b)(iii) and 7.1(b)(v) of this Agreement shall extend without limit as to time. Notwithstanding the preceding sentence, any covenant, agreement, representation, or warranty in respect of which indemnity may be sought under this Section 7 shall survive the time at which it would otherwise terminate pursuant to such sentence, if notice of the inaccuracy or breach thereof giving rise to such indemnity shall have been given to the party against whom such indemnity may be sought, prior to such time. (b) Prost and its successors and assigns (each an "Indemnitor"), jointly and severally, hereby agree to indemnify each Indemnitee and Indemnitee Affiliate (as each is defined in Section 7.4 of this Agreement) against and agree to hold it harmless from any and all damage, loss, liability, and expense (including, without limitation, reasonable expenses of investigation and attorney's fees and expenses in connection with any action, suit, proceeding, claim, investigation, or other loss) (a "Loss") incurred or suffered by such Indemnitee arising out of (i) any breach of any covenant or agreement or of any inaccuracy or omission in any representation or warranty made by Prost pursuant to this Agreement; (ii) the failure of Prost to perform any obligation or liability of the Business not assumed by the Partnership pursuant to this Agreement or relating to the Excluded Assets for which indemnification provisions are set forth in Section 7.3 of this Agreement; (iii) or relating to claims by third parties in connection with the contribution by Prost of the Business to the Partnership; (iv) any and all losses, claims, demands, penalties, fines, settlements, or damages arising under U.S. or any state or local Environmental Laws and relating to conditions, events, actions, violations, obligations, or circumstances that exist in whole or part prior to the Contribution Date; and (v) any breach of any covenant or agreement or of any inaccuracy or omission in any representation or warranty made by Prost pursuant to this Agreement and at the time such representation or warranty was made, Prost knew it was false with the intent to deceive Indemnitee or an Indemnitee Affiliate. 23 of 37 72 7.2 LIMITATIONS OF INDEMNIFICATION. Notwithstanding anything contained in this Section 7 to the contrary, the Indemnitors shall be required to indemnify each Indemnitee and Indemnitee Affiliate against and hold it harmless from all Loss (other than relating to Taxes) with respect to Sections 7.1(b)(i) and 7.1(b)(iv) of this Agreement only to the extent that the aggregate amount of such Loss exceeds Five Thousand Dollars ($5,000.00) (the "Liability Threshold"). In the event that the aggregate amount of all Loss (other than relating to Taxes) with respect to Sections 7.1(b)(i) and 7.1(b)(iv) of this Agreement sustained by the Indemnitees or Indemnitee Affiliates exceeds the Liability Threshold, and the Indemnitors are required to indemnify such Indemnitees, the Indemnitors shall be responsible for payment for all Loss with respect to Sections 7.1(b)(i) and 7.1(b)(iv) of this Agreement in excess of the Liability Threshold; provided, however, that in no event shall the amount of Loss (other than relating to Taxes) with respect to Sections 7.1(b)(i) and 7.1(b)(iv) of this Agreement payable by the Indemnitors exceed in the aggregate the value of Prost's Capital Contribution. 7.3 TAX INDEMNIFICATION WITH RESPECT TO TAX LIABILITY. (a) Except to the extent such Taxes are set forth in the Contribution Date Balance Sheet and subject to Section 7.3(i) hereof, Prost shall indemnify and hold harmless each Indemnitee from (i) any liability for Tax of Prost which is incurred in or attributable to the Tax Indemnification Period; and (ii) any liability, cost, expense (including, without limitation, reasonable expenses of investigation and reasonable attorneys' fees and expenses), loss, damages, assessment, settlement, or judgment arising out of or incident to the imposition, assessment, or assertion of any liability described in subclauses (i) and (ii) hereof, including those incurred in the contest in good faith of appropriate proceedings for the imposition, assessment, or assertion of any tax (subject to the provisions of Section 7.3(e) hereof), and any liability of any Indemnitee by reason of being a transferee of the assets of Prost with respect to any liability for Tax of Prost which is incurred or attributable to the Tax Indemnification Period. The sum of (i) and (ii) above is referred to herein as a "Tax Loss." (b) In the case of any Taxes that are imposed, assessed, or asserted on a periodic basis and are payable for a Taxable period that includes (but does not end on) the Contribution Date, the portion of such Taxes related to the portion of such Taxable period ending on the Contribution Date and the portion of such Taxes that is incurred in or attributable to the Pre-Contribution Tax Period shall (i) in the case of any Tax other than a Tax imposed on, measured by, or related to revenues, gross or net income, receipts, gains, or compensation, be deemed to be the amount of such Tax for the entire Taxable period multiplied by a fraction, the numerator of which is the number of days in the Pre-Contribution Tax Period and the denominator of which is the number of days in the entire Taxable period, and (ii) in the case of any Tax imposed on, measured by, or related to revenues, gross or net income, receipts, gains, or compensation, be deemed equal to the amount of such Tax for the entire Taxable period multiplied by a fraction, the numerator of which is the revenues, gross or net income, receipts, gains, or compensation, as the case may be, attributable to the Tax Indemnification Period and the denominator of which is the total amount of revenues, gross or net income, receipts, gains, or compensation for the entire Taxable period. 24 of 37 73 (c) Upon the incurrence by any Indemnitee of any Tax Loss or any Loss relating to an excluded Tax Liability (as defined in Section 1.5(i) hereof), Prost shall discharge its obligations to indemnify such Indemnitee against such Tax Loss or Loss by paying to the Indemnitee in U.S. dollars an amount equal to the amount of such Tax Loss or Loss. Any payment pursuant to this Section 7.3(c) or Section 7.1 hereof relating to an Excluded Tax Liability shall be delivered no later than five (5) days prior to the first date on which such Indemnitee is required (without incurring interest or penalties) under applicable law to make any payment with respect to or as a result of such Tax Loss or Loss. The Partnership shall deliver to Prost, upon the incurrence of a Tax Loss or any Loss relating to an Excluded Tax Liability by any Indemnitee, written notice describing such Tax Loss or Loss and stating the amount thereof, the amount of the indemnity payment requested, and the first date on which such Indemnitee is required (without incurring interest or penalties) to make any payment with respect to or as a result of such Tax Loss or Loss. Any payment required under this Section 7.3(c) or any Loss relating to an Excluded Tax Liability and not made when due shall bear interest at the federal short-term rate under Section 1274 of the Code for each day until paid. (d) If any Indemnitee receives a refund or reduces its Tax liability by using a credit of any Tax in respect of the Tax Indemnification Period or any Excluded Tax Liability, such Indemnitee shall pay to Prost the amount of such refund or credit within thirty (30) days of the date on which such refund or credit is received or used by such Indemnitee. The Partnership agrees that, upon the request of Prost, the Partnership shall file, or cause an Indemnitee to file, a claim for refund in such form as Prost may reasonably request of any Tax in respect of the Tax Indemnification Period or any Excluded Tax Liability provided that the Partnership or an Indemnitee shall not be required to file such a claim if such claim would adversely affect the Tax liability of the Partnership, or any of its Affiliates or, after the Contribution Date. Prost shall have the sole right to prosecute such claim for refund (by suit or otherwise) at Prost's expense and with counsel of Prost's choice. The Partnership agrees that it will cooperate, and cause each Indemnitee to cooperate, fully with Prost and its counsel in connection therewith. (e) The Partnership agrees to give prompt notice to Prost of the assertion of any claim, or the commencement of any suit, action, proceeding, audit, or assessment in respect of which indemnity may be sought hereunder or under Section 7.1 of this Agreement relating to an Excluded Tax Liability, and of any Loss, (specifying with reasonable particularity the basis therefor) and will give Prost such information with respect thereto as Prost may reasonably request. Prost may, at its own expense, participate in and, upon notice to the Partnership, assume the defense of any such suit, action, proceeding, or audit; Prost shall thereafter consult with the Partnership upon the Partnership's reasonable request for such consultation from time to time with respect to such suit, action, proceeding, or audit and shall not, without Company's consent, agree to any settlement or assert any position with respect to any Tax if such settlement or position could adversely affect the Tax liability of the Partnership, any of its Affiliates, or, after the Contribution Date, Prost. If Prost assumes such defense, the Partnership shall have the right (but not the duty) to participate in the defense thereof and to employ counsel, at its own expense, separate from the counsel employed by Prost provided that ultimate control shall 25 of 37 74 remain with Prost. Prost shall be liable for the fees and expenses of counsel employed by the Partnership for any period during which Prost has not assumed the defense thereof. Whether or not Prost chooses to defend or prosecute any claim, all of the parties hereto shall cooperate in the defense or prosecution thereof. (f) Prost shall not be liable under this Section 7.3 or Section 7.1 of this Agreement relating to an Excluded Tax Liability with respect to any Tax resulting from a claim or demand the defense of which Prost was not offered the opportunity to assume as provided under Section 7.3(e) of this Agreement. No investigation by the Partnership or any of its Affiliates at or prior to the Contribution Date shall relieve Prost of any liability hereunder. (g) If any adjustments shall be made to any Tax return relating to Prost in respect of the Business for any Pre-Contribution Tax Period which result in any Tax detriment to Prost or any Affiliate thereof with respect to such period and any Tax benefit to the Partnership or any Affiliate thereof for any Taxable period ending after the Contribution Date, Prost shall be entitled to the benefit of such Tax benefit, and the Partnership shall pay to Prost the amount of such Tax benefit at such time or times as and to the extent that the Partnership or any Affiliate thereof actually realizes such benefit through a refund of Tax or reduction in the amount of Tax which the Partnership or any Affiliate thereof otherwise would have had to pay if such adjustment had not been made. If any adjustments (including any adjustment arising by reason of a refund claim) shall be made to any Tax return relating to the Partnership or Prost for any Taxable period after the Contribution Date which result in any Tax detriment to the Partnership or any Affiliate thereof with respect to such period and any Tax benefit to Prost or any Affiliate thereof for any Pre-Contribution Tax Period, the Partnership shall be entitled to the benefit of such Tax benefit, and Prost shall pay to the Partnership the amount of such Tax benefit at such time or times as and to the extent that Prost or any Affiliate thereof actually realizes such benefit through a refund of Tax or reduction in the amount of Tax which Prost or any such Affiliate otherwise would have had to pay if such adjustment had not been made. (h) If the Partnership or any Affiliate thereof realizes such a Tax benefit in a taxable period ending after the Contribution Date with respect to a Tax Loss through a refund of Tax or reduction in the amount of Tax which the Partnership or any Affiliate thereof otherwise would have to pay then, (i) if such benefit is actually realized prior to the indemnity payment being made, the amount of such benefit shall reduce the amount of the indemnity payment otherwise required to be made hereunder, and (ii) if such benefit is actually realized subsequent to the indemnity payment or contribution being made, the Partnership or such Affiliate shall pay the amount of such benefit to Prost at such time as such benefit is actually realized. (i) With respect to liability for Tax of Prost incurred in or attributable to the Pre-Contribution Tax Period in respect of any item which gave rise to an amount included in the provision for deferred income taxes on the Contribution Date Balance Sheet, Prost shall pay to an Indemnitee an amount equal to the amount of such Tax liability, minus the present value of (i) any deduction, amortization, exclusion from income, or tax credit allowable to such 26 of 37 75 Indemnitee which would not be allowable but for an adjustment with respect to which Prost is obligated to indemnify such Indemnitee ("the Tax Benefit"), multiplied (ii) by the maximum applicable tax rate in effect at such time or, in the case of a credit, by 100 percent (the product of (i) and (ii) in the preceding clause shall be referred to as "the Hypothetical Tax Benefit"). The present value of the Hypothetical Tax Benefit shall be determined based on the federal mid-term rate under Section 1274 of the Code in effect at the time the indemnification payment is made, compounded annually for the number of years between the year to which the adjustment relates and the year on which such Tax Benefit would be allowable under law whether or not the Indemnitee could derive any actual tax savings as a result thereof. 7.4 DEFINITIONS. For the purpose of this Agreement, the following terms have the following meanings: (a) "Affiliate" means, with respect to any person, any person directly or indirectly controlling, controlled by, or under common control with such other person. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Indemnitee" means the Partnership, any of its Affiliates, and BWISS. (d) "Indemnitee Affiliate" means the employees, successors, and assigns of each Indemnitee, and, with respect to each corporate Indemnitee, its directors, officers, and shareholders. (e) "Pre-Contribution Tax Period" means any Tax Period ending on or before the close of business on the Contribution Date, or, in the case of any Tax period which includes, but does not end on, the Contribution Date, the portion of such period up to and including the Contribution Date. (f) "Tax" means (i) any net income, alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad valorem, franchise, capital, paid-up capital, profits, greenmail, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental or windfall profit tax, custom, duty, or other tax, governmental fee, or other like assessment or charge of any kind whatsoever, together with any interest or any penalty, addition to tax, or additional amount imposed by any governmental authority (a "Taxing Authority") responsible for the imposition of any such tax (domestic or foreign), and (ii) liability for the payment of any amounts of the type described in (i) as a result of any express obligations to indemnify any other Person. (g) "Tax Asset" means any net operating loss or other Tax loss, net capital loss, investment Tax credit, foreign Tax credit, charitable deduction, or any other credit or Tax attribute of Prost which could reduce Taxes (including, without limitation, deductions and credits related to alternative minimum Taxes). 27 of 37 76 (h) "Tax Indemnification Period" means (i) any Pre-Contribution Tax Period, or (ii) with respect to any Tax described in clause (ii) of Section 7.4(f), the survival period of the indemnification obligation under the applicable contract. 7.5 CONTROL OF LITIGATION. (a) The Indemnitees and Indemnitee Affiliates agree to give prompt notice to the Indemnitors of the assertion of any claim, or the commencement of any suit, action, or proceeding in respect of which indemnity may be sought under Section 7.1(b) of this Agreement and of any Loss which any such Indemnitee deems to be within Section 7.1(b) of this Agreement other than relating to Taxes (specifying with reasonable particularity the basis therefor) and will give the Indemnitors such information with respect thereto as the Indemnitors may reasonably request. The Indemnitors may, at their own expense, participate in and, upon notice to such Indemnitee, assume the defense of any such suit, action, or proceeding; provided that the Indemnitors' counsel is reasonably satisfactory to such Indemnitee, the Indemnitors shall thereafter consult with such Indemnitee upon such Indemnitee's reasonable request for such consultation from time to time with respect to such suit, action, or proceeding, and the Indemnitors shall not, without such Indemnitee's consent, which consent shall not be unreasonably withheld, settle or compromise any such suit, action, or claim. If the Indemnitors assume such defense, such Indemnitees shall have the right (but not the duty) to participate in the defense thereof and to employ counsel, at their own expense, separate from the counsel employed by the Indemnitors. For any period during which the Indemnitors have not assumed the defense thereof, the Indemnitors shall be liable for the fees and expenses of counsel employed by any Indemnitee; provided, however, that the Indemnitors shall not be liable for the fees or expenses of more than one counsel employed by any Indemnitee in any jurisdiction for all Indemnitees. If the Indemnitees assume the defense thereof, the Indemnitees shall thereafter consult with the Indemnitors upon the Indemnitors' reasonable request for such consultation from time to time with respect to such suit, action, or proceeding and the Indemnitees shall not, without the Indemnitors' consent, which consent shall not be unreasonably withheld, settle or compromise any such suit, action, or claim. Whether or not the Indemnitors choose to defend or prosecute any claim, all of the parties hereto shall cooperate in the defense or prosecution thereof. (b) The Indemnitors shall not be liable under Section 7.1(b) hereof with respect to any Loss resulting from a claim or demand the defense of which the Indemnitors were not offered the opportunity to assume as provided under Section 7.5(a) hereof to the extent the Indemnitors' liability under Section 7.1(b) hereof is prejudiced as a result thereof. No investigation by any Indemnitee or Indemnitee Affiliate prior to the Contribution Date shall relieve any Indemnitor of any liability hereunder. 7.6 TRANSFER TAXES. Prost shall pay, or cause to be paid, all Taxes or recording fees imposed on any transfers by Prost of real property and tangible and intangible personal property, including without limitation Intellectual Property, applicable to the transfers of the Assets contemplated by this Agreement and all sales and use Taxes applicable to transfers by Prost of 28 of 37 77 the Assets contemplated by this Agreement. 7.7 COOPERATION ON TAX MATTERS. Prost and the Partnership shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with any audit, litigation, or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other party's request) the provision of records and information which are reasonably relevant to any such audit, litigation, or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Partnership and Prost agree (a) to retain all books and records which are relevant to the determination of the Tax liabilities pertinent to the Assets and Prost relating to any Pre-Contribution Tax Period until the expiration of the applicable statute of limitations and to abide by all record retention agreements entered into with any Taxing Authority, and (b) to give the other party reasonable written notice prior to destroying or discarding any such books and records and, if the other party so requests, the Partnership or Prost, as the case may be, shall allow the other party to take possession of such books and records. 7.8 ELECTIONS. Prior to the Contribution Date, without the prior written consent of BWISS, neither Prost nor any Affiliate of Prost shall make or change any election, change an annual accounting period, adopt or change any accounting method, file any amended Return, enter into any closing agreement, settle any Tax claim or assessment relating to Prost, surrender any right to claim a refund of Taxes, consent to any extension or waiver of the limitation period applicable to an Tax claim or assessment relating to Prost, take any other action, or omit to take any action, if any such election, adoption, change, amendment, agreement, settlement, surrender, consent, or other action or omission that had (or will have) the effect of increasing the Tax liability of Prost, the Partnership, or any Affiliate of the Partnership. 7.9 TAX RETURNS OF PROST. With respect to any Tax return required to be filed by Prost for its taxable period which includes (but does not end on) the Contribution Date, the Partnership shall provide Prost and its authorized representatives with copies of such completed Tax return and a statement (with which the Partnership will supply supporting schedules and information) setting forth the amount of Tax shown on such Tax return that is allocable to Prost pursuant to Section 7.3(b) hereof (the "Statement") at least forty-five (45) business days prior to the due date (including any extension thereof) for the filing of such Tax return. Reasonable costs, fees, and expenses relating to the preparation of such Tax return shall be borne equally by Prost and the Partnership. Prost shall have the right at its own expense to review such Tax return and Statement prior to the filing of such Tax return. If Prost, within ten (10) business days after delivery of the Statement, notifies the Partnership in writing that it objects to any items on such Statement, specifying with particularity any such item and stating the specific factual or legal basis for any such objection, the Partnership and Prost shall resolve in good faith and use their best efforts to resolve such items. If the dispute is not resolved within twenty (20) days after receipt by the Partnership of such notice, the disputed items shall be resolved pursuant to Section 7.10 hereof and such Tax return shall be filed consistently therewith. Not later than the later of five (5) days before the due date for payment of Taxes with respect to such Tax 29 of 37 78 return or, in the event of a dispute, five (5) days after notice to Prost of the resolution thereof, Prost shall contribute to the Partnership or the Partnership shall distribute to Prost, as the case may be, an amount equal to the difference between (a) the Taxes shown on the Statement as being allocable to Prost pursuant to Section 7.10 hereof or in such notice (as the case may be) and (b) any payment made by Prost or any Affiliate thereof prior to the Contribution Date in respect of such Taxes. 7.10 CERTAIN DISPUTES. To the extent provided in Section 7.9 hereof, disputes arising under such Section and not resolved by mutual agreement as stated therein shall be resolved by an accounting firm with no affiliation or relationship whatsoever with the Partnership, Prost, or its Affiliates (the "Accounting Referee"), chosen and mutually acceptable to both the Partnership and Prost within five (5) days of the date on which the need to choose the Accounting Referee arises. The Accounting Referee shall resolve any disputed items within thirty (30) days of having the item referred to it pursuant to such procedures as it may require. The costs, fees, and expenses of the Accounting Referee shall be borne equally by the Partnership and Prost. 7.11 OTHER TAX MATTERS. Any payment by Prost to the Partnership or any other Indemnitee or Indemnitee Affiliate or any payment by the Partnership or any other Indemnitee to Prost made under this Section 7 will be treated as Capital Contributions to the Partnership or distributions from the Partnership for federal income tax purposes, provided that such payments will not affect the Capital Account of, any other contributions to be made by, or the distributions or allocations to be made to Prost under the Partnership Agreement. SECTION 8 CONDITIONS TO CLOSING; TERMINATION 8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE CLOSING. The respective obligations of each party to effect the closing of the transaction contemplated by this Agreement and the Partnership Agreement shall be subject to the fulfillment of all of the following conditions precedent at or prior to the Contribution Date: (a) The closing of a public offering of BWI's common stock realizing gross proceeds (before any deductions, including, but not limited to, underwriters' compensation and expenses) of at least $8,000,000; (b) This Agreement, the Partnership Agreement and the Other Agreements shall have been approved and adopted by (i) the requisite vote of the Board of Directors and shareholders of Prost's General Partner, (ii) the requisite vote of the Board of Directors and sole shareholder of BWISS, and (iii) the requisite vote of Prost partners; (c) No governmental entity or federal or state court of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which is in effect and which materially restricts, prevents or prohibits consummation 30 of 37 79 of the transactions contemplated by this Agreement; provided, however, that the parties shall use their reasonable best efforts to cause any such decree, judgment, injunction or other order to be vacated or lifted; and (d) All licenses, permits, registrations, authorizations, consents, waivers, orders or other approvals required to be obtained, and all filings, notices or declarations required to be made, by Prost, BWISS, or the Partnership in order to consummate the Proposal and the transactions contemplated hereunder shall have been obtained from, and made with, all required governmental entities, without any material condition thereto. 8.2 CONDITIONS TO OBLIGATION OF BWISS TO EFFECT THE CLOSING. The obligation of BWISS to effect the closing of the transaction contemplated by this Agreement and the Partnership Agreement is subject to fulfillment of all of the following conditions precedent at or prior to the Contribution Date: (a) The representations and warranties of Prost set forth herein are true and correct in all material respects as of the date hereof and as of the Contribution Date. Any matter which would otherwise constitute a failure to comply with or conform to a representation or warranty by Prost hereunder shall not be deemed to be such a failure if BWISS has consented to the same in writing. (b) Prost shall have performed, satisfied and complied with all covenants, agreements, and conditions required to be performed by it. (c) At the closing, Prost shall have delivered to, or have made available to BWISS at the offices of Prost, all of the following: (1) a certificate of Prost, executed by the President and Chief Financial Officer of Prost's General Partner, to the effect that each of the conditions specified in Sections 8.2(a), 8.2(b), 8.2(e) and 8.2(g) have been satisfied and that this Agreement and the transactions contemplated hereby were approved by the requisite vote of the Prost partners; (2) resolutions duly adopted by the Board of Directors of Prost's General Partner's authorizing the transactions which are the subject of this Agreement, certified by the Secretary of Prost's General Partner; (3) certificates issued as of the most recent practicable date, by the appropriate governmental authorities with respect to the good standing of Prost in the jurisdiction in which Prost is organized; (4) certificates executed by the Secretary of Prost's General Partner to the effect that there have been no amendments to the charter documents attached as Schedule 4.1 hereof, since the date of this Agreement; 31 of 37 80 (5) the original books of account and other records of Prost; (6) a balance sheet of the assets and liabilities to be contributed by Prost dated as of a date no more than ten (10) business days before the Contribution Date ("Closing Balance Sheet"). The Closing Balance Sheet shall be provided to BWISS at least five (5) business days before the Contribution Date and shall be certified by the Chief Financial Officer of Prost's General Partner that the Closing Balance Sheet was prepared from the books and records of Prost in conformity with U.S. Generally Accepted Accounting Principles consistently applied and fairly present the financial condition of the assets and liabilities to be contributed by Prost as of the date stated therein. If BWISS shall notify Prost within three (3) business days after receipt of the Closing Balance Sheet that it disputes any matter with respect to such Closing Balance Sheet, then any such matters (the "Disputed Matters") shall be submitted to an arbitrator which shall be a certified public accounting firm ("Arbitrator") mutually selected by BWISS and Prost within two (2) business days after such notice unless the parties agree in writing to extend such period in an attempt to negotiate a settlement. The Arbitrator shall consider only the Disputed Matters. The Arbitrator shall act promptly to resolve all Disputed Matters and its decision with respect to all Disputed Matters shall be final and binding upon the parties hereto and shall not be appealable to any court. The costs and expenses of the Arbitrator shall be shared equally by Prost and BWISS, except that the Arbitrator shall have the authority to award the reimbursement of such expenses to the prevailing party; (7) such other documents, records and other items as shall be necessary for the operation of the Business; (d) The Other Agreements, substantially in the form attached to the Partnership Agreement, shall be executed by Prost or its Affiliates, as applicable. (e) Prost shall have obtained and delivered to BWISS all consents set forth in Schedules 4.4, 4.21 and 4.22 annexed hereto. (f) From and after the date hereof, there shall have occurred or be threatened no event relative to the assets or business of Prost which is reasonably likely, individually or in the aggregate, to have a material adverse effect on the business, assets, operations or financial condition of Prost. (g) There shall not be pending or threatened before any governmental authority any action, suit or proceeding which, if adversely determined, would (i) make the consummation of this Agreement illegal, (ii) require the divestiture by the Partnership of all or a material portion of the business or assets as a result of the transactions contemplated hereby, (iii) impose limitations which adversely affect to a significant extent the ability of the Partnership to exercise full rights of ownership of the assets of the Business, as currently conducted by Prost, as a result of the transactions contemplated hereby, (iv) prevent the consummation of this Agreement or (v) cause this Agreement to be rescinded following consummation of this Agreement, and no judgment with respect to any of the foregoing shall be in effect. 32 of 37 81 (h) All proceedings in connection with the transactions contemplated by this Agreement shall be in form and substance reasonable satisfactory to BWISS and its Counsel, and BWISS shall have received all such counterpart originals or certified or other copies of such documents and proceedings in connection with such transactions as BWISS reasonably requests. 8.3 CONDITIONS TO OBLIGATION OF PROST TO EFFECT THE TRANSACTION. The obligations of Prost and its General Partner to effect the Transaction are subject to the fulfillment of all of the conditions precedent at or prior to the Contribution Date: (a) The representations and warranties of BWISS set forth herein are true and correct in all material respects as of the date hereof and the Contribution Date. Any matter which would otherwise constitute a failure to comply with or conform to a representation or warranty by Prost hereunder shall not be deemed to be such a failure if Prost has consented to the same in writing. (b) BWISS has or shall have performed, satisfied and complied with all covenants, agreements and conditions required to be performed by it. (c) At the closing, BWISS shall deliver to Prost the following: (1) a certificate of BWISS executed by the President and Chief Financial Officer of BWISS to the effect that each of the conditions specified in Sections 8.3(a), 8.3(b), 8.3(e) and 8.3(f) have been satisfied; (2) resolutions adopted by the Board of Directors of BWISS authorizing the transactions contemplated hereby, certified by the Secretary of BWISS; (3) certificates issued by appropriate governmental authorities evidencing, as of the most recent practicable date, the good standing of BWISS in its state of incorporation. (d) The Other Agreements, substantially in the form attached to the partnership Agreement, shall be executed by BWISS or its Affiliates, as applicable. (e) BWISS shall have obtained and delivered to Prost all consents set forth in Schedules 5.3 and 5.5 annexed hereto. (f) There shall not be pending or threatened before any governmental authority any action, suit or proceeding which, if adversely determined would (i) prevent the consummation of the transaction contemplated by this Agreement, or (ii) cause such transaction to be rescinded following consummation of the transaction contemplated by this Agreement, and no judgment with respect to any of the foregoing shall be in effect. (g) All legal and corporate proceedings in connection with the transactions 33 of 37 82 contemplated by this Agreement shall be in form and substance reasonably satisfactory to Prost and Prost's Counsel, and Prost shall have received all such counterpart originals or certified or other copies of such documents and proceedings in connection with such transactions as Prost reasonably requests. 8.4 TERMINATION. This Agreement may be terminated at any time prior to the Contribution Date, whether before or after approval by the partners of Prost: (a) by mutual consent of Prost and BWISS; or (b) by either Prost or BWISS if (i) the Contribution Date shall not have been consummated on or before March 31, 1997 (the "Termination Date"), (ii) the requisite vote of the partners of Prost to approve this Agreement and the transactions contemplated hereby and thereby shall not be obtained at the meetings, or any adjournments thereof, called therefor, (iii) any governmental or regulatory body, the consent of which is a condition to the obligations of Prost or BWISS to consummate the transactions contemplated hereby, shall have determined not to grant its consent and all appeals of such determination shall have been taken and have been unsuccessful, or (iv) any court of competent jurisdiction in the United States or any State shall have issued an order, judgment or decree (other than a temporary restraining order) restraining, enjoining or otherwise prohibiting the transactions contemplated hereby and such order, judgment or decree shall have become final and nonappealable. (c) In the event of termination of this Agreement by either Prost or BWISS, as provided in Section 8.4(a) or (b), this Agreement shall forthwith become void and there shall be no liability on the part of either BWISS, Prost or BWI or their respective officers or directors, except that nothing in this Section 8.4 shall relieve any party from liability for any breach of this Agreement. 8.5 BREAK UP FEES. In the event of termination of this Agreement under Section 8.4, other than arising from the breach of this Agreement by a party hereto, and each party hereto shall otherwise be responsible for their own disbursements and expenses incurred in the transactions contemplated hereby, except BWISS shall pay Prost's reasonable legal and accounting fees in connection with negotiating the agreement contemplated hereby. SECTION 9 MISCELLANEOUS PROVISIONS 9.1 AMENDMENT AND MODIFICATION. This Agreement may be amended, modified, or supplemented only by written agreement of Prost and BWISS. 9.2 WAIVER OF COMPLIANCE; CONSENTS. Any failure of a party to comply with any obligation, covenant, agreement, or condition herein may be waived by the other party; provided, however, that any such waiver may be made only by a written instrument signed by the party granting such waiver, but such waiver or failure to insist upon strict compliance with 34 of 37 83 such obligation, covenant, agreement, or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits consent by or on behalf of any party hereto, such consent shall be given in writing in a manner consistent with the requirements for a waiver of compliance as set forth in this Section 9.2, with appropriate notice in accordance with Section 9.8 of this Agreement. 9.3 ASSIGNMENT. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. No party may assign any of its rights hereunder without the written consent of the other party. Nothing in this Agreement, expressed or implied, is intended or shall be construed to confer upon any person other than the parties, any successors and permitted assigns, any rights, remedy, or claim under or by reason of this Agreement or any provisions herein contained. 9.4 FURTHER ASSURANCES. From time to time, at the request of Prost or the Partnership and without further consideration, each party, at its own expense, will execute and deliver such other documents, and take such other action, as Prost or the Partnership may reasonably request in order to consummate more effectively the transactions contemplated hereby and to vest in the Partnership good and marketable title to the Assets. Prost hereby constitutes and appoints, effective as of the Contribution Date, the Partnership and its successors and permitted assigns as the true and lawful attorney of Prost with full power of substitution in the name of the Partnership or in the name of Prost, but for the benefit of the Partnership, to collect for the account of the Partnership any items of Assets and to institute and prosecute all proceedings which the Partnership may in its reasonable discretion deem proper in order to assert or enforce any right, title, or interest in, to, or under the Assets, and to defend or compromise any and all action, suits, or proceedings in respect of the Assets. The Partnership shall be entitled to retain for its own account any amounts collected pursuant to the foregoing powers, including any amounts payable as interest in respect thereof. 9.5 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the Laws of the State of California without regard to its conflicts of law doctrines. 9.6 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument and shall become a binding Agreement when one or more of the counterparts have been signed by each of the parties and delivered to the other party. 9.7 PUBLICITY. Neither of the parties will make any disclosure of the transactions contemplated by this Agreement, the Partnership Agreement or the Other Agreements, or any discussions in connection therewith, without the prior written consent of the other party. The preceding sentence shall not apply to any disclosure required to be made by Law or the regulations of any stock exchange(s) as reasonably determined by counsel to the party determining that such disclosure is required, except that such party, whenever practicable, shall be required to consult with the other party concerning the timing and content of such disclosure 35 of 37 84 before making it. 9.8 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): If to Prost: with a copy to: ------------ --------------- Prost Partners, L.P. Wild, Carter & Tipton 821 L Street 246 W. Shaw Modesto, CA 95354 Fresno, CA 93704 Attn: Garith Helm Attn: Bruce Brown, Esq. If to BWISS: with a copy to: ------------ --------------- BWI - St. Stan's, Inc. Hecht & Steckman, P.C. 9800 S. Sepulveda Blvd., Suite 720 60 East 42nd Street, Suite 5101 Los Angeles, CA 90045 New York, NY 10165-5101 Attn: Frederik Rodenhuis Attn: James G. Smith, Esq. If to the Partnership: with a copy to: ---------------------- --------------- BWI-Prost Partners BWI - St. Stan's, Inc. 821 L Street 9800 S. Sepulveda Blvd., Suite 720 Modesto, CA 95354 Los Angeles, CA 90045 Attn: Garith Helm Attn: Frederik Rodenhuis and with a copy to: ------------------- Hecht & Steckman, P.C. 60 East 42nd Street, Suite 5101 New York, NY 10165-5101 Attn: James G. Smith, Esq. 9.9 SPECIFIC PERFORMANCE. Each of the parties acknowledge that money damages would not be a sufficient remedy for any breach of this Agreement and that irreparable harm would result if this Agreement were not specifically enforced. Therefore, the rights and obligations of the parties under this Agreement shall be enforceable by a decree of specific performance issued by any court of competent jurisdiction, and appropriate injunctive relief may be applied for and granted in connection therewith. A party's right to specific performance shall be in addition to all other legal or equitable remedies available to such party. 9.10 HEADINGS. The article and section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 36 of 37 85 9.11 ENTIRE AGREEMENT. This Agreement, including the exhibits, schedules, and other documents and instruments referred to herein, together with the Partnership Agreement and the Other Agreements, embodies the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 9.12 SEVERABILITY. If any one or more provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been contained herein. 9.13 INCONSISTENCY OR CONFLICT. In the event of any inconsistency or conflict between any provision of this Agreement and any provision of any of the Other Agreements, the provisions of this Agreement shall govern. In the event of any inconsistency or conflict between any provision of this Agreement and any provision of the Partnership Agreement, the provision of the Partnership Agreement shall govern. However, to the extent possible, the Agreement, Partnership Agreement and Other Agreements shall be interpreted to give effect to the provisions contained in each such document. 9.14 EXHIBITS AND SCHEDULES. All Exhibits and Schedules attached hereto are hereby incorporated in and made a part as if set forth in full herein. 9.15 ARBITRATION. Any dispute arising under this Agreement or the transactions contemplated thereby shall be arbitrated before the American Arbitration Association at its offices located in San Francisco, California. 9.16 ATTORNEYS' FEES. If any legal action, whether in court or arbitration, arises under this Agreement or by reason of any asserted breach of it, the prevailing party shall be entitled to recover all costs and expenses, including reasonable attorneys' and expert witness fees, incurred in enforcing or attempting to enforce any of the terms, covenants or conditions. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of December 17, 1996. PROST PARTNERS, L.P. BWI-ST. STAN'S, INC. By: /s/ GARITH HELM By: /s/ FREDERIK G.M. RODENHUIS ------------------------------ ------------------------------ Garith Helm, President of Frederik G.M. Rodenhuis, President and Stanislaus Brewing Company, Inc., Chief Executive Officer General Partner EX-2.3 7 SHARE PURCHASE AGREEMENT DATED NOVEMBER 8, 1995 1 EXHIBIT 2.3 SHARE PURCHASE AGREEMENT dated as of ______________ 1996 by and among BEVERAGE WORKS, INC. (the "Buyer") and ORANGE EMPIRE BREWING COMPANY (the "Company") and JOHN BARNICOAT NORMAN KRETSCHMAR MICHAEL HAGERMAN KENNETH MCMILLIN (the "Management Shareholders") and those individuals whose names are set forth on Schedule 1.1 who are not Management Shareholders (the "Non-Management Shareholders") 2 TABLE OF CONTENTS
Page ---- ARTICLE I - PURCHASE AND SALE OF THE SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Purchase and Sale of the Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Default by a Shareholder at the Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.3 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.4 Post-Closing Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.5 [Intentionally Omitted] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.6 Payment of Certain Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.7 Concurrent Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE II - THE CLOSING AND TRANSFER OF THE SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.1 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.2 Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLES III AND IV - REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE V - ADDITIONAL COVENANTS AND AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.1 Conduct of Business Pending Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 5.2 Records and Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 5.3 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.4 Additional Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.5 No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.6 Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.7 Equipment Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.8 [Intentionally Omitted] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.9 Riverside National Bank Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.10 Updating of Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 5.11 Financial Statements of Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE VI - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE BUYER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.1 Accuracy of Warranties; Performance of Covenants . . . . . . . . . . . . . . . . . . . . . . . 14 6.2 Regulatory Consents, Authorizations, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.3 No Pending Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.4 No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6.5 No Adverse Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.6 Force majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.7 Third Party Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.8 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.9 Further Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 6.10 Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.11 Concurrent Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.12 [Intentionally Omitted] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.13 Legal Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.14 Initial Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 6.15 Absence of Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 6.16 Shareholder Debt; Equipment Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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Page ---- ARTICLE VII - CONDITIONS PRECEDENT TO OBLIGATIONS OF EACH OF THE SHAREHOLDERS AND THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . 18 7.1 Accuracy of Warranties; Performance of Covenants . . . . . . . . . . . . . . . . . . . . . . . 18 7.2 Regulatory Consents, Authorizations, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.3 No Pending Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.4 No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.5 No Adverse Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7.6 Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.7 Third Party Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.8 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.9 Further Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.10 Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.11 Legal Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 7.12 Concurrent Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 7.13 Initial Public Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 ARTICLE VIII - EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 ARTICLE IX - SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS; INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . 23 ARTICLE IX - SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS; INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . 23 9.1 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 9.2A Indemnification by Each of the Shareholders as to Title to, and Transferability of, Shares . . . . . . . . . . . . . . . . . . . . . . . . . 23 9.2B Indemnification by Each of the Management Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 9.3 Indemnification by the Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 9.4 Event of Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 9.5 Notice and Demand, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 9.6 Limitation on Indemnification Amount; Other Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
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Page ---- ARTICLE X - MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 10.1 Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 10.2 Entire Understanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 10.3 Waiver and Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 10.4 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 10.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 10.6 Severability; Relationship of the Parties . . . . . . . . . . . . . . . . . . . . . . . . . . 28 10.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 10.8 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 10.9 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 10.10 Governing Law and Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 10.11 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 10.12 Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 10.13 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 10.14 Representation by Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 10.15 No Interpretation Against Draftsman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 10.16 Termination by Mutual Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 10.17 Termination for Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
- iii - 5 EXHIBITS EXHIBIT SUBJECT I [Intentionally Omitted] II Form of Management Agreement III Agreement Not to Compete IV A. Representations and Warranties of each of the Sellers and the Shareholder B. Representations and Warranties of Buyer V Opinion of Counsel to the Company and the Shareholders VI Opinion of Counsel to the Buyer - iv - 6 EXHIBIT 2.3 SHARE PURCHASE AGREEMENT THIS SHARE PURCHASE AGREEMENT (the "Agreement") is made and entered into as of this 10th day of September, 1996 by and among BEVERAGE WORKS, INC., a California Corporation (the "Buyer"), on the one hand, and ORANGE EMPIRE BREWING COMPANY, a California corporation (the "Company") and JOHN BARNICOAT, NORMAN KRETSCHMAR, MICHAEL HAGERMAN and KENNETH MCMILLIN (individually, a "Management Shareholder," and collectively, the "Management Shareholders") and those individuals whose names and addresses are set forth on Schedule 1.1, attached hereto and made a part hereof by this reference, (individually, a "Non-Management Shareholder," and collectively, the "Non-Management Shareholders") (the Management Shareholders and the Non-Management Shareholders may hereinafter be referred to individually, as a "Shareholder," and collectively, as the "Shareholders"), on the other hand. RECITALS WHEREAS, the Shareholders own all of the issued and outstanding shares of capital stock of the Company (the "Shares"); and WHEREAS, the Buyer desires to purchase from the Shareholders and the Shareholders desire to sell to the Buyer, on the terms and subject to the conditions of this Agreement, the Shares, in exchange for the Purchase Price (as hereinafter defined), as more specifically set forth in this Agreement; NOW, THEREFORE, in consideration of the respective mutual covenants, promises, representations and warranties contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I PURCHASE AND SALE OF THE SHARES 1.1 Purchase and Sale of the Shares. On the basis of the representations and warranties contained herein, and subject to the terms, conditions and other provisions contained herein, the Shareholders shall sell, transfer, assign and deliver to the Buyer, and the Buyer shall purchase and accept from the Shareholders, on the Closing Date (as hereinafter defined) all right, title and interest in and to, the Shares, in exchange for the payment and delivery to each Shareholder of his or her portion of the aggregate Purchase Price (as hereinafter defined), as specifically set forth on Schedule 1.1 attached hereto. - 1 - 7 1.2 Default by a Shareholder at the Closing. Notwithstanding the provisions of Section 1.1, if any Shareholder shall fail or refuse to deliver any of the Shares owned by such Shareholder, or, if any Shareholder shall fail or refuse to consummate the transactions described in this Agreement prior to or on the Closing Date, such failure or refusal shall not relieve such Shareholder of any obligations under this Agreement, and the Buyer, at its option and without prejudice to its rights against such Shareholder, may either (i) acquire the remaining Shares which it is entitled to acquire hereunder with a proportional revision to the Purchase Price, or (ii) refuse to make such acquisition and thereby terminate all of its obligations under this Agreement. Each of the Shareholders acknowledges and agrees that the Shares are unique and otherwise not available and that in addition to any other remedies, the Buyer may invoke any equitable remedies to enforce delivery of the Shares hereunder, including, without limitation, an action or suit for specific performance against any Shareholder who shall fail or refuse to deliver any of the Shares owned by such Shareholder or who shall fail or refuse to consummate the transactions described in this Agreement. 1.3 Purchase Price. Subject to Section 1.4 of this Agreement, the aggregate purchase price (the "Purchase Price") for the Shares is payable as follows: (i) One Hundred Forty-One Thousand Sixty-Three (141,063) shares of Common Stock, no par value per share (the "Common Stock") of the Buyer to be delivered at the Closing; and (ii) One Hundred Fifty-Five Thousand (155,000) shares of Common Stock of the Buyer (the "Earn-Out Shares"), to be paid as follows: (a) The Earn-Out Shares shall be delivered as calculated hereinbelow based on the performance of the Company in the period commencing at 12:01 a.m. on the Closing Date and ending at 11:59 p.m. on December 31, 1998 (the "Measurement Period") as follows: (I) For each barrel of beer that the Company produces, ships and sells above Seven Thousand (7,000) and up to and including Thirty-Seven Thousand (37,000) barrels of beer in the Measurement Period, then the Shareholders shall be entitled to receive four (4) Earn-Out Shares up to a maximum of One Hundred Twenty Thousand (120,000) Earn-Out Shares if the Company produces, ships and sells Thirty-Seven Thousand (37,000) or more barrels of beer during the Measurement Period; (II) If the Company produces, ships and sells Forty Thousand (40,000) or more barrels of beer in the Measurement Period, then the Shareholders shall be entitled to receive as a bonus an additional Thirty-Five Thousand (35,000) Earn-Out Shares; - 2 - 8 (III) For purposes of making the above calculations, the number of barrels of beer produced by the Company will include (a) all Riverside product produced irrespective of the location of production, (b) all Humpback barrels produced at the Company's premises, however, in the case where Riverside does not brew the beer and only fills kegs, the total number of barrels produced shall be multiplied by .333 to determine the number of barrels that will be credited towards the earn-out, (c) all Naked Aspen barrels produced at the Company's premises, (d) all beers produced for Trader Joe's under the proposed private label program, excluding, however, Heritage Brewing's Red Pig and related products contract with The Cabo Group, Inc., (e) all San Luis Obispo keg business produced at the Company's premises and (f) all kegs of beer produced as identified on Schedule 1.3 attached hereto and not otherwise specified in (a) through (e) above, inclusive, which are produced on a contract basis at the Company's premises; and (IV) During the Measurement Period, the Company covenants and agrees to provide up to 80 percent of the current potential maximum capacity (i.e., 24,000 barrels out of a 30,000 barrel capacity) per year for production of the products specified hereinabove and in the event that such product is not produced because of capacity constraints at the Company's premises and additional capacity cannot be provided elsewhere, then the parties agree to negotiate in good faith to adjust the number of barrels required for the Company to produce, ship and sell in order for the Shareholders to be entitled to receive any or all of the Earn-Out Shares; and (V) If earned, the Earn-Out shares will be delivered to the individual Non-Management Shareholders in the percentages specified on Schedule 1.1 and the delivery thereof shall be effected not later than January 31, 1999. 1.4 Post-Closing Adjustments. (i) Preparation of Closing Date Balance Sheet. Within 90 days after the Closing Date, the Company shall prepare a balance sheet for the Company as of the Closing Date (the "Closing Date Balance Sheet"). The Closing Date Balance Sheet shall be prepared in accordance with United States Generally Accepted Accounting Principles ("GAAP"), using the same methods and criteria employed by the Company in connection with preparation of its Latest Balance Sheet (as hereinafter defined) to the extent such methods are consistent with GAAP, and shall present fairly the Company's financial position as of the Closing Date. Upon completion of the Closing Date Balance Sheet, copies thereof shall promptly be provided to Michael Hagerman and Norman Kretschmar as the representatives of the Shareholders (collectively, the "Shareholder Representative"). (ii) Resolution of Disputes. If the Shareholder Representative shall notify the Buyer within 15 days after receipt of the Closing Date Balance Sheet that the Shareholders dispute any - 3 - 9 matter with respect to such Closing Date Balance Sheet, then any such matters (the "Disputed Matters") shall be submitted to arbitration in Los Angeles County, California within 30 days after such notice unless the parties agree in writing to extend such 30-day period in an attempt to negotiate a settlement of such Disputed Matters. The arbitrator (the "Arbitrator") shall be an accounting firm (the "Accounting Firm") mutually agreed to by the Shareholder Representative and the Buyer. Any reference herein to the Accounting Firm shall be deemed to include a reference to any member or employee thereof (who is a certified public accountant) which any such firm may designate as the Arbitrator on its behalf. If within 20 days following the expiration of the 30-day period referred to above or any extension thereof the Shareholder Representative and the Buyer shall have failed to agree upon the selection of the Arbitrator or any such Arbitrator selected by them shall not have agreed to perform the services called for hereunder, the Arbitrator shall thereupon be selected in accordance with the rules of the American Arbitration Association, which or who may be willing to perform such services, other than any such firm which is then employed by any of the Shareholders, the Company or the Buyer or any affiliate thereof. The Arbitrator shall consider only the Disputed Matters and the arbitration shall be conducted in accordance with the rules of the American Arbitration Association then in effect. The Arbitrator shall act promptly to resolve all Disputed Matters and its decision with respect to all Disputed Matters shall be final and binding upon the parties hereto and shall not be appealable to any court. The costs and expenses of the Arbitrator shall be shared equally by the Shareholders and the Buyer, except that Arbitrator shall have the authority to award the reimbursement of such expenses to the prevailing party. (iii) Determination of Closing Net Book Value. The Purchase Price has been determined on the assumption, and the parties have entered into this Agreement with the reasonable expectation, that the excess (the "Closing Net Book Value") of (1) the total assets of the Company as of the Closing Date, over (2) the total liabilities of the Company as of the Closing Date, will be $ X , which is based on the Latest Balance Sheet. As used herein, the terms "total assets" and "total liabilities" shall mean the aggregate amount of all assets or liabilities, respectively, of the Company (whether classifiable in accordance with GAAP as current or long-term) determined in accordance with GAAP and applied on a basis consistent with the Latest Balance Sheet. (iv) Adjustment of Purchase Price; Payment. (a) The Purchase Price shall be increased dollar for dollar by the amount by which the Closing Net Book Value on the - 4 - 10 Closing Date is greater than $___X__ plus $350,000, without giving effect to the transactions contemplated by Section 5.9 of this Agreement. Within 15 days after receipt by the Shareholders of the Closing Date Balance Sheet, the Buyer shall pay the net amount of any increase to the Purchase Price, as calculated in accordance with this Section 1.4, to the Shareholders in shares of Common Stock of the Buyer valued at $8.00 per share; provided, however, that if there are any Disputed Matters, any payment finally determined to be due either by agreement or by arbitration shall be made by the Buyer within 10 days after such determination. (b) The Purchase Price shall be decreased dollar for dollar by the amount by which the Closing Net Book Value on the Closing Date is less than $ X minus $350,000. Within 15 days after receipt by the Shareholders of the Closing Date Balance Sheet, the Shareholders shall pay the net amount of any decrease to the Purchase Price, as calculated in accordance with this Section 1.4, to the Buyer in shares of Common Stock of the Buyer valued at $8.00 per share; provided, however, that if there are any Disputed Matters, any payment finally determined to be due either by agreement or by arbitration shall be made by the Shareholders within 10 days after such determination. Any such payment required to be made by the Shareholders to the Buyer shall be paid by the individual Shareholders in the percentages specified on Schedule 1.1; provided, further, however that but only to the extent of their respective percentages of liability specified on Schedule 1 each Management Shareholder shall be jointly and severally liable to pay the full amount due pursuant to this provision to the Buyer in shares of Common Stock of the Buyer valued at $8.00 per share. 1.5 [Intentionally Omitted]. 1.6 Payment of Certain Taxes. Any sales, use, transfer or other tax arising from or relating to the Shares to be sold contemplated herein, shall be paid by and shall be solely the responsibility of the Shareholders. 1.7 Concurrent Agreements. Concurrently herewith, (i) the Buyer and certain of the Shareholders are entering into a management agreement, a form of which is attached hereto as Exhibit II (the "Management Agreement"); and (ii) the Buyer, on the one hand, and each of the Management Shareholders are entering into an Agreement Not to Compete, a form of which attached hereto as Exhibit III (the "Agreement Not to Compete"). The Management Agreement and the Agreements Not to Compete are collectively referred to herein as the "Concurrent Agreements". Each of the Concurrent Agreements shall be effective concurrently with the Closing (as hereinafter defined). - 5 - 11 ARTICLE II THE CLOSING AND TRANSFER OF THE SHARES 2.1 Closing. The Closing of the transactions contemplated by this Agreement (the "Closing") shall take place on that date (the "Closing Date") which is the latest to occur of: (i) the date of the closing of the Buyer's initial public offering as such date is set forth in the Prospectus for such initial public offering; (ii) the first business day thereafter as all of the conditions to the Closing set forth in Articles VI and VII hereof shall have been satisfied or waived in accordance with the respective terms thereof, (iii) the latest date which may from time to time be designated in writing by the Buyer, but not later than the Latest Date (as defined hereinbelow); or (iv) any other date mutually agreed upon in writing by the Buyer, the Shareholders and the Company. The Closing shall take place at the offices of Donahue & Mesereau, 1900 Avenue of the Stars, Suite 2700, Los Angeles, California 90067. If for any reason the Closing does not occur by March 31, 1997 (the "Latest Date"), either the Shareholder Representative, the Company or the Buyer may unilaterally terminate this Agreement and all further obligations of the parties hereunder shall thereupon terminate, except that it is expressly agreed and understood that a party's right to pursue all legal rights and remedies for breach of contract or otherwise hereunder, including, without limitation, damages relating thereto, shall survive such termination unimpaired. 2.2 Deliveries. At the Closing, each of the Shareholders shall transfer and deliver to the Buyer good and marketable title to the Shares owned by such Shareholder immediately prior to the Closing, free and clear of any and all liens, claims, mortgages, charges, commission arrangements, title retention agreements, covenants, restrictions, options, purchase agreements, security agreements, security interests, encumbrances and adverse interests of any kind or nature whatsoever (each, an "Adverse Interest"), other than those disclosed to the Buyer in writing and approved by the Buyer in writing, by delivering to the Buyer the certificates for the Shares to be sold by such Shareholder in negotiable form, - 6 - 12 duly endorsed in blank, or with separate notarized or guaranteed stock transfer powers attached thereto and signed in blank, in exchange for the delivery by the Buyer to the Shareholders of the Purchase Price as specified in Section 1.3. In addition, at the Closing, each of the parties shall execute and deliver each and every Concurrent Agreement to which such party is also a party. At the Closing, the Shareholders will make available to the Buyer the written resignations of all of the directors and officers of the Company and each Subsidiary effective as of the Closing and shall cause to be made available to the successor directors and officers of the Company and each Subsidiary all minute books, stock record books, books of account, corporate seals, contracts, agreements, plans commitments, understandings and other documents, instruments and papers belonging to the Company and each Subsidiary and shall cause full possession and control of all of the assets, properties, business, goodwill and rights of every kind and description, real and personal, tangible and intangible, choate or inchoate, wherever situated belonging to the Company and each Subsidiary (collectively, the "Assets") and of all other things and matters pertaining to the operation of the existing and prospective business, operations, facilities and other Assets, financial condition, results of operations, finances, markets, products, competitive position, inventory and other supplies, customers and customer relations and personnel of the Company and each Subsidiary (collectively, the "Business") to be transferred and delivered to the directors and officers elected to succeed the resigned directors and officers of the Company and each Subsidiary. At the Closing, the Shareholders shall also deliver to the Buyer, and the Buyer shall deliver to the Shareholders, the certificates, opinions and other instruments and documents referred to in Articles VI and VII of this Agreement. At any time and from time to time after the Closing Date, the parties shall duly execute, acknowledge and deliver all such further assignments, conveyances, instruments and documents, and will take such other action consistent with the terms of this Agreement, in each case, as may be reasonably necessary to assign, transfer and convey to the Buyer good and marketable title to the Shares, free and clear of any and all Adverse Interests, to carry out the transactions contemplated by this Agreement, and to comply with the terms hereof. ARTICLES III AND IV REPRESENTATIONS AND WARRANTIES Each of the Management Shareholders (jointly and severally as to each other, but only up to their respective percentages of liability as specified on Schedule 1.1) and the Company, jointly and severally, represent and warrant to, and agree with, the Buyer, - 7 - 13 its successors and assigns, as of the date hereof, as set forth in Section A of Exhibit IV attached hereto, the entirety of which is hereby incorporated into this Agreement by this reference. The Buyer represents and warrants to, and agrees with, each of the Shareholders and the Company, each of their or its successors and assigns, as the case may be, as of the date hereof, as set forth in Section B of Exhibit IV attached hereto, the entirety of which is hereby incorporated into this Agreement by this reference. ARTICLE V ADDITIONAL COVENANTS AND AGREEMENTS 5.1 Conduct of Business Pending Closing. Until the Closing Date, except as may be approved by the Buyer in writing or as otherwise expressly provided in this Agreement, the Company shall, and the Shareholders shall cause the Company to: (i) operate the Business only in the ordinary course and in substantially the same manner as it has been operated in the past and not sell any of the Assets except for sales from inventory in the ordinary course of business; (ii) not issue, repurchase or redeem or commit to issue, repurchase or redeem, any shares of its capital stock, any options or other rights to acquire such stock or any securities convertible into or exchangeable for such stock; (iii) not declare or pay any dividend on, or make any other distribution with respect to, the Shares; (iv) not (a) incur any amount of long or short-term debt for money borrowed, (b) guarantee or agree to guarantee the obligations of others, (c) indemnify or agree to indemnify others, or (d) incur any other direct or indirect liability, indebtedness, obligation, expense, claim, deficiency or endorsement of or by any person of any type, whether accrued, absolute, contingent, matured, unmatured or otherwise (collectively, "Liabilities"); (v) keep in full force and effect insurance covering the Company, each Subsidiary, the Assets and the Business comparable in amount and scope of coverage to that now maintained; (vi) maintain the tangible Assets in good condition and working order, ordinary wear and tear excepted and maintain the title to and enforceability of claims pursuant to any intangible rights or Assets; - 8 - 14 (vii) use its best efforts to retain the Company's employees and maintain the Business so that such employees will remain available to the Company on and after the Closing Date and to maintain existing relationships with suppliers, customers and others having business dealings with the Company and its Subsidiaries and otherwise to preserve the goodwill of the Business so that such relationships and goodwill will be preserved on and after the Closing Date; (viii) not amend the Articles of Incorporation or By-Laws of the Company or any Subsidiary; (ix) not merge with or into any other corporation, partnership, association or entity or sell, assign, transfer, pledge or encumber any part of the Assets or agree to do any of the foregoing; (x) not enter into any written or oral contract, agreement, lease, plan, commitment, arrangement, undertaking, practice, authorization, obligation, instrument or other document that is or may be binding on any person or its property under applicable law (each, a "Contract," and collectively, the "Contracts") that is material and not in the ordinary course of business consistent with past practice, nor permit any amendment or termination of any material contract; (xi) not waive any rights of value or rights that would otherwise accrue to the Company after the Closing Date; (xii) not increase the salaries of, or make any bonus or similar payments to or establish or modify any employee benefits plans for, any of the Company's directors, officers or employees or enter into or modify any employment, consulting or similar Contracts with any such persons or agree to do any of the foregoing; (xiii) continue to maintain all employee benefit plans in accordance with applicable rules and regulations, and ensure that no employee benefit plan, or any trust related thereto, shall be amended or terminated prior to the Closing Date, except for any such amendment as may be required to comply with applicable rules and regulations; (xiv) collect its accounts receivable in the ordinary course of business consistent with past practice; (xv) pay its accounts payable in the ordinary course of business consistent with past practice and not fail to pay or discharge when due any Liabilities; - 9 - 15 (xvi) use its best efforts to help the Shareholders complete the transactions contemplate by this Agreement and obtain the satisfaction of the conditions specified in Article VI; (xvii) promptly notify the Buyer of (a) a breach of or default under any Contract, (b) the occurrence of an event that with the passage of time, the giving of notice, or both would constitute a breach of or default under any Contact, or (c) the occurrence of an event that with or without the passage of time, the giving of notice, or both, would give rise to a right of termination, renegotiation or acceleration under any Contract (collectively, a "Default"), the threat or commencement of any litigation, or any development that occurs before the Closing that could in any way materially affect the Company, the Assets or the Business; (xviii) use its best efforts to obtain any consents or approvals required under any Contracts or otherwise that are necessary to complete the transactions contemplated by this Agreement or to avoid a Default under any such Contracts; (xix) comply with all rules and regulations applicable to it and to the conduct of its and their, as the case may be, Business; (xx) provide the Buyer with such financial and other reports of the Business as may be reasonably requested; (xxi) not make any capital expenditures in excess of $5,000; and (xxii) promptly disclose to the Buyer in writing any information set forth in any Schedule attached hereto which no longer is correct and any information of the nature of that set forth in any such Schedule which arises after the date hereof and which would have been required to be included in any such Schedule if such information had obtained on the date hereof. 5.2 Records and Documents. Each of the Shareholders and the Company hereby grant the Buyer and its agents and representatives, at their request, access to and the right to make copies, at the Buyer's expense, of all records of the Company and the Shareholders that relate to the Business as conducted prior to the Closing as may be necessary, useful, desirable or appropriate in connection with the Buyer's operation of the Business after the Closing. By way of example, and without limiting the generality of the foregoing, the Shareholders shall, and they shall cause the Company to (i) give to the Buyer's officers, employees, counsel, accountants and other representatives free and full access to and the right to inspect, during normal business hours, all of the - 10 - 16 Assets, records, Contracts and other documents relating to the Business, (ii) permit them to consult with the officers, employees, accountants, counsel and agents of the Company for the purpose of making such investigation of the Company, the Business and the Assets as the Buyer shall desire to make, provided that such investigation shall not unreasonably interfere with the Company's business operations, and (iii) furnish to the Buyer all such documents and copies of documents and records and information with respect to the Company's affairs and copies of any working papers relating thereto as the Buyer shall from time to time reasonably request. 5.3 Publicity. Each party hereto agrees not to issue any press release or otherwise make any public statement in any general circulation medium with respect to the transactions contemplated by this Agreement, without the consent, which shall not be unreasonably withheld, of the Shareholder Representative (in the case of releases or statements issued or made by the Buyer) or the Buyer (in the case of releases or statements issued or made by any of the Shareholders or the Company), except as may be required by law, in which event such press release or public statement shall be made only after consultation with the Shareholder Representative and the Company, on the one hand, or the Buyer, on the other hand, as the case may be; provided, however, that the Shareholder Representative consents to the Buyer issuing a press release or public statement with respect to Buyer's filing a registration statement with the United States Securities and Exchange Commission. 5.4 Additional Agreements. Subject to the terms and conditions herein provided, each of the parties hereto shall use its reasonable best efforts to bring about the transactions contemplated by this Agreement, as soon as reasonably practicable, including the execution and delivery of all instruments and other documents, and shall take or cause to be taken such further actions necessary, proper or desirable to carry out the intent and purposes of, and consummate the transactions contemplated by, this Agreement. No party will take or knowingly permit to be taken any action or do or knowingly permit to be done anything in the conduct of its business, or otherwise, which would be contrary to or in breach of any of the terms or provisions of this Agreement, or which would cause any of the representations or warranties contained herein to become untrue or incomplete. 5.5 No Solicitation. The Company will not, and will authorize its officers, directors, employees, agents or other representatives (including any broker, financial advisor, attorney, accountant or other agent) not to, and the Shareholders will not, - 11 - 17 and will cause their agents or other representatives (including any broker, financial advisor, attorney, accountant or other agent) not to, and the Shareholders will cause the Company not to, directly or indirectly, initiate contact with, solicit or encourage or take any action to facilitate (including by way of furnishing information), any proposal or inquiry by, or enter into or take any action to facilitate any discussions or negotiations with, or provide any information or assistance to, any third party (other than the Buyer as contemplated in Section 5.2 of this Agreement or appropriate regulatory authorities) concerning any acquisition (whether by merger, purchase of assets, or otherwise) of any or all shares of capital stock of the Company or any material portion of the assets of the Company. The Company or the Shareholders, as the case may be, will notify the Buyer immediately upon receipt of any inquiry, proposal or offer relating to any of the foregoing. 5.6. Tax Returns. The Shareholders will prepare and file all federal, foreign, state or local tax returns required to be filed for any period ending on or before the Closing Date, and will pay all federal, foreign, state and local income taxes (including interest and penalties relating thereto) due for the periods covered by such returns. 5.7 Equipment Leases. Brewery Leasing Company ("BLC"), the holder of the Brewery Leasing identified on Schedule 7A, covenants and agrees to (i) reduce the effective interest rate of such lease(s) to ten percent (10%), (ii) extend such leases by that number of months which is equal to the number of months payments on each such lease is in arrears for calendar year 1995 only, and (iii) provide that all such equipment may be purchased by the Buyer upon the expiration of such leases for an aggregate of $1.00, it being understood and agreed by the Buyer that such provisions will not be effective until immediately after the Closing. 5.8 [Intentionally Omitted]. 5.9 Riverside National Bank Loan. (i) The Company shall obtain the agreement of Michael Hagerman, Norman Kretschmar and Riverside National Bank ("RNB") to modify and amend the loan (the "Riverside Loan") from RNB to the Company and Riverside Brewing Company, Inc. ("RBC") which is evidenced by that certain promissory note dated May 10, 1996 and is identified as Loan Number 121399771 such that concurrently with the Closing, the Riverside Loan will be evidenced by two Promissory - 12 - 18 notes, one in the principal amount of $220,940.67, the makers of which shall be Michael Hagerman and Norman Kretschmar ("Loan I") and the other in the principal amount of the principal balance of the Riverside Loan on the date of Closing less the principal amount of Loan I, the makers of which shall be the Company and RBC ("Loan II"). To induce Michael Hagerman and Norman Kretschmar to assume Loan I, Buyer shall issue to Michael Hagerman and Norman Kretschmar, pro rata, that number of shares of the Buyer's Common Stock equal to the principal balance of Loan I divided by 8, said shares to be delivered at the Closing. In addition, if, on January 1, 1999, the per share "Fair Market Value" (as hereinafter defined) of the Buyer's Common Stock is equal to or less than $6.00, then the Buyer agrees to issue to Michael Hagerman and Norman Kretschmar an additional 9,227 shares no later than January 10, 1999. (ii) The Company shall obtain the agreement of RNB to release the Company and each of its Subsidiaries from all of their respective obligations under and pursuant to the Riverside Loan and to terminate any and all financing statements that it filed against the assets of the Company and any of its Subsidiaries effective as of the Closing, provided, however, that RNB may take a security interest for Loan II in the tangible fixed assets of the Company and RBC as such assets exist on the Closing Date but not in the proceeds of such tangible fixed assets or in any after acquired assets or properties. (iii) "Fair Market Value" means the average of the daily closing prices for fifteen (15) consecutive trading days commencing immediately before the date of such computation. The closing price for each day shall be the last reported sales price regular way or in case no such reported sale takes place on such day, the average of the closing bid and asked prices regular way for such day, in either case on the principal national securities exchange on which the shares are listed or admitted to trading, of it they are not listed or admitted to trading on any national securities exchange, but are traded in the over-the-counter market, the closing sale price of the Common Stock or, in case no sale is publicly reported, the average of the representative closing bid and asked quotations for the Common Stock on the National Association of Securities Dealers Automated Quotation ("NASDAQ") system or any comparable system, or if the Common Stock is not listed on the NASDAQ system or any comparable system, the closing price of the Common Stock or, in case no sale is publicly reported, the average of the closing bid and asked prices as furnished by two members of the National Association of Securities Dealers selected from time to time by the Company for that purpose, or if there are no closing bid and asked prices available, "Fair Market Value" shall be determined by the Board of Directors of the Buyer in good faith. - 13 - 19 5.10 Updating of Schedules. The Company shall notify the Buyer of any changes, additions or events which may cause any change in or addition to any of the Schedules attached hereto or to any of the documents delivered to the Buyer pursuant to the terms of this Agreement promptly after the occurrence of the same and again at the Closing by delivery of appropriate updates to all Schedules and documents previously delivered. No such notification or delivery of updates made shall be deemed to cure any breach of any representation and warranty made in this Agreement, nor shall any such notification or delivery of updates be considered to constitute or give rise to a waiver by the Buyer of any condition set forth in this Agreement. 5.11 Financial Statements of Subsidiary. Each of the Company and Buyer covenant and agree to provide each Shareholder Representative with the monthly financial statements that are produced by the Subsidiary for the Buyer's management. ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF THE BUYER Unless, at the Closing, each of the following conditions is either satisfied or waived by the Buyer in writing, the Buyer shall not be obligated to purchase the Shares and shall not otherwise be obligated to consummate or effect the transactions contemplated by this Agreement. The Buyer shall have the right to waive in writing any or all of the foregoing conditions precedent to the obligations of the Buyer; provided, however, that no waiver by the Buyer of any conditions precedent to the obligations of the Buyer shall constitute a waiver by the Buyer of any other condition precedent. 6.1 Accuracy of Warranties; Performance of Covenants. The representations and warranties of each of the Shareholders and the Company contained or incorporated herein shall be true, accurate and correct on the date hereof and on the Closing Date, and each of the Shareholders and the Company shall have performed each and every obligation and complied with each and every agreement and covenant required by this Agreement to be performed or complied with on or prior to the date hereof and the Closing Date, respectively. Each of the documents required to be delivered by each of the Shareholders and the Company to the Buyer hereunder shall be in form and substance reasonably satisfactory to the Buyer. - 14 - 20 6.2 Regulatory Consents, Authorizations, etc. All consents, authorizations, orders and approvals of, and filings and registrations with, any governmental commission, board or other regulatory body which are required in connection with the execution and delivery of this Agreement and the consummation by each party hereto of the transactions contemplated on its part hereby, shall have been obtained or made, other than consents, authorizations, orders, approvals, filings and registrations as to which the failure to obtain or make will not, after the Closing, (i) materially and adversely affect the assets, properties, operations, prospects, or the condition, financial or otherwise, or the results of operations of the Business, (ii) limit the right of the Buyer to own each of the Assets or conduct any material aspect of the Business, or (iii) subject the Buyer, any of its Subsidiaries or affiliates or any of its or their respective directors or officers to liability on the ground that it or they have breached any law or regulation or have otherwise acted improperly in relation to the transactions contemplated by this Agreement. 6.3 No Pending Action. No (i) claim, investigation, action, suit, proceeding or litigation, either administrative or judicial, at law or in equity, by any governmental or regulatory commission, agency or other body or authority or by any other person, firm, corporation or other entity shall have been instituted, threatened or pending on the Closing Date (a) which challenges or seeks to prohibit, enjoin, restrict or delay the consummation of this Agreement or any of the transactions contemplated by this Agreement, or any of the conditions to the consummation of the transactions contemplated by this Agreement, (b) which claims damages against the Buyer or any of the Shareholders, the Company or any Subsidiary as a result of the consummation of the transactions contemplated hereby or otherwise claims that this Agreement or the consummation thereof is improper, or (c) which in the reasonable opinion of the Buyer, could materially or adversely affect the right of the Buyer to own the Assets or to conduct any aspect of the Business after the Closing, or the ability of each of the Shareholders and the Company to consummate the transactions contemplated hereby, and (ii) injunction or restraining order shall be in effect prohibiting the transactions contemplated by this Agreement. 6.4 No Material Adverse Change. There shall have been no material and adverse change in the Assets, condition, financial or otherwise, operations or prospects of the Business since April 30, 1996. There shall be no conditions existing or threatened with respect to the Assets, condition, financial or otherwise, operations or prospects of the Business that might be expected to have a material and adverse effect on any of them. - 15 - 21 6.5 No Adverse Laws. There shall not have been enacted or promulgated by any federal, state or local governmental agency, body or entity, any statute, ordinance or regulation which has a material and adverse affect upon the Assets, condition, financial or otherwise, operations or prospects of the Business. 6.6 Force Majeure. All or any material part of the Assets of the Business shall not have been adversely affected in any way by any act of God, fire, flood, war, legislation (proposed or enacted) or other event or occurrence, whether or not covered by insurance. 6.7 Third Party Consents. All consents of third parties, including, without limitation, lenders and lessors of the Company and governmental authorities, which are required for the consummation of the transactions contemplated hereby shall have been obtained in writing on terms and conditions and in form and substance satisfactory to the Buyer in its sole and absolute discretion, including, without limitation, estoppel certificates. 6.8 Authority. The Buyer shall have received from the Company a copy of the resolutions of its Board of Directors and of the Shareholders authorizing the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. Said resolutions shall be certified by a duly authorized officer of the Company as being true and correct and in full force and effect as of the Closing Date. The Buyer shall also have received a certificate of incumbency executed by the Secretary of the Company certifying the names, titles and signatures of the officers authorized to execute and deliver this Agreement and the other documents contemplated hereby to be executed and delivered by the Company, and further certifying that the Articles of Incorporation and Bylaws of the Company delivered to the Buyer at the Closing have been validly adopted, have not been amended or modified and are in full force and effect. 6.9 Further Actions. All proceedings to be taken in connection with the consummation of the transactions contemplated by this Agreement, and all certificates, documents and instruments incidental thereto, shall be reasonably satisfactory in form and substance to the Buyer, and the Buyer shall have received copies of such documents and instruments as the Buyer and its counsel may reasonably request in connection with such transactions. - 16 - 22 6.10 Certificates. Prior to or at the Closing, the Buyer shall have received from each of the Shareholders and the Company a certificate dated the Closing Date and signed by the President and Secretary of the Company and by each of the Shareholders certifying that the conditions set forth in Section 6.1, 6.2, 6.3, 6.4, 6.5, 6.6 and 6.7 hereof have been satisfied. Prior to or at the Closing, the Buyer shall have also received from the Company or the Shareholders, as appropriate, (a) a certificate from the Secretary of State of the State of California to the effect that the Company is in good standing or subsisting in such jurisdiction and listing all charter documents of the Company on file, (b) a certificate from the Secretary of State or other appropriate official in each state in which the Company is qualified or licensed to do business as a foreign corporation to the effect that the Company is in good standing in such state, (c) a certificate as to the tax status of the Company from the appropriate official in the State of California and each state in which the Company is qualified or licensed to do business as a foreign corporation and (d) such additional supporting documentation and other information with respect to the transactions contemplated hereby as the Buyer or its counsel may reasonably request. 6.11 Concurrent Agreements. Each of the Shareholders and the Company shall have delivered to the Buyer executed originals of each of the Concurrent Agreements to which they are parties. 6.12 [Intentionally Omitted] 6.13 Legal Opinion. The Buyer shall have received the legal opinion, dated the Closing Date, of counsel to the Shareholders and the Company in the form acceptable to Buyer's Shareholders' and Company's respective legal counsel attached hereto as Exhibit V. 6.14 Initial Public Offering. The registration statement relating to the Buyer's initial public offering shall have been declared effective by the Securities and Exchange Commission (the "SEC"), the closing contemplated by the prospectus (the "Prospectus") which forms a part of such registration statement shall have occurred and the Buyer shall have received an aggregate of $6,000,000 as shown in the column entitled Price to Public-Total on the cover page of the final Prospectus and in addition the Price per Share shall not be less than $8.00, unless such initial public offering is priced on a unit basis (i.e., including warrants), in which case the Price per Share shall be not less than $7.90. - 17 - 23 6.15 Absence of Liens. At or prior to the Closing Date, the Buyer shall have obtained a Uniform Commercial Code search report dated as of a date not more than five days prior to the Closing Date issued by the Secretary of State of the State of California indicating that there are no filings under the Uniform Commercial Code on file with such Secretary of State which name the Company as debtor or otherwise indicting any lien on the Assets, except for liens otherwise disclosed in the Schedules hereto and which the Buyer has agreed to assume. 6.16 Equipment Leases and Riverside National Bank Debt. The agreements contemplated by Section 5.7 and 5.9 shall have been obtained and shall be in full force and effect. ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF EACH OF THE SHAREHOLDERS AND THE COMPANY Unless, at the Closing, each of the following conditions is either satisfied, or waived by each of the Shareholders and the Company in writing, the Shareholders shall not be obligated to sell the Shares and shall not be otherwise obligated to consummate or effect the transactions contemplated by this Agreement. Each of the Shareholders and the Company shall have the right to waive in writing any or all of the foregoing conditions precedent to the obligations of each of the Shareholders and the Company, respectively; provided, however, that no waiver by any of the Shareholders or the Company of any conditions precedent to the obligations of said Shareholders or the Company shall constitute waiver by said Shareholder or the Company of any other condition precedent. 7.1 Accuracy of Warranties; Performance of Covenants. The representations and warranties of the Buyer contained or incorporated herein shall be true, accurate and correct on the date hereof and on the Closing Date, and the Buyer shall have performed each and every obligation and complied with each and every covenant required by this Agreement to be performed or complied with on its part on or prior to the date hereof and the Closing Date, respectively. Each of the documents required to be delivered by the Buyer to each of the Shareholders and the Company hereunder shall be in form and substance reasonably satisfactory to each of the Shareholders and the Company. - 18 - 24 7.2 Regulatory Consents, Authorizations, etc.. All consents, authorizations, orders and approvals of, and filings and registrations with, any governmental commission, board or other regulatory body which are required in connection with the execution and delivery of this Agreement and the consummation by each party hereto of the transactions contemplated on its part hereby, shall have been obtained or made, other than consents, authorizations, orders, approvals, filings and registrations as to which the failure to obtain or make will not, after the Closing, materially and adversely affect the right of the Shareholders to receive the Purchase Price. 7.3 No Pending Action. No (i) claim, investigation, action, suit, proceeding or litigation, either administrative or judicial, at law or in equity, by any governmental or regulatory commission, agency or other body or authority or by any other person, firm corporation or other entity shall have been instituted, threatened or pending on the Closing Date (a) which challenges or seeks to prohibit, enjoin, restrict or delay the consummation of this Agreement or any of the transactions contemplated by this Agreement, or any of the conditions to the consummation of the transactions contemplated by this Agreement or (b) which claims damages against the Buyer or any of the Shareholders or the Company as a result of the consummation of the transactions contemplated hereby or otherwise claims that this Agreement or the consummation thereof is improper, and (ii) injunction or restraining order shall be in effect prohibiting the transactions contemplated by this Agreement. 7.4 No Material Adverse Change. There shall have been no material and adverse change in the assets, condition, financial or otherwise, operations or prospects of the business of Buyer since April 30, 1996. There shall be no conditions existing or threatened with respect to the assets, condition, financial or otherwise, operations or prospects of the business of Buyer that might be expected to have a material and adverse effect on any of them. 7.5 No Adverse Laws. There shall not have been enacted or promulgated by any federal, state or local governmental agency, body or entity, any statute, ordinance or regulation which has a material and adverse affect upon the assets, condition, financial or otherwise, operations or prospects of the Buyer. - 19 - 25 7.6 Force Majeure. All or any material party of the assets of Buyer shall not have been adversely affected in any way by any act of God, fire, flood, war, legislation (proposed or enacted) or other event or occurrence, whether or not covered by insurance. 7.7 Third party Consents. All consents of third parties, including, without limitation, governmental authorities, which are required for the consummation of the transactions contemplated hereby shall have been obtained in writing on terms and conditions and in form and substance reasonably satisfactory to the Shareholder Representative. 7.8 Authority. The Shareholder Representative shall have received from the Buyer a copy of the resolutions of its Board of Directors authorizing the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby. Said resolutions shall be certified by a duly authorized officer of the Buyer as being true and correct and in full force and effect as of the Closing Date. The Shareholder Representative shall also have received a certificate of incumbency executed by the Secretary of the Buyer certifying the names, titles and signatures of the officers authorized to execute and deliver this Agreement and the other documents contemplated hereby to be executed and delivered by the Company, and further certifying that the Articles of Incorporation and Bylaws of the Buyer delivered to the Shareholder Representative at the Closing have been validly adopted, have not been amended or modified and are in full force and effect. 7.9 Further Actions. All proceedings to be taken in connection with the consummation of the transactions contemplated by this Agreement, and all certificates, documents and instruments incidental thereto, shall be reasonably satisfactory in form and substance to the Shareholder Representative, and the Shareholder Representative shall have received copies of such documents and instruments as the Shareholders Representative and counsel for the Company may reasonably request in connection with such transactions. 7.10 Certificate. Prior to the Closing, each of the Shareholders and the Company shall have received from the Buyer a certificate dated the Closing Date and signed by the President and Secretary of the Buyer certifying that the conditions set forth in Sections 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, 7.7 and 7.13 hereof have been satisfied. - 20 - 26 7.11 Legal Opinion. The Company and the Shareholders shall have received the legal opinion, dated the Closing Date, of counsel to the Buyer in the form attached as Exhibit VI. 7.12 Concurrent Agreements. The Buyer shall have delivered to each of the Shareholders executed originals of each of the Concurrent Agreements to which he or she is a party. 7.13 Initial Public Offering. The registration statement relating to the Buyer's initial public offering shall have been declared effective by the SEC, the closing contemplated by the Prospectus shall have occurred and the Buyer shall have received an aggregate of $6,000,000 as shown in the column entitled Price to Public-Total on the cover page of the Prospectus and in addition the Price per Share shall not be less than $8.00, unless such initial public offering is priced on a unit basis (i.e., including warrants), in which case the Price per Share shall not be less than $7.90. - 21 - 27 ARTICLE VIII EMPLOYEES Except pursuant to the terms and conditions of Employment Agreements which the Buyer intends to present to certain key employees of the Company, the Buyer shall not be obligated in any way to offer employment to any employee of the Company or any Subsidiary after the Closing, and the Buyer will not be responsible or liable in connection with any employment arrangements (whether written or oral) with employees of the Company or any Subsidiary, or for any salaries, severance pay, vacation accruals, health insurance benefits and other benefits owed or payable to any employees of the Company or any Subsidiary; provided, however, that the Buyer shall be responsible for any salaries, severance pay, vacation accruals, health insurance benefits or other benefits owed or payable to employees of the Company or any Subsidiary employed by the Buyer, the Company or any Subsidiary after the Closing Date. - 22 - 28 ARTICLE IX SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS; INDEMNIFICATION 9.1 Survival. Each of the representations, warranties, covenants and agreements of the Buyer, each of the Shareholders and the Company contained in this Agreement (including those made in the Exhibits and Schedules hereto and certificates and other documents delivered pursuant to the terms hereof) shall survive the Closing and shall be fully effective and enforceable for a period of two years following the Closing provided, however, that any representation and warranty relating to Taxes shall survive until any applicable statute of limitations has run; and provided, further, however, that any representation and warranty relating to title to the shares and transfer of the Shares to the Buyer shall survive in perpetuity) , notwithstanding any investigation or examination by, or on behalf of, any party hereto, any notice of a breach or of a failure to perform, not waived in writing, and the consummation of the transactions contemplated hereby with knowledge of such breach or failure. 9.2A Indemnification by Each of the Shareholders as to Title to, and Transferability of, the Shares. Notwithstanding anything herein to the contrary, each of the Shareholders, severally and not jointly, hereby agrees to indemnify, defend and hold harmless the Buyer and every subsidiary and affiliate of Buyer, and every officer, director, shareholder, employee and agent of the Buyer and every such subsidiary and affiliate, and the successors and assigns of each of them, from any and all claims, liabilities, losses, damages (including without limitation incidental, consequential and punitive damages), costs and expenses, including court costs, reasonable attorneys' fees, reasonable accountant's fees investigative fees, expert witness fees and the costs associated therewith, arising out of or relating to the failure of any Shareholder to transfer and deliver to the Buyer good and marketable title to such Shareholder's Shares owned by such Shareholder immediately prior to Closing, fee and clear of any and all Adverse Interests. 9.2B Indemnification by Each of the Management Shareholders. Each of the Management Shareholders (jointly and severally as to each other but only up to their respective percentages of liability as specified on Schedule 1), hereby agrees to indemnify, defend and hold harmless the Buyer and every subsidiary and affiliate of Buyer, and every officer, director, shareholder employee and agent of the Buyer and every such subsidiary and affiliate, and the successors and assigns of each of them, from any and all claims, liabilities, losses, damages (including without limitation incidental, consequential and punitive damages), costs and - 23 - 29 expenses, including court costs, reasonable attorneys' fees, reasonable accountant's fees, investigative fees, expert witness fees and the costs associated therewith, arising out of or relating to an Event of Breach, as defined in Section 9.4 hereof, of any Shareholder or the Company except with respect to any indemnification obligation already undertaken pursuant to Section 9.2A. 9.3 Indemnification by the Buyer. The Buyer hereby agrees to indemnify, defend and hold harmless each of the Shareholders and every affiliate thereof, and every agent of each of the Shareholders and every such affiliate, and the successors and assigns of each of them, from any and all claims, liabilities, losses, damages (including without limitation incidental, consequential and punitive damages), costs and expenses, including court costs and reasonable attorneys' fees, investigative fees, expert witness fees and the costs associated therewith, arising out of or relating to an Event of Breach, as defined in Section 9.4 hereof, of Buyer. 9.4 Event of Breach. As used herein, an "Event of Breach" shall mean, as to a party, any one or more of the following: (i) any untruth, inaccuracy or misrepresentation or breach of any of the representations, warranties, covenants or agreements made by said party in this Agreement; (ii) any failure of said party to perform or observe any term, provision, covenant, obligation, agreement or condition on the part of said party to be performed or observed pursuant to the terms of this Agreement; and (iii) any misrepresentation of said party in, or omission from, any statement, certificate, Schedule, Exhibit or other document prepared or furnished by said party pursuant to the terms of this Agreement. In addition, "Event of Breach" shall also mean, as to any of the Shareholders and/or the Company, claims or liabilities of any kind or nature which arise out of, result from or are related to the operations, ownership, conduct, activities or failure to act of any of the Management Shareholders, the Company, any Subsidiary or their respective affiliates prior to or on the Closing Date and irrespective of the date that any claim, suit or other cause of action related to any of the foregoing is filed or otherwise instituted against the Company, the Buyer or any of its subsidiaries or affiliates including, without limitation, claims or liabilities related to actual, potential or inchoate security interests, liens, claims, obligations or encumbrances involving the Business (e.g., any claim or liability relating to, arising out of, or based upon negligence, strict liability or any express or implied representation, warranty, agreement or guaranty made by or on behalf of the Company or any Subsidiary, or alleged to have been made by or on behalf of the Company or any Subsidiary or which is imposed or asserted to be imposed on the Company or any Subsidiary - 24 - 30 by operation of law or otherwise, in connection with any product designed, used, rented, sold, manufactured, shipped or installed by or on behalf of the Company or any Subsidiary, or for any service performed by or on behalf of the Company or any Subsidiary, in any case prior to or on the Closing Date), and further, including, without limitation, claims, liabilities or liens which may result from (i) any commencement, termination or other activity with respect to any employee benefit plan and (ii) any unpaid federal, foreign, state or local tax liabilities of the Company or any Subsidiary for all periods (or portions thereof) ended on or before the Closing Date, together with any interest or penalties attributable to any such liabilities. 9.5 Notice and Demand, etc. Each indemnified party hereunder agrees that upon its obtaining actual knowledge of facts indicating that there may be a basis for a colorable claim for indemnity under the provisions hereof, including, but not limited to, receipt by it of notice of any demand, assertion, claim, action or proceeding, judicial or otherwise, by any third party, it will give prompt written notice thereof to the indemnifying party(ies) (such written notice being hereinafter referred to as a "Notice of Claim"), which Notice of Claim shall contain a brief description of the nature of such claim and an estimate of the dollar amount at issue. The failure of an indemnified party to send a Notice of Claim shall not relieve the indemnifying party(ies) from any liability hereunder with respect to any claim except to the extent such failure results in insufficient time being available to permit the indemnifying party(ies) or its or their, as appropriate, counsel to effectively defend any such claim and to make a timely response thereto and thereby prejudices the indemnifying party's(ies') ability to defend such claim. The indemnifying party(ies) shall thereupon be obligated to defend, contest or otherwise protect the indemnified party against any such demand, assertion, claim, action or proceeding, at the indemnifying party's(ies') sole cost and expense. The indemnified party shall have the right, but not the obligation, to participate at its own expense in the defense thereof by counsel of the indemnified party's choice. In the event that the indemnifying party(ies) fails timely to defend, contest or otherwise protect against such demand, assertion, claim, action or proceeding, the indemnified party shall have the right to do so, including, without limitation, the right to make any compromise or settlement thereof, and the indemnified party shall have the right to recover the entire cost thereof from the indemnifying party(ies), including, without limitation, attorneys' fees, disbursements and amounts paid as a result of such demand, assertion, claim, action, or proceeding. - 25 - 31 9.6 Limitation on Indemnification Amount; Other Limitations. Each party hereto agrees that it shall not be permitted to pursue any claim for an Event or Events of Breach until the aggregate of all such claims for an Event or Events of Breach exceed $59,999.99 (the "Deductible"); provided however, that, notwithstanding the Deductible, Buyer shall be permitted to pursue any claim regardless of amount at issue under Section 9.2A of this Agreement. Any provision of this Agreement to the contrary notwithstanding, but subject to the provisions of Section 5.10 of this Agreement, no claim for indemnification shall lie with respect to any representation or warranty given herein where the claim is based upon any event, circumstance or condition which is disclosed in this Agreement or in the Schedules or Exhibits attached and incorporated herein on the date of this Agreement, it being expressly understood by the parties that any updating of Schedules that occurs after the date of this Agreement shall not relieve such party from any indemnification obligation if such updated schedule adds, deletes, amends or modifies information set forth on such Schedule as of the date of this Agreement; provided, however, that a claim for indemnification shall lie with respect to the items set forth on Schedule 9.6; and provided, further however, that a claim for an Event or Events of Breach relating to a matter set forth on Schedule 9.6 shall not be subject to the Deductible (i.e., the Buyer shall have the right to seek indemnification from the first dollar). - 26 - 32 ARTICLE X MISCELLANEOUS PROVISIONS 10.1 Brokers. The Buyer, on the one hand, and each of the Shareholders and the Company, on the other hand, represent and warrant to each other that, except as set forth on Schedule 10.1 attached hereto, no broker, investment banker or finder is entitled to any financial advisory fee, brokerage fee or finder's fee or other similar payment from it or him, as the case may be, with respect to (i) the execution of this Agreement or (ii) the transactions contemplated hereby. The Buyer, on the one hand, and each of the Shareholders and the Company, on the other hand, each agree to indemnify, defend and hold each other harmless against and in respect of all claims, losses, liabilities and expenses which may be asserted by any broker or other person who claims to be entitled to a broker's, finder's or similar fee or commission from it or him, as the case may be, in respect of the execution of this Agreement, or the consummation of the transactions contemplated hereby, by reason of his acting at the request of said person. 10.2 Entire Understanding. This Agreement (including the Schedules and Exhibits hereto, each of which is incorporated herein and made a part of this Agreement) and the other agreements and instruments, the execution and delivery of which are provided for herein, constitute the entire agreement and understanding of the parties hereto and terminates and supersedes any and all prior agreements, arrangements and understandings, both oral and written, among the parties hereto concerning the subject matter of this Agreement. 10.3 Waiver and Amendment. No waiver, amendment, modification or change of any provision of this Agreement shall be effective unless and until made in writing and signed by all of the parties hereto. No waiver, forbearance or failure by any party of its right to enforce any provision of this Agreement shall constitute a waiver or estoppel of such party's right to enforce any other provision of this Agreement or a continuing waiver by such party of compliance with any provision. 10.4 Headings. The headings herein are for convenience only, do not constitute a part of this Agreement, and shall not be deemed to limit or affect any of the provisions hereof. 10.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. - 27 - 33 10.6 Severability; Relationship of the Parties. The provisions of this Agreement are intended to be interpreted and construed in a manner so as to make such provisions valid, binding and enforceable. In the event that any provision of this Agreement is determined to be partially or wholly invalid, illegal or unenforceable, then such provision shall be deemed to be modified or restricted but only to the limited extent reasonably necessary to make such provision valid, binding and enforceable, or, if such provision cannot be modified or restricted in a reasonable manner so as to make such provision valid, binding and enforceable, then such provision shall be deemed to be excised from this Agreement and the validity, binding effect and enforceability of the remaining provisions of this Agreement shall not be affected or impaired in any manner. Nothing in this Agreement shall be interpreted or construed as creating, expressly or by implication, a partnership, joint venture, agency relationship or employment relationship (other than pursuant to any Employment Agreement) between or among the parties hereto or any of their respective officers, directors, agents, employees or representatives. 10.7 Notices. ALl notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been delivered three business days after having been mailed in a general or branch U.S. post office and enclosed in a registered or certified post-paid envelope; one business day after having been sent by overnight courier; when telecopied on a business day, or otherwise on the next succeeding business day thereafter; and, in each case, addressed to the respective parties at the addresses stated below or to such other changed addresses the parties may have fixed by notice as provided herein: If to any of the Shareholders: To the addresses set forth on Schedule __. If to the Company: Orange Empire Brewing Company 1229 Columbia Avenue, Suite C-4 Riverside, California 92507 Attention: Telephone: ( ) Telecopier: ( ) With a copy to: McPeters McAlearney Shimoff & Hatt 615 Brookside Avenue, Suite B Redlands, California 92373 Attention: John D. McAlearney, Jr. Telephone: (909) 792-8919 Telecopier: (909) 792-6234 - 28 - 34 If to the Buyer: Beverage Works, Inc. 9800 South Sepulveda Blvd., Suite 720 Los Angeles, California 90045 Attention: Mr. Lyle Maul Chief Financial Officer Telephone: (310) 642-5643 Telecopier: (310) 642-5645 With a copy to: Donahue & Mesereau 1900 Avenue of the Stars, Suite 2700 Los Angeles, California 90067 Attention: Asher M. Leids, Esq. Telephone: (310) 277-1441 Telecopier: (310) 277-2888 10.8 Successors and Assigns. This Agreement shall not be assigned or delegated by any party without the prior written consent of the other parties hereto, except that the Buyer may assign this Agreement and the rights under this Agreement after the Closing (i) to one or more subsidiaries or affiliates of the Buyer or, (ii) to one or more lending institutions for security purposes so long as Buyer remains primarily liable for its obligations hereunder. Subject to the preceding sentence, each term and provision of this Agreement shall be binding upon and enforceable against and inure to the benefit of any successors or assigns of the Buyer and any successors or assigns of any of the Shareholders or the Company. Nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties and their respective successors and assigns any rights or remedies under or by reason of this Agreement. 10.9 Attorney's Fees. If any action (whether it be for contract or tort, at law or in equity, or otherwise) is brought to enforce or interpret the provisions of this Agreement or any other agreement or instrument provided for herein, the prevailing party in such action shall be entitled to recover as an element of such party's costs of suit, and not as damages, a reasonable attorneys' fee to be fixed by the court. The prevailing party shall be the party who is entitled to recover its costs of suit as ordered by the court or by applicable law or court rules. A party not entitled to recover its costs shall not recover attorneys' fees. No sum for attorneys' fees shall be counted in calculating the amount of judgment for purposes of determining whether a party is entitled to recover its costs or attorneys' fees. 10.10 Governing Law and Jurisdiction. This Agreement shall be governed by and construed in accordance with the internal substantive laws of the State of California, without regard to principles of choice of law or conflict of laws. Each of the - 29 - 35 parties hereto recognizes and hereby irrevocably consents to the exclusive jurisdiction over it or him, as the case may be, of the Federal District Court for the Central District of California or the Superior Court of California, County of Los Angeles, in connection with any action or proceeding (whether it be for contract or tort, at law or in equity, or otherwise) arising out of or relating in any way to this Agreement, or any other document relating hereto or delivered in connection with the transactions contemplated hereby. 10.11 Construction. Whenever in this Agreement the context so requires, references to the masculine shall be deemed to include the feminine and the neuter, reference to the neuter shall be deemed to include the masculine and feminine, and references to the plural shall be deemed to include the singular and the singular to include the plural as appropriate and apparent in the context used. The disjunctive "or" and the conjunctive "and" shall mean "and/or" unless otherwise required in the context in which such words are used. Except as otherwise specified, the agreements, covenants, representations, warranties, undertakings, liabilities and obligations herein of the Company and each of the Shareholders are several and not joint. All dollar amounts set forth in this Agreement or any Exhibit or Schedule attached hereto, are expressed in terms of U.S. Dollars. All time periods specified herein are to Pacific time. 10.12 Cooperation. Each party hereto shall cooperate with the other parties and shall take such further action and shall execute and deliver such further documents as may be necessary or desirable in order to carry out the provisions and purposes of this Agreement. 10.13 Expenses. Whether or not the transactions contemplated by this Agreement and the related agreements are consummated, each party to this Agreement shall pay its or his, as the case may be, own costs and expenses in connection with the negotiation, preparation, execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, including, but not limited to, attorneys' fees, accountants' fees and other professional fees and expenses. 10.14 Representation by Counsel. Each party hereto represents and agrees with the others that such party has been represented by or had the opportunity to be represented by, independent counsel of such party's own choosing, and that such party has had the full right and opportunity to consult with such party's respective attorneys, that to the extent, if any, that such - 30 - 36 party desired, such party availed itself or himself of this right and opportunity, that such party, if an individual, or such party's authorized officers, have carefully read and fully understand this Agreement in its entirety and have had it fully explained to them by such party's respective counsel, that each is fully aware of the contents hereof and its meaning, intent and legal effect, and that such party, if an individual, or such party's authorized officer, is competent to execute this Agreement and has executed this Agreement free from coercion, duress or undue influence. Each party hereto further represents and agrees with the others that such party has consulted and is relying solely upon such party's independent counsel as to tax, legal and related matters concerning this Agreement and consummation of the transactions contemplated hereby. 10.15 No Interpretation Against Draftsman. This Agreement is the product of negotiations between the parties hereto, and any rules of construction relating to interpretation against the draftsman of an agreement shall not apply to this Agreement. 10.16 Termination by Mutual Consent. This Agreement may be terminated at any time on or prior to the Closing Date by the mutual written consent of the parties hereto. In consenting to the termination of this Agreement, the Shareholder Representative shall have authority to act on behalf of all Shareholders. 10.17 Termination for Breach. The Buyer may terminate its obligations under this Agreement at any time prior to the Closing Date if any of the Shareholders or the Company shall have breached any of their respective representations, warranties or other obligations under this Agreement in any material respect. The Shareholders and the Company may likewise terminate their obligations under this Agreement at any time prior to the Closing Date if the Buyer shall have breached any of its representations, warranties or other obligations under this Agreement in any material respect. Such termination may be effected by written notice from either the Buyer, on the one hand, or the Shareholders and the Company, on the other hand, as appropriate, citing the reasons for termination. - 31 - 37 subject the terminating party to any liability for any valid termination. For purposes of this provision only, "material" shall mean __________________. IN WITNESS WHEREOF, the Buyer, the Company and each of the Shareholders have executed and delivered this Agreement as of the day and year first above written. "MANAGEMENT SHAREHOLDERS" JOHN C. BARNICOAT, Trustee of the Barnicoat Living Trust u/d/t December 16, 1986 By: ---------------------------------- Name: Title: SECURITY TRUST COMPANY, a California corporation, as Trustee of IRA No. 100048-00, FBO John C. Barnicoat By: ---------------------------------- Name: Title: MICHAEL R. HAGERMAN, Trustee of the Michael and Linda Hagerman 1987 Trust u/d/t dated May 25, 1987 By: ---------------------------------- Name: Title: NORMAN KRETSCHMAR By: ---------------------------------- Norman Kretschmar - 32 - 38 MLPF&S CUST FBO NORMAN E. KRETSCHMAR IRA By: ---------------------------------- Name: Title: KENNETH McMILLIN By: ---------------------------------- Kenneth McMillin KENNETH McMILLIN and RHONDA McMILLIN By: ---------------------------------- Kenneth McMillin By: ---------------------------------- Rhonda McMillin BREWERY LEASING COMPANY (as to Section 5.7) By: ---------------------------------- Name: Michael Hagerman Title: "COMPANY" ORANGE EMPIRE BREWING COMPANY a California Corporation By: ---------------------------------- Name: Title: "BUYER" BEVERAGE WORKS, INC. a California corporation By: ---------------------------------- Name: Title: By: ---------------------------------- Name: Title: - 33 - 39 JOSEPH BENETKA By: ---------------------------------- Joseph Benetka JOHN M. HENNESSEY AND JOAN HENNESSEY By: ---------------------------------- John M. Hennessey By: ---------------------------------- Joan Hennessey DEAN IRVING By: ---------------------------------- Dean Irving THOR W. KONWIN, Trustee of the Thor W. Konwin 1992 Living Trust u/d/t January 13, 1992 By: ---------------------------------- Name: Title: RICHARD R. SAUNDERS By: ---------------------------------- Richard R. Saunders RICHARD R. SAUNDERS, Trustee of the Saunders Family Trust u/d/t dated 6/9/92 By: ---------------------------------- Name: Title: - 34 - 40 JIMMY SMITH By: ---------------------------------- Jimmy Smith STREIT & PETERS, CPA'S, INC., a California corporation, formerly Streit & Peters, CPA's, a partnership By: ---------------------------------- Name: Title: PAUL T. TUCKER By: ---------------------------------- Paul T. Tucker WILLIAM E. THOMAS By: ---------------------------------- William E. Thomas - 35 - 41 SPOUSAL CONSENT I, ____________________, acknowledge that I have read the Share Purchase Agreement (the "Agreement"), dated as of _______________, 1996 by and among Beverage Works, Inc., a California corporation (the "Buyer"), Orange Empire Brewing Company, a California corporation (the "Company") and the Shareholders (as such term is defined in the Agreement), and that I know and understand its contents. I am aware that by its provisions, my spouse agrees to sell all of his shares of common stock (the "Shares") of the Company, including any community or joint ownership interest I may have in it, on the occurrence of certain events. I hereby consent to the sale, approve of the provisions of the Agreement, and agree that I will take no action at any time to hinder operation of the Agreement, including, without limitation, all covenants of my spouse contained therein, on those Shares or my interest in them. Further, I agree that I shall not bequeath to anyone but my spouse any interest I may have in such Shares (or, to the extent that such Shares would be affected, in any entity which holds such Shares); that the residuary clause of my will shall not apply to such Shares (or, to the extent that such Shares would be affected, to any entity which holds such Shares); and that in the event of a dissolution of my marriage, I shall make no claim to the Shares of the Company (or, to the extent that such Shares would be affected, to any entity which holds such Shares) but shall look to my spouse for compensating equity apart from any interest in the Company. Dated as of ____________________, 1996 ________________________________ Spouse of: ________________________________ Name of person of whom signatory is spouse: - 36 - 42 AMENDMENT AGREEMENT This Amendment Agreement (the "Amendment Agreement") is made and entered into as of the 7th day of January, 1997 by and among Beverage Works, Inc., a California corporation (the "Buyer"), on the one hand, and Orange Empire Brewing Company, a California corporation (the "Company"), and John Barnicoat, Norman Kretschmar, Michael Hagerman and Kenneth McMillin (individually, a "Management Shareholder," and collectively, the "Management Shareholders") and those individuals whose names and addresses are set forth on Schedule 1.1 of the Share Purchase Agreement (the "Agreement"), dated as of September 10, 1996 by and among the Buyer, the Company and the Shareholders (as such term is defined in the Agreement), on the other hand. RECITALS WHEREAS, the parties desire to amend the Agreement to provide for the changes and modifications set forth herein. NOW, THEREFORE, in consideration of the respective mutual covenants, promises, representations and warranties contained herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: AGREEMENT 1. Purchase Price (i) Section 1.3(i) if the Agreement is hereby amended by deleting the words "Two Hundred Forty-Seven Thousand Four Hundred Seventy-Nine (247,479)" and replacing them with the following: "One Hundred Forty-One Thousand Sixty-Three (141,063)". (ii) Section 1.3(ii) of the Agreement is hereby amended by deleting the words "One Hundred Thirty Thousand (130,000)" and replacing them with the following: "One Hundred Fifty-Five Thousand (155,000)". (iii) Section 1.3(ii)(a)(i) of the Agreement is hereby amended by deleting the words "Twelve Thousand (12,000)" and replacing them with "Seven Thousand (7,000)" and by deleting the words "One Hundred Thousand (100,000)" and replacing them with "One Hundred Twenty Thousand (120,000)". (iv) Section 1.3(ii)(a)(ii) of the Agreement is hereby amended by deleting the words "Forty-Five Thousand (45,000)" and replacing them with "Forty Thousand (40,000)" and by -1- 43 deleting the words "Thirty Thousand (30,000)" and replacing them with "Thirty-Five Thousand (35,000)". (v) Section 1.3(ii)(a)(iii) of the Agreement is hereby amended by adding the following at the end of subsection (b) thereof "...provided, however, in the case where Riverside does not brew the beer and only fills the kegs, the total number of barrels produced shall be multiple by .333 to determine the number of barrels that will be credited hereunder,". 2. Post-Closing Adjustments. (i) Section 1.4(iv)(a) of the Agreement is hereby amended by deleting "$ x plus $350,000" and replacing it with "$(911,542) minus $500,000". (ii) Section 1.4(iv)(b) of the Agreement is hereby amended by deleting "$ x minus $350,000" and replacing it with "$(911,542) minus $500,000". (iii) Section 1.4(iv)(b) of the Agreement is hereby amended by adding the following between the words "provided, further, however that" and "each Management Shareholder": "(but only to the extent of their respective percentages of liability specified on Schedule 1)". 3. Closing. (i) Section 2.1 of the Agreement is hereby amended by deleting "March 30, 1997" wherever it appears and replacing it with "March 31, 1997". 4. Equipment Leases (i) Section 5.7 of the Agreement is hereby deleted in its entirety and replaced with the following: "5.7 Equipment Leases. Brewery Leasing Company ("BLC"), the holder of the brewery leases identified on Schedule 5.7, covenants and agrees to (i) reduce the effective interest rate of such leases to ten percent (10%), (ii) extend such leases by that number of months which is equal to the number of months payments on each such lease was in arrears for calendar year 1995 and (iii) provide that all such equipment may be purchased by the Buyer upon the expiration of such leases for an aggregate of $1.00, it being understood and agreed by Buyer that such provisions will not be effective until immediately after the Closing." 5. Additional Covenants and Agreements. The following Sections are hereby added to Article V of the Agreement. -2- 44 (i) "5.12 Registration Rights. The Company covenants and agrees to provide the Shareholders with the same registration rights as to the shares of Buyer's Common Stock they will own upon consummation of the transactions contemplated hereby as may be given to any of the executive officers of the Buyer in the future with respect to any of Buyer's shares of Common Stock owned by any such executive officers." (ii) "5.13 Rule 144. Buyer covenants and agrees to cause the restrictive legend on any of the shares of Buyer's Common Stock provided to the Shareholders hereunder to be removed after the period of time required to elapse under Rule 144(k) as promulgated under the Securities Act of 1933, as amended (the "Act"), as such Rule may be amended from time to time and provided further that all other provisions of such Rule have been satisfied." 6. Legal Opinion. (i) Section 6.13 of the Agreement is hereby amended by deleting the words "attached hereto as Exhibit V" and replacing them with "reasonably acceptable to the legal counsel for each of the Company, the Shareholders and the Buyer". 7. Indemnification. (i) Section 9.28 of the Agreement is hereby amended by deleting the words "Schedule 1.1" and replacing them with "Schedule 1". (ii) Section 9.3 of the Agreement is hereby amended by adding the following to the end thereof. "or arising out of or relating to any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (the "Registration Statement") filed by the Buyer with the Securities and Exchange Commission whereby the Buyer is registering its securities for sale or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided however, that the Buyer will not be liable to the extent that any such claim, liability, loss, damage, cost or expense arises out of or is based upon information furnished to the Buyer by or on behalf of the Shareholders that is used in the preparation of the Registration Statement." (iii) Section 9.6 of the Agreement is hereby amended by adding the following to the end thereof: -3- 45 "Notwithstanding anything in this Agreement to the contrary, the parties agree that the liability of the Shareholders for any matter relating to Bob Kirkland as set forth in Schedule 11, as amended, shall be limited to paying up to a maximum of fifty percent (50%) of the costs of any settlement reached with Mr. Kirkland, with a cap of $2,500.00, which amount shall not be subject to the Deductible." IN WITNESS WHEREOF, the Buyer, the Company and each of the Shareholders have executed and delivered this Agreement as of the day and year first above written. "MANAGEMENT SHAREHOLDERS" JOHN BARNICOAT By: ------------------------------ John Barnicoat MICHAEL HAGERMAN By: /s/ MICHAEL HAGERMAN ------------------------------ Michael Hagerman NORMAN KRETSCHMAR By: /s/ NORMAN KRETSCHMAR ------------------------------ Norman Kretschmar KENNETH McMILLIN By: ------------------------------ Kenneth McMillin -4- 46 "NON-MANAGEMENT SHAREHOLDERS" JOHN C. BARNICOAT, Trustee of the Barnicoat Living Trust u/d/t/ December 16, 1966 By: ------------------------------ Name: Title: SECURITY TRUST COMPANY, a California corporation, as Trustee of IRA No. 100046-00, FBO John C. Barnicoat By: ------------------------------ Name: Title: MICHAEL R. HAGERMAN, Trustee of the Michael and Linda Hagerman 1967 Trust u/d/t/ dated May 26, 1967 By: /s/ MICHAEL HAGERMAN ------------------------------ Name: Title: Trustee MLPF&S CUSTFBO NORMAN E. KRETSCHMAR IRA By: ------------------------------ Name: Title: -5- 47 KENNETH McMILLIN AND RHONDA McMILLIN By: -------------------------------- Kenneth McMillin By: -------------------------------- Rhonda McMillin BREWERY LEASING COMPANY (as to Section 5.7) By: /s/ MICHAEL HAGERMAN ------------------------------ Name: Michael Hagerman Title: President JOSEPH BENETKA By: ------------------------------ JOSEPH BENETKA JOHN M. HENNESSEY AND JOAN HENNESSEY By: -------------------------------- John M. Hennessey By: -------------------------------- Joan Hennessey DEAN IRVING By: -------------------------------- Dean Irving -6- 48 THOR W. KONWIN, Trustee of the Thor W. Konwin 1992 Living Trust U/D/T January 13, 1992 By: ------------------------------ Name: Title: RICHARD R. SAUNDERS By: ------------------------------ Richard R. Saunders RICHARD R. SAUNDERS, Trustee of the Saunders Family Trust u/d/t dated 6/9/92 By: ------------------------------ Name: Title: JIMMY SMITH By: ------------------------------- Jimmy Smith STREIT & PETERS, CPA'S, INC., a corporation, formerly Streit & Peters, CPA's, a partnership By: ------------------------------ Name: Title: PAUL T. TUCKER By: ------------------------------ Paul T. Tucker -7- 49 WILLIAM E. THOMAS By: --------------------------------- William E. Thomas "COMPANY" ORANGE EMPIRE BREWING COMPANY, a California Corporation By: /s/ NORMAN KRETSCHMAR ---------------------------------- Name: Norman Kretschmar Title: President "BUYER" BEVERAGE WORKS, INC. a California Corporation By: --------------------------------- Name: Title: By: ---------------------------------- Name: Title: -8- EX-4.2 8 WARRANT AGREEMENT 1 EXHIBIT 4.2 WARRANT AGREEMENT AGREEMENT, dated as of this ____ day of _______ 1997, by and between Beverage Works, Inc., a California corporation ("Company"), and American Stock Transfer & Trust Company, as Warrant Agent (the "Warrant Agent"). WITNESSETH: WHEREAS, in connection with a public offering of up to 1,500,000 shares of the Company's Common Stock, no par value ("Common Stock") and 1,500,000 Class A Redeemable Common Stock Purchase Warrants ("Class A Warrants" or "Warrants") and an additional 225,000 shares of Common Stock and 225,000 Class A Warrants under the underwriter's overallotment option pursuant to an underwriting agreement (the "Underwriting Agreement") dated ________________, 1996 between the Company and First London Securities Corporation ("FLSC"), the Company will issue up to 1,725,000 Class A Warrants; WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, transfer, exchange and redemption of the Warrants, the issuance of certificates representing the Warrants, the exercise of the Warrants, and the rights of the holders thereof; NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth and for the purpose of defining the terms and provisions of the Warrants and the certificates representing the Warrants and the respective rights and obligations thereunder of the Company, the holders of certificates representing the Warrants and the Warrant Agent, the parties hereto agree as follows: 1. Definitions. As used herein, the following terms shall have the following meanings, unless the context shall otherwise require: (a) "Common Stock" shall mean the common stock of the Company of which at the date hereof consists of 20,000,000 authorized shares, no par value, and shall also include any capital stock of any class of the Company thereafter authorized which shall not be limited to a fixed sum or percentage in respect to the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary liquidation, dissolution, or winding up of the Company; provided, however, that the shares issuable upon exercise of the Warrants shall include (i) only shares of such class designated in the Company's Articles of Incorporation as Common Stock on the date of the original issue of the Warrants, or (ii) in the case of any reclassification, change, consolidation, merger, sale, or conveyance of the character referred to in Section 9(c) hereof, the stock, securities, or property provided for in such section, or (iii) in the case of any reclassification or change in the outstanding shares of Common Stock issuable upon exercise of the Warrants as a result of a subdivision or combination or consisting of a change in par value, or from par value to no par value, or from no par value to par value, such 2 shares of Common Stock as so reclassified or changed. (b) "Corporate Office" shall mean the office of the Warrant Agent (or its successor) at which at any particular time its principal business shall be administered, which office is located at the date hereof at 40 Wall Street, New York, NY 10005. (c) "Exercise Date" shall mean, as to any Warrant, the first business day on which the Warrant Agent shall have received both (a) the Warrant Certificate representing such Warrant, with the exercise form thereon duly executed by the Registered Holder thereof or his attorney duly authorized in writing, and (b) payment in cash, or by official bank or certified check made payable to the Company, of an amount in lawful money of the United States of America equal to the applicable Purchase Price. (d) "Initial Warrant Exercise Date" shall mean ________, 1997. (e) "Purchase Price" shall mean the purchase price per share to be paid upon exercise of each Warrant in accordance with the terms hereof, which price shall be $________ per share (except as set forth in paragraph 2(e) hereof), subject to adjustment from time to time pursuant to the provisions of Section 9 hereof, and subject to the Company's right, in its sole discretion, to reduce the Purchase Price upon notice to all warrantholders. (f) "Redemption Price" shall mean the price at which the Company may, at its option, redeem the Warrants, in accordance with the terms hereof, which price shall be $0.05 per Warrant. (g) "Registered Holder" shall mean as to any Warrant and as of any particular date, the person in whose name the certificate representing the Warrant shall be registered on that date on the books maintained by the Warrant Agent pursuant to Section 6. (h) "Transfer Agent" shall mean American Stock Transfer & Trust Company, as the Company's transfer agent, or its authorized successor, as such. (i) "Warrant Expiration Date" shall mean 5:00 P.M. (New York time) on _____, 2002, or the Redemption Date as defined in Section 8, whichever is earlier; provided that if such date shall in the State of New York be a holiday or a day on which banks are authorized or required to close, then 5:00 P.M. (New York time) on the next following day which in the State of New York is not a holiday or a day on which banks are authorized or required to close. Upon notice to all warrantholders the Company shall have the right to extend the warrant expiration date. 2. Warrants and Issuance of Warrant Certificates. (a) A Warrant initially shall entitle the Registered Holder of the Warrant representing such Warrant to purchase one share of Common Stock upon the exercise thereof, -2- 3 in accordance with the terms hereof, subject to modification and adjustment as provided in Section 9. (b) Upon execution of this Agreement, Warrant Certificates representing the number of Warrants sold pursuant to the Underwriting Agreement shall be executed by the Company and delivered to the Warrant Agent. Upon written order of the Company signed by its President or Chairman or a Vice President and by its Secretary or an Assistant Secretary, the Warrant Certificates shall be countersigned, issued, and delivered by the Warrant Agent. (c) From time to time, up to the Warrant Expiration Date, the Transfer Agent shall countersign and deliver stock certificates in required whole number denominations representing up to an aggregate of 1,725,000 shares of Common Stock, subject to adjustment as described herein, upon the exercise of Warrants in accordance with this Agreement. (d) From time to time, up to the Warrant Expiration Date, the Warrant Agent shall countersign and deliver Warrant Certificates in required whole number denominations to the persons entitled thereto in connection with any transfer or exchange permitted under this Agreement; provided that no Warrant Certificates shall be issued except (i) those initially issued hereunder, (ii) those issued on or after the Initial Warrant Exercise Date, upon the exercise of fewer than all Warrants represented by any Warrant Certificate, to evidence any unexercised Warrants held by the exercising Registered Holder, (iii) those issued upon any transfer or exchange pursuant to Section 6; (iv) those issued in replacement of lost, stolen, destroyed, or mutilated Warrant Certificates pursuant to Section 7; (v) those issued pursuant to the Underwriter's Options; and (vi) those issued at the option of the Company, in such form as may be approved by its Board of Directors, to reflect any adjustment or change in the Purchase Price, the number of shares of Common Stock purchasable upon exercise of the Warrants or the Redemption Price therefor made pursuant to Section 9 hereof. 3. Form and Execution of Warrant Certificates. (a) The Class A Warrant Certificates shall be substantially in the form annexed hereto as Exhibit A (the provisions of which are hereby incorporated herein) and may have such letters, numbers, or other marks of identification or designation and such legends, summaries, or endorsements printed, lithographed, or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Warrants may be listed, or to conform to usage or to the requirements of Section 2(b). The Warrant Certificates shall be dated the date of issuance thereof (whether upon initial issuance, transfer, exchange, or in lieu of mutilated, lost, stolen, or destroyed Warrant Certificates) and issued in registered form. -3- 4 Warrant Certificates shall be numbered serially with the letter W. (b) Warrant Certificates shall be executed on behalf of the Company by its Chairman of the Board, President, or any Vice President and by its Secretary or an Assistant Secretary, by manual signatures or by facsimile signatures printed thereon, and shall have imprinted thereon a facsimile of the Company's seal. Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be an officer of the Company or to hold the particular office referenced in the Warrant Certificate before the date of issuance of the Warrant Certificates or before countersignature by the Warrant Agent and issue and delivery thereof, such Warrant Certificates may nevertheless be countersigned by the Warrant Agent, issued and delivered with the same force and effect as though the person who signed such Warrant Certificates had not ceased to be an officer of the Company or to hold such office. After countersignature by the Warrant Agent, Warrant Certificates shall be delivered by the Warrant Agent to the Registered Holder without further action by the Company, except as otherwise provided by Section 4 hereof. 4. Exercise. (a) Each Class A Warrant may be exercised by the Registered Holder thereof at any time on or after the Initial Warrant Exercise Date, but not after the Warrant Expiration Date, upon the terms and subject to the conditions set forth herein and in the applicable Warrant Certificate. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date and the person entitled to receive the securities deliverable upon such exercise shall be treated for all purposes as the holder of those securities upon the exercise of the Warrant as of the close of business on the Exercise Date. As soon as practicable on or after the Exercise Date the Warrant Agent shall deposit the proceeds in an interest bearing account received from the exercise of a Warrant and shall notify the Company in writing of the exercise of the Warrants. Promptly following, and in any event within five days after the date of such notice from the Warrant Agent, the Warrant Agent, on behalf of the Company, shall cause to be issued and delivered by the Transfer Agent, to the person or persons entitled to receive the same, a certificate or certificates for the securities deliverable upon such exercise (plus a certificate for any remaining unexercised Warrants of the Registered Holder), unless prior to the date of issuance of such certificates the Company shall instruct the Warrant Agent to refrain from causing such issuance of certificates pending clearance of checks received in payment of the Purchase Price pursuant to such Warrants. Upon the exercise of any Warrant and clearance of the funds received, the Warrant Agent shall promptly remit the payment received for the Warrant (the "Warrant Proceeds") to the Company or as the Company may direct in writing. (b) If, subsequent to_______ 1998, in respect of the exercise of any Warrant, (i) the market price of the Company's Common Stock is greater than the then Purchase Price of the Warrants, (ii) the exercise of the Warrant was solicited by a member of the National -4- 5 Association of Securities Dealers, Inc. ("NASD") and such member was designated in writing by the holder of such Warrant as having solicited such Warrant, (iii) the Warrant was not held in a discretionary account, (iv) disclosure of compensation arrangements was made both at the time of the original offering and at the time of exercise and (v) the solicitation of the exercise of the Warrant was not in violation of Rule 10b-6 (as such rule or any successor rule may be in effect as of such time of exercise) promulgated under the Securities Exchange Act of 1934, as amended, then the Warrant Agent, simultaneously with the distribution of proceeds to the Company received upon exercise of the Warrant(s) so exercised shall, on behalf of the Company, pay from the proceeds received upon exercise of the Warrant(s), a fee of 5% of the Purchase Price to FLSC. Within five days after exercise, the Warrant Agent shall send FLSC a copy of the reverse side of each Warrant exercised. FLSC shall reimburse the Warrant Agent, upon request, for its reasonable expenses relating to compliance with this Section. In addition, FLSC and the Company may at any time during business hours, examine the records of the Warrant Agent, including its ledger of original Warrant Certificates returned to the Warrant Agent upon exercise of Warrants. The provisions of this paragraph may not be modified, amended or deleted without the prior written consent of FLSC. 5. Reservation of Shares; Listing; Payment of Taxes, etc. (a) The Company covenants that it will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue upon exercise of Warrants, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants. The Company covenants that all shares of Common Stock which shall be issuable upon exercise of the Warrants shall, at the time of delivery, be duly and validly issued, fully paid, nonassessable, and free from all taxes, liens, and charges with respect to the issue thereof, (other than those which the Company shall promptly pay or discharge) and, that upon issuance, such shares shall be listed on each national securities exchange or eligible for inclusion in each automated quotation system, if any, on which the other shares of outstanding Common Stock of the Company are then listed or eligible for inclusion. (b) The Company covenants that if any securities to be reserved for the purpose of exercise of Warrants hereunder require registration with, or approval of, any governmental authority under any federal securities law before such securities may be validly issued or delivered upon such exercise, then the Company will in good faith and as expeditiously as reasonably possible, endeavor to secure such registration or approval and will use its reasonable efforts to obtain appropriate approvals or registrations under state "blue sky" securities laws, provided, however, that the Company shall not be required to qualify as a foreign corporation or a dealer in securities or to execute a general consent of service of process in any jurisdiction. With respect to any such securities, however, Warrants may not be exercised by, or shares of Common Stock issued to, any Registered Holder in any state in which such exercise would be unlawful. (c) The Company shall pay all documentary, stamp, or similar taxes and other -5- 6 governmental charges that may be imposed with respect to the issuance of Warrants, or the issuance, or delivery of any shares upon exercise of the Warrants; provided, however, that if the shares of Common Stock are to be delivered in a name other than the name of the Registered Holder of the Warrant Certificate representing any Warrant being exercised, then no such delivery shall be made unless the person requesting the same has paid to the Warrant Agent the amount of transfer taxes or charges incident thereto, if any. (d) The Warrant Agent is hereby irrevocably authorized to requisition the Company's Transfer Agent from time to time for certificates representing shares of Common Stock issuable upon exercise of the Warrants, and the Company will authorize the Transfer Agent to comply with all such proper requisitions. The Company will file with the Warrant Agent a statement setting forth the name and address of the Transfer Agent of the Company for shares of Common Stock issuable upon exercise of the Warrants. 6. Exchange and Registration of Transfer. (a) Warrant Certificates may be exchanged for other Warrant Certificates representing an equal aggregate number of Warrants of the same class or may be transferred in whole or in part. Warrant Certificates to be exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and upon satisfaction of the terms and provisions hereof, the Company shall execute and the Warrant Agent shall countersign, issue, and deliver in exchange therefor the Warrant Certificate or Certificates which the Registered Holder making the exchange shall be entitled to receive. (b) The Warrant Agent shall keep at its office books in which, subject to such reasonable regulations as it may prescribe, it shall register Warrant Certificates and the transfer thereof in accordance with its regular practice. Upon due presentment for registration of transfer of any Warrant Certificate at such office, the Company shall execute and the Warrant Agent shall issue and deliver to the transferee or transferees a new Warrant Certificate or Certificates representing an equal aggregate number of Warrants. (c) With respect to all Warrant Certificates presented for registration or transfer, or for exchange or exercise, the subscription form on the reverse thereof shall be duly endorsed, or be accompanied by a written instrument or instruments of transfer and subscription, in form satisfactory to the Company and the Warrant Agent, duly executed by the Registered Holder or his attorney-in-fact duly authorized in writing. (d) A service charge may be imposed on the Registered Holder by the Warrant Agent for any exchange or registration of transfer of Warrant Certificates. In addition, the Company may require payment by such holder of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. (e) All Warrant Certificates surrendered for exercise or for exchange in case of mutilated Warrant Certificates shall be promptly canceled by the Warrant Agent and thereafter -6- 7 retained by the Warrant Agent until termination of this Agreement or resignation as Warrant Agent, or disposed of or destroyed, at the direction of the Company. (f) Prior to due presentment for registration of transfer thereof, the Company and the Warrant Agent may deem and treat the Registered Holder of any Warrant Certificate as the absolute owner thereof and of each Warrant represented thereby (notwithstanding any notations of ownership or writing thereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. 7. Loss or Mutilation. Upon receipt by the Company and the Warrant Agent of evidence satisfactory to them of the ownership of and loss, theft, destruction, or mutilation of any Warrant Certificate and (in case of loss, theft, or destruction) of indemnity satisfactory to them, and (in the case of mutilation) upon surrender and cancellation thereof, the Company shall execute and the Warrant Agent shall (in the absence of notice to the Company and/or Warrant Agent that the Warrant Certificate has been acquired by a bona fide purchaser) countersign and deliver to the Registered Holder in lieu thereof a new Warrant Certificate of like tenor representing an equal aggregate number of Warrants. Applicants for a substitute Warrant Certificate shall comply with such other reasonable regulations and pay such other reasonable charges as the Warrant Agent may prescribe. 8. Redemption. (a) Subject to the provisions of paragraph 2(e) hereof, on not less than thirty (30) days notice given at any time after the Initial Warrant Exercise Date, the Warrants may be redeemed, at the option of the Company, at a redemption price of $0.05 per Warrant, provided that the Market Price (defined below) of the Common Stock receivable upon exercise of the Class A Warrant shall equal or exceed $_____ (the "Target Price"), subject to adjustment as set forth in Section 8(f) below. Market Price for the purpose of this Section 8 shall mean (i) the average closing bid price for any ten (10) consecutive trading days within a period of thirty (30) consecutive trading days ending within five (5) days prior to the date of the notice of redemption, which notice shall be mailed no later than five days thereafter, of the Common Stock as reported by the National Association of Securities Dealers, Inc. Automatic Quotation System or (ii) the average of the last reported sale price, for ten (10) consecutive business days, ending within five (5) days of the date of the notice of redemption, which notice shall be mailed no later than five days thereafter, on the primary exchange on which the Common Stock is traded, if the Common Stock is traded on a national securities exchange. (b) If the conditions set forth in Section 8(a) are met, and the Company desires to exercise its right to redeem the Class A Warrants, it shall mail a notice of redemption to each of the Registered Holders of the Warrants to be redeemed, first class, postage prepaid, not later than the thirtieth (30th) day before the date fixed for redemption, at their last address as shall appear on the records maintained pursuant to Section 6(b). Any notice mailed in the manner -7- 8 provided herein shall be conclusively presumed to have been duly given whether or not the Registered Holder receives such notice. (c) The notice of redemption shall specify (i) the redemption price, (ii) the date fixed for redemption, (iii) the place where the Warrant Certificates shall be delivered and the redemption price paid, and (iv) that the right to exercise the Warrant shall terminate at 5:00 P.M. (New York time) on the business day immediately preceding the date fixed for redemption. The date fixed for the redemption of the Class A Warrant shall be the Redemption Date. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a Registered Holder (a) to whom notice was not mailed or (b) whose notice was defective. An affidavit of the Warrant Agent or of the Secretary or an Assistant Secretary of the Company that notice of redemption has been mailed shall be prima facie evidence of the facts stated therein. (d) Any right to exercise a Warrant shall terminate at 5:00 P.M. (New York time) on the business day immediately preceding the Redemption Date. On and after the Redemption Date, Holders of the Warrants shall have no further rights except to receive, upon surrender of the Warrant prior to the Redemption Date, the Redemption Price. (e) From and after the Redemption Date specified for, the Company shall, at the place specified in the notice of redemption, upon presentation and surrender to the Company by or on behalf of the Registered Holder thereof of one or more Warrant Certificates evidencing Warrants to be redeemed, deliver or cause to be delivered to or upon the written order of such Holder a sum in cash equal to the redemption price of each such Warrant. From and after the Redemption Date and upon the deposit or setting aside by the Company of a sum sufficient to redeem all the Warrants called for redemption, such Warrants shall expire and become void and all rights hereunder and under the Warrant Certificates, except the right to receive payment of the redemption price, shall cease. (f) If the shares of the Company's Common Stock are issued as a dividend or stock split or are subdivided or combined into a greater or smaller number of shares of Common Stock, the Target Price shall be proportionally adjusted by the ratio which the total number of shares of Common Stock outstanding immediately prior to such event bears to the total number of shares of Common Stock to be outstanding immediately after such event. 9. Adjustment of Exercise Price and Number of Shares of Common Stock or Warrants. (a) In the event the Company shall, at any time or from time to time after the date hereof, issue any shares of Common Stock as a stock dividend to the holders of Common Stock or subdivide or combine the outstanding shares of Common Stock into a greater or lesser number of shares (any such issuance, subdivision, or combination being herein called a "Change of Shares"), then, and thereafter upon each further Change of Shares, the Purchase Price in effect immediately prior to such Change of Shares shall be changed to a price (including any -8- 9 applicable fraction of a cent) determined by multiplying the Purchase Price in effect immediately prior thereto by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the Change of Shares, and the denominator of which shall be the number of shares of Common Stock outstanding immediately after the Change of Shares. Such adjustment shall be made successively whenever such an issuance is made. Upon each adjustment of the Purchase Price pursuant to this Section 9, the total number of shares of Common Stock purchasable upon the exercise of each Warrant shall (subject to the provisions contained in Section 9(b) hereof) be such number of whole shares purchasable at the Purchase Price in effect immediately prior to such adjustment multiplied by a fraction, the numerator of which shall be the Purchase Price in effect immediately prior to such adjustment and the denominator of which shall be the Purchase Price in effect immediately after such adjustment. (b) The Company may elect, upon any adjustment of the Purchase Price hereunder, to adjust the number of Warrants outstanding, in lieu of the adjustment in the number of shares of Common Stock purchasable upon the exercise of each Warrant as hereinabove provided, so that each Warrant outstanding after such adjustment shall represent the right to purchase one share of Common Stock. Each Warrant held of record prior to such adjustment of the number of Warrants shall become that number of Warrants determined by multiplying the number one by a fraction, the numerator of which shall be the Purchase Price in effect immediately prior to such adjustment and the denominator of which shall be the Purchase Price in effect immediately after such adjustment. Upon each adjustment of the number of Warrants pursuant to this Section 9, the Company shall, as promptly as practicable, cause to be distributed to each Registered Holder of Warrant Certificates on the date of such adjustment Warrant Certificates evidencing, subject to Section 10 hereof, the number of additional Warrants to which such Holder shall be entitled as a result of such adjustment or, at the option of the Company, cause to be distributed to such Holder in substitution and replacement for the Warrant Certificates held by him prior to the date of adjustment (and upon surrender thereof, if required by the Company) new Warrant Certificates evidencing the number of Warrants to which such Holder shall be entitled after such adjustment. (c) After the date hereof, in case of any reclassification, capital reorganization, or other change of outstanding shares of Common Stock, or in case of any consolidation or merger of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification, capital reorganization, or other change of outstanding shares of Common Stock), (or in case of any sale or conveyance to another corporation of all or substantially all of the assets of the Company (other than a sale/leaseback, mortgage, or other financing transaction)), the Company shall cause effective provision to be made so that each holder of a Warrant then outstanding shall have the right thereafter, by exercising such Warrant, to purchase the kind and number of shares of stock or other securities or property (including cash) receivable upon such reclassification, capital reorganization, or other change, consolidation, merger, sale, or conveyance by a holder of the number of shares of Common Stock that might have been -9- 10 purchased upon exercise of such Warrant immediately prior to such reclassification, capital reorganization, or other change, consolidation, merger, sale, or conveyance. Any such provision shall include provision for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 9. The Company shall not effect any such consolidation, merger, or sale unless prior to or simultaneously with the consummation thereof, the successor (if other than the Company) resulting from such consolidation or merger or the corporation purchasing assets or other appropriate corporation or entity shall assume, by written instrument executed and delivered to the Warrant Agent, the obligation to deliver to the holder of each Warrant such shares of stock, securities, or assets as, in accordance with the foregoing provisions, such holders may be entitled to purchase and the other obligations under this Agreement. The foregoing provisions shall similarly apply to successive reclassification, capital reorganizations, and other changes of outstanding shares of Common Stock and to successive consolidations, mergers, sales, or conveyances. (d) Irrespective of any adjustments or changes in the Purchase Price or the number of shares of Common Stock purchasable upon exercise of the Warrants, the Warrant Certificates theretofore and thereafter issued shall, unless the Company shall exercise its option to issue new Warrant Certificates pursuant to Section 2(d) hereof, continue to express the Purchase Price per share, the number of shares purchasable thereunder, and the Redemption Price therefor as the Purchase Price per share, and the number of shares purchasable and the Redemption Price therefore were expressed in the Warrant Certificates when the same were originally issued. (e) After each adjustment of the Purchase Price pursuant to this Section 9, the Company will promptly prepare a certificate signed by the Chairman or President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary, of the Company setting forth: (i) the Purchase Price as so adjusted, (ii) the number of shares of Common Stock purchasable upon exercise of each Warrant after such adjustment, and, if the Company shall have elected to adjust the number of Warrants, the number of Warrants to which the registered holder of each Warrant shall then be entitled, and the adjustment in Redemption Price resulting therefrom, and (iii) a brief statement of the facts accounting for such adjustment. The Company will promptly file such certificate with the Warrant Agent and cause a brief summary thereof to be sent by ordinary first class mail to FLSC and to each registered holder of Warrants at his last address as it shall appear on the registry books of the Warrant Agent. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity thereof except as to the holder to whom the Company failed to mail such notice, or except as to the holder whose notice was defective and who is prejudiced thereby. The affidavit of an officer of the Warrant Agent or the Secretary or an Assistant Secretary of the Company that such notice has been mailed shall be prima facie evidence of the facts stated therein. (f) For purposes of Section 9(a) and 9(b) hereof, the following provisions (i) and (ii) shall also be applicable: (i) The number of shares of Common Stock outstanding at any given -10- 11 time shall include shares of Common Stock owned or held by or for the account of the Company and the sale or issuance of such treasury shares or the distribution of any such treasury shares shall not be considered a Change of Shares for purposes of said sections. (ii) No adjustment of the Purchase Price shall be made unless such adjustment would require an increase or decrease of at least $0.10 in such price; provided that any adjustments which by reason of this subsection (ii) are not required to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment(s) so carried forward, shall require an increase or decrease of at least $0.10 in the Purchase Price then in effect hereunder. (g) As used in this Section 9, the term "Common Stock" shall mean and include the Company's Common Stock authorized on the date of the original issue of the Warrants and shall also include any capital stock of any class of the Company thereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary liquidation, dissolution, or winding up of the Company; provided, however, that the shares issuable upon exercise of the Warrants shall include only shares of such class designated in the Company's Articles of Incorporation as Common Stock on the date of the original issue of the Warrants, or (i) in the case of any reclassification, change, consolidation, merger, sale, or conveyance of the character referred to in Section 9(c) hereof, the stock, securities, or property provided for in such section or, (ii) in the case of any reclassification or change in the outstanding shares of Common Stock issuable upon exercise of the Warrants as a result of a subdivision or combination or consisting of a change in par value, or from par value to no par value, or from no par value to par value, such shares of Common Stock as so reclassified or changed. (h) Any determination as to whether an adjustment in the Purchase Price in effect hereunder is required pursuant to Section 9, or as to the amount of any such adjustment, if required, shall be binding upon the holders of the Warrants and the Company if made in good faith by the Board of Directors of the Company. 10. Fractional Warrants and Fractional Shares. (a) If the number of shares of Common Stock purchasable upon the exercise of each Warrant is adjusted pursuant to Section 9 hereof, the Company nevertheless shall not be required to issue fractions of shares, upon exercise of the Warrants or otherwise, or to distribute certificates that evidence fractional shares. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of such fractional share, determined as follows: (i) If the Common Stock is listed on a National Securities Exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq -11- 12 System, the current value shall be the last reported sale price of the Common Stock on such exchange on the last business day prior to the date of exercise of this Warrant or if no such sale is made on such day, the average of the closing bid and asked prices for such day on such exchange; or (ii) If the Common Stock is not listed or admitted to unlisted trading privileges, the current value shall be the mean of the last reported bid and asked prices reported by the National Quotation Bureau, Inc. on the last business day prior to the date of the exercise of this Warrant; or (iii) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current value shall be an amount determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. 11. Warrant Holders Not Deemed Stockholders. No holder of Warrants shall, as such, be entitled to vote or to receive dividends or be deemed the holder of Common Stock that may at any time be issuable upon exercise of such Warrants for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the holder of Warrants, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue or reclassification of stock, change of par value or change of stock to no par value, consolidation, merger, or conveyance or otherwise), or to receive notice of meetings, or to receive dividends or subscription rights, until such Holder shall have exercised such Warrants and been issued shares of Common Stock in accordance with the provisions hereof. 12. Rights of Action. All rights of action with respect to this Agreement are vested in the respective Registered Holders of the Warrants, and any Registered Holder of a Warrant, without consent of the Warrant Agent or of the holder of any other Warrant, may, in his own behalf and for his own benefit, enforce against the Company his right to exercise his Warrants for the purchase of shares of Common Stock in the manner provided in the Warrant Certificate and this Agreement. 13. Agreement of Warrant Holders. Every holder of a Warrant, by his acceptance thereof, consents and agrees with the Company, the Warrant Agent and every other holder of a Warrant that: (a) The Warrants are transferable only on the registry books of the Warrant Agent by the Registered Holder thereof in person or by his attorney duly authorized in writing and only if the Warrant Certificates representing such Warrants are surrendered at the office of the Warrant Agent, duly endorsed or accompanied by a proper instrument of transfer satisfactory to the Warrant Agent and the Company in their sole discretion, together with payment of any applicable transfer taxes; and -12- 13 (b) The Company and the Warrant Agent may deem and treat the person in whose name the Warrant Certificate is registered as the holder and as the absolute, true, and lawful owner of the Warrants represented thereby for all purposes, and neither the Company nor the Warrant Agent shall be affected by any notice or knowledge to the contrary, except as otherwise expressly provided in Section 7 hereof. 14. Cancellation of Warrant Certificates. If the Company shall purchase or acquire any Warrant or Warrants, the Warrant Certificate or Warrant Certificates evidencing the same shall thereupon be delivered to the Warrant Agent and canceled by it and retired. The Warrant Agent shall also cause to be cancelled Common Stock following exercise of any or all of the Warrants represented thereby or delivered to it for transfer, split up, combination, or exchange. 15. Concerning the Warrant Agent. The Warrant Agent acts hereunder as agent and in a ministerial capacity for the Company, and its duties shall be determined solely by the provisions hereof. The Warrant Agent shall not, by issuing and delivering Warrant Certificates or by any other act hereunder be deemed to make any representations as to the validity, value, or authorization of the Warrant Certificates or the Warrants represented thereby or of any securities or other property delivered upon exercise of any Warrant or whether any stock issued upon exercise of any Warrant is fully paid and nonassessable. The Warrant Agent shall not at any time be under any duty or responsibility to any holder of Warrant Certificates to make or cause to be made any adjustment of the Purchase Price or the Redemption Price provided in this Agreement, or to determine whether any fact exists which may require any such adjustments, or with respect to the nature or extent of any such adjustment, when made, or with respect to the method employed in making the same. It shall not (i) be liable for any recital or statement of facts contained herein or for any action taken, suffered, or omitted by it in reliance on any Warrant Certificate or other document or instrument believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties, (ii) be responsible for any failure on the part of the Company to comply with any of its covenants and obligations contained in this Agreement or in any Warrant Certificate, or (iii) be liable for any act or omission in connection with this Agreement except for its own negligence or wilful misconduct. The Warrant Agent may at any time consult with counsel satisfactory to it (who may be counsel for the Company) and shall incur no liability or responsibility for any action taken, suffered or omitted by it in good faith in accordance with the opinion or advice of such counsel. Any notice, statement, instruction, request, direction, order, or demand of the Company shall be sufficiently evidenced by an instrument signed by the Chairman of the Board, President, any Vice President, its Secretary, or Assistant Secretary (unless other evidence in respect thereof is herein specifically prescribed). The Warrant Agent shall not be liable for any action taken, suffered or omitted by it in accordance with such notice, statement, instruction, request, direction, order, or demand believed by it to be genuine. -13- 14 The Company agrees to pay the Warrant Agent reasonable compensation for its services hereunder and to reimburse it for its reasonable expenses hereunder; it further agrees to indemnify the Warrant Agent and save it harmless against any and all losses, expenses, and liabilities, including judgments, costs, and counsel fees, for anything done or omitted by the Warrant Agent in the execution of its duties and powers hereunder except losses, expenses, and liabilities arising as a result of the Warrant Agent's negligence or wilful misconduct. The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder (except liabilities arising as a result of the Warrant Agent's own negligence or wilful misconduct), after giving 30 days' prior written notice to the Company. At least 15 days prior to the date such resignation is to become effective, the Warrant Agent shall cause a copy of such notice of resignation to be mailed to the Registered Holder of each Warrant Certificate at the Company's expense. Upon such resignation, or any inability of the Warrant Agent to act as such hereunder, the Company shall appoint a new warrant agent in writing. If the Company shall fail to make such appointment within a period of 15 days after it has been notified in writing of such resignation by the resigning Warrant Agent, then the Registered Holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a new warrant agent. Any new warrant agent, whether appointed by the Company or by such a court, shall be a bank or trust company having a capital and surplus, as shown by its last published report to its stockholders, of not less than $10,000,000 or a stock transfer company. After acceptance in writing of such appointment by the new warrant agent is received by the Company, such new warrant agent shall be vested with the same powers, rights, duties, and responsibilities as if it had been originally named herein as the Warrant Agent, without any further assurance, conveyance, act, or deed; but if for any reason it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act, or deed, the same shall be done at the expense of the Company and shall be legally and validly executed and delivered by the resigning Warrant Agent. Not later than the effective date of any such appointment the Company shall file notice thereof with the resigning warrant agent and shall forthwith cause a copy of such notice to be mailed to the Registered Holder of each Warrant Certificate. Any corporation into which the Warrant Agent or any new warrant agent may be converted or merged or any corporation resulting from any consolidation to which the Warrant Agent or any new warrant agent shall be a party or any corporation succeeding to the trust business of the Warrant Agent shall be a successor warrant agent under this Agreement without any further act, provided that such corporation is eligible for appointment as successor to the Warrant Agent under the provisions of the preceding paragraph. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed to the Company and to the Registered Holder of each Warrant Certificate. The Warrant Agent, its subsidiaries and affiliates, and any of its or their officers or directors, may buy and hold or sell Warrants or other securities of the Company and otherwise deal with the Company in the same manner and to the same extent and with like -14- 15 effects as though it were not Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. 16. Modification of Agreement. The Warrant Agent and the Company may by supplemental agreement make any changes or corrections in this Agreement (i) that they shall deem appropriate to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained; or (ii) that they may deem necessary or desirable and which shall not adversely affect the interests of the holders of Warrant Certificates; provided, however, that this Agreement shall not otherwise be modified, supplemented, or altered in any respect except with the consent in writing of the Registered Holders of Warrant Certificates representing not less than 50% of the Warrants then outstanding; and provided, further, that no change in the number or nature of the securities purchasable upon the exercise of any Warrant, or the Purchase Price therefor, or the acceleration of the Warrant Expiration Date, shall be made without the consent in writing of the Registered Holder of the Warrant Certificate representing such Warrant, other than such changes as are specifically prescribed by this Agreement as originally executed or are made in compliance with applicable law. In addition, the Company and FLSC may by supplemental agreement extend the Warrant Expiration Date without the consent of the Registered Holders. 17. Notices. All notices, requests, consents, and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first class registered or certified mail, postage prepaid as follows: if to the Registered Holder of a Warrant Certificate, at the address of such holder as shown on the registry books maintained by the Warrant Agent; if to the Company, 9800 S. Sepulveda Blvd., Suite 720, Los Angeles, CA 90045, Attention: President, with a copy sent to Hecht & Steckman, P.A., 60 East 42nd St., Suite 5101, New York, NY 10165, Attention: James G. Smith, Esq.; or at such other address as may have been furnished to the Warrant Agent in writing by the Company; and if to the Warrant Agent, at its corporate office. 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflict of laws. 19. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company and, the Warrant Agent and their respective successors and assigns, and the holders from time to time of Warrant Certificates. Nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy, or claim, in equity or at law, or to impose upon any other person any duty, liability, or obligation. 20. Termination. This Agreement shall terminate at the close of business on the Warrant Expiration Date of all the Warrants or such earlier date upon which all Warrants have been exercised, except that the Warrant Agent shall account to the Company for cash held by it and the provisions of Section 15 hereof shall survive such termination. -15- 16 21. Counterparts. This Agreement may be executed in several counterparts, which taken together shall constitute a single document. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. BEVERAGE WORKS, INC. By: ---------------------------- Its President AMERICAN STOCK TRANSFER & TRUST COMPANY By: ---------------------------- -------------------------- Its Authorized Officer -16- 17 EXHIBIT A Form of Face of Class A Warrant Certificate No. W __________ Class A Warrants Void after ______, ____ WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK BEVERAGE WORKS, INC. This certifies that For Value Received or registered assigns (the "Registered Holder") is the owner of the number of Class A Redeemable Common Stock Purchase Warrants ("Warrants") specified above. Each Warrant initially entitles the Registered Holder to purchase, subject to the terms and conditions set forth in this Certificate and the Warrant Agreement (as hereinafter defined), one fully paid and nonassessable share of Common Stock, no par value ("Common Stock"), of Beverage Works, Inc., a California corporation (the "Company"), at any time between the Initial Warrant Exercise Date (as herein defined) and the Expiration Date (as hereinafter defined), upon the presentation and surrender of this Warrant Certificate with the Subscription Form on the reverse hereof duly executed, at the corporate office of AMERICAN STOCK TRANSFER & TRUST COMPANY, as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of $_____ ("Purchase Price") in lawful money of the United States of America in cash or by official bank or certified check made payable to Beverage Works, Inc. This Warrant Certificate and each Warrant represented hereby are issued pursuant to and are subject in all respects to the terms and conditions set forth in the Warrant Agreement (the "Warrant Agreement") dated _________, 1996, by and between the Company and the Warrant Agent. In the event of certain contingencies provided for in the Warrant Agreement, the Purchase Price or the number of shares of Common Stock subject to purchase upon the exercise of each Warrant represented hereby are subject to modifications or adjustment. Each Warrant represented hereby is exercisable at the option of the Registered Holder, but no fractional shares of Common Stock will be issued. In the case of the exercise of less than all the Warrants represented hereby, the Company shall cancel this Warrant Certificate upon the surrender hereof and shall execute and deliver a new Warrant Certificate or Warrant Certificates of like tenor, which the Warrant Agent shall countersign, for the balance of such Warrants. The term "Initial Warrant Exercise Date" shall mean __________, 1997. The term "Expiration Date" shall mean 5:00 p.m. (New York time on ______,____, or such earlier date as the Warrants shall be redeemed. If such date shall in the State of New York be a holiday or a day on which the banks are authorized to close, then the Expiration Date shall -17- 18 mean 5:00 p.m. (New York time) the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. The Company shall not be obligated to deliver any securities pursuant to the exercise of this Warrant unless a registration statement under the Securities Act of 1933, as amended, with respect to such securities is effective. This Warrant shall not be exercisable by a Registered Holder in any state where such exercise would be unlawful. This Warrant Certificate is exchangeable, upon the surrender hereof by the Registered Holder at the corporate office of the Warrant Agent, for a new Warrant Certificate or Warrant Certificates of like tenor representing an equal aggregate number of Warrants, each of such new Warrant Certificates to represent such number of Warrants as shall be designated by such Registered Holder at the time of such surrender. Upon due presentment with any transfer fee in addition to any tax or other governmental charge imposed in connection therewith, for registration of transfer of this Warrant Certificate at such office, a new Warrant Certificate or Warrant Certificates representing an equal aggregate number of Warrants will be issued to the transferee in exchange therefor, subject to the limitations provided in the Warrant Agreement. Prior to the exercise of any Warrant represented hereby, the Registered Holder shall not be entitled to any rights of a stockholder of the Company, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided in the Warrant Agreement. This Warrant may be redeemed at the option of the Company, at a redemption price of $0.05 per Warrant at any time provided the Market Price (as defined in the Warrant Agreement) for the securities issuable upon exercise of such Warrant shall exceed $_____ per share. Notice of redemption shall be given not later than the thirtieth day before the date fixed for redemption, all as provided in the Warrant Agreement. On and after the date fixed for redemption, the Registered Holder shall have no rights with respect to this Warrant except to receive the $0.05 per Warrant upon surrender of this Certificate prior to the Redemption Date (as defined in the Warrant Agreement). Prior to due presentment for registration of transfer hereof, the Company and the Warrant Agent may deem and treat the Registered Holder as the absolute owner hereof and of each Warrant represented hereby (notwithstanding any notations of ownership or writing hereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. This Warrant Certificate is not valid unless countersigned by the Warrant Agent. -18- 19 IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, manually or in facsimile by two (2) of its officers thereunto duly authorized and a facsimile of its corporate seal to be imprinted hereon. BEVERAGE WORKS, INC. By: ------------------------ Its By: ------------------------ Its Date: ---------------------------- Seal Countersigned: American Stock Transfer & Trust Company as Warrant Agent By: ----------------------------- ---------------------------- Its Authorized Officer -19- 20 Form of Reverse of Class A Warrant Certificate SUBSCRIPTION FORM To Be Executed by the Registered Holder in Order to Exercise Warrants THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise _____ Warrants represented by this Warrant Certificate, and to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities shall be issued in the name of ____________________________________________. (please insert social security or other identifying number) and be delivered to ____________________________________________ ____________________________________________ ____________________________________________ ____________________________________________ (please print or type name and address) and if such number of Warrants shall not be all the Warrants evidenced by this Warrant Certificate, that a new Warrant Certificate for the balance of such Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below: ____________________________________________ ____________________________________________ ____________________________________________ (Address) _________________________________ (Date) _________________________________ (Taxpayer Identification Number) _________________________________ (Soliciting Broker) Signature Guaranteed -20- 21 ASSIGNMENT To Be Executed by the Registered Holder in Order to Assign Warrants FOR VALUE RECEIVED, hereby sells, assigns, and transfers unto ____________________________________________ (please insert social security or other identifying number) ____________________________________________ ____________________________________________ ____________________________________________ ____________________________________________ (please print or type name and address) of the Warrants represented by this Warrant Certificate, and hereby irrevocably constitutes and appoints _________________________________ Attorney to transfer this Warrant Certificate on the books of the Company, with full power of substitution in the premises. _________________________________ (Date) Signature Guaranteed THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION (AS DEFINED IN RULE 17AD-15 UNDER THE SECURITIES AND EXCHANGE ACT OF 1934). -21- EX-4.11 9 CLASS E WARRANT AGREEMENT 1 Exhibit 4.11 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("THE ACT") OR QUALIFIED OR REGISTERED UNDER ANY STATE SECURITIES OR BLUE SKY LAWS. NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND SUCH STATE LAWS UNLESS SUCH OFFER, SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION IS EXEMPT FROM REGISTRATION OR QUALIFICATION UNDER THE ACT AND SUCH STATE LAWS. BEVERAGE WORKS, INC. CLASS E WARRANT AGREEMENT RECITALS. This Class E Warrant Agreement ("Agreement") dated December 18, 1996 certifies that the registered owners ("Holders") of the Class E Warrants (herein referred to as the "Class E Warrants") to purchase shares of the common stock, no par value ("Shares"), of Beverage Works, Inc., a California corporation (herein referred to as the "Company") entitles the Holders to purchase from the Company, for a five (5) year period commencing on the date hereof, one fully-paid and nonassessable Share for each Class E Warrant at an exercise price equal to the lesser of (i) 105% of the offering price per share of the Company's common stock in the Company's anticipated initial public offering as stated in the Company's prospectus for such initial public offering, on the closing of such initial public offering or (ii) $8.25 (the "Exercise Price"), upon presentation and surrender of the Class E Warrant certificate at the principal corporate office of the Company, with the Form of Election to Purchase duly executed, and upon payment of the Exercise Price per Share. 1. REGISTRATION. The Class E Warrants shall be numbered and shall be registered in the Class E Warrant Register. The Company shall be entitled to treat the Holder of any Class E Warrant as the owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Class E Warrant on the part of any other person, and shall not be liable for any registration of transfer of Class E Warrants which are registered or to be registered in the name of a fiduciary or the nominee of a fiduciary unless made with actual knowledge that a fiduciary or nominee is committing a breach of trust in requesting such registration of transfer, or with such knowledge of such facts that its participation therein amounts to bad faith. 2. TRANSFER. The Class E Warrants shall be transferable only on the books of the Company maintained at the Company's principal office upon delivery thereof duly endorsed by a Holder or by its duly authorized attorney or representative, or accompanied by proper evidence of succession, assignment, or authority to transfer. In all cases of transfer by an attorney, the original letter of attorney, duly approved, or an official copy thereof, duly certified, shall be deposited and remain with the Company. In case of transfer by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their 2 authority shall be produced. Upon any registration of transfer, the Company shall countersign and deliver new Class E Warrants to the person entitled thereto. 3. FORM OF CLASS E WARRANTS. The text of the Class E Warrants and of the form of election to purchase Shares shall be substantially as set forth in Exhibit "A" attached hereto. The price of Shares and the number of Shares issuable upon exercise of Class E Warrants are subject to adjustment upon the occurrence of certain events, all as hereinafter provided. The Class E Warrants shall be executed on behalf of the Company by its President or one of its Vice Presidents, under its corporate seal reproduced thereon attested by its Secretary or an Assistant Secretary. The signature of any of these officers on the Class E Warrants may be manual or facsimile. Class E Warrants bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any one of them shall have ceased to hold such offices prior to the delivery of such Class E Warrants or did not hold such office on the date of this Agreement. Class E Warrants shall be dated as of the date of counter-signature thereof by the Company either upon initial issuance or upon division, exchange, substitution, or transfer. 4. EXCHANGE. Class E Warrant certificates may be exchanged for another certificate or certificates entitling the Holder thereof to purchase a like aggregate number of Shares as the certificate or certificates surrendered then entitle such Holder to purchase. Any Holder of a Class E Warrant desiring to exchange Class E Warrant certificates shall make such request in writing delivered to the Company, and shall surrender, properly endorsed, the certificate or certificates evidencing the Class E Warrant or Class E Warrants to be so exchanged. Thereupon, the Company shall countersign and deliver to the person entitled thereto a new Class E Warrant certificate or certificates, as the case may be, as so requested. 5. TERM OF CLASS E WARRANTS. Subject to the terms of this Agreement, each Holder shall have the right, at any time during the period commencing at 10:00 A.M., New York time, on the date of this Agreement until 3:00 P.M. New York time, on the date five (5) years from the date of this Agreement (the "Termination Date"), to purchase from the Company the number of fully paid and nonassessable Shares to which the Holder may at the time be entitled to purchase pursuant to such Class E Warrants, upon surrender, to the Company at the principal office of the Company of the certificate or certificates evidencing the Class E Warrants to be exercised, together with the form of election to purchase duly completed and signed, and upon payment to the Company of the Exercise Price, for the number of Shares in respect of which such Class E Warrants are then exercised. 6. PAYMENT UPON EXERCISE. Payment of the aggregate Exercise Price shall be made in cash or by certified or cashier's check. 3 Upon such surrender of Class E Warrants and payment of the Exercise Price as aforesaid, the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate or certificates for the number of full Shares so purchased upon the exercise of such Class E Warrants, together with cash, as provided in Section 15 hereof, in respect of any fractional Shares otherwise issuable upon such surrender. Such certificate or certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such Shares as of the date of the surrender of such Class E Warrants and payment of the Exercise Price, as aforesaid; provided, however, that if, at the date of surrender of such Class E Warrants and payment of such Exercise Price, the transfer books for the Shares or other class of stock purchasable upon the exercise of such Class E Warrants shall be closed, the certificates for the Shares in respect of which such Class E Warrants are then exercised shall be issuable as of the date on which such books shall next be opened (whether before or after the Termination Date) and until such date the Company shall be under no duty to deliver any certificate for such Shares; provided further, however, that the transfer books of record, unless otherwise required by law, shall not be closed at any one time for a period longer than twenty days. The rights of purchase represented by the Class E Warrants shall be exercisable, at the election of the Holders thereof either in full or from time to time in part and, in the event that a certificate evidencing Class E Warrants is exercised in respect of less than all of the Shares specified therein at any time prior to the date of expiration of the Class E Warrants, a new certificate evidencing the remaining Class E Warrant or Class E Warrants will be issued. 7. TAXES. The Company will pay all documentary stamp taxes, if any, attributable to the initial issuance of Shares issuable upon the exercise of Class E Warrants; provided, however, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issue or delivery of any Class E Warrants or certificates for Shares. 8. REDEMPTION. (a) On not less than thirty (30) days notice given at any time after the date of this Agreement, the Class E Warrants may be redeemed, at the option of the Company, at a redemption price of $0.01 per Class E Warrant, provided that the Market Price (defined below) of the Shares issuable upon exercise of the Class E Warrant shall equal or exceed 200% of the Exercise Price (the "Target Price"), subject to adjustment as set forth in Section 8(f) below. Market Price for the purpose of this Section 8 shall mean (i) the average closing bid price for any ten (10) consecutive trading days ending within five (5) days prior to the date of the notice of redemption, which notice shall be mailed no later than five days thereafter, of the Shares as reported by the National Association of Securities Dealers, Inc. Automatic Quotation System or (ii) the 4 average of the last reported sale price, for ten (10) consecutive business days, ending within five (5) days of the date of the notice of redemption, which notice shall be mailed no later than five days thereafter, on the primary exchange on which the Shares are traded, if the Shares are traded on a national securities exchange. (b) If the conditions set forth in Section 8(a) are met, and the Company desires to exercise its right to redeem the Class E Warrants, it shall mail a notice of redemption to each of the Holders of the Class E Warrants to be redeemed, first class, postage prepaid, not later than the thirtieth (30th) day before the date fixed for redemption, at their last address as shall appear on the records of the Company. Any notice mailed in the manner provided herein shall be conclusively presumed to have been duly given whether or not the Holder receives such notice. (c) The notice of redemption shall specify (i) the redemption price, (ii) the date fixed for redemption, (iii) the place where the Class E Warrant certificates shall be delivered and the redemption price paid, and (iv) that the right to exercise the Class E Warrants shall terminate at 5:00 P.M. (New York time) on the business day immediately preceding the date fixed for redemption. The date fixed for the redemption of the Class E Warrants shall be the Redemption Date. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a Holder (a) to whom notice was not mailed or (b) whose notice was defective. An affidavit of the Warrant Agent or of the Secretary or an Assistant Secretary of the Company that notice of redemption has been mailed shall be prima facie evidence of the facts stated therein. (d) Any right to exercise a Class E Warrant shall terminate at 5:00 P.M. (New York time) on the business day immediately preceding the Redemption Date. On and after the Redemption Date, Holders of the Warrants shall have no further rights except to receive, upon surrender of the Class E Warrant certificates prior to the Redemption Date, the redemption price. (e) From and after the Redemption Date specified for, the Company shall, at the place specified in the notice of redemption, upon presentation and surrender to the Company by or on behalf of the Holder thereof of one or more Class E Warrant certificates evidencing Class E Warrants to be redeemed, deliver or cause to be delivered to or upon the written order of such Holder a sum in cash equal to the redemption price of each such Class E Warrant. From and after the Redemption Date and upon the deposit or setting aside by the Company of a sum sufficient to redeem all the Class E Warrants called for redemption, such Class E Warrants shall expire and become void and all rights hereunder and under the Class E Warrant certificates, except the right to receive payment of the redemption price, shall cease. 5 (f) If the Company pays a dividend in shares of common stock or makes a distribution in shares of common stock or if the shares of the Company's common stock are subdivided or combined into a greater or smaller number of shares of common stock, the Target Price shall be proportionally adjusted by the ratio which the total number of shares of common stock outstanding immediately prior to such event bears to the total number of shares of common stock to be outstanding immediately after such event. 9. MUTILATED OR MISSING WARRANTS. In case any of the certificates evidencing the Class E Warrants shall be mutilated, lost, stolen or destroyed, the Company may, in its discretion, issue and deliver in exchange and substitution for and upon cancellation of the mutilated Class E Warrant certificate, or in lieu of and substitution for the Class E Warrant certificate lost, stolen or destroyed, a new Warrant certificate of like tenor and representing an equivalent right or interest; but only upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of such Warrant and indemnity, if requested, also satisfactory to them. Applicants for such substitute Class E Warrant certificate shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company may prescribe. 10. RESERVATION OF SHARES. There have been reserved, and the Company shall at all times keep reserved, out of its authorized Common stock a number of shares of common stock sufficient to provide for the exercise of the rights of purchase represented by the outstanding Class E Warrants. The Transfer Agent for the Common Stock (the "Transfer Agent") and every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of any of the rights of purchase aforesaid will be irrevocably authorized and directed at all times to reserve such number of authorized shares as shall be requisite for such purpose. The Company will keep a copy of this Agreement on file with the Transfer Agent for the Common Stock and with every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of the rights of purchase represented by the Class E Warrants. The Company will supply such Transfer Agent with duly executed stock certificates for such purpose and will provide or otherwise make available any cash which may be payable as provided herein. All Class E Warrants surrendered in the exercise of the rights thereby evidenced shall be cancelled by the Company. 11. ANTI-DILUTION. In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (iv) issue by reclassification of its shares of Common Stock other securities of the Company, the number of Shares purchasable upon exercise of each Class E Warrant immediately prior thereto shall be adjusted so that the Holder of each Class E Warrant shall be entitled to receive the 6 kind and number of Shares or other securities of the Company which he would have owned or have been entitled to receive after the happening of any of such event or any record date with respect thereto. An adjustment shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. Whenever the number of Shares purchasable upon the exercise of each Class E Warrant is adjusted, as herein provided, the Exercise Price per Share payable upon exercise of each Class E Warrant shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Shares purchasable upon the exercise of each Class E Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Shares so purchasable immediately thereafter. Whenever the number of Shares purchasable upon the exercise of each Class E Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by first class mail, postage prepaid, to each Holder of a Class E Warrant or Class E Warrants notice of such adjustment or adjustments setting forth the number of Shares purchasable upon the exercise of each Class E Warrant after such adjustment, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. Such certificate shall be conclusive evidence of the correctness of such adjustment. 12. NO ADJUSTMENT FOR DIVIDENDS. Except as provided in Section 11, no adjustment in respect of any dividends shall be made during the term of the Class E Warrants or upon the exercise of the Class E Warrants. 13. PRESERVATION OF PURCHASE RIGHTS UPON RECLASSIFICATION, CONSOLIDATION, ETC. In case of any consolidation of the Company with or merger of the Company into another corporation or in case of any sale or conveyance to another corporation of the property, assets or business of the Company as an entirety or substantially as an entirety, the Company or such successor or purchasing corporation, as the case may be, shall execute an agreement that each Holder of a Class E Warrant shall have the right thereafter upon payment of the Exercise Price in effect immediately prior to such action to purchase upon exercise of each Class E Warrant the kind and amount of Shares and other securities and property which he would have owned or have been entitled to receive after the happening of such consolidation, merger, sale or conveyance had such Class E Warrant been exercised immediately prior to such action. Such agreement shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in Section 11. The Company shall mail by first class mail, postage prepaid, to the Holder of each Class E Warrant, notice of the execution of any such agreement. The provisions of this Section 13 shall similarly apply to successive consolidations, mergers, sales, or conveyances. 14. STATEMENT ON WARRANTS. Irrespective of any adjustments in the number or kind of Shares purchasable upon the exercise of 7 the Class E Warrants, Class E Warrants theretofore or thereafter issued may continue to express the same number and kind of Shares as are stated in the Class E Warrants initially issuable pursuant to this Agreement. 15. FRACTIONAL INTERESTS. The Company shall not be required to issue fractional Shares on the exercise of Class E Warrants. If more than one Class E Warrant shall be presented for exercise in full at the same time by the same Holder, the number of full Shares which shall be issuable upon the exercise thereof shall be computed on the basis of the aggregate number of Shares represented by the Class E Warrants so presented. If any fraction of a Share would, except for the provisions of this Section 15, be issuable on the exercise of any Class E Warrant (or specified portion thereof), the Company shall pay an amount in cash equal to the current market price per Share multiplied by such fraction. 16. NO RIGHTS AS STOCKHOLDER. Nothing contained in this Agreement or in any of the Class E Warrants shall be construed as conferring upon the Holders or their transferees the right to vote or to receive dividends or to consent or to receive notice as stockholders in respect of any meeting of stockholders for the election of directors of the Company or any other matter, or any rights whatsoever as stockholders of the Company. 17. NOTICES. Any notice pursuant to this Agreement by the Company or by the Holder of any Class E Warrant, shall be in writing and shall be deemed to have been duly given if delivered or mailed, certified mail, return receipt requested: (a) If to the Company addressed as follows: Beverage Works, Inc. 9800 S. Sepulveda Blvd., Suite 720 Los Angeles, CA 90045 Attn: Lyle Maul, CFO with a copy to : Hecht & Steckman, P.C. 60 East 42nd Street, Suite 5101 New York, NY 10165-5101 Attn: James G. Smith, Esq. (b) If to the Holder addressed to the address as reflected on the Company's books. Any notice mailed pursuant to this Agreement by the Company or to the Holders of Class E Warrants shall be in writing and shall be deemed to have been duly given if mailed, postage prepaid, to such Holders at their respective addresses on the books of the Company. 18. AMENDMENTS. The Company may from time to time supplement or amend this Agreement, without the approval of any Holders of Class E Warrants, in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, or to make any other 8 provisions in regard to matters or questions arising hereunder which the Company may deem necessary or desirable and which shall not be inconsistent with the provisions of the Class E Warrants and which shall not materially adversely affect the interest of the Holders of Class E Warrants. 19. MERGER OR CONSOLIDATION OF COMPANY. The Company will not merge or consolidate with or into any other corporation unless the corporation resulting from such merger or consolidation (if not the Company) shall expressly assume, by supplemental agreement, the due and punctual performance and observance of each and every covenant and condition of this Agreement to be performed and observed by the Company. 20. RESTRICTED SECURITIES. The Class E Warrants and the shares of Common Stock issuable upon exercise of the Class E Warrants have not been registered under the Securities Act of 1933, as amended, and that the Class E Warrants and the Shares issuable upon exercise of the Class E Warrants may be sold, transferred, assigned or disposed of, except in accordance with such Act and the Rules and Regulations of the Securities and Exchange Commission promulgated thereunder. Holders consent that the Class E Warrant certificates and certificates evidencing Shares issuable upon exercise of the Class E Warrants may contain the following legend: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("THE ACT") OR QUALIFIED OR REGISTERED UNDER ANY STATE SECURITIES OR BLUE SKY LAWS. NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND SUCH STATE LAWS UNLESS SUCH OFFER, SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION IS EXEMPT FROM REGISTRATION OR QUALIFICATION UNDER THE ACT AND SUCH STATE LAWS. 21. APPLICABLE LAW. This Agreement and each Class E Warrant referred to hereunder shall be deemed to be a contract made under the laws of the State of California and for all purposes shall be construed in accordance with the laws of said state. 22. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Holders shall bind and inure to the benefit of their respective successors and assigns hereunder. 23. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company and the Holders of Class E Warrants any legal or equitable right, remedy or claim under this Agreement and this Agreement shall be for the sole and exclusive benefit of the Company and the Holders of Class E Warrants. 24. CAPTIONS. The captions of sections and paragraphs of this Agreement have been inserted for convenience only and shall 9 have no substantive effect. 25. WARRANT AGENT. The Company shall act as the initial warrant agent in connection with the issuance, transfer and exchange of the certificates and the exercise of the Class E Warrants. The Company may, without prior consent of any of the Holders, appoint a successor warrant agent. Notice of the appointment of a successor warrant agent shall be promptly given by the Company to all registered Holders. BEVERAGE WORKS, INC. Attest: /s/ FREDERIK G.M. RODENHUIS /s/ LYLE R. MAUL - --------------------------- ---------------- By: Frederik G.M. Rodenhuis, By: Lyle R. Maul, President Secretary 10 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("THE ACT") OR QUALIFIED OR REGISTERED UNDER ANY STATE SECURITIES OR BLUE SKY LAWS. NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND SUCH STATE LAWS UNLESS SUCH OFFER, SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION IS EXEMPT FROM REGISTRATION OR QUALIFICATION UNDER THE ACT AND SUCH STATE LAWS. BEVERAGE WORKS, INC. CLASS E WARRANT CERTIFICATE Certificate Number ___ ________ Warrants This Warrant Certificate certifies that ____________________ is the registered holder of the number of Warrants indicated above (herein referred to as the "Warrants") to purchase shares of the Common Stock, no par value ("Shares"), of Beverage Works, Inc., a California corporation (herein referred to as the "Company"). Each Warrant entitles the holder thereof to purchase from the Company, for a five (5) year period commencing on _________________, 1996 one fully-paid and nonassessable Share at an exercise price equal to the lesser of (i) 105% of the offering price of the Company's common stock in the Company's anticipated initial public offering as stated in the Company's prospectus for such initial public offering or (ii) $8.25 (the "Exercise Price") upon presentation and surrender of this Warrant Certificate at the principal corporate office of the Company, with the Form of Election to Purchase duly executed, and upon payment of the Exercise Price per share of such Common Stock. Payment of the Exercise Price shall be made in lawful money of the United States of America. This Warrant Certificate is subject to terms, provisions and conditions of the Class E Warrant Agreement, which is incorporated by reference and to which reference is hereby made for a full description of the rights, limitations, obligations, duties and immunities hereunder of the Company and the holder of the Warrant Certificates, including the right of the Company to redeem the Warrants at $0.01 per Warrant provided the Company's common stock has achieved a certain trading price. This Warrant Certificate, upon surrender to the Company, may be exchanged for another Warrant Certificate or Warrant Certificates evidencing a like aggregate number of Warrants. If this Warrant Certificate shall be exercised in part, the holder hereof shall be entitled to receive upon surrender hereof, another Warrant Certificate or Warrant Certificates evidencing the number of Warrants not exercised. COMPANY: BEVERAGE WORKS, INC. Attest: - ---------------------------- ---------------------------- By: Frederik G.M. Rodenhuis, By: Lyle R. Maul, President Secretary 11 The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM -as tenants in common TEN ENT -as tenants by the entireties JT TEN -as joint tenants, with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -Uniform Gifts to Minors Act of ______(State)______ Additional abbreviations may also be used thought not in the above list. ELECTION TO PURCHASE The undersigned Registered Holder hereby irrevocably elects to exercise _____ Class E Warrants represented by this Class E Warrant certificate, and to purchase the securities issuable upon the exercise of such Class E Warrants, and requests that certificates for such securities shall be issued in the name of and be delivered to: Name ____________________________________________________ Address ____________________________________________________ Taxpayer I.D. ____________________________________________________ Soliciting Broker ____________________________________________________ and if such number of Class E Warrants shall not be all the Class E Warrants evidenced by this Class E Warrant certificate, that a new Class E Warrant Certificate for the balance of such Class E Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below: Name ____________________________________________________ Address ____________________________________________________ Taxpayer I.D. ____________________________________________________ ASSIGNMENT FOR VALUE RECEIVED __ HEREBY SELL, ASSIGN AND TRANSFER UNTO Name ____________________________________________________ Address ____________________________________________________ Taxpayer I.D. ____________________________________________________ Class E Warrants represented by the within Certificate and do hereby irrevocably constitute and appoint _______________________________________________ attorney to transfer the said shares on the books of the within named Corporation with full power of substitution in the premises. SIGNATURE Dated: _____________________________________ Signed: _____________________________________ In presence of - --------------------------------------------- --------------------------------- THE SIGNATURE TO THE ELECTION TO PURCHASE OR ASSIGNMENT MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. EX-4.12 10 REGISTRATION RIGHTS AGREE-CLASS E WARRENTS 1 Exhibit 4.12 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT is made as of December 18, 1996, by and between BEVERAGE WORKS, INC., a California corporation (the "Company"), and the investors listed on Schedule "A" hereto, each of which is herein referred to as an "Investor." 1. REGISTRATION RIGHTS. The Company covenants and agrees as follows: 1.1 DEFINITIONS. For purposes of this Agreement: (a) The term "Act" means the Securities Act of 1933, as amended. (b) The term "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.8 hereof. (c) The term "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document. (d) The term "Registrable Securities" means (i) the shares of common stock issuable or issued upon exercise of the Class E Warrants, and (ii) any shares of common stock of the Company issued as a dividend or other distribution with respect to, or in exchange for or in replacement of the shares referenced in (i) above, excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which his rights under this Section 1 are not assigned. (e) The term "SEC" shall mean the Securities and Exchange Commission. 1.2 OBLIGATIONS OF THE COMPANY. The Company shall: (a) Prepare and file with the SEC a registration statement for the Company's proposed initial public offering ("IPO"), which shall include such Registrable Securities and use reasonable good faith efforts to cause such registration statement to become effective, and keep such registration statement effective for a period of up to one hundred eighty (180) days after the lockup under Section 1.9 is released or is no longer applicable to the Registrable Securities. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. 2 (c) Furnish to the Holders such numbers of copies of a final prospectus, but no preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use reasonable good faith efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the managing underwriter for the proposed IPO. (e) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (f) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed. (g) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration. 1.3 FURNISH INFORMATION. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. 1.4 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registration pursuant to Section 1.2 for each Holder (which right may be assigned as provided in Section 1.8), including (without limitation) all registration, filing, and qualification fees, printers and accounting fees relating or apportionable thereto and the fees and disbursements of counsel for the Company in its capacity as counsel to the selling Holders hereunder; if Company counsel does not make itself available for this purpose, the Company will pay the reasonable fees and disbursements of one counsel for the selling Holders selected by 3 them, but excluding underwriting discounts and commissions relating to Registrable Securities. 1.5 UNDERWRITING REQUIREMENTS. In connection with the proposed IPO or any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required to include any of the Holders' securities in such underwriting. 1.6 DELAY OF REGISTRATION. No Holder shall have any right to obtain or seek an injunction restraining or delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Agreement. 1.7 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, and each person, if any, who controls such Holder within the meaning of the Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act or any rule or regulation promulgated under the Act, and the Company will pay to each such Holder or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.7(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter, any other Holder selling 4 securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 1.7(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.7(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, that, in no event shall any indemnity under this subsection 1.7(b) exceed the gross proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 1.7 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.7, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.7, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.7. (d) If the indemnification provided for in this Section 1.7 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party 5 hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (f) The obligations of the Company and Holders under this Section 1.7 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise. 1.8 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities, provided: (a) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; (b) such transferee or assignee agrees in writing to be bound by and subject to the terms and conditions of this Agreement, including without limitation the provisions of Section 1.9 below; and (c) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. 1.9 "LOCK-UP" AGREEMENT. Each Holder hereby agrees that, during the period of duration specified by the Company and the managing underwriter for the proposed IPO, following the effective date of a registration statement of the Company filed under the Act, it shall not, without the approval of the managing underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time during such period. The lock-up time period shall not exceed one hundred eighty (180) days. In 6 order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Investor (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 2. MISCELLANEOUS. 2.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any shares of Registrable Securities). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 2.2 GOVERNING LAW. This Agreement shall be governed by and construed under the internal laws of the State of California. 2.3 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 2.4 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 2.5 NOTICES. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or upon deposit with the United States Post Office, by registered or certified mail, or international equivalent, postage prepaid and addressed to the Company at its principle executive offices and to any Investor at such address as indicated on the books of the Company, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. 2.6 EXPENSES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 2.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of 7 any Registrable Securities then outstanding, each future holder of all such Registrable Securities, and the Company. 2.8 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 2.9 ENTIRE AGREEMENT. This Agreement (including the Schedules hereto, if any) constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. BEVERAGE WORKS, INC.: INVESTOR: By: /s/ FREDERIK G.M. RODENHUIS By: /s/ FREDERIK G.M. RODENHUIS --------------------------- --------------------------- Frederik G.M. Rodenhuis, Frederik G.M. Rodenhuis President pursuant to a limited power of 9800 S. Sepulveda Blvd., Suite attorney contained in the 720 Warrant Exchange Agreement Los Angeles, CA 90045 between the Company and Investor, dated December 18, 1996 EX-4.13 11 REGISTRATION RIGHTS AGREE-CLASS B WARRANTS 1 Exhibit 4.13 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT is made as of December 19, 1996, by and between Beverage Works, Inc., a California corporation (the "Company"), and Frederick Friedman ("Investor") 1. REGISTRATION RIGHTS. The Company covenants and agrees as follows: 1.1 DEFINITIONS. For purposes of this Agreement: (a) The term "Act" means the Securities Act of 1933, as amended. (b) The term "Holder" means any person owning or having the right to acquire Registrable Securities or any assignee thereof in accordance with Section 1.9 hereof. (c) The term "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement or document. (d) The term "Registrable Securities" means the Common Stock issuable or issued upon exercise of the Class B Warrants. (e) The term "SEC" shall mean the Securities and Exchange Commission. 1.2 OBLIGATIONS OF THE COMPANY. The Company shall: (a) Prepare and file with the SEC a registration statement for the Company's proposed initial public offering ("IPO"), which shall include such Registrable Securities and use its best efforts to cause such registration statement to become effective, and keep such registration statement effective for a period of up to one hundred eighty (180) days after the lock-up under Section 1.10 is released or is no longer applicable to the Registrable Securities. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish to the Holders such numbers of copies of a final prospectus, but no preliminary prospectus, in conformity with the requirements of the Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. 2 (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the managing underwriter for the proposed IPO. (e) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (f) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed. (g) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereunder and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration. 1.3 FURNISH INFORMATION. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 1 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. 1.4 EXPENSES OF COMPANY REGISTRATION. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registration pursuant to Section 1.2 for each Holder (which right may be assigned as provided in Section 1.9), including (without limitation) all registration, filing, and qualification fees, printers and accounting fees relating or apportionable thereto and the fees and disbursements of counsel for the Company in its capacity as counsel to the selling Holders hereunder; if Company counsel does not make itself available for this purpose, the Company will pay the reasonable fees and disbursements of one counsel for the selling Holders selected by them, but excluding underwriting discounts and commissions relating to Registrable Securities. 1.5 UNDERWRITING REQUIREMENTS. In connection with the proposed IPO or any offering involving an underwriting of shares of the Company's capital stock, the Company shall not be required to 3 include any of the Holders' securities in such underwriting. 1.6 DELAY OF REGISTRATION. No Holder shall have any right to obtain or seek an injunction restraining or delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Agreement. 1.7 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under this Section 1: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, and each person, if any, who controls such Holder within the meaning of the Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Act, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Act or any rule or regulation promulgated under the Act, and the Company will pay to each such Holder or controlling person, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.8(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder, underwriter or controlling person. (b) To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, any underwriter, any other Holder selling securities in such registration statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of the foregoing persons may become subject, under the Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are 4 based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any person intended to be indemnified pursuant to this subsection 1.8(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this subsection 1.8(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided, that, in no event shall any indemnity under this subsection 1.8(b) exceed the gross proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 1.8 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 1.8, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties which may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 1.8, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 1.8. (d) If the indemnification provided for in this Section 1.8 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage, or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions that resulted in such loss, liability, 5 claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (f) The obligations of the Company and Holders under this Section 1.8 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise. 1.9 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to register Registrable Securities pursuant to this Section 1 may be assigned (but only with all related obligations) by a Holder to a transferee or assignee of such securities, provided: (a) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned; (b) such transferee or assignee agrees in writing to be bound by and subject to the terms and conditions of this Agreement, including without limitation the provisions of Section 1.10 below; and (c) such assignment shall be effective only if immediately following such transfer the further disposition of such securities by the transferee or assignee is restricted under the Act. 1.10 "LOCK-UP" AGREEMENT. Each Holder hereby agrees that, during the period of duration specified by the Company and the managing underwriter for the proposed IPO, following the effective date of a registration statement of the Company filed under the Act, it shall not, without the approval of the managing underwriter, directly or indirectly sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) any securities of the Company held by it at any time during such period. The lock-up time period shall not exceed one hundred eighty (180) days. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Investor (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 6 2. MISCELLANEOUS. 2.1 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any shares of Registrable Securities). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 2.2 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 2.3 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 2.4 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 2.5 NOTICES. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or upon deposit with the United States Post Office, by registered or certified mail, or international equivalent, postage prepaid and addressed to the Company at its principle executive offices and to any Investor at such address as indicated on the books of the Company, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. 2.6 EXPENSES. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 2.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the holders of a majority of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of any Registrable Securities then outstanding, each future holder of all such Registrable Securities, and the Company. 2.8 SEVERABILITY. If one or more provisions of this 7 Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 2.9 ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement (including the Schedules hereto, if any) constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. COMPANY INVESTOR BEVERAGE WORKS, INC. By:/s/ FREDERIK G.M. RODENHUIS By:/s/ FREDERICK FRIEDMAN --------------------------- ---------------------- Frederik G.M. Rodenhuis, Frederick Friedman President EX-4.14 12 $500,000 NOTE EXHANGE AGREEMENT - DECEMBER 19,1996 1 Exhibit 4.14 NOTE EXCHANGE AGREEMENT THIS NOTE EXCHANGE AGREEMENT is made as of December 19, 1996, by and among Beverage Works, Inc. (the "Company") and Frederick Friedman ("Investor"). RECITALS WHEREAS, the Company entered into a Note Agreement, as amended, and Promissory Note dated April 20, 1996, copies of which are annexed hereto as Exhibit "A", providing for repayment by the Company of a loan provided by Investor; and WHEREAS, as an inducement to enter into the Note Agreement, the Company issued 35,000 Class B Warrants to Investor, a copy of the Class B Warrant Agreement is annexed hereto as Exhibit "B"; and WHEREAS, the parties hereto desire to extend the maturity date of the Promissory Note as provided in the Revised Promissory Note, a copy of which is annexed hereto as Exhibit "C"; and WHEREAS, as an inducement to grant the extension of the maturity date, the Company desires to issue twenty thousand (20,000) shares of its Common Stock, no par value, to Investor. NOW THEREFORE, the Parties hereby agree as follows: 1. CONSIDERATION. 1.1 Subject to the terms and conditions of this Agreement and as and for consideration for Investor executing this Agreement, the Company agrees as follows: 1.1.1 Shares. The Company agrees to issue at the Closing Twenty Thousand (20,000) shares of Common Stock, no par value, of the Company ("Shares"). 1.1.2 Class B Warrants. The Company agrees to issue at the Closing thirty-five thousand (35,000) Class B Warrants in addition to the 35,000 Class B Warrants previously issued to Investor. 1.1.3 Registration Rights. The Company agrees to execute at the Closing the Registration Rights Agreements copies of which are annexed hereto as Exhibit "D". 1.1.4 Revised Promissory Note. The Company agrees to execute at the Closing the Revised Promissory Note, a copy of which is annexed hereto as Exhibit "C". The Revised Promissory Note is to be dated the date of Closing, with the principal amount equal to $500,000 plus accrued but unpaid interest on the Original Note at the Closing, to bear interest from such date at the rate of 18% per annum, simple interest, payable on the fifteenth day of each month (commencing January 15, 1997) and at 2 maturity until paid to mature on the earlier of (i) closing of a public offering by the Company with aggregate gross proceeds of no less than $6,000,000 (the "IPO"), the occurrence of which there is no guarantee, or (ii) April 15, 1997, whichever shall occur earlier. The Revised Promissory Note shall be secured by all equipment, inventory and accounts receivable of the Company. The Company shall execute and file with the California Secretary of State a Form UCC-1 containing such appropriate information as reasonably requested by Investor. 1.2 Subject to the terms and conditions of this Agreement and as and for consideration for the Company executing this Agreement, Investor agrees as follows: 1.2.1 Registration Rights. Investor agrees to execute the Registration Rights Agreements, copies of which are annexed hereto as Exhibit "D". 1.2.2 Terminate April 20, 1996 Note. Investor agrees to surrender to the Company the Note Agreement and Promissory Note dated April 20, 1996, copies of which are annexed hereto as Exhibit "A", at the Closing. 1.2.3 Issue Revised Note. Investor agrees to accept the Revised Promissory Note, a copy of which is annexed hereto as Exhibit "C", as satisfaction in full for the Note Agreement and Promissory Note dated April 20, 1996. 1.3 Closing. The transactions contemplated hereby shall take place at Hecht & Steckman, P.C., 60 East 42nd St., Suite 5101, New York, NY 10165, at 10:00 a.m., December 18, 1996, or at such other time and place as the Company and Investor mutually agree upon in writing (which time and place are designated as the "Closing"). At the Closing the Company shall deliver to Investor (i) a certificate representing the Shares, (ii) a certificate representing the additional 35,000 Class B Warrants, (iii) the Revised Promissory Note, and (iv) the Registration Rights Agreement. At the Closing, Investor shall deliver to the Company (i) the original Promissory Note dated April 20, 1996, and (ii) the Registration Rights Agreement. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to Investor that: 2.1 Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California. 2.2 Shares and Class B Warrants. The Shares and Class B Warrants when issued, sold and delivered in accordance with the terms of this Agreement for the consideration expressed herein, will be duly and validly issued, fully paid, and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement, the Registration Rights Agreements, 3 and under applicable state and federal securities laws. 2.3 Authorization. All corporate action on the part of the Company necessary for the authorization, execution and delivery of this Agreement, the performance of all obligations of the Company hereunder and thereunder, and the authorization, issuance, sale and delivery of the Revised Promissory Note, Shares and Class B Warrants being issued hereunder has been taken or will be taken prior to the Closing, and this Agreement constitutes a valid and legally binding obligation of the Company, enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, and other laws of general application affecting enforcement of creditors' rights generally, and as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies. 3. REPRESENTATIONS AND WARRANTIES OF INVESTOR. Investor hereby represents and warrants that: 3.1 Authorization. Investor has full power and authority to enter into this Agreement and the Agreement constitutes his valid and legally binding obligation, enforceable in accordance with its terms. 3.2 Purchase Entirely for Own Account. This Agreement is made with Investor in reliance upon Investor's representation to the Company, which by Investor's execution of this Agreement, Investor hereby confirms, that the Revised Promissory Note, Shares and Class B Warrants (collectively the "Securities") to be acquired by Investor will be acquired solely for investment and for Investor's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that Investor has no present intention of selling or otherwise distributing the same. By executing this Agreement, Investor further represents that Investor does not have any contract, undertaking, agreement or arrangement with any person or entity to sell, transfer or grant participations to such person or entity or to any third person, with respect to any of the Securities. 3.3 Disclosure of Information. Investor represents that he has received all the information and documentation, financial and otherwise and has conducted all investigations as to the Company and Securities he considers necessary or appropriate for deciding whether to execute this Agreement. Investor acknowledges that the Company has made no other representations except as provided in Section 2 and that Investor has relied solely on his own inquiries and investigations with respect to his decision to execute this Agreement. 3.4 Investment Experience. Investor acknowledges that he is able to fend for himself, can bear the economic risk of this investment, and has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the investment in the Securities. 4 3.5 Accredited Investor. Investor is an "accredited investor" with respect to the Company within the meaning of Rule 501 of Regulation D, promulgated under the Securities Act of 1933, as amended (the "Act"), as presently in effect. 3.6 Restricted Securities. Investor understands that the Securities he is purchasing are characterized as "restricted securities" under the federal securities laws and that under such laws and applicable regulations such securities may be resold without registration under the Act, only in certain limited circumstances. In this connection, Investor represents that he is familiar with Rule 144 promulgated under the Act, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 3.7 Further Limitations on Disposition. Without in any way limiting the representations set forth above, Investor further agrees not to make any disposition of all or any portion of the Securities unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 3 provided and to the extent this Section is then applicable, and: 3.7.1 There is then in effect a Registration Statement under the Act covering such proposed disposition and such disposition is made in accordance with such Registration Statement; or 3.7.2 Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and if requested by the Company, Investor shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such Securities under the Act, or applicable Blue Sky law. 3.7.3 The Company shall have no obligation or responsibility with regards to any subsequent sale or transfer of any of the Securities by Investor. 3.8 Legends. It is understood that the certificates evidencing the Securities will bear a legend in substantially the following form, in addition to any other legend required by applicable state or federal law: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("THE ACT") OR QUALIFIED OR REGISTERED UNDER ANY STATE SECURITIES OR BLUE SKY LAWS. NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND SUCH STATE LAWS UNLESS SUCH OFFER, SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION IS EXEMPT FROM REGISTRATION OR QUALIFICATION 5 UNDER THE ACT AND SUCH STATE LAWS. 4. CONDITIONS OF INVESTOR'S OBLIGATIONS AT CLOSING. The obligations of Investor under Section 1 of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions: 4.1 Representations and Warranties. The representations and warranties of the Company contained in Section 2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of such Closing. 4.2 Performance. The Company shall have performed and complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by him on or before the Closing. 4.3 Additional Agreements. The Company shall have delivered to Investor (i) a fully executed Revised Promissory Note in substantially the form annexed hereto as Exhibit "C", (ii) fully executed Registration Rights Agreements, in substantially the forms annexed hereto as Exhibit "D" and (iii) the Class B Warrant Certificate in substantially the form annexed hereto as Exhibit "E". 5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The obligations of the Company under Section 1 of this Agreement are subject to the fulfillment on or before the Closing of each of the following conditions: 5.1 Representations and Warranties. The representations and warranties of Investor contained in Section 3 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 5.2 Qualifications. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Securities pursuant to this Agreement shall be duly obtained and effective as of the Closing. 5.3 Additional Agreements. Investor shall have delivered to the Company (i) fully executed Registration Rights Agreements in substantially the forms annexed hereto as Exhibit "D", and (ii) the original Promissory Note dated April 20, 1996. 6. INDEMNIFICATION. 6.1 Indemnity. Investor hereby agrees to hold harmless, indemnify and defend the Company, from and against any obligation, liability, encumbrance, loss, damage, cost, expense, cause of 6 action, in law or equity, asserted against or incurred by the Company ("Claims") asserted by any third person, against the Company, resulting from any untrue statement made in, or breach of, any representation, warranty or covenant by Investor. 6.2 Prerequisites of Indemnity. This indemnity provision shall cover the costs and expenses of the Company, including reasonable attorney's fees, related to claims, actions, suits and/or judgments incident to any matters covered by such indemnity, except that Investor shall in no event be liable for costs or expenses incurred by the Company prior to notification as described in Paragraph 6.3 below, and Investor may, at his option undertake the defense and indemnification of any Claim by counsel reasonably acceptable to the Company, following which the Company shall not be entitled to be reimbursed for any costs or expenses incurred by the Company directly from the defense or settlement of such Claims. 6.3 Timing of Notice. In connection with a claim by the Company for indemnification under this Section 6, the Company shall notify, in writing, Investor, by certified or registered mail or international equivalent, of any Claim against the Company covered by this Section 6 within a reasonable time after it has received notice of such Claim so as not to cause Investor to be prejudiced by a loss of rights. Failure to notify Investor within such period shall result solely in the Company receiving no indemnity under the terms of this Agreement only if such failure materially prejudices Investor, and in no event shall preclude the Company from seeking indemnity without reference to the terms of this Agreement. 7. MISCELLANEOUS. 7.1 Survival of Warranties. The warranties, representations and covenants of the Company and Investor contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing. 7.2 Successors and Assigns. Except as otherwise provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective heirs, personal representatives, successors and assigns of the parties (including any transferee of any Shares or Class B Warrants). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective heirs, personal representatives, successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. This Agreement shall not be assignable by either party without the consent of the other party. 7.3 Governing Law. This Agreement shall be governed by and construed under the internal laws of the State of California. 7.4 Counterparts. This Agreement may be executed in two 7 or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 7.5 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 7.6 Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or upon deposit with the United States Post Office, by registered or certified mail, or international equivalent, postage prepaid and addressed to the party to be notified at the address indicated for such party on the signature page hereof, or at such other address as such party may designate by ten (10) days' advance written notice to the other party. 7.7 Finder's Fee. Each party represents that it neither is nor will be obligated for any finders' fee or commission in connection with this transaction. The Investor agrees to indemnify and to hold harmless the Company from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Investor or any of his agents, employees, or representatives is responsible. The Company agrees to indemnify and hold harmless the Investor from any liability for any commission or compensation in the nature of a finders' fee (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 7.8 Expenses. Except as provided in Section 7.12, whether or not the Closing is effected, each party shall pay all costs and expenses that they incur with respect to the negotiation, execution, delivery and performance of this Agreement. 7.9 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the parties. 7.10 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. 7.11 Entire Agreement. This Agreement and the documents referred to herein constitute the entire agreement among the parties and no party shall be liable or bound to any other party in any manner by any warranties, representations, or covenants except 8 as specifically set forth herein or therein. 7.12 Arbitration. Any dispute arising out of this Agreement shall be submitted to binding arbitration before the American Arbitration Association located in Los Angeles, California. The prevailing party in any such arbitration shall be entitled to recover its costs, including reasonable legal fees, incurred in connection with the arbitration, including confirming any arbitration award and appeals, if any. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE COMPANY: INVESTOR: /s/ FREDERIK G.M. RODENHUIS /s/ FREDERICK FRIEDMAN - --------------------------- ---------------------- Frederik G.M. Rodenhuis, Frederick Friedman President 207 West Old Mill Road Beverage Works, Inc. Greenwich, CT 06831 9800 S. Sepulveda Blvd. Suite 720 Los Angeles, CA 90045 9 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("THE ACT") OR QUALIFIED OR REGISTERED UNDER ANY STATE SECURITIES OR BLUE SKY LAWS. NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND SUCH STATE LAWS UNLESS SUCH OFFER, SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION IS EXEMPT FROM REGISTRATION OR QUALIFICATION UNDER THE ACT AND SUCH STATE LAWS. REVISED PROMISSORY NOTE $500,000 APRIL 15, 1997 1. Beverage Works, Inc., a California corporation (the "Company"), for value received, hereby promises to pay to Frederick Friedman ("Payee"): a. the principal amount of $500,000 on (i) the date of a close of a public offering by the Company with aggregate gross proceeds of at least $6,000,000, or (ii) April 15, 1997, whichever shall occur earlier (the "Maturity Date"); and b. interest on the principal amount from time to time remaining unpaid hereon at the rate of 18% per annum, simple interest, from the date hereof until the Maturity Date, payable on the fifteenth day of each month (commencing on January 15, 1997). 2. Both the principal hereof and interest hereon are payable in United States currency. If any amount of principal or interest on or in respect of this Note becomes due and payable on any date which is not a Business Day, such amount shall be payable on the immediately preceding Business Day. "Business Day" means any day other than a Saturday, Sunday or other day on which banks in New York are required by law to close or are customarily closed. 3. Default shall occur (i) in the payment of interest on the Note when the same shall have become due and such default shall continue for more than five business days; or (ii) in the payment of principal on the Note when the same shall have become due and such default shall continue for more than thirty days. 4. Any term, covenant, agreement or condition herein may be amended or compliance therewith may be waived, only upon the written consent of the Payee and the Company. Any such amendment or waiver shall be binding upon each future holder of the Note and upon the Company, whether or not the Note shall have been marked to indicate such amendment or waiver. No such amendment or waiver 10 shall extend to or affect any obligation not expressly amended or waived or impair any right consequent thereon. 5. The Company may prepay this Note at any time prior to Maturity without penalty. 6. The laws of the State of California shall apply. BEVERAGE WORKS, INC. Dated: December 19, 1996 /s/ FREDERIK G.M. RODENHUIS ----------------- --------------------------- Frederik Rodenhuis Chief Executive Officer EX-4.15 13 REPRESENTATIVE'S WARRANT AGREEMENT 1 Exhibit 4.15 REPRESENTATIVE'S WARRANT AGREEMENT (the "Representative's Warrant Agreement" or "Agreement"), dated as of _______________, 1997, between BEVERAGE WORKS, INC. (the "Company"), and FIRST LONDON SECURITIES CORPORATION (the "Representative"). W I T N E S S E T H: WHEREAS, the Representative has agreed, pursuant to that certain underwriting agreement dated as of the date hereof by and between the Company and the Representative (the "Underwriting Agreement"), to act as the representative of the Underwriters in connection with the Company's proposed public offering of 1,500,000 shares of the Company's Common Stock at $____ per share and 1,500,000 Redeemable Class A Warrants ("Public Warrants") at $____ per warrant (the "Public Offering"); and WHEREAS, the Company proposes to issue to the Representative and/or persons related to the Representative as those persons are defined in Rule 2710 of the NASD Conduct Rules (the "Holder"), 150,000 warrants ("Common Stock Representative Warrants") each Common Stock Representative Warrant entitling the Holder to purchase one share of the Company's Common stock (the "Shares") and 150,000 warrants ("Warrant Representative Warrants") each Warrant Representative Warrant entitling the Holder to purchase one Common Stock Purchase Warrant ("Underlying Warrants") exercisable to purchase one share of the Company's Common Stock. The "Common Stock Representative Warrants" and the "Warrant Representative Warrants" are collectively referred to as the "Warrants". The "Shares" and the "Underlying Warrants" are collectively referred to as the "Warrant Securities"; and WHEREAS, the Warrants to be issued pursuant to this Agreement will be issued on the Closing Date (as such term is defined in the Underwriting Agreement) by the Company to the Holders in consideration for, and as part of the compensation in connection with, the Representative acting as representative pursuant to the Underwriting Agreement. NOW, THEREFORE, in consideration of the premises, the payment by the Representative to the Company of ONE HUNDRED DOLLARS AND NO CENTS ($100.00), the agreements herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Grant and Period. The Public Offering has been registered under a Registration Statement on Form SB-2 (File No. 333-11789) and declared effective by the Securities and Exchange Commission (the "SEC" or "Commission") on _____________, 1997 (the "Effective Date"). This Agreement, relating to the purchase of the Warrants, is entered into pursuant to the Underwriting Agreement between the Company and the Representative, as representative of the Underwriters, in 1 2 connection with the Public Offering. Pursuant to the Warrants, the Holders are hereby granted the right to purchase from the Company, at any time during the period commencing one year after the Effective Date and expiring five (5) years thereafter (the "Expiration Time"), up to 150,000 Shares at an initial exercise price (subject to adjustment as provided in Article 8 hereof) of $____ per share (120% of the public offering price) and/or 150,000 non-redeemable Underlying Warrants at an initial exercise price of $____ per warrant (120% of the public offering price) (the "Exercise Price" or "Purchase Price"), subject to the terms and conditions of this Agreement. Each Underlying Warrant is exercisable to purchase one (1) share of Common Stock at $____ per share during the five (5) year period commencing on the Effective Date. Except as specifically otherwise provided herein, the Shares and the Underlying Warrants constituting the Warrant Securities shall bear the same terms and conditions as such securities described under the caption "Description of Securities" in the Registration Statement, and as designated in the Company's Articles of Incorporation and any amendments thereto, and the Underlying Warrants shall be governed by the terms of the Warrant Agreement executed in connection with the Company's public offering (the "Warrant Agreement"), except as provided herein, and the Holders shall have registration rights under the Securities Act of 1933, as amended (the "Act"), for the Warrants, the Shares, the Underlying Warrants, and the shares of Common Stock underlying the Underlying Warrants, as more fully described in paragraph Article 7 of this Representative's Warrant Agreement. In the event of any extension of the expiration date or reduction of the exercise price of the Public Warrants, the same such changes to the Underlying Warrants shall be simultaneously effected, except that the Underlying Warrants shall expire no later than five (5) years from the Effective Date. 2. Warrant Certificates. The warrant certificates (the "Warrant Certificate",) delivered and to be delivered pursuant to this Agreement shall be in the form set forth in the form of Warrant Certificate, attached hereto and made a part hereof, with such appropriate insertions, omissions, substitutions, and other variations as required or permitted by this Agreement. 3. Exercise of Warrant. 3.1 Full Exercise. (i) The Holder hereof may effect a cash exercise of the Common Stock Representative Warrants and/or the Warrant Representative Warrants and/or the Underlying Warrants by surrendering the Warrant Certificate, together with a Subscription in the form of Exhibit "A" attached thereto, duly executed by such Holder to the Company, at any time prior to the Expiration Time, at the Company's principal office, accompanied by payment in cash or by certified or official bank check payable to 2 3 the order of the Company in the amount of the aggregate purchase price (the "Aggregate Price"), subject to any adjustments provided for in this Agreement. The aggregate price hereunder for each Holder shall be equal to the exercise price as set forth in Article 6 hereof multiplied by the number of Warrants, Underlying Warrants or Shares that are the subject of each Holder's Warrant (as adjusted as hereinafter provided). (ii) The Holder hereof may effect a cashless exercise of the Common Stock Representative Warrants and/or the Underlying Warrants by delivering the Warrant Certificate to the Company together with a Subscription in the form of Exhibit "B" attached thereto, duly executed by such Holder, in which case no payment of cash will be required. Upon such cashless exercise, the number of Shares to be purchased by each Holder hereof shall be determined by dividing: (i) the number obtained by multiplying the number of Shares that are the subject of each Holder's Warrant Certificate by the amount, if any, by which the then Market Value (as hereinafter defined) exceeds the Purchase Price; by (ii) the per share purchase price. In no event shall the Company be obligated to issue any fractional securities and, at the time it causes a certificate or certificates to be issued, it shall pay the Holder in lieu of any fractional securities or shares to which such Holder would otherwise be entitled, by Company check, in an amount equal to such fraction multiplied by the Market Value. The Market Value shall be determined on a per Share basis as of the close of the business day preceding the exercise, which determination shall be made as follows: (a) if the Common Stock is listed for trading on a national or regional stock exchange or is included on the NASDAQ National Market or Small-Cap Market, the average closing sale price quoted on such exchange or the NASDAQ National Market or Small-Cap Market which is published in The Wall Street Journal for the ten (10) trading days immediately preceding the date of exercise, or if no trade of the Common Stock shall have been reported during such period, the last sale price so quoted for the next day prior thereto on which a trade in the Common Stock was so reported; or (b) if the Common Stock is not so listed, admitted to trading or included, the average of the closing highest reported bid and lowest reported ask price as quoted on the National Association of Securities Dealer's OTC Bulletin Board or in the "pink sheets" published by the National Daily Quotation Bureau for the first day immediately preceding the date of exercise on which the Common Stock is traded. 3.2 Partial Exercise. The securities referred to in Section 3.1 above also may be exercised from time to time in part by surrendering the Warrant Certificate in the manner specified in Section 3.1 hereof, except that with respect to a cash exercise, the Purchase Price payable shall be equal to the number of securities being purchased hereunder multiplied by the per security Purchase Price, subject to any adjustments provided for in this Agreement. Upon any such partial exercise, the Company, at its expense, will forthwith issue to the Holder hereof a new Warrant Certificate or Warrants of like tenor calling in the aggregate for the number of securities (as constituted as of the date hereof) for which the Warrant Certificate shall not have been exercised, issued in the name of the Holder hereof or as such Holder (upon payment by 3 4 such Holder of any applicable transfer taxes) may direct. 4. Issuance of Certificates. Upon the exercise of the Warrants and/or the Underlying Warrants, the issuance of certificates for the shares of Common Stock and/or other securities shall be made forthwith (and in any event within three (3) business days thereafter) without charge to the Holder thereof including, without limitation, any tax which may be payable in respect of the issuance thereof, and such certificates shall (subject to the provisions of Articles 5 and 7 hereof) be issued in the name of, or in such names as may be directed by, the Holder thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificates in a name other than that of the Holder and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Warrant Certificates and the certificates representing the shares of Common Stock and/or other securities shall be executed on behalf of the Company by the manual or facsimile signature of the then present Chairman or Vice Chairman of the Board of Directors or President or Vice President of the Company under its corporate seal reproduced thereon, attested to by the manual or facsimile signature of the then present Secretary or Assistant Secretary of the Company. Warrant Certificates shall be dated the date of execution by the Company upon initial issuance, division, exchange, substitution or transfer. 5. Restriction On Transfer of Warrants. The Holder of a Warrant Certificate, by acceptance thereof, covenants and agrees that the Warrants may not be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or in part, for a period of one (1) year from the Effective Date of the Public Offering, except (a) to officers of the Representative or to officers and partners of the other Underwriters or Selected Dealers participating in the Public offering; (b) by will; or (c) by operation of law. 6. Exercise Price. 6.1 Initial and Adjusted Exercise Prices. The initial exercise price of each Common Stock Representative Warrant shall be $____ per share (120% of the public offering price) . The initial exercise price of each Warrant Representative Warrant shall be $____ per Underlying Warrant (120% of the public offering price). The initial exercise price of each Underlying Warrant shall be $____ per share (120% of the public offering price). The adjusted exercise price shall be the price which shall result from time to time from any and all adjustments of the initial exercise price in accordance with the provisions of Article 8 hereof. 4 5 The Warrant Representative Warrants and the Underlying Warrants are exercisable during the five (5) year period commencing on the Effective Date. 6.2 Exercise Price. The term "Exercise Price" herein shall mean the initial exercise price or the adjusted exercise price, depending upon the context. 7. Registration Rights. 7.1 Registration Under the Securities Act of 1933. The Warrants, the Shares, the Underlying Warrants and the shares of Common Stock issuable upon exercise of the Underlying Warrants (collectively the "Registrable Securities") have been registered under the Securities Act of 1933, as amended (the "Act"). Upon exercise, in part or in whole, of the Warrants, certificates representing the Shares, the Underlying Warrants and/or the shares of Common Stock issuable upon exercise of the Underlying Warrants shall bear the following legend in the event there is no current registration statement effective with the Commission at such time as to such securities: The securities represented by this certificate may not be offered or sold except pursuant to (i) an effective registration statement under the Act, (ii) to the extent applicable, Rule 144 under the Act (or any similar rule under such Act relating to the disposition of securities), or (iii) an opinion of counsel, if such opinion shall be reasonably satisfactory to counsel to the issuer, that an exemption from registration under such Act and applicable state securities laws is available. 7.2 Piggyback Registration. If, at any time commencing after the Effective Date of the Public Offering and expiring seven (7) years thereafter, the Company prepares and files a post-effective amendment to the Registration Statement, or a new Registration Statement, under the Act, or files a Notification on Form 1-A or otherwise registers securities under the Act, or files a similar disclosure document with the Commission (collectively the "Registration Documents") as to any of its securities under the Act (other than under a Registration Statement pursuant to Form S-8), it will give written notice by registered mail, at least thirty (30) days prior to the filing of each such Registration Document, to the Representative and to all other Holders of the Registrable Securities of its intention to do so. If the Representative and/or other Holders of the Registrable Securities notify the Company within twenty (20) days after receipt of any such notice of its or their desire to include any such Registrable Securities in such proposed Registration Documents, the Company shall afford the Representative and such Holders of such Registrable Securities the opportunity to have any Registrable Securities registered under such Registration Documents or any other available Registration Document. 5 6 Notwithstanding the provisions of this Section 7.2, the Company shall have the right at any time after it shall have given written notice pursuant to this Section 7.2 (irrespective of whether a written request for inclusion of any such securities shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. 7.3 Demand Registration. (a) At any time commencing one (1) year after the Effective Date of the Public Offering, and expiring four (4) years thereafter, the Holders of Registrable Securities representing more than 50% of such securities at that time outstanding shall have the right (which right is in addition to the registration rights under Section 7.2 hereof), exercisable by written notice to the Company, to have the Company prepare and file with the Commission at the sole expense of the Company, on one occasion, a registration statement and/or such other documents, including a prospectus, and/or any other appropriate disclosure document as may be reasonably necessary in the opinion of both counsel for the Company and counsel for the Representative and Holders, in order to comply with the provisions of the Act, so as to permit a public offering and sale of their respective Registrable Securities for nine (9) consecutive months (or such longer period of time as permitted by the Act) by such Holders and any other Holders of any of the Registrable Securities who notify the Company within ten (10) days after being given notice from the Company of such request (Demand Registration Statement). A Demand Registration shall not be counted as a Demand Registration hereunder until such Demand Registration has been declared effective by the SEC and maintained continuously effective for a period of at least nine months or such shorter period when all Registrable Securities included therein have been sold in accordance with such Demand Registration, provided that a Demand Registration shall be counted as a Demand Registration hereunder if the Company ceases its efforts in respect of such Demand Registration at the request of the majority Holders making the demand for a reason other than a material and adverse change in the business, assets, prospects or condition (financial or otherwise) of the Company and its subsidiaries taken as a whole. (b) The Company covenants and agrees to give written notice of any registration request under this Section 7.3 by the majority of the Holders to all other registered Holders of any of the Registrable Securities within ten (10) days from the date of the receipt of any such registration request. (c) In addition to the registration rights under Section 7.2 and subsection (a) of this Section 7.3. at any time commencing one (1) year after the Effective Date of the Public Offering, and expiring four (4) years thereafter, the Holders of a majority of the Registrable Securities shall have the right, exercisable by written request to the Company, to have the Company prepare and file, on one occasion, with the Commission a registration statement or any other appropriate disclosure document so as to permit a public offering and sale for nine (9) consecutive months (or such longer period of time as permitted by the Act) by any such Holder 6 7 of Registrable Securities; provided, however, that the provisions of Section 7.4(b) hereof shall not apply to any such registration request and registration and all costs incident thereto shall be at the expense of the Holder or Holders participating in the offering pro-rata. (d) Any written request by the Holders made pursuant to this Section 7.3 shall: (i) specify the number of Registrable Securities which the Holders intend to offer and sell and the minimum price at which the Holders intend to offer and sell such securities; (ii) state the intention of the Holders to offer such securities for sale; (iii) describe the intended method of distribution of such securities; and (iv) contain an undertaking on the part of the Holders to provide all such information and materials concerning the Holders and take all such action as may be reasonably required to permit the Company to comply with all applicable requirements of the Commission and to obtain acceleration of the effective date of the registration statement. (e) In the event the Company receives from the Holders of any Registrable Securities representing more than 50% of such securities at that time outstanding, a request that the Company effect a registration on Form S-3 with respect to the Registrable Securities and if Form S-3 is available for such offering, the Company shall, as soon as practicable, effect such registration as would permit or facilitate the sale and distribution of the Registrable Securities as are specified in the request. All expenses incurred in connection with a registration requested pursuant to this Section shall be borne by the Company. Registrations effected pursuant to this Section 7.3 (e) shall not be counted as registrations pursuant to Section 7.3 (a) and 7.3 (c) hereof. 7.4 Covenants of the Company With Respect to Registration. In connection with any registration under Section 7.2 or 7.3 hereof, the Company covenants and agrees as follows: (a) The Company shall use its best efforts to file a registration statement within forty-five (45) days of receipt of any demand pursuant to Section 7.3, and shall use its best efforts to have any such registration statement declared effective at the earliest practicable time. The Company will promptly notify each seller of such Registrable Securities and confirm such advice in writing, (i) when such registration statement becomes effective, (ii) when any post-effective amendment to such registration statement becomes effective and (iii) of any request by the SEC for any amendment or supplement to such registration statement or any prospectus relating thereto or for additional information. 7 8 The Company shall furnish to each seller of such Registrable Securities such number of copies of such registration statement and of each such amendment and supplement thereto (in each case including each preliminary prospectus and summary prospectus) in conformity with the requirements of the Act, and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities by such seller. (b) The Company shall pay all costs (excluding transfer taxes, if any, and fees and expenses of Holder's counsel and the Holder's pro-rata portion of the selling discount or commissions), fees and expenses in connection with all registration statements filed pursuant to Sections 7.2 and 7.3(a) hereof including, without limitation, the Company's legal and accounting fees, printing expenses, blue sky fees and expenses. The Holder will pay all costs, fees and expenses in connection with any registration statement filed pursuant to Section 7.3(c). If the Company shall fail to comply with the provisions of Section 7.3(a), the Company shall, in addition to any other equitable or other relief available to the Holder, be liable for any or all special and consequential damages sustained by the Holder requesting registration of their Registrable Securities. (c) The Company shall prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be reasonably necessary to keep such registration statement effective for at least nine months (or such longer period as permitted by the Act), and to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the seller or sellers of Registrable Securities set forth in such registration statement. If at any time the SEC should institute or threaten to institute any proceedings for the purpose of issuing a stop order suspending the effectiveness of any such registration statement, the Company will promptly notify each seller of such Registrable Securities and will use all reasonable efforts to prevent the issuance of any such stop order or to obtain the withdrawal thereof as soon as possible. The Company will use its good faith reasonable efforts and take all reasonably necessary action which may be required in qualifying or registering the Registrable Securities included in a registration statement for offering and sale under the securities or blue sky laws of such states as reasonably are required by the Holder, provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction. The Company shall use its good faith reasonable efforts to cause such Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities of the United States or any State thereof as may be reasonably necessary to enable the seller or sellers thereof to consummate the disposition of such Registrable Securities. (d) The Company shall indemnify the Holder of the Registrable Securities to be sold pursuant to any registration statement and each person, if any, who controls such Holders within 8 9 the meaning of Section 15 of the Act or Section 20 (a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"). against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Representative as contained in the Underwriting Agreement. (e) If requested by the Company prior to the filing of any registration statement covering the Registrable Securities, each of the Holder of the Registrable Securities to be sold pursuant to a registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 (a) of the Exchange Act, against all loss, claim, damage or expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from written information furnished by such Holder, or their successors or assigns, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in the Underwriting Agreement pursuant to which the Representative has agreed to indemnify the Company, except that the maximum amount which may be recovered from each Holder pursuant to this paragraph or otherwise shall be limited to the amount of net proceeds received by the Holder from the sale of the Registrable Securities. (f) Nothing contained in this Agreement shall be construed as requiring the Holder to exercise their Warrants or Underlying Warrants prior to the filing of any registration statement or the effectiveness thereof. (g) The Company shall not permit the inclusion of any securities other than the Registrable Securities to be included in any registration statement filed pursuant to Section 7.3 hereof without the prior written consent of the Holders of the Registrable Securities representing a majority of such securities. (h) The Company shall furnish to each Holder participating in the offering and to each underwriter, if any, a signed counterpart, addressed to such Holder or underwriter, of (i) an opinion of counsel to the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement) , and (ii) a "cold comfort" letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial 9 10 statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities. (i) The Company shall deliver promptly to each Holder participating in the offering requesting the correspondence and memoranda described below and the managing underwriter copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of the National Association of Securities Dealers, Inc. ("NASD"). Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times and as often as any such Holder shall reasonably request. (j) With respect to a registration statement filed pursuant to Section 7.3, the Company, if requested, shall enter into an underwriting agreement with the managing underwriter, reasonably satisfactory to the Company, selected for such underwriting by Holders holding a majority of the Registrable Securities requested to be included in such underwriting. Such agreement shall be satisfactory in form and substance to the Company, each Holder and such managing underwriters, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter. The Holders, if required by the underwriter to be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities, may, at their option, require that any or all the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders and their intended methods of distribution. (k) Notwithstanding the provisions of paragraph 7.2 or paragraph 7.3 of this Agreement, the Company shall not be required to effect or cause the registration of Registrable Securities pursuant to paragraph 7.2 or paragraph 7.3 hereof if, within thirty (30) days after its receipt of a request to register such Registrable Securities (i) counsel for the Company delivers an opinion to the Holders requesting registration of such Registrable Securities, in form and substance satisfactory to counsel to such Holder, to the effect that the entire number of Registrable Securities proposed to be sold by such Holder may otherwise be sold, in the manner proposed by such Holder, without registration under the Securities Act, or (ii) the SEC shall have issued a no-action position, in form and substance satisfactory to counsel for the Holder requesting registration of such Registrable Securities, to the effect that the entire number of Registrable Securities proposed to be sold by such Holder may be sold by it, in the manner proposed by such Holder, without registration under the Securities Act. 10 11 (l) After completion of the Public Offering, the Company shall not, directly or indirectly, enter into any merger, business combination or consolidation in which (a) the Company shall not be the surviving corporation and (b) the stockholders of the Company are to receive, in whole or in part, capital stock or other securities of the surviving corporation, unless the surviving corporation shall, prior to such merger, business combination or consolidation, agree in writing to assume the obligations of the Company under this Agreement, and for that purpose references hereunder to "Registrable Securities" shall be deemed to include the securities which the Holders would be entitled to receive in exchange for Registrable Securities under any such merger, business combination or consolidation, provided that to the extent such securities to be received are convertible into shares of Common Stock of the issuer thereof, then any such shares of Common Stock as are issued or issuable upon conversion of said convertible securities shall also be included within the definition of "Registrable Securities". 8. Adjustments to Exercise Price and Number of Securities. 8.1 Adjustment for Dividends, Subdivisions, Combinations or Reclassification. In case the Company shall (a) pay a dividend or make a distribution in shares of its capital stock (whether shares of Common Stock or of capital stock of any other class), (b) subdivide its outstanding shares of Common Stock into a greater number of shares, (c) combine its outstanding shares of Common Stock into a smaller number of shares, or (d) issue by reclassification of its shares of Common Stock any shares of capital stock of the Company; then, and in each such case, the per share Exercise Price and the number of Warrant Securities in effect immediately prior to such action shall be adjusted so that the Holder of this Warrant thereafter upon the exercise hereof shall be entitled to receive the number and kind of shares of the Company which such Holder would have owned immediately following such action had this warrant been exercised immediately prior thereto. An adjustment made pursuant to this Section shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this Section, the Holder of this Warrant shall become entitled to receive shares of two or more classes of capital stock of the Company, the Board of Directors of the Company (whose determination shall be conclusive) shall determine the allocation of the adjusted Exercise Price between or among shares of such class of capital stock. Immediately upon any adjustment of the Exercise Price pursuant to this Section, the Company shall send written notice thereof to the Holder of Warrant Certificates (by first class mail, postage prepaid), which notice shall state the Exercise Price resulting from such adjustment, and any increase or decrease in the number of Warrant Securities to be acquired upon exercise of the Warrants, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 8.2 Adjustment For Reorganization, Merger or Consolidation. 11 12 In case of any reorganization of the Company or consolidation of the Company with, or merger of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Common Stock), the corporation formed by such consolidation or merger shall execute and deliver to the Holder a supplemental Warrant agreement providing that the Holder of each Warrant then outstanding or to be outstanding shall have the right thereafter (until the expiration of such Warrant) to receive, upon exercise of such Warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation or merger, by a holder of the number of shares of Common Stock of the Company for which such Warrant might have been exercised immediately prior to such reorganization, consolidation, merger, conveyance, sale or transfer. Such supplemental Warrant agreement shall provide for adjustments which shall be identical to the adjustments provided in Section 8.1 and such registration rights and other rights as provided in this Agreement. The Company shall not effect any such consolidation, merger, or similar transaction as contemplated by this paragraph, unless prior to or simultaneously with the consummation thereof, the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing, receiving, or leasing such assets or other appropriate corporation or entity shall assume, by written instrument executed and delivered to the Holders, the obligation to deliver to the Holders, such shares of stock, securities, or assets as, in accordance with the foregoing provisions, such holders may be entitled to purchase, and to perform the other obligations of the Company under this Agreement. The above provision of this Subsection shall similarly apply to successive consolidations or successively whenever any event listed above shall occur. 8.3 Dividends and Other Distributions. In the event that the Company shall at any time prior to the exercise of all of the Warrants and/or Underlying Warrants distribute to its stockholders any assets, property, rights, evidences of indebtedness, securities (other than a distribution made as a cash dividend payable out of earnings or out of any earned surplus legally available for dividends under the laws of the jurisdictions of incorporation of the Company), whether issued by the Company or by another, the Holders of the unexercised Warrants shall thereafter be entitled, in addition to the shares of Common Stock or other securities and property receivable upon the exercise thereof, to receive, upon the exercise of such Warrants, the same property, assets, rights, evidences of indebtedness, securities or any other thing of value that they would have been entitled to receive at the time of such distribution as if the Warrants had been exercised immediately prior to such distribution. At the time of any such distribution, the Company shall make appropriate reserves to ensure the timely performance of the provisions of this subsection or an adjustment to the Exercise Price, which shall be effective as of the day following the record date for such distribution. 8.4 Adjustment in Number of Securities. Upon each adjustment of the Exercise Price pursuant to the provisions of this Article 8, 12 13 the number of securities issuable upon the exercise of each Warrant and/or Underlying Warrant shall be adjusted to the nearest full amount by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of securities issuable upon exercise of the Warrants and/or the Underlying Warrants immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 8.5 No Adjustment of Exercise Price in Certain Cases. No adjustment of the Exercise Price shall be made if the amount of said adjustment shall be less than 5 cents ($.05) per Share, provided, however, that in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to at least 5 cents ($.05) per Share. 8.6 Accountant's Certificate of Adjustment. In each case of an adjustment or readjustment of the Exercise Price or the number of any securities issuable upon exercise of the Warrants and/or Underlying Warrants, the Company, at its expense, shall cause independent certified public accountants of recognized standing selected by the Company (who may be the independent certified public accountants then auditing the books of the Company) to compute such adjustment or readjustment in accordance herewith and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first class mail, postage prepaid, to any Holder of the Warrants and/or Underlying Warrants at the Holder's address as shown on the Company's books. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based including, but not limited to, a statement of (i) the Exercise Price at the time in effect, and (ii) the number of additional securities and the type and amount, if any, of other property which at the time would be received upon exercise of the Warrants and/or Underlying Warrants. 8.7 Adjustment of Underlying Warrant Exercise Price. With respect to any of the Underlying Warrants whether or not the Underlying Warrants have been exercised (or are exercisable) and whether or not the Underlying Warrants are issued and outstanding, the Underlying Warrant exercise price and the number of shares of Common Stock underlying such Underlying Warrants shall be automatically adjusted in accordance with the Warrant Agreement between the Company and the Company's transfer agent, upon occurrence of any of the events relating to adjustments described therein. Thereafter, the Underlying Warrants shall be exercisable at such adjusted Underlying Warrant exercise price for such adjusted number of underlying shares of Common Stock or other securities, properties or rights. 9. Exchange and Replacement of Warrant Certificates. 13 14 Each Warrant Certificate is exchangeable without expense, upon the surrender thereof by the registered Holder at the principal executive office of the Company, for a new Warrant Certificate of like tenor and date representing in the aggregate the right to purchase the same number of securities in such denominations as shall be designated by the Holder thereof at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Warrants, if mutilated, the Company will make and deliver a new Warrant Certificate of like tenor, in lieu thereof. 10. Elimination of Fractional Interest. The Company shall not be required to issue certificates representing fractions of shares of Common Stock upon the exercise of the Warrants and/or Underlying Warrants, nor shall it be required to issue script or pay cash in lieu of fractional interests, it being the intent of the parties that all fractional interests may be eliminated, at the Company's option, by rounding any fraction up to the nearest whole number of shares of Common Stock or other securities, properties or rights, or in lieu thereof paying cash equal to such fractional interest multiplied by the current value of a share of Common Stock. 11. Reservation and Listing. The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon the exercise of the Warrants and the Underlying Warrants, such number of shares of Common Stock or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Warrants and/or the Underlying Warrants, and payment of the Exercise Price therefor, all shares of Common Stock and other securities issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any stockholder. As long as the Warrants and/or Underlying Warrants shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock issuable upon the exercise of the Warrants and the Underlying Warrants to be listed and quoted (subject to official notice of issuance) on all securities Exchanges and Systems on which the Common Stock and/or the Public Warrants may then be listed and/or quoted, including NASDAQ. 12. Notices to Warrant Holders. Nothing contained in this Agreement shall be construed as conferring upon the Holders of the Warrants and/or Underlying Warrants the right to vote or to consent or to receive notice as a 14 15 stockholder in respect of any meetings of stockholders, for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of the warrants and/or Underlying Warrants and their exercise, any of the following events shall occur: (a) the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or (b) the Company shall offer to all the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business as an entirety shall be proposed; then, in any one or more of said events, the Company shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date of the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notices shall specify such record date or the date of closing the transfer books, as the case may be. Failure to give such notice or any defect therein shall not affect the validity of any action taken in connection with the declaration or payment of any such dividend, or the issuance of any convertible or exchangeable securities, or subscription rights, options or warrants, or any proposed dissolution, liquidation, winding up or sale. 13. Underlying Warrants. The form of the certificate representing the Underlying Warrants (and the form of election to purchase shares of Common Stock upon the exercise of the Underlying Warrants and the form of assignment printed on the reverse thereof) shall be substantially as set forth in the exhibits to the Warrant Agreement. Subject to the terms of this Agreement, one (1) Underlying Warrant shall evidence the right to initially purchase one (1) fully-paid and non-assessable share of Common Stock at an initial purchase price of $120% of the public offering price during the five (5) year period commencing on the Effective Date of the Registration Statement, at which time the Underlying Warrants, unless the exercise period has been extended, shall expire. The exercise price of the Underlying Warrants and the number of shares of Common Stock issuable upon the exercise of 15 16 the Underlying Warrants are subject to adjustment, whether or not the Warrants have been exercised and the Underlying Warrants have been issued, in the manner and upon the occurrence of the events set forth in the Warrant Agreement, which is hereby incorporated herein by reference and made a part hereof as if set forth in its entirety herein. Subject to the provisions of this Agreement and upon issuance of the Underlying Warrants, each registered holder of such Underlying Warrant shall have the right to purchase from the Company (and the Company shall issue to such registered holders) up to the number of fully-paid and non-assessable shares of Common Stock (subject to adjustment as provided in the Warrant Agreement) set forth in such Warrant Certificate, free and clear of all preemptive rights of stockholders, provided that such registered Holder complies with the terms governing exercise of the Underlying Warrant set forth in the Warrant Agreement, and pays the applicable exercise price, determined in accordance with the terms of the Warrant Agreement. Upon exercise of the Underlying Warrants, the Company shall forthwith issue to the registered Holder of any such Underlying Warrant in his name or in such name as may be directed by him, certificates for the number of shares of Common Stock so purchased. Except as otherwise provided herein and in this Agreement, the Underlying Warrants shall be governed in all respects by the terms of the Warrant Agreement. The Underlying Warrants shall be transferable in the manner provided in the Warrant Agreement, and upon any such transfer, a new Underlying Warrant certificate shall be issued promptly to the transferee. The Company covenants to send to each Holder, irrespective of whether or not the Warrants have been exercised, any and all notices required by the Warrant Agreement to be sent to holders of Underlying Warrants. 14. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly given when personally delivered, or mailed by registered or certified mail, return receipt requested: (a) If to the registered Holder of any of the Registrable Securities, to the address of such Holder as shown on the books of the Company; or (b) If to the Company, to the address set forth below or to such other address as the Company may designate by notice to the Holders. Lyle Maul, President BEVERAGE WORKS, INC. 9800 South Sepulveda, Suite 720 Boca Raton, California 33432 With a copy to: Charles J. Hecht, Esq. Hecht & Steckman, P.C. 60 East 42nd Street, Suite 5101 New York, NY 10165-5101 16 17 15. Entire Agreement: Modification. This Agreement (and the Underwriting Agreement and Warrant Agreement to the extent applicable) contain the entire understanding between the parties hereto with respect to the subject matter hereof, and the terms and provisions of this Agreement may not be modified, waived or amended except in a writing executed by the Company and the Holders of at least a majority of Registrable Securities (based on underlying numbers of shares of Common Stock). Notice of any modification, waiver or amendment shall be promptly provided to any Holder not consenting to such modification, waiver or amendment. 16. Successors. All the covenants and provisions of this Agreement shall be binding upon and inure to the benefit of the Company, the Holders and their respective successors and assigns hereunder. 17. Termination. This Agreement shall terminate at the close of business on ____________, 2002. Notwithstanding the foregoing, the indemnification provisions of Section 7 shall survive such termination. 18. Governing Law; Submission to Jurisdiction. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Texas and for all purposes shall be construed in accordance with the laws of said State without giving effect to the rules of said State governing the conflicts of laws. The Company, the Representative and the Holders hereby agree that any action, proceeding or claim arising out of, or relating in any way to, this Agreement shall be brought and enforced in a federal or state court of competent jurisdiction with venue only in the State District court in Dallas, County, Texas or the United States District Court for the Northern District of Texas, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company, the Representative and the Holders hereby irrevocably waive any objection to such exclusive jurisdiction or inconvenient forum. Any such process or summons to be served upon any of the Company, the Representative and the Holders (at the option of the party bringing such action, proceeding or claim) may be served by transmitting a copy thereof, by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 14 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the party so served in any action, proceeding or claim. 19. Severability. If any provision of this Agreement shall be held to be invalid or unenforceable, such 17 18 invalidity or unenforceability shall not affect any other provision of this Agreement. 20. Captions. The caption headings of the Sections of this Agreement are for convenience of reference only and are not intended, nor should they be construed as, a part of this Agreement and shall be given no substantive effect. 21. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company and the Representative and any other registered Holder of the Warrant Certificates or Registrable Securities any legal or equitable right, remedy or claim under this Agreement; and this Agreement shall be for the sole and exclusive benefit of the Company and the Representative and any other Holder of the Warrant Certificates or Registrable Securities. 22. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. IN WITNESS HEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. BEVERAGE WORKS, INC. By: _______________________________ Lyle Maul, President Attest: __________________________ _____________ , Secretary FIRST LONDON SECURITIES CORPORATION By: _______________________________ Douglas Nichols, President 18 19 WARRANT CERTIFICATE THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. EXERCISABLE ON OR BEFORE 5:30 P.M, EASTERN TIME ON _____________, 2002 NO. W-______ ___________ Common Stock ___________ Warrant Representative Representative Warrants Warrants or ___________ Underlying Warrants This Warrant Certificate certifies that ___________________, or registered assigns, is the registered holder of _____________ Common Stock Representative Warrants and/or ________ Warrant Representative Warrants and/or _________________ Underlying Warrants of BEVERAGE WORKS, INC. (the "Company"). Each Common Stock Representative Warrant permits the Holder hereof to purchase initially, at any time from _________, 1997 ("Purchase Date") until 5:30 p.m. Eastern Time on ____________, 2002 ("Expiration Date"), one (1) share of the Company's Common Stock at the initial exercise price, subject to adjustment in certain events (the "Exercise Price"), of $____ per share (___% of the public offering price). Each Warrant Representative Warrant permits the Holder hereof to purchase initially, at any time from the Purchase Date until five (5) years from the Purchase Date, one (1) Underlying Warrant at the Exercise Price of $____ per Underlying Warrant. Each 19 20 Underlying Warrant permits the Holder thereof to purchase, at any time from the Purchase Date until five (5) years from the Purchase Date, one (1) share of the Company's Common Stock at the Exercise Price of $____ per share. Any exercise of Common Stock Representative Warrants and/or Warrant Representative Warrants and/or Underlying Warrants shall be effected by surrender of this Warrant Certificate and payment of the Exercise Price at an office or agency of the Company, but subject to the conditions set forth herein and in the Representative's Warrant Agreement dated as of _____, 1997, between the Company and First London Securities Corporation (the "Representative's Warrant Agreement"). Payment of the Exercise Price shall be made by certified check or official bank check in New York Clearing House funds payable to the order of the Company in the event there is no cashless exercise pursuant to Section 3.1(ii) of the Representative's Warrant Agreement. The Common Stock Representative Warrants, the Warrant Representative Warrants, and the Underlying Warrants are collectively referred to as "Warrants". No Warrant may be exercised after 5:30 p.m., Eastern Time, on the Expiration Date, at which time all Warrants evidenced hereby, unless exercised prior thereto, hereby shall thereafter be void. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants issued pursuant to the Representative's Warrant Agreement, which Representative's Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation or rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. The Representative's Warrant Agreement provides that upon the occurrence of certain events, the Exercise Price and the type and/or number of the Company's securities issuable thereupon may, subject to certain conditions, be adjusted. In such event, the Company will, at the request of the holder, issue a new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or type of securities issuable upon the exercise of the Warrants; provided, however, that the failure of the Company to issue such new Warrant Certificates shall not in any way change, alter, or otherwise impair, the rights of the holder as set forth in the Representative's Warrant Agreement. Upon due presentment for registration or transfer of this Warrant Certificate at an office or agency of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferees) in exchange for this Warrant Certificate, subject to the limitations provided herein and in the Representative's Warrant Agreement, without any charge except for any tax or other governmental charge imposed in connection with such transfer. Upon the exercise of less than all of the Warrants evidenced by this Certificate, the 20 21 Company shall forthwith issue to the holder hereof a new Warrant Certificate representing such number of unexercised Warrants. The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant certificate (notwithstanding any notation of ownership or other writing hereon made by anyone) , for the purpose of any exercise hereof, and of any distribution to the Holder hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. All terms used in this Warrant Certificate which are defined in the Representative's Warrant Agreement shall have the meanings assigned to them in the Representative's Warrant Agreement. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its corporate seal. Dated as of ____________________, 1997 BEVERAGE WORKS, INC. By:________________________________________ Lyle Maul, President (Seal) Attest: ____________________________ ________________ , Secretary 21 22 EXHIBIT "A" FORM OF SUBSCRIPTION (CASH EXERCISE) (To be signed only upon exercise of Warrant) TO: BEVERAGE WORKS, INC. 9800 South Sepulveda, Suite 720 Los Angeles, California 90045 The undersigned, the Holder of Warrant Certificate number ____ (the "Warrant"), representing ______________ Common Stock Representative Warrants and/or __________ Warrant Representative Warrants and/or _______________ Underlying Warrants of BEVERAGE WORKS, INC. (the "Company"), which Warrant Certificate is being delivered herewith, hereby irrevocably elects to exercise the purchase right provided by the Warrant Certificate for, and to purchase thereunder, _____________ Shares and/or _____________ Underlying Warrants of the Company, and herewith makes payment of $____________ therefor, and requests that the certificates for such securities be issued in the name of, and delivered to, _________________________________________ whose address is ______________________________________, all in accordance with the Representative's Warrant Agreement and the Warrant Certificate. Dated:____________________________ __________________________________ (Signature must conform in all respects to name of Holder as specified on the face of the Warrant Certificate) __________________________________ __________________________________ (Address) 22 23 EXHIBIT "B" FORM OF SUBSCRIPTION (CASHLESS EXERCISE) TO: BEVERAGE WORKS, INC. 9800 South Sepulveda, Suite 720 Boca Raton, California 33432 The undersigned, the Holder of Warrant Certificate number ____ (the "Warrant"), representing ___________ Common Stock Representative Warrants and/or _________________ Underlying Warrants of BEVERAGE WORKS, INC. (the "Company"), which Warrant is being delivered herewith, hereby irrevocably elects the cashless exercise of the purchase right provided by the Representative's Warrant Agreement and the Warrant Certificate for, and to purchase thereunder, Shares of the Company in accordance with the formula provided at Section three (3) of the Representative's Warrant Agreement. The undersigned requests that the certificates for such Shares be issued in the name of, and delivered to, _______ ________________________________________________________________________________ ____________________ whose address is, _________________________________________ ____________________ all in accordance with the Warrant Certificate. Dated:____________________________ _________________________________ (Signature must conform in all respects to name of Holder as specified on the face of the Warrant Certificate) _________________________________ _________________________________ (Address) 23 24 (FORM OF ASSIGNMENT) (To be exercised by the registered holder if such holder desires to transfer the Warrant Certificate.) FOR VALUE RECEIVED ___________________________________________________________ hereby sells, assigns and transfers unto (Print name and address of transferee) this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ___________________________ ________________________________________________ Attorney, to transfer the within Warrant Certificate on the books of the within-named Company, and full power of substitution. Dated: Signature: ___________________________ ____________________________________ (Signature must conform in all respects to name of holder as specified on the fact of the Warrant Certificate) ____________________________________ (Insert Social Security or Other Identifying Number of Assignee) 24 EX-10.1 14 SMALL BUSINESS ADMIN. LOAN DATED 11/10/93 1 EXHIBIT 10.1 SBA LOAN NUMBER CLPGP5975053006SNA U.S. Small Business Administration NOTE DANA Point, CA (City and State) 445,000.00 (Date) 11/10, 93 For value received, the undersigned promises to pay to the order of LIBERTY NATIONAL BANK its office in the city of HUNTINGTON BEACH, State of - ----------------------- ------------------- (Payee) CALIFORNIA at holder's option, at such other place as may be designated from - ------------ time to time by the holder **FOUR HUNDRED FORTY FIVE THOUSAND AND 00/100** -------------------------------------------------- (Write out amount) dollars, with interest on unpaid principal computed from the date of each advance to the undersigned at the rate of 8.750 percent per annum, payment to be made in installments as follows: Interest on this Note shall be computed on the basis of a 360 day year. SIX (6) interest installment(s), payable monthly, commencing on the first day of the month(s) from date of first disbursement followed by 120 installments including principal and interest each in the amount of FIVE THOUSAND FIVE HUNDRED SEVENTY EIGHT AND 00/100 DOLLARS ($5,578.00), payable monthly thereafter until TEN (10) years six months from the date of first disbursement when the full unpaid balance of principal and interest shall become due and payable. Each installment shall be applied to interest accrued as of date of receipt and the balance, if any, to principal. THIS IS A VARIABLE INTEREST RATE NOTE. Interest on unpaid principal shall accrue at the initial rate of EIGHT AND THREE QUARTERS (8.750%) percent per annum. Commencing on the first calendar day of the calendar quarter following first disbursement, and quarterly thereafter, the interest rate shall increase or decrease to TWO AND THREE QUARTERS (2.750%) percent above the lowest New York Prime Rate in effect on the first business day of the month, as published in the Money Rate Section of the West Coast Edition of The Wall Street Journal. NOTE: The amount of the monthly payment shown above is based upon the prime interest rate as of the date of the receipt of the loan application by SBA of SIX (6.000%) percent plus a spread of TWO AND THREE QUARTERS (2.750%). The amount of the monthly installments of principal and interest required herein shall be increased or decreased, as appropriate, to an amount necessary to amortize principal remaining unpaid as of the date of change in the interest rate over the remaining term of this Note. The Lender shall give the Borrower written notice of any change in the interest rate of this Note and of any change (either an increase or decrease) in the amount of the principal and interest installments required herein within thirty (30) days after the effective date of any such change. If the Borrower shall be in default in payment due on the indebtedness herein and the Small Business Administration (SBA) purchases its guaranteed portion of said indebtedness, the rate of interest on both the guaranteed and unguaranteed portion herein shall become fixed at the rate in effect as of the initial date of default. If the Borrower shall not be in default in payment when SBA purchases its guaranteed and unguaranteed portion shall be fixed at the rate in effect as of the date of purchase by SBA. LATE CHARGE: If a payment is more than 10 days late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment or $1.00, whichever is greater. If this Note contains a fluctuating interest rate, the notice provision is not a pre-condition for fluctuation (which shall take place regardless of notice). Payment of any installment of principal or interest owing on this Note may be made prior to the maturity date hereof without penalty. Borrower shall provide lender with written notice of intent to prepay part or all of this loan at least three (3) [days prior?] to the anticipated prepayment. A prepayment is any payment made ahead of schedule that exceeds twenty (20) percent of the then outstanding principal balance. If borrower makes a prepayment and fails to give at least three weeks advance notice of intent to prepay, then, notwithstanding any other provision to the contrary in this note or other document, borrower shall be required to pay lender three weeks interest on the unpaid principal as of the date preceding such prepayment. Page 1 2 The term "indebtedness" as used herein shall mean the indebtedness evidenced by this Note, including principal, interest, and expenses, whether contingent, now due or hereafter to become due and whether heretofore or contemporaneously herewith or hereafter contracted. The term "Collateral" as used in this Note shall mean any funds, guaranties, or other property or rights therein of any nature whatsoever or the proceeds thereof which may have been, are, or hereafter may be, hypothecated, directly or indirectly by the undersigned or others, in connection with, or as security for, the Indebtedness or any party thereof. The covenants and conditions set forth or referred to in any and all instruments of hypothecation constituting the Collateral are hereby incorporated in this Note as covenants and conditions of the undersigned with the same force and effect as though such covenants and conditions were fully set forth herein. The indebtedness shall immediately become due and payable, without notice or demand, upon the appointment of a receiver or liquidator, whether voluntary or involuntary, for the undersigned or for any of its property, or upon the filing of a petition by or against the undersigned under the provisions of any State insolvency law or under the provisions of the Bankruptcy Reform Act of 1978, as amended, or upon the making by the undersigned of an assignment for the benefit of its creditors. Holder is authorized to declare all or any part of the Indebtedness immediately due and payable upon the happening of any of the following events: (1) Failure to pay any part of the Indebtedness when due; (2) nonperformance by the undersigned of any agreement with, or any condition imposed by, Holder or Small Business Administration (hereinafter called "SBA"), with respect to the Indebtedness; (3) Holder's discovery of the undersigned's failure in any application of the undersigned to Holder or SBA to disclose any fact deemed by Holder to be material or of the making therein or in any of the said agreements, or in any affidavit or other documents submitted in connection with said application or the indebtedness, of any misrepresentation by, on behalf of, or for the benefit of the undersigned; (4) the reorganization (other than a reorganization pursuant to any of the provisions of the Bankruptcy Reform Act of 1978, as amended) or merger or consolidation of the undersigned (or the making of any agreement therefor) without the prior written consent of Holder; (5) the undersigned's failure duly to account, to Holder's satisfaction, at such time or times as Holder may require, for any of the Collateral, or proceeds thereof, coming into the control of the undersigned; or (6) the institution of any suit affecting the undersigned deemed by Holder to affect adversely its interest hereunder in the Collateral or otherwise. Holder's failure to exercise its rights under this paragraph shall not constitute a waiver thereof. Upon the nonpayment of the Indebtedness, or any part thereof, when due, whether by acceleration or otherwise, Holder is empowered to sell, assign, and deliver the whole or any part of the Collateral at public or private sale, without demand, advertisement or notice of the time or place of sale or of any adjournment thereof, which are hereby expressly waived. After deducting all expenses incidental to or arising from such sale or sales. Holder may apply the residue of the proceeds thereof to the payment of the Indebtedness, as it shall deem proper, returning the excess, if any, to the undersigned. The undersigned hereby waives all right of redemption or appraisement whether before or after sale. Holder is further empowered to collect or cause to be collected or otherwise to be converted into money all or any part of the Collateral, by suit or otherwise, and to surrender, compromise, release, renew, extend, exchange, or substitute any item of the Collateral in transactions with the undersigned or any assignee. Whenever any item of the Collateral shall not be paid when due, or otherwise shall be in default, whether or not the indebtedness, or any part thereof, has become due, Holder shall have the same rights and powers with respect to such item of the Collateral as are granted in this paragraph in case of nonpayment of the Indebtedness, or any part thereof, when due. None of the rights, remedies, privileges, or powers of Holder expressly provided for herein shall be exclusive, but each of them shall be cumulative with and in addition to every other right, remedy, privilege, and power now or hereafter existing in favor of Holder, whether at law or equity, by statute or otherwise. The undersigned agrees to take all necessary steps to administer, supervise, preserve, and protect the Collateral; and regardless of any action taken by Holder, there shall be no duty upon Holder in this respect. The undersigned shall pay all expenses of any nature, whether incurred in or out of court, and whether incurred before or after this Note shall become due at its maturity date or otherwise, including but not limited to reasonable attorney's fees and costs, which Holder may deem necessary or proper in connection with the satisfaction of the Indebtedness or the administration, supervision, preservation, protection of (including, but not limited to, the maintenance of adequate insurance) or the realization upon the Collateral. Holder is authorized to pay at any time and from time to time any or all of such expenses, add the amount of such payment to the amount of the Indebtedness, and charge interest thereon at the rate specified herein with respect to the principal amount of this Note. The security rights of Holder and its assigns hereunder shall not be impaired by Holder's sale, hypothecation or rehypothecation of any note of the undersigned or any lien of the Collateral, or by any indulgence, including but not limited to (a) any renewal, extension, or modification which Holder may grant with respect to the Indebtedness or any part thereof, or (b) any surrender, compromise, release, renewal, extension, exchange, or substitution which Holder may grant in respect of the Collateral, or (c) any indulgence granted in respect of any endorser, guarantor, or surety. The purchaser, assignee, transferee, or pledgee of this Note, the Collateral, and guaranty, and any other document (or any of them), sold, assigned, transferred, pledged, or repledged, shall forthwith become vested with and entitled to exercise all the powers and rights given by this Note and all applications of the undersigned to Holder or SBA, as if said purchaser, assignee, transferee, or pledgee were originally named as Payee in this Note and in said application or applications. Page 2 3 This promissory note is given to secure a loan which SBA is making or in which it is participating and, pursuant to Part 101 of the Rules and Regulations of SBA (13 C.F.R. 101.1(d)), this instrument is to be construed and (when SBA is the Holder or a party in interest) enforced in accordance with applicable Federal law. Upon any breach of this Note, the balance shall continue to accrue interest at the rate specified herein. DUE ON SALE - CONSENT BY LENDER. Lender may, at its option, declare immediately due and payable all sums secured by this Deed of Trust upon the sale or transfer, without the Lender's prior written consent, of all or any part of the Real Property, or any interest in the Real Property. A "sale or transfer" means the conveyance of Real Property or any right, title or interest therein; whether legal or equitable; whether voluntary or involuntary; whether by outright sale deed, installment sale contract, land contract, contract for deed, leasehold interest with a term greater than three (3) years, lease-option contract, or by sale, assignment, or transfer of any beneficial interest in or to any land trust holding title to the Real Property, or by any other method of conveyance of Real Property interest. If any Trustor is a corporation or partnership, transfer also includes any change in ownership of more than twenty-five percent (25%) of the voting stock or partnership interests, as the case may be, of Trustor. However, this option shall not be exercised by Lender if such exercise is prohibited by applicable law. HERITAGE BREWING COMPANY, INC. BY: /s/ JOHN G. STONER ------------------------------------------- JOHN G. STONER, CHIEF EXECUTIVE OFFICER BY: /s/ MARK B. MERICLE ------------------------------------------- MARK B. MERICLE, PRESIDENT/SECRETARY Note. -- Corporate applicants must execute Note, in corporate name, by duly authorized officer, and seal must be affixed and duly attested: part-applicants must execute Note in firm name, together with signature of a general partner. Page 3 EX-10.2 15 EQUIPMENT LEASE DECEMBER 20, 1993 1 EXHIBIT 10.2 EQUIPMENT LEASE AGREEMENT ------------------------- TERMS AND CONDITIONS OF LEASE 1. Lease Equipment. BREWERY LEASING COMPANY ("Lessor") leases to RIVERSIDE BREWING COMPANY ("Lessee") and Lessee hereby leases from Lessor all equipment, and leasehold improvements, if any (collectively, the "Equipment"), listed in Exhibit "A" attached hereto and incorporated herein. 2. Effective Date; Rental Terms. This Lease shall become effective on December 20, 1993. The rental term of this Lease shall commence on December 20, 1993 ("Commencement Date") and terminate on December 19, 2000. All provisions of this Lease shall apply during any extended rental term except as may be otherwise specifically provided in this Lease, or in any subsequent written agreement of the parties modifying this Lease. 3. Rent. Lessee agrees to pay Lessor aggregate rentals equal to $508,935, the sum of all rental payments. Rental payments shall be payable in equal monthly installments of (i) $2,353 beginning on January 1, 1994 and on the same day of each month thereafter through March 1, 1994 and (ii) $6,196 beginning on April 1, 1994 and on the same day of each month thereafter through December 1, 2000 at the office of Lessor set forth herein or to such other place as Lessor may from time to time designate in writing. 4. Security Deposit. Lessor shall retain $-0- as security for the performance by Lessee of its obligations hereunder. Any Security Deposit so taken shall be non-interest bearing. Lessor may, but shall not be obligated to, apply any Security Deposit to cure any default of Lessee hereunder in which event Lessee shall promptly restore any amount so applied. If Lessee is not in default in any of Lessee's obligations hereunder, any Security Deposit will be returned to Lessee at the termination of this Lease. 5. Selection of Equipment; Disclaimer of Warranty. Lessee has selected both the Equipment and the supplier. LESSEE ACKNOWLEDGES THAT LESSOR HAS NO EXPERTISE OR SPECIAL FAMILIARITY ABOUT OR WITH RESPECT TO THE EQUIPMENT. LESSEE AGREES THAT THE EQUIPMENT LEASED HEREUNDER IS LEASED "AS IS" AND IS OF A SIZE, DESIGN AND CAPACITY SELECTED BY LESSEE AND THAT LESSEE IS SATISFIED THAT THE SAME IS SUITABLE FOR LESSEE'S PURPOSES, AND THAT LESSOR HAS MADE NO REPRESENTATION OR WARRANTY WITH RESPECT TO THE SUITABILITY OR DURABILITY OF SAID EQUIPMENT FOR THE PURPOSES AND USES OF LESSEE, OR ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT THERETO, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. If the Equipment is not properly installed, does not operate as represented or warranted by the supplier and/or manufacturer, or is unsatisfactory for any reason, Lessee shall 1 2 make any claim on account thereof solely against the supplier and or manufacturer and shall, nevertheless, pay Lessor all rental payable under this Lease and shall not set up against Lessee's obligations any such claims as a defense, counterclaim, set-off or otherwise. So long as Lessee is not in breach or default of this Lease, Lessor hereby assigns to Lessee, solely for the purpose of making and prosecuting any such claim at Lessee's expense, all rights which Lessor may have against the supplier and the manufacturer for breach of warranty or other representation respecting any item of Equipment. All proceeds of any warranty recovery by Lessee from the supplier and/or manufacturer of any item of Equipment shall first be used to repair or replace the affected item of Equipment. LESSEE ACKNOWLEDGES THAT NEITHER THE SUPPLIER NOR ANY SALESMAN, EMPLOYEE, REPRESENTATIVE OR AGENT OF THE SUPPLIER IS AN AGENT OR REPRESENTATIVE OF LESSOR, AND THAT NONE OF THE ABOVE IS AUTHORIZED TO WAIVE OR ALTER ANY TERM, PROVISION OR CONDITION OF THIS LEASE, OR MAKE ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THIS LEASE. NO SALESMAN, EMPLOYEE REPRESENTATIVE OR AGENT OF SUPPLIER IS AUTHORIZED TO WAIVE OR ALTER ANY TERM OR CONDITION OF THIS LEASE, AND NO REPRESENTATION AS TO THE EQUIPMENT, OR ANY OTHER MATTER, BY THE SUPPLIER SHALL IN ANY WAY AFFECT LESSEE'S OBLIGATION TO PAY RENT AND OTHERWISE PREFORM AS SET FORTH IN THIS LEASE. 6. Delivery; Acceptance. Lessee has accepted the Equipment. Lessee agrees to hold Lessor harmless from specific performance of this Lease and from damages if the Equipment is unsatisfactory for any reason whatsoever. 7. Location; Inspection; Use Possession. The Equipment has been delivered to Lessee and installed by Lessee, at Lessee's own expense, and shall be kept at Lessee's premises located at 3397 7th Street, Riverside, California 92501. Lessee shall not remove the Equipment from the aforementioned location without Lessor's prior written consent. Lessor hereby warrants and represents that the Equipment will be used for business purposes and not for personal, family or household purposes, and Lessee acknowledges that Lessor has relied upon this representation in entering into this Lease. Lessee shall use the Equipment in a careful and proper manner and shall comply with all laws, regulations and ordinances relating to its possession, use or maintenance. Lessee shall affix and maintain labels, if supplied by Lessor, upon a visible place on each item of Equipment. Lessor shall have the right from time to time, during reasonable business hours, to enter upon the Lessee's premises for the purpose of inspecting the Equipment. So long as Lessee is not in default with regard to the payment of any obligation owing to Lessor as defined herein, or with regard to any warranty or representation by Lessee to Lessor or with regard to any term or condition of this Lease, then Lessee may remain in possession of the Equipment and have the use thereof. 2 3 8. Alterations; Maintenance. Lessee shall, at Lessee's own expense, maintain the Equipment in good operating condition, repair and appearance, furnish all parts and labor required to keep the Equipment in such condition, protect same from deterioration other than normal wear and tear, and only use the Equipment in the regular course of Lessee's business and within normal capacity. For the purpose of assuring Lessor that the Equipment will be properly serviced, Lessee shall cause the Equipment to be maintained by the supplier pursuant to the supplier's standard preventative maintenance contract, if any. Lessee shall not make any modifications, alterations or additions to the Equipment without prior written consent of Lessor, and the, all such modifications, alterations and additions shall belong to Lessor and shall be returned to Lessor with the Equipment upon the expiration or earlier termination of this Lease. 9. Insurance. Lessee shall obtain, maintain and keep the Equipment insured against all risks of loss or damage from every cause whatsoever in an amount not less than the greater or actual cash value of the aggregate amount of all unpaid rentals at any time for the then entire unexpired portion of the term of this Lease without deductible and without co-insurance. Lessee shall also obtain and maintain for the term of this Lease, comprehensive public liability insurance, with a severability of interest endorsement or its equivalent, covering liability for bodily injury, including death, and property damage resulting from the purchase, ownership, leasing, maintenance, use, operation or return of the Equipment in an amount satisfactory to Lessor. Lessor, its successors or assigns, shall be the sole named payee with respect to insurance for damage to or loss of the Equipment and shall be named additional insured on the public liability insurance. Lessee shall pay all premiums for such insurance and shall deliver to Lessor the original policy or policies of insurance, certificates of insurance, or other evidence satisfactory to Lessor evidencing the insurance required thereby, along with proof, satisfactory to Lessor, of the payment of the premium therefor; provided, however, that Lessor shall be under no duty to ascertain the existence of or to examine such insurance policy or to advise Lessee in the event such insurance coverage shall not comply with the requirements hereof. All insurance shall provide for at least thirty (30) days advance written notice to Lessor before any cancellation or material modification thereof. Lessee hereby irrevocably appoints Lessor as Lessee's attorney-in-fact to make claim for, receive payment of, and execute and endorse all documents, checks or drafts received in payment for loss or damage under any such insurance policy. Lessee agrees if Lessee shall fail to procure, maintain and pay for such insurance, Lessor shall have the right, but not the obligation, to obtain such insurance on behalf of and at the expense of Lessee in the event Lessor does obtain such insurance, Lessee agrees to pay all costs thereof with the next rental payment. 3 4 10. Risk of Loss. Lessee shall bear the entire risk of loss, theft, destruction, damage or disrepair of the Equipment or any part thereof for any cause whatsoever. No such loss, damage, theft, destruction or disrepair of the Equipment shall relieve Lessee of the obligation to pay rent or from any other obligation under this Lease. In the event of any of the above, Lessee, at Lessee's own expense and at Lessor's option, shall either (a) repair the Equipment, returning same to its previous condition, unless unrepairable, or (b) replace same with like Equipment of equivalent value, in good condition and acceptable to Lessor, which shall become the property of the Lessor; or (c) immediately pay Lessor all rent due and to become due under this Lease or such amount as may be allocated by Lessor, in its sole discretion, to specific items of Equipment. All proceeds of insurance, received by Lessor as a result of such loss or damage shall, where applicable, be applied toward the replacement or repair of the Equipment or the payment of the obligations of Lessee hereunder. 11. Taxes. Lessee shall comply with all laws and regulations relating to, and shall promptly pay when due, all license fees, registration fees, sales taxes, use and property taxes, assessments, charges and other taxes, municipal, state and federal, which may now or hereafter be imposed upon the ownership, possession, leasing, renting, operation, control, use, maintenance, delivery and/or redelivery of the Equipment and shall prepare and/or file, upon request by Lessor, any schedules required by taxing authorities; provided, however, that notwithstanding the foregoing Lessor shall be responsible for California state sales or use taxes relating to the lease of the Equipment. In the event Lessee does not pay all sums specified above, Lessor has the right, but not the obligation, to pay the same. If Lessor shall so pay any of the aforementioned, then the Lessee shall remit such amount with the next installment of rent. 12. Redelivery. Upon the termination of this Lease, Lessee shall, at Lessee's own expense and risk promptly return the Equipment by delivering it, packed and ready for shipment to such place or carrier as Lessor may specify in the same condition as received, reasonable wear and tear excepted. In the event Lessee does not return the Equipment as provided herein, Lessee shall pay to Lessor the rent specified herein on a prorated basis for each day Lessee fails to return the Equipment. The acceptance of said rent by Lessor shall not waive Lessor's rights to have the Equipment promptly returned to Lessor pursuant to the provisions hereof, nor shall the acceptance of said rent be deemed to be an extension of the term of this Lease. 13. Indemnity. Lessee shall, and does hereby, indemnify and save Lessor, its agents, employees, successors and assigns, harmless from any and all liability, obligations, losses, damages, penalties, claims, suits, depreciation. Invested Tax Credit (if passed through to Lessee), strict liability in tort, costs and expenses, including attorneys' fees, arising out of the ownership, selection, location, installation, possession, leasing, renting, 4 5 operation, control, use, maintenance, repair, delivery and/or redelivery of the Equipment. The indemnities and assumptions of liabilities and obligations herein provided for shall continue in full force and effect notwithstanding the expiration or other termination of this Lease. 14. Default. Any of the following events or conditions shall constitute an event of default hereunder: (a) if Lessee shall default in the payment when due of any indebtedness of Lessee to Lessor arising independently of this Lease; (b) if Lessee fails to make payment when due of any rentals, or other monies or charges hereunder on the due date; (c) if Lessee fails to perform any or all obligations, covenants, agreements, terms or conditions contained or referred to in this Lease, or in any Security Instrument executed with reference to this Lease, or in any written instrument modifying any or all of Lessee's obligations to Lessor; (d) if Lessee fails to pay any rental or mortgage payment due under, or if Lessee breaches any of the terms, covenants or conditions contained in, any lease, deed of trust, or Security Instrument executed by Lessee pertaining to the premises upon which the Equipment or any other collateral which secures this Lease is located, or to any other property, or interest therein, which secures this Lease, including, but not limited to, the lease relating to Lessee's business premises; (e) if Lessee sells, assigns, transfers, encumbers, or hypothecates any Equipment hereunder or any other collateral which is security hereto, or any use thereof (except such use as is expressly authorized by this Lease or the Security Instruments), or if there is loss, theft, substantial damage, destruction, or other damage to any of the Equipment or any other collateral; (f) if any person, firm or entity files suit for the purpose of or the making of any levy, seizure or attachment of or upon the Equipment or any other collateral; (g) if Lessee cease doing business as a going concern; (h) if Lessee forfeits the right to do business; (i) if Lessee merges or consolidates with another person, firm or entity (unless Lessor issues its prior written consent thereto); (j) if Lessee becomes insolvent or makes an assignment for the benefit of creditors; (k) if a petition is filed by or against Lessee under the Bankruptcy Code; (l) if a receiver, trustee, conservator or liquidator is appointed either with or without the application and consent of Lessee; (m) if any statement, representation or warranty heretofore or hereafter furnished by Lessee shall be untrue or unperformed in any material respect; (n) if Lessee breaches any of the terms of any loan or credit agreements, or defaults thereunder or if the condition of Lessee's affairs shall so change as to, in Lessor's good faith opinion, increase the credit risk involved as to Lessor; or (o) if any guarantor or surety dies or any event described above occurs with respect to any guarantor or surety. 15. Remedies. Upon the happening of any one or more events or conditions of default, lessor shall have each and all of the following rights, which Lessee and Lessor specifically understand and agree are cumulative and are an addition to any and remedies 5 6 available to Lessor by reason of any other collateral, provision of law, or agreement between Lessee and lessor, whether specifically enumerated herein or not: (a) to declare each and every obligation of lessee to lessor to be immediately due and payable (with lessor retaining title to the Equipment) and to recover the balance of rents and charges reserved under the lease (plus any purchase option which Lessee has agreed to pay Lessor may specifically enforce this provision which is a material inducement to Lessor entering into this Lease) and Lessee shall immediately pay said amount discounted to its present value at a rate or 6% per annum; (b) Lessor may take immediate possession of all or any part of the Equipment and any additional collateral and for such purposes may enter upon any premises upon which any of the Equipment or other collateral may be situated and remove it. In this regard, upon demand by Lessor, Lessee will assemble the Equipment and collateral and make them, or any part thereof requested by Lessor, available to Lessor at a place and time designated by Lessor which is reasonably convenient to both parties; (c) upon the taking of any or all of the Equipment and additional collateral, Lessor is authorized by Lessee to enter upon any premises where any of the Equipment or collateral may be located and to secure the same by removing and changing locks if required; (d) Lessor may enter upon Lessee's business premises, prepare said premises for sale, advertise said premises for sale, and sell said premises either for cash or upon such terms and conditions as Lessor, in its sole discretion, shall determine; (e) Lessor may install another operator at Lessee's business premises to operate the business, either temporarily pending sale, or for so long as is necessary for lessor to recover payment in full of each and every obligation owing to Lessor by Lessee including repayment of all collection costs, repair costs, maintenance costs, insurance premiums, premises rents, attorneys' fees or other expenses of any kind or nature whatsoever incurred by Lessor in relation to Lessee's default; (f) upon taking or obtaining possession of the Equipment, Lessor may propose to retain all or a part of the Equipment in satisfaction of the obligations owing by Lessee's by giving notice thereof in accordance with Section 9505 of the California Commercial Code, or sell the collateral, or any part thereof, in such order or amounts as Lessor may deem necessary at public or private sale, or any other intended disposition to be made by giving notice thereof to Lessee pursuant to the provisions of Section 9504 of the California Commercial Code, or without taking possession to sell, lease or otherwise dispose of the Equipment at public or private sale in accordance with the provisions of the California Commercial Code. Lessee waives the provisions of California Code of Civil Procedure 726 with regard to any sale by Lessor of the Equipment, any additional collateral or any part thereof, or with regard to the order in which Lessor may proceed against the Equipment, the collateral, or any part thereof; (g) Lessor shall have all rights afforded by California Commercial Code Section 9501, as amended by Chapter 974 of the California Statutes of 1985, including, but not limited to: (1) separate proceedings in any sequence against any real property collateral and against the Equipment or other collateral that is 6 7 personal property or fixtures, or (2) an action for the judicial or nonjudicial foreclosure of some or all of the real property collateral that would include some or all of the Equipment, personal property collateral or fixtures, all as referred to in California Commercial Code Section 9501(4)(i)-(ii); (h) proceeds of any sale hereunder shall be applied by Lessor in the manner provided by the California Commercial Code, and Lessor shall also be entitled to all collection costs, costs of repair, maintenance or rehabilitation of the Equipment or any collateral, reasonable attorneys' fees and legal expenses expended or incurred after the curing or attempt to cure of any default, whether with regard to the taking and selling of the Equipment and additional collateral, or as permitted in any action upon the obligations due for any deficiency after any sale; (i) Lessor shall have, in any jurisdiction where enforcement is sought, all of the rights and remedies of a secured party, whether under the California Commercial Code, or any other applicable provision of California Commercial Code, or any other applicable provision of California law. No failure on the part of Lessor to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof. 16. Assignment. Without Lessor's prior written consent, Lessee shall not: (a) assign, transfer, pledge, hypothecate or otherwise dispose of this Lease, the Equipment or any interest therein; or (b) sublet or lend the Equipment or permit it to be used by anyone other than Lessee's employees. Any such assignment, subletting, or attempt thereof shall be void if Lessee is a corporation, or is an unincorporated association or partnership, the transfer, assignment or hypothecation of any stock or interest in such corporation, association or partnership in the aggregate in excess of twenty-five percent (25%) shall be deemed an assignment within the meaning and provision of this Section 16. Lessor may assign this Lease or grant a security interest in the Equipment in whole or in part without notice to Lessee, and Lessor's assignee or secured party may then assign this lease or the Security Agreement without notice to Lessee. Each such assignee and/or secured party shall have all the rights but none of the obligations of Lessor under this Lease. Lessee shall recognize such assignments and/or security agreements and shall not assert against the assignees and/or the secured parties any defense, counterclaim or set-off that Lessee may have against Lessor. 17. Ownership; Personal Property. The Equipment is, and shall at all times be and remain the sole and exclusive property of Lessor, and Lessee, notwithstanding any trade-in or down payment made by Lessee on its behalf with respect to the Equipment, shall have no right, title or interest thereon, except as to the use thereof subject to the terms and conditions of this lease. The Equipment is, and at all times shall remain, personal property notwithstanding that the Equipment or any item thereof may not be, or hereafter become, in any manner affixed or attached to, or imbedded in, or permanently resting upon real property or any improvement thereof or attached in any manner to what is 7 8 permanent. If requested by Lessor prior to or at any time during the term hereof with respect to an item of Equipment, Lessee will obtain and deliver to Lessor waivers of interest or liens in recordable form, satisfactory to Lessor, from all persons claiming any interest in the real property on which such item is installed or located. So long as Lessee shall not be in default and fully performs all of its obligations hereunder, Lessor will not interfere with the quiet enjoyment of the Equipment by Lessee. 18. Late Charges. If Lessee fails to pay any rental payment or any other sum to be paid by Lessee to Lessor hereunder within ten (10) days after said payment is due, Lessee shall pay to Lessor a penalty of five percent (5%) of the payment then due, which amount is due immediately upon being incurred, as part compensation for Lessor's internal operating expenses incurred by Lessor in the collection of said late payments including, but not limited to, payments to others relevant to the collection thereof. 19. Net Lease Offset. This Lease is a net Lease, and Lessee shall not be entitled to any abatement of rent or other payments due hereunder, or any reduction thereof whatsoever. Lessee hereby waives any and all existing and future claims, as offsets against any rent or other payments due hereunder and agrees to pay the rent and other amounts due as and when due, regardless of any offset or claim which may be asserted by Lessee or on its behalf. This Lease shall not terminate, or the respective obligations of Lessor or Lessee be otherwise affected, or Lessor have any liability whatsoever to Lessee, by reason of any defect in or damage to or loss or destruction of any or all items of Equipment from whatever cause, including, without limitation, any prohibition, commercial frustration or impracticability of Lessee's use of the Equipment or any item thereof, or the interference with such use by any government, person or corporation. Lessee specifically acknowledges the foregoing as its responsibility under the terms and conditions of this Lease. 20. Miscellaneous. All obligations of the Lessee, if more than one, shall be joint and several. Lessee shall provide Lessor with a copy of Lessee's annual financial statement, including balance sheet and profit and loss statement within ninety (90) days after the close of Lessee's business year, in addition to any other financial data or information relative to this Lease and the Equipment as Lessor may from time to time reasonably request. This lease shall be binding upon the parties, their successors, legal representatives and assigns and is a valid and subsisting legal instrument, and no provision which may be deemed unenforceable shall in any way invalidate any other provision or provisions, all of which shall remain in full force and effect. All paragraph headings are inserted for reference purposes only and shall not affect the interpretation or meaning of this agreement. This instrument constitutes the entire contract between the parties hereto, and no representation, oral or written, shall constitute an amendment hereto unless signed in writing by an officer of Lessor. Time is of the essence in this 8 9 Lease and each and all of its provisions. This Lease shall be interpreted, construed and enforced pursuant to the laws of the State of California. 21. Eligibility of Rent As Tax Deductions. Lessor assumes no liability and makes to representation as to the treatment of the rental payments stated in the Schedule above by any federal, state or local taxation Agency, nor does Leasor assume any liabiity or guarantee the availability of investment tax credits or any other tax consequences relating to this Lease. 22. Notices. Any written notice or demand under this Lease may be given to a party by mailing it to the party at its address set forth herein, or at such address as the party may provide in writing from time to time. Notice or demand so mailed shall be effective when deposited in the United States Mail duly addressed and with postage prepaid. 23. Expenses of Enforcement. Lessee shall pay to Lessor all costs and expenses, including reasonable attorneys' fees and costs of collection agencies, incurred by Lessor in exercising any of its rights or remedies hereunder or in enforcing any of the terms or provisions hereof whether or not suit is brought. THIS LEASE IS NONCANCELABLE FOR THE TERM INDICATED ABOVE except as expressly provided herein. lessee hereby agrees that Lessee's obligation to pay rent and any other amounts owing hereunder shall be absolute and unconditional. The undersigned Lessee attests that it has read this Lease Agreement, its Exhibits and any Security Instruments executed with reference to this Lease Agreement, which Security Instruments are deemed to be a part of this Lease, and is fully aware of all the terms and conditions contained therein. Leessee acknowledges that it has heretofore purchased the Equipment from supplier(s), sold the Equipment to Lessor and desires to lease said Equipment from Lessor upon the terms and conditions of this Lease. LESSOR LESSEE BREWERY LEASING COMPANY RIVERSIDE BREWING COMPANY By: /s/ Michael R. Hagerman By: /s/ (illegible) ----------------------- ------------------------ Michael R. Hagerman Title: Pres --------------------- Address: Address: 2300 Gardner Pl. 2025 Chicago Ave STE A4 - --------------------------- ---------------------------- Glendale CA 91205 Riverside CA 92557 - --------------------------- ---------------------------- 9 10 ADDENDUM TO BREWERY LEASING CORP. (BLC) EQUIPMENT LEASES WITH RIVERSIDE BREWING COMPANY Effective with the closing of the acquisition of Riverside Brewing Company by Beverage Works, Inc. (BWI), BLC agrees to make the following changes to the leases: 1. Reduce total amount of lease by $500,000, applying 25% to the reduction to the brewpub and 75% to brewery. 2. Interest rate on the lease will be lowered to 10%. 3. Payment of terms shall remain the same through December 31, 1997, except for the reduction on the interest rate. 4. Effective January 1, 1998, the leases will be consolidated into one five year lease with a one dollar purchase option at the end of the lease. 5. The October 1995 through December 1995 deferred lease payments will be deducted from accounts payable and added back to the lease. The January 1996 through September 1996 deferred lease payments will be forgiven and removed from accounts payable in receipt of additional shares from Orange Empire Brewing Company. 6. BLC shall enter into a two year consulting agreement with BWI for brewery advisory services, with the possibility of earning up to 10,000 shares during the term of the agreement. EX-10.3 16 GROUND LEASE AGREEMENT DATED 6/6/88 1 EXHIBIT 10.3 PERTINENT DATES GROUND LEASE AGREEMENT 1203 9TH STREET
DUE DATE * Lessee inspection for soils, feasibility, etc. July 6, 1988 * Delivery of Building Plans to Lessor July 6, 1988 * Approval of Building Plans by Lessor July 20, 1988 * Removal of Spur Track Upon Delivery of Premises Notification of Availability Upon Delivery of Premises * Financing October 31, 1988 * Zoning and Building Permits October 31, 1988 Commencement of Construction Not later than January 1, 1989 Completion of Construction Not later than January 1, 1990 First Appraisal June 6, 1993 Second Appraisal June 6, 1998 Third Appraisal June 6, 2008 Fourth Appraisal June 6, 2018 Fifth Appraisal June 6, 2028
* These items may be extended for up to sixty (60) days, but not later than December 31, 1988, by providing ten (10) days written notice. 2 GROUND LEASE AGREEMENT Dated June 6th, 1988 By and Between RANDALL LYLE STEELE and SUSAN STEELE as Lessor, and STANISLAUS BREWING COMPANY INC., as Lessee 3 BASIC GROUND LEASE TERMS This Lease is dated for reference purposes only this 6th day of June, 1988. 1. RENT PAYMENT ADDRESS: Lessor: RANDALL LYLE STEELE (PARAGRAPH 2 (D)) SUSAN STEELE 442 Wayer Road Modesto, CA. 95351 2. PARTIES AND NOTICE Lessor: RANDALL LYLE STEELE ADDRESSES: SUSAN STEELE (PARAGRAPH 20) 442 Wayer Road Modesto, CA. 95351 Lessee: STANISLAUS BREWING COMPANY, INC., A California Corporation 3454 Shoemake Drive Modesto, CA. 95351 ATTENTION: Garith Helm 3. PREMISES: General Location: 1203 9th Street Modesto, CA. 4. TERM: Fifty (50) years, beginning the (PARAGRAPH 1) earlier of the Commencement Date as defined or October 1, 1988. 5. RENT: Minimum Monthly Rent: (PARAGRAPH 2) Commencement through 12th month: Three Thousand and no/l00 Dollars ($3,000.00), thereafter according to PARAGRAPH 2 (B)(1) and (2). 6. USE: Commercial - Brewery, Restaurant, Pub (PARAGRAPH 8) Combination. 7. CONTENTS: This Lease contains Pages 1 through 53, and Exhibit "A", "B", "C", "D-1, and "D-2". The above terms are incorporated in this Lease as indicated above and referenced herein. (i) 4 INDEX
PARAGRAPH PAGE BASIC GROUND LEASE TERMS (i) DESCRIPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1. TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A. Commencement Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 B. Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1. Feasibility, Soil, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2. Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3. Zoning and Building Permit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4. Removal of Spur Track . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 C. Condition of the Premises Upon Commencement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 D. Early Occupation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 E. Delivery of the Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 F. Escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1. Satisfaction of Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (a) Inspection Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (b) Executed Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a (c) Notification of Availability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (d) Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (e) Zoning and Building Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (f) Removal of Spur Track . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (g) Extension of Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2. Delivery of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (a) Evidence of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3. Receipt and Disbursement of Funds; Escrow Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (a) Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (b) Prepaid Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (c) Cost of Escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (d) Title Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5 2 . RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 A. Minimum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 B. Rent Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1. Appraisals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2. Cost of Living Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 C. Prepaid Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 D. Manner of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3. LESSEE'S CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 A. Building Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 B. Interior Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 C. Commencement of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 D. Completion Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4. TAXES AND ASSESSMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 A. Real and Personal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 B. Payment in Installments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 C. Proration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 D. Contest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5. UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6. CONSTRUCTION OF BUILDINGS AND IMPROVEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 A. Legal Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 B. Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 C. Removal Upon Expiration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 D. Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 E. Alterations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 F. Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 G. No Liens or Charges; Bond Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 H. Notice of Completion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 I. City of Modesto Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 7. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 8. USE OF PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 A. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 B. Acts Affecting Fire Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 C. Environmental Hazards and Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 D. Lessee's Business Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 9. DAMAGE AND DESTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 10. ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
6 A. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 B. Consent of Lessor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 C. "Reasonable" Factors to Withhold Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 D. Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 11. DEFAULT AND REMEDIES OF THE LESSOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 A. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 B. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 C. Interest and Late Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 D. No Termination Without Election by the Lessor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 E. Remedies Not Exclusive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 F. The Lessor's Right to Cure Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 12. DEFAULT BY THE LESSOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 13. TERMINATION OF LEASE; FORFEITURE OF PROPERTY; CONDITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 14. SURRENDER OF LEASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 15. COSTS AND FEES OF LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 16. CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 17. ARBITRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 18. QUIET ENJOYMENT AND WARRANTIES OF TITLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 19. EMINENT DOMAIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 A. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 B. Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 C. Right to Representation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 D. Condemnation by Eminent Domain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 E. Early Delivery of Possession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 20. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 21. ENCUMBRANCE OF LEASEHOLD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 A. Encumbrance Subject to Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 B. Lessor's Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 C. No Voluntary Surrender of Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 D. Notification of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 E. No Prior Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 F. Deferral of Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 G. Recorded Request for Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 H. No Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 I. Delivery of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 J. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 K. Modification of Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 22. SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 A. Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 B. Execution of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
7 23. RIGHT OF FIRST REFUSAL TO BUY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 24. BANKRUPTCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 A. Time Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 B. Assumption; Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 C. Lessor's Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 D. Assignment by Trustee; Payment to Lessor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 E. Lessor's Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 F. Lessor's Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 25. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 A. Further Execution of Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 B. Cumulative Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 C. Enforcement Delay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 D. Inurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 E. Language of Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 F. California Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 G. Table of Contents and Paragraph Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 H. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 I. Sublessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 J. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 K. Waiver of Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 L. Month-to-Month Tenancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 M. Covenants and Conditions of Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 N. Right of Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 0. In the Event of a Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 P. Time is of the Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 0. Corporate Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 R. Waiver of California Code Sections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 S. Relationship of Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 T. Preparation and Submissions of Draft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 U. Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 V. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Exhibit "A" Premises Exhibit "B" Plans & Specifications Exhibit "C" Parcel Map Exhibit "D-l" Letter from Sidney A. Israels Exhibit "D-2" Letter from Stan T. Yamamoto 8 GROUND LEASE THIS GROUND LEASE is made as of this 6th day of June, 1988, by and between RANDALL LYLE STEELE and SUSAN STEELE, Husband and Wife as community property, collectively as; ("Lessor") and STANISLAUS BREWING COMPANY, INC., A California Corporation as ("Lessee"). DESCRIPTION A. Lessor is the owner of that certain real property located in the City of Modesto, County of Stanislaus, State of California, more particularly described in Exhibit "A" attached hereto and made a part hereof, together with any and all improvements, appurtenances, rights, privileges and easements benefiting, belonging or pertaining thereto, but exclusive of any improvements now or hereafter located on the property (the "Premises") B. Lessor leases to Lessee and Lessee hires from Lessor, the Premises upon the following terms and conditions: 1. TERM. A. Commencement Date. The Term of this Lease shall be the earlier of October 1, 1988, or that date that Lessor causes the Premises to become available by removing the current building, slab and asphalt and is able to deliver bare ground with stubbed utilities, at Lessor's cost, the current tenant vacating, and Lessor is reasonably assured that Lessee has obtained financing and satisfied the contingencies set forth below in Subparagraph B1 (the "Commencement Date"). Notwithstanding the fact that the Lease shall have commenced on the Commencement Date, in the event the contingencies set forth below in Subparagraph 1.B have not been satisfied within the times set forth therein, including any extensions, such contingencies shall be conclusively interpreted as conditions subsequent that were not satisfied and the Lease shall terminate and be of no further effect. Thereafter, neither Lessee nor Lessor shall have any obligation hereunder. The Escrow provided for in Paragraph 1.F. below shall terminate and any funds therein distributed according to the terms of the Lease. Lessor shall be entitled to keep any payments of rent received from Lessee prior to such termination, on account of Lessor's time and effort expended. -1- 9 B. Contingencies. This Lease is contingent upon Lessee being satisfied as to the following conditions within the periods of time proscribed: (1) Feasibility, Soil, etc. The Lessee shall have the right to enter upon the Premises to inspect and conduct tests and investigations on the Premises for a period of thirty (30) days after the Execution Date (the "Inspection Period~) to determine for itself the fitness and suitability of the Premises for the purposes for which the Lessee intends to use the Premises. Such inspections, surveys, tests and investigations shall be at the sole cost and expense of the Lessee, and the Lessee shall indemnify and hold Lessor harmless from any claims resulting from such activities. Fitness and suitability shall include not only immediate availability to the Premises at its perimeter of sewerage, water, gas, electricity and telephone service adequate for the needs of the lessee as well as suitable soil conditions and zoning, but also governmental approval of entrances and exists, building and health permits, fire regulation requirements, environmental matters, including the nature and extent of hazardous materials present or near the Premises, toxic substance contamination, and labor considerations based upon the plans and specifications of the Lessee attached as Exhibit "B" ("the Plans"). The foregoing partial enumeration is in no way intended to limit the meaning of fitness and suitability of the Premises for the purposes and use of the Lessee of the Premises. Should the Lessee deem it necessary to apply or and obtain a building permit or other permits during the Inspection Period, then the Lessor agrees to reasonably cooperate in such efforts and to execute appropriate documents and allow such to be in the name of the Lessor, if necessary. In the event the Lessee should notify the Lessor on or before the end of the Inspection Period by an affirmative written notice of cancellation that it disapproves of the Premises for any reason, this Lease shall terminate and neither Party shall have any further obligation under this Lease. Absent an affirmative written notice of cancellation, this Lease shall commence upon the Commencement Date. -2- 10 (2) Financing. No later than October 31, 1988, Lessee shall obtain funds required for the construction of improvements based upon plans and specifications as described in Subparagraph (3) below, either through the securities offering anticipated by the Lessee, personal financing, and/or through a leasehold permanent commitment from a Commercial Bank, Savings and Loan, Insurance Company, Real Estate Investment Trust, Mortgage Company or other lender reasonably approved by Lessor. If financing is obtained through an institutional lender, the loan shall not exceed the cost of improvements as reasonably approved by Lessor, including professional services directly related thereto, at an interest rate not exceeding the prevailing market rate for similar financing. Said commitment shall be for a permanent leasehold loan upon terms reasonably satisfactory to Lessor. In the event of a securities offering, Lessee shall hold Lessor harmless from all liability, losses, penalties, costs, expenses (including without limitation, attorneys' fees), causes of action, claims or judgments arising out of or related to said securities offering. (3) Zoning and Building Permit. Lessee shall obtain suitable zoning and building permits based upon plans and specifications reasonably approved by Lessor no later than October 31, 1988. Lessor shall be provided the aforementioned plans and specifications no later than thirty (30) days from the Execution Date, and Lessor shall indicate its decision no later than fourteen (14) days thereafter. Lessor hereby agrees to cooperate with Lessee and any third party in granting or relocating such utility easements as are reasonably necessary to service the property as required by said plans and specifications. (4) Removal of Spur Track. Lessor shall at Lessor's sole cost, remove the spur track adjoining the Southern Pacific or railway located to the west of the Premises. The aforedescribed contingency periods maybe extended for respective sixty (60) day periods, but in no event later than December 31, 1988. Either party may extend contingency periods -3- 11 by giving written notice to the other within ten (10) days of expiration a contingency period. C. Condition of the Premises Upon Commencement. The satisfaction of the aforedescribed contingency periods is an acknowledgment by the Lessee.to Lessor that Lessee accepts the Premises in its condition existing as of the Execution Date of this Lease and subject to all matters of record and to all applicable zoning, municipal, county, state and federal laws, ordinances and regulations governing and regulating the use of the Premises (including, but not limited to, the Occupational and Health Safety Act and Proposition 65 of the State of California). To the best of Lessors knowledge, there are none of the aforedescribed violations of any such law, ordinance or regulation however, Lessee acknowledges that except as expressly set forth in this Lease, neither the Lessor nor any agent of the Lessor has made any representation or warranty as to the condition of the Premises or the suitability of the Premises for the conduct of the business of the lessee or the use thereof allowed by this Lease. The execution of this Lease by the Lessee shall constitute the acknowledgment by the Lessee that the Premises are in good condition and that the Lessee accepts the Premises in its current "As Is" condition. In addition, the Lessee acknowledges having had an adequate and independent opportunity, at its sole option, cost and expense, to undertake an investigation of the Premises to determine the nature and extent of any hazardous materials, substances or conditions present at, on or near the Premises. Lessor represents and warrants to the best of Lessor's knowledge that as of the date of this Lease there are no hazardous materials, substances or conditions present at, on or near the Premises that would adversely impact the Lessees' ability to use the Premises as expressed herein. The Lessee warrants that it is leasing the Premises with the full satisfaction that there are no violations of applicable federal, state or local ordinances, statutes or regulations and no hazardous materials, substances or conditions at, on or about the Premises. The Lessee acknowledges that it has leased the premises from the Lessor without any form of warranty, except as otherwise set forth herein, from the Lessor with regard to the existence of or absence of knowledge on the part of the Lessor of the existence of any hazardous materials, substances or conditions at, on or about the Premises. The Lessee accepts the Premises in its current "As Is" condition, subject to the removal of the building by Lessor as set forth in paragraph 1. -4- 12 D. Early Occupation. In the event that the Lessor shall permit the Lessee to occupy the Premises prior to the Commencement Date of the Term, such occupancy shall be subject to all the provisions of this Lease. Such early occupancy shall not advance the termination date of the Term set forth as applicable herein. E. Delivery of the Premises. The Lessor shall deliver to the Lessee possession of the Premises on the Commencement Date. F. Escrow. An Escrow has been opened with Ticor Title Company, 1207 "I" Street, Modesto, CA. 95354, Attention: Gail L. Brickley, who shall act as the assigned Escrow Holder herein for expediting the following conditions subsequent. Failure to satisfy such conditions shall result in termination of this Lease as described in Paragraph 1.A: (I) Satisfaction of Conditions. (a) Inspection Period. Lessee shall provide written indication to the Escrow Holder of the fitness and suitability of the Premises pursuant to Paragraph I. B. (1) of the Lease, within thirty (30) days of execution of said Lease. (b) Executed Lease. within five (5) days of execution, Lessor shall deliver to the Escrow Holder, an.executed copy of this Lease. (c) Notification of Availability. Lessor shall notify Escrow Holder upon the date Lessor is able to deliver bare ground with stubbed utilities. (d) Financing. Lessee shall provide to the Escrow Holder, evidence of financing satisfactory to Lessor no later than October 31, 1988, pursuant to Paragraph 1. B (2) of the Lease. (e) Zoning and Building Permits. Lessee shall obtain suitable zoning and building permits based on plans and specifications approved by Lessor, no later -5- 13 than October 31, 1988, pursuant to Paragraph 1. B. (3) of the Lease. (f) Removal of Spur Track. Lessor shall remove the spur track prior to the Commencement Date pursuant to Paragraph 1. B. (4) of the Lease. Lessor shall notify Escrow Holder upon completion of the spur track removal. (g) Extension of Conditions. The aforementioned conditions may be extended upon written notification from either party, not less than ten (10) days prior to the expiration of a condition. However, conditions may be extended no later than December 31, 1988. (2) Delivery of Documents. (a) Evidence of Insurance. Lessee shall provide Escrow Holder for the benefit of Lessor, certificates or evidence of adequate insurance prior to the satisfaction of the contingencies described herein and thereafter in accordance with Paragraph 7 of the Lease. (3) Receipt and Disbursement of Funds; Escrow Costs. (a) Commissions. Commissions payable in accordance with Paragraph 25. U. shall be payable through Escrow Holder by Lessor. (b) Prepaid Rent. Prepaid rent payable in accordance with Paragraph 2. C. shall be disbursed to Lessor through Escrow Holder upon Commencement Date. (c) Cost of Escrow. The cost of Escrow shall be shared equally between Lessor and Lessee. The cost of said escrow is estimated at $570.00; this figure is for estimation purposes only, final cost may vary. -6- 14 (d) Title Insurance. In the event that Lessee desires to obtain a Leasehold Policy of Title Insurance, this Escrow shall not be contingent on same, but may be obtained at Lessee's sole cost and expense. Each party shall execute additional instructions and documents as required by the Escrow Holder for the purpose of expediting the conditions and additional documentation required as outlined in the preceding paragraphs. 2. RENT. A. Minimum. For the use and occupancy of the Premises, the Lessee agrees to pay to the Lessor rent ("Rent"). On an annualized basis, Rent shall initially be the sum of Thirty-Six Thousand And No/100 Dollars ($36,000.00). All Rent shall be payable monthly (the Monthly Rental"). The Monthly Rental shall initially be in the sum of Three Thousand And No/100 Dollars ($3,000.00). Rent shall be adjusted upward (and not downward) in accordance with the provisions of Subparagraph 3 B. Monthly Rent shall be payable on the first day of each and every month commencing on the Commencement Date (unless the Commencement Date is not the first of a month, in which event the first payment of Monthly Rent shall be payable no later than the Commencement Date with the sum due for Monthly Rent for the fractional month to be prorated on the basis of a thirty (30) day month. B. Rent Adjustments. Throughout the Term, the initial Rent specified in Subparagraph 3A of this Lease shall be adjusted upward in accordance with the provisions of this Subparagraph. (1) Appraisals. In addition to the minimum monthly rent and the CPI Adjustments set forth herein, appraisals shall be conducted for each adjustment year commencing on the fifth (5th) year and upon the tenth (10th), twentieth (20th), thirtieth (30th) and fortieth (40th) years of this Lease to determine the then current market value of the Land excluding the value of any improvements thereon, as of the date of the Commencement Date of the respective adjustment year. After such determination is made, the minimum annual rental amount shall be based on no -7- 15 less than twelve percent (12%) of the appraisal amount. However, in no event shall the minimum monthly rent be less than that set forth herein for each appraisal year. (a) Appraisals shall be conducted no less than ninety (90) days prior to the sixtieth (60th), one hundred twentieth (120th), two hundred fortieth (240th), three hundred sixtieth (360th) and four hundred eightieth (480th) months ("Appraisal Date" herein) (b) The method for selecting the appraiser(s) shall be as follows: (i) Upon agreement of a single appraiser, the appraisal shall he conducted by that appraiser. The fee for such appraiser shall be paid by the Lessor. (ii) Any appraiser selected under this provision shall have M.A.I. credentials or their equivalent, be reasonably qualified and demonstrate familiarity to appraise similar properties in the San Joaquin Valley. All appraisals shall be based on the then current usage of the property. (iii) If Lessor and Lessee cannot agree on a single appraiser, Lessor and Lessee shall each employ an appraiser and shall each be responsible for the payment of the appraisal fee to their respective appraiser. Upon review of the appraisal reports provided by both appraisers, Lessor and Lessee shall utilize the mid point of the appraisals to determine the new minimum monthly rental amount. -8- 16 (iv) If Lessor and Lessee further disagree, they shall allow the two appraisers selected in subparagraph (iii) above to select an independent third party appraiser to conduct an additional appraisal. If the Lessor and Lessee can agree on two of the three appraisals, those two reports may be used to determine the minimum monthly rental amount. If no agreement is made, then the mid point of the three appraisal reports shall be used to determine the new minimum monthly rental amount. The fee for this third party appraisal shall be shared equally between Lessor and Lessee. In no event shall this appraisal amount be determined later than the respective appraisal year. Any delay shall nevertheless at Lessor's option permit a retroactive payment of any rental increase to the date that the appraisal should have been completed for the respective appraisal year. (2) Cost of Living Adjustment. In addition any appraisal adjustment described in Paragraph 1 above, the basic annual rent shall be adjusted every twelve (12) months of the term of the Lease, including any extensions, by the percentage change that occurs in the Consumer Price Index, All Urban Consumers, for the San Francisco-Oakland region, All Items (1984=100 base), as published by the Bureau of labor Statistics, U.S. Department of Labor. Accordingly, the Consumer Price Index average figure for the year preceding the Commencement Date ("Commencement Index") shall be divided into the Consumer Price Index figure for the year preceding the anniversary date ("Anniversary Index") and said quotient shall be multiplied by the minimum monthly rent. The result then becomes the minimum monthly rent. -9- 17 However, in no event shall the minimum monthly rent be less than that set forth herein, nor shall any increase by reason of this CPI Rent Adjustment be greater than five percent (5%) on any twelve (12) month period per year. The above is expressed by a formula as follows: Anniversary Index x Minimum Monthly Rent Commencement Index As an illustration of the application of the above formula, assume for the purpose of this illustration that the Anniversary Index for the fourth year Adjustment Date is 130, and the Commencement Index is 100. Base rental is given at $3,000.00. The minimum monthly rent to be carried forward to the next Adjustment Date would he determined as follows 130 x 3,000 (1.30 x 3,000) = $3,900.00 100 However, due to the limitation of five percent (5%) per year the actual adjusted rent to be carried forward to the next Adjustment Date would be $3,600.00 (1.20 x 3,000). If the Index is discontinued or revised during the term, such other government index or computation with which it is replaced shall be used in order to obtain substantially the same results as would be obtained if the Index had not been discontinued or revised. C. Pre aid Rent. In accordance with the terms of Subparagraph A, Rent is prepaid and non-refundable for the ensuing two (2) months. Accordingly, no later than the Commencement Date, the Lessee shall pay to the Lessor the sum of Six Thousand And No/100 Dollars ($6,000.00) for the first two (2) months of the Term. D. Manner of Payment. The monthly installment payable pursuant to this Paragraph 2 shall be paid to Lessor, at 442 Weyer Road, Modesto, CA. 95351, or at any other address Lessor may from time to time provide Lessee for this purpose. -10- 18 3. LESSEE'S CONSTRUCTION. A. Building Construction. The Lessee agrees to and shall have constructed on the Premises the building in accordance with the plans heretofore agreed to by the parties. The Lessee shall bear the entire expense of Lessee's construction improvements ("Lessee's Improvements" herein). B. Interior Improvements. In addition to the construction of the building, the Lessee agrees to and shall have constructed at Lessee's sole cost and expense within interior improvements to the building in accordance with and shall equip the building and/or affix thereto the equipment and fixtures called for by the plans. C. Commencement of Construction. The Lessee shall cause construction (to include non-building activities, e.g., engineering) of the Lessee's Improvements to be commenced as soon as practicable, but in no event, later than January 1, 1989, and shall cause construction thereof to be diligently prosecuted to completion. The Lessee shall as soon as practicable (and, if practicable, prior to completion of the Lessee's Improvements) commence the interior improvements and shall cause said construction to be diligently prosecuted to completion. D. Completion Date. Subject to material shortages, labor shortages, strikes, lockouts, boycotts, other labor disruptions, delays by contractors or subcontractors, governmental actions, war, riot, insurrection, rebellion, act of God, fire, reasonable control of the Lessee, the Lessee's Improvements shall be completed on or before January 1, 1990. Subject to the same limitations, the Lessee shall cause the Interior Improvements to be completed within two (2) weeks of completion of the Lessee's Improvements. 4. TAXES AND ASSESSMENTS. A. Real and Personal. In addition to the amounts of money due as Rent under this Lease, the Lessee shall pay to Lessor the real property taxes imposed on the Premises, and the Lessee's exterior and interior improvements. Payment of these taxes is to be made to Lessor upon demand and before this tax is to become delinquent. -11- 19 As used herein the term "real property taxes" shall include any form of real estate tax or assessment, general special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond(s), levy or tax (other than inheritance, personal income or estate taxes) imposed on the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, as against any legal or equitable interest of Lessor or Lessee in the Premises, as against Lessor's right to rent or any income therefrom, and as against Lessor's business of leasing the Premises. Lessee shall pay any assessments associated with the obtaining a building permit or conditional thereto. The term "real property taxes" shall also include any tax, fee, levy, assessment or charge (i) in substitution of, partially or totally, any tax, fee, levy, assessment, or charge hereinabove included within the definition of "real property tax" or (ii) the nature of which was hereinbefore included within the definition of "real property taxes." B. Payment in Installments. If the right is given to pay either in one sum or in installments, the Lessee may elect either mode of payment and its election shall be binding upon the Lessor. If by making such election to pay in installments, any of the installments shall be payable after the termination of the Initial Term or an Extended Term or any extension thereof, such unpaid installment shall be prorated as of the date of termination and any amounts payable after the date of termination shall be paid by the Lessor. C. Proration. All taxes, assessments, levies and charges payable under this Paragraph shall be prorated at the Commencement Date and upon termination of this Lease. For taxes paid by the Lessor prior to the Commencement Date, the Lessee shall within ten (10) days of demand by the Lessor pay its proportionate share thereof. D. Contest. If the Lessee in good faith should desire to contest the validity of amount of any tax, assessment, levy or governmental charge herein agreed to be paid by the Lessee, the Lessee shall be permitted to do so and to defer the payment thereof to the extent of the tax that is being contested in validity or amount until final determination of the contest and Lessor will cooperate in all reasonable ways in respect to Lessees' tax contest or appeal, if, but only if, the Lessee shall have given to the Lessor at least fifteen (15) days written notice of the desire to the Lessee to contest the tax, assessment, levy or governmental charge and upon protecting the Lessor by good and sufficient surety bond against such tax, assessment, levy or governmental charge and from any costs, liability or damage arising out of such contest. 5. UTILITIES. The lessee shall make all arrangements for -12- 20 and pay for all utilities an services furnished to or utilized by it at or for the benefit of the Premises, including, but not limited to, gas, water, electricity, telephone service, and trash. The Lessee shall be responsible for any and all connection charges and deposits which utility and service providers may require. In all cases wherever possible, there shall be separate meters installed for the utilities which are furnished to the Lessee. The Lessee hereby represents that it is leasing the Premises with a full understanding of and having had an ample opportunity to reasonably investigate that all utilities, including, but not limited to, water, sewer, gas, electricity and telephone are property installed to and available at the boundaries of the Premises and that upon completion of the building in conformance with the agreed Plans, the utility services will meet the needs of the Lessee, and that if not, the utility service(s) to meet its needs and that of its commercial venture. 6. CONSTRUCTION OF BUILDINGS AND IMPROVEMENTS. A. Legal Compliance. Lessee agrees that any building or buildings that may be constructed on the Premises prior to and during the term of this Lease shall comply with and be constructed in accordance with all existing building ordinances and any other laws or municipal, state, federal or other governmental regulations or orders applicable thereto. Lessee may at any time and from time to time construct improvements and/or remodel the improvements then located on the Premises, or raze any improvements then located thereon for the purpose of constructing new improvements having a value at least equivalent to the improvements razed. Any improvements shall be commenced and completed, under direction of a licensed contractor, with all due diligence after commencement and after the razing of any existing improvements, where necessary, subject, however, to delays occasioned by strikes, lockouts, acts of God, governmental restrictions, or any other causes of any description that are beyond the control of Lessee. B. Title. All buildings and other improvements hereinafter constructed upon the Premises shall become subject to this Lease, but title thereto shall remain in the Lessee until the expiration or sooner termination of the term of this Lease, at which time any building and other improvements then remaining upon the Premises shall become and be the property of Lessor. C. Removal Upon Expiration. At the expiration of the term of this Lease, provided Lessee is not then in default, Lessee shall have the right to remove any or all trade fixtures, provided all resultant injuries to the Premises and remaining improvements are remedied. D. Maintenance. Lessee covenants and agrees, at its own cost and expense, to keep any improvements located on the -13- 21 Premises, including the roofs, sidewalks, and any and all appurtenances, in good condition and repair except for ordinary wear and tear during the entire term of this Lease except as provided in Paragraph 7 hereof, it being expressly understood and agreed that Lessor is not to be called upon to make any expenditure whatsoever, on account of any improvements, alterations, renewals, modifications, additions or changes to any improvements on the Premises, abutting sidewalks, or appurtenances. In the event Lessee fails to perform any of its covenants in this Paragraph or in Paragraph 7 and, if by doing so such failure may be corrected, Lessor may, but shall not be required to, after at least thirty (30) days' written notice to Lessee and the failure of Lessee to correct such failure within such time, enter the Premises, or direct others to do so, to correct such failure and Lessor's reasonable costs thereto shall be due and payable as additional rent together with the next regular monthly rent payable after Lessor incurs such cost; provided, however, that if the matter involved may not be corrected within such time it shall be adequate for Lessee to begin such correction within such time and complete the same thereafter with due diligence. E. Alterations. So long as this Lease is in effect, Lessee shall have the right to make alterations, improvements, additions or repairs to any improvement on the premises, at any time, provided that the improvement will not be weakened by reason thereof and that any such alteration shall not diminish the value of the improvements on the Premises. All of such work shall be performed in accordance with ordinances, laws, regulations and orders, as provided for new buildings, and in a good and workmanlike manner. -14- 22 F. Notice. Lessee agrees to give Lessor not less than ten (10) days notice in writing of Lessee's intention to construct any improvements on the real property demised hereunder and/or to perform any work of alteration, improvement, addition or repair to any building located on the Premises prior to commencing any such work so that Lessor may post a notice of non-responsibility. G. No Liens or Charges; Bond Requirement. At all times during the term of this Lease, Lessee shall keep the Premises and improvements free and clear of mechanics liens and other liens for labor, service, supplies, equipment or materials supplied to Lessee. Lessee will at all times fully pay and discharge and wholly protect and save harmless Lessor and the Premises and improvements against any and all demands or claims, and against all attorneys' fees and costs and any and all expenses, damages or outlays which may or might be incurred by Lessor or Lessee by reason of, or on account of, any such liens or claims. Should Lessee fail to pay off and fully discharge any such liens or claims within forty-five (45) days after written notice form Lessor of the existence of such a lien or claim, Lessor shall have the right, at Lessor's option, to require Lessee to furnish the bond described in Section 3143 of the California Civil Code (or any comparable statute hereafter enacted for providing a bond freeing the Premises from the effect of such a lien claim) equal to one and one-half (1 1/2) times the total estimated costs of improvement. In the event Lessee does not furnish such a bond after written request from Lessor, and final judgment has been rendered against Lessee by a court of competent jurisdiction for the foreclosure of such lien or clam and Lessee fails to stay the judgment by lawful means or pay the judgment, or otherwise discharge, stay or present the execution of any such judgment or lien or both. Lessee agrees to repay the Lessor and to reimburse Lessor for all monies which Lessor may pay out in discharge of any such claims, liens or judgment, and for all reasonable attorneys' fees, costs and expenses which may be incurred by Lessor by reasons of, or in account of, any of the same, with interest at the annual rate of two percentage points above the prime rate, but in no event greater than the highest rate then legally permitted from the time of payment by Lessor until repaid by Lessee to Lessor; and all such sums of money shall be repaid by Lessee to Lessor on or before the first day of the next calendar month after such payment by Lessor. H. Notice of Completion. On completion of any substantial work of improvement during the term, Lessee shall file or cause to be filed a valid notice of completion. Lessee hereby irrevocably appoints Lessor as Lessee's attorney-in-fact to file the notice of completion on Lessee's failure to do so after the work of improvement has been substantially completed. I. City of Modesto Requirements. Lessee assumes full -15- 23 responsibility for completion of curbs, gutters and sidewalks pursuant to the Parcel Map attached hereto as Exhibit "C." To the extent Lessee's building or wall does not satisfy the so-called "firewall" requirements pursuant to those letters from Attorney Sidney A. Israels and City Attorney Stanley Yamamoto dated December 30, 1987, and January 6, 1988, respectively, and attached hereto as Exhibit "D-1" and "D-2" respectively, such "firewall" requirements shall be satisfied by Lessor. However, Lessee shall use reasonable best efforts to satisfy said "firewall" requirement. 7. INSURANCE. Lessee shall, throughout the term of this Lease, procure and maintain Comprehensive General Liability insurance insuring Lessor and Lessee as named co-insureds against any and all claims and liability of personal injury, death, or property damage occurring upon or about the Premises and or its improvements and appurtenances, including elevators (when and if there are elevators on the premises) and sidewalks abutting the Premises, in the amount of One Million Dollars ($1,000,000) combined single limit for injury or death to any one person or persons or damages to property. Throughout the terms of this Lease, Lessee shall keep all improvements located on the Premises insured against loss or damage by fire and other risks commonly covered for commercial structures. The amount of the insurance shall be not less than one hundred percent (100%) of the then actual replacement cost, excluding architect's and engineers' fees and costs of replacing excavations and foundations but without deduction for depreciation (the "Full Insurable Value"). The Full Insurable Value shall be determined from time to time, not more frequently than at one (1) year intervals, by an appraisal made in accordance with the rules and regulations and/or practice of any board of underwriters, or like board or body, recognized and accepted by the insurance company or companies writing such insurance. -16- 24 The insurance policies provided for in this Paragraph against loss or damage by fire shall insure Lessor and Lessee as named co-insureds and the mortgagee, if any, of the fee and the mortgagee, if any, of the Leasehold (provided that any mortgagee included in such insurance agrees to use the proceeds thereof in conformity with this Lease), as their interests may appear. The policies required by this Paragraph shall be at the cost and expense of Lessee. Lessee agrees to pay the premiums for all insurance required hereunder in annual or lesser installments as Lessee and the applicable insurance company may deem appropriate. Lessee shall deliver policies or duplicates thereof or certificates therefor to Lessor. If Lessee fails to effect, maintain or renew any required insurance or to pay the premiums therefor, then Lessor, at its option (but without obligation to do so), may procure such insurance, and any sums expended by it for such insurance shall be repaid by Lessee to Lessor on the first day of the next calendar month after payment by Lessor, together with interest at the annual rate of two (2) points above the preferred commercial or prime rate charged to Wells Fargo Bank customers, but in no event greater than the highest rate then legally permitted, from the date of payment by Lessor until paid by Lessee. Any failure of Lessee to repay the same shall carry with it the same consequence as failure to pay an installment of rental. To the extent obtainable each insurer shall agree, by endorsement on the policy or policies issued by it, or by independent instrument furnished to Lessor, that it will give Lessor thirty (30) days' written notice before the policy or policies in question shall be materially altered or cancelled. Neither Lessor nor Lessee shall carry separate insurance, concurrent in form or contributing in the event of loss with any insurance required to be furnished by Lessee under this Paragraph, unless both Lessor and Lessee are included therein as the insureds, with loss payable as provided in this Lease. All policies provided for in this Paragraph may be by separate insurance or included in blanket policies of Lessee or the parents, subsidiaries or affiliates of Lessee. -17- 25 The insurance policies provided for in this Paragraph against loss or damage by fire shall be made payable to any bank doing business in Stanislaus County, California, selected from time to time as trustee by Lessee should said loss or damage equal or exceed Twenty-Five Thousand Dollars ($25,000); and disposition of the recoveries thereon shall be subject to the restrictions and shall be made as hereinafter provided for in this Lease. In the event of the resignation of any such trustee, such trustee shall file an accounting of the assets held hereunder with the parties hereto and shall deliver any trust assets held hereunder to such bank as is selected by Lessee as the successor trustee. Any coverage minimums, the deductible and the minimum amount of proceeds payable to the trustee set forth in this Paragraph or elsewhere in this Lease may at Lessor's option be increased to the extent so advised in the reasonable judgment of Lessor's independent insurance broker at the beginning of the fifth, and at the beginning of each five year period thereafter throughout the term of this Lease. Subject to the replacement cost provision herein, so long as the applicable policy is not affected and the cost thereof is not increased thereby, each of the parties hereto waives its entire right of recovery against the other for any damages caused by an occurrence insured against by such party and the rights of any insurance carrier to be subrogated to the rights of the insured under the applicable policy. 8. USE OF PREMISES. A. Compliance with Laws. Lessee may use the Premises for commercial purpose, specifically for a Brewery, Restaurant, Pub, or any combination thereof, or other commercial usage, reasonably approved by Lessor, allowed under the applicable zoning ordinance for the Premises. Lessee will not use nor knowingly permit any person to use or occupy in any manner whatsoever the Premises or any improvement thereon, or any part thereof, for any extra hazardous purpose, nor for any purpose nor in any manner or use in violation of any law or ordinance or of any governmental, political or military order or regulation. -18- 26 Lessee agrees to conform to all laws and ordinances and all orders and regulations of any and every legal, governmental or military board, body, commission or officer relating to, affecting or controlling the construction, reconstruction, replacement, changes in construction of, repair, maintenance, condition, equipment, protection, occupancy or use of any and every building, structure or improvement that may be, or that may be placed or maintained upon the Premises, or relating to, affecting or controlling the improvement, occupancy, use or condition of, or any work or operation in or upon the Premises, or any sidewalk or street surrounding or adjoining the Premises. Lessee agrees to pay and discharge, and to keep the Lessor and the Premises and any improvement thereon, free and harmless from any fine, penalty, or other change incurred for violation of any law, order, ordinance or regulation. Lessee shall have the right to contest by appropriate legal proceedings or in such other lawful manner as Lessee may deem suitable in the name of Lessee or Lessor, or both, but without cost or expense to Lessor, the validity of any law, ordinance, certificate, order, rule, regulation or requirement of the type referred to in this Paragraph. If compliance may legally be held in abeyance without incurring any lien, charge or liability of any kind against the Premises or the improvements thereon or any interest of Lessor or Lessee therein, and without subjecting Lessor to any liability, civil or criminal, Lessee may postpone compliance therewith until the final determination of any contest, provided that all such proceedings shall be prosecuted with all due diligence and dispatch. Provided the same shall be without cost or expense to Lessor, Lessor agrees he will cooperate with Lessee in any such contest. If Lessee shall initiate or carry on any such contest in the name of Lessor, or of Lessor and Lessee, Lessee shall advise Lessor in writing not less than five (5) days before initiating such contest, and shall give full details as to the tribunal in which the contest is to be filed, the laws, ordinances, certificate, order, ruling, regulation or requirement contested, and such additional data as Lessor may require. If any lien, charge or civil liability, but not criminal liability, is incurred by reason of non-compliance, Lessee may still proceed with such contest if Lessee furnishes to Lessor security reasonably satisfactory to Lessor against any loss or injury by reason of such non-compliance or delay therein, and prosecutes the contest with due diligence and dispatch. -19- 27 B. Acts Affecting Fire Insurance. The Lessee shall not do or permit anything to be done in, on or about the Premises or bring or keep anything therein which will an any way increase the rate of fire insurance upon the building or any of its contents. The Lessee shall at its sole cost and expense promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force and with the requirements of any board of fire underwriters or other similar body now or hereafter constituted relating to or affecting structural changes not related to the Lessee's Improvements or the Interior Improvements. C. Environmental Hazards and Compliance. The Lessee, at its sole cost and expense, agrees to comply with all federal, state and local laws, rules and regulations now in force or which may hereafter be in force which deal with the handling, control, discharge and disposition of hazardous waste, material and substances (as such are defined from time to time in the federal, state and local laws, rules and regulations. Specifically, without subtracting from the generality of the foregoing, the Lessee agrees to comply with the language of Proposition 65 of the State of California, which in part provides as follows, "No person in the course of doing business shall knowingly discharge or release a chemical known to the state to cause cancer or reproductive toxicity into water or onto or into land where such chemical passes or probably will pass into any source of water......" Upon the expiration of this Lease, the Landlord shall be the sole cost and expense of the Lessee, have the Premises surveyed for the presence of hazardous waste, material and substances. Any and all hazardous waste, material and substances discovered at, upon or about the Premises which the survey develops shall, at the sole cost and expense of the lessee, be removed and disposed of in accordance with the requirements of the federal, state or local governmental agency in charge thereof. During the period of cleanup, if the Premises cannot then be offered by the Lessor for reletting under applicable federal, state or local statutes, ordinances or regulations, the Lessee shall continue to pay to the Lessor Rent and any and all other expenses which are the responsibility of the Lessee under this Lease. -20- 28 The Lessee shall indemnify and hold the Lessor and its directors, officers, and employees harmless from and defend the Lessor against any and all claims or liability for injury or damage to any person or property whatsoever arising from all matters related to hazardous waste, material and substances. D. Lessee's Business Operation. The Lessee hereby agrees that the Lessor shall not be liable for injury to the business of the Lessee or any loss of income therefrom or for damage to the goods, wares, merchandise or other property of the Lessee, the Lessee's employees, invitees, customers or other person in, on or about the Premises, nor shall the Lessor be liable for injury to the person of the Lessee, the Lessee's employees, invitees, customers or any other person in, on or about the Premises, either such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether such damage or injury results from conditions arising in, on or about the Premises or the building or the overall parcel, or from other sources or places and regardless of whether the cause of such damage or injury to the means of repairing the same is accessible to the Lessee. The Lessor shall not be exempt from liability for its negligence or the negligence of its employees. The Lessee shall indemnify and hold the Lessor harmless from and defend the Lessor against any and all claims or liability for injury or damage to any person or property whatsoever arising from the use by the Lessee of the Premises, or from the conduct of the Lessee's business, or from any work, activity or things done, permitted or suffered by the Lessee in, on or about the Premises or elsewhere. The Lessee shall further indemnify the Lessor and hold the Lessor harmless from and against any and all claims arising from any breach or default in the performance of any obligation on the part of the Lessee to be performed under the terms of this Lease, or arising from the negligence or willful acts of the Lessee, or any of the Lessee's agents and employees, and from and against all costs, attorneys' fees, expenses and liabilities incurred in the defense of any such claim. As a material part of the consideration to the Lessor in entering this Lease, the Lessee hereby assumes all risk of damage to the Premises, the building and the overall parcel, other property (both real and personal) or injury to persons in, on or about the Premises from any -21- 29 cause, and the Lessee hereby waives all claims in respect thereof against the Lessor, except for any claim arising out of the sole negligence of the Lessor. 9. DAMAGE AND DESTRUCTION. If at any time during the term of this Lease any improvement on the Premises is damaged or destroyed by fire, act of God, earthquake or the elements, or public enemies, other casualty, Lessee shall repair the improvement or replace it as follows: If the damage is partial and can be repaired under the then existing building ordinances of the applicable jurisdiction or the building laws of the State of California, Lessee shall repair the improvement at Lessee's own cost and expense. If the damage to the improvement cannot be repaired, or if the improvement is totally destroyed, Lessee shall replace the improvement so irreparably damaged or totally destroyed with another improvement of equal value. If the damage or destruction is covered by insurance then a reasonable period of time shall be allowed to adjust the claim against the insurance company before Lessee is required to begin the work of repair or replacement. All of the work provided for in this paragraph shall be in conformity with all ordinances, laws, regulations and orders, as provided for a new building in Section 7 hereof. Subject to Lessees' obligations to Lessees' leasehold lender, all recoveries upon any insurance policies required or permitted under Paragraph 7 shall be applied toward the work of repair and/or replacement, and any excess funds shall be payable to Lessee. In the event that such damage or destruction to any improvement on the Premises exceeds twenty-five percent (25%) of the replacement cost (excluding architectural and engineering fees, foundation and excavation), Lessee shall have the option of repairing the Premises or returning the Premises to a "broom clean" condition, provided such damage or destruction occurs during the last three (3) years of the term of this Lease, Lessee may upon at least thirty (30) days' prior written notice to Lessor terminate this Lease as to such improvement, together with such immediately adjacent land thereunder as is reasonably necessary for the comfortable use and occupancy, free and clear of all tenancies. In such event (i) all insurance proceeds not used for repair or restoration of any portion of the Premises not terminated shall be paid to Lessor, (ii) rent under this Lease shall be reduced as of the date of termination in the proportion that the square footage of the land so terminated bears to the square footage of the -22- 30 entire land initially demised hereunder and shall be prorated, (iii) all costs and expenses relating to the terminated land and building shall be prorated as of termination and Lessee shall thereafter cease to have any obligation therefor, and (iv) the parties shall exchange among themselves easements and such other instruments as shall be reasonably necessary to assure that all buildings on the Premises (including the terminated portion) retain the same parking, utilities, access and similar rights and privileges as they enjoyed prior to such termination. In the event of a dispute under any of the provisions of this final paragraph of Paragraph 9, the matter shall be determined by arbitration. 10. ASSIGNMENT AND SUBLETTING. A. Purpose. The purpose of this Lease is to transfer possession of the premises to Lessee for Lessee's use in return for certain benefits including rent to be transferred to the Lessor. The essence of this Lease agreement then is the transfer of possession of the premises to Lessee for its personal use and payment of money and other consideration by Lessee for this transfer by Lessor. The Lessee's right to assign or sublet as stated in this Paragraph is subsidiary and incidental to the underlying purpose hereof. Lessee acknowledges that it has entered into this Lease in order to acquire the premises for its own personal use and has not entered into this lease for the purpose of obtaining the right to convey the leasehold to others. The terms "assignment" or "subletting" as used herein shall include any transfer of possession or of a contingent right of possession, including without limitation, any agency, franchise or management agreement amounting in terms to a "net lease" or complete abdication and assignment of Lessee's legal responsibility, and excluding any mortgage or hypothecation pursuant to Lessee's lender's requirements and subject to the requirements of this Lease. B. Consent of Lessor. Lessee shall not assign this Lease or any interest therein, and shall not sublet the said Leased premises or any part thereof, or any right or privilege appurtenant thereto, or suffer any other person (the agents and servant of Lessee excepted) to occupy or use the said leased premises, or any portion thereof, without the reasonable written consent of Lessor first had and obtained, and a consent to one assignment, subletting, occupation or use by any other person shall not be deemed to be a consent to any subsequent assignments, subletting, occupation or use by another person. Any such assignment or subletting without such consent shall be void, at the option of the Lessor. This Lease shall not, nor shall any interest therein, be assignable, as to the interest of Lessee, by operation of law, without the written consent of Lessor. C. "Reasonable" Factors to Withhold Consent. The consent of the Lessor to an assignment or sublet may not be -23- 31 unreasonably withheld, provided, should Lessor withhold its consent for any of the following reasons, which list is not exclusive, such withholding shall be deemed to be reasonable: (1) In the event of a sublease that the Lessee has virtually assigned and/or completely abrogated its legal responsibility under this Lease. (2) That the proposed use is different from assignor's use of the Premises and such proposed use diminishes the value of the Premises. (3) That the financial capacity of the proposed assignee is less than that of Lessee herein, or if greater than Lessee, it is otherwise financially inadequate. D. Conditions. Notwithstanding the foregoing, the following conditions shall apply to any proposed assignment or sublease hereunder: (1) Each and every covenant, condition or obligation imposed on Lessee by this lease and each and every right, remedy or benefit afforded Lessor by this Lease shall not be impaired or diminished as a result of such sublease; (2) Any sums of money, or other consideration received by Lessee as a result of such subletting or assignment, including bonuses, key money, or the like (except rental or other payments received which are attributable to the amortization for the cost of leasehold improvements performed at the expense of the Lessee herein) which shall exceed, in the aggregate, the total sums which Lessee is obligated to pay Lessor under this Lease, or the prorated portion thereof if the premises subleased or assigned is less than the entire premises, shall be payable to Lessor as additional rental under this lease without affecting or reducing any other obligation of the Lessee hereunder; (3) If Lessee is a corporation which is not deemed a public corporation, or is an unincorporated association or partnership, the transfer, assignment or hypothecation of any stock or interest in such corporation, association or partnership in the aggregate in excess of fifty percent (50%) shall be deemed an assignment within this Paragraph; (4) Lessee shall reimburse Lessor as additional rent for Lessor's reasonable costs and attorney's fees incurred in conjunction with the processing and -24- 32 documentation of any such requested assignment, subletting, transfer, change of ownership or hypothecation of this Lease or Lessee's interest in and to the premises said costs and fees are subject to arbitration; and (5) No subletting even with the consent of Lessor shall relieve Lessee of its primary obligation to pay the rent and perform all other obligations to be performed by Lessee hereunder. The acceptance of rent by Lessor from any person shall not be deemed to be a waiver by Lessor of any provision of this Lease or to be a consent to any subletting. 11. DEFAULT AND REMEDIES OF THE LESSOR. A. Events of Default. The occurrence of any one or more of the following events ("Events of Default") shall constitute a breach of this Lease by the Lessee: (1) If the Lessee shall fail to pay any Rent when and as the same becomes due and payable and such failure shall continue for more than ten (10) days after the same becomes due and payable; (2) If the Lessee shall fail to obtain or maintain any of the several policies of insurance which are required of it by this Lease; (3) The failure of the Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by the Lessee, other than those described in Sub-Subparagraphs (1), (2), and (3) above, if such failure continues for a period of thirty (30) days after written notice thereof from the Lessor to the Lessee; provided, however, that if the nature of the Lessee's failure is such that more than thirty (30) days are reasonably required for its cure, then the Lessee shall commence such cure with the thirty (30) day period and thereafter diligently prosecute such cure to completion; (4) If the Lessee (i) shall make a general assignment for the benefit of creditors, or (ii) shall admit in writing its inability to pay its debts as they become due or shall file a petition in bankruptcy, or shall be adjudicated a bankrupt or insolvent, or shall file a petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, or (iii) shall file an answer admitting or shall fail reasonably to contest the material -25- 33 allegations of a petition filed against it in any such proceeding, or (iv) shall seek or consent to or acquiesce in the appointment of any trustee, receiver or liquidator of the Lessee or any material part of its properties; (5) If within ninety (90) days after the commencement of any proceeding against the Lessee seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceeding shall not have been dismissed, or if, within ninety (90) days after the appointment without the consent or acquiescence of the Lessee of any trustee, receiver or liquidator of the Lessee or of any material part of its properties, such appointment shall not have been vacated; (6) If this lease or any estate of the Lessee hereunder shall be levied upon under any attachment or execution, and such attachment or execution is not vacated within ten (10) days; (7) The vacating or abandonment of the Premises by the Lessee; or (8) The discovery by the Lessor that any financial statement given to the Lessor by the Lessee, any permitted assignee/sublessee of the Lessee, any successor in interest of the Lessee or any guarantor of the Lessee's obligations under this Lease is materially false. (9) An assignment or sublease in violation of Paragraph 10 of this Lease. B. Remedies. If any Event of Default should occur, without limiting the Lessor in the exercise of any right or remedy which the Lessor may have by reason of such Event of Default either under this Lease or at law or equity, then the Lessor may, at any time thereafter, with not less than twenty (20) days prior written notice or demand: (1) Terminate the right of the Lessee to possession of the Premises by any lawful means, in which case this Lease shall terminate and the Lessee shall immediately surrender possession of the Premises to the Lessor. Upon a termination of the Lease under this remedy, the Lessee's right to possession shall terminate and this Lease shall terminate, unless on or before such date all arrears of rent and all other sums payable by the Lessee under this Lease (together with interest -26- 34 thereon at the rate set forth in Subparagraph C hereof if payable to the Lessor) and all costs and expenses incurred by or on behalf of the Lessor hereunder shall have been paid by the Lessee and/or any and all obligations, promises or covenants or any other Event of Default and all other breaches of this Lease by the Lessee at the time existing shall have been cured and fully remedied to the satisfaction of the Lessor. Absent a cure and upon a termination hereunder, the Lessor may recover from the Lessee: (a) The worth at the time of award of the unpaid Rent which had been earned at the time of termination; (b) The worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such Rent loss that the Lessee proves could have been reasonably avoided; (c) The worth at the time of award of the amount by which the unpaid Rent for the balance of the Initial Term or an Extended Term after the time of award exceeds the amount of such Rent loss that the Lessee proves could be reasonably avoided; and (d) Any other amount necessary to compensate the Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom. The "worth at the time of award" of the amounts referred to in Subparts (a) and (b) of Sub-Subparagraphs B(1) above is computed by allowing interest at the rate set forth in Subparagraph C. The "worth at the time of award" of the amount referred to in Subpart (c), Sub-Subparagraphs B(2) above is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award, plus one percent (1%). (2) Maintain the Lessee's right to possession, in which case this Lease shall continue in effect whether or not the Lessee shall have abandoned the Premises. In such event, the Lessor shall be entitled to enforce all of the Lessor's rights and remedies under this Lease, -27- 35 including the right to recover Rent as it becomes due under this Lease. (3) Pursue any other remedy now or hereinafter available to the Lessor under the laws or judicial decisions of the State of California. C. Interest and Late Charges. Every installment of Rent and every other payment due hereunder from the Lessee to the Lessor which shall not be paid within ten (10) days after the same shall have become due and payable shall bear interest at the rate of twelve percent (12%) per annum, but in no event greater than the highest rate then legally permitted, form the date that the same became due and payable and until paid, whether or not demand be made therefor. The Lessee acknowledges that late payment by the Lessee to the Lessor of Rent will cause the Lessor to incur costs not contemplated by this Lease, the exact amount of such costs being extremely difficult and impracticable to fix. Such costs include, without limitation, processing and accounting charges and late charges that may be imposed on the Lessor by the terms of any mortgage or trust deed covering the Premises. Therefore, if any installment of Rent due from the Lessee is not received by the Lessor when due, the Lessee shall pay to the Lessor an additional sum equal to six percent (6%) of the overdue Rent as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that the Lessor will incur by reason of late payment by the Lessee. In no event shall the operation of this Subparagraph cause the Lessor to accept a sum greater than the highest rate of interest then allowed in the State of California. Any sum accepted as a late charge or interest which is later shown to have violated the usury laws of the State of California shall be applied to future Rent obligations of the Lessee, if any, and if none, returned to the Lessee without interest. Acceptance of interest or any late charge shall not constitute a waiver of the default of the Lessee with respect to the overdue amount, or prevent the Lessor from exercising any of the other rights and remedies available to the Lessor under this Lease or at law or equity. D. No Termination Without Election by the Lessor. Even though the Lessee has breached this Lease and abandoned the Premises, this Lease shall continue in effect for so long as the Lessor does not terminate the rights of the Lessee to possession, and the Lessor may enforce all its rights and remedies under this Lease, including the right to recover the Rent as it become due under this Lease. Acts of maintenance or preservation or efforts to relet the Premises or the appointment of a receiver upon initiative of the Lessor to protect its interest under this Lease shall not constitute a termination of the Lessee's right to possession. E. Remedies Not Exclusive. The remedies provided for -28- 36 in this Lease are in addition to any other remedies available to the Landlord at law, in equity, by statute or otherwise. F. The Lessor's Right to Cure Defaults. All agreements and provisions to be performed by the Lessee under any of the terms of this Lease shall be at its sole cost and expense and without any abatement of Rent. If the Lessee shall fail to pay any sum of money, other than Rent, required to be paid by it hereunder or shall fail to perform any other act on its part to be performed hereunder, and such failure shall continue for ten (10) days after notice thereof by the Lessor, the Lessor may, but shall not be obligated to do so, and without waiving or releasing the Lessee from any obligations of the Lessee, make any such payment or perform any such other act on the Lessee's part to be made or performed as in this Lease provided. All sums so paid by the Lessor and all necessary incidental costs shall be deemed additional rent hereunder and shall be payable to the Lessor on demand, and Lessor shall have (in addition to any other right or remedy of the Lessor) the same rights and remedies in the event of non-payment thereof by the Lessee as in the case of default by the Lessee in the payment of Rent. 12. DEFAULT BY THE LESSOR. The Lessor shall not be in default unless the Lessor fails to perform obligations required of the Lessor within thirty (30) days after written notice by the Lessee to the Lessor and to the holder of any first mortgage or deed of trust covering the Premises (whose name and address will be provided to the Lessee upon written request), specifying therein the alleged failure to the Lessor to perform such obligation. Furthermore, if the nature of the obligation of the Lessor is such that more than thirty (30) days are required to affect a cure, then the Lessor shall not be in default if the Lessor commences such cure within such thirty (30) day period and thereafter prosecutes such cure to completion. 13. TERMINATION OF LEASE; FORFEITURE OF PROPERTY; CONDITION. Lessee agrees that as at the termination of this Lease or repossession of the leased Premises by Lessor, by way of default or otherwise, it shall remove all personal property to which it has the right to ownership pursuant to the terms of this Lease. Any and all such property of Lessee not removed by such date shall, at the option of the Lessor, irrevocably become the sold property of Lessor. Lessee waives all rights to notice and all common law and statutory claims and causes of action which it may have against Lessor subsequent to such date as regards the storage, destruction, damage, loss of use and ownership of the personal property affected by the terms of this Paragraph. Lessee acknowledges Lessor's need to relet the leased Premises upon termination of this Lease or repossession of the leased premises and understands that the forfeitures and waivers herein are necessary to aid said reletting, and to prevent Lessor incurring a loss for inability to deliver the property to a prospective -29- 37 Lessee. In addition, upon such termination of the Lease, the Lessee shall deliver up to Lessor peaceable possession of the Premises and improvements in the same condition as received, including proper site clearance and removal if requested by Lessor, free and clear of any and all hazardous waste, material, substance and violations of law. Not less than one year prior to the termination date of this Lease, Lessor shall notify Lessee of Lessors intention to have the premises demolished and the property returned to Lessor in the same state it was delivered to Lessee or to have the premised remain in place. Should demolition be requested, the cost of demolition shall be at the sole expense of the Lessee. 14. SURRENDER OF LEASE. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, shall not work as a merger, and shall, at the option of Lessor, terminate all or any existing subleases or subtenancies, or may, at the option of Lessor, operate as an assignment to it of any or all such subleases. 15. COSTS AND FEES OF LITIGATION. In the event that the Lessor should institute any suit against Lessee for violation of any of the covenants or conditions of this Lease or for recovery of possession of the Premises, or should the Lessee institute suit against Lessor for violation of any of the covenants or conditions of this Lease, or should either party intervene in any action or proceeding in which the other is a party, to enforce or protect its interest or rights hereunder, the prevailing party shall be entitled to the reasonable fees of its attorneys, as determined by the adjudicatory authority hearing the matter and taxes as part of the costs thereof. Arbitration provided for by this Lease is included within the scope of this Paragraph 15. 16. CERTIFICATES. Lessor and Lessee shall, without charge, at any time and from time to time, within ten (10) days after receipt of written request, deliver a duly executed and acknowledged written instrument to the requesting party or to any other person, firm or corporation specified in the request, certifying: (a) That this Lease is unmodified and in full force and effect, or, if there has been any modification, that it is in full force and effect as modified in the manner stated in such document; (b) That Lessee is not in default under the terms of this Lease, or, if in default, the details thereof; (c) Whether or not there are then existing any setoffs -30- 38 or defenses against the enforcement of any of the agreements, terms, covenants or conditions of this Lease and any modification thereof upon the part of Lessor or Lessee, to be performed or complied with, and, if so, specifying the same; and (d) The dates to which the net rent, additional rent (if any) and other charges hereunder have been paid. Any such statement delivered pursuant to this Paragraph may be relied upon by any prospective purchaser of the fee of the Premises, or by any prospective purchaser or encumbrance of the leasehold estate, or other party to whom the instrument is directed. 17. ARBITRATION. Wherever arbitration is provided for in this Lease, it shall be conducted under the Commercial Arbitration Rules of the American Arbitration Association ("AAA") then in effect. The decision of the arbitrator(s) shall be final, binding and non-appealable and may be entered as a judgment in any court of competent jurisdiction. Either party shall have the right to specifically enforce this Paragraph 17 in order to compel an arbitration as required by the terms of this Lease, and the failure of the opposing party to agree to such arbitration shall render such party liable as a material default under this Lease for all damages proximately caused by the failure to so agree. Following a receipt of a list of proposed arbitrators from AAA, the parties shall have ten (10) days within which to reject any arbitrator deemed objectionable, failing in which the right to reject arbitrators shall be deemed waived. To the extent consistent with the rules, the arbitration hearing shall be set within ninety (90) days after the selection of the arbitrator(s) in Stanislaus County. Each party shall have the right to pre-arbitration discovery pursuant to the rules set forth in California Code of Civil Procedure Section 2016 through 2037. The arbitrator(s) shall render this award within thirty (30) days after conclusion of the hearing. The arbitrator(s) shall be entitled to award the prevailing party in such arbitration, reasonable attorneys' fees, cost of arbitration filing, fees or the arbitrator(s), costs of the reporter's transcript and expert witness fees. 18. QUIET ENJOYMENT AND WARRANTIES OF TITLE. Lessor warrants that so long as Lessee is not in default hereunder Lessee shall have the quiet enjoyment of the Premises throughout the term of this Lease, including any extended term, without let or hindrance on the part of Lessor, and Lessor will warrant and defend Lessee in the peaceful and quiet enjoyment of the Premises against all persons claiming through Lessor. -31- 39 19. EMINENT DOMAIN. A. Definitions. The following definitions shall apply in construing provisions of this Lease relating to a taking of or damage to all or any party of the premises or improvements or any interest in them by eminent domain or inverse condemnation: (1) "Taking" means the taking or damaging, including severance damage, by eminent domain or by inverse condemnation or by any public or quasi-public use under any statute. The transfer for title may be either a transfer resulting from the recording of a final order or condemnation or a voluntary transfer or conveyance to the condemning agency or entity under threat of condemnation, in avoidance of an exercise of eminent domain, or while condemnations are pending. The taking shall be considered to take place as of the later (a) the actual date physical possession is taken by the condemnor, or (b) the date on which the right to compensation and damages accrues under the law applicable to the premises. (2) "Improvements" means all products of skill artifact, plan or design for construction on, modification of, or planned use of existing structures, natural or cultivated or earth contours on the premises including, but not limited to, buildings, structures, fixtures, fences, utility installments, excavations, surfacing, ornamental trees, bushes, vines and other plants or shrubbery, whether occurring on the premises naturally or placed by human design or effort, and whether coming into being on the premises before or after commencement of the term; landscaping, ground cover, and artistic and ornamental components of any of the above. (3) "Notice of intended taking" means any written notice expressing an existing intention of taking, as distinguished from a mere preliminary inquiry proposal and that contains a description or map of the taking reasonably defining the extent of the taking, including, the service of a condemnation summons and complaint on a party to this Lease. The notice is deemed given when actually received by a party to this Lease from the condemning agency or entity. (4) "Award" means compensation paid for the taking whether pursuant to judgment or by agreement or otherwise. B. Notice. The party receiving any notice of the following specified kind shall promptly give the other party -32- 40 notice of the receipt, contents, and date of the notice received: (1) Notice of intended taking; (2) Service of any legal process relating to condemnation of the premises of improvements; (3) Notice in connection with any proceeding or negotiations with respect to such a condemnation; or (4) Notice of intent or willingness to make or negotiate a private purchase, sale, or transfer, in lieu of condemnation. C. Right to Representation. Lessor, Lessee, and all persons and entities holding under Lessee, shall each have the right to represent his or its respective interest at each proceeding or negotiation with respective interest at each proceeding or negotiation with respect to a taking or intended taking and to make full proof of his or its claim. Not agreement, settlement, sale or transfer to or with the condemning authority shall be made without the consent of Lessor and Lessee. Notwithstanding the above, Lessor shall have no right of representation where the taking only applies to the improvements. Lessor and Lessee each agree to execute and deliver to the other any instructions that may be required to effectuate or facilitate the provisions of this Lease relating to condemnation. D. Condemnation by Eminent Domain. In the event of condemnation by eminent domain (or any similar law authorizing the involuntary taking of private property, which shall include a sale in lieu thereof to a public body, quasi-public or other authority to entity legally endowed with such power) of a portion or all of the Premises, the respective rights and obligations of the parties hereto shall be as follows: (1) If the portion condemned and taken is not a Substantial Portion, defined below) of the Premises, or in the event a substantial Portion is taken but Lessee does not terminate this Lease as allowed by subparagraph (b) hereof, then Lessee shall reconstruct the remainder of the Premises so as to constitute an architectural unit, if any portion but less than all of a building is taken, and/or to an integrated plan of development for the remaining parcel, in the event an entire building or land other than land upon which a building is taken. All awards (other than any award based upon a taking of Lessee's fixtures and equipment) shall be paid as follows: (a) Subject to the rights of any Leasehold -33- 41 Mortgagee, there shall be held by Lessee and applied to the cost of repair and restoration an amount sufficient for the cost of such repair and restoration required by this paragraph; (b) Next, there shall be paid pro rata to Lessor and Lessee the value of the land, as unimproved land exclusive of improvements and the improvements so taken. (c) In the event of such condemnation and taking, the rental shall be reduced by an amount equal to that proportion of such rent which the value of the law and improvements so taken shall bear to the value of all of the Premises and the improvements thereon. In the event that the parties cannot agree upon the allocation of the award or reduction of the rental, or if there is a dispute under any of the other provisions of this subparagraph (1), the same shall be determined by arbitration. (2) Notwithstanding the above, Lessee will be relieved of its obligation to repair or reconstruct improvements taken during the final twenty (20) years of the term of the Lease if: (a) The work of repair or reconstruction would constitute a "major" repair or alteration as defined in the provisions of this Lease relating to maintenance, repair and alteration of improvements; (b) Within sixty (60) days after Lessee receives notice of intent of taking, Lessee given Lessor notice of election to claim the relief; and (c) Lessee is not otherwise in monetary default under the terms of this Lease. If the conditions described herein are met, the award shall be apportioned as described in subparagraph (3) below. If all the foregoing conditions for relief are satisfied, the cost of such repair or reconstruction shall be deducted from Lessee's share of the award and paid to any Leasehold Mortgagee demanding it by notice within twenty (2) days after Lessee's notice of election, and otherwise to Lessor. (3) In the event that a Substantial Portion of the Premises is taken, the Lessee shall have the option by written notice to Lessor within sixty (60) days of such taking to terminate this Lease, in which event this -34- 42 Lease shall terminate and all awards shall be paid in the following order: (a) The Leasehold Mortgagee shall receive all sums due under any note executed by Lessee secured by a leasehold deed of trust only after the Lessor's Fee Mortgagee or Beneficiary, if any, received its sums due under any note executed by Lessor, secured by a senior deed of trust on the Premises; (b) Next, there shall be paid pro rata to Lessor and Lessee the value of the land and improvements so taken; (c) In the event of any dispute as to the allocation of award or of any other dispute under any of the provisions of this subparagraph (3), the same shall be determined by arbitration. (4) A "Substantial Portion" of the Premises shall mean five percent (5%) or more of the square footage of the Premises as originally comprised or a lesser portion indispensable to Lessee's operations. (5) If all or any portion of the Premises and any building located thereon shall be taken by the exercise of the right of eminent domain for governmental occupancy for a limited period, this Lease shall not terminate and Lessee shall continue to perform and observe all of its obligations hereunder as though the taking had not occurred, except to the extent that it may be prevented from so doing by reason of such taking. Lessee, however, shall in no event be excused from the payment of rent, and all other sums and charges required to be paid by Lessee under this Lease. In the event of such a temporary taking, Lessee shall be entitled to received the entire amount of any award made for such taking (whether paid by way of damages, rent or otherwise) and Lessor hereby assigned such award to Lessee, unless the period of governmental occupancy extends beyond the termination of the then existing term of this Lease, in which case the award shall be apportioned between Lessor and Lessee as of the date of such termination and, in such apportionment, Lessor shall receive the full amount, if any, of any portion of the award which represents the cost of restoration at the termination of any such governmental occupancy. Lessee covenants that at the termination of any such governmental occupancy, it will, at its sole cost and expense, restore the building as nearly as may be reasonably possible to the condition in which the same -35- 43 was prior to such taking. However, Lessee shall not be required to do such restoration work if on or prior to the date of such termination of governmental occupancy, the term of this Lease shall have terminated or if such date of termination of governmental occupancy shall occur less than three (3) years prior to the termination of the initial term of this Lease, in which event the award shall be allocated under the provisions of paragraph (b) hereof. Notwithstanding the above, if a portion of the Premises indispensable to Lessee's operations is taken by the right of eminent domain for governmental occupancy for a limited period, Lessor and Lessee shall treat the taking as a taking of a Substantial Portion. E. Early Delivery of Possession. Lessee may continue to occupy the premises and improvements until the condemnor takes physical possession. However, at any time following notice of intended total taking, or within the time limits specified to delivering possession in the provision on substantial taking, Lessee may elect to deliver possession of the premises before actual taking. The election shall be made by notice declaring the election and covenanting to pay all rents required under this Lease to the date of taking. Lessee's right to a portion of or compensation from an award shall then accrue as of date that Lessee goes out of possession. 20. NOTICES. Any communication required under this Lease shall be in writing, and shall be effective (a) when delivered in person to the recipient named below, (b) one day after timely deposit with a responsible overnight courier to the recipient named below, or (c) three days after deposit with the U.S. Postal Service, postage prepaid, certified mail, return receipt requested: Lessor: RANDALL AND SUSAN STEELE 442 Weyer Road Modesto, CA 95351 Lessee: STANISLAUS BREWING COMPANY, INC. 3454 Shoemake Modesto, CA 95355 Attn: Garith Helm Either party may, by notice as provided in this paragraph, require subsequent notices to be given to another person or to a different address. 21. ENCUMBRANCE OF LEASEHOLD A. Encumbrance Subject to Conditions. Lessee may without the prior consent of Lessor at any time or from time to -36- 44 time during the term of this Lease, mortgage or otherwise encumber its interest in this Lease, in the leasehold estate created hereunder, and/or the buildings and improvements thereon upon and subject to the following conditions: (1) No deed of trust, mortgage or other encumbering instrument (collectively "Leasehold Mortgage") shall extend to or otherwise affect the fee, reversionary interest or estate of Lessor in and to the Premises. The Leaseholder Mortgage and all rights acquired under it shall be subject to each and all of the covenants, conditions and restrictions stated in this Lease and to all rights and interests of Lessor, except as otherwise provided in this Lease. Should there be any conflict between the provisions of the Lease and of any Leasehold Mortgage executed by Lessee, the provisions of this Lease shall control. (2) Either prior to or concurrent with the recordation of the Leasehold Mortgage, Lessee shall cause a fully conformed copy thereof and of the note secured thereby to be delivered to Lessor together with a written notice containing the name and post office address of the mortgagee, trustee, beneficiary or other holder of the beneficial interest in the Leasehold Mortgage (collectively "Leasehold Mortgagee"). (3) Lessor Agrees that it will not terminate this Lease because of any default or breach by Lessee if the Leasehold Mortgagee, or the trustee under such Leasehold Mortgage, within ninety (90) days after service of written notice on the Leasehold Mortgagee by Lessor of Lessor's intention to terminate this Lease for such breach or default, shall: (a) (i) Cure any monetary breach or default specifically including, but not limited to, the payment of rent or commence diligent performance of curative measures of any breach not curable within the ninety (90) day period; (ii) diligently take any action to obtain possession of the leasehold estate (including possession by receiver) and to cure such default or breach in the case of default or breach which cannot be cured unless and until the Leasehold Mortgagee has obtained possession; or, if the default or breach is not so curable, commence and thereafter pursue to completion the steps and proceedings for foreclosure by sale, or by exercise of power of sale under the Leasehold Mortgage, of the leasehold estate. In the event Lessee cures such breach or default, the Leasehold Mortgagee shall -37- 45 not be required to continue any action for possession or any foreclosure action; and (b) Keep and perform all of the covenants and conditions of this Lease requiring the payment of expenditure of money by the Lessee until such time as the leasehold estate created hereunder shall be sold upon foreclosure, or by the exercise of a power of sale, or shall be released or reconveyed under the Leasehold Mortgage; provided, however, that if the Leasehold Mortgagee shall fail or refuse to comply with the conditions of this Paragraph, then Lessor shall be released from the covenants of forbearance herein contained with respect to such breach of default. (c) Notwithstanding the above, in the event Leasehold Mortgagee completes the foreclosure proceedings mentioned above, Leasehold Mortgagee shall have the right to sublet or assign its interest in the leasehold estate without the prior consent of Lessor. 4. If for any reason the Leasehold Mortgagee cannot complete the foreclosure proceedings mentioned above, Lessor agrees, if requested by Leasehold Mortgagee, should the Lease be terminated prior to the expiration of the term thereof for any reason, to immediately thereafter enter into a new Lease with the Leasehold Mortgagee upon the same rental and other terms and conditions as in the original Lease; provided, however, that as a condition to Lessor's obligation to enter into any such lease, subject to the provisions of Paragraph 21(F) deferring the payment of rent, all defaults under the original Lease must be remedied and Lessor must be compensated for all reasonable expenses, including attorneys' fees incident to the execution and delivery of such new lease. If the parties cannot agree as to the reasonableness of such expenses, then the matter shall be submitted to arbitration before an arbitrator to be mutually agreed upon, or in lieu of such agreement, by an arbitrator appointed by the Presiding Judge of the Stanislaus Superior Court at the request of either party. The term of such new lease shall be equal to the unexpired term of the original Lease. The new lease shall be subject to all existing subleases under which the sublessees are not in default. Any such new lease as herein contemplated may, at the option of the Leasehold Mortgagee and with the Lessor's prior written consent, which consent shall not be unreasonably withheld, be executed by a nominee or assignee of the Leasehold Mortgagee without the -38- 46 Leasehold Mortgagee assuming the obligations of Lessee thereunder, so long as said nominee or assignee does assume such obligation. Notwithstanding anything to the contrary expressed or implied in the Lease or in any deed of trust executed by Lessor, any new lease made pursuant to this paragraph shall be prior to any mortgage, deed of trust, or other lien or encumbrance on the fee title to the real property created by lessor, and shall be accompanied by a conveyance of title to the improvements (free of any mortgage, deed of trust, lien or encumbrance created by Lessor for a term of years equal to the term of the new lease), but said conveyance shall be subject to all the terms of the new lease, including the reversionary rights of lessor to said improvements. Nothing herein contained shall be deemed to impose any obligations on the part of Lessor to deliver physical possession of the property to the Leasehold Mortgagee or its nominee or assignee. B. Lessor's Consent. As to any Leasehold Mortgage, Lessor hereby consents to terms that provide (i) for an assignment of Lessee's share of the net proceeds from any award or other compensation resulting from a total or partial (other than temporary) taking of the Premises by condemnation, (ii) for the entry of the Leasehold Mortgagee upon the Premises during business hours, with reasonable notice to Lessor or Lessee, to view the state of the Premises, (iii) that a default by Lessee under this Lease shall constitute a default under the Leasehold Mortgage, (iv) for an assignment of Lessee's right, if any, to terminate, cancel, modify, change, supplement, alter or amend this Lease, (v) for an assignment of any sublease to which the Leasehold Mortgage is subordinated, and (vi) effective upon any default in any such Leasehold Mortgage, (1) for the foreclosure of the Leasehold Mortgage pursuant to a power of sale, by judicial proceedings or other lawful means and the subsequent sale of the leasehold estate to the purchaser at the foreclosure sale and a sale by such purchaser if the purchasers is the Leasehold Mortgagee, (2) for the appointment of a received, irrespective of whether the Leasehold Mortgagee accelerates the maturity of all indebtedness secured by the Leasehold Mortgage, (3) for the right of the Leasehold Mortgagee or the receiver to enter and take possession of the Premises to manage and operate the same and to collect the subrentals, issues and profits therefrom and to cure any default under the Leasehold Mortgage or any default by Lessee under this Lease, and (4) for an assignment of Lessee's right, title and interest in and to any deposit of cash, securities or other property which may be held to secure the performance of covenants, conditions and agreements contained in this Lease, the premiums for or dividend upon any insurance provided for the benefit of any Leasehold Mortgagee or required by the terms of this Lease, as well as in all refunds or rebates of taxes or assessments upon or other charges against the Premises, whether paid or to be paid. -39- 47 C. No Voluntary Surrender of Lease. For the benefit of the holder of any Leasehold Mortgage, Lessor agrees not to accept a voluntary surrender of this Lease at any time while such Leasehold Mortgage shall remain a lien on the leasehold. D. Notification of Default. Lessor shall send to any Leasehold Mortgagee by certified or registered mail a notice of any default by Lessee under this Lease at the same time as and whenever any such notice of default shall be given by Lessor to Lessee, addressed to such Leasehold Mortgagee as the address last furnished to Lessor. No notice by Lessor shall be deemed to have been given unless and until a copy thereof shall have been so given to such Leasehold Mortgagee. Lessee irrevocably directs that Lessor accept, and Lessor agrees to accept, performance and compliance by any such Leasehold Mortgagee of and with any term, covenant, agreement, provisions, condition or limitation on Lessee's part to be kept, observed or performed hereunder with the same force and effect as though kept, observed or performed by Lessee. E. No Prior Consent. The prior written consent of Lessor shall not be required for: (1) A transfer of this Lease at foreclosure sale under the Leasehold Mortgage, under judicial foreclosure or by an assignment in lieu of foreclosure; or (2) Any subsequent transfer by the Leasehold Mortgagee if the Leasehold Mortgagee is the purchaser at such foreclosure sale; provided that in either such event the Leasehold Mortgagee forthwith gives notice to the Lessor in writing of any such transfer, setting forth the name and address of the transferee, the effective date of such transfer and including the express agreement of the transferee assuming and agreeing to perform all of the obligations of this Lease, together with a copy of the document by which such transfer was made. Any such transferee shall be liable to perform the obligations of the Lessee under this Lease only so long as such transferee holds title to the leasehold, provided that upon any conveyance of title, such transferee expressly assumes and agrees to perform all of the obligations of this Lease. Any subsequent transfer of the leasehold shall be subject to the conditions relating to assignment as set forth in this Lease. F. Deferral of Rent. If Lessee defaults under the terms of any Leasehold Mortgage or similar secured transaction and the Leasehold Mortgagee acquires Lessee's leasehold estate, whether by exercising its power of sale, by judicial foreclosure or by an assignment in lieu of foreclosure or of exercise of power -40- 48 of sale, Lessor agrees to defer the receipt of the rents falling due during the three (3) months following the Leasehold Mortgagees' acquisition conditioned on the following: (1) Payment of all taxes assessments and insurance premiums required by this Lease to be paid by Lessee are current or are brought current by Leasehold Mortgagee and are kept current by Leasehold Mortgagee; (2) Payment of all utility charges are current or are brought current and are kept current; (3) Leasehold Mortgagee performs all of Lessee's obligations for maintaining the Premises and leasehold improvements in good order and repair; and (4) All income and rents from the operation of the Premises or leasehold improvements are held by Leasehold Mortgagee in trust for Lessor. Leasehold Mortgagee shall within sixty (60) days of the expiration of said three (3) months period cure any rent defaults of Lessee and pay in full the rents deferred for the three (3) month period following the Leasehold Mortgagee's acquisition. G. Recorded Request for Notice of Default. Upon and immediately after the recording of the Leasehold Mortgage, Lessee, at Lessee's expense, shall cause to be recorded in the office of the County Recorder of the county in which the Premises is located, a written request duly executed and acknowledged by Lessor for a copy of any notice of default and of any notice of sale under the Leasehold Mortgage as provided by the statutes of the State of California. H. No Merger. In the event that the title to Lessor's estate and to Lessee's estate shall be acquired by the same person, firm or entity, other than as a result of termination of this Lease, no merger shall occur if the effect of such merger would impair the lien of any Leasehold Mortgage. I. Delivery of Documents. Lessor agrees that, upon request of the Leasehold Mortgagee, it will execute and deliver to any person, firm or entity a certificate stating that this Lease is in full force and effect and that the documents creating or evidencing the leasehold estate are true and correct copies and not incomplete, provided that such be the case. J. Insurance. Lessor agrees that any policy of hazard insurance in favor of Lessor shall contain an endorsement waiving the insurer's right of subrogation or as against the Leasehold Mortgagee and Lessee. -41- 49 K. Modification of Lease. (1) Should Lessee allow any encumbrance pursuant to this Paragraph 21, Lessor and Lessee agree they will not modify this Lease in any way without the prior written consent of the beneficiary of such encumbrance; (2) In the event that in connection with any financing or refinancing of the leasehold estate by Lessee any Leasehold Mortgagee requests any changes or additions to this Lease, Lessor and Lessee shall amend this Lease to include such changes or additions provided that such changes or additions do not impair Lessor's rights hereunder, materially increase Lessor's obligations hereunder or decrease the value of this Lease. 2. SUBORDINATION. A. Subordination. This Lease, at Lessor's option, shall be subordinate to any mortgage, Deed of Trust, or any other hypothecation for security now or hereafter placed upon the real property of which the leased Premises are a part and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the leased Premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, or trustee shall elect to have this lease prior to the lien of its mortgage or Deed of Trust, and shall give written notice thereof to Lessee, this lease shall be prior or subsequent to the date of said mortgage or Deed of Trust or the date of recording thereof. B. Execution of Documents. Lessee agrees to execute any documents required to effectuate such subordination or to make this Lease prior to any lien of any mortgage or Deed of Trust, as the case may be so long as Lessee receives reasonable written assurance of non-disturbance, and failing to do so within ten (10) days after written demand, does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead to do so. It is understood by all parties, that Lessee's failure to execute the subordination documents referred to above may cause the Lessor serious financial damage by causing the failure of a financing or sale transaction. Lessee shall attorn to any purchaser at any foreclosure sale, or to any grantee or transferee designated in any Deed given in lieu of foreclosure. 23. RIGHT OF FIRST REFUSAL TO BUY. Lessor hereby grants to Lessee the exclusive right, at Lessee's option, to purchase fee title to the Premises at any time during the term of this Lease -42- 50 upon the same terms and conditions and at the same price as any bona fide offer which Lessor desires to accept for the purchase of fee title to the Premises received by lessor. Upon receipt of a bona fide offer which is acceptable to Lessor and each time any such offer is received, Lessor shall modify Lessee in writing, by certified or registered mail, of the full details of such offer, including price, terms, length of escrow, warranties of seller, and other terms and conditions, whereupon Lessee shall have thirty (30) days from the date of receipt of such notice in which to elect to exercise Lessee's right to purchase. No sale or voluntary transfer of the fee title to the Premises shall be binding unless and until the foregoing requirements are fully complied with. In the event Lessee elects to exercise its right to purchase as granted herein above, then Lessee may do so by notifying Lessor (or such accepted person or entity) in writing by certified mail of its acceptance within such thirty (30) day period. Lessee hereby acknowledges approval of soils report or other studies at the Commencement date of this Lease and agrees that said purchase shall be "as-is". Should Lessee decline to exercise its right of first refusal upon the presentation of the details of the offer to Lessee, then Lessor (or such excepted person or entity) shall be free to accept the offer of the said third party, provided that Lessor (or such excepted person or entity) shall have no right to grant any more liberal terms to the offeror than those first offered Lessee, and provided, further, that the sale transaction contemplated by said offer must be completed and title transferred to the offeror within six (6) months of the date Lessee declined to exercise its right to purchase. 24. BANKRUPTCY. If at any time during the term of this Lease there shall be filed by or against Lessee in any court pursuant to any statute either or the United States or of any State a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee of all or a portion of Lessee's property, or if a receiver or trustee takes possession of any of the assets of Lessee, or if the leasehold interest herein passes to a receiver, or if Lessee makes an assignment for the benefit of creditors or petitions for or enters into an arrangement (any of which are referred to herein as "a bankruptcy event"), then the following provisions shall apply: A. Time Period. At all events any receiver or trustee in bankruptcy shall either expressly assume or reject this Lease within forty-five (45) days following the entry of an "Order for Relief". B. Assumption; Assurances. On the event of an assumption of the Lease by a debtor or by a trustee, such debtor or trustee shall within fifteen (15) days after such assumption (1) cure any default or provide adequate assurances that defaults will be promptly cured; and (2) compensate Lessor for all -43- 51 pecuniary loss or provide adequate assurances that compensation will be made for actual pecuniary loss; and (3) provide adequate assurance of future performance. C. Lessor's Obligations. Where a default exists in the Lease, the trustee or debtor assuming the Lease may not require Lessor to provide services or supplies incidental to the Lease before its assumption by such trustee or debtor, unless Lessor is compensated under the terms of the Lease for such services and supplies provided before the assumption of such Lease. D. Assignment by Trustee; Payment to Lessor. The debtor or trustee may only assign this Lease if adequate assurance of future performance by the assignee is provided, whether or not there has been a default under this Lease. Any consideration paid by any assignee in excess of the rental reserved in the Lease shall be the sole property of, and paid to, Lessor. Upon assignment by the debtor or trustee the obligations of the Lease shall be deemed to have been assumed and the assumptor shall execute an assignment agreement on request of Lessor. E. Lessor's Consideration. The Lessor shall be entitled to the fair market value for the Premises and the services provided by Lessor (but in no event less than the rental reserved in the Lease) subsequent to the commencement of a bankruptcy event. F. Lessor's Remedies. Lessor specifically reserves any and all remedies available to Lessor in Paragraph 11 hereof or at law or in equity in respect of a bankruptcy event by Lessee to the extent such remedies are permitted by law. 25. MISCELLANEOUS. A. Further Execution of Documents. The parties will at any time, at the request of either one, promptly execute and acknowledge duplicate originals of an instrument, in recordable form, which will constitute a short form of Lease, setting forth a description of the Premises, the term of this Lease, and any other portions thereof, excepting the rental provisions, as either party may request and shall execute other documents reasonably requested, such as estoppel certificates or other items requested. B. Cumulative Rights. Each and all of the various rights, power, options, recourses and remedies of Lessor and Lessee contained or provided for in this Lease shall be construed as cumulative and no one of them as exclusive of the other, or as exclusive of any remedies allowed by law. C. Enforcement Delay. No delay of Lessor or Lessee in enforcing any right, remedy, privilege or recourse accorded to -44- 52 Lessor or Lessee either by the express terms hereof by law, shall affect, diminish, suspend or exhaust any of such rights, remedies, privileges or recourse. D. Inurement. Subject to the provisions of this Lease relating to assignment, each and all of the covenants, agreements, obligations, conditions and provisions of this Lease shall inure to the benefit of and shall bind (as the case may be) not only the parties hereto, but each and all of the heirs, executors, administrators, successors and assigns for the respective parties hereto, or any of them; and whenever and wherever a reference is made to Lessor, or to Lessee, such reference shall be deemed to include the respective heirs, administrators, executors, successors and assigns of Lessor or Lessee, as the case may be; and all of the promises, covenants, agreements, obligations, conditions and provisions contained in this Lease shall be construed to be and as, covenants running with the land. E. Language of Lease. The language in all parts of this Lease shall in all cases be construed as a whole and simply according to its fair meaning and not strictly for nor against either Lessor or Lessee, and the construction of this Lease and any of its various provisions shall be unaffected by any claim, whether or not justified, that it has been prepared, wholly or in substantial part, by or on behalf of either party. F. California Law. This Lease shall be governed by and construed in accordance with the laws of the State of California. G. Table of Contents and Paragraph Headings. The table of contents at the beginning of this Lease and the Paragraph headings are for convenience only and are not a part of this Lease, and do not in any way limit or amplify the terms and provisions of this Lease. H. Severability. The invalidity or unenforceability of any provision of this Lease shall not affect the validity or enforceability of the remainder of this Lease. I. Sublessee. Any act required to be performed by Lessee pursuant to the terms of this Lease may be performed by any sublessee occupying all or any part of the Premises and the performance of such act shall be deemed to be performed by Lessee and shall be acceptable as Lessee's act by Lessor. J. Entire Agreement. This Lease contains all agreements of the parties with respect to any matter mentioned herein. This Lease may be modified in writing only, signed by the parties. K. Waiver of Provisions. No waiver of Lessor of any -45- 53 provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to or approval of any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver of any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. L. Month to Month Tenancy. If Lessee remains in possession of the Premises or any part thereof after the expiration of the term hereof or any extension thereof, with the consent of Lessor, such occupancy shall be a tenancy from month to month at a rental calculated by the same method used to determine the final monthly rent during the term hereof, plus all other charges payable hereunder, and upon all of the terms hereof. M. Covenants and Conditions of Lease. Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. N. Right of Entry. Lessor and Lessor's agents shall have the right to enter the Premises at reasonable times during business hours for the purposes of inspecting the same or showing the same to prospective purchasers. Lessor may at any time during the last year of the term or this Lease place on or about the Premises any ordinary "For Sale" signs, and the same shall be without rebate of rent or liability to Lessee. O. In the Event of a Sale. The terms "Lessor" as used herein means the owner of the Premises for the time being only. If, during the term of this Lease, Lessor shall sell its interest in the Premises, then from and after the effective date of the sale or conveyance, Lessor shall be released and discharged from any and all obligations and responsibility under this Lease, except those already accrued. P. Time is of the Essence. Time is of the essence of this Lease with respect to each and every article, section and subsection hereof. Q. Corporate Authority. If Lessee is a corporation, each individual executing this Lease on behalf of said corporation, represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the Bylaws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. Further, Lessee shall, within thirty (30) days after execution of this Lease, deliver to -46- 54 Lessor a certified copy of a resolution of the Board of Directors of said corporation authorizing or ratifying the execution of this Lease. R. Waiver of California Code Sections. Lessee waives (for itself and all persons claiming under Lessee) the provisions of Civil Code Sections 1932(2) and 1933(4) with respect to the destruction of the leased Premises, Code of Civil Procedure Section 1265.130, allowing either party to petition the Superior Court to terminate this Lease in the event of a partial taking of the Premises by condemnation as herein defined. This waiver applies to future statues enacted in addition or in substitution to the statutes specified herein. S. Relationship of Parties. It is not the intention of the parties to form a partnership or joint venture and nothing contained in this Lease shall be deemed or construed by the parties or any third party to be a partnership or joint venture agreement. T. Preparation and Submissions of Draft. The preparation and submission of a draft of this Lease by either party to the other shall not constitute an offer nor shall either party be bound to any terms of this Lease or the entirety of the Lease itself until both parties have fully executed a final document and an original signature document has bene received by both parties. Until such time as described in the previous sentence, either party is free to terminate negotiations with no obligations to the other. U. Commission. Lessor shall pay a leasing commission in the amount of $53,100.00, to be paid fifty percent (50%) to Paul M. Zagaris, Inc. Realtor and Bob Wood Associates, to be payable in accordance with a separate Commission Agreement executed concurrently herewith between Lessor and Realtor. Both parties warrant that there are no other commissions or fees to be paid herewith, and hereby agree to indemnify the other against any cost, liability, or attorneys' fees incurred as a result of any third party making such a claim for a commission or finder's fees resulting from this transaction, not expressly provided for in this Lease. V. Exhibits. All exhibits referred to are attached to this Lease, incorporated by reference, and referenced below: Exhibit "A" Premises Exhibit "B" Plans and Specifications Exhibit "C" Parcel Map Exhibit "D-1" Letter from Sidney A. Israels -47- 55 Dated: December 30, 1987 Exhibit "D-2" Letter from Stan T. Yamamoto Dated: January 6, 1988 IN WITNESS WHEREOF, the parties hereto have executed these presents as of the day and year first above written. "LESSOR" /s/ RANDALL LYLE STEELE ------------------------------ RANDALL LYLE STEELE /s/ SUSAN STEELE ------------------------------ SUSAN STEELE "LESSEE" STANISLAUS BREWING COMPANY, INC. A California Corporation By: /s/ GARITH HELM --------------------------- Garith Helm President -48- 56 AMENDMENT TO GROUND LEASE The progress thus far regarding construction of the St. Stan's Brewery is satisfactory and fulfills my requirements regarding the lease to this date. All other terms and conditions as identified in the lease shall remain in full force. I also extend the completion date of paragraph 3 d to read: "the Lessee's Improvements shall be completed on or before January 1, 1991." "LESSOR" /s/ RANDALL LYLE STEELE ------------------------------ RANDALL LYLE STEELE "LESSEE" ------------------------------ STANISLAUS BREWING CO., INC. A California Corporation By: /s/ GARITH HELM --------------------------- Garith Helm its President -49- EX-10.7 17 LEASE DATED NOVEMBER 3, 1993 1 EXHIBIT 10.7 HERITAGE BREWING COMPANY, INC. 571-CRANE STREET LAKE ELSINORE, CA 92530 909 245-1752 August 16 ,1995 Marilyn Zimel Rancon 27720 Jefferson Ave. Temecula, Ca 92590 Ms. Zimel: This letter serves as notification of Heritage Brewing Company, Inc. exercising it's option to extend contained in the leased darted November 3, 1993 by and between Central Business Park Investors-89 and Heritage Brewing Company, inc. for the premises known as 571-C Crane St., Lake Elsinore. Should you have any questions, please do not hesitate to call. Cheers, John Stoner Heritage Brewing Company, Inc. ks 2 AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. Parties. This Lease, dated, for reference purposes only, November 3, 1993, is made by and between Central Business Park Investors-89 (herein called, "Lessor") and Heritage Brewing Company (herein called, "Lessee"). 2. Premises. Lessor hereby leases to Lessee and Lessee leases from Lessor for the term at the rental, and upon all of the conditions set forth commonly known as 571-C crane St., Lake Elsinore as described as Building #11, Central Business Park and consisting of approximately 5,429 square feet. Said real property including the land and all improvements therein, is herein called "the Premises". 3. Term. 3.1 Term. The term of this Lease shall be for twenty-seven (27) months commencing on November 15, 1993 and ending on March 14, 1996 unless sooner terminated pursuant to any provision thereof. 3.2 Delay in Possession. Notwithstanding said commencement date, if for any reason Lessor cannot deliver possession of the Premises to Lessee on said date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Lessee hereunder or extend the term hereof, but in such case, Lessee shall not be obligated to pay rent until possession of the Premises is tendered to Lessee; provided, however, that if Lessor shall not have delivered possession of the Premises within sixty (60) days from said commencement date, Lessee may, at Lessee's option, by notice in writing to Lessor within ten (10) days thereafter cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided further, however, that if such written notice of Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. 3.3 Early Possession. If Lessee occupies the Premises prior to said commencement date, such occupancy shall be subject to all provisions hereof, such occupancy shall not advance the termination date, and Lessee shall pay rent for such period at the initial monthly rates set forth below. 4. Rent. Lessee shall pay to Lessor as rent for the Premises, monthly payments of $2,000.00, in advance, on the 15th day of each month of the term hereof. Lessee shall pay Lessor upon the execution hereof $2,000.00 as rent for the one month of February 15, 1994-March 14, 1994. Rent for any period during the term hereof which is for less than one month shall be a pro rata portion of the monthly installment. Rent shall be payable in lawful money of the United States to Lessor at the address stated herein or to such other persons or at such other places as Lessor may designate in writing. 5. Security Deposit. Lessee shall deposit with Lessor upon execution hereof $2,000.00 as security of Lessee's faithful performance of Lessee's obligations hereunder. If Lessee fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Lessor may use, apply or retain all or any portion of said deposit for the payment of any rent or other charge in default or for the payment of any other sum to which Lessor may become obligated by reason of Lessee's default or to compensate Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so uses or applies all or any portion of said deposit, Lessee shall within ten (10) days after written demand therefor deposit cash with Lessor in an amount sufficient to restore said deposit to the full amount hereinabove stated and Lessee's failure to do so shall be a material breach of this Lease. If the monthly rent shall from time to time, increase during the term of this lease, Lessee shall thereupon deposit with Lessor additional security deposit so that the amount of security deposit held by Lessor shall at all times bear the same proportion to current rent as the original security deposit bears to the original monthly rent set forth in paragraph 4, hereof, Lessor shall not be required to keep said deposit separate from its general accounts. If Lessee performs all of Lessee's obligations hereunder, said deposit, or so much thereof as has not theretofore been applied by Lessor, shall be returned, without payment of interest or other 3 increment for its use, to Lessee (or, at Lessor's option, to the last assignee, if any of Lessee's interest hereunder) at the expirations of the term hereof, and after Lessee has vacated the Premises. No trust relationship is created herein between Lessor and Lessee with respect to said Security Deposit. 6. Use. 6.1 Use. The Premises shall be used and occupied only for Production of beverages including but not limited to, malt beverages and the sale of beer and wine making supplies or any other use which is reasonably comparable and for no other purpose. 6.2 Compliance with Law. (a) Lessor warrants to Lessee that the Premises, in its state existing on the date that the Lease term commences, but without regard to the use for which Lessee will use the Premises, does not violate any covenants or restrictions of record, or any applicable building code, regulation or ordinance in effect on such Lease term commencement date. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Lessor, after written notice from Lessee, to promptly, at Lessor's sole cost and expense, rectify any such violation. In the event Lessee does not give to Lessor written notice of the violations of this warranty within six months from the date that the Lease term commences, the correction of same shall be the obligation of the Lessee at Lessee's sole cost. The warranty contained in this paragraph 6.2 (a) shall be of no force or effect if, prior to the date of this Lease, Lessee was the owner or occupant of the Premises, and, in such event, Lessee shall correct any such violations at Lessee's sole cost. (b) Except as provided in paragraph 6.2(a), Lessee shall, at Lessee's expense comply promptly with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions, of record, and requirements in effect during the term or any part of the term hereof, regulating the use by Lessee of the Premises. Lessee shall not use nor permit the use of the Premises in any manner that will tend to create waste or a nuisance or, if there shall be more than one tenant in the building containing the Premises, shall tend to disturb such other tenants. 6.3 Condition of Premises. (a) Lessor shall deliver the Premises to Lessee clean and free of debris on Lease commencement date (unless Lessee is already in possession) and Lessor further warrants to Lessee that the plumbing , electrical, lighting, air conditioning, heating and loading doors in the Premises shall be in good operating condition on the Lease commencement date. In the event that it is determined that this warranty has been violated, the it shall be the obligation of Lessor, after receipt of written notice from Lessee setting forth with specificity the nature of the violation, to promptly, at Lessor's sole cost, rectify such violation. Lessee's failure to give such written notice to Lessor within thirty (30) days after the Lease commencement date shall cause the conclusive presumption that Lessor has compiled with all of Lessor's obligations hereunder. The warranty contained in this paragraph 6.3 a) shall be of no force or effect if prior to the date of this Lease, Lessee was the owner or occupant of the Premises. (b) Except as otherwise provided in this Lease, Lessee hereby accepts the Premises in their condition existing as of the Lease commencement date or the date that Lessee takes possession of the premises, whichever is earlier, subject to all applicable zoning, municipal county and state laws, ordinances and regulations governing and regulating the use of the Premises, and any covenant or restrictions of record and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that neither Lessor nor Lessor's agent has made any representation or warranty as to the present or future suitability of the Premises for the conduct of Lessee's business. 7. Maintenance, Repairs and Alterations. 7.1 Lessor's Obligations. Subject to the provisions of Paragraphs 6,7.2, and 9 and except for damage caused by an negligent or intentional act or omission of Lessee, Lessee's agents, employees or invitees in which event Lessee shall repair the damage, Lessor, at Lessor's expense, shall keep in good order, condition and repair the foundations, exterior walls and the exterior roof of the Premises. Lessor shall not however, be obligated to paint such exterior, nor shall Lessor be required to maintain the interior surface of exterior walls, windows, doors or plate glass. Lessor shall have no obligation to make repairs under this Paragraph 7.1 until a reasonable time after receipt of written notice of the need for such repairs. Lessee expressly waives the 4 benefits of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Premises in good order, condition and repair. 7.2 Lessee's Obligations. (a) Subject to the provisions o Paragraphs 6, 7.1 and 9, Lessee, at Lessee's expense, shall keep in good order, condition and repair the Premises and every part thereof (whether or not the damaged portion of the Premises or the means of repairing the same are reasonable or readily accessible to Lessee) including, without limiting the generality of the foregoing, all plumbing, heating, air conditioning, (Lessee shall procure and maintain at Lessee's expense, an air conditioning system maintenance contract) ventilating, electrical and lighting facilities and equipment within the Premises, fixtures, interior walls and interior surface of exterior walls ceilings, windows, doors, plate glass and skylights, located within the Premises and all landscaping driveways parking lots, fences and signs located in the Premises. (b) If lessee fails to perform Lessee's obligations under this Paragraph 7.2 or under any other paragraph of this Lease, Lessor may at Lessor's option enter upon the Premises after 10 days' prior written notice to Lessee (except in the case of emergency, in which case no notice shall be required), perform such obligations on Lessee's behalf and put the Premises in good order, condition and repair and the cost thereof together with interest thereon at the maximum rate then allowable by law shall be due and payable as additional rent to Lessor together with Lessee's next rental installment. (c) On the last day of the term hereof, or on any sooner termination, Lessee shall surrender the Premises to Lessor in the same condition as received ordinary wear and tear excepted, clean and free of debris. Lessee shall repair any damage to the Premises occasioned by the installation or removal of its trade fixtures, furnishings and equipment. Notwithstanding anything to the contrary otherwise stated in this Lease, Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing and fencing on the premises in good operating condition. 7.3 Alterations and Additions. (a) Lessee shall not, without Lessor's prior written consent make any alterations, improvements, additions or Utility Installations in, on or about the Premises, except for nonstructural alterations not exceeding $2,500 in cumulative costs during the term of this Lease. In any event whether or not in excess of $2,500 in cumulative cost, Lessee shall make not change or alteration to the exterior of the Premises nor the exterior of the building(s) on the Premises without Lessor's prior written consent. As used in this Paragraph 7.3 the term "Utility Installation" shall mean the carpeting window coverings, air lines, power panels, electrical distribution systems, lighting fixtures, space heaters, air conditioning, plumbing, and fencing. Lessor may require that Lessee remove any or all of said alterations, improvements, additions or Utility Installations at the expiration of the term and restore the Premises to their prior condition. Lessor may require Lessee to provide Lessor, at Lessee's sole cost and expense , a lien and completion bond in an amount equal to one and one-half times the estimated cost of such improvements, to insure Lessor against any liability for mechanic's and materialmen's liens and to insure completion of the work. Should Lessee make any alterations, improvements, additions or Utility Installations without the prior approval of Lessor, Lessor may require that Lessee remove any or all of the same. (b) Any alterations, improvements, additions or Utility Installations in, or about the Premises that Lessee shall desire to make and which requires the consent of the Lessor shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent the consent shall be deemed conditioned upon Lessee acquiring a permit to do so from appropriate governmental agencies, the furnishing of a copy thereof to Lessor prior to the commencement of the work and the compliance by Lessee of all conditions of said permit in a prompt and expeditious manner. (c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend itself and Lessor against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises, upon the condition that if 5 Lessor shall require Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to such contested lien claim or demand indemnifying Lessor against liability for the same and holding the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorneys fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. (d) Unless Lessor requires their removal, as set forth in Paragraph 7.3(a), all alterations, improvements, additions and Utility Installations (whether or not such Utility Installations constitute trade fixtures of Lessee), which may be made on the Premises, shall become the property of Lessor and remain upon and be surrendered with the Premises at the expirations of the term. Notwithstanding the provisions of this Paragraph 7.3(d). Lessee's machinery and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises, shall remain the property of Lessee and may be removed by Lessee subject to the provisions of Paragraph 7.2(c). 8. Insurance; Indemnity. 8.1 Liability Insurance - Lessee. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Property Damage Insurance insuring Lessee and Lessor against any liability arising out of the use occupancy or maintenance of the Premises and all other areas appurtenant thereto. Such insurance shall be in an amount not less than $500,000 per occurrence. The policy shall insurance performance by Lessee of the indemnity provisions of this Paragraph 8. The limits of said insurance shall not, however, limit the liability of Lessee hereunder. 8.2 Liability Insurance-Lessor. Lessor shall obtain and keep in force during the term of this Lease a policy of Combined Single Limit Bodily Injury and Property Damage Insurance, insuring Lessor, but not Lessee, against any liability arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto in an amount not less than $500,000 per occurrence. 8.3 Property Insurance. Lessor shall obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Premises, but not Lessee's fixtures, equipment or tenant improvements in an amount not to exceed the full replacement value thereof, as the same may exist from time to time, providing protection against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, flood ( in the event same is required by a lender having a lien on the Premises) special extended perils ("all risk", as such term is used in the insurance industry) but not plate glass insurance. In addition, the Lessor shall obtain and keep in force during the term of this Lease, a policy of rental value insurance covering a period of one year, with loss payable to Lessor, which insurance shall also cover all real estate taxes and insurance costs for said period. 8.4 Payment of Premium Increase. (a) Lessee shall pay to Lessor, during the term hereof, in addition to the rent, the amount of any increase in premiums for the insurance required under Paragraphs 8.2 and 8.3 over and above such premiums paid during the Base Period, as hereinafter defined, whether such premium trust covering the Premises, increased valuation of the Premises, or general rate increases. In the event that the Premises have been occupied previously, the words "Base Period" shall mean the last twelve months of the prior occupancy. In the event that the Premises have never been previously occupied, the premiums during the "Base Period" shall be deemed to be the lowest premiums reasonably obtainable for said insurance assuming the most nominal use of the Premises. Provided, however, in lieu of the Base Period, the parities may insert a dollar amount at the end of this sentence which figure shall be considered as the insurance premium for the Base Period: $____________. In no event, however, shall Lessee be responsible for any portion of the premium cost attributable to liability insurance coverage in excess of $1,000,000 procured under paragraph 8.2. (b) Lessee shall pay any such premium increases to Lessor within 30 days after receipt by Lessee of a copy of the premium statement or other satisfactory evidence of the amount due. If the insurance policies maintained hereunder cover other improvements in addition to the Premises, Lessor shall also deliver to Lessee a statement of the amount of such increase attributable to the Premises and showing a reasonable detail , the manner in which such amount was computed. If the term of this Lease shall not expire concurrently with the expirations of the period detail, the manner in which such amount was computed. If the term of this Lease shall not expire 6 concurrently with the expirations of the period covered by such insurance. Lessee's liability for premium increases shall be prorated on an annual basis. (c) If the Premises are part of a larger building, then Lessee shall not be responsible for paying any increase in the property insurance premium caused by the acts or omissions of any other tenant of the building of which the Premises are a part. 8.5 Insurance Policies. Insurance required hereunder shall be in companies holding a "General Policyholders Rating" of at least B plus, or such other rating as may be required by a lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide". Lessee shall deliver to Lessor copies of policies of liability insurance required under Paragraph 8.1 or certificates evidencing the existence and amounts of such insurance. No such policy shall be cancelable or subject to reduction of coverage or other modifications except after thirty (30) days' prior written notice to Lessor, Lessee shall, at least thirty 930) days prior to the expiration of such policies, furnish Lessor with renewals or "binders" thereof or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee upon demand Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in Paragraph 8.3. 8.6 Waiver of Subrogation. Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recovery against the other for loss or damage arising out of or incident to the perils insured against under paragraph 8.3 which perils occur in, on or about the Premises, whether due to the negligence of Lessor or Lessee or their agents, employees, contractors and/or invitees. Lessee and Lessor shall, upon obtaining the policies of insurance required hereunder, give notice to the insurance carrier or carriers that the foregoing mutual waiver of subrogation's is contained in this Lease. 8.7 Indemnity. Lessee shall indemnify and hold harmless Lessor from and against any and all claims arising from Lessee's use of the Premises, or from the conduct of Lessee's business or from any activity, work or things done, permitted or suffered by Lessee in or about the Premises or elsewhere and shall further indemnify and hold harmless Lessor from and against any and all claims arising from any breach of default in the performance of any obligation on Lessee's part to be performed under the terms of this Lease or arising from any negligence of the Lessee or in the performance of any obligation on Lessee's part to be performed under the terms of this Lease, or arising from any negligence of the Lessee, or any of Lessee's agents contractors or employees, and from and against all costs, attorney's fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon and in case any action or proceeding be brought against Lessor by reason of any such claim, Lessee upon notice from Lessor shall defend the same at lessee's expense by counsel satisfactory to Lessor. Lessee, as a material part of the consideration to the Lessor, hereby assumes all risk of damage to property or injury to persons, in, upon or about the Premises arising from any cause and Lessee hereby waives all claims in respect thereof against Lessor. 8.8 Exemption of Lessor from Liability Lessee hereby agrees that Lessor shall not be liable for injury to Lessee's business or any loss of income therefrom or for damage to the goods, wares, merchandise or other property of Lessee. Lessee's employees, invitees, customers, or any other person in or about the Premises, nor shall Lessor be liable for injury to the person of Lessee, Lessee's employees, agents or contractors, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said damage or injury results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Lessee. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant, if any, of the building in which the Premises are located. 9. Damage or Destruction 9.1 Definitions (a) "Premises Partial Damage" shall herein mean damage or destruction to the Premises to the extent that the cost of repair is less than 50% of the fair market value of the Premises immediately prior to such damage or destruction. "Premises Building Partial Damage" shall herein mean damage or destruction to the building of which the Premises are a part of the extent that the cost of repair is less than 50% of the 7 fair market value of such building as a whole immediately prior to such damage or destruction. (b) "Premises Total Destruction" shall herein mean damage or destruction to the Premises to the extent that the cost of repair is 50% or more of the fair market value of the Premises immediately prior to such damage or destruction. "Premises Building total Destruction" shall herein mean damage or destruction to the building of which the Premises are a part to the extent that the cost of repair is 50% or more of the fair market value of such building as a whole immediately prior to such damage or destruction. (c) "Insured Loss" shall herein mean damage or destruction which was caused by an event required to be covered by the insurance described in paragraph 8. 9.2 Partial Damage - Insured Loss Subject to the provisions of paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this ease there is damage which is an Insured Loss and which falls into the classifications of Premises Partial Damage or Premises Building Partial Damage, then Lessor shall, at Lessor's sole cost, repair such damage, but not Lessee's fixtures, equipment or tenant improvements, as soon as reasonably possible and this Lease shall continue in full force and effect. 9.3 Partial Damage Uninsured Loss Subject to the provisions of Paragraphs 9.4, 9.5 and 9.6, if at any time during the term of this Lease there is damage which is not an Insured Loss and which falls within the classifications of Premises Partial Damage or Premises Building Partial Damage, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense). Lessor may at Lessor's option either (I) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after the date of the occurrence of such damage of Lessor's intention to cancel and terminate this Lease, as of the date of the occurrence of such damage. In the event Lessor elects to give such notice of Lessor's intention to cancel and terminate this Lease, as of the date of the occurrence of such damage. In the event Lessor elects to give such notice of Lessor's intention to cancel and terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's intentions to repair such damage at Lessee's expense, without reimbursement from Lessor, in which event this Lease shall continue in full force and effect, and Lessee shall proceed to make such repairs as soon as reasonably possible. If Lessee does not give such notice within such 10-day period this Lease shall be canceled sand terminated as of the date of the occurrence of such damage. 9.4 Total Destruction. If at any time during the term of this Lease there is damage, whether or not an insured Loss, (including destruction required by an authorized public authority), which falls into the classification of Premises Total Destruction or Premises Building Total Destruction, this Lease shall automatically terminate as of the date of such total destruction. 9.5 Damage Near End of Term (a) If at any time during the last six months of the term of this Lease there is damage, whether or not an Insured Loss, which falls within the classification of Premises Partial Damage, Lessor may at Lessor's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Lessee of Lessor's elections to do so within 30 days after the date of occurrence of such damage. (b) Notwithstanding paragraph 9.5 (a) In the event that Lessee has an option to extend or renew this Lease, and the time within which said option may be exercised has not yet expired, Lessee shall exercise such option, if it is to be exercised at all, no later than 20 days after the occurrence of an Insured Loss falling within the classification of Premises Partial Damage during the last six months of the term of this Lease. If Lessee duly exercises such option during said 20 period, Lessor shall, at Lessor's expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option during said 20 day period, then Lessor may at Lessor's option terminate and cancel this Lease as of the expiration of said 20 day period by giving written notice to Lessee of Lessor's elections to do so within 10 days after the expiration of said 20 day period, notwithstanding any term or provision in the grant of option to the contrary. 9.6 Abatement of Rent; Lessee's Remedies. 8 (a) In the event of damage described in paragraphs 9.2 or 9.3 and Lessor or Lessee repairs or restores the Premises pursuant to the provisions of this Paragraph 9, the rent payable hereunder for the period during which such damage, repair or restoration continues shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of rent, if any, Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence such repair or restoration within 90 days after such obligations shall accrue, Lessee may at Lessee's option cancel and terminate this Lease by giving Lessor written notice of Lessee's elections to do so at any time prior to the commencement of such repair or restoration. In such event this Lease shall terminate as of the date of such notice. 9.7 Termination - Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance rent and any advance payments made by Lessee to Lessor, Lessor shall, in addition, return to Lessee so much of Lessee's security deposit as has not theretofore been applied by Lessor. 9.8 Waiver. Lessor and Lessee waive the provisions of any statutes which relate to termination of leases when leased property is destroyed and agree that such event shall be governed by the terms of this Lease. 10. Real Property Taxes 10.1 Payment of Tax Increase. Lessor shall pay the real property tax as defined in paragraph 10.3, applicable to the Premises; provided, however, that Lessee shall pay, in addition to rent the amount, if any, by which real property taxes applicable to the Premises Increase over the fiscal real estate tax year 19__19__. Such payment shall be made by Lessee within thirty (30) days after receipt of Lessor's written statement setting forth the amount of such increase and the computation thereof. If the term of this Lease shall not expire concurrently with the expiration of the tax fiscal year, Lessee's liability for increase taxed for the last partial lease year shall be prorated on an annual basis. 10.2 Additional Improvements. Notwithstanding paragraph 10.1 hereof, Lessee shall pay to Lessor upon demand therefor the entirety of any increase in real property tax if assessed solely by reason of additional improvements placed upon the Premises by Lessee or at Lessee's request. 10.3 Definition of "Real Property Tax" As used herein, the term "real property tax" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed on the Premise by any authority having the direct or indirect power to tax, including any city, state or federal government or any school, agricultural, sanitary, fire, street, drainage, or other improvement district thereof, as against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, as against Lessor's right to rent or other income therefrom, and as against Lessor's business of leasing the Premises. The term "real property tax" shall also include any tax, fee, levy, assessment or charge (I) in substitution of, partially totally, any tax, fee, levy, assessment or charge hereinabove included within the definition of "real property tax," or (ii) the nature of which was hereinbefore included within the definition of "real property tax," or (iii) which is imposed for a service or right not charged prior to June 1, 1978, or, if previously charged, has been increased since June 1, 1978, or (iv) which is imposed as a result of a transfer, either partial or total, of Lessor's interest in the Premises or which is added to a tax or charge hereinbefore included within the definition of real property tax by reason of such transfer, or (v) which is imposed by reason of this transaction, any modifications or changes hereto, or any transfers hereof. 10.4 Joint Assessment. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the real property taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work 9 sheets or such other information as may be reasonable available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 Personal Property Taxes. (a) Lessee shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause said trade fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. (b) If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within 10 days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. Utilities. Lessee shall pay for all water, gas, heat, light, power, telephone and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion to be determined by Lessor of all charges jointly metered with other premises. 12. Assignment and Subletting. 12.1 Lessor's Consent Required. Lessee shall not voluntarily or by operation of law assign, transfer, mortgage, sublet, or otherwise transfer or encumber all or any part of Lessee's interest in this Lease or in the Premises, without Lessor's prior written consent, which Lessor shall not unreasonably withhold. Lessor shall respond to Lessee's request for consent hereunder in a timely manner and any attempted assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void and shall constitute a breach of this Lease. 12.2 Lessee Affiliate. Notwithstanding the provisions of paragraph 12.1 hereof, Lessee may assign or sublet the Premises, or any portion thereof, without lessor's consent, to any corporation which controls, is controlled by or is under common control with Lessee, or to any corporation resulting from the merger or consolidation with Lessee, or to any person or entity which acquires all the assets of Lessee as a going concern of the business that is being conducted on the Premises, proved that said assignee assumes, in full, the obligations of Lessee under this Lease. any such assignment shall not, in any way, affect or limit the liability of Lessee under the terms of this Lease even if after such assignment or subletting the terms of this Lease are materially changed or altered without the consent of Lessee, the consent of whom shall not be necessary. 12.3 No Release of Lessee. Regardless of Lessor's consent, no subletting or assignment shall release Lessee of Lessee's obligation or alter the primary liability of Lessee to pay the rent and to perform all other obligations to be performed by Lessee hereunder. The acceptance of rent by Lessor from any other person shall not be deemed to be a waiver by Lessor of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. In the event of default by any assignee of Lessee or any successor of Lessee, in the performance of any of the terms hereof, Lessor may proceed directly against Lessee without the necessity of exhausting remedies against said assignee. Lessor may consent to subsequent assignments or subletting of this Lease or amendments or modifications to this Lease with assignees of Lessee, without notifying Lessee or any successor of Lessee, and without obtaining its or their consent thereto and such action shall not relieve Lessee of liability under this Lease. 12.4 Attorney's Fees., In the event Lessee shall assign or sublet the Premises or request the consent of Lessor to any assignment or subletting or if Lessee shall request the consent of Lessor for any act Lessee proposes to do then Lessee shall pay Lessor's reasonable attorney fees incurred in connection therewith, such attorneys fees not to exceed $350,000 for each such request. 13. Defaults; Remedies. 13.1 Defaults. The occurrence of any one or more of the following events shall constitute a material default and breach of this Lease by Lessee: (a) The vacating or abandonment of the Premises by Lessee. 10 (b) The failure by Lessee to make any payment of rent or any other payment required to be made by Lessee hereunder, as when due, where such failure shall continue for a period of three days after written notice thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to Pay Rent or Quit shall also constitute the notice required by this subparagraph. (c) The failure by Lessee to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Lessee, other than described in paragraph (b) above, where such failure shall continue for a period of 30 days after written notice thereof from Lessor to Lessee; provided, however, that if the nature of Lessee's default is such that more than 30 days are reasonably required for its cure, then Lessee shall not be deemed to be in default if Lessee commenced such cure within said 30-day period and thereafter diligently prosecutes such cure to completion. (d) (I) The making by Lessee of any general arrangement or assignment for the benefit of creditors: (ii) Lessee becomes a "debtor" as defined in 11 U.S.C. 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within 30 days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within 30 days, substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within 30 days. Provided, however, in the event that any provision of this paragraph 13.1 (d) is contrary to any applicable law, such provision shall be of no force or effect. (e) the discovery by Lessor that any financial statement given to Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any successor in interest of Lessee or any guarantor of Lessee's obligation hereunder, and any of them was materially false. 13.2 Remedies. In the event of any such material default or breach by Lessee, Lessor may at any time thereafter, with or without notice or demand and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such default or breach: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee all damages incurred by Lessor by reason of Lessee's default including, but not limited to, the cost of recovering possession of the Premises: expenses of reletting, including necessary renovations a alterations of the Premises, reasonable attorney's fees, and any real estate commission actually paid; the worth at the time of award by the court having jurisdiction, thereof of the amount by which the unpaid rent for the balance of the term after the time of such award exceeds the amount of such rental loss for the same period that Lessee proves could be reasonably avoided; that portion of the leasing commission paid by Lessor pursuant to Paragraph 15 applicable to the unexpired term of this Lease. (b) Maintain Lessee's right to possession in which case this Lease shall continue in effect whether or not Lessee shall have abandoned the Premises, in such event Lessor shall be entitled to enforce all of Lessor's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. Unpaid installments of rent and other unpaid monetary obligations of Lessee under the terms of this Lease shall bear interest from the date due at the maximum rate then allowable by law. 13.3 Default by Lessor. Lessor shall not be in default unless Lessor fails to perform obligations required of Lessor within a reasonable time, but in no event later than thirty (30) days after written notice by Lessee to Lessor and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have theretofore been furnished to Lessee in writing, specifying wherein Lessor has failed to perform such obligations; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are required for performance then 11 Lessor shall not be in default if Lessor commences performance within such 30 day period and thereafter diligently prosecutes the same to completion. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include but are not limited to, processing and accounting charges, and late charges which may be imposed on Lessor by the terms of any mortgage or trust deed covering the Premises. Accordingly, if any installment of rent or any other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to 6% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's default with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of rent, then rent shall automatically become due and payable quarterly in advance, rather than monthly, notwithstanding paragraph 4 or any other provision of this Lease to the contrary. 13.5 Impounds. In the event that a late charge is payable hereunder, whether or not collected, for three (3) installments of rent or any other monetary obligation of Lessee under the terms of this Lease. Lessee shall pay to Lessor, if Lessor shall so request in addition to any other payments required under this Lease, a monthly advance installment, payable at the same time as the monthly rent, as estimated by Lessor, for real property tax and insurance expenses on the Premises which are payable by Lessee under the terms of this Lease. Such fund shall be established to insure payment when due, before delinquency, of any or all such real property taxes and insurance premiums. If the amounts paid to Lessor by Lessee under the provisions of this paragraph are insufficient to discharge the obligations of Lessee to pay such real property taxes and insurance premiums as the same become due. Lessee shall pay to Lessor, upon Lessor's demand, such additional sums necessary to pay such obligations. all moneys paid to Lessor under this paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a default in the obligations of Lessee to perform under this Lease, then any balance remaining from funds paid to Lessor under the provisions of this paragraph may, at the option of Lessor, be applied to the payment of any monetary default of Lessee in lieu of being applied to the payment of real property tax and insurance premiums. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain, or sold under the threat of the exercise of said power (all of which are herein called "condemnation"). This Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10% of the floor area of the building on the Premises or more than 25% of the land area of the Premises which is not occupied by any building is taken by condemnation, Lessee may at Lessee's option to be exercised in writing only within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority take such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to their portion of the Premises remaining, except that the rent shall be reduced in the proportion that the floor area of the building taken bears to the total floor area of the building situated on the Premises. No reduction of rent shall occur if the only area taken is that which does no have a building located thereon. Any award for the taking of all or any part of the Premises under their power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made and compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any award for loss of or damage to Lessee's trade fixtures and removable personal property. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of severance damages received by Lessor in connection with such condemnation repair any damage to the Premises caused by such condemnation 12 except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall pay any amount in excess of such severance damages required to complete such repair. 15. Broker's Fee. (a) Upon execution of this Lease by both parties, Lessor shall pay to Legacy Commercial 50% and CDM Group Inc. 50%, licensed real estate broker(s), a fee as set forth in a separate agreement between Lessor and said broker(s), or in the event there is not separate agreement between Lessor and said broker(s) the sum of $2,952.00 for brokerage services rendered by said broker(s) to Lessor in this transaction. (b) Lessor further agrees that if Lessee exercises any Option as defined in paragraph 39.1 of this Lease, which is granted to Lessee under this Lease, or any subsequently granted option which is substantially similar to an Option granted to Lessee under this Lease, or if Lessee acquires any rights to the Premises or other premises described in this Lease which are substantially similar to what Lessee would have acquired had an Option herein granted to Lessee been exercised, or if Lessee remains in possession of the Premises after the expirations of the term of this Lease after having failed to exercise an Option, or if said broker(s) are the procuring cause of any other lease or sale entered into between the parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest, then as to any of said transactions, Lessor shall pay said broker(s) a fee in accordance with the schedule of said broker(s) in effect at the time execution of this lease. (c) Lessor agrees to pay said fee not only on behalf of Lessor but also on behalf of any person, corporation association, or other entity having an ownership interest in said real property or any part thereof, when such fee is due hereunder. Any transferee of Lessor's interest in this Lease, whether such transfer is by agreement or by operations of law, shall be deemed to have assumed Lessor's obligation under this Paragraph 15. Said broker shall be a third party beneficiary of the provisions of this Paragraph 15. 16. Estoppel Certificate. (a) Lessee shall at any time upon not less than ten (10) days' prior written notice from Lessor executor, acknowledge and deliver to Lessor a statement in writing (I) certifying that this Lease is unmodified and in full force and effect (or, if modified stating the nature of such modifications and certifying that this Lease, as so modified is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to Lessee's knowledge, any uncured defaults on the part of Lessor hereunder, or specifying such defaults if any are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrance of the Premises. (b) At Lessor's option. Lessee's failure to deliver such statement within such time shall be a material breach of this Lease or shall be conclusive upon Lessee (I) that this Lease is in full force and effect, without modification except as may be represented by Lessor, (ii) that there are no uncured defaults in Lessor's performance, and (iii) that not more than one month's rent has been paid in advance or such failure may be considered by Lessor as a default by Lessee under this Lease. (c) If Lessor desire to finance, refinance, or sell the Premises, or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser. such statements shall include the past three years' financial statements of Lessee. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean only the owner or owners at the time in question of the fee title or a lessee's interest in a ground lease of the Premises, and except as expressly provided in Paragraph 15. In the event of any transfer of such title or interest, Lessor herein named (and in case of any subsequent transfers then the grantor) shall be relieved from and after the date of such transfer of all liability as respects Lessor's obligations thereafter to be performed, provided that any funds in the hands of Lessor or the then grantor at the time of such transfer, in which Lessee has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Lessor shall, subject as 13 aforesaid, be binding on Lessor's successors and assigns, only during their respective periods of ownership. 18. Severability. The invalidity of any provision of this Lease as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Interest on Past-due Obligations. Except as expressly herein provided, any amount due to Lessor not paid when due shall bear interest at the maximum rate then allowable by law from the date due. Payment of such interest shall not excuse or cure any default by Lessee under this Lease, provided, however, that interest shall not be payable on late charges incurred by Lessee nor on any amounts upon which late charges are paid by Lessee. 20. Time of Essence. Time of the essence. 21. Additional Rent. Any monetary obligations of Lessee to Lessor under the terms of this Lease shall be deemed to be rent. 22. Incorporation of Prior Agreements; Amendments. This Lease contains all agreements of the parties with respect to any matter mentioned herein. No prior agreement or understanding pertaining to any such matter shall be effective. This Lease may be modified in writing only, signed by the parties in interest at the time of the modification. Except as otherwise stated in this Lease, Lessee hereby acknowledges that neither the real estate broker listed in Paragraph 15 hereof nor any cooperating broker on this transaction nor the Lessor or any employees or agents of any of said persons has made any oral or written warranties or representations to Lessee relative to the condition or use by Lessee of said Premises and Lessee acknowledges that Lessee assumes all responsibility regarding the Occupational Safety Health Act, the legal use and adaptability of the Premises and the compliance thereof with all applicable laws and regulations in effect during the term of the Lease except as otherwise specifically stated in this Lease. 23. Notices. Any notice required or permitted to be given hereunder shall be in writing and may be given by personal delivery or by certified mail, and if given personally or by mail, shall be deemed sufficiently given if addressed to Lessee or to Lessor at the address noted below the signature of the respective parties, as the case may be. Either party may by notice to the other specify a different address for notice purposes except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice purposes. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties as such addresses as Lessor may from time to time hereafter designate by notice to Lessee. 24. Waivers. No waiver by Lessor or any provision hereof shall be deemed a waiver of any other provision hereof or of any subsequent breach by Lessee of the same or any other provision. Lessor's consent to, or approval of any act, shall not be deemed to render unnecessary the obtaining of Lessor's consent to or approval of any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall not be a waiver or any preceding breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted, regardless of Lessor's knowledge of such preceding breach at the time of acceptance of such rent. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a "short form" memorandum of this Lease for recording purposes. 26. Holding Over. If Lessee, with Lessor's consent, remains in possession of the Premises or any part thereof after the expiration of the term hereof, such occupancy shall be a tenancy from month to month upon all the provisions of this Lease pertaining to the obligations of Lessee, but all options and rights of first refusal, if any, granted under the terms of this Lease shall be deemed terminated and be of not further effect during said month to month tenancy. 14 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. Each provision of this Lease performable by Lessee shall be deemed both a covenant and a condition. 29. Binding Effect; Choice of Law. Subject to any provisions hereof restricting assignment or subletting by Lessee and subject to the provisions of Paragraph 17, this Lease shall bind the parties, their personal representatives, successors and assigns. This Lease shall be governed by the laws of the State wherein the Premises are located. 30. Subordination. (a) This Lease, at Lessor's option, shall be subordinate to any ground lease, mortgage, deed of trust, or any other hypothecation or security now or hereafter placed upon the real property o which the Premises are a part and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. Notwithstanding such subordination, Lessee's right to quiet possession of the Premises shall not be disturbed if Lessee is not in default and so long as Lessee shall pay the rent and observe and perform all of the provisions of this Lease, unless this Lease is otherwise terminated pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect to have this Lease prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Lessee, this Lease shall be deemed prior to such mortgage, deed of trust, or ground lease, whether this Lease is dated prior or subsequent to the date of said mortgage, deed or trust or ground lease or the date of recording thereof. (b) Lessee agrees to execute any documents require to effectuate an attornment, a subordination or to make this Lease prior to the lien of any mortgage, deed of trust or ground lease, as the case may be. Lessee's failure to execute such documents within 10 days after written demand shall constitute a material default by Lessee hereunder, or, at Lessor's option Lessor shall execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to execute such documents in accordance with this paragraph 30(b). 31. Attorney's Fees. If either party or the broker named herein brings an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, on trial or appeal, shall be entitled to his reasonable attorney's fees to be paid by the losing party as fixed by the court. The provisions of this paragraph shall inure to the benefit of the broker named herein who seeks to enforce a right hereunder. 32. Lessor's Access. Lessor and Lessor's agents shall have the right to enter the Premises at reasonable times for the purpose of inspecting the same, showing the same to prospective purchasers, lenders, or lessee's, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part as Lessor may deem necessary or desirable. Lessor may at any time place on or about the Premises any ordinary "For Sale" signs and Lessor may at any time during the last 120 days of the term hereof place on or about the Premises any ordinary "For Lease" signs, all without rebate of rent or liability to Lessee. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grand such consent. 34. Signs. Lessee shall not place any sign upon the Premises without Lessor's prior written consent except that Lessee shall have the right, without the prior permission of Lessor to place ordinary and usual for rent or sublet signs thereon. 35. Merger. The voluntary or other surrender of this Lease by Lessee, or a mutual cancellation thereof, or a termination by Lessor, shall not work a merger, and shall, at the option of Lessor, terminate all or any existing subtenancies or may, at the option of Lessor, operate as an assignment to Lessor of any or all of such subtenancies. 15 36. Consents. Except for paragraph 33 hereof, wherever in this Lease the consent of one party is required to an act of the other party, such consent shall not be unreasonably withheld. 37. Guarantor. In the event that there is a guarantor of this Lease, said guarantor shall have the same obligations as Lessee under this Lease. 38. Quiet Possession. Upon Lessee paying the rent for the Premises and observing and performing all of the covenants, conditions and provisions on Lessee's part to be observed and performed hereunder, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. The individuals executing this Lease on behalf of Lessor represent and warrant to Lessee that they are fully authorized a legally capable of executing this Lease on behalf of Lessor and that such execution is binding upon all parties holding an ownership interest in the Premises. 39. Options. 39.1 Definition. As used in this paragraph the work "Options" has the following meaning: (1) the right or option to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (2) the option or right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (3) the right or option to purchase the Premises, or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises or the right or option to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor or the right of first offer to purchase other property of Lessor. 39.2 Options Personal. Each Option granted to Lessee in this Lease are personal to Lessee and may not be exercised or be assigned, voluntarily or involuntarily, by or to any person or entity other than Lessee, provided, however, the Option may be exercised by or assigned to any Lessee Affiliate as defined in paragraph 12.2 of this Lease. The Options herein granted to Lessee are not assignable separate and apart from this Lease. 39.3 Multiple Options. In the event that Lessee has any multiple options to extend or renew this Lease a later option cannot be exercised unless the prior option to extend or renew this Lease has been so exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary, (I) during the time commencing from the date Lessor gives to Lessee a notice of default pursuant to paragraph 13.1(b) or 13.1(c) and continuing until the default alleged in said notice of default is cured, or (ii) during the period o time commencing on the day after a monetary obligation to Lessor is due from Lessee and unpaid (without any necessity for notice thereof to Lessee) continuing until the obligation is paid, or (iii) at any time after an event of default described in paragraphs 13.1(a, 13.1(d), or 13.1(e) (without any necessity of Lessor to give notice of such default to Lessee), or (iv) in the event that Lessor has given to Lessee three or more notices of default under paragraph 13.1(b), where a late charge becomes payable under paragraph 13.4 for each of such defaults, or paragraph 13.1(c), whether or not the defaults are cured, during the 12 month period prior to the time that Lessee intends to exercise the subject Option. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be o no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (I) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of 30 days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to cure a default specified in paragraph 13.1(c) within 30 days after the date that Lessor gives notice to Lessee of such default 16 and/or Lessee fails thereafter to diligently prosecute said cure to completion, or (iii) Lessee commits a default described in paragraph 13.1(a), 13.1(d) or 13.1)e) (without any necessity of Lessor to give notice of such default to Lessee), or (iv) Lessor gives to Less three or more notices of default under paragraph 13.1b, where a late charge becomes payable under paragraph 13.4 for each such default, or paragraph 13.1(c), whether or not the defaults are cured. 40. Multiple Tenant Building. In the event that the Premises are part of a larger building or group of buildings then Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of the building and grounds, the parking of vehicles and the preservations of good order therein as well as for the convenience of other occupants and tenants of the building. The violations of any such rules and regulations shall be deemed a material breach of this Lease by Lessee. 41. Security Measures. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of Lessee, its agents and invitees from acts of third parties. 42. Easements. Lessor reserves the to itself the right, from time to time, to grant such easements, rights and dedications that Lessor deems necessary or desirable, and to cause the recordation of Parcel Maps and restrictions, so long as such easements, rights, dedications, Maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee shall sign any of the aforementioned documents upon request of Lessor and failure to do so shall constitute a material breach of this Lease. 43. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one party to the other under the provisions hereof, the party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of said partly to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said party to pay such sum or any part thereof, said party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. Authority. If Lessee is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represent and warrants that he or she is duly authorized to execute and deliver this Lease on behalf of said entity. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after execution of this Lease, deliver to Lessor evidence of such authority satisfactory to Lessor. 45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 46. Addendum. Attached hereto is an addendum to addenda containing paragraphs 47 through 54 which constitutes a part of this Lease. 47. Rent Escalations: year 2, beginning 2/15/95. The monthly rent for each month shall be $2,100.00. 48. Lessor to provide Lessee $7,000.00 tenant improvement allowance. Lessor to approve building improvements. Within 15 days after final inspection from the city of Lake Elsinore, lessor shall reimburse tenant for improvements. 49. Lessor will provide Lessee with three (3) months free rent. Rental to begin on 2/15/94. 50. Lessor grants Lessee approval to place two (2) grain silos adjacent to building. 17 51. Lessor to allow a fenced yard using chain link with slats. To be approved by landlord. 52. Lessee shall, at Lessee's expense, obtain and keep in force during the term of this lease a policy of Commercial General Liability Insurance with a combined single limit of not less than One Million ($1,000,000.00) Dollars per occurrence and in the aggregate with Landlord and, if requested by Landlord, Landlord's lender designated as Additional Insureds. Such policy shall include, without limitation, the following specific coverages: (I) products/completed operations; (ii) contractual liability; and (iii) hot (and business related) liquor liability. Lessor and Lessee have carefully read and reviewed this lease and each term and provision contained herein and by execution of this lease show their informed and voluntary consent thereto the parties hereby agree that a6 the time this lease is executed, the terms of this lease are commercially reasonable and effectuate the intent and purpose of Lessor and Lessee with respect to the premises. If this lease has been filled in it has been prepared for submission to your attorney for his approval. No representation or recommendations is made by the American Industrial Real Estate Association or by the Real Estate Broker or its Agents or Employees as to the legal sufficiency, legal effect, or tax consequences of this lease or the transaction relating thereto; The parties shall relay solely upon the advice of their own legal counsel as to the legal and tax consequences of this Lease. The parties hereto have executed this Lease at the place on the date specified immediately adjacent to their respective signatures. ---------------------------- By ---------------------------- By ---------------------------- "Lessor" (Corporate Seal) ---------------------------- By ---------------------------- By ---------------------------- "Lessee" (Corporate Seal) 18 ADDENDUM TO STANDARD LEASE Dated: November 3, 1993 By and Between: Central Business Park Investors 89 and Heritage Brewing Company 53 Option to Extend A. Lessor hereby grants to Lessee the option to extend the term of this Lease for a two year period commencing when the prior term expires upon each and all of the following terms and conditions: (I) Lessee give to Lessor, and Lessor actually receives, on a date which is prior to the date that the option period would commence (if exercised) by at least six (6) and not more than nine (9) months, a written notice of the exercise of the option to extend this lease for said additional term, time being of the essence. If said notification of the exercise of said option is not so given and received, this option shall automatically expire; (ii) the provisions of paragraph 39, including the provisions relating to default of Lessee set forth in paragraph 39.4 of this Lease are conditions of this Option; (iii) All of the terms and conditions of this Lease except where specifically modified by this option shall apply. (iv) The monthly rent for each month of the option period shall be as follows: Year 3, beginning 2/15/96: $2,205.00; Year 4, beginning 2/15/97: $2,315.25. EX-10.8 18 EMPLOYMENT AGREEMENT-FREDERIK G.M. RODENHUIS 1 EXHIBIT 10.8 EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into on December 31, 1996 ("Employment Agreement"), by and among BEVERAGE WORKS, INC., a California corporation ("Employer"), and FREDERIK G.M. RODENHUIS ("Employee"). This Agreement shall be effective as of the date of the Employer's initial public offering. WHEREAS, Employer wishes to employ Employee as President and Chief Executive Officer, with such other duties and responsibilities as Employer may reasonably assign to Employee consistent with the nature and character of such employment (the "Position"), and Employee wishes to accept such employment subject to the terms and conditions of this Employment Agreement; and WHEREAS, Employer is in the business of producing beer and other beverages, and performs services related thereto, and markets such products and services in the United States and in various foreign countries and has accumulated valuable and confidential information including trade secrets and know-how relating to technology, manufacturing procedures, formulas, machines, marketing plans, sources of supply, business strategies, and other business records; and WHEREAS, the giving of the covenants contained herein is a condition precedent to the employment of Employee in the Position and Employee acknowledges that the execution of this Employment Agreement and the entering into of these covenants is an express condition of his employment in the Position and that said covenants are given in consideration for such employment and the other benefits conferred upon him by this Employment Agreement. NOW, THEREFORE, in consideration of such employment and other valuable consideration, receipt of which is hereby acknowledged Employer and Employee agree as follows: 1. DUTIES OF EMPLOYEE. Employer hereby employs Employee as its President and Chief Executive Officer and agrees to cause Employee from time to time to be elected or appointed to such corporate offices or positions. Employee shall serve in such capacity at Employer's office, or at such other place as Employer may direct provided that Employer shall not direct or cause Employee to perform his services from an office outside of Orange County, California without Employee's prior written consent. Employee's principal duties and responsibilities shall consist of Employee's corporate offices and positions which are set forth in the by-laws of Employer from time to time, over-all responsibility for the development and implementation of Employer's business strategy and such other duties and responsibilities consistent with Employee's corporate offices and positions which the Board of Directors of Employer, from time to time may assign to Employee. Employee shall perform such other services and duties as may from time to time be assigned to Employee by Employer's Board of Directors provided that such other services and duties are not inconsistent with any other term of this Employment Agreement. Except during vacation periods or in accordance with Employer's personnel policies covering executive leaves and reasonable periods of illness or other incapacitation, Employee shall devote full-time his services to Employer's business and 2 interests in a manner consistent with Employee's title and office and Employer's needs for his services. Employee shall perform the duties of Employee's office and those assigned to Employee by Employer's Board of Directors with fidelity, to the best of Employee's ability, and in the best interests of Employer. 2. TERM OF EMPLOYMENT. Employer hereby employs Employee, and Employee hereby accepts employment with Employer, for four (4) years commencing on the date of this Employment Agreement ("Employment Period"). Notwithstanding anything in this Section 2 to the contrary, this Employment Agreement may be terminated at any time in accordance with Section 6. 3. COMPENSATION OF EMPLOYEE. 3.1 Base Compensation. As compensation for Employee's services hereunder, Employee shall receive a base salary (the "Base Salary") at an annual amount of not less than One Hundred Fifty-Two Thousand Dollars ($152,000) payable in bi-monthly installments of six thousand, three hundred thirty-three ($6,333) each, or a ratable portion thereof for periods of less than one-half month. The Board or the Compensation Committee of the Board shall review the Base Salary at least annually as of the payroll date nearest the anniversary of this Employment Agreement; and Employer agrees to make such increases in the Base Salary as the Board may approve from time to time. Once established at a specific increased annual rate, the Base Salary may not be reduced by Employer without Employee's written consent. 3.2 Car Allowance. In addition, Employee shall be entitled to a monthly car allowance of Five Hundred Dollars ($500), which shall be paid to Employee concurrently with the second (2nd) installment of Employee's monthly base compensation. The monthly car allowance shall be increased by Fifty Dollars ($50) each calendar year commencing January 1, 1997. 3.3 Non-accountable T&E Allowance. In addition, Employee shall be entitled to a monthly non-accountable travel & entertainment allowance of Six Hundred Dollars ($600), which shall be paid to Employee concurrently with the second (2nd) installment of Employee's monthly base compensation. 3.4 Bonuses. The Board of Directors, (or a management compensation committee of the board of directors, if any), may award a cash bonus to Employee at the board's or committee's discretion. 4. EXPENSE REIMBURSEMENTS. Employee shall promptly be reimbursed for reasonable and actual out-of-pocket expenses incurred by Employee in performance of Employee's duties and responsibilities hereunder in accordance with Employer's established personnel policy covering executive officer expense reimbursements, as such policy may be amended, revised or otherwise changed from time to time. Employee shall furnish proper vouchers and expense reports and shall be reimbursed only for those expenses which shall be reimbursable. 5. VACATION, SICK LEAVE AND OTHER FRINGE BENEFITS. Employee shall be entitled to four (4) weeks vacation per every twelve (12) month period of employment 2 of 9 3 hereunder and no more than two (2) weeks vacation at a time. Employee shall also be entitled to leaves for illness or other incapacitation as is consistent with Employee's title and Employer's needs for Employee's services, except as otherwise provided for in Section 6.2. Commencing with calendar year 1997, Employee shall receive Two Thousand Five Hundred Dollars ($2,500) for 1997 Five Thousand Dollars ($5,000) annually thereafter for life insurance, which Employee shall have sole authority to appoint beneficiaries, and shall receive Two Thousand Five Hundred Dollars ($2,500) for 1997 and Five Thousand Dollars ($5,000) annually thereafter for personal legal and accounting services. Employee shall be entitled to full health and dental insurance coverage, including covering any deductible, for Employee, Employee's spouse and minor children. Employee shall be entitled during Employee's employment hereunder to share or participate in such other "fringe" benefit plans or programs as shall be made available to employees employed by Employer generally, in accordance with Employer's established personnel policies, if any, or as established, amended, revised or otherwise changed from time to time, covering employee benefits. 6. TERMINATION. 6.1 Termination by Employer for Cause. Employer may terminate this Employment Agreement and Employee's employment hereunder for Cause (as defined herein) any time effective upon written notice to Employee. As used herein, the term "Cause" shall mean: 6.1.1 Habitual neglect in the performance of Employee's material duties as set forth in Section 1 which continues uncorrected for a period of thirty (30) days after written notice thereof by Employer to Employee; 6.1.2 Employee's confession or conviction of theft, fraud, embezzlement, or any other crime involving dishonesty with respect to Employer or any parent, subsidiary or affiliate of Employer; 6.1.3 Gross negligence involving misfeasance or nonfeasance by Employee in the performance of Employee's material duties as set forth in Section 1 which continues uncorrected for a period of thirty (30) days after written notice thereof by Employer to Employee; 6.1.4 Material violation by Employee of the provisions of Section 8; or 6.1.5 The representations in Section 7 were materially false as of the date of this Employment Agreement. In no event shall the results of Employer's operations or any business agreement made in good faith by Employee constitute an independent basis for termination for cause of Employee's employment under this Employment Agreement. Any termination of Employee's employment for cause must be authorized by a majority vote of the Board taken not later than twelve (12) months after a majority of the members of the Board (other than Employee) have actual 3 of 9 4 knowledge of the occurrence of the event or conduct constituting the cause for such termination. If Employee's employment under this Employment Agreement is terminated by Employer for cause, then Employee shall be entitled to receive his Base Salary through the effective date of such termination. 6.2 Termination Upon Death or Disability. This Employment Agreement and Employee's employment hereunder shall terminate upon Employee's death or Disability (as defined herein). For this purpose "Disability" means incapacity, whether by reason of physical or mental illness or disability, which prevents Employee from substantially performing Employee's material duties as set forth in Section 1 for six (6) months, or for shorter periods aggregating six (6) months in any twelve (12) successive calendar months. Upon termination for death, and unless Employer shall have in force a disability insurance policy providing for benefits in an amount at least equal thereto, upon termination for Disability, Employer shall continue to pay the compensation payments pursuant to Section 3 to the surviving spouse of Employee (or if there is none to Employee's estate) in the case of death and to Employee or Employee's court appointed conservator in the case of Disability until the date three (3) months thereafter. Termination for death shall become effective upon the occurrence of such event and termination for Disability shall become effective upon written notice to Employee. 6.3 Events Upon Termination. The termination of this Employment Agreement pursuant to Section 6.1 and 6.2 shall also result in the termination of all rights and benefits of Employee under this Employment Agreement except for any rights to compensation accrued under Section 3 prior to the date of termination or rights to expense reimbursement under Section 4. 6.4 Payments As Liquidated Damages. In the event Employer elects to terminate this Employment Agreement prior to the scheduled termination date for any reason other than Cause, Employer shall continue to make the compensation payments specified in Section 3 hereof for the entire term, through and including the scheduled termination date, and such payments shall be deemed to be liquidated damages for the damage done to Employee's reputation and for having foregone the opportunity to pursue other employment opportunities while performing services pursuant to this Employment Agreement. Employer hereby agrees that such amount shall constitute a realistic and reasonable valuation of the damages with respect to Employee's claims, and Employee shall not be required to mitigate his damages by seeking other business, as the damages resulting to him as a result of the loss of the unique business arrangement set forth herein could not be mitigated by seeking business elsewhere, nor shall any monies earned by Employee in any capacity after such termination, attempted termination or breach act to reduce such damages. 7. EMPLOYEE'S REPRESENTATIONS. Employee represents and warrants that Employee is free to enter into this Employment Agreement and to perform each of the provisions contained herein. Employee represents and warrants that Employee is not restricted or prohibited, contractually or otherwise, from entering into and performing this Employment Agreement, and that Employee's execution and performance of this Employment Agreement is 4 of 9 5 not a violation or breach of any agreement between Employee and any other person or entity. 8. NONDISCLOSURE OF CONFIDENTIAL INFORMATION; OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS; NON COMPETITION; COVENANT NOT TO COMPETE. 8.1 Nondisclosure of Confidential Information. During the term of this Employment Agreement and at all times thereafter, Employee will keep confidential and will not directly or indirectly divulge to anyone nor use or otherwise appropriate for Employee's own benefit, or on behalf of any other person, firm, partnership or corporation by whom Employee might subsequently be employed or otherwise associated or affiliated with, any Confidential Information (as defined herein). For this purpose, "Confidential Information" means any and all customer lists, product formulations, arrangements with distributors and parties for whom Employer does contract brewing, marketing information or strategies, trade secrets or other confidential information of any kind, nature or description concerning any matters affecting or relating to the business of Employer or any affiliate which derives economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use and which is subject to efforts by Employer that are reasonable under the circumstances to maintain its secrecy. 8.2 Employer Intellectual Property Rights. All intellectual property rights, whether or not patentable or copyrightable, which (i) are made or developed with the equipment, supplies, facilities, product formulations, trade secrets, time or other assets of Employer; (ii) relate to the business, including anticipated research or development, of Employer, or (iii) result from work performed by Employee for Employer, are and shall remain the sole property of Employer, and upon request made by Employer, Employee shall assign any and all rights, including patents and patent rights, trade mark and trade dress rights, Employee may have therein to Employer. This Section 8.2 does not apply to any intellectual property rights which are the subject of Section 2870 of the California Labor Code. 8.3 Employer Materials. All reports and analysis, designs, drawings, contracts, contractual arrangements, specifications, computer software, computer hardware and other equipment, computer printouts, computer disks, documents, memoranda, notebooks, correspondence, files, lists and other records, and the like, and all photocopies or other reproductions thereof, affecting or relating to the business of Employer which Employee shall prepare, use, construct, observe, possess or control ("Employee Materials"), shall be and remain the sole property of Employer. Upon termination of this Employment Agreement, Employee shall deliver promptly to Employer all such Employer Materials. 8.4 Certain Restrictions on Business Activities. During the term of this Employment Agreement, Employee agrees that: 8.4.1 Business Activities. He will not, directly or indirectly, own an interest in, operate, join, control or participate in, or be connected as an officer, employee, 5 of 9 6 agent, independent contractor, partner, shareholder or principal of any corporation, partnership, proprietorship, firm, association, person or other entity providing services and/or products or a combination thereof which directly or indirectly compete with Employer's business, and he will not undertake planning for or organization of any business activity competitive with Employer's business or combine or conspire with other employees or representatives of Employer's business for the purpose of organizing any such competitive business activity, except the purchase of less than ten percent (10%) of the stock of a publicly traded company which is not affiliated with Employer. 8.4.2 Solicitation of Customers, Etc. He will not, directly or indirectly, either for himself or for any other person, firm or corporation, divert or take away or attempt to divert or take away (and after the term of this Employment Agreement, call on or solicit or attempt to call on or solicit) any of Employer's customers or distributors, including but not limited to, those upon whom Employee called or whom Employee solicited or serviced or with whom Employee became acquainted while engaged as an employee in Employer's business. 8.4.3 Solicitation of Employees, Etc. He will not, directly or indirectly or by action in concert with others, induce or influence (or seek to induce or influence) any person who is engaged (as an employee, agent, independent contractor or otherwise) by Employer to terminate his or her employment or engagement. 8.5 Covenant Not to Compete. 8.5.1 Obligations of Employee. Employee acknowledges that, as a key management employee, Employee will be involved, on a high level, in the development, implementation and management of the business strategies and plans of Employer, which shall also consist of such other business, units, divisions, subsidiaries or other entities of Employer as Employer shall determine in its sole discretion from time to time (the "Business"). By virtue of Employee's unique and sensitive position and special background, employment of Employee by a competitor of Employer represents a serious competitive danger to Employer and the Business, and the use of Employee's talent and knowledge and information about Employer or the Business can and would constitute a valuable competitive advantage over Employer and the Business. In view of the foregoing, Employee covenants and agrees that, if Employee's employment with Employer is terminated by Employee or for cause at any time, for a period of one year after the date of such termination, but not longer than the term of this Employment Agreement under Section 2 had employment not been terminated, Employee will not engage or be engaged, in any capacity, directly or indirectly, including but not limited as employee, agent, consultant, manager, executive, owner or stockholder (except as a passive investor holding less than a 1% equity interest in any enterprise the securities of which are publicly traded) in any business entity doing business in the United States engaged in competition with any business conducted by Employer on the date of termination. This Covenant Not to Compete shall survive the termination or expiration of the other provisions of this Employment Agreement. If any court determines that this Covenant Not to Compete, or any part thereof, is unenforceable because of the duration or geographic scope of such provision, such court shall have the power 6 of 9 7 to reduce the duration or scope of such provision, as the case may be, and, in its reduced form, such provision shall then be enforceable. 8.5.2 Continuing Obligations. Employee agrees that, for one year following his termination of employment with Employer, Employee shall keep Employer informed of the identification of Employee's employer and the nature of such employment or of Employee's self-employment. Employer agrees that, within fifteen (15) days after receiving notice pursuant to this section of the identification of the prospective employer, the nature of the employment or self-employment or any change therein, Employer will advise Employee as to whether such employment constitutes a violation of Section 8.5.1 hereof. 8.5.3 Injunctive Relief. Employee acknowledges that the violation of the covenants contained in this Section 8.5 would be detrimental and cause irreparable injury to Employer and its affiliates which could not be compensated by money damages. Employee agrees that an injunction from a court of competent jurisdiction is the appropriate remedy for these provisions, and consents to the entry of an appropriate judgment enjoining Employee from violating these provisions in the event there is a find of their breach. 8.6 Severability. Employee agrees, in the event that any provision of this Section 8 or any word, phrase, clause, sentence or other portion thereof shall be held to be unenforceable or invalid for any reason, such provision or portion thereof shall be modified or deleted in such a manner so as to make this Section 8 as modified legal and enforceable to the fullest extent permitted under applicable laws. The validity and enforceability of the remaining provisions or portions thereof shall not be affected thereby and shall remain valid and enforceable to the fullest extent permitted under applicable laws. A waiver of any breach of the provisions of this Section 8 shall not be construed as a waiver of any subsequent breach of the same or any other provision. 9. MERGER, ETC., OF EMPLOYER. In the event of a future disposition of (or including) the properties and business of Employer, substantially or in its entirety, by merger, consolidation, sale of assets, or otherwise, then Employer may assign this Employment Agreement and all of the rights and obligations of Employer under this Employment Agreement to the acquiring or surviving corporation; provided, that such acquiring or surviving corporation shall assume in writing all of the obligations of the companies under this Employment Agreement; and provided further, that the companies (in the event and so long as they or either of them remains in business as an independent going enterprise) shall remain jointly and severally liable for the performance of their obligations under this Employment Agreement in the event of an unjustified failure of the acquiring corporation to perform its obligations under this Employment Agreement. 10. GENERAL PROVISIONS. 10.1 Severable Provisions. The provisions of this Employment Agreement are severable, and if any one or more provisions may be determined to be judicially unenforceable, 7 of 9 8 in whole or in part, the remaining provisions shall nevertheless be binding and enforceable. 10.2 Assignment. Neither this Employment Agreement nor any of the rights or obligations of Employee or Employer hereunder shall be assignable. 10.3 Arbitration. Any dispute arising under or in connection with this Employment Agreement shall be subject to arbitration before the American Arbitration Association ("AAA") at the facility nearest Employer's principal place of business. 10.4 Attorneys' Fees. If any legal action arises under this Employment Agreement or by reason of any asserted breach of it, the prevailing party shall be entitled to recover all costs and expenses, including reasonable attorneys' fees, incurred in enforcing or attempting to enforce any of the terms, covenants or conditions, including costs incurred prior to commencement of legal action, and all costs and expenses, including reasonable attorneys' fees, incurred in any appeal from an action brought to enforce any of the terms, covenants or conditions. 10.5 Notices. Any notice to be given to Employer under the terms of this Employment Agreement shall be addressed to Employer at the address of Employer's principal place of business, with a copy to, Hecht & Steckman, P.C., 60 East 42nd Street, Suite 5101, New York, New York 10165-5101, Attn: James G. Smith, Esq., and any notice to be given to Employee shall be addressed to Employee at his home address last shown on the records of Employer, or at such other address as either party may hereafter designate in writing to the other. Any notice required or permitted under this Employment Agreement shall be in writing and shall be deemed effective: (i) upon receipt in the event of delivery by hand, including delivery made by private delivery or overnight mail service where either the recipient or delivery agent executes a written receipt or confirmation of delivery; or (ii) 48 hours after deposited in the United States mail, registered or certified mail, return receipt requested, postage prepaid. 10.6 Waiver. Either party's failure to enforce any provision or provisions of this Employment Agreement shall not in any way be construed as a waiver of any such provision or provisions, or prevent that party thereafter from enforcing each and every other provision of this Employment Agreement. 10.7 Entire Agreement; Amendments. This Employment Agreement supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of Employee by Employer and contains all of the covenants and agreements between the parties with respect to the employment of Employee by Employer. Each party to this Employment Agreement acknowledges that no representations, inducements, promises or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein, and that no other agreement, statement or promise not contained in this Employment Agreement will be effective only if it is in writing signed by the party to be charged. 8 of 9 9 10.8 Titles and Headings. Titles and headings to sections of this Employment Agreement are for the purpose of reference only and shall in no way limit, define or otherwise affect the interpretation or construction of such provisions. 10.9 Counterparts. This document may be executed in one or more counterparts each of which shall be deemed to be an original and all of which together shall constitute a single agreement. 10.10 Governing Law. This Employment Agreement shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of the day and year first above written. EMPLOYEE: /s/ FREDERIK G.M. RODENHUIS -------------------------------------- FREDERIK G.M. RODENHUIS EMPLOYER: BEVERAGE WORKS, INC. a California corporation /s/ LYLE MAUL -------------------------------------- By: LYLE MAUL ---------------------------------- Title: COO & CFO ------------------------------- 9 of 9 EX-10.9 19 EMPLOYMENT AGREEMENT-LYLE R. MAUL 1 EXHIBIT 10.9 EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into on December 31, 1996 ("Employment Agreement"), by and among BEVERAGE WORKS, INC., a California corporation ("Employer"), and LYLE R. MAUL ("Employee"). This Agreement shall be effective as of the close of the Employer's initial public offering. WHEREAS, Employer wishes to employ Employee as Chief Financial Officer and Chief Operating Officer, with such other duties and responsibilities as Employer may reasonably assign to Employee consistent with the nature and character of such employment (the "Position"), and Employee wishes to accept such employment subject to the terms and conditions of this Employment Agreement; and WHEREAS, Employer is in the business of producing beer and other beverages, and performs services related thereto, and markets such products and services in the United States and in various foreign countries and has accumulated valuable and confidential information including trade secrets and know-how relating to technology, manufacturing procedures, formulas, machines, marketing plans, sources of supply, business strategies, and other business records; and WHEREAS, the giving of the covenants contained herein is a condition precedent to the employment of Employee in the Position and Employee acknowledges that the execution of this Employment Agreement and the entering into of these covenants is an express condition of his employment in the Position and that said covenants are given in consideration for such employment and the other benefits conferred upon him by this Employment Agreement. NOW, THEREFORE, in consideration of such employment and other valuable consideration, receipt of which is hereby acknowledged Employer and Employee agree as follows: 1. DUTIES OF EMPLOYEE. Employer hereby employs Employee as its Chief Financial Officer and Chief Operating Officer and agrees to cause Employee from time to time to be elected or appointed to such corporate offices or positions. Employee shall serve in such capacity at Employer's office, or at such other place as Employer may direct provided that Employer shall not direct or cause Employee to perform his services from an office outside of Los Angeles County, California without Employee's prior written consent. Employee's principal duties and responsibilities shall consist of Employee's corporate offices and positions which are set forth in the by-laws of Employer from time to time, over-all responsibility for the development and implementation of Employer's corporate finance, acquisition strategy, budgeting and accounting, and such other duties and responsibilities consistent with Employee's corporate offices and positions which the Board of Directors or Chief Executive Officer of Employer, from time to time may assign to Employee. Employee shall perform such other services and duties as may from time to time be assigned to Employee by Employer's Board of Directors provided that such other services and duties are not inconsistent with any other term of this Employment Agreement. Except during vacation periods or in accordance with Employer's personnel policies covering executive leaves and reasonable periods of illness or 2 other incapacitation, Employee shall devote full-time his services to Employer's business and interests in a manner consistent with Employee's title and office and Employer's needs for his services. Employee shall perform the duties of Employee's office and those assigned to Employee by Employer's Board of Directors with fidelity, to the best of Employee's ability, and in the best interests of Employer. 2. TERM OF EMPLOYMENT. Employer hereby employs Employee, and Employee hereby accepts employment with Employer, for four (4) years commencing on the date of this Employment Agreement ("Employment Period"). Notwithstanding anything in this Section 2 to the contrary, this Employment Agreement may be terminated at any time in accordance with Section 6. 3. COMPENSATION OF EMPLOYEE. 3.1 Base Compensation. As compensation for Employee's services hereunder, Employee shall receive a base salary (the "Base Salary") at an annual amount of not less than One Hundred Fifty Thousand Dollars ($150,000) payable in bi-monthly installments of Six Thousand, Two Hundred Fifty ($6,250) each, or a ratable portion thereof for periods of less than one-half month. The Board or the Compensation Committee of the Board shall review the Base Salary at least annually as of the payroll date nearest the anniversary of this Employment Agreement; and Employer agrees to make such increases in the Base Salary as the Board may approve from time to time. Once established at a specific increased annual rate, the Base Salary may not be reduced by Employer without Employee's written consent. 3.2 Car Allowance. In addition, Employee shall be entitled to a monthly car allowance of Five Hundred Dollars ($500), which shall be paid to Employee concurrently with the second (2nd) installment of Employee's monthly base compensation. The monthly car allowance shall be increased by Fifty Dollars ($50) each calendar year commencing January 1, 1997. 3.3 Non-accountable T&E Allowance. In addition, Employee shall be entitled to a monthly non-accountable travel & entertainment allowance of Five Hundred Dollars ($500), which shall be paid to Employee concurrently with the second (2nd) installment of Employee's monthly base compensation. 3.4 Bonuses. The Board of Directors, (or a management compensation committee of the board of directors, if any), may award a cash bonus to Employee at the board's or committee's discretion. 4. EXPENSE REIMBURSEMENTS. Employee shall promptly be reimbursed for reasonable and actual out-of-pocket expenses incurred by Employee in performance of Employee's duties and responsibilities hereunder in accordance with Employer's established personnel policy covering executive officer expense reimbursements, as such policy may be amended, revised or otherwise changed from time to time. Employee shall furnish proper vouchers and expense reports and shall be reimbursed only for those expenses which shall be reimbursable. 2 of 9 3 5. VACATION, SICK LEAVE AND OTHER FRINGE BENEFITS. Employee shall be entitled to four (4) weeks vacation per every twelve (12) month period of employment hereunder and no more than two (2) weeks vacation at a time. Employee shall also be entitled to leaves for illness or other incapacitation as is consistent with Employee's title and Employer's needs for Employee's services, except as otherwise provided for in Section 6.2. Commencing with calendar year 1997, Employee shall receive Two Thousand Five Hundred Dollars ($2,500) for 1997 and Five Thousand Dollars ($5,000) annually thereafter for life insurance, which Employee shall have sole authority to appoint beneficiaries, and shall receive Two Thousand Five Hundred Dollars ($2,500) for 1997 and Five Thousand Dollars ($5,000) annually thereafter for personal legal and accounting services. Employee shall be entitled to full health and dental insurance coverage, including covering any deductible, for Employee, Employee's spouse and minor children. Employee shall be entitled during Employee's employment hereunder to share or participate in such medical insurance programs or other "fringe" benefit plans or programs as shall be made available to employees employed by Employer generally, in accordance with Employer's established personnel policies, if any, or as established, amended, revised or otherwise changed from time to time, covering employee benefits. 6. TERMINATION. 6.1 Termination by Employer for Cause. Employer may terminate this Employment Agreement and Employee's employment hereunder for Cause (as defined herein) any time effective upon written notice to Employee. As used herein, the term "Cause" shall mean: 6.1.1 Habitual neglect in the performance of Employee's material duties as set forth in Section 1 which continues uncorrected for a period of thirty (30) days after written notice thereof by Employer to Employee; 6.1.2 Employee's confession or conviction of theft, fraud, embezzlement, or any other crime involving dishonesty with respect to Employer or any parent, subsidiary or affiliate of Employer; 6.1.3 Gross negligence involving misfeasance or nonfeasance by Employee in the performance of Employee's material duties as set forth in Section 1 which continues uncorrected for a period of thirty (30) days after written notice thereof by Employer to Employee; 6.1.4 Material violation by Employee of the provisions of Section 8; or 6.1.5 The representations in Section 7 were materially false as of the date of this Employment Agreement. In no event shall the results of Employer's operations or any business agreement made in good faith by Employee constitute an independent basis for termination for cause of Employee's employment under this Employment Agreement. Any termination of Employee's employment 3 of 9 4 for cause must be authorized by a majority vote of the Board taken not later than twelve (12) months after a majority of the members of the Board (other than Employee) have actual knowledge of the occurrence of the event or conduct constituting the cause for such termination. If Employee's employment under this Employment Agreement is terminated by Employer for cause, then Employee shall be entitled to receive his Base Salary through the effective date of such termination. 6.2 Termination Upon Death or Disability. This Employment Agreement and Employee's employment hereunder shall terminate upon Employee's death or Disability (as defined herein). For this purpose "Disability" means incapacity, whether by reason of physical or mental illness or disability, which prevents Employee from substantially performing Employee's material duties as set forth in Section 1 for six (6) months, or for shorter periods aggregating six (6) months in any twelve (12) successive calendar months. Upon termination for death, and unless Employer shall have in force a disability insurance policy providing for benefits in an amount at least equal thereto, upon termination for Disability, Employer shall continue to pay the compensation payments pursuant to Section 3 to the surviving spouse of Employee (or if there is none to Employee's estate) in the case of death and to Employee or Employee's court appointed conservator in the case of Disability until the date three (3) months thereafter. Termination for death shall become effective upon the occurrence of such event and termination for Disability shall become effective upon written notice to Employee. 6.3 Events Upon Termination. The termination of this Employment Agreement pursuant to Section 6.1 and 6.2 shall also result in the termination of all rights and benefits of Employee under this Employment Agreement except for any rights to compensation accrued under Section 3 prior to the date of termination or rights to expense reimbursement under Section 4. 6.4 Payments As Liquidated Damages. In the event Employer elects to terminate this Employment Agreement prior to the scheduled termination date for any reason other than Cause, Employer shall continue to make the compensation payments specified in Section 3 hereof for the entire term, through and including the scheduled termination date, and such payments shall be deemed to be liquidated damages for the damage done to Employee's reputation and for having foregone the opportunity to pursue other employment opportunities while performing services pursuant to this Employment Agreement. Employer hereby agrees that such amount shall constitute a realistic and reasonable valuation of the damages with respect to Employee's claims, and Employee shall not be required to mitigate his damages by seeking other business, as the damages resulting to him as a result of the loss of the unique business arrangement set forth herein could not be mitigated by seeking business elsewhere, nor shall any monies earned by Employee in any capacity after such termination, attempted termination or breach act to reduce such damages. 7. EMPLOYEE'S REPRESENTATIONS. Employee represents and warrants that Employee is free to enter into this Employment Agreement and to perform each of the provisions contained herein. Employee represents and warrants that Employee is not restricted or 4 of 9 5 prohibited, contractually or otherwise, from entering into and performing this Employment Agreement, and that Employee's execution and performance of this Employment Agreement is not a violation or breach of any agreement between Employee and any other person or entity. 8. NONDISCLOSURE OF CONFIDENTIAL INFORMATION; OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS; NON COMPETITION; COVENANT NOT TO COMPETE . 8.1 Nondisclosure of Confidential Information. During the term of this Employment Agreement and at all times thereafter, Employee will keep confidential and will not directly or indirectly divulge to anyone nor use or otherwise appropriate for Employee's own benefit, or on behalf of any other person, firm, partnership or corporation by whom Employee might subsequently be employed or otherwise associated or affiliated with, any Confidential Information (as defined herein). For this purpose, "Confidential Information" means any and all customer lists, product formulations, arrangements with distributors and parties for whom Employer does contract brewing, marketing information or strategies, trade secrets or other confidential information of any kind, nature or description concerning any matters affecting or relating to the business of Employer or any affiliate which derives economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use and which is subject to efforts by Employer that are reasonable under the circumstances to maintain its secrecy. 8.2 Employer Intellectual Property Rights. All intellectual property rights, whether or not patentable or copyrightable, which (i) are made or developed with the equipment, supplies, facilities, product formulations, trade secrets, time or other assets of Employer; (ii) relate to the business, including anticipated research or development, of Employer, or (iii) result from work performed by Employee for Employer, are and shall remain the sole property of Employer, and upon request made by Employer, Employee shall assign any and all rights, including patents and patent rights, trade mark and trade dress rights, Employee may have therein to Employer. This Section 8.2 does not apply to any intellectual property rights which are specifically enumerated in Schedule 8.2 or are the subject of Section 2870 of the California Labor Code. 8.3 Employer Materials. All reports and analysis, designs, drawings, contracts, contractual arrangements, specifications, computer software, computer hardware and other equipment, computer printouts, computer disks, documents, memoranda, notebooks, correspondence, files, lists and other records, and the like, and all photocopies or other reproductions thereof, affecting or relating to the business of Employer which Employee shall prepare, use, construct, observe, possess or control ("Employee Materials"), shall be and remain the sole property of Employer. Upon termination of this Employment Agreement, Employee shall deliver promptly to Employer all such Employer Materials. 8.4 Certain Restrictions on Business Activities. During the term of this Employment Agreement, Employee agrees that: 5 of 9 6 8.4.1 Business Activities. He will not, directly or indirectly, own an interest in, operate, join, control or participate in, or be connected as an officer, employee, agent, independent contractor, partner, shareholder or principal of any corporation, partnership, proprietorship, firm, association, person or other entity providing services and/or products or a combination thereof which directly or indirectly compete with Employer's business, and he will not undertake planning for or organization of any business activity competitive with Employer's business or combine or conspire with other employees or representatives of Employer's business for the purpose of organizing any such competitive business activity, except the purchase of less than ten percent (10%) of the stock of a publicly traded company which is not affiliated with Employer. 8.4.2 Solicitation of Customers, Etc. He will not, directly or indirectly, either for himself or for any other person, firm or corporation, divert or take away or attempt to divert or take away (and after the term of this Employment Agreement, call on or solicit or attempt to call on or solicit) any of Employer's customers or distributors, including but not limited to, those upon whom Employee called or whom Employee solicited or serviced or with whom Employee became acquainted while engaged as an employee in Employer's business. 8.4.3 Solicitation of Employees, Etc. He will not, directly or indirectly or by action in concert with others, induce or influence (or seek to induce or influence) any person who is engaged (as an employee, agent, independent contractor or otherwise) by Employer to terminate his or her employment or engagement. 8.5 Covenant Not to Compete. 8.5.1 Obligations of Employee. Employee acknowledges that, as a key management employee, Employee will be involved, on a high level, in the development, implementation and management of the business strategies and plans of Employer, which shall also consist of such other business, units, divisions, subsidiaries or other entities of Employer as Employer shall determine in its sole discretion from time to time (the "Business"). By virtue of Employee's unique and sensitive position and special background, employment of Employee by a competitor of Employer represents a serious competitive danger to Employer and the Business, and the use of Employee's talent and knowledge and information about Employer or the Business can and would constitute a valuable competitive advantage over Employer and the Business. In view of the foregoing, Employee covenants and agrees that, if Employee's employment with Employer is terminated by Employee or for cause at any time, for a period of one year after the date of such termination, but not longer than the term of this Employment Agreement under Section 2 had employment not been terminated, Employee will not engage or be engaged, in any capacity, directly or indirectly, including but not limited as employee, agent, consultant, manager, executive, owner or stockholder (except as a passive investor holding less than a 1% equity interest in any enterprise the securities of which are publicly traded) in any business entity doing business in the United States engaged in competition with any business conducted by Employer on the date of termination. This Covenant Not to Compete shall survive the termination or expiration of the other provisions of this Employment Agreement. If any 6 of 9 7 court determines that this Covenant Not to Compete, or any part thereof, is unenforceable because of the duration or geographic scope of such provision, such court shall have the power to reduce the duration or scope of such provision, as the case may be, and, in its reduced form, such provision shall then be enforceable. 8.5.2 Continuing Obligations. Employee agrees that, for one year following his termination of employment with Employer, Employee shall keep Employer informed of the identification of Employee's employer and the nature of such employment or of Employee's self-employment. Employer agrees that, within fifteen (15) days after receiving notice pursuant to this section of the identification of the prospective employer, the nature of the employment or self-employment or any change therein, Employer will advise Employee as to whether such employment constitutes a violation of Section 8.5.1 hereof. 8.5.3 Injunctive Relief. Employee acknowledges that the violation of the covenants contained in this Section 8.5 would be detrimental and cause irreparable injury to Employer and its affiliates which could not be compensated by money damages. Employee agrees that an injunction from a court of competent jurisdiction is the appropriate remedy for these provisions, and consents to the entry of an appropriate judgment enjoining Employee from violating these provisions in the event there is a find of their breach. 8.6 Severability. Employee agrees, in the event that any provision of this Section 8 or any word, phrase, clause, sentence or other portion thereof shall be held to be unenforceable or invalid for any reason, such provision or portion thereof shall be modified or deleted in such a manner so as to make this Section 8 as modified legal and enforceable to the fullest extent permitted under applicable laws. The validity and enforceability of the remaining provisions or portions thereof shall not be affected thereby and shall remain valid and enforceable to the fullest extent permitted under applicable laws. A waiver of any breach of the provisions of this Section 8 shall not be construed as a waiver of any subsequent breach of the same or any other provision. 9. MERGER, ETC., OF EMPLOYER. In the event of a future disposition of (or including) the properties and business of Employer, substantially or in its entirety, by merger, consolidation, sale of assets, or otherwise, then Employer may assign this Employment Agreement and all of the rights and obligations of Employer under this Employment Agreement to the acquiring or surviving corporation; provided, that such acquiring or surviving corporation shall assume in writing all of the obligations of the companies under this Employment Agreement; and provided further, that the companies (in the event and so long as they or either of them remains in business as an independent going enterprise) shall remain jointly and severally liable for the performance of their obligations under this Employment Agreement in the event of an unjustified failure of the acquiring corporation to perform its obligations under this Employment Agreement. 7 of 9 8 10. GENERAL PROVISIONS. 10.1 Severable Provisions. The provisions of this Employment Agreement are severable, and if any one or more provisions may be determined to be judicially unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable. 10.2 Assignment. Neither this Employment Agreement nor any of the rights or obligations of Employee or Employer hereunder shall be assignable. 10.3 Arbitration. Any dispute arising under or in connection with this Employment Agreement shall be subject to arbitration before the American Arbitration Association ("AAA") at the facility nearest Employer's principal place of business. 10.4 Attorneys' Fees. If any legal action arises under this Employment Agreement or by reason of any asserted breach of it, the prevailing party shall be entitled to recover all costs and expenses, including reasonable attorneys' fees, incurred in enforcing or attempting to enforce any of the terms, covenants or conditions, including costs incurred prior to commencement of legal action, and all costs and expenses, including reasonable attorneys' fees, incurred in any appeal from an action brought to enforce any of the terms, covenants or conditions. 10.5 Notices. Any notice to be given to Employer under the terms of this Employment Agreement shall be addressed to Employer at the address of Employer's principal place of business, with a copy to Hecht & Steckman, P.C., 60 East 42nd Street, Suite 5101, New York, New York 10165-5101, Attn: James G. Smith, Esq., and any notice to be given to Employee shall be addressed to Employee at his home address last shown on the records of Employer, or at such other address as either party may hereafter designate in writing to the other. Any notice required or permitted under this Employment Agreement shall be in writing and shall be deemed effective: (i) upon receipt in the event of delivery by hand, including delivery made by private delivery or overnight mail service where either the recipient or delivery agent executes a written receipt or confirmation of delivery; or (ii) 48 hours after deposited in the United States mail, registered or certified mail, return receipt requested, postage prepaid. 10.6 Waiver. Either party's failure to enforce any provision or provisions of this Employment Agreement shall not in any way be construed as a waiver of any such provision or provisions, or prevent that party thereafter from enforcing each and every other provision of this Employment Agreement. 10.7 Entire Agreement; Amendments. This Employment Agreement supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of Employee by Employer and contains all of the covenants and agreements between the parties with respect to the employment of Employee by Employer. Each party to this Employment Agreement acknowledges that no representations, inducements, promises or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of 8 of 9 9 any party, which are not embodied herein, and that no other agreement, statement or promise not contained in this Employment Agreement will be effective only if it is in writing signed by the party to be charged. 10.8 Titles and Headings. Titles and headings to sections of this Employment Agreement are for the purpose of reference only and shall in no way limit, define or otherwise affect the interpretation or construction of such provisions. 10.9 Counterparts. This document may be executed in one or more counterparts each of which shall be deemed to be an original and all of which together shall constitute a single agreement. 10.10 Governing Law. This Employment Agreement shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of the day and year first above written. EMPLOYEE: /s/ LYLE R. MAUL ------------------------------------- LYLE R. MAUL EMPLOYER: BEVERAGE WORKS, INC. a California corporation /s/ FREDERIK G.M. RODENHUIS ------------------------------------- By: FREDERIK G.M. RODENHUIS ---------------------------------- Title: CEO ------------------------------- 9 of 9 EX-10.18 20 INCENTIVE COMPENSATION PLAN 1 EXHIBIT 10.18 BEVERAGE WORKS, INC. 1996 INCENTIVE COMPENSATION PLAN This BEVERAGE WORKS, INC. 1996 INCENTIVE COMPENSATION PLAN (the "Plan") is adopted by Beverage Works, Inc., a California corporation (the "Corporation") in order to attract, motivate and retain eligible employees. The Plan is intended to promote the interests of the Corporation and its shareholders by providing eligible employees with the opportunity to earn incentive compensation that is linked to the financial performance of the Corporation. Incentive compensation provided under the Plan is intended to qualify as performance based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended, and the Plan shall be interpreted consistently with such intent. Existence of this Plan is not intended to preclude the Corporation from providing additional incentive compensation to eligible employees or incentive compensation under other plans, agreements or arrangements to an employee, whether such employee is eligible to participate in the Plan or actually participates in the Plan. I. Definitions A. "Award" means the amount of money payable to a Participant who has received an IC Agreement. B. "Board" means the Board of Directors of the Corporation. C. "Code" means the Internal Revenue Code of 1986, as amended. D. "Committee" means the committee appointed pursuant to Article II to administer the Plan. E. "Corporation" means Beverage Works, Inc., a California corporation. F. "Fiscal Year" means the fiscal year of the Corporation. G. "IC Agreement" means the incentive compensation agreement evidencing the terms of a Participant's participation in the Plan. H. "Modified EBITDA" means the consolidated net income of the Corporation and its subsidiaries before interest, federal and state income taxes, depreciation and amortization determined in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), applied consistent with past practices of the Corporation, provided, however, to the extent included in the consolidated net income of the Corporation, excluding the effect of the following items: (1) the gain or loss from any sale, exchange or other disposition of assets other than in the ordinary course of business consistent with past practice; 2 (2) any extraordinary gain or loss; (3) any gain, loss, income or expense resulting from a change in the Corporation's accounting methods, principles or practices or a change in GAAP or any GAAP election or treatment not made or utilized by the Corporation in its audited financial statements for its fiscal year 1996; (4) any reserves or adjustments to reserves which are not consistent with past practices of the Corporation; (5) cash bonuses paid pursuant to this Plan; and (6) compensation paid to the members of the board of directors. I. "Participant" means an eligible employee of the Corporation that has received an IC Agreement under the Plan. J. "Plan" means this Incentive Compensation Plan. II. Administration The regularly appointed compensation committee of the Board shall serve as the Committee that administers the Plan unless the Board shall appoint another compensation committee of members of the Board to administer the Plan. In all cases, the Committee shall have at least two (2) members and no member of the Board may serve on the Committee unless such person is an "outside director" within the meaning of Section 162(m)(4)(C)(i) of the Code, and applicable guidance issued thereunder. The Committee shall have the full power and authority, subject to provisions of the Plan, to select employees to receive IC Agreements, determine the terms of IC Agreements, promulgate rules and regulations as it deems appropriate for the proper administration of the Plan, interpret the terms of the Plan, certify whether the Performance Goals and the material terms of an IC Agreement are met prior to payment of any amount under the Plan, and to otherwise take any and all action as it deems to be necessary or appropriate in connection with the operation of the Plan. Decisions and selections of the Committee shall be made by a majority of its members, and if made pursuant to the terms of the Plan shall be final. Action of the Committee may be evidenced by approved minutes of a meeting of the Committee, or a document executed by any member of the Committee or an officer of the Corporation authorized by the Committee to execute documents on the Committee's behalf. -2- 3 III. Participation A. Eligibility. Only officers and key employees (as determined by the Committee) of the Corporation shall be eligible to participate in the Plan and receive an IC Agreement under the Plan. B. Designation of Participants. The Committee shall select those eligible employees who shall receive an IC Agreement under the Plan. The IC Agreement shall be in writing, shall specify the period to which the IC Agreement relates, and shall include any other material terms of the IC Agreement. IV. Incentive Compensation Agreement A. Performance Periods. IC Agreements under the Plan shall be for at least one Fiscal Year and for a total of no more than four (4) consecutive Fiscal Years. The Committee shall specify the number of Fiscal Years applicable to each IC Agreement. An IC Agreement for a Fiscal Year must be established not later than ninety (90) days after the beginning of the first day of such Fiscal Year. B. Performance Goals. The right to receive an Award and amount of an Award is conditioned on the Corporation's performance with respect to Modified EBITDA of the Corporation for the relevant Fiscal Year. C. Calculation of Award. The Award to a Participant is determined based on the Corporation's attainment of Modified EBITDA specified in the Participant's IC Agreement for the relevant Fiscal Year. A Participant's Award for the entire period covered by an IC Agreement is determined in accordance with the following steps: Step 1. Based on the Modified EBITDA, determine a Participant's Percentage Award under the IC Agreement. The Percentage Award shall not exceed the following table:
PERCENTAGE TOTAL MAXIMUM MODIFIED EBITDA AWARD AUTHORIZED - ---------------------------- ---------- -------------- (IS LESS THAN OR EQUAL TO) 0 0% 0% (IS GREATER THAN) 0 but (IS LESS THAN OR EQUAL TO) $1,000,000 2% 8.45% (IS GREATER THAN) $1,000,000 but (IS LESS THAN OR EQUAL TO) $2,000,000 2% 8.45% (IS GREATER THAN) $2,000,000 but (IS LESS THAN OR EQUAL TO) $4,000,000 2% 8.45% (IS GREATER THAN) $4,000,000 4% 12.45%
-3- 4 Step 2. Determine the Participant's Award, if any, under the following formula: Modified EBITDA x Percentage Award = Award D. Total Maximum Authorized. The total percentage of Modified EBITDA that may be awarded under this Plan to all Participants for any Fiscal Year is stated in Step 1 of Paragraph C under the column "Total Maximum Authorized." V. Payment of Awards. A. Certification and Payment. No payment of any Award shall be made to a Participant until the Committee has certified in writing that the material terms of an IC Agreement have been met and the Participant is entitled to payment. The amount of an Award to a Participant for a Fiscal Year shall be determined not later than the last day of February following the end of such Fiscal Year. The full amount shall be payable not later than such determination date. B. Employment on Payment Date Generally Required. No Participant shall receive payment of an amount with respect to an Award unless such Participant is an active employee of the Corporation (or a subsidiary) as of the 180th day of the Fiscal Year. A Participant so employed on or after the 180th day of a Fiscal Year but not so employed as of the last day of such Fiscal Year shall be entitled to an Award prorated based on the number of days employed for such Fiscal Year divided by the number of days of such Fiscal Year. A Participant who dies or is disabled during the Fiscal Year shall continue to receive amounts payable under an IC Agreement for such Fiscal Year. For purposes of this paragraph, a Participant shall be disabled if the participant is determined to be disabled under the Participant's employment agreement with the Corporation. VI. Amendment or Termination The Board reserves the right to amend, suspend, or terminate the Plan or adopt a new plan at any time; provided that no such amendment shall without the consent of the Participant affect the payment of any IC Agreement to such Participant. In case any one or more of the provisions contained in the Plan shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of the Plan. VII. Miscellaneous A. Nonassignment. The interest of any Participant under the Plan shall not be assignable either by voluntary or involuntary assignment or by operation of law, except by will or the laws of descent and distribution. -4- 5 B. Interpretation. This Plan is intended to provide Participants with the opportunity to receive incentive compensation that is deductible by the Corporation without regard to the limitations of Section 162(m)(1) of the Code and shall be construed accordingly. The Plan shall otherwise be governed by the laws of the State of California and construed in accordance therewith. C. No Employment Right. The granting of an IC Agreement confers on no employee the right to employment or continued employment by the Corporation. The right of the Corporation to terminate the employment of a Participant shall not be diminished or affected by reason of receipt of an IC Agreement under the Plan. VIII. Effective Date This Plan is adopted effective as of January 1, 1997, provided that no payment of an Award shall be made under the Plan unless the Plan is approved by the shareholders of the Corporation. BEVERAGE WORKS, INC. /s/ FREDERIK G.M. RODENHUIS /s/ LYLE R. MAUL -------------------------------- ----------------------------------- Frederik G.M. Rodenhuis Lyle R. Maul Chief Executive Officer Secretary -5- EX-10.23 21 KEG MANAGEMENT AGREEMENT DATED DEC 2, 1996 1 EXHIBIT 10.23 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 arrangements to be established between Brewing Company and wholesalers in accordance with the provisions of Section 3.1.b. hereof. KEG MANAGEMENT AGREEMENT Page 6 7 6.3. Audit Rights of the Parties MicroStar and Brewing Company each shall have the right to review and audit at reasonable intervals the records and information maintained or acquired by the other party hereto for the purpose of determining, verifying or analyzing any deliveries, retrievals, charges or credits arising in the course of performance of this Agreement. Any expenses incurred by a party in relation to record keeping or reporting of information contemplated by this Agreement, shall be borne by the party charged with maintaining such records and providing such information. Expenses incurred by a party in relation to audits performed hereunder shall be borne by the party undertaking such audit. 6.4. Accounting Procedures MicroStar shall specify and may periodically supplement or revise the basic accounting procedures to be implemented by the parties in relation to the transactions contemplated by this Agreement. The initial accounting procedures formulated by MicroStar are set forth in Exhibit "D" hereto. SECTION 7: MISCELLANEOUS 7.1. Amendment and Supplementation This Agreement may be amended or supplemented only by a written instrument executed by MicroStar and Brewing Company. 7.2. Third-Party Beneficiary Status of MicroStar Under Agreements between Brewing Company and Wholesalers To the extent necessary to accord MicroStar the full scope of entitlements, rights and authorities in relation to Brewing Company's agreements and arrangements with wholesaler as contemplated hereby, MicroStar shall be recognized as a third-party beneficiary of such agreements and arrangements. 7.3. Force Majeure In the event that any obligation hereunder, other than the obligation to remit any payment due hereunder, cannot be timely performed due to circumstances beyond the reasonable control of a party hereto, the time period for the performance of such obligation shall be reasonably extended until the conditions precluding, impairing or delaying performance have been resolved. 7.4. Changes in Economic Conditions/Right of Termination In the event that as a result of business or economic developments occurring after the effective date hereof, the transactions contemplated by this Agreement cannot be KEG MANAGEMENT AGREEMENT Page 7 8 implemented by a party hereto without undue cost, loss or detriment to such party, the party experiencing such adverse consequences shall have the right, upon notification to the other party of the particulars of such developments, to cancel this Agreement effective thirty (30) days after the giving of such written notice. In the event of any such termination, Brewing Company shall repurchase kegs from MicroStar in a quantity and at a price to be separately agreed upon in writing at the time the purchase price for kegs purchased from Brewing Company is determined pursuant to Section 1, 1.1.a.. In the event of Brewing Company's exercise of the foregoing right of termination for economic reasons, Brewing Company shall agree not to utilize the services of any company engaged in performing the same or substantially similar services to those of MicroStar for a period of three (3) years from the date of such termination. 7.5. Choice of Law This Agreement and the performance hereof shall be construed in accordance with, and governed by the internal laws of the state of Colorado. 7.6. Ad Valorem or Use Taxes Any ad valorem, personal property, use or similar taxes imposed as a result of Brewing Company's physical custody or use of MicroStar-owned kegs shall be the responsible of Brewing Company. 7.7. Notices Notice and communications required or permitted hereunder shall be in writing and any communication hereunder shall be deemed to be duly made if actually delivered, transmitted by facsimile, or mailed, prepaid to the parties as follows: MicroStar Keg Management, L.L.C. ______________________ 8567 154th Ave. N.E. ______________________ Redmond, Washington 98052 ______________________ Attention: Robert M. Imeson Attention:____________ 7.8. Captions The headings and captions in this Agreement are for convenience only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement. 7.9. Exhibits All Exhibits attached to or referred to in this Agreement are incorporated into and made a part of this Agreement. KEG MANAGEMENT AGREEMENT Page 8 9 THIS AGREEMENT is executed on the date set forth below each party's respective signature to be effective however as of the day of December, 1996. MICROSTAR KEG MANAGEMENT, L.L.C. By: ----------------------------------------- Name: Robert M. Imeson --------------------------------------- Title: Manager and Chief Executive Officer -------------------------------------- ------ Date: --------------------------------------- -------------------------------------------- By: ----------------------------------------- Name: --------------------------------------- Title: -------------------------------------- Date: --------------------------------------- KEG MANAGEMENT AGREEMENT Page 9 10 EXHIBIT "B" TO KEG MANAGEMENT AGREEMENT MICROSTAR KEG MANAGEMENT, L.L.C. P.O. Box 3139 Redmond, Washington 98073 December 2, 1996 TO: ALL WHOLESALERS PURCHASING FROM HERITAGE BREWING COMPANY ("HERITAGE") RE: KEG MANAGEMENT AGREEMENT CONCLUDED BETWEEN HERITAGE BREWING COMPANY AND MICROSTAR KEG MANAGEMENT, L.L.C.; TERMS AND CONDITIONS APPLICABLE TO WHOLESALERS HERITAGE Brewing Company delivers its products in kegs to ____________________ ("Wholesaler"). HERITAGE and MicroStar Keg Management, L.L.C. ("MicroStar") hereby notify Wholesaler that effective December 2, 1996 all shipments from Heritage Brewing Company will be made in kegs owned by MicroStar and subject to MicroStar's administration and retrieval rights and responsibilities under a Keg Management Agreement between HERITAGE Brewing Company and MicroStar dated December 2, 1996 ("the Keg Management Agreement"). Pursuant to the Keg Management Agreement, HERITAGE Brewing Company is required to obtain Wholesaler's agreement to the terms and conditions applicable to the MicroStar-owned kegs and to the administrative services being performed by MicroStar for HERITAGE Brewing Company. The pertinent requirements applicable to Wholesaler are as follows: 1) DEPOSITS. A deposit computed based upon the amount of $15.00 per keg ("the Deposit") for each MicroStar keg delivered to Wholesaler will be billed to Wholesaler by MicroStar and shall be payable directly to MicroStar. The Deposit shall serve as security to MicroStar against the loss of any keg owned by MicroStar, based on a charge of $125.00 per keg, for any keg the location of which cannot be ascertained. Periodic charges to and withdrawals from the Deposit will be made for kegs which cannot be located. Similarly, credit memos will be issued whenever kegs are returned and whenever kegs previously classified as lost are located. Wholesaler 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 the loss call whenever a previously lost keg for which a loss charge was made is located and returned. 2) AUDITS. Wholesaler shall be required to provide a monthly written report of the movement of MicroStar kegs in the form(s) prescribed by MicroStar, including inventory by brewer (including HERITAGE Brewing Company and any other brewers contracting with MicroStar who deliver product to Wholesaler), empty kegs on hand and kegs in the retail system. Wholesaler also agrees to respond to weekly verbal inquiries by MicroStar representatives concerning the extent of empty MicroStar kegs in Wholesaler's system. MicroStar shall be authorized to conduct periodic audits of 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 Wholesaler's inventory and any discrepancies ascertained as a result of prior audits, etc. A summary of the accounting procedures applicable to Wholesaler is set forth in Attachment "A" hereto. Wholesaler's acceptance of deliveries of MicroStar kegs from HERITAGE Brewing Company will evidence Wholesaler's agreement to the foregoing terms, conditions and policies. Please confirm receipt of this notice and Wholesaler's agreement to the foregoing terms by signing below and returning a copy of this notice and agreement to MicroStar at the address shown above. HERITAGE BREWING COMPANY MICROSTAR KEG MANAGEMENT, L.L.C. By:____________________________________ By:_____________________________ ACKNOWLEDGED AND AGREED TO AS OF THE DATE FIRST ABOVE WRITTEN: WHOLESALER: 11 By:____________________________________ KEG MANAGEMENT AGREEMENT Page 11 12 EXHIBIT "A" TO KEG MANAGEMENT AGREEMENT List of Local Wholesalers Wine Warehouse, City of Commerce, Cal. .Southern Wines & Spirits, Cerritos, Cal. 13 EXHIBIT "D" TO KEG MANAGEMENT AGREEMENT MICROSTAR KEG MANAGEMENT, L.L.C. ACCOUNTING PROCEDURES STANDARD ACCOUNTING PROCEDURES: MicroStar provides kegs which meets quality standard on a per usage basis at a rate of $15.00 with certain adjustments rebate for local (as agreed) shipments. Procedure: The ongoing standard policy is as follows: 1. Brewing Company shall order kegs 30 days prior to any requested delivery date. Brewing Company will be required to provide ninety (90) days advance written notice to MicroStar for all orders which are 20% or more in excess of normal order quantity. All orders will be confirmed by fax or US mail by close of next business day. All Order(s) shall be deemed incomplete if not confirmed by MicroStar. 2. Brewing Company will be invoiced $15.00 per keg upon the receipt of each delivery of kegs (30 day terms). This invoicing is generated by shipment date and cross checked with the bill of lading returned by Brewing Company and trucking company invoice. In the event of delinquent payment of any invoice, MicroStar has the right to suspend deliveries of kegs and/or to require future payments to be made prior to delivery of kegs. 3. Brewing Company must provide MicroStar with a bill of lading for all shipments from Brewing Company to its wholesaler(s) within 24 hours of shipment. This bill of lading will be required for inventory control and will generate an invoicing of deposit to wholesaler. Brewing Company is held responsible for lost/unaccounted for kegs and misuse of kegs under Brewing Company's control (subject to $125 per lost keg fee or a $500 penalty for unauthorized use). 4. If Brewing Company effectuates a local shipment to agreed upon wholesaler(s), a $7.50 credit rebate will be provided to the Brewing Company by MicroStar. In the event Brewing Company currently incurs no freight expense for the return of kegs from certain wholesalers identified on Exhibit "A" to the Keg Management Agreement 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 EXHIBIT "D" TO KEG MANAGEMENT AGREEMENT Page 1 14 or credit to Brewing Company will be ten dollars ($10.00) per keg (resulting in an effective use fee to Brewing Company hereunder of five dollars ($5.00) per keg). This information concerning local shipments and return of kegs from specific wholesalers shall be cross checked against the bill of lading and/or the signed loading report. Such credit will be applied to next Brewing Company's next invoice for kegs or, if a net credit is generated, the credit will be refunded during normal processing within 30 days. 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. 5. MicroStar will invoice wholesaler for a deposit of $15.00 per keg from the bill of lading or, if no bill of lading, a signed loading report as provided by Brewing Company. 6. MicroStar will credit wholesaler for each empty keg shipped from the wholesaler by and at the direction of MicroStar. The credit will be generated by the bill of lading on shipment and will be corrected for any errors for incorrect shipments including wrong kegs being shipped, mistakes in number of kegs and the damage of kegs at wholesaler level. The information on shipment errors will be provided by Brewing Company upon Brewing Company's receipt of such kegs. 7. Brewing Company is required to provide a written monthly keg movement report including opening inventory, number of kegs received from MicroStar during the month, shipments out (summarized by wholesaler) and ending inventory. Brewing Company will also provide MicroStar or its representative with state and federal tax reports for purpose of cross checking shipments upon request. 8. Brewing Company shall be subject to inspection and audit of inventory by MicroStar with 24 hour notice. 9. Wholesaler will provide a weekly report on empty and full kegs in their system. 10.Wholesaler will provide monthly written reports on MicroStar forms for inventory of empty, full and at retail. 11.Wholesaler will be subject to audit at least twice a year. 12.Brewing Company will be responsible for inventorying kegs received from MicroStar as to the number of kegs received, verification of MicroStar ownership of kegs and identification of any damaged kegs. 13.Wholesaler refund credits will be adjusted for wrong kegs shipped to Brewing Company or damage which occurs at its level. 15 EXHIBIT "D" TO KEG MANAGEMENT AGREEMENT Page 1 16 EXHIBIT "C" TO KEG MANAGEMENT AGREEMENT MINERAL WASHING/STERILIZING SEQUENCE (STEAM) WASH HEAD Purge out ullage beer with air until clear. 3 sec. Pre-rinse keg with fresh or recovered water. 8 sec. Purge out ore-rinse water with air. 5 sec. Hot caustic or acid wash. 12 sec. Low flow hot caustic or acid wash 12 sec. Purge out hot caustic or acid to recovery tank with air. 6 sec. Final rinse keg with hot water. 12 sec. Low flow hot water rinse. 12 sec. Purge out hot water rinse with steam. 18 sec. Pressurize to 20 p.s.i.g. with steam. 1 sec. Release pressure from process head. 1 sec. STERILIZE HOLD STATION Steam 60 sec. RACKING HEAD Steam conn. head and keg neck. 5 sec. Steam pressure release from keg. 5 sec. Gas purge keg. 8 sec. Counter pressurize to 20 p.s.i.g. 2 sec. Product fill. 50 sec. Spear out. 1 sec. Water scavenge and/or gas scavenge. 5 sec. EXHIBIT "D" TO KEG MANAGEMENT AGREEMENT Page 1 17 EXHIBIT "C" TO KEG MANAGEMENT AGREEMENT MINERAL WASHING/SANITIZING SEQUENCE (OXINE) WASH HEAD Purge out ullage beer with air until clear. 3 sec. Pre-rinse keg with Oxine water. 8 sec. Purge out Oxine water with air. 5 sec. Hot caustic or acid wash. 12 sec. Low flow hot caustic or acid wash 12 sec. Purge out hot caustic or acid to recovery tank with air. 6 sec. Final rinse keg with Oxine water. 12 sec. Low flow Oxine water rinse. 12 sec. Oxine water fill. 18 sec. Spear out. 1 sec. Purge head. 1 sec. SANITIZE HOLD STATION Oxine sanitize hold. 60 sec. RACKING HEAD Gas purge Oxine water from keg. 10 sec. Gas counter pressurize to 20 p.s.i.g. 2 sec. Product fill. 50 sec. Spear out. 1 sec. Oxine water scavenge and/or gas scavenge 4 sec. EXHIBIT "D" TO KEG MANAGEMENT AGREEMENT Page 1 18 EXHIBIT "C" TO KEG MANAGEMENT AGREEMENT KEG PLANT QUALITY CONTROL CHECKS A. DETERGENT TANK TITRATION The detergent set, detergent tank(s), Quality Control checks should be made before starting and at least twice during each eight (8) hour operating shift. Adjust frequency to meet the Quality Control department "comfort level". The acid titration level (phosphoric) should be in the range of 0.25% to maximum of 0.4% v/v and alkali titration level (caustic) in the range of 1.5 to 2.0% v/v. B. KEG WATER CARRY-OVER AND TITRATION CHECKS 1) After the keg has completed the wash head(s) sequence(s), the keg must be allowed to continue through the sterilizing sequence and then rejected (stopped) immediately prior to commencing the racking head(s) sequence(s). When the keg is retrieved at the discharge end of the machine, the keg can be cooled down by placing a cold water hose over the outer surfaces (if steam is used). A Quality Control keg coupler or funnel coupler (with the C02 and beer check valves removed) is then used to tap the keg. The keg must be inverted to remove the contents via the C02 port of the coupler by allowing the keg to drain or forcing the contents out with air or C02. The condensate or rinse residuals in a 50 liter or 1/2 half barrel keg normally measures between 40 to 80 ml.. A limit of 100 ml. should be set as a maximum allowable limit. If the levels are in excess of these amounts then the machine operation must be checked together with that of the steam quality and relevant steam main condensate traps. 2) The condensate obtained from the keg can be titrated to ensure that there is no acid and/or alkali carry-over from the wash heads. NOTE 1: For this check the pH. of the condensate should be a known factor if steam is used for purging. NOTE 2: This check should be carried out once a day for each machine lane and then reduced to the Quality Control department "comfort level". 3) Another keg is used to do a similar check after it has been allowed to complete the sequences through the racker head(s) up to the point of immediately prior to commencing the beer filling sequence. Reject the keg prior to starting the beer filling sequence and remove the conveyor EXHIBIT "D" TO KEG MANAGEMENT AGREEMENT Page 1 19 after discharging from the machine. When checking for the quantity of condensate present in the keg, it should be less than 15 ml. NOTE: This check should be carried out once a day for each machine lane and then reduced to the Quality Control department "comfort level". C. MICROBIOLOGICAL CHECKS TO THE KEG Introduce a liter of sterile liquid, (preferably beer), into a keg having completed the sequence as described in Procedure 3) above, via a sterilized keg valve and "funnel" coupler. This allows the keg to be checked for microbial integrity by removing 250 ml. of the sterile liquid into a sterile flask. Split the sample into two, 100 ml. samples via Millipore type membranes, plate and incubate the membranes on agar suitable for aerobic and anaerobic organisms. Methods of doing this vary slightly. The main objective, however, is to ensure that consistency in sampling is maintained, i.e. having introduced the sterile liquid into the keg, each keg should be rotated a set number of times to ensure all surfaces have been covered equally before it is extracted. A known quantity should always go into the keg and a known quantity should always be extracted, filtered and plated. NOTE 1: This procedure should be carried out at least once every two weeks. NOTE: 2: Funnel couplers can be purchased via IDD to suit your keg valve type. D. AFTER A C.I.P. SEQUENCE After the C.I.P. sequence, the process mains, bright beer tank and racker connection head(s), can be swabbed and checked for visual cleanliness to ensure that the cleaning operation frequencies are effective and adequate. NOTE: This should be carried out at least once a week. E. BEER STABILITY SAMPLING Samples are taken from the bright beer tank and keg at a frequency laid down by the brewery Quality Control department. A suitable stability test is to set aside a keg of beer from the leg line after filling and "forcing" the contents by leaving the keg in an environment of 70(degree) F. (21(degree)C). Taste, odor and clarity tests can then be taken after 72 hours and at regular durations thereafter as desired to suit the Quality Control departments standards. SUMMARY EXHIBIT "D" TO KEG MANAGEMENT AGREEMENT Page 1 20 It is possible to determine the following about the keg machine function and cleaning procedures from the aforementioned. 1) The wash water and detergent is being cleared from the keg by the final C02 or steam purge sequence on the final wash head. 2) The final rinse water on the final wash head is removing the detergent residual from the keg. 3) The C02 purge is removing the condensate trace from the keg on the racker head prior to filling with beer. 4) The microbial integrity, via steam sterilizing or Oxine (Cl02) sanitizing of the keg is being achieved. 5) The separate plant C.I.P. sequence is effective in removing all traces of beer protein and other residuals from the keg plant connection head(s) and piping system(s). 6) The cleanliness and microbial integrity is being maintained by the separate plant C.I.P. regime. If you have any questions, please contact Jeff Gunn at IDD Process & Packaging, Inc. 1-800-621-4144 or 805-529-9890. JWG/9/16/94 EXHIBIT "D" TO KEG MANAGEMENT AGREEMENT Page 1 21 BILL OF SALE For and in consideration of the sum of eighty two thousand three hundred sixty four dollars ($82,364) paid by MicroStar Keg Management, L.L.C. to Heritage Brewing Company the receipt of which is hereby acknowledged, Heritage Brewing Company, whose address 9800 South Sepulveda Blvd, Suite 720, Los Angeles, California 90045, has bargained, sold and delivered, and by these presents does bargain, sell and deliver unto the said MicroStar Keg Management, L.L.C., a Delaware limited liability company whose address is P.O. Box 3129, Redmond, Washington 98052, 983 kegs which are specifically identified by manufacturer, serial number (where available), date of manufacture (where available), MicroStar-assigned UPC number and other information as scheduled on Exhibit "A" attached hereto and made a part hereof. BREWING COMPANY hereby binds itself, its successors and assigns to warrant and defend title to the aforesaid personal property unto MicroStar Keg Management, L.L.C.. its successors and assigns, against the lawful claims of any and all persons whomsoever. EXECUTED this 13th day of December, 1996. HERITAGE BREWING COMPANY By:_____________________________ Name:___________________________ Title:__________________________ EXHIBIT "D" TO KEG MANAGEMENT AGREEMENT Page 1 22 EXHIBIT "A" to Bill of Sale from HERITAGE BREWING COMPANY to MicroStar Keg Management, L.L.C. dated December 13, 1996
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EXHIBIT "D" TO KEG MANAGEMENT AGREEMENT Page 2 23 Signed for identification: HERITAGE BREWING COMPANY MICROSTAR KEG MANAGEMENT, L.L.C. By:________________________________ By:___________________________________ EXHIBIT "D" TO KEG MANAGEMENT AGREEMENT Page 2 EX-10.24 22 OFFICE LEASE DATED NOVEMBER 22, 1996 1 Exhibit 10.24 OFFICE LEASE BY AND BETWEEN EDWARDS THEATRES CIRCUIT, INC. AS LANDLORD AND BEVERAGE WORKS, INC. AS TENANT 2 Table of Contents Article 1 LEASE OF PREMISES . . . . . . . . . . . . . . . . . . 1 Article 2 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . 1 Article 3 EXHIBITS AND ADDENDA . . . . . . . . . . . . . . . . 2 Article 4 DELIVERY OF POSSESSION . . . . . . . . . . . . . . . 2 Article 5 RENT . . . . . . . . . . . . . . . . . . . . . . . . 2 Article 6 INTEREST AND LATE CHARGES . . . . . . . . . . . . . . 5 Article 7 SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . 5 Article 8 TENANT'S USE OF THE PREMISES . . . . . . . . . . . . 6 Article 9 SERVICES AND UTILITIES . . . . . . . . . . . . . . . 6 Article 10 CONDITION OF THE PREMISES . . . . . . . . . . . . . . 7 Article 11 CONSTRUCTION, REPAIRS AND MAINTENANCE . . . . . . . . 7 Article 12 ALTERATIONS AND ADDITIONS . . . . . . . . . . . . . . 8 Article 13 LEASEHOLD IMPROVEMENTS; TENANTS PROPERTY . . . . . . 9 Article 14 RULES AND REGULATIONS . . . . . . . . . . . . . . . . 9 Article 15 CERTAIN RIGHTS RESERVED BY LANDLORD . . . . . . . . . 9 Article 16 ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . 10 Article 17 HOLDING OVER . . . . . . . . . . . . . . . . . . . . 11 Article 18 SURRENDER OF PREMISES . . . . . . . . . . . . . . . . 11 Article 19 DESTRUCTION OR DAMAGE . . . . . . . . . . . . . . . . 11 Article 20 EMINENT DOMAIN . . . . . . . . . . . . . . . . . . . 12 Article 21 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . 12 Article 22 TENANT'S INSURANCE . . . . . . . . . . . . . . . . . 13 Article 23 WAIVER OF SUBROGATION . . . . . . . . . . . . . . . . 13 Article 24 SUBORDINATION AND ATTORNMENT . . . . . . . . . . . . 13 Article 25 TENANT ESTOPPEL CERTIFICATES . . . . . . . . . . . . 14 Article 26 TRANSFER OF LANDLORD'S INTEREST . . . . . . . . . . . 14 Article 27 DEFAULT . . . . . . . . . . . . . . . . . . . . . . . 14 Article 28 BROKERAGE FEES . . . . . . . . . . . . . . . . . . . 16 Article 29 NOTICES . . . . . . . . . . . . . . . . . . . . . . . 16 Article 30 GOVERNMENT ENERGY OR UTILITY CONTROLS . . . . . . . . 16 Article 31 RELOCATION OF PREMISES . . . . . . . . . . . . . . . 16 Article 32 QUIET ENJOYMENT . . . . . . . . . . . . . . . . . . . 17 Article 33 OBSERVANCE OF LAW . . . . . . . . . . . . . . . . . . 17 Article 34 FORCE MAJEURE . . . . . . . . . . . . . . . . . . . . 17 Article 35 CURING TENANT'S DEFAULTS . . . . . . . . . . . . . . 17 Article 36 SIGN CONTROL . . . . . . . . . . . . . . . . . . . . 17 Article 37 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . 17 (i) 3 This Lease between EDWARDS THEATRES CIRCUIT, INC., a California Corporation ("Landlord"), and BEVERAGE WORKS INC., a Corporation ("Tenant"), is dated NOVEMBER 22, 1996. 1. LEASE OF PREMISES In consideration of the Rent (as defined at Section 5.4) and the provisions of this Lease, Landlord leases to Tenant and Tenant leases from Landlord the Premises shown by diagonal lines on the floor plan attached hereto as Exhibit "A", and further described at Section 21. The Premises are located within the Building and Project described in Section 2m. Tenant shall have the non-exclusive right (unless otherwise provided herein) in common with Landlord, other tenants, subtenants and invitees, to use of the Common Areas (as defined at Section 2e). 2. DEFINITIONS As used in this Lease the following terms shall have the following meanings: a. Base Rent (initial): Ten Thousand Nine Hundred Seventy Five and 20/100 Dollars ($10,975.20) per year. b. Base Year: The calendar year of 1996. c. Broker(s) Landlord's: Edwards Theatres Circuit, Inc. Tenant's: Edwards Theatres Circuit, Inc. In the event that Edwards Theatres Circuit, Inc. represents both Landlord and Tenant, Landlord and Tenant hereby confirm that they were timely advised of the dual representation and that they consent to the same, and that they do not expect said broker to disclose to either of them the confidential information of the other party. d. Commencement Date: December 1, 1996. e. Common Areas: the building lobbies, common corridors and hallways, restrooms, garage and parking areas, stairways, elevators, and other generally understood public or common areas. Landlord shall have the right to regulate or restrict the use of the Common Areas. f. Expense Stop: (fill in if applicable): N/A. g. Expiration Date: November 30, 1999, unless otherwise sooner terminated in accordance with the provisions of this Lease. h. Index (Section 5.2): United States Department of Labor, Bureau of Labor Statistics Consumer Price Index for All Urban Consumers. Los Angeles, Riverside and Orange Counties Average, Subgroup "All Items" (1967=100). i. Landlord's Mailing Address: Edwards Theatres Circuit, Inc., 300 Newport Center Drive, Newport Beach, CA 92660. Tenant's Mailing Address: 200 Newport Center Drive, Suite 205, Newport Beach, CA 92660. j. Monthly Installments of Base Rent (initial): Nine Hundred Fourteen and 60/100 Dollars ($914.60) per month. 1 4 k. Parking: Tenant shall be permitted, upon payment of the then prevailing monthly rate (as set by Landlord from time to time) to park N/A cars on a non-exclusive basis in the area(s) designated by the Landlord for parking. Tenant shall abide by any and all parking regulations and rules established from time to time by Landlord or Landlord's parking operator. Landlord reserves the right to separately charge Tenant's guests and visitors for parking. l. Premises: That portion of the Building containing approximately 538 square feet of Usable Area, shown by diagonal lines on Exhibit "A", located on the second floor of the Building and known as Suite 205. m. Project: the building of which the Premises are a part (the "Building") and any other buildings or improvements on the real property (the "Property") located at 200 Newport Center Drive, Newport Beach, CA 92660 and further described at Exhibit "B". The Project is known as 200 Newport Center Drive. n. Rentable Area: as to both the Premises and the Project, the respective measurements of floor area as may from time to time be subject to lease by Tenant and all tenants of the Project, respectively, as determined by Landlord and applied on a consistent basis throughout the Project. o. Security Deposit (Section 7): Eighteen Hundred Twenty Nine and 20/100 Dollars ($1,829.20). p. State: the State of California. q. Tenant's First Adjustment Date (Section 5.2): the first day of the calendar month following the Commencement Date plus Twelve (12) months. r. Tenant's Proportionate Share: 2.08%. Such share is a fraction, the numerator of which is the Rentable Area of the Premises, and the denominator of which is the Rentable Area of the Project, as determined by Landlord from time to time. The Project consists of One building(s) containing a total Rentable Area of 25,928 square feet. s. Tenant's Use Clause (Article 8): General Office Use. t. Term: the period commencing on the Commencement Date and expiring at midnight on the Expiration Date. 3. EXHIBITS AND ADDENDA. The exhibits and addenda listed below (unless lined out) are incorporated by reference in this Lease: a. Exhibit "A" - Floor Plan showing the Premises. b. Exhibit "B" - Site Plan of the Project. [STRUCK OUT TEXT] d. Exhibit "D" - Rules and Regulations. 4. DELIVERY OF POSSESSION. [STRUCK OUT TEXT] 5. RENT. 5.1 Payment of Base Rent. Tenant agrees to pay the Base Rent for the Premises. Monthly 2 5 installments of Base Rent shall be payable in advance on the first day of each calendar month of the Term. If the Term begins (or ends) on other than the first (or last) day of a calendar month, the Base Rent for the partial month shall be prorated one per diem basis. Tenant shall pay Landlord the first Monthly Installment of Base Rent when Tenant executes the Lease. 5.2 Adjusted Base Rent. a. The Base Rent (and the corresponding Monthly Installments of Base Rent) set forth at Section 8 as shall be adjusted annually (the "Adjustment Date"), commencing on Tenant's First Adjustment Date. Adjustments, if any, shall be based upon increases (if any) in the Index. The Index in publication three (3) months before the Commencement Date shall be the "Base Index." The Index in publication three (3) months before each Adjustment Date shall be the "Comparison Index." As of each Adjustment Date, the Base Rent payable during the ensuing twelve-month period shall be determined by increasing the initial Base Rent by a percentage equal the percentage increase, if any, in the Comparison Index over the Base Index. If the Comparison Index for any Adjustment Date is equal to or less than the Comparison Index for the preceding Adjustment Date (or the Base Index, in the case of the First Adjustment Date), the Base Rent for the ensuing twelve-month period shall remain the amount of Base Rent payable during the preceding twelve-month period. When the Base Rent payable as of each Adjustment Date is determined, Landlord shall promptly give Tenant written notice of such adjusted Base Rent and the manner in which it was computed. The Base Rent as so adjusted from time to time shall be the "Base Rent" for all purposes under this Lease. b. If at any Adjustment Date the Index no longer exists in the form described in this Lease, Landlord may substitute any substantially equivalent official index published by the Bureau of Labor Statistics or its successor. Landlord shall use any appropriate conversion factors to accomplish such substitution. The substitute index shall then become the "Index" hereunder. 5.3 Project Operating Costs. a. In order that the Rent payable during the Term reflect any increase in Project Operating Costs, Tenant agrees to pay to Landlord as Rent, Tenant's Proportionate Share of all increases in costs, expenses and obligations attributable to the Project and its operation, all as provided below. b. If, during any calendar year during the Term, Project Operating Costs exceed the Project Operating Costs for the Base Year, Tenant shall pay to Landlord, in addition to Base Rent and all other payments due under this Lease, an amount equal to Tenant's Proportionate Share of such excess Project Operating Costs in accordance with the provisions of this Section 5.3b. (1) The term "Project Operating Costs" shall include all those items described in the following subparagraphs (a) and (b). (a) All taxes, assessments, water and sewer charges and other similar governmental charges levied on or attributable to the Building or Project or their operation, including without limitation, (i) real property taxes or assessments levied or assessed against the Building or Project, (ii) assessments or changes levied or assessed against the Building or Project by any redevelopment agency, (iii) any tax measured by gross rentals received from the leasing of the Premises, Building or Project, excluding any net income, franchise, capital stock, estate or inheritance taxes imposed by the State of federal government or their agencies, branches, or departments; provided that if at any time during the Term any governmental entity levies, assesses or imposes on Landlord any (1) general or special, ad valorem or specific, excise, capital levy or other tax, assessment, levy or charge directly on the Rent received under this Lease or on the rent received under any other leases of space in the Building or Project, or (2) any license fee, excise or franchise tax, assessment, levy or charge measured by or based, in whole or in part, upon such rent, or (3) any transfer, transaction, or similar tax, assessment, levy or charge based directly or indirectly upon the transaction represented by this Lease or such other leases, or (4) any occupancy, use, per capita or other tax, assessment, levy or charge based directly or indirectly upon the use or occupancy of the Premises or other premises within the Building or Project, then any such taxes, assessments, levies and charges shall be deemed to be included in the term Project Operating Costs. If at any time during the Term the assessed valuation of, or taxes on, the Project are not based on a completed Project having at least eighty-five percent (85%) of the Rentable Area occupied, then the "taxes" component of Project Operating Costs shall be adjusted by Landlord to reasonably approximate the taxes which would have been payable if the Project were completed and at lease eighty-five (85%) occupied. 3 6 (b) Operating costs incurred by Landlord in maintaining and operating the Building and Project, including without limitation the following: costs of (1) utilities; (2) supplies; (3) insurance (including public liability, property damage, earthquake, and fire and extended coverage insurance for the full replacement cost of the Building and Project) as required by Landlord or its lenders for the Project; (4) services of independent contractors; (5) compensation (including employment taxes and fringe benefits) of all persons who perform duties connected with the operation, maintenance, repair or overhaul of the Building or Project, and equipment, improvements and facilities located within the Project, including without limitation engineers, janitors, painters, floor waxers, window washers, security and parking personnel and gardeners (but excluding persons performing services not uniformly available to or performed for substantially all building or Project tenants); (6) operation and maintenance of a room for delivery and distribution of mail to tenants of the Building or Project as required by the U.S. Postal Service (including, without limitation, an amount equal to the fair market rental value of the mail room premises); (7) management of the Building or Project, whether managed by Landlord or an independent contractor (including, without limitation, an amount equal to the fair market value of any on-site manager's office); (8) rental expenses for (or a reasonable depreciation allowance on) personal property used in maintenance, operation or repair of the Building or Project; (9) costs, expenditures or charges (whether capitalized or not) required by any governmental or quasi-governmental authority; (10) amortization of capital expenses (including financing costs) (i) required by governmental entity for energy conservation or life safety purposes, or (ii) made by Landlord to reduce Project Operating Costs; and (11) any other costs or expenses incurred by Landlord under this Lease and not otherwise reimbursed by tenants of the Project. If at any time during the Term, less than eighty-five percent (85%) of the Rentable Area of the Project is occupied, the "operating costs" component of Project Operating Costs shall be adjusted by Landlord to reasonably approximate the operating costs which would have been at least eighty-five percent (85%) occupied. (2) Tenant's Proportionate Share of Project Operating Costs shall be payable by Tenant to Landlord as follows: (a) Beginning with the calendar year following the Base Year and for each calendar year thereafter ("Comparison Year"), Tenant shall pay Landlord an amount equal to Tenant's Proportionate Share of the Project Operating Costs incurred by Landlord in the Comparison Year which exceeds the total amount of Project Operating Costs payable by Landlord for the Base Year. This excess is referred to as the "Excess Expenses." (b) To provide for current payments of Excess Expenses. Tenant shall, at Landlord's request, pay as additional rent during each Comparison Year, an amount equal to Tenant's Proportionate Share of the Excess Expenses payable during such Comparison Year, as estimated by Landlord from time to time. Such payments shall be made in monthly installments commencing on the first day of the month following the month in which Landlord notifies Tenant of the amount it is to pay hereunder and continuing until the first day of the month following the month in which the Landlord gives Tenant a new notice of estimated Excess Expenses. It is the intention hereunder to estimate from time to time the amount of the Excess Expenses of each Comparison Year and Tenant's Proportionate Share thereof, and then to make an adjustment in the following year based on the actual Excess Expenses incurred for that Comparison Year. (c) On or before April 1 of each Comparison Year (or as soon thereafter as is practical), Landlord shall deliver to Tenant a statement setting forth Tenant's Proportionate Share of the Excess Expenses for the preceding Comparison Year. If Tenant's Proportionate Share of the actual Excess Expenses for the previous Comparison Year exceeds the total of the estimated monthly payments made by Tenant for such year, Tenant shall pay Landlord the amount of the deficiency within ten (10) days of the receipt of the statement. If such total exceeds Tenant's Proportionate Share of the actual Excess Expenses for such Comparison Year, then Landlord shall credit against Tenant's next ensuing monthly installment(s) of additional rent an amount equal to the difference until the credit is exhausted. If a credit is due from Landlord on the Expiration Date, Landlord shall pay Tenant the amount of the credit. The obligations of Tenant and Landlord to make payments required under this Section 5.3 shall survive the Expiration Date. (d) Tenant's proportionate Share of Excess Expenses in any Comparison Year having less than 365 days shall be appropriately prorated. (e) If any dispute arises as the amount of any additional rent due hereunder, Tenant shall have the right after reasonable times to inspect Landlord's accounting office and, if after such inspection Tenant still disputes the amount of additional rent owed, a certification as to the proper amount shall be made by Landlord's certified public accountant, which certification shall be final and conclusive. Tenant agrees to pay the cost of such certification unless it is determined that Landlord's original statement overstated Project Operating Costs by 4 7 more than five percent (5%). (f) If this Lease sets forth an Expense Stop at Section 2f, then during the Term Tenant shall be liable for Tenant's Proportionate Share of any actual Project Operating Costs which exceed the amount of the Expense Stop. Tenant shall make current payments of such excess during the Term in the same manner as is provided for payment of Excess Expenses under the applicable provisions of Section 5.3b(2)(b) and (c) above. 5.4 Definition of Rent. All costs and expenses which Tenant assumes or agrees to pay to Landlord under this Lease shall be deemed additional rent (which, together with the Base Rent is sometimes referred to as the "Rent"). The Rent shall be paid to the Building manager (or other person) and at such place, as Landlord may from time to time designate in writing, without any prior demand therefore and without deduction or offset, unlawful money of the United States of America. 5.5 Rent Control. If the amount of Rent or any other payment due under this Lease violates the terms of any governmental restrictions on such Rent or payment, then the Rent or payment due during the period of such restrictions shall be the maximum amount allowable under those restrictions. Upon termination of the restrictions, Landlord shall, to the extent it is legally permitted, recover from Tenant the difference between the amounts received during the period of the restrictions and the amounts Landlord would have received had there been no restrictions. 5.6 Taxes Payable by Tenant. In addition to the Rent and any other charges to be paid by Tenant hereunder, Tenant shall reimburse Landlord upon demand for any and all taxes payable by Landlord (other than net income taxes) which are not otherwise reimbursable under this Lease, whether or not now customary or within the contemplation of the parties, where such taxes are upon, measured by or reasonably attributable to (a) the cost or value of Tenant's equipment, furniture, fixtures and other personal property located in the Premises, or the cost or value of any leasehold improvements made in or to the Premises by or for Tenant, other than Building Standard Work made by Landlord, regardless of whether title to such improvements is held by Tenant or Landlord; (b) the gross or net Rent payable under this Lease, including, without limitation, any rental or gross receipts tax levied by any taxing authority with respect to the receipt of the Rent hereunder; (c) the possession, leasing, operation, manage, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof; or (d) this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. If it becomes unlawful for Tenant to reimburse Landlord for any costs as required under this Lease, the Base Rent shall be revised to net Landlord the same net Rent after imposition of any tax of other charge upon Landlord as would have been payable to Landlord but for the reimbursement being unlawful. 6. INTEREST AND LATE CHARGES. If Tenant fails to pay when due any Rent or other amounts or charges which Tenant is obligated to pay under the terms of this Lease, the unpaid amounts shall bear interest at the maximum rate then allowed by law. Tenant acknowledges that the late payment of any Monthly Installment of Base Rent will cause Landlord to lose the use of that money and incur costs and processing and accounting expenses, the exact amount of which is extremely difficult to ascertain. Therefore, in addition to interest, if any such installment is not received by Landlord within ten (10) days from the date it is due, Tenant shall pay Landlord a late charge equal to ten percent (10%) of such installment. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the loss suffered from such nonpayment by Tenant. Acceptance of any interest or late charge shall not constitute a waiver of Tenant's default with respect to such nonpayment by Tenant nor prevent Landlord from exercising any other rights or remedies available to Landlord under this Lease. 7. SECURITY DEPOSIT. Tenant agrees to deposit with Landlord the Security Deposit set forth at Section 2.0 upon execution of this Lease, as security for Tenant's faithful performance of its obligations under this Lease. Landlord and Tenant agree that the Security Deposit may be commingled with funds of Landlord and Landlord shall have no obligation or liability for payment of interest on such deposit. Tenant shall not mortgage, assign, transfer or encumber the Security Deposit without the prior written consent of Landlord and any attempt by Tenant to do so shall be void, without force or effect and shall not be binding upon Landlord. If Tenant fails to pay any Rent or other amount when due and payable under this Lease, or fails to perform any of the terms hereof, Landlord may appropriate and apply or use all or any portion of the Security Deposit for 5 8 Rent payments or any other amount then due and unpaid, for payment of any amount for which Landlord has become obligated as a result of Tenant's default or breach, and for any loss or damage sustained by Landlord as a result of Tenant's default or breach, and Landlord may so apply or use this deposit without prejudice to any other remedy Landlord may have by reason of Tenant's default or breach. If Landlord so uses any of the Security Deposit, Tenant shall, within ten (10) days after written demand therefore, restore the Security Deposit to the full amount originally deposited; Tenant's failure to do so shall constitute an act of default hereunder and Landlord shall have the right to exercise any remedy provided for at Article 27 hereof. Within fifteen (15) days after the Term (or any extension thereof) has expired or Tenant has vacated the Premises, whichever shall last occur, and provided Tenant is not then in default on any of its obligations hereunder, Landlord shall return the Security Deposit to Tenant, or, if Tenant has assigned its interest under this Lease, to the last assignee of Tenant. If Landlord sells its interest in the Premises, Landlord may deliver this deposit to the purchaser of Landlord's interest and thereupon be relieved of any further liability or obligation with respect to the Security Deposit. 8. TENANT'S USE OF THE PREMISES. Tenant shall use the Premises solely for the purpose set forth in Tenant's Use Clause. Tenant shall not use or occupy the Premises in violation of law or any covenant, condition or restriction affecting the Building or Project or the certificate of occupancy issued for the Building or Project, and shall, upon notice from Landlord, immediately discontinue any use of the Premises which is declared by any governmental authority having jurisdiction to be a violation of law or the certificate of occupancy. Tenant, at Tenant's own cost and expense, shall comply with all laws, ordinances, regulations, rules and/or any directions of any governmental agencies or authorities having jurisdiction which shall, by reason of the nature of Tenant's use or occupancy of the Premises, impose any duty upon Tenant or Landlord with respect to the Premises or its use or occupation. A judgment of any court of competent jurisdiction or the admission by Tenant in any action or proceeding against Tenant that Tenant has violated any such laws, ordinances, regulations, rules and/or directions in the use of the Premises shall be deemed to be a conclusive determination of that fact as between Landlord and Tenant. Tenant shall not do or permit to be done anything which will invalidate or increase the cost of any fire, extended coverage or other insurance policy covering the Building or Project and/or property located therein, and shall comply with all rules, orders, regulations, requirements and recommendations of the Insurance Services Office or any other organization performing a similar function. Tenant shall promptly upon demand reimburse Landlord for any additional premium charged for such policy by reason of Tenant's failure to comply with the provisions of the Article. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or Project, or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful of objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. 9. SERVICES AND UTILITIES. Provided that Tenant is not in default hereunder, Landlord agrees to furnish to the Premises during generally recognized business days, and during hours determined by Landlord in its sole discretion, and subject to the Rules and Regulations of the Building or Project, electricity for normal desk top office equipment and normal copying equipment, and heating, ventilation and air conditioning ("HVAC") as required in Landlord's judgment for the comfortable use and occupancy of the Premises. If Tenant desires HVAC at any other time, Landlord shall use reasonable notice from Tenant and Tenant shall pay Landlord's charges therefor on demand. Landlord shall also maintain and keep lighted the common stairs, common entries and restrooms in the Building. Landlord shall not be in default hereunder or be liable for any damages directly or indirectly resulting from, nor shall the Rent be abated by reason of (i) the installation, use or interruption of use of any equipment in connection with the furnishing of any of the foregoing services, (ii) failure to furnish or delay in furnishing any such services where such failure or delay is caused by accident or any condition or event beyond the reasonable control of Landlord, or by the making of necessary repairs or improvements to the Premises, Building or Project, or (iii) the limitation, curtailment or rationing of, or restrictions on, use of water, electricity, gas or any other form of energy serving the Premises, Building or Project. Landlord shall not be liable under any circumstances for a loss of or injury to property or business, however occurring, through or in connection with or incidental to failure to furnish any such services. If Tenant uses heat generating machines or equipment in the Premises which affect the temperature otherwise maintained by the HVAC system, Landlord reserves the right to install supplementary air conditioning units in the Premises and the cost thereof, including the cost of installation, operation and maintenance thereof shall be paid by Tenant to Landlord upon demand by Landlord. Tenant shall not, without the written consent of Landlord, use any apparatus or device in the Premises, 6 9 including without limitation, electronic data processing machines, punch card machines using in excess of 120 volts, which consumes more electricity than is usually furnished or supplied for the use of premises as general office space, as determined by Landlord. Tenant shall not connect any apparatus with electric current except through existing electrical outlets in the Premises. Tenant shall not consume water or electric current in excess of that usually furnished or supplied for the use of Premises as general office space (as determined by Landlord), without first procuring the written consent of Landlord, which Landlord may refuse, and in the event of consent, Landlord may have installed a water meter or electrical current meter in the Premises to measure the amount of water or electric current consumed. The cost of any such meter and of its installation, maintenance and repair shall be paid for by the Tenant and Tenant agrees to pay to Landlord promptly upon demand for all such water and electric current consumed as shown by said meters, at the rates charged for such services by the local public utility plus any additional expense incurred in keeping account of the water and electric current so consumed. If a separate meter is not installed, the excess cost for such water and electric current shall be established by an estimate made by a utility company or electrical engineer hired by Landlord at Tenant's expense. Nothing contained in this Article shall restrict Landlord's right to require at any time separate metering of utilities furnished to the Premises. In the event utilities are separately metered, Tenant shall pay promptly upon demand for all utilities consumed at utility rates charged by the local public utility plus any additional expense incurred by Landlord in keeping account of the utilities so consumed. Tenant shall be responsible for the maintenance and repair of any such meters at its sole cost. Landlord shall furnish elevator service, lighting replacement for building standard lights, restroom supplies, window washing and janitor services in a manner that such services are customarily furnished to comparable office buildings in the area. 10. CONDITION OF THE PREMISES. Tenant's taking possession of the Premises shall be deemed conclusive evidence that as of the date of taking possession the Premises are in good order and satisfactory condition, except for such matters as to which Tenant gave Landlord notice on or before the Commencement date. No promise of Landlord to alter, remodel, repair or improve the Premises, the Building or the Project and no representation, express or implied, respecting any matter or thing relating to the Premises, Building, project or this Lease (including, without limitation, the condition of the Premises, the Building or the Project) have been made to Tenant by Landlord or its Broker or Sales Agent, other than as may be contained herein or in separate exhibit or addendum signed by Landlord and Tenant. 11. CONSTRUCTION, REPAIRS, AND MAINTENANCE. a. Landlord's Obligation. [Struck out text] Landlord shall maintain in good order, condition and repair the Building and all other portions of the Premises not the obligation of Tenant or of any other tenant in the Building. b. Tenant's Obligations. [Struck out text] (2) Tenant at Tenant's sole expense shall expect for services furnished by Landlord pursuant to Article 9 hereof, maintain the Premises in good order, condition and repair, including the interior of surfaces of the ceilings, walls and floors, all doors, all interior windows, all plumbing, pipes and fixtures, electrical wiring, switches and fixtures, Building Standard furnishings and special items and equipment installed by or at the expense of Tenant. (3) Tenant shall be responsible for all repair and alterations in and to the Premises, Building and Project and the facilities and systems thereof, the need for which arises out of (i) Tenant's use or occupancy of the premises, (ii) the installation, removal, use or operation of Tenant's Property (as defined in Article 13) in the Premises, (iii) the moving of Tenant's Property into or out of the Building, or (iv) the act, omission, misuse or negligence of Tenant, its agents, contractors, employees or invitees. (4) If Tenant fails to maintain the Premises in good order, condition and repair, Landlord shall give Tenant notice to do such acts as are reasonably required to so maintain the Premises. If Tenant fails to promptly commence such work and diligently prosecute it to completion, then Landlord shall have the right to do such 7 10 acts and expend such funds at the expense of Tenant as are reasonably required to perform such work. Any amount so expended by Landlord shall be paid by Tenant promptly after demand with interest at the prime commercial rate then being charged by Bank of America NT & SA plus two percent (2%) per annum, from the date of such work, but not to exceed the maximum rate then allowed by law. Landlord shall have no liability to Tenant for any damage, inconvenience, or interference with the use of the Premises by Tenant as a result of performing any such work. c. Compliance with Law. Landlord and Tenant shall each do all acts required to comply with all applicable laws, ordinances, and rules of any public authority relating to their respective maintenance obligations as set forth herein. d. Waiver by Tenant. Tenant expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford the right to make repairs at Landlord's expense or to terminate this Lease because of Landlord's failure to keep the Premises in good order, condition and repair. e. Load and Equipment Limits. Tenant shall not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry, as determined by Landlord or Landlord's structural engineer. The cost of any such determination made by Landlord's structural engineer shall be paid for by Tenant upon demand. Tenant shall not install business machines or mechanical equipment which cause noise or vibration to such a degree as to be objectionable to Landlord or other Building tenants. f. Except as otherwise expressly provided in this Lease, Landlord shall have no liability to Tenant nor shall Tenant's obligations under this Lease be reduced or abated in any manner whatsoever by reason of any inconvenience, annoyance, interruption or injury to business arising from Landlord's making any repairs or changes which Landlord is required or permitted by this Lease or by any other Tenant's lease or required by law to make in or to any portion of the Project, Building or the Premises. Landlord shall nevertheless use reasonable efforts to minimize any interference with Tenant's business in the Premises. g. Tenant shall give Landlord prompt notice of any damage to or defective condition in any part or appurtenance of the Building's mechanical, electrical, plumbing, HVAC or other systems serving, located in, or passing through the Premises. h. Upon the expiration or earlier termination of this Lease, Tenant shall return the Premises to Landlord clean and in the same condition as on the date Tenant took possession, except for normal wear and tear. Any damage to the Premises, including any structural damage, resulting from Tenant's use or from the removal of Tenant's fixtures, furnishings and equipment pursuant to Section 13b shall be repaired by Tenant at Tenant's expense. 12. ALTERATIONS AND ADDITIONS a. Tenant shall not make any additions, alterations or improvements to the Premises without obtaining the prior written consent of Landlord. Landlord's consent may be conditioned on Tenant's removing any such additions, alterations or improvements upon the expiration of the Term and restoring the Premises to the same condition as on the date Tenant took possession. All work with respect to any addition, alteration or improvement shall be done in a good and workmanlike manner by properly qualified and licensed personnel approved by Landlord, and such work shall be diligently prosecuted to completion. Landlord may, at Landlord's option, require that any such work be performed by Landlord's contractor, in which case the cost of such work shall be paid for before commencement of the work. Tenant shall pay to Landlord upon completion of any such work by Landlord's contractor, an administrative fee of fifteen percent (15%) of the cost of the work. b. Tenant shall pay the costs of any work done on the Premises pursuant to Section 12a, and shall keep the Premises, Building and Project free and clear of liens of any kind. Tenant shall indemnify, defend against and keep Landlord free and harmless from all liability, loss damage, costs, attorneys' fees and any other expense incurred on account of claims by any person performing work or furnishing materials or supplies for Tenant or any person claiming under Tenant. Tenant shall keep Tenant's leasehold interest, and any additions or improvements which are or become the property of Landlord under this Lease, free and clear of all attachment or judgment liens. Before the actual commencement of any work for which a claim or lien may be filed, Tenant shall give Landlord notice of the intended 8 11 commencement date a sufficient time before that date to enable Landlord to post notices of non-responsibility or any other notices which Landlord deems necessary for the proper protection of Landlord's interest in the Premises, Building or the Project, and Landlord shall have the right to enter the Premises and post such notices at any reasonable time. c. Landlord may require, at Landlord's sole option, that Tenant provide to Landlord, at Tenant's expense, a lien and completion bond in an amount equal to at lease one and one-half (1 1/2) times the total estimated cost of any additions, alterations or improvements to be made in or to the Premises, to protect Landlord against any liability for mechanic's and materialmen's liens and to insure timely completion of the work. Nothing contained in this Section 12c shall relieve Tenant of its obligation under Section 12b to keep the Premises, Building and Project free of all liens. d. Unless their removal is required by Landlord as provided in Section 12a, all additions, alterations and improvements made to the Premises shall become the property of Landlord and be surrendered with the Premises upon the expiration of the Term; provided, however, Tenant's equipment, machinery and trade fixtures which can be removed without damage to the Premises shall remain the property of Tenant and may be removed, subject to the provisions of Section 13b. 13. LEASEHOLD IMPROVEMENTS; TENANT'S PROPERTY. a. All fixtures, equipment, improvements and appurtenances attached to or built into the Premises at the commencement of or during the Term, whether or not by or at the expense of Tenant ("Leasehold Improvements"), shall be and remain a part of the Premises, shall be the property of Landlord and shall not be removed by Tenant, except as expressly provided in Section 13b. b. All movable partitions, business and trade fixtures, machinery and equipment, communications equipment and office equipment located in the Premises and acquired by or for the account of Tenant, without expense to Landlord, which can be removed without structural damage to the Building, and all furniture, furnishings and other articles of movable personal property owned by Tenant and located in the Premises (collectively "Tenant's Property") shall be and shall remain the property of Tenant and may be removed by Tenant at any time during the Term; provided that if any of Tenant's Property is removed, Tenant shall promptly repair any damage to the Premises or to the Building resulting from such removal. 14. RULES AND REGULATION. Tenant agrees to comply with (and cause its agents, contractors, employees and invitees to comply with) the rules and regulations attached hereto as Exhibit "D" and with such reasonable modification thereof and additions thereto as Landlord may from time to time make. Landlord shall not be responsible for any violation of said rules and regulations by other tenants or occupants of the Building or Project. 15. CERTAIN RIGHTS RESERVED BY LANDLORD. Landlord reserves the following rights, exercisable without liability to Tenant for (a) damage or injury to property, person or business, (b) causing an actual or constructive eviction from the Premises, or (c) disturbing Tenant's use or possession of the Premises: a. To name the Building and Project and to change the name or street address of the Building or Project; b. To install and maintain all signs on the exterior and interior of the Building and Project; c. To have pass keys to the Premises and all doors within the Premises, excluding Tenant's vaults and safes; d. At any time during the Term, and on reasonable prior notice to Tenant, to inspect the Premises, and to show the Premises to any prospective purchaser or mortgagee of the Project, or to any assignee of any mortgage on the Project, or to others having an interest in the Project or Landlord, and during the last six months of the Term, to show the Premises to prospective tenants thereof; and e. To enter the Premises for the purpose of making inspections, repairs, alterations, additions or improvements to the Premises or the Building (including, without limitation, checking, calibrating, adjusting or balancing 9 12 controls and other parts of the HVAC system), and to take all steps as may be necessary or desirable for the safety, protection, maintenance or preservation of the Premises of the Building or Landlord's interest therein, or as may be necessary or desirable for the operation or improvement of the Building or in order to comply with laws, orders or requirements of governmental or other authority. Landlord agrees to use its best efforts (except in an emergency) to minimize interference with Tenant's business in the Premises in the course of any such entry. 16. ASSIGNMENT AND SUBLETTING. No assignment of this Lease or sublease of all or any part of the Premises shall be permitted, except as provided in this Article 16. a. Tenant shall not, without the prior written consent of Landlord, assign or hypothecate this Lease or any interest herein or sublet the Premises or any part thereof, or permit the use of the Premises by any party other than Tenant. Any of the foregoing acts without such consent shall be void and shall, at the option of Landlord, terminate this Lease. This Lease shall not, nor shall any interest of Tenant herein, be assignable by operation of law without written consent of Landlord. b. If at any time or from time to time during the Term Tenant desires to assign this Lease or sublet all or any part of the Premises, Tenant shall give notice to Landlord setting forth the terms and provisions of the proposed assignment or sublease, and the identity of the proposed assignee or subtenant. Tenant shall promptly supply Landlord with such information concerning the business background and financial condition of such proposed assignee or subtenant as Landlord may reasonably request. Landlord shall have the option, exercisable by notice given to Tenant within twenty (20) days after Tenant's notice is given, either to sublet such space from Tenant at the rental and on other terms set forth in this Lease for the term set forth in Tenant's notice, or, in the case of an assignment, to terminate this Lease. If Landlord does not exercise such option, Tenant may assign the Lease or sublet such space to such proposed assignee or subtenant on the following further conditions: (1) Landlord shall have the right to approve such proposed assignee or subtenant, which approval shall not be reasonably withheld; (2) The assignment or sublease shall be on the same terms set forth in the notice given to Landlord; (3) No assignment or sublease shall be valid and no assignee or sublessee shall take possession of the Premises until an executed counterpart of such assignment or sublease has been delivered to Landlord; (4) No assignee or sublessee shall have a further right to assign or sublet except on the terms herein contained; and (5) Any sums or other economic consideration received by Tenant as a result of such assignment or subletting, however denominated under the assignment or sublease, which exceed, in the aggregate, (i) the total sums which Tenant is obligated to pay Landlord under this Lease (prorated to reflect obligations allocable to any portion of the Premises subleased), plus (ii) any real estate brokerage commissions or fees payable in connection with such assignment or subletting, shall be paid to Landlord as additional rent under this Lease without affecting or reducing any other obligations of Tenant hereunder. c. Notwithstanding the provisions of paragraphs a and b above, Tenant may assign this Lease or sublet the Premises or any portion thereof, without Landlord's consent and without extending any recapture or termination option to Landlord, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from a merger or consolidation with Tenant, or to any person or entity which acquires all the assets of Tenant's business as a going concern, provided that (i) the assignee or sublessee assumes, in full, the obligations of Tenant under this Lease, (ii) Tenant remains fully liable under this Lease, and (iii) the use of the Premises under Article 8 remains unchanged. d. No subletting or assignment shall release Tenant of Tenant's obligation under this Lease or alter the primary liability of Tenant to pay the Rent and to perform all other obligations to be performed by Tenant hereunder. The acceptance of Rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent 10 13 assignment or subletting. In the event of default by an assignee or subtenant of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee, subtenant or successor. Landlord may consent to subsequent assignments of the Lease or sublettings or amendments or modifications to the Lease with assignees of Tenant, without notifying Tenant, or any successor of Tenant, and without obtaining its or their consent thereto and any such actions shall not relieve Tenant of liability under this Lease. e. If Tenant assigns the Lease or sublets the Premises or requests the consent of Landlord to any assignment or subletting or if Tenant requests the consent of Landlord for any act that Tenant proposes to do, then Tenant shall, upon demand, pay Landlord an administrative fee of One Hundred Fifty and No/100ths Dollars ($150.00) plus any attorneys' fees reasonably incurred by Landlord in connection with such act or request. 17. HOLDING OVER. If after expiration of the Term, Tenant remains in possession of the Premises with Landlord's permission (express or implied), Tenant shall become a tenant from month to month only, upon all the provisions of this Lease (except as to term and Base Rent), but the "Monthly Installments of Base Rent" payable by Tenant shall be increased to one hundred fifty percent (150%) of the Monthly Installments of Base Rent payable by Tenant at the expiration of the Term. Such monthly rent shall be payable in advance on or before the first day of each month. If either party desires to terminate such month to month tenancy, it shall give the other party not less than thirty (30) days' advance written notice of the date of termination. 18. SURRENDER OF PREMISES. a. Tenant shall peaceably surrender the Premises to Landlord on the Expiration Date, in broom-clean condition and in as good condition as when Tenant took possession, except for (i) reasonable wear and tear, (ii) loss by fire or other casualty, and (iii) loss by condemnation. Tenant shall, on Landlord's request, remove Tenant's Property on or before the Expiration Date and promptly repair all damage to the Premises or Building caused by such removal. b. If Tenant abandons or surrenders the Premises, or is dispossessed by process of law or otherwise, any of Tenant's Property left on the Premises shall be deemed to be abandoned, and, at Landlord's option, title shall pass to Landlord removal, including repairing any damage to the Premises or Building caused by such removal, shall be paid by Tenant. On the Expiration Date Tenant shall surrender all keys to the Premises. 19. DESTRUCTION OR DAMAGE. a. If the Premises or the portion of the Building necessary for Tenant's occupancy is damaged by fire, earthquake, act of God, the elements or other casualty, Landlord shall, subject to the provisions of this Article, promptly repair the damage, if such repairs can, in Landlord's opinion, be completed within (90) ninety days. If Landlord determines that repairs can be completed within ninety (90) days, this Lease shall remain in full force and effect, except that if such damage is not the result of the negligence or willful misconduct of Tenant or Tenant's agents, employees, contractors, licensees or invitees, the Base Rent shall be abated to the extent Tenant's use of the Premises is impaired, commencing with the date of damage and continuing until completion of the repairs required of Landlord under Section 19d. b. If in Landlord's opinion, such repairs to the Premises or portion of the Building necessary for Tenant's occupancy cannot be completed within ninety (90) days, Landlord may elect, upon notice to Tenant given within thirty (30) days after the date of such fire or other casualty, to repair such damage, in which event this Lease shall continue in full force and effect, but the Base Rent shall be partially abated as provided in Section 19a. If Landlord does not so elect to make such repairs, this Lease shall terminate as of the date of such fire or other casualty. c. If any other portion of the Building or Project is totally destroyed or damaged to the extent that in Landlord's opinion repair thereof cannot be completed within ninety (90) days, Landlord may elect upon notice to Tenant given within thirty (30) days after the date of such fire or other casualty, to repair such damage, in which event this Lease shall continue in full force and effect, but the Base Rent shall be partially abated as provided in Section 19a. If Landlord does not elect to make such repairs, this Lease shall terminate as of the date of such fire or other casualty. d. If the Premises are to be repaired under this Article, Landlord shall repair at its cost any injury or damage to the Building and Building Standard Work in the Premises. Tenant shall be responsible at its sole cost and 11 14 expense for the repair, restoration and replacement of any other Leasehold Improvements and Tenant's Property. Landlord shall not be liable for any loss of business, inconvenience or annoyance arising from any repair or restoration of any portion of the Premises, Building or Project as a result of any damage from fire or other casualty. e. This Lease shall be considered an express agreement governing any case of damage to or destruction of the Premises, Building or Project by fire or other casualty, and any present or future law which purports to govern the rights of Landlord and Tenant in such circumstances in the absence of express agreement, shall have no application. 20. EMINENT DOMAIN. a. If the whole of the Building or Premises is lawfully taken by condemnation or in any other manner for any public or quasi-public purpose, this Lease shall terminate as of the date of such taking, and Rent shall be prorated to such date. If less than the whole of the Building or Premises is so taken, this Lease shall be unaffected by such taking, provided that (i) Tenant shall have the right to terminate this Lease by notice to Landlord given within ninety (90) days after the date of such taking if twenty percent (20%) or more of the Premises is taken and the remaining area of the Premises is not reasonably sufficient for Tenant to continue operation of its business, and (ii) Landlord shall have the right to terminate this Lease by notice to Tenant given within ninety (90) days after the date of such taking. If either Landlord or Tenant so elects to terminate this Lease, the Lease shall terminate on the thirtieth (30th) day after either such notice. The Rent shall be prorated to the date of termination. If this Lease continues in force upon such partial taking, the Base Rent and Tenant's Proportionate Share shall be equitably adjusted according to the remaining Rentable Area of the Premises and Project. b. In the event of any taking, partial or whole, all of the proceeds of any award, judgment or settlement payable by the condemning authority shall be the exclusive property of Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in any award, judgment or settlement from the condemning authority. Tenant, however, shall have the right, to the extent that Landlord's award is not reduced or prejudiced, to claim from the condemning authority (but not from Landlord) such compensation as may be recoverable by Tenant in its own right for relocation expenses and damage to Tenant's personal property. c. In the event of a partial taking of the Premises which does not result in a termination of this Lease, Landlord shall restore the remaining portion of the Premises as nearly as practicable to its condition prior to the condemnation or taking, but only to the extent of Building Standard Work. Tenant shall be responsible at its sole cost and expense for the repair, restoration and replacement of any other Leasehold Improvements and Tenant's Property. 21. INDEMNIFICATION. a. Tenant shall indemnify and hold Landlord harmless against and from liability and claims of any kind for loss or damage to property of Tenant or any other person, or for any injury to or death of any person, arising out of: (1) Tenant's use and occupancy of the Premises, or any work, activity or other things allowed or suffered by Tenant to be done in, on or about the Premises; (2) any breach or default by Tenant of any of Tenant's obligations under this Lease; or (3) any negligent or otherwise tortious act or omission of Tenant, its agents, employees, invitees or contractors. Tenant shall at Tenant's expense, and by counsel satisfactory to Landlord in any action or proceeding arising from any such claim and shall indemnify Landlord against all costs, attorneys' fees, expert witness fees and any other expenses incurred in such action or proceeding. As a material part of the consideration for Landlord's execution of this Lease, Tenant hereby assumes all risk of damage or injury to any person or property in, on or about the Premises from any cause. b. Landlord shall not be liable for injury or damage which may be sustained by the person or property of Tenant, its employees, invitees or customers, or any other person in or about the Premises, caused by or resulting from fire, steam, electricity, gas, water or rain which may leak or flow from or into any part of the Premises, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, whether such damage or injury results from conditions arising upon the Premises or upon other portions of the Building or Project or from other sources. Landlord shall not be liable for any damages arising from any act or omission of any other tenant of the Building or Project. 12 15 22. TENANT'S INSURANCE. a. All insurance required to be carried by Tenant hereunder shall be issued by responsible insurance companies acceptable to landlord and Landlord's lender and qualified to do business in the State. Each policy shall name Landlord, and at Landlord's request any mortgagee of Landlord, as an additional insured, as their respective interests may appear. Each policy shall contain (i) a cross-liability endorsement, (ii) a provision that such policy and the coverage evidenced thereby shall be primary and non-contributing with respect to any policies carried by Landlord and that any coverage carried by Landlord shall be excess insurance, and (iii) a waiver by the insurer of any right of subrogation against Landlord, its agents, employees and representatives, which arises or might arise by reason of any payment under such policy or by reason of any act or omission of Landlord, its agents, employees or representatives. A copy of each paid up policy (authenticated by the insurer) or certificate of the insurer evidencing the existence and amount of each insurance policy required hereunder shall be delivered to Landlord before the date Tenant is first given the right of possession of the Premises, and thereafter within thirty (30) days after any demand by Landlord therefor, Landlord may, at any time and from time to time, inspect and/or copy any insurance policies required to be maintained by Tenant hereunder. No such policy shall be cancelable except after twenty (20) days' written notice to Landlord and Landlord's lender. Tenant shall furnish Landlord with renewals or "binders" of any such policy at least ten (10) days prior to the expiration thereof. Tenant agrees that if Tenant does not take out and maintain such insurance, Landlord may (but shall not be required to) procure said insurance on Tenant's behalf and charge the Tenant the premiums together with a twenty-five percent (25%) handling charge, payable upon demand. Tenant shall have the right to provide such insurance coverage pursuant to blanket policies obtained by the Tenant, provided such blanket policies expressly afford coverage to the Premises, Landlord, Landlord's mortgagee and Tenant as required by this Lease. b. Beginning on the day Tenant is given access to the Premises for any purpose and continuing until expiration of the Term, Tenant shall procure, pay for and maintain in effect policies of casualty insurance covering (i) all Leasehold Improvements (including any alterations, additions or improvements as may be made by Tenant pursuant to the provisions of Article 12 hereof), and (ii) trade fixtures, merchandise and other personal property from time to time in, on or about the Premises, in an amount not less than one hundred percent (100%) of their actual replacement cost from time to time, providing protection against any peril included within the classification "Fire and Extended Coverage" together with insurance against sprinkler damage, vandalism and malicious mischief. The proceeds of such insurance shall be used for the repair or replacement of the property so insured. Upon termination of this Lease following a casualty as set forth herein, the proceeds under (ii) above shall be paid to Tenant. c. Beginning on the date Tenant is given access to the Premises for any purpose and continuing until expiration of the term, Tenant shall procure, pay for and maintain in effect workers' compensation insurance as required by law and comprehensive public liability and property damage insurance with respect to the construction of improvements on the Premises, the use, operation or condition of the Premises and the operations of Tenant in, on or about the Premises, providing personal injury and broad form property damage coverage for not less than One Million Dollars ($1,000,000.00) combined single limit for bodily injury, death and property damage liability. d. Not less than every three (3) years during the Term, Landlord and Tenant shall mutually agree to increases in all of Tenant's insurance policy limits for all insurance to be carried by Tenant as set forth in this Article. In the event Landlord and Tenant cannot mutually agree upon the amounts of said increases, then Tenant agrees that all insurance policy limits as set forth in this Article shall be adjusted for increases in the cost of living in the same manner as is set forth in Section 5.2 hereof for the adjustment of the Base Rent. 23. WAIVER OF SUBROGATION. Landlord and Tenant waive all rights of recovery against the other and against the officers, employees, agents and representatives of the other, on account of loss by or damage to the waiving party of its property of others under its control, to the extent that such loss or damage is insured against under any fire and extended coverage insurance policy which either may have in force at the time of the loss or damage. Tenant shall, upon obtaining the policies of insurance required under this Lease, give notice to its insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease. 24. SUBORDINATION AND ATTORNMENT. Upon written request of Landlord, or any first mortgagee of first deed of trust beneficiary of Landlord, or ground lessor of Landlord, Tenant shall, in writing, subordinate its rights under this Lease to the lien of any first mortgage or first deed of trust, or to the interest of any lease in which Landlord is lessee, and to all advances made or 13 16 hereafter to be made thereunder. However, before signing any subordination agreement, Tenant shall have the right to obtain from any lender or lessor or Landlord requesting such subordination, an agreement in writing providing that, as long as Tenant is not in default hereunder, this Lease shall remain in effect for the full Term. The holder of any security interest may, upon written notice to Tenant, elect to have this Lease prior to its security interest regardless of the time of the granting or recording of such security interest. In the event of any foreclosure sale, transfer in lieu of foreclosure or termination of the lease in which Landlord is lessee, Tenant shall attorn to the purchaser, transferee or lessor as the case may be, and recognize that party as Landlord under this Lease provided such party acquires and accepts the Premises subject to this Lease. 25. TENANT ESTOPPEL CERTIFICATES. Within ten (10) days after written request from Landlord, Tenant shall execute and deliver to Landlord or Landlord's designee, a written statement certifying (a) that this Lease is unmodified and in full force and effect, or is in full force and effect as modified and stating the modifications; (b) the amount of Base Rents and the date to which Base Rent and additional rent have been paid in advance; (c) the amount of any security deposited with Landlord; and (d) that Landlord is not in default hereunder or, if Landlord is claimed default. Any such statement may be relied upon by purchaser, assignee or lender. Tenant's failure to execute and deliver such statement within the time required shall at Landlord's election be a default under this Lease and shall also be conclusive upon Tenant that: (1) this Lease is in full force and effect and has not been modified except as represented by Landlord; (2) there are no uncured defaults in Landlord's performance and that Tenant has no right of offset, counter-claim or deduction against Rent; and (3) not more than one month's Rent has been paid in advance. 26. TRANSFER OF LANDLORD'S INTEREST. In the event of any sale or transfer by Landlord of the Premises, Building or Project, and assignment of this Lease by Landlord, Landlord shall be and is hereby entirely freed and relieved of any and all liability and obligations contained in or derived from this Lease arising out of any act, occurrence or omission relating to the Premises, Building, Project or Lease occurring after the consummation of such sale or transfer, providing the purchaser shall expressly assume all of the covenants and obligations of Landlord under this Lease. If any security deposit or prepaid rent has been paid by Tenant, Landlord may transfer the security deposit or prepaid Rent to Landlord's successor and upon such transfer, Landlord shall be relieved of any and all further liability with respect thereto. 27. DEFAULT. 27.1 Tenant's Default. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant: a. If Tenant abandons or vacates the Premises; or b. If Tenant fails to pay any Rent or any other charges required to be paid by Tenant under this Lease and such failure continues for five (5) days after such payment is due and payable; or c. If Tenant fails to promptly and fully perform any other covenant, condition or agreement contained in this Lease and such failure continues for thirty (30) days after written notice thereof from Landlord to Tenant; or d. If a writ of attachment or execution is levied on this Lease or on any of Tenant's Property; or e. If Tenant makes a general assignment for the benefit of creditors, or provides for an arrangement, composition, extension or adjustment with its creditors; or f. If Tenant files a voluntary petition for relief or if a petition against Tenant in a proceeding under the federal bankruptcy laws or other insolvency laws is filed and not withdrawn or dismissed within forty-five (45) days thereafter, or if under the provisions of any law providing for reorganization or winding up of corporations, any court of competent jurisdiction assumes jurisdiction, custody or control of Tenant or any substantial part of its property and such jurisdiction, custody or control remains in force unrelinquished, unstayed or unterminated for a period of forty-five (45) days; or g. If in any proceeding or action in which Tenant is a party, a trustee, receiver, agent or custodian is appointed to take charge of the Premises or Tenant's Property (or has the authority to do so) for the purpose 14 17 of enforcing a lien against the Premises or Tenant's Property; or h. If Tenant is a partnership or consists of more than one (1) person or entity, if any partner of the partnership or other person or entity is involved in any of the acts or events described in subparagraphs d through g above. 27.2 Remedies. In the event of Tenant's default hereunder then in addition to any other rights or remedies Landlord may have under any law, Landlord shall have the right, at Landlord's option, without further notice or demand of any kind to do the following: a. Terminate this Lease and Tenant's right to possession of the Premises and reenter the Premises and take possession thereof, and Tenant shall have no further claim to the Premises or under this Lease; or b. Continue this Lease in effect, reenter and occupy the Premises for the account of Tenant, and collect any unpaid Rent or other charges which have or thereafter become due and payable; or c. Reenter the Premises under the provisions of subparagraph b, and thereafter elect to terminate this Lease and Tenant's right to possession of the Premises. If Landlord reenters the Premises under the provisions of subparagraphs b or c above, Landlord shall not be deemed to have terminated this Lease or the obligation of Tenant to pay any Rent or other charges thereafter accruing, unless Landlord notifies Tenant in writing of Landlord's election to terminate this Lease. In the event of any reentry or retaking of possession by Landlord, Landlord shall have the right, but not the obligation, to remove all or any part of Tenant's Property in the Premises and to place such property in storage at a public warehouse at the expense and risk of Tenant. If Landlord elects to relet the Premises for the account of Tenant, the rent received by Landlord from such reletting shall be applied as follows: first, to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord; second to the payment of any costs of such reletting; third, to the payment of the cost of any alterations or repairs to the Premises; fourth to the payment of Rent due and unpaid hereunder, and the balance, if any, shall be held by Landlord and applied in payment of future Rent as it becomes due. If that portion of Rent received from the reletting which is applied against the Rent due hereunder is less than the amount of the Rent due, Tenant shall pay the deficiency to Landlord promptly upon demand by Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as determined, any costs and expenses incurred by Landlord in connection with reletting or in making alterations and repairs to the Premises, which are not covered by the rent received from the reletting. Should Landlord elect to terminate this Lease under the provisions of subparagraph a or c above, Landlord may recover as damages from the Tenant the following: 1. Past Rent. The worth at the time of the award of any unpaid Rent which had been earned at the time of termination; plus 2. Rent Prior to Award. The worth at the time of the award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus 3. Rent After Award. The worth at the time of the award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of the rental loss that Tenant proves could be reasonably avoided; plus 4. Proximately Caused Damages. Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including, but not limited to, any costs or expenses (including attorneys' fees), incurred by landlord in (a) retaking possession of the Premises, (b) maintaining the Premises after Tenant's default, (c) preparing the Premises for reletting to a new tenant, including any repairs or alterations, and (d) reletting the Premises, including broker's commissions. "The worth at the time of the award" as used in subparagraphs 1 and 2 above, is to be 15 18 computed by allowing interest at the rate of ten percent (10%) per annum. "The worth at the time of the award" as used in subparagraph 3 above, is to be compupted by discounting the amount at the discount rate of the Federal Reserve Bank situated nearest to the Premises at the time of the award plus one percent (1%). The waiver by Landlord of any breach of any term, covenant or condition of this Lease shall not be deemed a waiver of such term, covenant or condition or of any subsequent breach of the same or any other term, covenant or condition. Acceptance of Rent by Landlord subsequent to any breach hereof shall not be deemed a waiver of any preceding breach other than the failure to pay the particular Rent so accepted, regardless of Landlord's knowledge of any breach at the time of such acceptance of Rent. Landlord shall not be deemed to have waived any term, covenant or condition unless Landlord gives Tenant written notice of such waiver. 27.3 Landlord's Default If Landlord fails to perform any covenant, condition or agreement contained in this Lease within thirty (30) days after receipt of written notice from Tenant specifying such default, or if such default cannot reasonably be cured within thirty (30) days, if Landlord fails to commence to cure within that thirty (30) day period, then, Landlord shall be liable to Tenant for any damages sustained by Tenant as a result of Landlord's breach; provided, however, it is expressly understood and agreed that if Tenant obtains a money judgment against Landlord resulting from any default or other claim arising under this Lease, that judgment shall be satisfied only out of the rents, issues, profits, and other income actually received on account of Landlord's right title and interest in the Premises, Building or Project, and no other real, personal or mixed property of Landlord (or of any of the partners which comprise Landlord, if any) wherever situated, shall be subject to levy to satisfy such judgment. If, after notice to Landlord or default, Landlord (or any first mortgagee or first deed of trust beneficiary of Landlord) fails to cure the default, Landlord (or any first mortgagee or first deed of trust beneficiary of Landlord) fails to cure the default as provided herein, then Tenant shall have the right to cure that default at Landlord's expense. Tenant shall not have the right to terminate this Lease or to withhold, reduce or offset any amount against any payments of Rent or any other charges due and payable under this Lease except as otherwise specifically provided herein. 28. BROKERAGE FEES. Tenant warrants and represents that it has not dealt with any real estate broker or agent in connection with this Lease or its negotiation except those noted in Section 2.c. Tenant shall indemnify and hold Landlord harmless from any cost, expense or liability (including costs of suit and reasonable attorneys' fees) for any compensation, commission or fees claimed by any other real estate broker or agent in connection with this Lease or its negotiation by reason of any act of Tenant. 29. NOTICES. All notices, approvals and demands permitted or required to be given under this Lease shall be in writing and deemed duly served or given if personally delivered or sent by certified or registered U.S. mail, postage prepaid, and addressed as follows: (a) if to Landlord, to Landlord's Mailing Address and to the Building manager, and (b) if to Tenant, to Tenant's Mailing Address; provided, however, notices to Tenant shall be deemed duly served or given if delivered or mailed to Tenant at the Premises. Landlord and Tenant may from time to time by notice to the other designate another place for receipt of future notices. 30. GOVERNMENT ENERGY OR UTILITY CONTROLS. In the even of imposition of federal, state or local government controls, rules regulations, or restrictions on the use or consumption of energy or other utilities during the Term, both Landlord and Tenant shall be bound thereby. In the event of a difference in interpretation by Landlord and Tenant of any such controls, the interpretation of Landlord shall prevail, and Landlord shall have the right to enforce compliance therewith, including the right of entry into the Premises to effect compliance. 31. RELOCATION OF PREMISES. Landlord shall have the right to relocate the premises to another part of the Building in accordance with the following: a. The new premises shall be substantially the same in size, dimensions, configuration, decor and nature as the Premises described in this Lease, and if relocation occurs after the Commencement Date, shall be placed in that condition by Landlord at its cost. b. Landlord shall give Tenant at least thirty (30) days' written notice of Landlord's intention to 16 19 relocate the Premises. c. As nearly as practicable, the physical relocation of the Premises shall take place on a weekend and shall be completed before the following Monday. If the physical relocation has not been completed in that time, Base Rent shall abate in full from the time the physical relocation commences to the time it is completed. Upon completion of such relocation, the new premises shall become the "Premises" under this Lease. d. All reasonable costs incurred by Tenant as a result of the relocation shall be paid by Landlord. e. If the new premises are smaller than the Premises as it existed before the relocation, Base Rent shall be reduced proportionately. f. The parties hereto shall immediately execute an amendment to this Lease setting forth the relocation of the Premises and the reduction of Base Rent, if any. 32. QUIET ENJOYMENT. Tenant, upon paying the Rent and performing all of its obligations under this Lease, shall peaceably and quietly enjoy the Premises, subject to the terms of this Lease and to any mortgage, lease, or other agreement to which this Lease may be subordinate. 33. OBSERVANCE OF LAW. Tenant shall not use the Premises or permit anything to be done in or about the Premises which will in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances and governmental rules, regulations and requirements now in force or which may hereafter be in force, and with the requirements of any board of fire insurance underwriters or other similar bodies now or hereafter constituted, relating to, or affecting the condition, use of occupancy of the Premises, excluding structural changes not related to or affected by Tenant's improvements or acts. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord is a party thereto or not, that Tenant has violated any law, ordinance or governmental rule, regulation or requirement, shall be conclusive of that fact as between Landlord and Tenant. 34. FORCE MAJEURE. Any prevention, delay or stoppage of work to be performed by Landlord or Tenant which is due to strikes, labor disputes, inability to obtain labor, materials, equipment or reasonable substitutes therefor, acts of God, governmental restrictions or regulations or controls, judicial orders, enemy or hostile government actions, civil commotion, fire or other casualty, or other causes beyond the reasonable control of the party obligated to perform hereunder, shall excuse performances of the work by that party for a period equal to the duration of that prevention, delay or stoppage. Nothing in this Article 34 shall excuse or delay Tenant's obligation to pay Rent or other charges under this Lease. 35. CURING TENANT'S DEFAULTS. If Tenant defaults in the performance of any of its obligations under this Lease, Landlord may (but shall not be obligated to) without waiving such default, perform the same for the account at the expense of Tenant. Tenant shall pay Landlord all costs of such performances promptly upon receipt of a bill therefor. 36. SIGN CONTROL. Tenant shall not affix, paint, erect, or inscribe any sign, projection, awning, signal or advertisement of any kind to any part of the Premises, Building or Project, including without limitation, the inside or outside of windows or doors, without the written consent of Landlord. Landlord shall have the right to remove any signs or other matter, installed without Landlord's permission, without being liable to Tenant by reason of such removal, and to charge the cost of removal to Tenant as additional rent hereunder, payable within ten (10) days of written demand by Landlord. 37. MISCELLANEOUS. a. Accord and Satisfaction; Allocation of Payments. No Payment by Tenant or receipt by Landlord of a lesser amount than the Rent provided for in this Lease shall be deemed to be other than on account of the earliest due Rent, nor shall any endorsement or statement on any check or letter accompanying any check or payment as 17 20 Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of the Rent or pursue any other remedy provided for in this Lease. In connection with the foregoing, Landlord shall have the absolute right in its sole discretion to apply any payment received from Tenant to any account or other payment of Tenant then not current and due or delinquent. b. Addenda. If any provision contained in an addendum to this Lease is inconsistent with any provision herein, the provision contained in the addendum shall control, unless otherwise provided in the addendum. c. Attorneys' Fees. If any action or proceeding is brought by either party against the other pertaining to or arising out of this Lease, the finally prevailing party shall be entitled to recover all costs and expenses, including reasonable attorneys' fees, incurred on account of such action or proceeding. d. Captions, Articles and Section Numbers. The captions appearing within the body of this Lease have been inserted as a matter of convenience and for reference only and in no way define, limit or enlarge the scope or meaning of this Lease. All references to Article and Section numbers refer to Articles and Sections in this Lease. e. Changes Requested by Lender. Neither Landlord or Tenant shall unreasonably withhold its consent to changes or amendments to this Lease requested by the lender on Landlord's interest, so long as these changes do not alter the basic business terms of this Lease or otherwise materially diminish any rights or materially increase any obligations of the party from whom consent to such charge or amendment is requested. f. Choice of Law. This Lease shall be construed and enforced in accordance with the laws of the State. g. Consent. Notwithstanding anything contained in this Lease to the contrary, Tenant shall have no claim, and hereby waives the right to any claim against Landlord for money damages by reason of any refusal, withholding or delaying by Landlord of any consent, approval or statement of satisfaction, and in such event, Tenant's only remedies therefor shall be an action for specific performance, injunction or declaratory judgment to enforce any right to such consent, etc. h. Corporate Authority. If Tenant is a corporation, each individual signing this Lease on behalf of Tenant represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of the corporation, and that this Lease is binding on Tenant in accordance with its terms. Tenant shall, at Landlord's request, deliver a certified copy of a resolution of its board of directors authorizing such execution. i. Counterparts. This Lease may be executed in multiple counterparts, all of which shall constitute one and the same Lease. j. Execution of Lease; No Option. The submission of this Lease to Tenant shall be for examination purposes only, and does not and shall not constitute a reservation of or option for Tenant to lease, or otherwise create any interest of Tenant in the Premises or any other premises within the Building or Project. Execution of this Lease by Tenant and its return to Landlord shall not be binding on Landlord notwithstanding any time interval, until Landlord has in fact signed and delivered this Lease to Tenant. k. Furnishing of Financial Statements; Tenant's Representations. In order to induce Landlord to enter into this Lease Tenant agrees that it shall promptly furnish Landlord from time to time, upon Landlord's written request, with financial statements reflecting Tenant's current financial condition. Tenant represents and warrants that all financial statements, records and information furnished by Tenant to Landlord in connection with this Lease are true, correct and complete in all respects. l. Further Assurances. The parties agree to promptly sign all documents reasonably requested to give effect to the provisions of this Lease. m. Mortgagee Protection Tenant agrees to send by certified or registered mail to any first mortgagee or first deed of trust beneficiary of Landlord whose address has been furnished to Tenant, a copy of any notice of default served by Tenant on Landlord. If Landlord fails to cure such default within the time provided for in this Lease, such mortgagee or beneficiary shall have an additional thirty (30) days to cure such default; cannot reasonably be cured 18 21 within that thirty (30) day period, then such mortgagee or beneficiary shall have such additional time to cure the default as is reasonably necessary under the circumstances. n. Prior Agreements; Amendments. This Lease contains all of the agreements of the parties with respect to any matter covered or mentioned in this Lease, and no prior agreement or understanding pertaining to any such matter shall be effective for any purpose. No provisions of this Lease may be amended or added to except by an agreement in writing signed by the parties or their respective successors in interest. o. Recording. Tenant shall not record this Lease without prior written consent of Landlord. Tenant, upon the request of Landlord, shall execute and acknowledge a "short form" memorandum of this Lease for recording purposes. p. Severability. A final determination by a court of competent jurisdiction that any provision of this Lease is invalid shall not affect the validity of any other provision, and any provision so determined to be invalid shall, to the extent possible, be construed to accomplish its intended effect. q. Successors and Assigns. This Lease shall apply to and bind the heirs, personal representatives, and permitted successors and assigns of the parties. r. Time of the Essence. Time is of the essence of this Lease. s. Waiver. No delay or omission in the exercise of any right or remedy of Landlord upon any default by Tenant shall impair such right or remedy or be construed as a waiver of such default. The receipt and acceptance by Landlord of delinquent Rent shall not constitute a waiver of any other default; it shall constitute only a waiver of timely payment for the particular Rent payment involved. No act or conduct of Landlord, including, without limitation, the acceptance of keys to the Premises, shall constitute an acceptance of the surrender of the Premises by Tenant before the expiration of the Term. Only a written notice from Landlord to Tenant shall constitute acceptance of the surrender of the Premises and accomplish a termination of the Lease. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. Any waiver by Landlord of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision of the Lease. The parties hereto have executed this Lease as of the dates set forth below. LANDLORD: TENANT: Edwards Theatres Circuit, Inc. Beverage Works, Inc. a California Corporation By: [SIG] By: /s/ FREDERIK G.M. RODENHUIS ----------------------------- ------------------------------- Frederik G.M. Rodenhuis Title: Corporate Secretary Title: President ----------------------------- ------------------------------- Date: Dec. 5, 1996 Date: 11-27-96 ----------------------------- ------------------------------- 19 EX-10.25 23 SUBLEASE AGREEMENT DATE JANUARY 1 1997 1 Exhibit 10.25 SUBLEASE AGREEMENT The Deretin Group subleases three offices with full rights and use of a conference room, kitchen, lobbies and storage area from a combined office area comprised of thirteen offices, a conference room, kitchen, storage area and lobby/secretarial space totaling approximately 3,000 square feet located at 9800 S. Sepulveda Blvd., Suite 720, Los Angeles, CA 90045 from K.E. McCarthy & Associates and herein enters into agreement to sublease its office space, rights and use to Beverage Works effective January 1, 1997 under the following terms and conditions. TERMS: The terms of the sublease provide for Beverage Works, Inc. to have exclusive use of the three offices and shared access to all common areas including conference rooms, kitchen and storage areas currently provided The Deretin Group pursuant to the terms of their sublease. This sublease shall be on a month to month basis. TELEPHONE EQUIPMENT: The suite comes with a 16 line Panasonic XDP phone system and includes telephone instruments in two offices, the conference room and all common areas. Additional phone instruments are the responsibility of Beverage Works. The cost of installing additional phone, data or fax lines shall be the responsibility of Beverage Works. OFFICE EQUIPMENT: The office space includes certain office equipment including lobby furniture, conference room furniture, some office furniture, a copier, typewriter, television with VCR, storage cabinets, fax machine, scanner, use of two IBM compatible computers, HP Desk Jet Printer, Epson Stylus Color Printer (compatible with IBM & MAC), two small refrigerators, coffee machine, micro wave oven and common area plants. RENT: The gross monthly rent shall be $1,280 per month which includes nightly cleaning Monday through Friday, 24 hour a day seven day a week security, building and common area maintenance and utilities, use of office and telephone equipment, basic office supplies including copier paper and supplies and $80.00 per month for one monthly parking pass and either $40.00 of guest parking stickers or an additional parking pass. The rent cannot be increased without a minimum of 90 days notice. Rent is due by the 10th day of each month. Rent does not include repair and maintenance of office equipment which will be billed as incurred. INSURANCE: The lease requires that the tenants have and provide proof of five, theft and general liability insurance. Beverage Works shall be responsible to pay for 25% of the cost of a policy if shared with K.E. McCarthy & Associates or provide proof of its own policy acceptable to the landlord. The parties acknowledge their understanding and acceptance of the terms and conditions of this lease by signing below. BEVERAGE WORKS, INC. THE DERETIN GROUP /s/ FREDERIK RODENHUIS /s/ LYLE MAUL - -------------------------- ----------------------- Frederik Rodenhuis Lyle Maul EX-10.26 24 NON-EMPLOYEE DIRECTOR COMPENSATION PLAN 1 EXHIBIT 10.26 BEVERAGE WORKS, INC. NON-EMPLOYEE DIRECTOR COMPENSATION PLAN 1. PURPOSE. The purpose of this Plan is to promote the interests of Beverage Works, Inc. and its affiliates and stockholders by helping to attract and retain highly qualified non- employee directors. 2. DEFINITIONS. Unless the context clearly indicates otherwise, the following terms, when used in the Plan, shall have the meanings set forth in this section: A. "Annual Meeting" shall mean the Company's regular annual meeting of shareholders. B. "Board" shall mean the Board of directors of the Company. C. "Company" shall mean Beverage Works, Inc., a California corporation, and any successor corporation. D. "Director" shall mean a member of the Board. E. "Non-Employee Director" shall mean a Director who is not also an officer or salaried employee of the Company or any of its subsidiaries. F. "Plan" shall mean this Beverage Works, Inc. Non- Employee Director Compensation Plan, as set forth herein and as it may be amended from time to time. G. "Shares" shall mean shares of the voting Common Stock of the Company, no par value. 3. ANNUAL RETAINER. Each Non-Employee Director shall be paid for each year of service a retainer at an annualized rate of Five Thousand Dollars ($5,000), payable in arrears in four equal quarterly installments on each of June 1, September 1, December 1, and March 1 (each, "Payment Date") following the Annual Meeting at which such director was elected or re-elected to the Board, as the case may be. A Non-Employee Director who becomes a member of the Board between Annual Meetings shall be paid the quarterly installment on each Payment Date which falls between the date he becomes a member of the Board and the date of the next Annual Meeting. A Non-Employee Director who resigns from the Board between Annual Meetings shall be paid the quarterly installment for the Payment Date next following the date of such resignation. Such annual retainer may be increased by the Board from time to time in its discretion. 4. EXPENSES. Non-Employees Director shall be reimbursed for reasonable travel expenses for board meetings and other pre- 2 approved business expenses. 5. ISSUANCE OF DIRECTORS' WARRANTS. A. On each Payment Date for which a Non-Employee Director shall be entitled to an installment payment under the provisions of Section 3 herein, such Non-Employee Director shall also receive One Thousand Two Hundred Fifty (1,250) warrants under the Directors' Warrant Agreement. B. Directors' Warrants or the shares issuable upon exercise of the Directors' Warrants shall not be issued unless such issuance shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, applicable state securities laws, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange (including Nasdaq) upon which the Company's common stock may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. The Company may require the Non-Employee Director to represent and warrant at the time of any such issuance that the Directors' Warrants and the shares issuable upon exercise of the Directors' Warrants are being acquired only for investment and without any present intention to sell or distribute such securities if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. C. The Company, during the term of this Plan, will at all times reserve and keep available such number of shares of common stock as shall be sufficient to satisfy the requirements of the Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance of any Directors' Warrants or the shares issuable upon exercise of the Directors' Warrants hereunder, shall relieve the Company of any liability in respect of the failure to issue such Directors' Warrants or the shares issuable upon exercise of the Directors' Warrants as to which such requisite authority shall not have been obtained. 6. EFFECTIVE DATE. The Plan shall be effective upon the later of the closing of the Company's first initial public offering or approval by the Board ("Effective Date"). 7. AMENDMENT AND TERMINATION OF THE PLAN. The Board in its discretion may terminate the Plan or alter or amend the Plan or any part thereof from time to time; provided, however, this Plan shall terminate no later than two years from the Effective Date. 2 3 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("THE ACT") OR QUALIFIED OR REGISTERED UNDER ANY STATE SECURITIES OR BLUE SKY LAWS. NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND SUCH STATE LAWS UNLESS SUCH OFFER, SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION IS EXEMPT FROM REGISTRATION OR QUALIFICATION UNDER THE ACT AND SUCH STATE LAWS. BEVERAGE WORKS, INC. DIRECTORS' WARRANT AGREEMENT RECITALS. This Directors' Warrant Agreement ("Agreement") dated January ____, 1997 certifies that the registered owners ("Holders") of the Directors' Warrants (herein referred to as the "Directors' Warrants") to purchase up to, subject to anti-dilution provisions herein, One Hundred Thousand (100,000) shares of the common stock, no par value ("Shares"), of Beverage Works, Inc., a California corporation (herein referred to as the "Company") entitles the Holders to purchase from the Company, for a five (5) year period commencing on the date hereof, one fully-paid and nonassessable Share for each Directors' Warrant at an exercise price equal $5.20 (the "Exercise Price"), upon presentation and surrender of the Directors' Warrant certificate at the principal corporate office of the Company, with the Form of Election to Purchase duly executed, and upon payment of the Exercise Price per Share. 1. REGISTRATION. The Directors' Warrants shall be numbered and shall be registered in the Directors' Warrant Register. The Company shall be entitled to treat the Holder of any Directors' Warrant as the owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Directors' Warrant on the part of any other person, and shall not be liable for any registration of transfer of Directors' Warrants which are registered or to be registered in the name of a fiduciary or the nominee of a fiduciary unless made with actual knowledge that a fiduciary or nominee is committing a breach of trust in requesting such registration of transfer, or with such knowledge of such facts that its participation therein amounts to bad faith. 2. TRANSFER. The Directors' Warrants shall be transferable only on the books of the Company maintained at the Company's principal office upon delivery thereof duly endorsed by a Holder or by its duly authorized attorney or representative, or accompanied by proper evidence of succession, assignment, or authority to transfer. In all cases of transfer by an attorney, the original letter of attorney, duly approved, or an official copy thereof, duly certified, shall be deposited and remain with the Company. In case of transfer by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be produced. Upon any registration of transfer, 4 the Company shall countersign and deliver new Directors' Warrants to the person entitled thereto. 3. FORM OF DIRECTORS' WARRANTS. The text of the Directors' Warrants and of the form of election to purchase Shares shall be substantially as set forth in Exhibit "A" attached hereto. The price of Shares and the number of Shares issuable upon exercise of Directors' Warrants are subject to adjustment upon the occurrence of certain events, all as hereinafter provided. The Directors' Warrants shall be executed on behalf of the Company by its President or one of its Vice Presidents, under its corporate seal reproduced thereon attested by its Secretary or an Assistant Secretary. The signature of any of these officers on the Directors' Warrants may be manual or facsimile. Directors' Warrants bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any one of them shall have ceased to hold such offices prior to the delivery of such Directors' Warrants or did not hold such office on the date of this Agreement. Directors' Warrants shall be dated as of the date of counter-signature thereof by the Company either upon initial issuance or upon division, exchange, substitution, or transfer. 4. EXCHANGE. Directors' Warrant certificates may be exchanged for another certificate or certificates entitling the Holder thereof to purchase a like aggregate number of Shares as the certificate or certificates surrendered then entitle such Holder to purchase. Any Holder of a Directors' Warrant desiring to exchange Directors' Warrant certificates shall make such request in writing delivered to the Company, and shall surrender, properly endorsed, the certificate or certificates evidencing the Directors' Warrant or Directors' Warrants to be so exchanged. Thereupon, the Company shall countersign and deliver to the person entitled thereto a new Directors' Warrant certificate or certificates, as the case may be, as so requested. 5. TERM OF DIRECTORS' WARRANTS. Subject to the terms of this Agreement, each Holder shall have the right, at any time during the period commencing at 10:00 A.M., New York time, on the date of this Agreement until 3:00 P.M. New York time, on January ___, 2002 (the date five (5) years from the date of this Agreement) (the "Termination Date"), to purchase from the Company the number of fully paid and nonassessable Shares to which the Holder may at the time be entitled to purchase pursuant to such Directors' Warrants, upon surrender, to the Company at the principal office of the Company of the certificate or certificates evidencing the Directors' Warrants to be exercised, together with the form of election to purchase duly completed and signed, and upon payment to the Company of the Exercise Price, for the number of Shares in respect of which such Directors' Warrants are then exercised. 2 5 6. PAYMENT UPON EXERCISE. Payment of the aggregate Exercise Price shall be made in cash or by certified or cashier's check. Upon such surrender of Directors' Warrants and payment of the Exercise Price as aforesaid, the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate or certificates for the number of full Shares so purchased upon the exercise of such Directors' Warrants, together with cash, as provided in Section 15 hereof, in respect of any fractional Shares otherwise issuable upon such surrender. Such certificate or certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such Shares as of the date of the surrender of such Directors' Warrants and payment of the Exercise Price, as aforesaid; provided, however, that if, at the date of surrender of such Directors' Warrants and payment of such Exercise Price, the transfer books for the Shares or other class of stock purchasable upon the exercise of such Directors' Warrants shall be closed, the certificates for the Shares in respect of which such Directors' Warrants are then exercised shall be issuable as of the date on which such books shall next be opened (whether before or after the Termination Date) and until such date the Company shall be under no duty to deliver any certificate for such Shares; provided further, however, that the transfer books of record, unless otherwise required by law, shall not be closed at any one time for a period longer than twenty days. The rights of purchase represented by the Directors' Warrants shall be exercisable, at the election of the Holders thereof either in full or from time to time in part and, in the event that a certificate evidencing Directors' Warrants is exercised in respect of less than all of the Shares specified therein at any time prior to the date of expiration of the Directors' Warrants, a new certificate evidencing the remaining Directors' Warrant or Directors' Warrants will be issued. 7. TAXES. The Company will pay all documentary stamp taxes, if any, attributable to the initial issuance of Shares issuable upon the exercise of Directors' Warrants; provided, however, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issue or delivery of any Directors' Warrants or certificates for Shares. 8. [RESERVED]. 9. MUTILATED OR MISSING WARRANTS. In case any of the certificates evidencing the Directors' Warrants shall be mutilated, lost, stolen or destroyed, the Company may, in its discretion, issue and deliver in exchange and substitution for and upon cancellation of the mutilated Directors' Warrant certificate, or in lieu of and substitution for the Directors' Warrant certificate lost, stolen or destroyed, a new Warrant certificate of like tenor and representing an equivalent right or interest; but only upon receipt of evidence satisfactory to the Company of such loss, theft 3 6 or destruction of such Warrant and indemnity, if requested, also satisfactory to them. Applicants for such substitute Directors' Warrant certificate shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company may prescribe. 10. RESERVATION OF SHARES. There have been reserved, and the Company shall at all times keep reserved, out of its authorized Common stock a number of shares of common stock sufficient to provide for the exercise of the rights of purchase represented by the outstanding Directors' Warrants. The Transfer Agent for the Common Stock (the "Transfer Agent") and every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of any of the rights of purchase aforesaid will be irrevocably authorized and directed at all times to reserve such number of authorized shares as shall be requisite for such purpose. The Company will keep a copy of this Agreement on file with the Transfer Agent for the Common Stock and with every subsequent transfer agent for any shares of the Company's capital stock issuable upon the exercise of the rights of purchase represented by the Directors' Warrants. The Company will supply such Transfer Agent with duly executed stock certificates for such purpose and will provide or otherwise make available any cash which may be payable as provided herein. All Directors' Warrants surrendered in the exercise of the rights thereby evidenced shall be cancelled by the Company. 11. ANTI-DILUTION. In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (iv) issue by reclassification of its shares of Common Stock other securities of the Company, the number of Shares purchasable upon exercise of each Directors' Warrant immediately prior thereto shall be adjusted so that the Holder of each Directors' Warrant shall be entitled to receive the kind and number of Shares or other securities of the Company which he would have owned or have been entitled to receive after the happening of any of such event or any record date with respect thereto. An adjustment shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. Whenever the number of Shares purchasable upon the exercise of each Directors' Warrant is adjusted, as herein provided, the Exercise Price per Share payable upon exercise of each Directors' Warrant shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Shares purchasable upon the exercise of each Directors' Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Shares so purchasable immediately thereafter. Whenever the number of Shares purchasable upon the exercise of each Directors' Warrant or the Exercise Price 4 7 is adjusted, as herein provided, the Company shall promptly mail by first class mail, postage prepaid, to each Holder of a Directors' Warrant or Directors' Warrants notice of such adjustment or adjustments setting forth the number of Shares purchasable upon the exercise of each Directors' Warrant after such adjustment, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. Such certificate shall be conclusive evidence of the correctness of such adjustment. 12. NO ADJUSTMENT FOR DIVIDENDS. Except as provided in Section 11, no adjustment in respect of any dividends shall be made during the term of the Directors' Warrants or upon the exercise of the Directors' Warrants. 13. PRESERVATION OF PURCHASE RIGHTS UPON RECLASSIFICATION, CONSOLIDATION, ETC. In case of any consolidation of the Company with or merger of the Company into another corporation or in case of any sale or conveyance to another corporation of the property, assets or business of the Company as an entirety or substantially as an entirety, the Company or such successor or purchasing corporation, as the case may be, shall execute an agreement that each Holder of a Directors' Warrant shall have the right thereafter upon payment of the Exercise Price in effect immediately prior to such action to purchase upon exercise of each Directors' Warrant the kind and amount of Shares and other securities and property which he would have owned or have been entitled to receive after the happening of such consolidation, merger, sale or conveyance had such Directors' Warrant been exercised immediately prior to such action. Such agreement shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in Section 11. The Company shall mail by first class mail, postage prepaid, to the Holder of each Directors' Warrant, notice of the execution of any such agreement. The provisions of this Section 13 shall similarly apply to successive consolidations, mergers, sales, or conveyances. 14. STATEMENT ON WARRANTS. Irrespective of any adjustments in the number or kind of Shares purchasable upon the exercise of the Directors' Warrants, Directors' Warrants theretofore or thereafter issued may continue to express the same number and kind of Shares as are stated in the Directors' Warrants initially issuable pursuant to this Agreement. 15. FRACTIONAL INTERESTS. The Company shall not be required to issue fractional Shares on the exercise of Directors' Warrants. If more than one Directors' Warrant shall be presented for exercise in full at the same time by the same Holder, the number of full Shares which shall be issuable upon the exercise thereof shall be computed on the basis of the aggregate number of Shares represented by the Directors' Warrants so presented. If any fraction of a Share would, except for the provisions of this Section 15, be issuable on the exercise of any Directors' Warrant (or specified 5 8 portion thereof), the Company shall pay an amount in cash equal to the current market price per Share multiplied by such fraction. 16. NO RIGHTS AS STOCKHOLDER. Nothing contained in this Agreement or in any of the Directors' Warrants shall be construed as conferring upon the Holders or their transferees the right to vote or to receive dividends or to consent or to receive notice as stockholders in respect of any meeting of stockholders for the election of directors of the Company or any other matter, or any rights whatsoever as stockholders of the Company. 17. NOTICES. Any notice pursuant to this Agreement by the Company or by the Holder of any Directors' Warrant, shall be in writing and shall be deemed to have been duly given if delivered or mailed, certified mail, return receipt requested: (a) If to the Company addressed as follows: Beverage Works, Inc. 9800 S. Sepulveda Blvd., Suite 720 Los Angeles, CA 90045 Attn: Lyle Maul, CFO with a copy to : Hecht & Steckman, P.C. 60 East 42nd Street, Suite 5101 New York, NY 10165-5101 Attn: James G. Smith, Esq. (b) If to the Holder addressed to the address as reflected on the Company's books. Any notice mailed pursuant to this Agreement by the Company or to the Holders of Directors' Warrants shall be in writing and shall be deemed to have been duly given if mailed, postage prepaid, to such Holders at their respective addresses on the books of the Company. 18. AMENDMENTS. The Company may from time to time supplement or amend this Agreement, without the approval of any Holders of Directors' Warrants, in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company may deem necessary or desirable and which shall not be inconsistent with the provisions of the Directors' Warrants and which shall not materially adversely affect the interest of the Holders of Directors' Warrants. 19. MERGER OR CONSOLIDATION OF COMPANY. The Company will not merge or consolidate with or into any other corporation unless the corporation resulting from such merger or consolidation (if not the Company) shall expressly assume, by supplemental agreement, the due and punctual performance and observance of each and every covenant 6 9 and condition of this Agreement to be performed and observed by the Company. 20. RESTRICTED SECURITIES. The Directors' Warrants and the shares of Common Stock issuable upon exercise of the Directors' Warrants have not been registered under the Securities Act of 1933, as amended, and that the Directors' Warrants and the Shares issuable upon exercise of the Directors' Warrants may be sold, transferred, assigned or disposed of, except in accordance with such Act and the Rules and Regulations of the Securities and Exchange Commission promulgated thereunder. Holders consent that the Directors' Warrant certificates and certificates evidencing Shares issuable upon exercise of the Directors' Warrants may contain the following legend: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("THE ACT") OR QUALIFIED OR REGISTERED UNDER ANY STATE SECURITIES OR BLUE SKY LAWS. NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND SUCH STATE LAWS UNLESS SUCH OFFER, SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION IS EXEMPT FROM REGISTRATION OR QUALIFICATION UNDER THE ACT AND SUCH STATE LAWS. 21. APPLICABLE LAW. This Agreement and each Directors' Warrant referred to hereunder shall be deemed to be a contract made under the laws of the State of California and for all purposes shall be construed in accordance with the laws of said state. 22. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Holders shall bind and inure to the benefit of their respective successors and assigns hereunder. 23. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company and the Holders of Directors' Warrants any legal or equitable right, remedy or claim under this Agreement and this Agreement shall be for the sole and exclusive benefit of the Company and the Holders of Directors' Warrants. 24. CAPTIONS. The captions of sections and paragraphs of this Agreement have been inserted for convenience only and shall have no substantive effect. 25. WARRANT AGENT. The Company shall act as the initial warrant agent in connection with the issuance, transfer and exchange of the certificates and the exercise of the Directors' Warrants. The Company may, without prior consent of any of the Holders, appoint a successor warrant agent. Notice of the appointment of a successor warrant agent shall be promptly given by 7 10 the Company to all registered Holders. BEVERAGE WORKS, INC. Attest: - --------------------------- ------------------------------ By: Frederik G.M. Rodenhuis, By: Lyle R. Maul, President Secretary 8 11 THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("THE ACT") OR QUALIFIED OR REGISTERED UNDER ANY STATE SECURITIES OR BLUE SKY LAWS. NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND SUCH STATE LAWS UNLESS SUCH OFFER, SALE, TRANSFER, PLEDGE OR OTHER DISPOSITION IS EXEMPT FROM REGISTRATION OR QUALIFICATION UNDER THE ACT AND SUCH STATE LAWS. BEVERAGE WORKS, INC. DIRECTORS' WARRANT CERTIFICATE Certificate Number ___ ________ Warrants This Warrant Certificate certifies that ____________________ is the registered holder of the number of Warrants indicated above (herein referred to as the "Warrants") to purchase shares of the Common Stock, no par value ("Shares"), of Beverage Works, Inc., a California corporation (herein referred to as the "Company"). Each Warrant entitles the holder thereof to purchase from the Company, for a five (5) year period commencing on _________________, 1996 one fully-paid and nonassessable Share at an exercise price of $5.20 (the "Exercise Price") upon presentation and surrender of this Warrant Certificate at the principal corporate office of the Company, with the Form of Election to Purchase duly executed, and upon payment of the Exercise Price per share of such Common Stock. Payment of the Exercise Price shall be made in lawful money of the United States of America. This Warrant Certificate is subject to terms, provisions and conditions of the Directors' Warrant Agreement, which is incorporated by reference and to which reference is hereby made for a full description of the rights, limitations, obligations, duties and immunities hereunder of the Company and the holder of the Warrant Certificates. This Warrant Certificate, upon surrender to the Company, may be exchanged for another Warrant Certificate or Warrant Certificates evidencing a like aggregate number of Warrants. If this Warrant Certificate shall be exercised in part, the holder hereof shall be entitled to receive upon surrender hereof, another Warrant Certificate or Warrant Certificates evidencing the number of Warrants not exercised. COMPANY: BEVERAGE WORKS, INC. Attest: - --------------------------- ---------------------------- By: Frederik G.M. Rodenhuis, By: Lyle R. Maul, President Secretary EXHIBIT "A" 12 The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM -as tenants in common TEN ENT -as tenants by the entireties JT TEN -as joint tenants, with right of survivorship and not as tenants in common UNIF GIFT MIN ACT -Uniform Gifts to Minors Act of ______(State)______ Additional abbreviations may also be used thought not in the above list. ELECTION TO PURCHASE The undersigned Registered Holder hereby irrevocably elects to exercise _____ Directors' Warrants represented by this Directors' Warrant certificate, and to purchase the securities issuable upon the exercise of such Directors' Warrants, and requests that certificates for such securities shall be issued in the name of and be delivered to: Name ____________________________________________________ Address ____________________________________________________ Taxpayer I.D. ____________________________________________________ Soliciting Broker ____________________________________________________ and if such number of Directors' Warrants shall not be all the Directors' Warrants evidenced by this Directors' Warrant certificate, that a new Directors' Warrant Certificate for the balance of such Directors' Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below: Name ____________________________________________________ Address ____________________________________________________ Taxpayer I.D. ____________________________________________________ ASSIGNMENT FOR VALUE RECEIVED __ HEREBY SELL, ASSIGN AND TRANSFER UNTO Name ____________________________________________________ Address ____________________________________________________ Taxpayer I.D. ____________________________________________________ Directors' Warrants represented by the within Certificate and do hereby irrevocably constitute and appoint_____________________________________ __________ attorney to transfer the said shares on the books of the within named Corporation with full power of substitution in the premises. SIGNATURE Dated: __________________________ Signed: __________________________ In presence of __________________________________ _______________________________ THE SIGNATURE TO THE ELECTION TO PURCHASE OR ASSIGNMENT MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. EX-11 25 COMPUTATION OF EARNINGS (LOSS) PER SHARE 1 EXHIBIT 11 COMPUTATION OF EARNINGS (LOSS) PER SHARE For the Period Ending September 30, 1996:
Number Weighted of days Number Number Shares of Shares of Shares Outstanding --------- --------- ----------- JANUARY 1, 1996 TO MARCH 31, 1996 Shares at Beginning of Period 2,341,363 2,341,363 Shares Issued on February 3, 1996 6,500 4,143 58 --------- --------- 2,347,863 2,345,506 ========= ========= APRIL 1, 1996 TO JUNE 30, 1996 Shares at Beginning of Period 2,347,863 2,347,863 Shares Issued Between April 1, 1996 and April 30, 1996 80,000 66,813 76 --------- --------- 2,427,863 2,414,676 ========= ========= JULY 1, 1996 TO SEPTEMBER 30, 1996 Shares at Beginning of Period 2,427,863 2,427,863 Shares Issued September 9, 1996 30,000 7,174 22 --------- --------- 2,457,863 2,435,037 ========= ========= WEIGHTED AVERAGE FOR PERIODS OUTSTANDING 2,398,406 COMMON SHARE EQUIVALENTS (INCREMENTAL AMOUNTS): RESULTING FROM COMMON STOCK ISSUED BELOW THE IPO PRICE 10,407 RESULTING FROM WARRANTS AND OPTIONS ISSUED WITH EXERCISE PRICES BELOW THE IPO PRICE 262,987 --------- Common shares and equivalents outstanding at September 30, 1996 2,671,800 =========
2 EXHIBIT 11 COMPUTATION OF EARNINGS (LOSS) PER SHARE For the Period Ending December 31, 1995:
Number Weighted of days Number Number Shares of Shares of Shares Outstanding --------- --------- ----------- FROM AUGUST 2, 1995 TO SEPTEMBER 30, 1995 Shares issued to Founders on August 2, 1995 245,310 245,310 ========= OCTOBER 1, 1995 TO DECEMBER 31, 1995 Shares at Beginning of Period 245,310 245,310 91 Shares Issued on October 6, 1995 1,549,100 1,464,910 87 Shares Issued on November 8, 1995 142,276 83,510 54 Shares Issued on November 12, 1995 49,015 26,639 50 Shares Issued on November 12, 1995 5,333 2,897 50 Shares Issued on November 15, 1995 16,583 8,472 47 Shares Issued Between November 20, 1995 and December 31, 1995 333,746 58,043 16 --------- --------- 2,341,363 1,889,781 ========= ========= WEIGHTED AVERAGE FOR PERIODS OUTSTANDING 1,067,546 COMMON SHARE EQUIVALENTS (INCREMENTAL AMOUNTS): RESULTING FROM COMMON STOCK ISSUED BELOW THE IPO PRICE 1,016,714 RESULTING FROM WARRANTS AND OPTIONS ISSUED WITH EXERCISE PRICES BELOW THE IPO PRICE 262,987 --------- Common shares and equivalents outstanding for the period ending December 31, 1995 2,347,247 =========
3 BEVERAGE WORKS, INC Computation of Incremental Shares and Warrants December 31, 1995 and September 30, 1996
Shares Number Purchased Weighted Number of Days Price Proceeds Estimated Under Shares Incremental of Shares Outstanding Per Share Received IPO Price SAB 83 Purchased Shares ---------------------------------------------------------------------------------------------------- (a) (b) (c) (c) x (a) = (e) (d) / (e) = (f) x (b) / (a) - (f) (d) (f) days in period = (g) AUGUST 2, 1995 TO SEPTEMBER 30, 1995 Shares issued to founders* 245,310 245,310 0 --------- OCTOBER 1, 1995 TO DECEMBER 31, 1995 Shares at the beginning of the period 245,310 Shares issued October 6, 1995 1,549,100 87 $0.05 $ 77,455 $6.00 12,909 12,208 1,536,191 Shares issued November 8, 1995 142,276 54 3.11 442,478 6.00 73,746 43,286 68,530 Shares issued November 12, 1995 5,333 50 4.00 21,332 6.00 3,555 1,932 1,778 Shares issued November 12, 1995 49,015 50 3.00 147,045 6.00 24,508 13,320 24,507 Shares issued November 15, 1995 16,583 47 3.47 57,543 6.00 9,591 4,899 6,992 Shares issued between November 20, 1995 and December 31, 1995 333,746 16 4.00 1,334,984 6.00 222,497 38,695 111,249 ---------- --------- 359,650 1,749,247 ---------- --------- Average of shares purchased - treasury stock method 302,480 Incremental shares - treated as outstanding since August 2 ,1995 1,781,780 --------- 2,084,260 Weighted average shares for period 1,067,546 --------- Incremental shares for the period ended December 31, 1995 1,016,714 ========= JANUARY 1, 1996 TO MARCH 31, 1996 Shares outstanding at the beginning of the period 2,341,363 Shares issued February 3, 1996 6,500 58 5.20 33,800 6.00 5,633 3,551 867 ---------- -------- 2,344,914 ---------- APRIL 1, 1996 TO JUNE 30, 1996 Shares at the beginning of the period 2,344,914 and April 30 ,1996 80,000 76 4.00 320,000 6.00 53,333 44,058 26,667 --------- 2,388,972 --------- JULY 1, 1996 TO SEPTEMBER 30, 1996 Shares at the beginning of the period 2,388,972 Shares issued September 9, 1996 30,000 22 5.00 150,000 6.00 25,000 5,979 5,000 --------- --------- 2,394,951 32,534 --------- --------- Average of shares purchased - treasury stock method 2,376,279 1,781,780 ========= Incremental shares - treated as outstanding since August 2 ,1995 32,534 --------- 2,408,813 Weighted average shares for period 2,398,406 --------- Incremental shares for the period ended September 30, 1996 10,407 =========
* Such shares are not included in this calculation as these shares were issued prior to the 12 months from the initial filing of the registration statement. 4 BEVERAGE WORKS, INC Computation of Incremental Shares and Warrants December 31, 1995 and September 30, 1996
Shares Exercise Purchased Number of Price Per Proceeds Estimated Under Incremental Warrants Warrant Received IPO Price SAB 83 Shares ---------------------------------------------------------------------------------- (a) (c) (c) x (a) = (e) (d) / (e) = (a)- (f) (d) (f) Warrants issued October 31, 1995 15,583 $4.50 $ 70,124 $6.00 11,687 3,896 Warrants issued April 22, 1996 35,000 4.75 166,250 6.00 27,708 7,292 Options granted August 6, 1996 933,500 5.20 4,854,200 6.00 809,033 124,466 Options granted August 6, 1996 955,000 5.20 4,966,000 6.00 827,667 127,333 Unit Warrants issued September 9, 1996 * 15,000 7.00 -- ------- Incremental shares resulting from warrants and options with exercise prices below the IPO price 262,987 =======
* such are excluded from the computation as such warrants were granted with an exercise price greater than the IPO price EX-23.2 26 CONSENT OF CORBIN & WERTZ 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors Beverage Works, Inc. We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the Prospectus. /s/ CORBIN & WERTZ ----------------------------- Corbin & Wertz Irvine, California January 10, 1997 EX-23.3 27 CONSENT OF CORBIN & WERTZ 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To the General Partner Prost Partners Limited Partnership To the Board of Directors Beverage Works, Inc. We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the Prospectus. /s/ CORBIN & WERTZ ---------------------------- Corbin & Wertz Irvine, California January 10, 1997 EX-23.4 28 CONSENT OF CORBIN & WERTZ 1 EXHIBIT 23.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors Orange Empire Brewing Company To the Board of Directors Beverage Works, Inc. We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the Prospectus. /s/ CORBIN & WERTZ ------------------------------- Corbin & Wertz Irvine, California January 10, 1997 EX-27.1 29 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BEVERAGE WORKS, INC. AND SUBSIDIARY FOR THE PERIOD AUGUST 2, 1995 (INCORPORATION) TO DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SB-2. 5-MOS DEC-31-1995 AUG-02-1995 DEC-31-1995 1,041,723 0 1,311 0 45,135 1,121,377 1,326,716 30,282 2,665,591 306,836 0 0 0 2,127,502 0 2,665,591 44,810 0 81,627 0 491,330 0 28,320 (556,467) (7,706) 0 0 0 0 (548,761) (.24) 0
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