-----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, GAaCkBK8KBRCQ3U4qFAhbI9LP4r/ezQo/7DPj62tA5L9vp+QkGyeTijYeVlcIDU4 3EGjv6ICgeiUa7DJ+q4THQ== 0000950005-96-000866.txt : 19961108 0000950005-96-000866.hdr.sgml : 19961108 ACCESSION NUMBER: 0000950005-96-000866 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 19961106 SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MENDOCINO BREWING CO INC CENTRAL INDEX KEY: 0000919134 STANDARD INDUSTRIAL CLASSIFICATION: MALT BEVERAGES [2082] IRS NUMBER: 680318293 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-15673 FILM NUMBER: 96655537 BUSINESS ADDRESS: STREET 1: 13351 S HWY 101 CITY: HOPLAND STATE: CA ZIP: 95449 BUSINESS PHONE: 7077441015 MAIL ADDRESS: STREET 1: 13351 S HWY 101 CITY: HOPLAND STATE: CA ZIP: 95449 SB-2 1 FORM SB-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1996 REGISTRATION NO. 333- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 MENDOCINO BREWING COMPANY, INC. (Exact name of registrant as specified in its charter) California 2082 680318293 (State or other jurisdiction (Primary Standard (I.R.S. Employer of incorporation Industrial Classification Identification or organization) Code Number) Number) 13351 South Highway 101 Hopland, CA 95449-0400 (707) 744-1015 (Address and telephone number of registrant's principal executive offices) H. Michael Laybourn Chief Executive Officer Mendocino Brewing Company, Inc. 13351 South Highway 101 Hopland, CA 95449-0400 (707) 744-1015 (Name, address and telephone number of agent for service) Copy to Nelson D. Crandall, Esq. Enterprise Law Group, Inc. Menlo Oaks Corporate Center 4400 Bohannon Drive, Suite 280 Menlo Park, CA 94025-1041 Tel: (415) 462-4700 Fax: (415) 462-4747 Approximate date of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] 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. CALCULATION OF REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------------
Proposed maximum Proposed maximum Title of each class of securities Amount to be offering price per aggregate offering Amount of to be registered registered security price registration fee - --------------------------------------------------------------------------------------------------------------------- Common Stock, no par value 600,000 $8.50 $5,100,000 $1,758.62
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 NOVEMBER 6, 1996 600,000 SHARES [COMPANY LOGO] MENDOCINO BREWING COMPANY, INC. COMMON STOCK -------------- All of the 600,000 shares of no par value Common Stock (the "Shares") offered by this Prospectus are being sold directly by Mendocino Brewing Company, Inc. ("Mendocino Brewing" or the "Company"). The public offering price has been determined by the Company based on the trading history of the Common Stock on the Pacific Stock Exchange and certain other factors that the Company deems relevant. See "Plan of Distribution." The minimum purchase is 100 Shares ($850.00). This offering is being made on a "best-efforts" basis. Properly completed subscriptions will be accepted on a first come, first served basis, except that record holders of the Company's Common Stock as of October 25, 1996 (the "Record Date") will be given priority to purchase the Shares provided that the Company receives their properly completed subscriptions within 15 days after the effective date of this Prospectus. The offering shall terminate upon the earlier of (a) the date on which all of the Shares have been sold; (b)_____________, unless such date is extended by the Company; or (c) the date on which the Company terminates the offering. See "Plan of Distribution." The Company reserves the right to reject any subscription in full or in part. The Shares offered by this Prospectus involve a high degree of risk. See "Risk Factors" beginning on page 5 of this Prospectus. 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.
========================================================================================== Underwriting Price to Discounts and Proceeds to Public Commissions(1) Company(2) -------- -------------- ------------- - ------------------------------------------------------------------------------------------ Per Share $8.50 None $8.50 - ------------------------------------------------------------------------------------------ Minimum Offering N/A None N/A - ------------------------------------------------------------------------------------------ Minimum Subscription: 100 Shares $850.00 None $850.00 - ------------------------------------------------------------------------------------------ Maximum Offering: 600,000 Shares $5,100,000 None $5,100,000 ========================================================================================== 1 The Shares are being sold directly by the Company through a designated executive officer who is registered as a sales representative, where required, and shall not receive any commission. See "Plan of Distribution." 2 Before deducting estimated expenses of $400,000 payable by the Company, including registration fees, transfer agent fees, printing and engraving, copying, postage, and other offering costs, in addition to legal, accounting, and consultant fees.
------------- The date of this Prospectus is _________ ___, 1996 No person has been authorized to give any information or to make any representations in connection with this offering other than those contained in this Prospectus. If given or made, any such information and representations must not be relied upon as having been authorized by the Company. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy securities to any person in any jurisdiction in which such offer or solicitation is unlawful. Neither the delivery of this Prospectus nor any sale made after the date of this Prospectus shall, under any circumstances, create any implication that the information contained in this Prospectus is correct as of any date after the date of this Prospectus. Mendocino Brewing's principal executive offices are located at 13351 South Highway 101, P.O. Box 400, Hopland, California 95449-0400. The Company's telephone numbers are 1-800-733-3871 and 1-707-744-1015. The Common Stock of Mendocino Brewing Company, Inc. is listed on the Pacific Stock Exchange under the symbol MBR. Reports and other information concerning the Company can be inspected at such exchange. [COMPANY LOGO] TABLE OF CONTENTS Page ---- Prospectus Summary .................................................. 3 Risk Factors ........................................................ 5 Priority of Existing Stockholders ................................... 8 Use of Proceeds ..................................................... 8 Price Range of Common Stock and Dividend Policy ..................... 9 Capitalization ...................................................... 10 Selected Financial Data ............................................. 11 Management's Discussion & Analysis of Financial Condition and Results of Operations ..................... 12 Business ............................................................ 17 Management .......................................................... 25 Certain Transactions ................................................ 27 Principal Stockholders .............................................. 28 Description of Capital Stock ........................................ 29 Shares Eligible for Future Resale ................................... 30 Plan of Distribution ................................................ 30 Legal Matters ....................................................... 31 Experts ............................................................. 31 Additional Information .............................................. 32 Index to Financial Statements ....................................... 32 ---------------- Until [25 days after the date of this Prospectus], 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. The Company will provide to each person who receives a prospectus, upon written or oral request of such person, a copy of any of the information that is incorporated by reference in the this Prospectus (not including exhibits to the information that is incorporated by reference unless the exhibits are themselves specifically incorporated by reference), if there is any. www.MENDOBREW.com PROSPECTUS SUMMARY The following summary is qualified in its entirety and should be read in conjunction with the more detailed information and Financial Statements and the Notes thereto appearing elsewhere in this Prospectus. Mendocino Brewing Company, Inc. brews Red Tail Ale along with five other ales, one stout, and one porter for the domestic craft beer market. A "craft beer" is a full-flavored beer brewed in the traditional style. Mendocino Brewing is one of the first modern craft brewers, and is considered to be an industry leader for its innovations. Mendocino Brewing's objective is to transform itself from the country's leading microbrewery to a major national craft brewer offering among the highest quality craft beers available anywhere in America. Mendocino Brewing competes in the domestic craft beer segment of the US beer market. The domestic craft beer segment has grown at a rate of approximately 40% per year for several years while overall domestic beer market sales have been relatively flat. Many industry analysts believe that the craft beer segment will grow from 1.9% of the total domestic beer market in 1995 to 5% - - 6% by the year 2000. In 1994 and 1995 Mendocino Brewing raised net proceeds of $3.3 million to finance construction of a brewery with an annual production capacity of 50,000 bbl., expandable to 130,000 bbl. At that time, the Company intended to finance future growth primarily through operations and debt financing. Management believes that following the successful completion of its initial public offering, the continued growth in the domestic craft beer segment gave rise to a qualitative shift in the public's awareness of craft beers, and that this shift now gives the Company an opportunity to enter new markets at a time when many consumers are discovering craft brews for the first time. In completing the plans for the new brewery, Management also concluded that it could realize certain cost efficiencies and overall cost reductions by designing a plant with an initial production capacity of 60,000 bbl. per year (20% greater than originally planned) and an ultimate capacity of 200,000 bbl. per year (54% greater than originally planned). Accordingly, Mendocino Brewing changed the configuration of the new brewery and modified its growth and marketing plans to call for accelerated introduction of additional products into existing markets, penetration of new regional markets, and greatly increasing the total availability of its products. Management expects the Company to complete its new brewery in Ukiah, California (110 miles north of San Francisco) in January or February 1997. Proceeds from this offering will be used to finance the increase in capacity from 50,000 bbl. to 60,000 bbl., pay certain cost increases resulting from design changes and inclement weather, and, if the maximum number of Shares is sold, expand annual production capacity to approximately 75,000 bbl., depending on the mix of products brewed. Proceeds from the offering of the Shares will also be used to implement an expanded marketing plan and to provide working capital. See "Use of Proceeds." For fiscal year 1996, Management expects Mendocino Brewing to realize increases in sales over 1995 of up to 10%. Management expects that annual sales could triple from 1995 levels by the time the Company reaches production of 60,000 bbl. per year at the Ukiah facility, depending on the mix of bottled and draft beer produced and future pricing. These forward looking statements are subject to risks and uncertainties. The Company's actual results could differ materially if, among other causes, the Company fails to complete construction of the new brewery on time, fails to sell its increased production, materially reduces the price of its products, experiences unanticipated difficulty in transferring bottling operations from Hopland to Ukiah, or experiences any of the other circumstances discussed in "Risk Factors." Mendocino Brewing intends to continue to compete primarily on the basis of product quality and image. The Company's marketing plan emphasizes introducing Red Tail Ale and its other brews in draft form; introducing Blue Heron Pale Ale and Black Hawk Stout in 12 oz. six packs using the same high quality graphics and packaging as has contributed to the success of Red Tail Ale; and introducing the Company's brews into new geographic regions. Mendocino Brewing operates a retail brewpub and merchandise store under the name the Hopland Brewery. Management does not expect the Company's expansion plans to materially increase or decrease the results of operations of the brewpub. See "Business - The Hopland Brewery Brewpub and Merchandise Store." -3- Mendocino Brewing was founded in March 1983 as a California limited partnership (the "Partnership"). On January 1, 1994, the business incorporated by transferring all of the Partnership's assets, including its name, to a newly formed California corporation in exchange for all of the Common and Preferred Stock of the corporation. The Partnership distributed these shares to its partners on January 3, 1994. As used hereafter, references to the "Company" and "Mendocino Brewing" include the business operations of the Partnership before their incorporation. Mendocino Brewing's principal executive offices are located at 13351 South Highway 101, P.O. Box 400, Hopland, California 95449-0400. The Company's telephone numbers are (800) 733-3871 and (707) 744-1015. The Company's e-mail address is mendobrew@mendobrew.com. The Offering Shareholders of record as of October 25, 1996 have the first right to purchase Shares pursuant to this offering on a first come, first served basis. The minimum purchase is 100 Shares ($850.00). Shares that remain unsold 15 days after the effective date of this Prospectus, if any, will be offered to the general public and sold in the order in which fully completed subscriptions are received at the Company. For more information concerning subscription procedures, see "Plan of Distribution -- Subscription Procedure." Common Stock offered................................... 600,000 Shares Common Stock outstanding before the offering........... 2,322,222 Shares(1) Use of Proceeds........................................ To finance expansion of the Company's brewing capacity, marketing, and working capital. See "Use of Proceeds." Pacific Stock Exchange Symbol.......................... MBR
Summary Financial and Operating Data
Year Ended Six Months Ended December 31, June 30, ------------------------------ ------------------------------ 1994 1995 1995 1996 ---- ---- ---- ---- Statements of Income Data: (unaudited) Sales.............................. $ 3,523,000 $ 3,735,100 $ 1,675,200 $ 1,911,400 Gross profit....................... 1,524,700 1,720,000 693,000 970,000 Income (loss) from operations...... 200,000 182,700 (27,500) (34,700) Net income (loss).................. $ 153,300 $ 173,700 $ 32,500 $ (50,600) =========== =========== ============ ============ Earnings (loss) per share.......... $ .08 $ .08 $ .01 $ (.02) =========== =========== ============ ============ Weighted average common shares outstanding............... 1,814,403 2,307,074 2,294,148 2,322,222 =========== =========== ============ ============
June 30, 1996 (unaudited) ------------------------------------------- Balance Sheet Data: Actual Pro Forma As Adjusted(2) ------ ------------------------ Working capital (deficit)....................... $(2,125,400) $ 1,782,500 Total assets.................................... 8,214,900 15,041,100 Long term debt, including current portion....... 560,700 4,810,000 Shareholders' equity............................ 4,373,500 9,073,500 - ---------------- (1) Does not include 300,000 shares issued to the general contractor for the new brewery as security for an obligation. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Liquidity and Capital Resources." (2) As adjusted to give effect to the sale of 600,000 Shares (the maximum number of Shares offered by this Prospectus) and the application of the estimated net proceeds therefrom. Also assumes that the Company's $2.7 million construction loan has been converted to long-term debt upon completion of the new brewery. See "Use of Proceeds," "Capitalization," and "Management's Discussion and Analysis of Financial Conditions and Results of Operations."
-4- RISK FACTORS An investment in the Shares being offered by this Prospectus involves a high degree of risk. Prospective investors should consider carefully the following risk factors, in addition to other information concerning Mendocino Brewing and its business contained in this Prospectus, before purchasing Shares. Expansion Plan Mendocino Brewing's expansion plan is subject to risk and management challenges. Growth depends upon completing construction of the new brewery, expanding the production capacity of the new brewery, and selling additional beer by introducing new brands and draft beer into existing and new regional markets. The Company's expansion program has created and will continue to create additional expense for the Company, although the Company will not realize additional revenues from expansion until the initial production from the new brewery is shipped and paid for, which is not likely to occur before March or April 1997. Management believes Mendocino Brewing has built its current customer base primarily on consumer loyalty to Red Tail Ale plus goodwill generated through customer visits to the Hopland Brewery. Management has limited experience in promoting products on a large scale, and there is no assurance that the Company's other brands will be as widely accepted as Red Tail Ale, or that consumers in new geographic markets will be receptive to the Company's products. See "Business -- Strategy;" "-- New Product Offerings;" and "-- Regional Expansion" and "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Material Commitments - Expansion Plan" and "- Liquidity and Capital Resources." Domestic Craft Beer Segment Growth Rate The domestic craft beer segment of the highly competitive U.S. beer market has been characterized by more than ten years of steady growth. The overall growth rate was 44% in 1995. The growth rate may vary from region to region, and there is no assurance that the rate of growth will continue. See "Business - Industry Overview Domestic Craft Beer Segment." Competition Certain competitors in the domestic craft beer segment have large advertising budgets, substantial financial resources, and/or access to the distribution networks of major national and international brewers. Several of Mendocino Brewing's primary competitors are expanding or have recently expanded their production capacity. The amount of supermarket shelf space that can be devoted to any class of products is limited. See "Business Industry Overview - Domestic Craft Beer Segment." No Minimum The offering of the Shares is not contingent upon the sale of any specified minimum number of Shares. Mendocino Brewing must sell a minimum number of Shares to recover the expense of the offering. See "Plan of Distribution." Management plans to pay between $900,000 and $1,165,000 of the Company's short term indebtedness out of the net proceeds of this offering. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Liquidity and Capital Resources." New Construction Construction of the new brewery broke ground in September 1995 and as of September 1996 was approximately 70% complete. New construction is subject to the risk of cost increases due to plan changes and delays from sources such as local government approval processes, inclement weather, unexpected geologic conditions, shortages of or increases in the price of materials such as steel, funding delays, and cooperation and coordination among various parties to the project such as the architect, general contractor, and equipment manufacturer, and timing of cash flow. The new brewery has experienced cost increases and delays, to some degree, from each of the above causes. Interest rates and general economic conditions can also have an effect the project. While Management believes that the sources of previous delays have been addressed, many factors are inherently uncertain and/or beyond the reasonable control of the Company. There can be no assurance that further delays in completion of construction will not occur or that local government agencies will construct certain infrastructure improvements that they have committed to construct. Management has limited experience in managing construction projects. Future Capital Needs -- Additional Future Funding and Reliance on Growth Strategy If the net proceeds of this offering, together with existing debt financing and funds generated by operations, are not sufficient to fund Mendocino Brewing's expansion plans, the Company may need to raise additional funds from public or private sources or enter into a strategic alliance or joint venture. See "Management's Discussion and -5- Analysis of Financial Conditions and Results of Operations - Liquidity and Capital Resources." Issuance of additional equity would likely dilute the investments of existing shareholders. Additional borrowing would increase interest expense and debt service requirements. The amount of additional financing the Company might require will depend in part upon the success of the Company's growth strategy. There can be no assurances as to the success of the Company's growth strategy. There is no assurance that the Company will be able to obtain additional financing from any source if needed. If adequate funds are not available, the Company could be required to curtail implementation of its expansion plans. Risks of Debt Mendocino Brewing has incurred approximately $6.5 million in debt to finance the acquisition of real estate, construction of the new brewery, and purchase of new brewing equipment. The ratio of the Company's long-term debt to equity as of June 30, 1996, when adjusted to include all long term debt added after June 30 and before the date of this Prospectus, is 1.10 to 1. See "Capitalization" and "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Liquidity and Capital Resources." Loan and lease payments must be paid regardless of the Company's revenue. Failure to make payments could lead to foreclosure and sale of all or an important part of the Company's assets. Geographic and Distributor Concentration Mendocino Brewing's wholesale distributions have historically been concentrated in Northern California. The Company's two largest distributors, both in Northern California, accounted for 40% of 1995 wholesale distributions. The distributors that the Company relies upon may also market competing imported and domestic craft beers. Although by law distributors are independent of any brewer, a distributor can be controlled if it relies on one or two large brewers who account for the majority of its sales. The Company has formal written distribution agreements with its distributors which may be terminated by either party with 30-day written notice. The laws of some states, however, may restrict the Company's ability to terminate its agreements with distributors in those states. Inability to terminate a distributor who is performing poorly could have a material adverse effect on the Company's business, financial condition, and results of operations. See "Business -- Product Distribution." Dividends Management does not have any present intention to declare or pay dividends on the Common Stock, but expects the Company to retain earnings for use in its business. The Company's agreements with its lenders prohibit the payment of dividends during the term of the loans. In addition, the Company is required to pay a $1.00 cash dividend on 227,600 shares of Series A Preferred Stock ($227,600 total) before cash dividends may be paid on the Common Stock. See "Dividend Policy" and "Description of Capital Stock." Trading Market for the Shares Mendocino Brewing's Common Stock is publicly traded on the Pacific Stock Exchange under the symbol MBR. Trading volume to date has been light. In the absence of a more active trading market, investors may find it difficult to sell their Shares and purchases or sales of relatively small numbers of shares may have a disproportionately large influence on the reported price of the stock. The Company's stock price may also be materially adversely affected by factors affecting the entire market or the Company's industry that may be unrelated to the operating performance of the Company. There can be no assurance that the market price of the Common Stock will not decline below the public offering price or experience volatility. See "Price Range of Common Stock and Dividend Policy." Dependence on Key Personnel Mendocino Brewing's success may depend to a significant extent upon the continued service of President Michael Laybourn, Master Brewer Donald Barkley, and other members of the Company's executive management. The loss of any key employee could have a material adverse effect upon the Company's business, financial condition, and results of operations. Furthermore, the Company's future performance depends on its ability to identify, recruit, motivate, and retain additional key management personnel, including executive, marketing, and production managers and other personnel. The failure to attract and retain key management personnel could have a material adverse effect on the Company's business, financial condition, and results of operations. See "Management" and "Principal Shareholders." Potential Control Groups Mendocino Brewing's officers, directors, and founders and their spouses own, in the aggregate, 970,222 shares of the Company's outstanding Common Stock, which represents 41.8% of the Common Stock outstanding at the commencement of this offering and will represent 33.2% of the Common Stock outstanding if the maximum number -6- of Shares offered by this Prospectus is sold. As a result, in some circumstances, these shareholders, acting together, might be able to determine matters requiring approval of the shareholders of the Company, including the election of the Company's directors or a change in control of the Company. See "Management" and "Principal Shareholders." The above percentages do not take into account 300,000 shares of Common Stock the Company has issued to the general contractor for the new brewery as security for payment of $900,000 of its fees. The Common Stock collateral is subject to the restrictions that the shares shall be canceled if the fees owed the contractor are paid in full, that if the Company is in default, the shares must be sold in a commercially reasonable manner as specified in the California Commercial Code, and that any shares not needed to be sold to satisfy the obligation to the contractor shall be canceled. Under California law, the contractor may not retain the shares in satisfaction of the obligation without the written consent of the Company given after an event of default. Management plans to pay the Company's obligation to the contractor out of the proceeds of this offering, but there is no assurance that the net proceeds will be sufficient. If the Company were to agree to permit the contractor to retain the shares in satisfaction of the Company's debt, or if the contractor were to sell the shares to a single purchaser or a single group of purchasers, the new shareholder would own 11.4% and the officers, directors, and founders and their spouses would own 37.0% of the outstanding Common Stock, respectively, if none of the Shares offered pursuant to this Prospectus are sold, and will own 9.3% and 30.1% of the outstanding Common Stock, respectively, if all 600,000 Shares are sold pursuant to this offering. (The foregoing percentages do not take into account 8,333 shares of Common Stock previously acquired by the general contractor, except to include them in the outstanding shares.) While the general contractor has the present right to vote the 300,000 shares, no shareholder votes are scheduled or anticipated before the due date of the indebtedness. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations Liquidity and Capital Resources." Shares Available for Future Sale Open market sales of Common Stock that is outstanding at the start of this offering may adversely affect the market price of the Shares during or after this offering. Other than restrictions imposed by S.E.C. Rule 144, there are no material restrictions on the transferability of the 1,453,330 shares of Common Stock held by non-affiliates of the Company. See "Shares Eligible for Future Resale." Excise Taxes Alcoholic beverages are subject to substantial federal and state excise taxes. The federal rate of taxation increases from $7.00 per bbl. to $18.00 per bbl. for annual production in excess of 60,000 bbl. Alcoholic beverages have in recent years been targets of attempts to increase so-called "sin taxes." If excise taxes are increased, the Company could have to raise prices to maintain profit margins. Historically, price increases due to additional excise taxes have not reduced unit sales, but past experience does not necessarily indicate future effects, and the actual effect is likely to depend on the amount of the increase, general economic conditions, and other factors. While higher taxes may reduce overall demand for beer, they would likely also lower the relative price difference between Mendocino Brewing's products and its less expensive competitors. Management believes that the Company's position as a high quality craft brewer whose products are already priced at or near the top of its market segment will enable it to withstand tax increases in the near future. These forward looking statements concerning the possible effect of future excise tax increases are subject to risks and uncertainties. These include general economic conditions, competition, and evolving consumer preferences and attitudes toward adult beverages. Dramshop Liability Serving alcohol to an intoxicated or minor patron is a violation of California law. A server who sells alcoholic beverages to an intoxicated or minor patron may also be liable to third parties for the acts of the patron. Although Mendocino Brewing has implemented procedures to minimize the liability associated with serving alcoholic beverages to intoxicated or minor patrons, there can be no assurance that intoxicated or minor patrons will not be served or that the Company will not be subject to liability for the acts of such patrons. The Company maintains general liability insurance which includes liquor and host liquor liability coverage, currently limited to $1,000,000 per occurrence and $2,000,000 in the aggregate annually, with $4,000,000 in additional secondary coverage. The Company intends to continue such coverage if coverage remains available at an affordable cost. Future increases in premiums could make it prohibitive for the Company to maintain adequate insurance. A large uninsured damage award could adversely affect the Company's business, financial condition, and results of operations. Product Liability Mendocino Brewing's products are not heat pasteurized, irradiated, or chemically treated. In addition, the Company's brewing operations are subject to certain hazards such as contamination. The Company maintains -7- product liability insurance, and no such claims have been made in the Company's thirteen-year history and such claims are rare in the industry. The Company carries general product liability insurance, currently limited to $1,000,000 per occurrence and $2,000,000 in the aggregate annually, with $4,000,000 in additional secondary coverage. The Company intends to continue such coverage if it remains available at an affordable cost. Future increases in premiums could make it prohibitive for the Company to maintain adequate insurance coverage. A large uninsured damage award could adversely affect the Company's financial condition. Environmental Hazards As a user of real estate, the possibility exists that Mendocino Brewing could be held responsible for any contamination of the earth beneath it, regardless of whether the Company in any way caused such contamination. Although the seller of the Company's real estate has agreed to indemnify the Company against any pre-existing contamination liability, there can be no assurance that the seller will have the willingness or financial wherewithal to perform its indemnification obligation. Primary Production Facility and Uninsured Losses After completing the new brewery, Mendocino Brewing will cease using the Hopland facility for wholesale production and will rely primarily or exclusively on the new brewery. The Company has obtained comprehensive insurance, including liability, fire, and extended coverage, as is customarily obtained for businesses similar to the Company. Certain types of catastrophic losses, however, such as losses resulting from floods, tornadoes, thunderstorms, and earthquakes, are either uninsurable or not economically insurable to the full extent of potential loss. Such "Acts of God," work stoppages, regulatory actions, and other causes could interrupt production and adversely affect the Company's business, financial condition, and results of operations. The Ukiah facility is located in a 100-year flood plain, although the base of the building has been elevated above the plain. The Company intends to purchase flood insurance if it is economically feasible to do so. Energy and Supply Shortages and Allocations Shortages or increased costs of fuel, water, raw materials, power, or building materials, or allocations by suppliers or governmental regulatory bodies, could materially delay the expansion of the brewery, hinder the operations of the Hopland brewing facility and/or the brewpub, or otherwise adversely affect the ability of Mendocino Brewing to meet its objectives. PRIORITY OF EXISTING SHAREHOLDERS Shareholders of record as of October 25, 1996 have the first right to purchase Shares pursuant to this offering on a first come, first served basis. The minimum purchase is 100 Shares ($850.00). Shares that remain unsold 15 days after the date of this Prospectus, if any, will be offered to the public and sold in the order in which fully completed subscriptions are received. For more information concerning subscription procedures, see "Plan of Distribution -- Subscription Procedure." USE OF PROCEEDS The maximum net proceeds to Mendocino Brewing from the sale of the Shares in this offering are estimated to be approximately $4,700,000, after deducting selling and other offering expenses. Proceeds from this offering will be used to finance the increase in capacity from 50,000 bbl. to 60,000 bbl., pay certain cost increases resulting from design changes and inclement weather, and, if the maximum number of Shares is sold, to expand the annual production capacity of the new brewery to 75,000 bbl. or more, depending on the mix of products brewed. Management presently estimates that the additional costs associated with expanding annual capacity to approximately 75,000 bbl. will be approximately $0.5 million. No decisions have been made with respect to the vendors of additional brewing equipment. Management has designated an additional $700,000 to fund increased marketing efforts and to provide working capital. The Company and its various lenders have agreed that the net proceeds of the offering will be applied first to the addition of $300,000 to the Company's working capital, second to construction of $600,000 worth of tenant improvements to the brewery (primarily consisting of office space and landscaping), third to payment of $500,000 in accrued fees to the general contractor for the new brewery otherwise due on January 31, 1997 bearing interest at 12% per annum from January 1, 1997; fourth, to payment of $400,000 of a $600,000 short term loan (which -8- Management expects the Company to replace with a revolving line of credit secured by accounts receivable and inventory, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources") bearing interest at prime plus 1.5% and maturing on April 30, 1997, and finally to payment of the remaining $400,000 in accrued fees to the general contractor for the new brewery. The Savings Bank of Mendocino County, in its commitment letter for conversion of the construction loan to a 15-year term loan, proposed to require the Company to pledge all proceeds of this offering in excess of $2.5 million as collateral for the term loan, with the provision that the Bank will release the funds from the pledge to purchase additional equipment if the Company is meeting its sales and revenue objectives. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Liquidity and Capital Resources." Subject to the approval of the Savings Bank of Mendocino County, if and to the extent required under the definitive documentation for the 15-year term loan, Management has also designated approximately $265,000 toward repayment of seller financing on the real estate bearing interest at 9% per annum and due on June 27, 1997. Pending the above uses, Mendocino Brewing intends to invest the net proceeds from this offering in short-term investment-grade interest bearing securities. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY Mendocino Brewing's Common Stock was listed on the Pacific Stock Exchange (symbol MBR) on February 21, 1995. Before February 21, 1995, there was no public trading market for the Company's Common Stock. The high and low closing sales prices for the Common Stock on the Pacific Stock Exchange are set forth below for the quarters indicated:
1995 1996 ------------------------------------------------------------ ------------------------------------------ 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter ----------- ----------- ----------- ----------- ----------- ----------- ----------- High $13.50 $9.25 $8.75 $8.12 $7.38 $10.82 $10.00 Low $7.62 $7.12 $7.75 $7.00 $5.50 $5.82 $7.38
There were approximately 2,496 shareholders of record as of June 30, 1996. Management intends to retain Mendocino Brewing's earnings for use in the business and does not expect the Company to pay cash dividends in the foreseeable future. The Company's credit agreements provide that the Company shall not declare or pay any dividend or other distribution on its Common Stock (other than a stock dividend) or purchase or redeem any Common Stock, without the lender's prior written consent. The holders of the Company's 227,600 outstanding shares of Series A Preferred Stock are entitled to aggregate cash dividends and liquidation proceeds of $1.00 per share before any dividend may be paid with respect to the Common Stock. See "Capitalization" and "Description of Capital Stock." -9- CAPITALIZATION The following table sets forth the actual capitalization of Mendocino Brewing on June 30, 1996, and also provides the pro forma capitalization of the Company as of June 30, 1996, after giving effect to the sale of the maximum (600,000 Shares) number of Shares offered by the Company in this offering at the public offering price of $8.50 per share and the application of the estimated net proceeds:
June 30, 1996 ------------------------------------- Pro Forma Actual As Adjusted ------ ----------- Short-term obligations: Short term debt ......................................... $ 360,000 $ 600,000(1) Current maturities of long-term debt .................... 10,000 32,400(2) Current portion of equipment financing .................. 0 196,800(3) ----------- ----------- Total short-term commitments ................... 370,000 829,200 Long-term obligations: Long-term debt, less current portion .................... 550,700 2,677,600(2) Equipment financing, less current portion ............... 0 1,903,200(3) ----------- ----------- Total long-term commitments .................... 550,700 4,580,800 Shareholders' equity: Common Stock, no par value, 20,000,000 shares authorized; 2,322,222 shares outstanding; 2,722,222 shares outstanding pro forma ...................... 3,869,600 8,569,600 Preferred Stock, no par value 2,000,000 shares authorized 227,600 shares designated Series A 227,600 Series A shares outstanding with a preferred dividend equal to $1.00 per share; shares cancel upon the aggregate payment of entire preferred dividend ......................................... 227,600 227,600 Retained Earnings ................................... 276,300 276,300 ----------- ----------- Total shareholders' equity .......................... 4,373,500 9,073,500 ----------- ----------- Total capitalization ......................... $ 4,934,200 $11,783,500 =========== =========== (1) The pro forma balance sheet reflects the conversion of Mendocino Brewing's short-term loan from WestAmerica Bank ($300,000 outstanding at June 30, 1996; $600,000 outstanding as of the date of this Prospectus) to a revolving line of credit secured by inventory and accounts payable of at least $600,000 and the retirement of $900,000 in short-term financing provided after June 30, 1996 by the general contractor for the new brewery. The Company repaid a separate $60,000 short term loan after June 30, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." (2) Long term debt consists of a $2.7 million construction loan from the Savings Bank of Mendocino County. Although the construction loan is due and payable upon completion of construction, the Savings Bank has given Mendocino Brewing a written commitment to convert the construction loan to permanent financing upon the satisfaction of certain conditions. (3) Mendocino Brewing has an equipment lease from FINOVA Capital Corporation which the Company has used to finance the acquisition of approximately $2.07 million in cost of new brewing equipment.
-10- SELECTED FINANCIAL DATA The following selected financial data have been derived from the Financial Statements and Notes to Financial Statements, audited by Moss Adams LLP, independent auditors, whose report thereon is also included. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Conditions and Results of Operations" and the Financial Statements and Notes thereto included elsewhere in this Prospectus.
Year Ended Six Months Ended December 31, June 30, ------------------------------ ------------------------------ 1994 1995 1995 1996 ---- ---- ---- ---- Statements of Income Data: (unaudited) Sales.............................. $ 3,523,000 $ 3,735,100 $ 1,675,200 $ 1,911,400 Less excise taxes.................. 157,400 168,600 74,500 71,000 ----------- ----------- ------------ ------------ Net sales.......................... 3,365,600 3,566,500 1,600,700 1,840,400 Cost of goods sold................. 1,840,900 1,846,500 907,800 870,400 ----------- ----------- ------------ ------------ Gross profit....................... 1,524,700 1,720,000 693,000 970,000 Operating expenses................. 1,342,700 1,537,300 720,500 1,004,700 ----------- ----------- ------------ ------------ Income (loss) from operations...... 200,000 182,700 (27,500) (34,700) Interest income, net............... 21,800 129,100 74,800 10,800 Other income (expense)............. 3,000 14,800 6,000 (47,400) ----------- ----------- ------------ ------------ Income (loss) before income taxes.. 224,800 326,600 53,300 (71,300) Provision for (benefit from) income taxes..................... 71,500 152,900 20,800 (20,700) ----------- ----------- ------------ ------------ Net income (loss).................. $ 153,300 $ 173,700 $ 32,500 $ (50,600) =========== =========== ============ ============ Earnings (loss) per share.......... $ .08 $ .08 $ .01 $ (.02) =========== =========== ============ ============ Weighted average common shares outstanding............... 1,814,403 2,307,074 2,294,148 2,322,222 =========== =========== ============ ============
Balance Sheet Data: December 31, 1995 June 30, 1996 ----------------- ------------- (unaudited) Cash and cash equivalents....................... $ 1,696,100 $ 21,200 Working capital (deficit)....................... 959,100 (2,125,600)(1) Property and equipment.......................... 3,954,100 6,947,700 Deposits and other assets....................... 71,000 98,400 Total assets.................................... 6,514,000 8,214,900 Long term debt, including current portion....... 554,900 560,700 Total liabilities............................... 2,089,800 3,841,400 Shareholders' equity............................ 4,424,200 4,373,500 - ---------------- (1) After June 30, 1996, Mendocino Brewing obtained a $2.7 million construction loan with a commitment to convert the loan to a long term loan, subject to certain conditions, form the Savings Bank of Mendocino County, plus an equipment lease agreement with FINOVA Capital Corporation for up to approximately $2.07 million of new brewing equipment, plus short term financing from the general contractor for the new brewery in the amount of $900,000. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Liquidity and Capital Resources."
-11- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Financial Statements and the Notes thereto and other financial information included elsewhere in this Prospectus. The discussion of results and trends does not necessarily imply that these results and trends will continue. Overview Mendocino Brewing's financial performance from 1994 through the first six months of 1996 has been characterized by increased sales and gross profits from brewing operations offset by increased administrative expenses attributable to the Company's expansion plan and the cost of being a public company and the aggregate net effect of certain one-time gains, certain one-time losses, and interest from the net proceeds of the Company's initial public offering. The increase in sales is attributable to increased production resulting from adding an additional bottling tank and implementing a 24 hour brewing schedule in September 1995, implementing certain marketing strategies, including new point of sale materials and field sales representatives, beginning in the second quarter of 1996, and retail price increases at the Hopland Brewery brewpub. The improvements to brewing operations increased production capacity by 32% and significantly reduced cost of goods as a percentage of sales. Comparing 1995 to 1994, sales were up 6%, cost of goods sold was flat, and gross profit was up 17.4%. Comparing the first six months of 1996 to the same period in 1995, sales are up 14.1%, cost of goods sold is down 4.1%, and gross profit is up 40%. In 1995, increased administrative expenses resulted in an 8.6% decline in income from operations over 1994, but a $119,100 increase in other income due to interest on the public offering proceeds plus a one time worker's compensation dividend resulted in a 45.3% increase in income before income taxes. In 1996, the bankruptcy of a distributor, increased expenses associated with the operation of the Hopland Brewery, and increased marketing expenses resulted in a 39.4% increase in operating expenses but only $7,200 in additional losses from operations compared to the same period in 1995. While Management plans to continue marketing expenses at a high level, Management has taken actions to control expenses at the Hopland Brewery and will not incur any additional losses attributable to the bankrupt distributor. Management's decision to write off $38,000 in expenses incurred in exploring an alliance with a mid-western distribution company (classified as "other expense"), when combined with a $64,000 decrease in interest earnings as the Company spent the cash proceeds from the public offering, further reduced pre-tax income to a $50,600 loss for the first six months of 1996 compared to income of $32,500 for the same period in 1995. For fiscal year 1996, Management expects Mendocino Brewing to realize increases in sales over 1995 of up to 10% as a result of its increased capacity over 1995, after taking into consideration wholesale beer price incentives and reductions to stimulate distributor interest. Management does anticipate, however, that the Company will be required to cease production of bottled beer for approximately two weeks while its bottling operation is transferred from Hopland to Ukiah, and Management expects to continue to increase the Company's marketing expense in anticipation of substantially increased capacity. Management expects the Company to begin realizing revenues from the new brewery April 1997. Any improvement in results of operations for fiscal 1996 are therefore likely to be attributable to increased production from the Hopland facility and not to completion of the new brewery. Management expects that by the time the Company reaches production of 60,000 bbl. per year at the Ukiah facility, depending on the mix of bottled and draft beer produced and future pricing, annual sales could triple from 1995 levels. These forward looking statements are subject to risks and uncertainties. The Company's actual results could differ materially if, among other causes, the Company fails to complete construction of the new brewery on time, fails to sell its increased production, materially reduces the price of its products, experiences difficulty in transferring bottling operations from Hopland to Ukiah, or experiences any of the other circumstances discussed in "Risk Factors." -12- Results of Operations The following tables set forth, as a percentage of net sales, certain items included in Mendocino Brewing's Statements of Income. See Financial Statements and Notes thereto elsewhere in this Prospectus, for the periods indicated. Year Ended Six Months Ended December 31, June 30 ---------------- ------------------- 1994 1995 1995 1996 Statements of Income Data: Sales ........................... 104.68% 104.73% 104.65% 103.86% Less Excise Taxes ............... 4.68 4.73 4.65 3.86 ------ ------ ------ ------ Net Sales ....................... 100.00 100.00 100.00 100.00 Costs of goods sold ............. 54.70 51.77 56.71 47.30 ------ ------ ------ ------ Gross profit .................... 45.30 48.23 43.29 52.70 Operating expenses .............. 39.36 43.10 45.01 54.59 ------ ------ ------ ------ Income (loss) from operations ... 5.94 5.12 (1.72) (1.89) Other income (expense) .......... 0.98 4.24 5.05 (1.99) ------ ------ ------ ------ Income before income taxes ...... 6.68 9.16 3.32 (3.88) Provision for income taxes ...... 2.12 4.29 1.30 (1.12) ------ ------ ------ ------ Net income ...................... 4.55% 4.87% 2.03% (2.75)% ====== ====== ====== ====== Sales. Sales increased 6.0% from $3,523,000 in 1994 to $3,735,100 in 1995 and 14.1% from $1,675,200 for the six month period ended June 30, 1995 to $1,911,400 for the comparable period in 1996. Growth in sales was attributable to increased production resulting from adding an additional bottling tank and implementing a 24 hour brewing schedule in September 1995, implementing certain marketing strategies, including new point of sale materials and field sales representatives, beginning in the second quarter of 1996, and retail price increases at the Hopland Brewery brewpub. A decrease in sales in the first quarter of 1996 compared to 1995 was offset by an increase in sales in the second quarter of 1996 compared to 1995. Management attributes the decrease in the first quarter of 1996 to delays in implementing a new marketing plan and the increase in the second quarter of 1996 to the implementation of the marketing plan plus expansion into new geographic market. Management attributes approximately half of the sales increase in the second quarter to increased sales to existing distributors with the other half attributable to geographic expansion. Retail sales at the Hopland Brewery brewpub and merchandise store increased 3.3% from 1994 to 1995 and 6.0% from the six month period ended June 30, 1995 to the comparable period in 1996. Management attributes the increase in brewpub sales to a busy summer in 1995 due to increased tourist trade and an increased awareness of MBC's products. These factors more than offset a decrease in beer and food sales in the first quarter of 1995 compared to 1994 which Management attributed to heavy rains and flooding in nearby areas. Cost of goods sold. Cost of goods sold decreased as a percentage of net sales by 2.93 percentage points from 1994 to 1995 and by 9.41 percentage points from the six month period ended June 30, 1995 to the same period in 1996. The implementation of 24-hour brewing in September 1995 significantly improved production efficiencies. The cost of bottles also dropped in the third quarter of 1995. Gross profit. Gross profit increased 17.4% from $898,400 in 1994 to $1,054,600 in 1995 and 40.0% from $693,000 for the six month period ended June 30, 1995 to $970,000 for the comparable period in 1996. Operating expenses. Operating expenses increased 14.5% from $1,342,700 in 1994 to $1,537,300 in 1995 and 39.4% from $720,500 for the six month period ended June 30, 1995 to $1,004,700 for the comparable period in 1996. Several factors contributed to the increases. Marketing expenses have increased partly because of the increase in production capacity that occurred in September 1995 and partly in anticipation of the opening of the new brewery. Management expects the Company to further increase marketing expenses in the balance of 1996 and into 1997. These marketing expenses take the form of point of sale and other promotional costs, periodic price discount specials to distributors, and labor expenses. Retail operating expenses increased due primarily to higher labor costs, increased utilities, increased repairs and maintenance, and during the first two quarters of 1996, increased promotional expenses. The Company wrote off $38,000 in bad debts in the second quarter of 1996 after a California distributor went out of business. Finally, general and administrative expense increased due to legal fees related to growth and trademark issues, payment of directors fees and expenses to the outside directors, costs associated with -13- being a public company, increased labor costs (due to the addition of a human resources director and a shareholder relations coordinator in 1994), and payment of performance bonuses in 1995. This increase was partially offset by a reduced contribution to the Company's profit sharing retirement plan. Other income (expense). Other income (expense) increased in 1995 over 1994. In 1995 Mendocino Brewing benefited from an increase of $106,800 in interest earnings attributable to interest on the proceeds of the Company's public offering of its Common Stock. In addition, one time refunds of worker's compensation premiums for prior years were paid as a result of rate adjustments in those years. In the first quarter of 1995 the Company wrote off an equipment deposit of $15,000 made in 1993. Other income (expense) decreased by $117,300 in the six months ended June 30, 1996 compared to the same period for 1995 as a result of a write-off of approximately $38,000 in expenses incurred in exploring an alliance with a mid-western distribution company and a decrease of $64,000 in interest earnings as cash from the initial direct public offering was used for the expansion project. Provision for (benefit from) income taxes. The provision for income taxes in 1995 was $81,400 more than the provision for income tax in 1994 primarily because of Mendocino Brewing's higher net income and timing differences resulting in more deferred income taxes. See "Notes to Financial Statements, Note 1(h) - Description of Operations and Summary of Significant Accounting Policies and Note 11 - Income Taxes." The Company recognized a benefit from income taxes in the first six months of 1996 of $20,700 compared to a tax provision in approximately the same amount for the same period in 1995. Net income. Net income increased 13.3% in 1995 over 1994 primarily due to increased sales and lower cost of goods sold as a percentage of sales resulting from process improvements in brewing operations. For the six month period ended June 30, 1996 compared to the same period for 1995, net income was down $83,100 for a net loss of $50,624 compared to net income of $32,500. Operating results for the first two quarters of 1996 are not necessarily indicative of operating results for the full year. For at least the past three fiscal years, operating results for the first two quarters have not been indicative of operating results for the entire year. In 1995, net income for the first two quarters was 18.7% of net income for the year; in 1994, it was 22.5%; and in 1993, it was 15.4% (on a pro forma basis assuming that the Partnership had paid income taxes at the corporate rates then in effect). Segment Information Mendocino Brewing's business presently consists of two primary segments. The first segment is brewing for wholesale to distributors and other retailers. This segment accounted for 74% of the Company's 1995 annual sales. The second segment consists of brewing beer for sale along with food and merchandise at the Company's brewpub and retail merchandise store, the Hopland Brewery. This segment accounted for 26% of the Company's 1995 annual sales, 11% of which consisted of the sale of draft and bottled beer, and the remaining 15% of which consisted of sales of food and merchandise. Wholesale and retail beer sales in both segments combined comprised 85% of the Company's annual sales in 1995. See "Notes to Financial Statements, Note 7 - Segment Information." Mendocino Brewing is now in the process of increasing its brewing capacity by more than three times (18,000 bbl. to 60,000 bbl.). Proceeds from the sale of all of the stock offered by this Prospectus would permit the Company to expand its operations to up to 75,000 bbl. per year, an aggregate increase from the Company's current capacity of 18,000 bbl. of more than 4.2four times. (See "Use of Proceeds.") As the Company does not intend to expand its brewpub operations, Management expects that retail sales, as a percentage of total sales, will decrease proportionally to the expected increase in the Company's wholesale sales. Retail beer sales for off-site consumption may decrease as the Company's brews become more widely available. Seasonality Beer consumption nationwide has historically increased by approximately 20% during the summer months. Mendocino Brewing's wholesale distributors were on an allocation basis while the Company's annual production was capped at 13,600 bbl., so seasonality had little effect on wholesale sales through late 1995. It is not clear to what extent seasonality will affect the Company as it expands its production capacity. The Company brews four seasonal beers: Springtide Ale in March, Eye of the Hawk Special Ale from July through October, Frolic Shipwreck Ale 1850 in July, and Yuletide Porter in November and December. These seasonal beers tend to augment sales during the periods in which they are available. Retail operations, which depend largely on tourist traffic, historically have been higher in the third and fourth quarters. -14- Material Commitments - Expansion Plan Mendocino Brewing is building a 62,000 sq. ft. custom designed turn-key brewery on nine acres of land in Ukiah, California. See "Business - New Brewery" and "Liquidity and Capital Resources." Liquidity and Capital Resources Generally. The expansion now underway has had and will continue to have a material impact on Mendocino Brewing's assets, liabilities, commitments for capital expenditures, and liquidity. Capital resources for the expansion plan have been supplied by the net proceeds of Mendocino Brewing's initial public offering and debt and equipment financing as described below. Working capital for day to day business operations to date has been provided primarily through operations. Financing the New Brewery. The presently estimated cost of the new brewery at its initial annual production capacity of 60,000 bbl. is $11.1 million. This includes $0.8 million for the land, $6.7 million for improvements to the real estate, $3.2 million for equipment, and $0.4 for financing costs. Increasing the initial annual production capacity of the new brewery to 75,000 bbl. will require an additional expenditure for equipment of approximately $0.5 million. Of this amount, approximately $3.3 million has been paid from the net proceeds of Mendocino Brewing's initial public offering completed in February 1995. Mendocino Brewing has obtained a $2.7 million construction loan secured by a first priority deed of trust on the Ukiah land and improvements and the proceeds of this offering from the Savings Bank of Mendocino County along with a written commitment to convert the construction loan to a 15 year term loan upon successful completion of the new brewery, subject to certain conditions. The construction loan bears interest at the lender's prime plus 2% (initially 10.25%), payable monthly, and matures on February 2, 1997. Upon conversion, the loan will bear interest at the then prevailing 5 Year Treasury Constant Maturity Index (but not less than 10%), with a maximum for the first five years at 2% above the initial fully indexed rate, and a maximum during the remaining term of the loan at 3% above the initial fully indexed rate at the beginning of the remaining term. The minimum annual interest rate is 8%. The loan will be over 25 years with a balloon payment upon maturity. The lender's commitment letter states that the lender will convert the unpaid principal at maturity to a fully amortized 10-year loan subject to terms an conditions to be agreed upon at that time. The commitment letter proposes to require the Company to pledge all proceeds of this offering in excess of $2.5 million as collateral for the 15-year term loan, with the provision that the Bank will release the funds from the pledge to purchase additional equipment if the Company is meeting its sales and revenue objectives. FINOVA Capital Corporation has also agreed to lease new brewing equipment with a total cost of approximately $2.07 million to Mendocino Brewing for a term of 7 years with monthly rental payments of approximately $29,000 each. The lease is to commence when the brewing equipment is operational. Until that time, FINOVA has loaned $750,000 to the Company with interest at the Citibank prime plus 3%. At expiration of the initial term of the lease, the Company may purchase the equipment at its then current fair market value but not less than 25% or more than 30% of the original cost of the equipment, or at the Company's option, may extend the term of the lease for an additional year at approximately $45,600 per month with an option to purchase the equipment at the end of the year at then current fair market value. The lease is not pre-payable. The seller of the Ukiah land has a note, secured by a third priority deed of trust on the land, with a remaining principal balance as of August 1, 1996 of approximately $265,000 at 9% annual interest payable in monthly installments of principal and interest of $2,380 with the balance due at maturity on June 27, 1997. WestAmerica Bank of Santa Rosa, California has loaned Mendocino Brewing $600,000 secured by Mendocino Brewing's accounts receivable and other tangible personal property located at its Hopland facility. The loan bears interest at a variable interest rate of prime plus 1.5% payable monthly and matures on April 27, 1997. The Company anticipates that it will convert this amount with a new revolving line of credit secured by accounts receivable and inventory, and has received a commitment letter from WestAmerica Bank to convert the $600,000 term loan to a revolving line of credit with an advance rate of 80% of qualified accounts receivable and 25% of inventory. As the Company's sales and production continue to expand, the amount of inventory and receivables financing available should increase proportionately. These forward looking statements are subject to risks and uncertainties. Even if the Company's accounts receivable and inventory grows in quantity, credit may be unavailable for other reasons relating either to the Company's business, financial condition, and results of operations, the craft brew industry, the lending industry, or economic conditions in general. To the extent that the loan is not extended or refinanced, the -15- Company will be required to repay the loan out of cash from operations, the net proceeds of this offering, or the proceeds of another debt or equity financing, a strategic alliance, or a joint venture. The general contractor for the new brewery, BDM Construction Co., Inc. ("BDM"), has agreed to defer up to $900,000 in fees otherwise owed or to become payable on December 31, 1996, subject to performance by BDM of its obligations under the construction contract, until January 31, 1997 with interest at 12% per annum. The deferral arrangement is secured by a second priority deed of trust on the Ukiah land and improvements, and by 300,000 shares of Mendocino Brewing's Common Stock. In the event of default, BDM is required to proceed against the Common Stock before initiating any proceeding against the real estate. The Common Stock collateral was issued to BDM by the Company pursuant to Section 4(2) of the Securities Act of 1933 subject to the restrictions (a) that the shares shall be canceled if the amounts owed BDM are paid in full, (b) that if full amount owed BDM is not paid, the shares must be sold in a commercially reasonable manner as specified in the California Commercial Code, and (c) that any shares not needed to be sold to satisfy the obligation to BDM shall be canceled. Under California law, BDM may not retain the shares in satisfaction of the obligation without the written consent of the Company given after an event of default. Management plans to pay the Company's obligation to BDM out of the proceeds of this offering, but there is no assurance that the Company will raise net proceeds sufficient to do so at the time required. See "Use of Proceeds." To the extent that the proceeds of the offering are insufficient, the Company will be required to pay the obligation out of cash from operations, proceeds from the sale of the shares held as collateral, or the proceeds of another debt or equity financing, strategic alliance, or a joint venture. Of the balance of the anticipated cost of the new brewery (approximately $1.26 million for a 60,000 bbl. brewery and $1.76 million for a 75,000 bbl. brewery), a portion has already been paid from operations, but Management expects most of the remainder to come from the proceeds of this offering, or if such proceeds are insufficient, vendor financing, future operations, other debt or equity financing, or a strategic alliance or joint venture. Debt to Equity Ratio. Upon completion of the new brewery, and after taking into account the sale of the maximum number of Shares offered by this Prospectus, Mendocino Brewing will have long-term debt and equipment financing commitments of at least $4.8 million. The exact amount to be financed will depend on the amount raised in this offering, the amount and type of any additional equipment purchased, and the extent to which the Company obtains debt or lease financing for additional equipment. On a pro forma basis, assuming that $4.8 million in long-term debt had been added as of June 30, 1996 to the Company's then existing long-term debt of $0.55 million, but without assuming the sale of any additional shares of Common Stock, the Company's ratio of long-term debt to shareholder's equity, which was actually 0.13 to 1 on June 30, 1996, would have been 1.10 to 1. Impact of Expansion on Cash Flow. Mendocino Brewing must make timely payment of its debt and lease commitment to continue in operation. Increased capacity will also place additional demands on the Company's working capital to fund increased purchases of supplies and pay the cost of additional production and administrative staff and additional sales and marketing staff and activities. There will be a lag between the time the Company must incur some or all of these costs and the time the Company generates revenue from sale of increased production. Working capital to fund these expenses will be provided by trade terms offered by suppliers and vendors, the proceeds of this offering, additional debt or equity from other sources, and/or deferral of certain expenses. Strategic Alliances and Joint Ventures. The rapid growth of the craft beer industry has been characterized in part by a variety of consolidations, strategic alliances, and joint ventures. Mendocino Brewing and its President, Michael Laybourn, are very visible within the craft brew segment because of the Company's place in the history of modern craft brewing, the distinctiveness of its Red Tail Ale label, and Mr. Laybourn's leadership positions in industry trade groups. See "Management." From time to time Mendocino Brewing has received indications of interest in forming a strategic alliance, joint venture, or other relationship. To date, only one such proposal evolved beyond a term sheet before the Company withdrew from negotiations. The Company is, however, carrying on discussions with certain parties that could result in a strategic alliance or joint venture. The Company's current goals in any such arrangement would be to obtain additional capital to expand the production capacity of the new brewery to 200,000 bbl per year, to enter into an arrangement for sharing the expanded brewery to provide optimal utilization of overhead and thereby reduce unit costs, and to access additional channels of domestic and/or international distribution. Creating additional value for shareholders is an important objective of these goals, but providing liquidity by way of a sale or merger is not. The Company offers no assurances or estimates of the possibility that the Company might enter into such a strategic alliance or joint venture at any time in the foreseeable future. -16- BUSINESS Overview Mendocino Brewing Company, Inc. brews Red Tail Ale along with five other ales, one stout, and one porter for the domestic craft beer market. A "craft beer" is a full-flavored beer brewed in the traditional style. Mendocino Brewing is one of the first of the modern craft brewers, and is considered to be an industry leader for its innovations. Mendocino Brewing's objective is to transform itself from the country's leading microbrewery (i.e., a brewery with annual capacity of less than 15,000 bbl. per year) to a major national craft brewer offering among the highest quality craft beers available anywhere in America. To accomplish this goal, Mendocino Brewing is building a new brewery in Ukiah, California (110 miles north of San Francisco), which Management presently expects to be completed in January or February of 1997. The new brewery will have an initial annual capacity of approximately 60,000 bbl., which is more than four times the Company's annual capacity from 1993 - 1995 of 13,600 bbl. Proceeds from this offering, if the maximum number of Shares is sold, will be used to further expand the new brewery's annual capacity to approximately 75,000 bbl., depending on the mix of products brewed. See "Use of Proceeds." Ultimately, the facility can expand to 200,000 bbl. per year. Company Background Mendocino Brewing Company was originally formed in March 1983 as a California limited partnership (the "Partnership"). On January 1, 1994, the business was incorporated by transferring all of the Partnership's assets, including its name, to a newly formed California corporation in exchange for all of the Common and Preferred Stock of the corporation. The Partnership distributed these shares to its partners on January 3, 1994. As used hereafter, references to the "Company" and "Mendocino Brewing" include the business operations of the Partnership before its incorporation. Mendocino Brewing first bottled its flagship brand, Red Tail Ale, in December 1983. In February 1995, Mendocino Brewing completed a $3.6 million direct public offering at $6 per share. The Company purchased nine acres of land in Ukiah, California in 1995 and broke ground on the new brewery in September 1995. Seeking to maximize the production of the Hopland facility in the interim, the Company added an additional bottling tank in the Fall of 1995, which permitted the Company to begin 24 hour brewing operations. This increased the annual capacity of the Hopland facility to 18,000 bbl., technically taking the Company out of the microbrewery category. The Company's products are sold in over 1,500 retail outlets in Northern California and in selected locations throughout the United States. See "Product Distribution." Mendocino Brewing is recognized as a leader in the craft brewing industry and enjoys a national and international reputation. The Company's distinctive and award winning Red Tail Ale label is frequently featured in calendars, posters, and literature concerning the craft beer industry. The Company enjoys good visibility within the industry as well, due in part to the leadership its officers have provided within various industry trade groups. See "Management." Industry Overview Domestic Beer Market. According to Modern Brewery Age's 1995 Statistical Report, overall domestic beer sales in 1995 was 177 million bbl. (down 1.5% from 1994). A barrel equals approximately 13.78 cases of 331 twelve ounce bottles; 177 million bbl. is therefore the approximate equivalent of 58.5 billion twelve ounce bottles of beer. The U.S. beer market may be divided into five segments:
Representative Suggested Segment Est. Market Share Top Brands Retail Price/6-pack - -------------------------------------------------------------------------------------------------------------------- Low-Priced 60.0% Busch, Milwaukee's Best, Old Milwaukee $2.80 Premium 31.4% Budweiser, Miller Lite, Bud Light, Coors Light $4.05 Super-Premium 1.2% Michelob, Lowenbrau $4.67 European Import 5.5% Heineken, Guinness, Bass $7.90 Domestic Craft 1.9% Samuel Adams, Pete's, Sierra Nevada, Red Tail Ale $5.99 to $6.99
-17- Domestic Craft Beer Segment. While overall beer sales have been basically flat for several years, domestic craft beer sales in 1995 were up 44% to 3.8 million bbl. and a 1.9% market share. Many industry analysts predict that craft beer sales will continue to increase until they achieve a market share of 5%-6% by the year 2000. Craft beers are characterized by their full-flavor and are usually produced along traditional European brewing styles. The majority of craft beers are ales, although some are malt lagers. Wheat beers and fruit flavored ales and lagers have enjoyed recent popularity among craft beer consumers. Competition The craft beer category consists of: o Contract brews -- any style brew produced by one brewer for sale under the label of someone else who does not have a brewery or whose brewery does not have sufficient capacity . o Regional craft brews -- "hand-crafted" brews, primarily ales, sold under the label of the brewery that produced it. o Microbrews -- "hand-crafted" brews, primarily ales, sold under the label of the brewery that produced it, if the capacity of the brewery does not exceed 15,000 bbl. per year. o Large brewer craft- style brews -- a brand brewed by a national brewer which may only imitate the style of a craft beer. These craft-style brews are often sold under the label of a brewery that does not exist or the label of a brewpub with no bottling capacity. The term "phantom brewery" is sometimes used to describe such brands. o Brewpub brews -- "hand-crafted" brews produced for sale and consumption at the brewery, which is normally connected with a restaurant/saloon. Brewpub brews are not normally sold for off-site consumption in significant quantities. Mendocino Brewing competes against all of the above brewers primarily on the basis of product quality and image. Of the approximately 3.7 million bbl. of craft beer produced in America in 1995, contract brews (led by Samuel Adams Boston Lager, Pete's Wicked Ale, and their respective related brands) accounted for approximately 1.5 million bbl., or 41% of the total; regional craft brands (led by Sierra Nevada, Redhook, Pyramid (Hart Brewing, Inc.), Anchor, and Full Sail) represented approximately 1.25 million bbl., or 34% of the total; and microbrews (led by Red Tail Ale) represented approximately 910,000 bbl., or 25% of the total. Mendocino Brewing's annual capacity grew slightly beyond 15,000 bbl. to 18,000 bbl. in 1995, and technically ceased to be a microbrew at that time.
- --------------------------------------------------------------------------------------------------------------- 1994 & 1995 Domestic Craft Beer Market 1994 1995 Largest Craft Brewers in Mendocino Total Sales Annual Total Sales Annual Brewing's Primary & Target Markets (x 1,000 bbl.) Growth (x 1,000 bbl.) Growth ----------------------------------------------------- -------------- ------ -------------- ------ 1. Boston Beer Co. (Boston, MA) 700 56% 961 37% 2. Pete's Brewing Co. (Palo Alto, CA) 182 43 348 91 3. Sierra Nevada Brewing Co. (Chico, CA) 156 50 205 31 4. Redhook Ale Brewery (Seattle, WA) 94 27 159 69 5. Hart Brewing Co. (Kalma, WA) 72 118 123 71 6. Anchor Brewing Co. (S.F., CA) 103 12 104 1 7. Full Sail Brewing Co. (Hood River, OR) 53 39 71 36 8. Widmer Brewing Co. (Portland, OR) 50 25 70 40 9. Portland Brewing Co. (Portland, OR) 34 N/A 62 82 10. Bridgeport Brewing Co. (Portland, OR) 18 12 N/A N/A 11. Mendocino Brewing Co. (Hopland, CA) 13 4 14 8 Remaining Domestic Craft Brewers (approx. 800) 1,154 N/A 1,663 44 ----- --- ----- --- Total Domestic Specialty Segment Production 2,629 N/A 3,780 44% - --------------------------------------------------------------------------------------------------------------- Source: Modern Brewery Age
-18- Products Mendocino Brewing brews three ales and a stout year-round, three seasonal ales, and a seasonal porter: o RED TAIL ALE, a full flavored amber ale, is the flagship brand of Mendocino Brewing. o BLUE HERON PALE ALE is a golden ale with a full body and a distinctive hop character. o BLACK HAWK STOUT is the fullest in flavor and body of the Company's brews. o EYE OF THE HAWK SELECT ALE is a high gravity deep amber summer ale. o YULETIDE PORTER is a deep brown Holiday brew with a traditionally rich, creamy flavor. o PEREGRINE PALE ALE is brewed year-round with a more delicate flavor and character. o SPRINGTIDE ALE is brewed around St. Patrick's Day and appears as a fresh, flowery, spicy golden ale. o FROLIC SHIPWRECK ALE 1850, a Scottish-style ale brewed around July, was introduced in 1994 as an annual fund-raiser at the request of the Mendocino County Museum to commemorate the wreck of the clipper ship Frolic, with its cargo of Scottish ale, on the Mendocino coast in 1850. Salvage efforts were abandoned when workers, upon sighting the previously unreported big trees of Mendocino County, launched the timber industry which has characterized the area ever since. Mendocino Brewing uses an ale yeast strain that was first introduced at New Albion Brewing Co. in the late 1970s. Management knows of no other brewery that ferments its beer with this particular strain of yeast, which is no longer available commercially elsewhere. Mendocino Brewing is among a minority of brewers who use whole hop flowers instead of processed hop pellets in their brewing processes. This technique contributes to the distinctive characteristics of the brews. The Company adds active fermenting beer (Krausen) after the beer is bottled, which produces a pleasant amount of natural carbonation. The thin layer of brewer's yeast in the bottom of the bottle is a natural characteristic of bottle conditioned ale. Mendocino Brewing's distinctive brews have been very well received in the market and within the industry. Eye of the Hawk Select Ale won a gold medal at the 1991 Great American Beer Festival after winning a silver in 1990, and also won a bronze in 1992. Blue Heron Pale Ale also won a bronze medal at the 1991 Great American Beer Festival. The Hopland Brewery Brewpub and Merchandise Store To date, Mendocino Brewing's major marketing tool has been the Hopland Brewery. Located on a major tourist route in Hopland, California, 100 miles north of San Francisco, the Hopland Brewery, which opened in 1983, was the first brewpub to open in California and the second in the United States since the repeal of Prohibition. The brewpub is housed in a 100 year-old brick building that was once known as the Hop Vine Saloon. The inside walls are trimmed with the original turn-of-the-century ornamental stamped tin. Works of local artists are featured on a rotating basis. The bar is hand-crafted early California style blond oak and brass that complements the tradition of the tavern and the Company's brews. The pub includes a dart room and a stage. Patrons can view the brewing process through windows in the adjoining brewhouse. An outdoor Beer Garden includes a shaded grape arbor, flowers, trellised hops in the summer, picnic tables, and a sandbox for the kids. Beverages served include Red Tail Ale, Blue Heron Pale Ale, Black Hawk Stout, Peregrine Pale Ale, and a seasonal brew on tap, along with local wines, Hopland Seltzer Water, local apple juice, and soft drinks. The brewpub also features hand pumped cask conditioned ales. The menu features home-style cooking, spicy beer sausages, legendary hamburgers, Red Tail chili, fresh salads, snacks, vegetarian entrees, and daily specials at moderate prices. The brewpub operates days and evenings, with live music on Saturdays and for special events, such as the Company's annual Anniversary Party in August and its Oktoberfest in October. The adjacent Merchandise Store sells off-sale packages of the Company's brews (including gift packs) and merchandise such as hand-screened label T-shirts, posters, engraved pint glasses and mugs, logo caps, books about brewing, gift packs, and other brewery-related gifts. Management plans to continue bottling operations at the Hopland facility until the Company can no longer keep up with demand, and will then transfer the bottling operations to the Ukiah facility. The Company will continue to operate the Hopland facility to provide special occasion draft beers for the brewpub; to research, develop, and test-market new craft brews; and as a brewing education and training site. -19- Strategy Mendocino Brewing's objective is to transform itself from the country's leading microbrewery to a nationally known and respected craft brewer that offers among the highest quality craft beers available anywhere in America. Management believes that the continued growth in the domestic craft beer segment (see "-- Industry Overview") has given rise to a qualitative shift in the public's awareness of craft beers, and that this shift now gives the Company an opportunity to enter new markets at a time when many consumers are discovering craft brews for the first time. Increasing capacity by building a new brewery has been a necessary step in achieving this objective. Management believes that an equally important step is to position Mendocino Brewing's products as offering superior quality with very high perceived value and distinctive brand images, even when compared with other craft brews. Management plans to accomplish this objective by making the Company's most popular brews available in 12 oz. six packs and draft, increasing the Company's brand development efforts, and entering new geographic markets. New Product Offerings Until recently, Mendocino Brewing's capacity limitations and marketing considerations dictated that the bulk of the Company's production be Red Tail Ale in 12 oz. six packs. Draft beer has been limited to production for sale at the Hopland Brewery, and other brews, such as Blue Heron Pale Ale, Black Hawk Stout, Eye of the Hawk Special Ale, Yuletide Porter, and Frolic Shipwreck Ale 1850 have been available only in limited quantities of 750 ml or 22 oz. bottles. A key element of the Company's strategy is to make more of its products available in 12 oz. six-packs and draft. The new products are: o Blue Heron Pale Ale. Blue Heron Pale Ale is now available at selected retail outlets in 12 oz. six packs. The bottles and carrier pack feature a colorful new label depicting a blue heron in flight over a river valley. The design has already won awards for graphics and packaging, including a Northern California Addy. o Black Hawk Stout 12 oz. six-packs. Management plans to introduce Black Hawk Stout in 12 oz. six following completion of its new label development, which Management expects to occur in 1997. This forward looking statement is subject to risks and uncertainties. Among other things, the task of completing the new brewery may divert Management's attention from matters such as label development. The speed with which new Black Hawk Stout labels are developed will also depend, in part, on the amount of proceeds raised in this offering. The Black Hawk Stout label presently consists of the basic Mendocino Brewing Company logo with the words BLACK HAWK STOUT and is distributed in 22 oz. bottles in limited quantities. o Draft brews in half barrel. kegs. Management presently intends to make draft production of Red Tail Ale, Blue Heron Pale Ale, Black Hawk Stout, and Peregrine Pale Ale in half barrel kegs the first priority of the new brewery. Historically in the beer industry, introducing draft products into restaurants and other establishments has driven bottle sales which in turn increased demand for draft products in locations not served. The Company is designing special tap handles and other marketing materials for its draft products. These forward looking statements are subject to risks and uncertainty. Among other things, there is no assurance that sale of the Company's brews will help it achieve the critical mass that Management seeks. Brand Development Management believes that consumers of the Company's brews are like the typical craft beer consumer described in the H.C. Wainwright & Co. industry report of October 12, 1995. According to this report, the typical craft beer consumer is interested in "upscale and diversified" products with a "distinctive brand image" and "full flavored taste." Craft beer consumers also tend to be consumers of gourmet coffees, fine wines, all-natural products, and other "affordable luxuries." A survey conducted by ICR of Media, PA found that the following percentages of people had tried a craft beer: * 25% of all U.S. beer drinkers * 23% of women beer drinkers * 26% of male beer drinkers * 51% of people with annual incomes of $75,000 + * (Greater Than) 50% of college educated people * 38% of adults 25-34 years old * 10% of adults 45 years and older * 32% of beer drinkers in the Northeast * 28% of beer drinkers in the West * 26% of beer drinkers in the Midwest * 17% of beer drinkers in the South One of the ways Mendocino Brewing projects its quality and corporate values to consumers is through its Red Tail Ale, Eye of the Hawk Special Ale, and Blue Heron Pale Ale labels. The Company has used nationally-known -20- wildlife artists including Randy Johnson and Lee Jayred for its label designs. In 1990, Mendocino Brewing received the Paperboard Packaging Council's Silver Award for Excellence in Packaging and Award for Excellence in Graphic Design and a Northern California Addy Award for its Red Tail Ale packaging. This year, the Company received a Northern California Addy Award for its Blue Heron Pale Ale packaging. It is Management's experience that distributors and retailers realize the importance of superior packaging graphics and appreciate the Company's offerings for that reason. Management believes that the Red Tail Ale label successfully communicates the value of Mendocino Brewing's products with the label's respectful depiction of a red tail hawk flaring its wings as it prepares to land with clusters of hops and barley in its talons. The illustrations Mendocino Brewing uses with its Eye of the Hawk Select Ale and Blue Heron Pale Ale labels are intended to evoke similar responses, as will be the illustrations for Black Hawk Stout and Peregrine Pale Ale when introduced. The popularity of Mendocino Brewing's logos and trademarks is evidenced by the success of the merchandise store at the Hopland Brewery and also by the success of the merchandise catalogue the Company introduced in 1994. As part of its marketing efforts, therefore, the Company intends to implement a brand marketing development program that will emphasize: o Point-of-sale promotional materials including brochures, signage, table tents, coasters, tap handles, and glassware. o Clothing (caps, T-shirts, polo shirts, sweatshirts, etc.). o Signage for distributor trucks to create "moving billboards." Mendocino Brewing's emphasis on separate, distinctive illustrations for its various brands enables it to produce a variety of images to create consumer interest. o World Wide Web Page. Mendocino Brewing's web page is located at http://mendobrew.com and features information about the Company and the Hopland Brewery brewpub, the Company's brewing process, the Company's brands, the Hopland area, Company merchandise, and shareholder information. The web page address is featured prominently on Company marketing materials. o Continued use of the Brewsletter beyond its current mailing list of 12,000. The Brewsletter is a newsletter Mendocino Brewing publishes and distributes to educate subscribers about the brewing industry and the Company's products and to promote the Company's image and corporate values. o Strong visual presence at beer shows and tasting competitions, including the Great America Beer Festival in Denver, the Portland Brewers Festival, and the KQED Beer Festival in San Francisco. Regional Expansion Mendocino Brewing's goal is to become a nationally known and respected craft brewer. In addition to California, the Company's products are distributed in limited quantities in the metropolitan areas of Washington D.C., Boston, Seattle, Phoenix, Chicago, Milwaukee, New York, Atlanta, and North Carolina, and throughout Texas, Oregon and Colorado at selected accounts. The Company plans to add distributors in New Jersey, Maryland, Virginia, and the metropolitan areas of Minneapolis/St. Paul and Philadelphia in the near future. Increased production will make it possible for the Company to sell greater quantities of its products in these and other locations. Northern California is the Company's most important market, and Management anticipates that it will remain so for the foreseeable future. The Company's two largest distributors, Bay Area Distributing (San Francisco and the East San Francisco Bay Area) and Golden Gate Distributing (Sonoma and Marin Counties) accounted for 21% and 19%, respectively, of the Company's wholesale distribution in 1995. The percentage of the Company's sales for which these distributors have accounted has decreased, and will continue to decrease, as the Company adds new distributors and supplies them with more product. Pricing Strategy Mendocino Brewing's products are priced at or near the top of the market and have been for several years. Recently, in anticipation of substantially increased production, the Company reduced its suggested retail price for a six-pack of Red Tail Ale from $7.43 to $6.99. The Company has noticed that the price range of 12 oz six packs of the major craft brew brands has narrowed in the last two years and appears to be converging on $6.50 per six pack, with no major craft brew brands at less than $6.45 per six pack. Management believes that the Company's products will continue to command prices that will be on at least a par with other major regional craft brewers. These forward -21- looking statements are subject to risks and uncertainties. Retail prices are subject to many factors most of which are beyond the control of the Company. These factors include general economic conditions, competition and consolidation, and ability to anticipate and respond to evolving consumer preferences and attitudes toward adult beverages. Management anticipates that the Company will periodically give temporary price reductions through special promotions in response to market conditions. Frequent price reductions can condition consumers to expect such reductions, which may increase or reduce overall unit sales depending on the circumstances. Social Responsibility Part of Mendocino Brewing's mission is to be viewed as a community, regional, and national asset and as a positive example of how a business should be operated. Management believes that the Company's customers require products with high intrinsic value; that product quality alone is not sufficient; and that a product must distinguish itself from the competition with the values it communicates. These values include commitment to employees, community involvement, and environmental responsibility. Management attempts to instill these values in Company personnel and operations and to communicate to customers the commitment of the Company to act responsibly. The Company encourages employees and distributors to share ownership and mission with Management as well as a sense of pride in the Company's products. Although part of the Company's strategy is to grow through expanded production and sales, it promotes its brews as beverages of moderation whose distinctive taste and high quality give the consumer satisfaction. New Brewery Mendocino Brewing is building a 62,000 sq. ft. custom designed turn-key brewery on nine acres of land in Ukiah, California, approximately 10 miles north of the original brewery. The facility was approximately 70% complete in September 1996. The facility is planned to feature new fermenting tanks, kegs, and packaging and other miscellaneous equipment to be installed with the Company's existing bottling line. Certain features of the new brewery have been specially designed for the Company's brewing methods, such as equipment for using whole hops and designated space for bottle conditioning. The facility will initially open with an annual capacity of 60,000 bbl. per year. The Company had originally planned a 50,000 bbl. facility, but was able to take advantage of certain economies by revising its plans to 60,000 bbl. per year (20% greater than originally planned). The facility has been designed to allow for expansion in stages up to a maximum capacity of 200,000 bbl. per year (54% greater than originally planned). The Company also elected to construct an extensive water treatment facility as part of its commitment to the environment and to reduce the over-all cost of disposing of its waste water. Management expects the sale of the maximum number of Shares offered by this Prospectus will be sufficient to permit the Company to purchase additional equipment to increase the plant's annual capacity to approximately 75,000 bbl., depending on the products brewed. Mendocino Brewing anticipates that it may have to cease production for approximately two weeks to move its bottling equipment from Hopland to the Ukiah facility. The Company intends to build up sufficient inventory of bottled product to maintain its then existing sales levels during the transition. These forward looking statements are subject to risks and uncertainties. The time required to relocate the bottling equipment could be subject to several factors, including problems or delays in disassembling, moving, reassembling, installing, and integrating the equipment. If the hiatus between shut down and re-start is extended, or if the build-up of inventory is inadequate for that or any other reason, the Company could find itself unable to meet demand, which could have an adverse effect on the Company's goodwill. If the inventory is built up too much, there is a possibility that the Company will not be able to sell the entire inventory before the end of its shelf-life of 90 days, although inventory rotation will reduce such a possibility. Product Distribution Mendocino Brewing's beers are sold through distributors to consumers in bottles at supermarkets, warehouse stores, liquor stores, taverns and bars, restaurants, and convenience stores. As production capacity expands, the Company intends to make its brews available in draft form and may add additional kinds of outlets, such as sporting events. The Company's products are delivered to retail outlets by independent distributors whose principal business is the distribution of beer and in some cases other alcoholic beverages, and who typically also distribute one or more national beer brands. The Company, together with its distributors, markets its products to retail outlets and relies on its distributors to provide regular deliveries, to maintain retail shelf space, and to oversee timely rotation of inventory. The Company also offers its products directly to consumers at the Hopland Brewery. Of the Company's -22- total sales for 1995, 74% (87% of total beer sales) constituted sales to independent distributors and 11% (13% of total beer sales) constituted sales at the Hopland Brewery brewpub and merchandise store. Beer sales (wholesale and retail combined) constituted 85% of the Company's total sales in 1995, with food and merchandise retail and catalogue sales constituting the balance. As the Company's production capacity increases, Management expects sales to independent distributors to increase materially as a percentage of total sales. Suppliers The Company's major suppliers are Great Western Malting Co., Yakima, Washington (malt); John I. Haas, Co., New York, New York (hops); and California Glass Company, Oakland, California and Vitro Packaging, Inc., Dallas, Texas (bottles). The City of Ukiah will supply power and water to the new brewery. Employees As of September 30, 1996, the Company employed 43 full-time and 42 part-time individuals including 10 in management and administration, 25 in brewing operations, and 50 in retail and brewpub operations. Upon the completion of its expansion, Management expects the Company to increase four current employees to full-time status and to hire five additional management and administrative employees, three marketing employees and five employees in operations. Management believes that the Company's relations with its employees is excellent. None of its work force is unionized. The Company has agreed with the City of Ukiah that for two years it will give preference in its hiring to residents of Mendocino County. Properties/Facilities The Company currently leases a 15,500 square foot building in Hopland. The lease expires on September 1, 2004. Additionally, the Company leases a 4,000 sq. ft. portion of a warehouse, located approximately two miles from the Hopland facility. The Company owns nine acres of land in Ukiah, California on which the Company has begun construction of its new brewery. Patents and Trademarks The Company has federal trademark registrations of the word marks MENDOCINO BREWING COMPANY (Reg. No. 1,785,745), BLUE HERON (Reg. No. 1,820,076), PEREGRINE PALE ALE (Reg. No. 1,667,796), EYE OF THE HAWK SELECT ALE (Reg. No. 1,673,594), BLACK HAWK STOUT (Reg. No. 1,791,807), YULETIDE PORTER (Reg. No. 1,666,891), and BREWSLETTER (Reg. No. 1,768,639). The Company's registration for the word mark RED TALE ALE (Reg. No. 1,575,386) became subject to automatic cancellation on January 2, 1996. The Company has pending a special application for a new registration of that mark. In addition, the Company has pending applications for registration of its Blue Heron Pale Ale design (Serial No. 74/734782), its Eye of the Hawk Anniversary Ale design (Serial No. 74/734781), its Eye of the Hawk Select Ale design (Serial No. 74/734784), its Red Tail Ale design (Serial No. 74/734783), and its FROLIC SHIPWRECK ALE 1850 word mark and design (Serial No. 75/019,867). The bird design marks were published for opposition on August 6, 1996. The registration of the word mark BLUE HERON is a concurrent use registration which gives the Company the exclusive right to use the word mark BLUE HERON throughout the United States with the exception of Oregon, Idaho, Washington, and Montana. BridgePort Brewing Company, the other concurrent owner, has the exclusive right to use the word mark BLUE HERON in those states. The BridgePort Pale Ale label used in other states depicts a blue heron wading in a marsh although the words BLUE HERON do not appear. Mendocino Brewing's use of the word mark BLACK HAWK STOUT is, by agreement with Hiram Walker & Sons, Inc., subject to the restriction that it be used only in conjunction with the words "Mendocino Brewing Company". Mendocino Brewing does not consider its recipes, techniques, processes, or equipment to be proprietary or necessary to protect. Legal Proceedings Mendocino Brewing is not currently involved in any material litigation or proceeding and is not aware of any material litigation or proceeding against it. -23- Government Regulation Mendocino Brewing is licensed to manufacture and sell beer by the California Department of Alcoholic Beverage Control ("ABC"). A "Small Beer Manufacturer's License" allows the Company to brew up to 1,000,000 bbl. per year, to conduct wholesale sales, and to sell beer and wine for consumption both on and off the premises. A federal permit from the Bureau of Alcohol, Tobacco, and Firearms ("BATF") allows the Company to manufacture fermented malt beverages. To keep these licenses and permits in force the Company must pay annual fees and submit timely production reports and excise tax returns. Prompt notice of any changes in the operations, ownership, or company structure must also be made to these regulatory agencies. BATF must also approve all product labels, which must include an alcohol use warning. These agencies require that individuals owning equity securities in aggregate of 10% or more in the Company be investigated as to their suitability. Taxation of alcohol has increased significantly in recent years. Currently, the Federal tax rate is $7.00 per bbl. for up to 60,000 bbl. per year and $18.00 per bbl. for over 60,000 bbl. The California tax rate is $6.20 per bbl. The Hopland Brewery's brewpub is regulated by the Mendocino County Health Department, which requires an annual permit and conducts spot inspections to monitor compliance with applicable health codes. The Company's production operations must also comply with the Occupational Safety and Health Administration's workplace safety and worker health regulations and applicable state laws thereunder. Management believes that the Company presently is in compliance with the aforementioned laws and regulations and has implemented its own voluntary safety program. Environmental Regulation. The Company is subject to various federal, state, and local environmental laws which regulate the use, storage, handling, and disposal of various substances. The Company's waste products consist of water, spent grains and hops, and glass and cardboard. The Company has instituted a recycling program for its office paper, newspapers, magazines, glass, and cardboard at minimal cost to the Company. The Company pays approximately $1,000 per month in sewage fees relating to waste water from its Hopland facility. The Company gives its spent grain to local cattle ranchers, who pick up the spent grain at their expense. The Company has not purchased any special equipment and does not incur any identifiable fees in connection with its environmental compliance at its Hopland site. Management anticipates that Mendocino Brewing will continue its recycling program at the new brewery. Because of the increased quantities involved, Management expects the Company to sell the spent grain from the Ukiah location to ranchers and/or dairy farmers rather than give it away. The Company has built its own waste water treatment plant for the Ukiah facility. As a consequence, the Company will not be required to incur sewer hook-up fees at that location. If the Company's discharge exceeds 55,000 gallons per day, which Management does not expect to occur until annual capacity exceeds 100,000 bbl., the Company will be required to pay additional fees. The estimated cost of the waste water treatment facility is approximately $900,000, and the estimated cost of operating the plant is between $6,000 and $10,000 per month. The cost may increase with increased production. The Company is exploring various methods of recycling treated waste water and could realize some revenue from doing so. The Company has contracted to have the liquid sediment that remains from the treated waste water to be trucked to a local composting facility for essentially the cost of transportation. A Mendocino County Air Quality Control Permit will be required to operate the natural gas fired boiler at the new facility. The Company has not received any notice from any governmental agency that it is a potentially responsible person under any environmental law. Research and Development The Company did not engage in material research and development activities in 1994. In 1995 the Company began research into low-alcohol and non-alcoholic ale and will continue to explore these and other new products. The Company intends to use its original brewing facility at the Hopland Brewery to develop and test market new brews after completion of the new facility. Qualified Small Business Issuer Federal and California tax laws provide a 50% exclusion of any gain from the sale of "qualified small business stock." For the Shares offered by this Prospectus to qualify for the exclusion, several tests must be met. For -24- instance, the Shares must be purchased directly from the Company, not in any later trading market, and the Shares must be held for at least five years. A "qualified small business" must not have more than $50 million in assets, at least 80% of which are used in a qualified trade or business throughout the holding period. A "qualified trade or business" does not include "operating a hotel, motel, restaurant, or similar business." It is uncertain whether the Company's operation of the Hopland Brewery currently prevents it from meeting the definition of "qualified small business", as the brewing equipment in Hopland is presently used in both wholesale and retail operations. Management believes, after consulting with its accountants, that completing the new brewery will reduce the assets of the Company used in the operation of the brewpub to well below 20%, but Management does not intend to request any opinions or rulings on this issue at the present time. The Company intends to submit reports if and to the extent any are required under the law to make the 50% exclusion from capital gains available. There are limitations on the persons who may use any exclusion. Prospective investors should consult their own tax advisors concerning the possible applicability of these exclusions. MANAGEMENT Executive Officers, Directors, and Significant Employees The executive officers, directors, and significant employees of the Company, and their ages as of June 30, 1996, are as follows:
Name Age Position ---------------------- --- ---------------------------------------------------------------- H. Michael Laybourn 58 Chief Executive Officer, President, and Chairman of the Board Norman H. Franks 49 Chief Financial Officer, Vice President, Treasurer, and Director Michael F. Lovett 49 Marketing Director, Secretary, and Director Eric G. Bradley* 59 Director Daniel R. Moldenhauer* 62 Director John Scahill 57 Facilities Manager Donald Barkley 42 Master Brewer - ---------- *Member of the Compensation and Audit Committees
H. Michael Laybourn, co-founder, has served as the Company's Chief Executive Officer and President since its inception in 1982. Mr. Laybourn was elected a director in November 1993 when the Company began the process of converting from a limited partnership to a corporation and Chairman of the Board in June 1994. Before co-founding Mendocino Brewing, Mr. Laybourn co-owned and operated Thunder Road Design and Construction. Mr. Laybourn is a Vice President of the California Small Brewers Association and Chairman of the Board of Directors of the Brewers Association of America. Mr. Laybourn holds a Bachelor of Fine Arts degree from Arizona State University. Norman H. Franks, co-founder, has served as the Company's Chief Financial Officer and Vice President since its inception in 1982. Mr. Franks was elected a director in November 1993 when the Company began the process of converting from a limited partnership to a corporation. Before co-founding Mendocino Brewing, Mr. Franks co-owned and operated Thunder Road Design and Construction. Mr. Franks holds a B.S. degree in mechanical engineering from the University of California, Berkeley. Michael F. Lovett joined the Company in 1983 as Assistant Master Brewer and became Marketing Director in 1987, serving since that time under that or other titles. Mr. Lovett was elected a director in November 1993 when the Company began the process of converting from a limited partnership to a corporation and was appointed Secretary in June 1994. Between 1980 and 1983, Mr. Lovett was Vice President Quality Control of New Albion Brewing Co. From 1976 to 1980, Mr. Lovett was Production Superintendent at Farm Foods in San Francisco. He is the immediate past Membership Chairman and a past Technical Chairman of the Master Brewers Association of the Americas. Mr. Lovett holds a B.A. degree in Psychology from San Francisco State College. Eric G. Bradley became a director in June 1994. Mr. Bradley has been a business and financial consultant since 1988. For the preceding 20 years, he was employed by Kaiser Aluminum & Chemical Corp., in positions -25- rising from Division Controller to Business Manager. Mr. Bradley is a Fellow of the Institute of Chartered Accountants (UK) and a Certified Personal Financial Planner. Daniel R. Moldenhauer became a director in June 1994. Mr. Moldenhauer is a management consultant. He was president of Conex Products Inc. of Dublin, California from 1988 to 1990, a company formed from assets divested by Kaiser Aluminum & Chemical Corp. and later sold to Coleman Cable Systems. Mr. Moldenhauer served in several capacities with Kaiser Aluminum & Chemical Corp. from 1971 to 1988, most recently as general manager of a subsidiary. John Scahill, co-founder, has served as the Company's Facilities Manager since its inception. Before co-founding the Company Mr. Scahill was a self-employed rancher. Mr. Scahill has a background in construction and counseling and holds a B.S. degree in sociology from the University of California, Berkeley. Donald Barkley joined the Company in 1983 as Master Brewer. Immediately before joining the Company, Mr. Barkley was the Head Brewer and Plant Manager at New Albion Brewing Co. from 1981 to 1983. Mr. Barkley joined New Albion Brewing Co. in 1978 and held several positions. In 1993 Mr. Barkley was the President and representative to the national board of governors of the Master Brewers Association of the Americas District, Northern California District. Mr. Barkley holds a B.S. degree in fermentation science from the University of California, Davis. Indemnification of Officers and Directors The Articles of Incorporation of the Company provide for the indemnification of its directors, officers, employees, and other agents to the maximum extent permitted by the California Corporations Code except in circumstances where the person is making a claim against the Company. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Securities Act") may be permitted to directors, officers, and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Director Term of Office Directors are elected at each annual meeting of shareholders to server until their successors are elected and qualified at the next annual meeting of shareholders. Director Compensation The Company's inside directors do not receive any cash compensation for their service on the Board of Directors. Outside directors receive $600 per meeting. No additional fees are paid for attending Compensation or Audit Committee meetings. Directors may be compensated for certain expenses in connection with their attendance at Board meetings. Since July 1996, Director Daniel R. Moldenhauer has acted as a project management consultant for the Company with respect to its ongoing construction project. Executive Compensation The following table sets forth, for the fiscal years ended December 31, 1994 and December 31, 1995, annual compensation, including salary, bonuses, and certain other compensation, paid by the Company to the Company's Chief Executive Officer, Chief Financial Officer, and to all executive officers as a group. None of the Company's other executive officers' total compensation exceeded $100,000 for fiscal 1995. Annual Compensation Fiscal ------------------- All Other Name and Principal Position Year Salary Bonus Compensation* - --------------------------- ---- ------ ----- ------------- H. Michael Laybourn ............... 1994 $59,520 $24,780 $13,529 Chief Executive Officer ...... 1995 89,016 22,255 9,804 Norman H. Franks .................. 1994 $56,016 $18,884 $13,228 Chief Financial Officer ...... 1995 79,008 23,702 5,835 - ----------- * Includes an allowance for health insurance, life insurance, disability insurance, and participation in the Company's profit sharing retirement plan (annual discretionary contributions by the Company of up to 15% of gross compensation). -26- Employment Agreements and Change in Control Arrangements The Company has entered into employment agreements with its President, Chief Financial Officer, and Marketing Director. The agreements call for minimum annual base salary of $89,000, $79,000, and $55,000 respectively. The agreements provide for bonus awards of a percentage of their respective base salaries upon the satisfaction of performance objectives established by the Compensation Committee (subject to the inherent oversight powers of the Board) and approved by the employee. The agreements specify that the performance objectives must be reasonably attainable, must not be probable of attainment without significant effort, and must reflect or indicate that value has been created for the shareholders. The Compensation Committee may award a bonus regardless of whether previously specified objectives are realized if, as a result of an employee's efforts or leadership, the Company has achieved other goals that reflect or indicate that value has been created for the shareholders. The agreements also award options to purchase up to 20,000, 20,000, and 10,000 shares of Company Common Stock pursuant to the Company's 1994 Stock Option Plan at exercise prices of $9.2125, $9.2125, and $8.375 per share, respectively. The options vest in equal monthly increments over five years. The option agreements have terms of 5 years, 5 years, and 10 years, respectively. The agreements do not provide for any benefits as a result of resignation or retirement. The Board of Directors has discussed the subject of, and might in the future grant, retirement benefits to Mendocino Brewing's founders in addition to their participation in the Company's profit sharing plan. The agreements provide for severance benefits in the form of 36, 36, and 18 months of salary continuation if the Company actually or constructively terminates the employee's employment without cause as defined in the agreement. If the actual or constructive termination occurs within one year after a change in control as defined in the agreement, the agreements provide for an additional lump sum benefit of up to $500,000, $500,000, and $250,000 respectively. Any amount payable pursuant to these severance provisions will be deferred indefinitely and without interest to the extent the amount would otherwise constitute an excess parachute payment as defined in Section 280G of the Internal Revenue Code. Amounts so deferred may be paid at such time in the future, if any, that no portion of the payment will be considered an excess parachute payment. CERTAIN TRANSACTIONS There have been no transactions during the last two years, and there are now, no proposed transactions involving more than $60,000 between the Company and any executive officer, director, nominee, 5% beneficial owner of any class of the Company's securities, or member of the immediate family of any of the foregoing persons, in which one or the foregoing individuals or entities had a material interest, except as follows: On October 11, 1996, the Company granted President Michael Laybourn a 5-year option to purchase 12,500 shares of Common Stock of the Company at an exercise price of $8.80 per share in recognition of the Mr. Laybourn's personal guaranty of the equipment lease with FINOVA Capital Corporation described in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Mr. Laybourn's guaranty automatically terminates when FINOVA makes the final payment for the purchase price of the equipment to the manufacturer following certification by an independent engineer acceptable to FINOVA that the equipment is fully installed, accepted, and fully operational. The Company has entered into written employment agreements with its President, Chief Financial Officer, and Marketing Director as described in "Management -- Employment Agreements and Change in Control Arrangements." -27- PRINCIPAL SHAREHOLDERS The following table sets forth certain information known to the Company regarding the beneficial ownership of the Company's Common Stock and Series A Preferred Stock as of June 30, 1996, and as adjusted to reflect the sale of the Shares offered by this Prospectus, for (a) each shareholder known by the Company to own beneficially 5% or more of the outstanding shares of its Common Stock or Series A Preferred Stock; (b) each director; and (c) all directors and executive officers of the Company as a group. Except as otherwise noted, Management believes that the beneficial owners of the Common Stock and Series A Preferred Stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable.
COMMON STOCK: Percentage of Shares Outstanding(1) Directors, Executive Officers, Shares Beneficially Before Offering Maximum Sold and 5% Shareholders Owned 2,322,222 shares 2,922,222 shares ------------------------------ --------------- ---------------- ---------------- H. Michael Laybourn* ...................................... 272,367 11.73% 9.32% Norman H. Franks*(2)+ ..................................... 244,428 10.53% 8.36% Michael F. Lovett*(3) ..................................... 101,559 4.37% 3.48% Eric G. Bradley ........................................... 1,000 0.04% 0.03% 1056 Park Lane, Piedmont, CA 94610 Daniel R. Moldenhauer ..................................... 500 0.02% 0.02% 662 St. Ives Court Walnut Creek, CA 94598 John Scahill* ............................................. 248,809 10.71% 8.51% All directors and executive officers as a group (5 persons) ......................... 619,938 26.70% 21.21% SERIES A PREFERRED STOCK: Directors, Executive Officers, Shares Beneficially Percentage of and 5% Shareholders Owned Shares Outstanding ------------------------------- ----------------- ------------------ H. Michael Laybourn........................................ 6,100 2.68% All directors and executive officers as a group (five persons) ...................... 6,100 2.68% * c/o Mendocino Brewing Company, Inc. 13351 Hwy. 101 South Hopland, CA 95449-0400 - ----------------- (1) Does not include 300,000 shares issued to BDM Construction Co., Inc. ("BDM") as security for the payment of up to $900,000 owed or to be owed to BDM for general contractor services in connection with the new brewery. The 300,000 shares will be canceled if the Company timely pays the amounts owed to BDM. BDM is not entitled to retain the shares as payment for the obligation but must sell the shares in satisfaction of the debt in a commercially reasonable manner unless the Company agrees, after a default, to permit BDM to retain the shares. To the extent that any of the shares are not required to be sold to satisfy the obligation, they will be canceled. The obligation is also secured by a second priority security interest on the Company's Ukiah real estate, but BDM has agreed to exhaust its remedies against the 300,000 shares before proceeding against the real estate collateral. Although BDM presently has the power to vote the 300,000 shares, no shareholder votes are contemplated until after the due date of the obligation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." (2) Does not include 145 shares owned by Mr. Franks's wife. Mr. Franks disclaims any beneficial ownership of shares held in the name of his wife. (3) Mr. Lovett's shares are pledged to a commercial bank as security for a personal loan.
-28- DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 20,000,000 shares of Common Stock, without par value, and 2,000,000 shares of Preferred Stock, without par value, 227,600 of which are designated Series A Preferred Stock. Common Stock At June 30, 1996, there were 2,322,222 shares of Common Stock outstanding and held of record by approximately 2,496 shareholders. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders, except that upon giving the legally required notice, shareholders may cumulate their votes in the election of directors. The Company may pay dividends only at the times and extent declared by the Board of Directors, and with respect to the Common Stock if and only if the Company has paid an aggregate amount of $1.00 each on the Series A Preferred Stock. The Company may at any time declare and pay a dividend with respect to the Common Stock payable solely in Common Stock. Dividends are only payable out of assets legally available for that purpose. See "Dividend Policy." Upon liquidation or dissolution of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and payment of an aggregate amount of $1.00 each in dividends and liquidation proceeds on the Series A Preferred Stock. The Common Stock has no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to the Common Stock. All outstanding shares of Common Stock are, and the Shares offered by this Prospectus will upon completion of this offering be, fully paid and nonassessable. Preferred Stock As of the date of this Prospectus, there are outstanding 227,600 shares of Series A Preferred Stock held of record by 43 shareholders. The Series A Preferred Stock is not convertible into Common Stock. The holders of Series A Preferred Stock have the right to receive cash dividends and/or liquidation proceeds equal in the aggregate to $1.00 per share Series A Preferred Stock before any cash dividends or liquidation proceeds may be paid on Common Stock or any other series of Preferred Stock. The Series A Preferred Stock does not entitle its holders to any voting rights, although the California Corporations Code requires that certain matters be approved by the share of each class, regardless of whether such shares otherwise have voting rights. When the entire dividend/liquidation preference has been paid, the Series A Preferred Stock will cease to be outstanding, and the Series A Preferred Stock will resume the status of authorized but unissued and undesignated Preferred Stock. The Board of Directors has the authority, without further action by the shareholders, to issue all or part of the remaining 1,772,400 shares of Preferred Stock in one or more series and to determine and alter the rights, preferences, privileges, and restrictions granted to and imposed upon any wholly unissued series of Preferred Stock, to fix the number of any series of Preferred Stock, and to set the designation of any series of Preferred Stock. Dividends do not cumulate, and do not accrue until declared by the Board of Directors. Except as otherwise required by law, Preferred Stock does not vote on any matter. The issuance of additional Preferred Stock could adversely affect the likelihood that holders of Common Stock will receive dividend payments and/or payments upon liquidation, and could have the effect of delaying, deferring, or preventing a change of control of the Company. The issuance of Preferred Stock with conversion rights may adversely affect the voting power of the holders of Common Stock. The Company has no present plan to issue any additional shares of Preferred Stock. Registration Rights There are no agreements between current holders of Common Stock or Series A Preferred Stock and the Company obligating the Company to register such shares under the Securities Act except for the employment agreements between Mendocino Brewing and its President, Chief Financial Officer, Marketing Director, and certain other employees holding an aggregate of 968,577 shares of Common Stock. Under the terms of the agreements, the holders are entitled to include the Common Stock they own with any registration by the Company of its securities under the Securities Act, either for its own account or for the account of other securities holders exercising registration rights who may acquire such rights in the future. The holders may also require the Company to file and use its best efforts to effect a registration statement under the Securities Act at the Company's expense with respect to their shares of Common Stock. The holders may further require the Company to file registration statements on Form S-3 with respect to their shares at the Company's expense when such form becomes available for use to the -29- Company. The registration rights are subject to certain conditions and limitations, including the right of any underwriters of an offering to limit the number of shares to be included in the registration. Transfer Agent and Registrar The transfer agent and registrar for the Company's Common Stock is Boston EquiServe, 150 Royall Street, MS 45-02-63, Canton, MA 02021 (Telephone: 617-575-2804). SHARES ELIGIBLE FOR FUTURE RESALE Upon completion of this offering, assuming that the maximum amount of Shares offered by this Prospectus is sold, the Company will have outstanding 2,922,222 shares of Common Stock.(1) Of these shares, approximately 1,020,697 shares will be freely tradable without restriction or further registration under the Securities Act unless purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act ("Rule 144") described below. The restrictions of Rule 144 on shares held by persons other than affiliates will expire completely on January 3, 1997. Approximately 1,701,525 of the shares of Common Stock outstanding prior to this offering are "restricted securities" and may not be sold in a public distribution except in compliance with the registration requirements of the Securities Act or an applicable exemption under the Securities Act, including an exemption pursuant to Rule 144 thereunder.(2) All such restricted securities are presently eligible for sale in the public market pursuant to Rule 144. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including an affiliate, who has beneficially owned shares for at least two years, is entitled to sell, within any three-month period, a number of shares that does not exceed 1% of the then outstanding shares of Common Stock. In addition, a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding the sale, and who has beneficially owned the shares proposed to be sold for at least three years, is entitled to sell such shares under Rule 144(k) without regard to the requirements described above. To the extent that shares were acquired from an affiliate of the Company, such shareholder's holding period for the purposes of effecting a sale under Rule 144 commences on the date of transfer from the affiliate. PLAN OF DISTRIBUTION General The Company is offering up to 600,000 Shares of its Common Stock on a "best efforts" basis directly to the public. The minimum subscription is 100 Shares ($850.00). Shareholders of record as of October 25, 1996 ("Record Shareholders") have the first right to purchase the Shares, provided that the Company receives their properly completed subscription agreement and good funds for the purchase price no later than fifteen days after the effective date of this Prospectus. Thereafter, the Company will accept subscriptions for any remaining Shares from the general public, subject only to the 100 Share minimum investment. Subject to the priority of the Record Shareholders, subscriptions will be honored on a first come, first served basis until all 600,000 Shares are sold or until the Company terminates the offering. The offering is not contingent upon subscriptions for any minimum number of Shares. The Company has determined the public offering price of the Shares offered by this Prospectus. Among factors considered in determining the public offering price were the trading history of the Common Stock on the Pacific Stock Exchange, growth in the industry segment, Management's assessments of the results of operations and future prospects for the Company's business, and recent sales growth. - ----------- (1) This amount does not include the 300,000 shares of common stock issued to BDM Construction Co., Inc. as security for payment of certain of its fees. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Note 1 to "Principal Shareholders." (2) This amount does not include the 300,000 shares of common stock issued to BDM Construction Co., Inc. as security for payment of certain of its fees. See Note 1 above. -30- The Company will only effect offers and sales of Shares through its designated sales representative, Michael F. Lovett, who also serves as the Company's Marketing Director and Secretary and is a member of the Board of Directors. Mr. Lovett is not subject to any of the statutory disqualifications set forth in Section 3(a)(39) of the Exchange Act, nor is he an associated person (partner, officer, director, or employee) of a broker or dealer. In connection with the sale of the Shares offered by this Prospectus, Mr. Lovett will not receive, directly or indirectly, any commissions, remuneration, or any other compensation. Mr. Lovett has successfully passed the Series 63 -- Uniform Securities Agent State Law Examination and is registered as a "sales representative of the issuer" for this offering in those jurisdictions in which such registration is required. Subscription Procedure The Shares are offered by the Company on a "best efforts" basis. The offering shall terminate upon the earlier of (a) the date on which all of the Shares have been sold; (b) __________________, unless such date is extended by the Company; or (c) the date on which the Company terminates the offering. To subscribe, investors must mail (a) the Subscription Agreement (or a photocopy thereof), properly completed and signed, (b) a check or money order payable to the order of "Mendocino Brewing Company, Inc." for the purchase price of $850.00 per share (minimum purchase 100 Shares), and (c) if the investor was a beneficial owner of shares of the Company's Common Stock held of record as of October 25, 1996 in the name of a nominee (i.e., a person other than the real owner, such as a stock broker), written evidence of such beneficial ownership, such as a copy of an account statement as of that date. Alternatively, the nominee may subscribe for Shares in the nominee's name. Subscription documents should be mailed or delivered to Mendocino Brewing Company, Inc., 13351 South Highway 101, PO Box 400, Hopland, CA 95449-0400. Investors should not include any other documents or correspondence. Since the number of Shares available is limited and subscriptions will be accepted on a first come, first served basis, with priority given to Record Shareholders, subscribers are advised to forward the Subscription Agreement, payment for the Shares, and evidence of beneficial ownership if required, as soon as possible. Acceptance Procedure The Company will first process properly completed subscriptions received from Record Shareholders in the order in which they are received. Subscriptions from other persons will be held until 15 days after the effective date of this Prospectus. At that time, properly completed subscriptions received from such other persons will also be processed in the order in which they are received. Subscription Agreements received on the same date will be processed in the order in which they are opened. Subscriptions are irrevocable. Subscriptions that are not accepted for any reason will be returned without interest or any deduction for expenses. Subscriptions accompanied by an overpayment which are otherwise properly completed will be accepted and a check will be mailed to the subscriber for the amount of the overpayment. The Company will assess a $25 charge for any check that is returned by the bank. Upon acceptance of a subscription, the Company will forward to the subscriber a copy of the accepted subscription agreement and a copy of this Prospectus (unless the Subscription Agreement indicates that the subscriber has already received the final Prospectus or the subscriber elects to take delivery of the Prospectus electronically over the Internet). At the same time, the Company will forward an instruction to the transfer agent for the Shares, Boston EquiServe, to prepare and forward a stock certificate directly to the subscriber. Subscribers will not be deemed holders of the Shares purchased until the stock certificate has been issued. The Company reserves the right to terminate the offering at any time before the sale of all 600,000 Shares. LEGAL MATTERS The legality of the Shares of Common Stock being offered by this Prospectus will be passed upon for the Company by Enterprise Law Group, Inc., Menlo Park, California. EXPERTS The financial statements of the Company included in this Prospectus have been audited by Moss Adams LLP, independent public accountants, as indicated in their report with respect thereto, in reliance upon the authority of Moss Adams LLP as experts in accounting and auditing. -31- ADDITIONAL INFORMATION The Company has electronically filed a Registration Statement on Form SB-2 relating to the Shares offered by this Prospectus with the Securities and Exchange Commission, Washington, D.C. 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 offered by this Prospectus, potential investors should refer to the Registration Statement and its exhibits and schedules. The complete Registration Statement and all amendments thereto will be available for viewing and downloading without charge from the SEC's World Wide Web site located at http://www.sec.gov shortly after being filed. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete. Copies of the Registration Statement and its amendments may also be inspected by anyone without charge at the Commission's principal office located at 450 Fifth Street, N.W., Washington, D.C. 20549, the Commission's New York Regional Office located at 7 World Trade Center, 13th Floor, New York, New York 10048, and the Commission's Chicago Regional Office located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of all or any part of the Registration Statement and its amendments may also be obtained from the Public Reference Branch of the Commission upon the payment of certain fees prescribed by the Commission. INDEX TO FINANCIAL STATEMENTS Page ---- INDEPENDENT AUDITOR'S REPORT .............................................. 33 FINANCIAL STATEMENTS Balance sheet ............................................................. 34 Statements of income ...................................................... 35 Statements of partners'/shareholders' equity .............................. 36 Statements of cash flows .................................................. 37 Notes to financial statements ............................................. 38 Balance sheet (unaudited) ................................................. 46 Statements of income (unaudited) .......................................... 47 Statements of cash flows (unaudited) ...................................... 48 Notes to financial statements (unaudited) ................................. 49 -32- MOSS-ADAMS LLP - -------------------------------------------------------------------------------- CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITOR'S REPORT To the Shareholders and Board of Directors Mendocino Brewing Company, Inc. We have audited the accompanying balance sheets of Mendocino Brewing Company, Inc., as of December 31, 1995 and 1994, and the related statements of income, equity and cash flows for each of the two years in the period then ended. These financial statements are the responsibility of the Company's 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. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mendocino Brewing Company, Inc., as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the two years in the period then ended, in conformity with generally accepted accounting principles. /s/ MOSS ADAMS LLP Santa Rosa, California January 26, 1996 A member of Moores Rowland INTERNATIONAL An association of independent accounting firms throughout the world. -33- MENDOCINO BREWING COMPANY, INC. BALANCE SHEETS December 31, ----------------------- 1995 1994 ---- ---- ASSETS CURRENT ASSETS Cash and cash equivalents ........................ $1,696,100 $2,900,800 Accounts receivable .............................. 458,900 293,900 Inventories ...................................... 256,200 202,000 Prepaid expenses ................................. 47,100 13,500 Deferred income taxes ............................ 15,500 11,800 ---------- ---------- Total current assets ...................... 2,473,800 3,422,000 ---------- ---------- PROPERTY AND EQUIPMENT ............................... 3,954,100 301,000 ---------- ---------- OTHER ASSETS Label development costs, net of amortization ..... 15,100 14,700 Deferred offering costs .......................... -- 41,700 Deposits and other assets ........................ 71,000 254,600 Deferred income taxes ............................ -- 4,100 ---------- ---------- 86,100 315,100 ---------- ---------- Total assets .............................. $6,514,000 $4,038,100 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable ................................. $ 105,700 $ 144,700 Accrued wages and related expense ................ 129,800 84,200 Accrued construction costs ....................... 1,182,300 -- Accrued profit sharing ........................... 30,000 45,000 Accrued liabilities .............................. 22,300 20,600 Income taxes payable ............................. 34,200 12,400 Current maturities of long-term debt ............. 10,400 7,900 ---------- ---------- Total current liabilities ................. 1,514,700 314,800 LONG-TERM DEBT, less current maturities .............. 554,900 -- DEFERRED INCOME TAXES ................................ 20,200 -- ---------- ---------- Total liabilities ......................... 2,089,800 314,800 ---------- ---------- COMMITMENTS .......................................... -- -- STOCKHOLDERS' EQUITY Common stock, no par value; 20,000,000 shares, authorized 2,322,222 and 2,220,445 shares issued and outstanding ....................... 3,869,600 3,342,400 Preferred stock, Series A, no par value, with aggregate liquidation preference of $227,600, outstanding 227,600 shares authorized, issued and outstanding ....................... 227,600 227,600 Retained earnings ................................ 327,000 153,300 ---------- ---------- Total stockholders' equity ................ 4,424,200 3,723,300 ---------- ---------- Total liabilities and stockholders' equity ................................ $6,514,000 $4,038,100 ========== ========== The accompanying notes are an integral part of these financial statements. -34- MENDOCINO BREWING COMPANY, INC. STATEMENTS OF INCOME Year Ended December 31, ---------------------------- 1995 1994 ---- ---- Sales .......................................... $ 3,735,100 $ 3,523,000 Less excise taxes .............................. 168,600 157,400 ----------- ----------- Net sales ...................................... 3,566,500 3,365,600 Cost of goods sold ............................. 1,846,500 1,840,900 ----------- ----------- Gross profit ................................... 1,720,000 1,524,700 ----------- ----------- Operating expenses Retail operating ........................... 649,200 594,300 Marketing .................................. 277,800 247,100 General and administrative ................. 610,300 483,300 ----------- ----------- 1,537,300 1,324,700 ----------- ----------- Income from operations ......................... 182,700 200,000 ----------- ----------- Other income (expense) Interest income ............................ 132,800 26,000 Other income ............................... 14,800 3,000 Interest expense ........................... (3,700) (4,200) ----------- ----------- 143,900 24,800 ----------- ----------- Income before income taxes ..................... 326,600 224,800 Provision for income taxes ..................... 152,900 71,500 ----------- ----------- Net income ..................................... $ 173,700 $ 153,300 =========== =========== Earnings per share ............................. $ .08 $ .08 =========== =========== Weighted average common shares outstanding ..... 2,307,074 1,814,403 =========== =========== The accompanying notes are an integral part of these financial statements. -35- MENDOCINO BREWING COMPANY, INC. STATEMENTS OF PARTNERS'/SHAREHOLDERS' EQUITY Years Ended December 31, 1995 and 1994
Partnership Equity Series A ------------------------- Preferred Stock Common Stock Limited General --------------- ------------------ Retained Total Partners Partners Shares Amount Shares Amount Earnings Equity -------- -------- ------ ------ ------ ------ -------- ------ Balance, December 31, 1993 $ 776,200 $ 7,700 -- $ -- -- $ -- $ -- $ 783,900 Conversion of partnership units to stock as a result of incorporation (776,200) (7,700) 227,600 227,600 1,722,222 556,300 -- -- Issuance of common stock . -- -- -- -- 498,223 2,786,100 -- 2,786,100 Net income ............... -- -- -- -- -- -- 153,300 153,300 ---------- ---------- ------- ---------- --------- ---------- ---------- ---------- Balance, December 31, 1994 -- -- 227,600 227,600 2,220,445 3,342,400 153,300 3,723,300 Issuance of common stock . -- -- -- -- 101,777 527,200 -- 527,200 Net income ............... -- -- -- -- -- -- 173,700 173,700 ---------- ---------- ------- ---------- --------- ---------- ---------- ---------- Balance, December 31, 1995 $ -- $ -- 227,600 $ 227,600 2,322,222 $3,869,600 $ 327,000 $4,424,200 ========== ========== ======= ========== ========= ========== ========== ========== The accompanying notes are an integral part of these financial statements.
-36- MENDOCINO BREWING COMPANY, INC. STATEMENTS OF CASH FLOWS Year Ended December 31, --------------------------- 1995 1994 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income ................................... $ 173,700 $ 153,300 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ......... 49,300 56,200 Loss (gain) on sale of assets ......... 500 (3,000) Deferred income taxes ................. 20,600 (15,900) Changes in: Accounts receivable ................... (165,000) (24,900) Inventories ........................... (54,200) (24,200) Prepaid expenses ...................... (33,600) 800 Accounts payable ...................... (39,000) 42,100 Accrued wages and related expense ..... 45,600 44,400 Accrued profit sharing ................ (15,000) 20,000 Accrued liabilities ................... 1,700 (63,400) Income taxes payable .................. 21,800 12,400 ----------- ----------- Net cash provided by operating activities ................... 6,400 197,800 ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES ............. (2,923,300) (148,600) Other assets ................................. (27,800) (197,200) Proceeds from sale of fixed assets ........... 500 3,100 ----------- ----------- Net cash used by investing activities ................... (2,950,600) (342,700) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on long-term debt ......... (11,700) (36,500) Accrued construction costs ................... 1,182,300 -- Proceeds from sale of common stock ........... 568,900 2,786,200 ----------- ----------- Net cash provided by financing activities ................... 1,739,500 2,749,700 ----------- ----------- INCREASE (DECREASE) IN CASH ...................... (1,204,700) 2,604,800 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ..... 2,900,800 296,000 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR ........... $ 1,696,100 $ 2,900,800 =========== =========== The accompanying notes are an integral part of these financial statements. -37- MENDOCINO BREWING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS December 31, 1995 and 1994 NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Nature of business - Founded in 1983 as a limited partnership, Mendocino Brewing Company, located in Hopland, California, operates a microbrewery producing beer and malt beverages for the specialty beer market and a brew pub and gift store. The majority of sales are in California. Effective January 1, 1994, the Partnership incorporated by contributing all of its assets and liabilities into the newly formed corporation in exchange for common and preferred stock. (b) Inventories - Inventories are stated at the lower-of-average cost or market. (c) Property and equipment - Property and equipment are stated at cost and depreciated or amortized using straight-line and accelerated methods over the assets' estimated useful lives. Capitalized interest was $15,200 in 1995. Costs of maintenance and repairs are charged to expense as incurred; significant renewals and betterments are capitalized. Estimated useful lives are as follows: Machinery and equipment ................................ 5 to 7 years Furniture and fixtures ................................. 5 to 7 years Leasehold improvements ................................. 7 to 30 years (d) Amortization - Label development costs are amortized on the straight-line method over a three-year period. (e) Deferred offering costs - Deferred offering costs consist of legal and other costs incurred as part of the Company's public offering of common stock. (f) Deposits and other assets - Deposits and other assets consist primarily of refundable deposits on the planned acquisition of brewing equipment during 1996 and costs associated with developing a contract brewing alliance. (g) Concentration of credit risks - Financial instruments that potentially subject the Company to credit risk consist principally of trade receivables and interest-bearing deposits. The Company's interest-bearing deposits are placed with major financial institutions. Wholesale distributors account for substantially all accounts receivable; therefore, this concentration risk is limited due to the number of distributors and state laws regulating the financial affairs of distributors of alcoholic beverages. (h) Income taxes - The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting For Income Taxes", which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under FAS 109, the Company is allowed to recognize currently future tax deductions of expenses previously recorded for financial reporting purposes. -38- MENDOCINO BREWING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 1995 and 1994 NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (i) Cash equivalents - The Company considers all highly liquid investments with a maturity of 90 days or less to be cash equivalents. (j) Earnings per share - Earnings per share were computed by dividing net income by the weighted average number of common shares outstanding. There were no common stock equivalents. (k) Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires the Company make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. The amounts estimated could differ from actual results. (l) Stock-based compensation - The Financial Accounting Standards Board has recently issued Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation. This standard will become effective for the year ending December 31, 1996, although earlier application is permitted. The Company has determined that it will implement the new standard in 1996. Under SFAS 123, a fair value method is used to determine compensation cost for stock options or similar equity instruments. Compensation is measured at the grant date and is recognized over the service or vesting period. Under the current accounting standard, compensation cost is the excess, if any, of the quoted market price of the stock at a measurement date over the amount that must be paid to acquire the stock. The new standard would allow the Company to account for stock-based compensation under the current standard, with disclosure of the effects of the new standard, or adopt a fair value based method of accounting. The Company has not yet decided which method will be utilized, nor has it determined the impact, if any, that adoption of the new standard will have on the financial condition and results of operations. However, management believes the effect of the new accounting standard will not be significant. (m) Fair value of financial instruments - The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amount reported in the balance sheet for cash and cash equivalents approximates fair value. Long-term debt: Based on the borrowing rates currently available to the Company for loans with similar terms and average maturities, the fair value of long-term debt approximates cost. (n) Accrued construction costs - Accrued construction costs consist of expenses incurred for the construction of the new brewery including equipment. (o) Reclassifications - Certain reclassifications have been made to the 1994 financial statements to conform them to the 1995 presentation. -39- MENDOCINO BREWING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 1995 and 1994 NOTE 2 - INVENTORIES Inventories consist of the following: December 31, --------------------------- 1995 1994 ---- ---- Raw Materials .......................... $ 91,500 $ 66,500 Work-in-process ........................ 89,500 75,300 Finished goods ......................... 37,200 24,000 Merchandise ............................ 38,000 36,200 -------- -------- $256,200 $202,000 ======== ======== NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment consists of: the following: December 31, ---------------------------- 1995 1994 ---- ---- Equipment in progress ................ $2,031,800 $ -- Construction in progress ............. 921,700 26,200 Land ................................. 810,900 -- Machinery and equipment .............. 537,900 598,000 Leasehold improvements ............... 129,000 124,500 Furniture and fixtures ............... 19,800 19,800 ---------- -------- 4,451,100 768,500 Less accumulated depreciation and amortization .............. 497,000 467,500 ---------- -------- $3,954,100 $301,000 ========== ======== NOTE 4 - LONG-TERM DEBT Long-term debt consists of the following: December 31, ------------------------ 1995 1994 ---- ---- Note payable to an individual, due in monthly payments of $4,435, including interest at 9%, maturing June 1997, secured by real property ........ $ 489,100 $ -- Note payable to an individual, due in full December 1998, including accrued interest at 9%, secured by real property ................ 76,200 -- -40- MENDOCINO BREWING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 1995 and 1994 NOTE 4 - LONG-TERM DEBT (Continued) December 31, ------------------------ 1995 1994 ---- ---- Note payable to bank, due in monthly payments of $1,302, including interest at 10.5%, matured July 1995, secured by fixed assets .................... -- 7,900 -------- ------- 565,300 7,900 Less current maturities ................ 10,400 7,900 -------- ------- $554,900 $ -- ======== ======= Maturities of long-term debt for succeeding years are as follows: Year ending December 31, ------------------------ 1996 ....................... $ 10,400 1997 ....................... 478,700 1998 ....................... 76,200 -------- $565,300 ======== NOTE 5 - PROFIT-SHARING PLAN The Company has a profit-sharing retirement plan under which it may make employer contributions at the discretion of the Board of Directors; although, no such contributions are required. The plan covers substantially all full-time employees over age 21 with one year of service, and employer contributions vest over a period of six years. Contributions totaled $30,000 and $45,000 for the years ended December 31, 1995 and 1994, respectively. NOTE 6 - COMMITMENTS The Company leases its facilities under a noncancellable operating lease expiring August 2004. The monthly lease payment is $2,014, to be adjusted annually by increases in the Consumer Price Index, as defined in the lease agreement. Additionally, the Company leases certain equipment under a noncancellable operating lease which expires in 1997. Total rent expense was $34,000 and $58,600 for the years ended December 31, 1995 and 1994, respectively. -41- MENDOCINO BREWING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 1995 and 1994 NOTE 6 - COMMITMENTS (Continued) The following is a schedule of future minimum lease payments: Year Ending December 31, ------------------------ 1996 ......................... $ 26,700 1997 ......................... 25,700 1998 ......................... 24,200 1999 ......................... 24,200 2000 ......................... 24,200 Thereafter ...................... 88,600 -------- $213,600 ======== NOTE 7 - BREWERY CONSTRUCTION In late 1995, the Company began construction of it's new brewery in Ukiah, California. At this time, the total cost of the brewery including land, building and equipment is estimated to be $9.2 million. Funding for the brewery is from a combination of proceeds from the stock sale, private party financing for the land, bank financing for the building and a capital lease for the equipment. The expected completion date is September 1996. NOTE 8 - STOCKHOLDERS' EQUITY Common Stock On January 3, 1994, the Company issued 1,722,222 shares of no-par value common stock in conjunction with the incorporation of the partnership. Also during 1994, the Company began selling, in a public offering, shares of no-par value common stock. As of December 31, 1995, 600,000 shares of stock had been sold at $6 per share for total gross proceeds of $3,600,000. These proceeds were reduced by $286,700 of offering costs. All shares of stock authorized to sell in the first public offering have been issued. Preferred Stock The Company authorized 2,000,000 shares of preferred stock, of which 227,600 have been designated as Series A. At the time of the incorporation of the partnership, the Company issued 227,600 shares of non-voting, no-par value Series A Preferred Stock in exchange for partnership interests. Series A shareholders are entitled to receive cash dividends and/or liquidation proceeds equal in the aggregate to $1.00 per share before any cash dividends are paid on the Common Shares or any other series of Preferred Shares. When the entire Series A dividend/liquidation proceeds have been paid, the Series A Shares shall automatically be cancelled and cease to be outstanding. -42- MENDOCINO BREWING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 1995 and 1994 NOTE 9 - STOCK OPTION PLAN Under the 1994 Stock Option Plan, the Company may issue options to purchase up to 200,000 shares of the Company's Common Stock. The plan provides for both incentive stock options, as defined in Section 422 of the Internal Revenue Code, and options that do not qualify as incentive stock options. The Plan shall terminate upon the earlier of (a) the tenth anniversary of its adoption by the Board or (b) the date on which all shares are available for issuance under the Plan have been issued. The exercise price of incentive options must be no less then the fair-market value of such stock at the date the option is granted, while the exercise price of nonstatutory options will be no less than 85% of the fair-market value per share on the date of grant. With respect to options granted to a person possessing more than 10% of the combined voting power of all classes of the Company's stock, the exercise price will be no less than 110% of the fair-market value of such share at the grant date. As of December 31, 1995, no options had been granted, exercised, or cancelled under the Plan. NOTE 10 - INCOME TAXES The provision for income taxes consists of the following: December 31, --------------------------- 1995 1994 ---- ---- Current Federal .................. $103,700 $ 67,200 State .................... 28,600 20,200 -------- -------- 132,300 87,400 -------- -------- Deferred Current .................. (3,700) (11,800) Non-current .............. 24,300 (4,100) -------- -------- 20,600 (15,900) -------- -------- $152,900 $ 71,500 ======== ======== The difference between the actual income tax provision and the tax provision computed by applying the statutory federal income tax rate to earnings before taxes is attributable to the following: Year Ended December 31, -------------------------- 1995 1994 ---- ---- Income tax provision at 34% ............ $105,300 $ 76,400 States taxes ........................... 28,100 20,900 Adjustment due to lower federal rates .. (1,100) (9,900) Recognition of future tax (deductions) . 20,600 (15,900) -------- -------- $152,900 $ 71,500 ======== ======== -43- MENDOCINO BREWING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 1995 and 1994 NOTE 10 - INCOME TAXES (Continued) Temporary differences and carryforwards which give rise to deferred tax assets and liabilities at December 31st are as follows: December 31, -------------------- 1995 1994 ---- ---- Inventories .................................. $ 3,000 $ 800 Other ........................................ 12,500 11,000 -------- -------- Current deferred tax asset ................... $ 15,500 $ 11,800 ======== ======== Depreciation and amortization ................ $ 21,000 $ (4,800) Other ........................................ (800) 700 -------- -------- Non-current deferred tax liability (asset) ... $ 20,200 $ (4,100) ======== ======== NOTE 11 - SEGMENT INFORMATION The Company's business segments are brewing operations and a retail establishment known as the Hopland Brewery. A summary of each segment is as follows:
Year Ended December 31, 1995 --------------------------------------------------------------- Brewing Hopland Corporate Operations Brewery and other Total ---------- ------- --------- ----- Sales ........................... $2,775,500 $959,600 $ -- $3,735,100 Operating profits ............... 758,400 34,600 -- 793,000 Identifiable assets ............. 4,633,900 109,500 1,770,600 6,514,000 Depreciation and amortization ................. 30,700 8,300 10,300 49,300 Capital expenditures ............ 3,655,900 25,500 3,900 3,685,300
-44- MENDOCINO BREWING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (Continued) December 31, 1995 and 1994 NOTE 11 - SEGMENT INFORMATION (Continued)
Year Ended December 31, 1995 -------------------------------------------------------------- Brewing Hopland Corporate Operations Brewery and other Total ---------- ------- --------- ----- Sales ........................... $2,594,300 $928,700 $ -- $3,523,000 Operating profits ............... 631,700 51,600 -- 683,300 Identifiable assets ............. 692,500 90,700 3,254,900 4,038,100 Depreciation and amortization ................. 38,200 8,800 9,200 56,200 Capital expenditures ............ 122,200 2,500 23,900 148,600
NOTE 12 - STATEMENT OF CASH FLOWS Supplementary cash flow information includes the following: December 31, ------------------------ 1995 1994 ---- ---- Cash paid during the year for: Interest ............................ $ 18,900 $ 4,300 Income taxes ........................ $113,500 $75,000 Non-cash investing and financing activities for the year ended December 31, 1995, consisted of land being acquired with seller financing of $569,100, offering costs of $41,700 incurred in 1994 being offset against stock proceeds and $207,100 of deposits being applied to equipment in progress. -45- MENDOCINO BREWING COMPANY, INC. BALANCE SHEET June 30, 1996 (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents ................................... $ 21,200 Accounts receivable ......................................... 550,400 Inventories ................................................. 463,500 Prepaid expenses and taxes .................................. 73,100 Deferred income taxes ....................................... 37,000 ---------- Total current assets ................................. 1,145,200 ---------- PROPERTY AND EQUIPMENT .......................................... 6,947,700 ---------- OTHER ASSETS Label development costs, net of amortization ................ 23,600 Deposits and other assets ................................... 98,400 ---------- Total other assets ................................... 122,000 ---------- Total assets ......................................... $8,214,900 ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term borrowing ........................................ $ 360,000 Accounts payable ............................................ 368,000 Accrued wages and related expense ........................... 105,500 Accrued construction costs .................................. 2,363,100 Accrued profit sharing ...................................... 30,000 Accrued liabilities ......................................... 33,900 Current maturities of long-term debt ........................ 10,000 ---------- Total current liabilities ............................ 3,270,500 LONG-TERM DEBT, less current maturities ......................... 550,700 DEFERRED INCOME TAXES ........................................... 20,200 ---------- Total liabilities .................................... 3,841,400 ---------- COMMITMENTS ..................................................... -- STOCKHOLDERS' EQUITY Common stock, no par value; 20,000,000 shares, authorized 2,322,222 and 2,220,445 shares issued and outstanding .................................. 3,869,600 Preferred stock, Series A, no par value, with aggregate liquidation preference of $227,600, 227,600 shares authorized, issued and outstanding ....... 227,600 Retained earnings ........................................... 276,300 ---------- Total stockholders' equity ........................... 4,373,500 ---------- Total liabilities and stockholders' equity ........... $8,214,900 ========== The accompanying notes are an integral part of these financial statements. -46- MENDOCINO BREWING COMPANY, INC. STATEMENTS OF INCOME (unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------------------------------- -------------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Sales .......................................... $ 1,227,400 $ 870,700 $ 1,911,400 $ 1,675,200 Less excise taxes .............................. 18,100 36,500 71,000 74,500 ----------- ----------- ----------- ----------- Net sales ...................................... 1,209,300 834,100 1,840,300 1,600,700 Cost of goods sold ............................. 545,700 465,600 870,500 907,800 ----------- ----------- ----------- ----------- Gross profit ................................... 663,600 368,500 969,900 693,000 ----------- ----------- ----------- ----------- Operating expenses Retail operating ........................... 192,100 146,500 372,300 280,900 Marketing .................................. 199,800 66,500 292,800 126,400 General and administrative ................. 187,700 138,400 339,600 313,300 ----------- ----------- ----------- ----------- 579,600 351,400 1,004,700 720,500 ----------- ----------- ----------- ----------- Income (loss)from operations ................... 84,000 17,200 (34,800) (27,600) Other income (expense) Interest income ............................ 300 37,900 10,800 74,800 Other income (expense) ..................... (43,500) 6,000 (47,400) 6,000 ----------- ----------- ----------- ----------- (43,300) 43,900 (36,500) 80,800 ----------- ----------- ----------- ----------- Income (loss) before income taxes ................................ 40,700 61,100 (71,300) 53,200 Provision for (benefit from) income taxes ................................ (21,500) 20,000 (20,700) 20,800 ----------- ----------- ----------- ----------- Net income (loss) .............................. $ 62,200 $ 41,100 $ (50,600) $ 32,500 =========== =========== =========== =========== Earnings (loss) per share ...................... $ 0.03 $ 0.02 $ (0.02) $ 0.01 =========== =========== =========== =========== Weighted average common shares outstanding ........................... 2,322,222 2,308,888 2,322,222 2,294,148 =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements.
-47- MENDOCINO BREWING COMPANY, INC. STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended Six Months Ended June 30, June 30, -------------------------------- -------------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) ............................... $ 62,200 $ 41,100 $ (50,600) $ 32,500 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization .............................. 11,800 11,400 23,000 22,400 Deferred income taxes ....................... (21,500) -- (21,500) -- Changes in: Accounts receivable ........................... (300,300) 9,800 (91,500) (38,800) Inventories ................................... (14,800) 39,100 (207,300) 34,500 Prepaid expenses and taxes .................... (20,700) 9,100 (26,000) (6,100) Accounts payable .............................. 229,900 (19,600) 262,300 (31,900) Accrued wages and related expense ............................. 7,100 1,400 (24,400) (5,400) Accrued profit sharing ........................ -- 11,300 -- (33,800) Accrued liabilities ........................... 9,400 14,100 11,700 5,800 Income taxes payable .......................... -- -- (34,200) -- ----------- ----------- ----------- ----------- Net cash provided (used) by operating activities: ............................. (37,100) 117,600 (158,500) (20,900) ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment ..................................... (1,759,700) (965,400) (3,013,200) (1,265,800) Deposits and other assets ....................... 23,100 44,000 14,600 255,400 Deferred offering costs ......................... (37,900) -- (53,900) -- Reduction of deferred offering costs ................................ -- (77,200) -- (35,500) ----------- ----------- ----------- ----------- Net cash used by in- vesting activities: ..................... (1,774,600) (998,500) (3,052,500) (1,045,900) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from (payments on) short-term borrowings ......................... (40,000) -- 360,000 -- Proceeds from long-term debt .................... -- 492,900 -- 492,900 Principal payments on long- term debt ..................................... (2,400) -- (4,700) (7,900) Accrued construction costs ...................... 1,351,800 -- 1,180,800 -- Proceeds from sale of common stock .................................. -- -- -- 527,100 ----------- ----------- ----------- ----------- Net cash provided by financing activities: ................... 1,309,500 492,900 1,536,100 1,012,100 DECREASE IN CASH ................................... (502,200) (388,000) (1,674,900) (54,800) CASH, BEGINNING OF PERIOD .......................... 523,400 3,234,000 1,696,100 2,900,800 ----------- ----------- ----------- ----------- CASH, END OF PERIOD ................................ $ 21,200 $ 2,846,000 $ 21,200 $ 2,846,000 =========== =========== =========== =========== Supplemental cash flow information includes the following: Cash paid during the period for income taxes ..................... $ -- $ 800 $ 52,500 $ 34,900 =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements.
-48- MENDOCINO BREWING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) June 30, 1996 and 1995 NOTE 1 - BASIS OF PRESENTATION The financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. It is believed, however, that the disclosures are adequate to make the information presented not misleading. The financial statements, in the opinion of management, reflect all adjustments necessary to fairly state the financial position and the results of operations. These results are not necessarily to be considered indicative of the results for the entire year. NOTE 2 - LONG-TERM DEBT Long-term debt consists of a note payable, due in monthly installments of $4,435 including interest at 9%, maturing June 1997, and secured by real property and a note payable, due in one lump sum of $76,200 plus interest at 9%, maturing December 1998, and secured by real property. NOTE 3 - SHORT-TERM BORROWING The Company has a $600,000 term line of credit from a bank with a variable interest rate of prime +1.5%, maturing December 1996. The note is secured by receivables, inventory, and equipment. NOTE 4 - NEW BREWERY FINANCING A $2.7 million construction loan secured by a first priority deed of trust on the Ukiah land and improvements and the proceeds of the proposed common stock offering from the Savings Bank of Mendocino County along with a written commitment to convert the construction loan to a 15 year term loan upon successful completion of the new brewery, subject to certain conditions. The construction loan bears interest at the lender's prime plus 2% (initially 10.25%), payable monthly, and matures on February 2, 1997. Upon conversion, the loan will bear interest at the then prevailing 5 Year Treasury Constant Maturity Index (but not less than 10%), with a maximum for the first five years at 2% above the initial fully indexed rate, and a maximum during the remaining term of the loan at 3% above the initial fully indexed rate at the beginning of the remaining term. The minimum annual interest rate is 8%. The loan will be over 25 years with a balloon payment upon maturity. The lender's commitment letter states that the lender will convert the unpaid principal at maturity to a fully amortized 10-year loan subject to terms an conditions to be agreed upon at that time. The commitment letter proposes to require the Company to pledge all proceeds of this offering in excess of $2.5 million as collateral for the 15-year term loan, with the provision that the Bank will release the funds from the pledge to purchase additional equipment if the Company is meeting its sales and revenue objectives. FINOVA Capital Corporation has also agreed to lease new brewing equipment with a total cost of approximately $2.07 million to the Company for a term of 7 years with monthly rental payments of approximately $29,000. The lease is to commence when the brewing equipment is operational. Until that -49- MENDOCINO BREWING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) June 30, 1996 and 1995 time, FINOVA has loaned $750,000 to the Company with interest at the Citibank prime plus 3%. At expiration of the initial term of the lease, the Company may purchase the equipment at its then current fair market value but not less than 25% or more than 30% of the original cost of the equipment, or at the Company's option, may extend the term of the lease for an additional year at approximately $45,600 per month with an option to purchase the equipment at the end of the year at then current fair market value. The lease is not pre-payable. The seller of the Ukiah land has a note, secured by a third priority deed of trust on the land, with a remaining principal balance as of August 1, 1996 of approximately $265,000 at 9% annual interest payable in monthly installments of principal and interest of $2,380 with the balance due at maturity on June 27, 1997. The general contractor for the new brewery, BDM Construction Co., Inc. ("BDM"), has agreed to defer up to $900,000 in fees otherwise owed or to become payable on December 31, 1996, subject to performance by BDM of its obligations under the construction contract, until January 31, 1997 with interest at 12% per annum. The deferral arrangement is secured by a second priority deed of trust on the Ukiah land and improvements, and by 300,000 shares of Mendocino Brewing's Common Stock. In the event of default, BDM is required to proceed against the Common Stock before initiating any proceeding against the real estate. The Common Stock collateral was issued to BDM by the Company pursuant to Section 4(2) of the Securities Act of 1933 subject to the restrictions (a) that the shares shall be canceled if the amounts owed BDM are paid in full, (b) that if full amount owed BDM is not paid, the shares must sold in a commercially reasonable manner as specified in the California Commercial Code, and (c) that any shares not needed to be sold to satisfy the obligation to BDM shall be canceled. -50- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 317 of the California Corporations Code authorizes a court to award, or a corporation's Board of Directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). Article 8 of the Articles of Incorporation (Exhibit 3.1 hereto) provides for the indemnification of the Company's directors, officers, employees, and other agents to the maximum extent permitted by the California Corporations Code. Article 11 of the Bylaws (Exhibit 3.2 hereto) requires the Company to so indemnify its directors and officers and authorizes, but does not require, the Company to so indemnify other persons. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth an estimate of the expenses that will be incurred by the Registrant in connection with the distribution of the securities being registered hereby: Securities and Exchange Commission filing fee .............. $ 1,758.62 State securities qualification fees and expenses ........... 20,000.00 Accounting fees and expenses ............................... 26,000.00 Consulting fees and expenses ............................... 44,000.00 Legal fees and expenses .................................... 123,000.00 Printing and engraving expenses ............................ 27,000.00 Transfer agent fees and expenses ........................... 15,000.00 Postage .................................................... 20,000.00 Marketing expenses.......................................... 96,000.00 Miscellaneous .............................................. 27,000.00 ------------ Total.................................................. $ 399,758.62 ============ ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. The following information relates to all securities sold by the registrant or any of its predecessors within the past three years prior to the filing of this Form SB-2, without registration under the Securities Act: On January 1, 1994, the Registrant issued 227,600 shares of Series A Preferred Stock and 1,722,222 shares of Common Stock in exchange for all of the assets of Mendocino Brewing Company, a California limited partnership (the Partnership). The Partnership thereupon dissolved and distributed the shares to its partners, and to the shareholders of the corporate sole general partner, in amounts proportional to their relative ownership in the partnership (see Exhibits 2.1 and 2.2 to this Registration Statement). There was no underwriter and no public offering was made. The Registrant originally issued the above securities to the Partnership without registration in reliance upon the exemption provided by Section 4(2) of the Securities Act as a transaction not involving any public offering and in reliance on Rules 505 and 506 included in Regulation D. The Partnership then dissolved and distributed the above securities to its partners. The corporate sole general partner of the Partnership adopted a plan of liquidation and directed the Partnership to distribute the shares otherwise distributable to it to its shareholders. The decision to incorporate the Partnership was made by the general partner without a vote of the limited partners pursuant to the Agreement of Limited Partnership. Substantially all of the partners of the Partnership had been beneficial owners of II-1 securities in the Partnership for more than three years. Because the incorporation of the Partnership and the subsequent liquidating distribution of the shares was made without the consent of the limited partners, there was no sale of the shares to the partners and the registration provisions of the Securities Act did not apply. Names of the limited partners are set forth on Exhibit 99.5 hereto. On or about October 11, 1996, the Registrant issued 300,000 shares of its common stock to BDM Construction Co., Inc. ("BDM") pursuant to Section 4(2) of the Securities Act. BDM is the general contractor for the registrant's new brewery and had purchased 8,333 shares of the Registrant's common stock in the Registrant's initial public offering. The Registrant issued the shares as security for the payment of up to $900,000 owed or to be owed to BDM for general contractor services in connection with the new brewery. The 300,000 shares will be canceled if the Company timely pays the amounts owed to BDM. BDM is not entitled to retain the shares as payment for the obligation but must sell the shares in satisfaction of the debt in a commercially reasonable manner unless the Company agrees, after a default, to permit BDM to retain the shares. To the extent that any of the shares are not required to be sold to satisfy the obligation, they will be canceled. Although BDM presently has the power to vote the 300,000 shares, no shareholder votes are contemplated until after the due date of the obligation. The certificate for the 900,000 shares bears a legend referencing the foregoing restrictions. The share Certificates for all for the above shares bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933 OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT." ITEM 27. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES. Exhibit Number Description of Document - ------- ------------------------------- 2.1 (A) Report to Limited Partners of Mendocino Brewing Company, a California limited partnership 2.2 (A) Stock for Assets Incorporation Agreement 3.1 (A) Articles of Incorporation, as amended, of the Company 3.2 (B) Bylaws of the Company (Incorporated by referenced from the Company's Report on Form 10-KSB for the annual period ended December 31, 1994 previously filed with the Commission.) 4.1 Articles 5 and 6 of the Articles of Incorporation, as amended, of the Company (Reference is made to Exhibit 3.1.) 4.2 Article 10 of the Restated Articles of Incorporation, as amended, of the Company (Reference is made to Exhibit 3.2.) 4.3 (A) Form of Common Stock Certificate (Incorporated by reference from the Company's Registration Statement dated June 15, 1994, as amended, previously filed with the Commission, Registration No. 33-78390-LA.) 5 Opinion and consent of counsel with respect to the legality of the securities being registered. 10.1 (A) Mendocino Brewing Company Profit Sharing Plan. 10.2 (A) Wholesale Distribution Agreement between the Company and Bay Area Distributing. 10.3 (A) Wholesale Distribution Agreement between the Company and Golden Gate Distributing. 10.4 (F) Letter of Intent with Vitro Packaging, Inc. II-2 Exhibit Number Description of Document - ------- ------------------------------- 10.5 (A) Sales Contract between the Company and John I. Hass, Inc. 10.6 (A) Lease Agreement between the Company and Kohn Properties. 10.7 (A) Lease Agreement between the Company and Associated Vintage Group, Inc. 10.8 (F) Commitment letter from Savings Bank of Mendocino County (previously filed as Exhibit 19.9). 10.9 (A) Letter of intent from California Statewide Certified Development Corporation. 10.10 (A) 1994 Stock Option Plan (previously filed as Exhibit 99.6). 10.11 (C) Commercial Real Estate Purchase Contract and Receipt for Deposit (previously filed as Exhibit 19.2). 10.12 (B) Proposal from Warren Capital Corporation. 10.13 (C) Brewery Fixtures Construction Agreement with Enerfab, Inc. (previously filed as Exhibit 19.3). 10.14 (D) Installment Note between Ukiah Redevelopment Agency and Langley et al. (previously filed as Exhibit 19.5). 10.15 (E) Agreement to Implement Condition of Approval No. 37 of the Site Development Permit 95-19 with the City of Ukiah, California (previously filed as Exhibit 19.6). 10.16 (F) Standard Form of Agreement Between Owner and Architect for Designated Services between the Company and Victor Lopes. 10.17 (F) Liquid Sediment Removal Services Agreement with Cold Creek Compost, Inc. 10.18 (F) Promissory Note for $76,230 in favor of Langley et al. 10.19 (G) Construction agreement with BDM Construction Company, Inc. 10.20 (G) $60,000 Note payable to BDM Construction Company, Inc. 10.21 (G) Agreement to modify note and deed of trust dated June 6, 1995 with Langley, et al. 10.22 (G) Agreement to modify note dated June 6, 1995 with Langley, et al. 10.23 (G) Amendment to installment note payable to Langley, et al. 10.24 (G) Manufacturing Business Expansion and Relocation Agreement with the City of Ukiah. 10.25 (G) Manufacturing Business Expansion and Relocation Agreement with the Ukiah Redevelopment Agency. 10.26 (G) Consulting Agreement with Daniel R. Moldenhauer. 10.27 (H) Business Loan Agreement with WestAmerica Bank. 10.28 Change in Terms Agreement with WestAmerica Bank. 10.29 Letter Agreement Concerning Use of Proceeds with WestAmerica Bank. 10.30 Commitment Letter from WestAmerica Bank. 10.31 Business Loan Agreement with the Savings Bank of Mendocino County. 10.32 Construction Loan Agreement with the Savings Bank of Mendocino County. 10.33 $2,700,000 Note in favor of the Savings Bank of Mendocino County. 10.34 Assignment of Deposit Account in favor of the Savings Bank of Mendocino County. 10.35 Commitment Letter from the Savings Bank of Mendocino County. 10.36 Equipment Lease with FINOVA Capital Corporation. 10.37 Tri-Election Rider to Equipment Lease with FINOVA Capital Corporation. 10.38 Master Lease Schedule with FINOVA Capital Corporation. II-3 Exhibit Number Description of Document - ------- ------------------------------- 10.39 Advance and Subordination Agreement among the Company, FINOVA Capital Corporation, and Enerfab, Inc. 10.40 $900,000 Note in favor of BDM Construction Co., Inc. 10.41 Letter Agreement Concerning Use of Proceeds with BDM Construction Co., Inc. 10.42 Employment Agreement with H. Michael Laybourn. 10.43 Employment Agreement with Norman H. Franks. 10.44 Employment Agreement with Michael F. Lovett. 10.45 Employment Agreement with John Scahill. 24.1 Consent of Moss Adams LLP. 24.2 Consent of Enterprise Law Group, Inc. (Reference is made to Exhibit 5.) 99.1 Form of Stock Purchase Agreement - -------------------------------- (A) Incorporated by reference from the Company's Registration Statement dated June 15, 1994, as amended, previously filed with the Commission, Registration No. 33-78390-LA. (B) Incorporated by referenced from the Company's Report on Form 10-KSB for the annual period ended December 31, 1994 previously filed with the Commission. (C) Incorporated by referenced from the Company's Report on Form 10-QSB for the quarter period ended March 31, 1995 previously filed with the Commission. (D) Incorporated by referenced from the Company's Report on Form 10-QSB for the quarter period ended June 30, 1995 previously filed with the Commission. (E) Incorporated by referenced from the Company's Report on Form 10-QSB for the quarter period ended September 30, 1995 previously filed with the Commission. (F) Incorporated by referenced from the Company's Report on Form 10-KSB for the annual period ended December 31, 1995 previously filed with the Commission. (G) Incorporated by referenced from the Company's Report on Form 10-QSB for the quarter period ended June 30, 1996 previously filed with the Commission. (H) Incorporated by referenced from the Company's Report on Form 10-QSB/A No. 1 for the quarter period ended June 30, 1996 previously filed with the Commission. Item 28. Undertakings. (a) The Registrant hereby undertakes that it will: (1) File, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: (i) Include any prospectus required by section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. II-4 (e) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to meet all of the requirements for filing on Form SB-2 and authorized this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Hopland, State of California, on November 4, 1996. MENDOCINO BREWING COMPANY, INC. By: /s/ H. MICHAEL LAYBOURN ----------------------------------------- H. Michael Laybourn Chief Executive Officer Each of the undersigned hereby constitutes and appoints H. Michael Laybourn and Norman H. Franks, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign this Registration Statement on Form SB-2 of Mendocino Brewing Company, Inc., and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as full to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or his or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date - ----------- ------ ------ /s/ H. MICHAEL LAYBOURN Chief Executive Officer, Director November 4, 1996 - --------------------------------------- (Principal Executive Officer) H. Michael Laybourn /s/ NORMAN H. FRANKS Vice President, Chief Financial Officer, Director November 4, 1996 - --------------------------------------- (Principal Financial and Accounting Officer) Norman H. Franks /s/ MICHAEL F. LOVETT Marketing Director, Director November 4, 1996 - --------------------------------------- Michael F. Lovett
II-5 EX-5 2 EXHIBIT 5 EXHIBIT 5 TO REGISTRATION STATEMENT ON FORM SB-2 ----------------------------------- OPINION AND CONSENT OF COUNSEL WITH RESPECT TO THE LEGALITY OF THE SECURITIES BEING REGISTERED Enterprise Law Group, Inc. MENLO OAKS CORPORATE CENTER TELEPHONE: (415) 462-4700 4400 BOHANNON DRIVE, SUITE 280 FACSIMILE: (415) 462-4747 MENLO PARK, CALIFORNIA 94025-1041 EMAIL: info@enterpriselaw.com November 4, 1996 Mendocino Brewing Company, Inc. P.O. Box 400 13351 South Highway 101 Hopland, CA 95449 Gentlemen: We have acted as counsel to Mendocino Brewing Company, Inc., a California corporation (the "Corporation") in connection with the preparation of the Registration Statement on Form SB-2, which will be filed with the Securities and Exchange Commission (the "Commission") on or about November 4, 1996 by the Corporation under the Securities Act of 1933, as amended (the "Act"), and the Prospectus to be used in conjunction therewith (the "Registration Statement"), for registration under the Act of an aggregate of 600,000 shares of the Corporation's no par value common stock (the "Shares"). This Opinion Letter is provided to you pursuant to Item 5.1 of the Registration Statement. Except as otherwise indicated herein, capitalized terms used in this Opinion Letter are defined as set forth in the Accord (see below). This Opinion Letter is governed by, and shall be interpreted in accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law (1991). As a consequence, it is subject to a number of qualifications, exceptions, definitions, limitations on coverage, and other limitations, all as more particularly described in the Accord, and this Opinion Letter should be read in conjunction therewith. The law covered by the opinions expressed herein is limited to the Law of the State of California. In connection with rendering this Opinion Letter, we have made inquiries regarding such matters of fact and law as we believe law firms ordinarily and customarily make and rely upon in connection with letters such as this. We advise you that Nelson D. Crandall, a principal of this law firm who has actively participated in the preparation of this Opinion Letter, owns 100 shares of the common stock of the Corporation. Based upon and subject to the foregoing, we are of the opinion that when issued and delivered against payment therefor in accordance with the Registration Statement, the Shares will be validly issued, fully paid, and nonassessable. This Opinion Letter may be filed as an exhibit to the Registration Statement. We consent to the reference to this firm as having passed on the validity of the Shares under the caption "Legal Matters" in the Prospectus contained in the Registration Statement. In EXHIBIT 5 Mendocino Brewing Company, Inc. November 4, 1996 Page 2 of 2 giving this consent, we make no admission that this firm is included in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission promulgated thereunder. Very truly yours, /s/ Enterprise Law Group, Inc. NDC:wp Ex05.doc 2 EXHIBIT 5 EX-10.28 3 EXHIBIT 10.28 EXHIBIT 10.28 TO REGISTRATION STATEMENT ON FORM SB-2 ----------------------------------- CHANGE IN TERMS AGREEMENT WITH WESTAMERICA BANK CHANGE IN TERMS AGREEMENT Borrower: MENDOCINO BREWING COMPANY, INC.; P. O. BOX 400 HOPLAND, CA 95449 Lender: WESTAMERICA BANK SONOMA REGION CREDIT ADMINISTRATION 31 D STREET SECOND FLOOR SANTA ROSA, CA 95404 Principal Amount: $600,000.00 Date of Agreement: October 1,1996 DESCRIPTION OF EXISTING INDEBTEDNESS. THAT CERTAIN NOTE DATED MAY 17, 1996 IN THE ORIGINAL AMOUNT OF $600,000.00 CURRENTLY MATURING ON SEPTEMBER 30, 1996 WITH AN OUTSTANDING BALANCE AS OF THIS DATE OF $600,000.00. DESCRIPTION OF COLLATERAL THIS NOTE IS SECURED BY THAT CERTAIN COMMERCIAL SECURITY AGREEMENT DATED MAY 17, 1996. DESCRIPTION OF CHANGE IN TERMS. EFFECTIVE THE DATE OF THIS AGREEMENT THE MATURITY DATE IS CHANGED FROM SEPTEMBER 30, 1996 TO APRIL 30, 1997. ACCRUED INTEREST SHALL BE PAYABLE ON THE LAST DAY OF EACH MONTH BEGINNING OCTOBER 31, 1996 AND ON APRIL 30, 1997 ALL OUTSTANDING PRINCIPAL PLUS ALL ACCRUED BUT UNPAID INTEREST SHALL BE DUE AND PAYABLE. EFFECTIVE THE DATE OF THIS AGREEMENT THE FOLLOWING PROVISIONS SHALL BE ADDED TO THAT CERTAIN BUSINESS LOAN AGREEMENT DATED MAY 17, 1996: 1) BORROWER SHALL PROVIDE TO BANK WITHIN 45 DAYS OF EACH FISCAL QUARTER, BORROWER'S BALANCE SHEET AND PROFIT AND LOSS STATEMENT FOR THE PERIOD ENDED. 2) BORROWER SHALL PROVIDE TO BANK WITHIN 90 DAYS OF EACH FISCAL YEAR END, BORROWER'S BALANCE SHEET AND INCOME STATEMENT FOR THE YEAR ENDED, AUDITED BY A CERTIFIED PUBLIC ACCOUNTANT SATISFACTORY TO LENDER. BORROWER AGREES THAT UPON EXECUTION OF THIS AGREEMENT TO PAY ACCRUED INTEREST TO SEPTEMBER 30,1996 IN THE AMOUNT OF $4,875.00 AND A DOCUMENTATION FEE OF $150.00. EXHIBIT 10.28 CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender's right to strict performance of the obligation(s) as changed, nor obligate Lender to make any future change in terms. Nothing in this Agreement Will constitute a satisfaction of the obligation(s). It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accommodation makers, Will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions. PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT. BORROWER: MENDOCINO BREWING COMPANY, INC. By: /s/ H. Michael Laybourn ------------------------ H. Michael Laybourn, President By: /s/ Norman H. Franks -------------------- Norman H. Franks, Chief Financial Officer EXHIBIT 10.28 - 2 - EX-10.29 4 EXHIBIT 10.29 EXHIBIT 10.29 TO REGISTRATION STATEMENT ON FORM SB-2 ----------------------------------- LETTER AGREEMENT CONCERNING USE OF PROCEEDS WITH WESTAMERICA BANK [Mendocino Brewing Company, Inc. letterhead] September 19, 1996 R. Dwight Davenport West America Bank 31 D Street Second Floor Santa Rosa, CA 95404 VIA FAX: 707-575-3546 Dear Mr. Davenport: Savings Bank of Mendocino County has agreed to the following plan of distribution and use of the first funds received from our proposed direct public offering. The list below shows, in order of priority, our proposed use of funds for the first $2,500,000 of the proposed $4,000,000 (sic) direct public offering. 1) Cost of offering (estimated) $ 300,000 2) Working Capital 300,000 3) Completion of deferred building construction 600,000 4) Short term debt - BDM note 500,000 5) Short term debt - West America Bank 400,000 6) Short term debt - BDM note 400,000 ---------- $2,500,000 The Savings Bank has asked that you signify your understanding of and agreement with our intentions by signing at the bottom of this letter. After signing, please fax this letter back to me as soon as possible. This should complete the final requirement for our loan package with the bank. Sincerely, West America Bank /s/ Norman Franks /s/ R. Dwight Davenport Norman Franks by: R. Dwight Davenport CFO, Vice President Vice President and Manager EXHIBIT 10.29 EX-10.30 5 EXHIBIT 10.30 EXHIBIT 10.30 TO REGISTRATION STATEMENT ON FORM SB-2 ----------------------------------- COMMITMENT LETTER FROM WESTAMERICA BANK [WestAmerica Bank letterhead] Sonoma Region Credit Administration October 30, 1996 Norman Franks, Vice President, CFO Mendocino Brewing Company, Inc. P.O. Box 400 Hopland, CA 95449 Dear Mr. Franks: WestAmerica Bank is pleased to commit to the restructure of the existing non-revolving line of credit into a revolving line of credit prior to the expiration date of April 30, 1997. This commitment is subject to the Bank's review of the 1996 fiscal year end financial statement, and involves the basic terms outlined below: 1. Type Of Facility: Revolving line of credit. 2. Maximum Principal Amount: $600,000 or the maximum applicable Borrowing Base as may change from time to time, as will be defined in the credit documentation. 3. Forms of Utilization: Cash advances, including direct deposits to your checking account. 4. Interest Rate: To be negotiated. Interest will accrue daily on the basis of a (365/360-day) year and actual days elapsed. 5. Expiration and/or Maturity Date: April 30, 1997 6. Borrowing Bass: 80% of eligible accounts receivable (as will be defined in the credit documents). 25% of eligible inventory to a maximum of $200,000 (as will be defined in the credit documents). EXHIBIT 10.30 7. Collateral: Perfected security interest of this priority in the following personal property: Accounts Receivable and Inventory 8. Purpose of Line of Credit: Finance trading assets. 9. Fees Payable On or Before Closing: Loan Fee: To be negotiated. 10. Repayment: Interest payable (monthly) with all accrued interest and unpaid principal to be due at maturity. 11. Loan Document: In addition to the documentation that will be required in connection with the security interest to be given to Bank in the property which will serve as collateral for this loan, the following documentation, in form and substance satisfactory to Bank will be required: Business Loan Agreement. Among other terms, this agreement will contain various financial and other covenants, agreements and conditions to be negotiated. Loan and Security Agreement (Accounts Payable/Inventory). This commitment is also subject to such additional terms as may be provided in Bank's credit documents or otherwise required by Bank or its counsel. Sincerely, /s/ Dwight Davenport Dwight Davenport Vice President and Manager EXHIBIT 10.30 - 2 - EX-10.31 6 EXHIBIT 10.31 EXHIBIT 10.31 TO REGISTRATION STATEMENT ON FORM SB-2 ----------------------------------- BUSINESS LOAN AGREEMENT WITH THE SAVINGS BANK OF MENDOCINO COUNTY BUSINESS LOAN AGREEMENT Borrower: Mendocino Brewing Company, a California Corporation PO Box 400 Hopland, CA 95449 Lender: SAVINGS BANK OF MENDOCINO COUNTY MAIN OFFICE PO. Box 3600 200 N. School Street Ukiah, CA 95482 THIS BUSINESS LOAN AGREEMENT between Mendocino Brewing Company, a California corporation ("Borrower") and SAVINGS BANK OF MENDOCINO COUNTY ("Lender") la made and executed on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans and other financial accommodations, Including those which may be described on any exhibit or schedule attached to this Agreement. All such loans and financial accommodations, together with all future loans and financial accommodations from Lender to Borrower, are referred to In this Agreement Individually as the "Loan" and collectively as the "Loans." Borrower understands and agrees tied: (a) In granting, renewing, or extending any Loan, Lender Is relying upon Borrower's representations, warranties, and agreements, as set forth In this Agreement; (b) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender's sole Judgment and discretion; and (c) all such Loans shall be and shall remain subject to the following terms and conditions of this Agreement. TERM. This Agreement shall be effective as of September 26, 1996, and shall continue thereafter until all Indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time. Borrower. The word "Borrower" means Mendocino Brewing Company, a California corporation. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries and Affiliates." CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. Cash Flow. The words "Cash Flow" mean net income after taxes, and exclusive of extraordinary gains and income, plus depreciation and amortization. Collateral. The word "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted EXHIBIT 10.31 directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. Debt. The word "Debt" means all of Borrower's liabilities excluding Subordinated Debt. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. Event of Default. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "Events OF DEFAULT." Grantor. The word "Grantor" means and includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the Indebtedness, including without limitation all Borrowers granting such a Security Interest. Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any Indebtedness. Indebtedness. The word "indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such Indebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable. Lender. The word "Lender" means SAVINGS BANK OF MENDOCINO COUNTY, its successors and assigns. Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand plus Borrower's readily marketable securities. Loan. The word "Loan" or "Loans" means and includes without limitation any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. Note. The word "Note" means and includes without limitation Borrower's promissory note or notes, if any, evidencing Borrower's Loan n obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. EXHIBIT 10.31 - 2 - Permitted Liens. The words "Permitted Liens" mean: (a) liens and security interests securing Indebtedness owed by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (d) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (f)those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Security Interest. The words "Security interest mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. Subordinated Debt. The words "Subordinated Debt mean indebtedness and liabilities of Borrower which have been subordinated by written agreement to indebtedness owed by Borrower to Lender in form and substance acceptable to Lender. Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total Debt. Working Capital. The words "Working Capital" mean Borrower's current assets, excluding prepaid expenses, less Borrower's current liabilities. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial Loan Advance and each subsequent Loan Advance under this Agreement shall be subject to the EXHIBIT 10.31 - 3 - fulfillment to Lender's satisfaction of all of the conditions set forth in this Agreement and in the Related Documents. Loan Documents. Borrower shall provide to Lender in form satisfactory to Lender the following documents for the Loan: (a) the Note, (b) Security Agreements granting to Lender security interests in the Collateral, (c) Financing Statements perfecting Lender's Security Interests, (d) evidence of insurance as required below; and (e) any other documents required under this Agreement or by Lender or its counsel, including without limitation any subordinations described below. Borrower's Authorization. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents, and such other authorizations and other documents and instruments as Lender or its counsel, in their sole discretion, may require. Payment of Fees and Expenses. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document. Representations and Warranties. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct. No Event of Default. There shall not exist at the time of any advance a condition which would constitute an Event of Default under this Agreement. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists: Organization. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of California and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its businesses or financial condition. Authorization. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. EXHIBIT 10.31 - 4 - Financial Information. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. Legal Effect. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. Hazardous Substances. The terms "hazardous waste,. "hazardous substance," "disposal," "release," and "threatened release," as used in this Agreement, shall have the same meanings as set forth in the "CERCLA," "SARA," 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., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (a) During the period of Borrower's ownership of the properties, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, about or from any of the properties. (b) Borrower has no knowledge of, or reason to believe that there has been (i) any use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance on, under, about or from the properties by any prior owners or occupants of any of the properties, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters. (c) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the properties shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, about or from any of the properties; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation those laws, regulations and ordinances described above. Borrower authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the properties for hazardous waste and hazardous substances. Borrower hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (b) agrees EXHIBIT 10.31 - 5 - to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage disposal, release or threatened release occurring prior to Borrower's ownership or interest in the properties, whether or not the same was or should have been known to Borrower. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination or expiration of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the properties, whether by foreclosure or otherwise. Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. Taxes. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. Binding Effect. This Agreement, the Note, all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note and all of the Related Documents are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. Commercial Purposes. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. Employee Benefit Plans. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. Location of Borrower's Offices and Records. Borrower's place of business, or Borrower's chief executive office, if Borrower has more than one place of business, is located at PO Box 400, EXHIBIT 10.31 - 6 - Hopland, CA 95449. Unless Borrower has designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. Information All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. Survival of Representations and Warranties. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in extending Loan Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: Litigation. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. Financial Records. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. Financial Statements. Furnish Lender with, as soon as available, but in no event later than one hundred twenty (120) days after the end of each fiscal year, Borrower's balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender, and, as soon as available, but in no event later than thirty (30) days after the end of each month, Borrower's balance sheet and profit and loss statement for the period ended, prepared and certified as correct to the best knowledge and belief by Borrower's chief financial officer or other officer or person acceptable to Lender. All financial reports required to be provided under this Agreement shall be prepared in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Additional Information. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. Financial Covenants and Ratios. Comply with the following covenants and ratios: Except as provided above, all computations made to determine compliance with the requirements contained EXHIBIT 10.31 - 7 - in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. In addition, upon request of Lender (however not more not than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. Subordination. Prior to disbursement of any Loan proceeds, deliver to Lender a subordination agreement on Lender's forms, executed by Borrower's creditor named below, subordinating all of Borrower's indebtedness to such creditor, or such lesser amount as may be agreed to by Lender in writing, and any security interests in collateral securing that indebtedness to the Loans and security interests of Lender. Name of Creditor Amount Cordes P. Langley, a married man on undivided 38/144 Interest; Philip G. Langley, a married man, on undivided 38/144 Interest; Ellen J. Alexander, a married woman, on undivided 38/144 Interest; and David C. Dutton, Jr. and Grey M. Dutton, Trustees, The David C. Dutton, Jr. and Grey M. Dutton Revocable Trust dated October 31,1989 on undivided 30/144 Interest $264,567.58 Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. EXHIBIT 10.31 - 8 - Loan Fees and Charges. In addition to all other agreed upon fees and charges, pay the following: 2% construction loan origination fee and a 1 1/2% permanent loan origination fee, $275.00 Loan Documentation Fee, $950.00 Inspection fee, $2,500.00 Legal Reimbursement fee. Loan Proceeds. Use all Loan proceeds solely for the following specific purposes: construction of a 62000 sq. ft. Brewery facility which will be located at 1601 Airport Road, Ukiah, CA. Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. Performance. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. Compliance Certificate Unless waived in writing by Lender, provide Lender at least annually and at the time of each disbursement of Loan proceeds with a certificate executed by Borrower's chief EXHIBIT 10.31 - 9 - financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. Environmental Compliance and Reports. Borrower shall comply in all respects with all environmental protection federal, state and local laws statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law, rule, regulation or guideline, or the interpretation or application of any thereof by any court or administrative or governmental authority (including any request or policy not having the force of law) shall impose, modify or make applicable any taxes (except U.S. federal, state or local income or franchise taxes imposed on Lender), reserve requirements, capital adequacy requirements or other obligations which would (a) increase the cost to Lender for extending or maintaining the credit facilities to which this Agreement relates, (b) reduce the amounts payable to Lender under this Agreement or the Related Documents, or (c) reduce the rate of return on Lender's capital as a consequence of Lender's obligations with respect to the credit facilities to which this Agreement relates, then Borrower agrees to pay Lender such additional amounts as will compensate Lender therefor, within five (5) days after Lender's written demand for such payment, which demand shall be accompanied by an explanation of such imposition or charge and a calculation in reasonable detail of the additional amounts payable by Borrower, which explanation and calculations shall be conclusive in the absence of manifest error. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: Capital Expenditures. Make or contract to make capital expenditures, including leasehold improvements, in any fiscal year in excess of $10,000.00 or incur liability for rentals of property (including both real and personal property) in an amount which, together with capital expenditures, shall in any fiscal year exceed such sum. Indebtedness and for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, EXHIBIT 10.31 - 10 - create, incur or assume indebtedness for borrowed money, including capital leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets, or (c) sell with recourse any of Borrower's accounts, except to Lender. Continuity of Operations. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, (c) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or entity, or (c) incur any obligation as surety or guarantor other than in the ordinary course of business. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Borrower to make any payment when due on the Loans. Other Defaults. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. EXHIBIT 10.31 - 11 - Default In Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished, or becomes false or misleading at any time thereafter.. Detective Collateralization This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the Indebtedness, or by any governmental agency. This includes a garnishment, attachment, or levy on or of any of Borrower's deposit accounts with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower or Grantor, as the case may be, as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding, and if Borrower or Grantor gives Lender written notice of the creditor or forfeiture proceeding and furnishes reserves or a surety bond for the creditor or forfeiture proceeding satisfactory to Lender. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure the Event of Default. Change In Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. Right to Cure. If any default, other than a Default on Indebtedness, is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or EXHIBIT 10.31 - 12 - Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default: (a) cures the default within one (1) days; or (b) if the cure requires more than one (1) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make Loan Advances or disbursements), and, at Lender's option all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the 'insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement has to Lender to Lender by Lender In the State the California It there Is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Mendocino County, the State of California This Agreement stroll be governed by and construed In accordance with the laws of the State of California Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Multiple Parties; Corporate Authority. All obligations of Borrower under this Agreement shall be joint and several, and all references to Borrower shall mean each and every Borrower. This means that each of the Borrowers signing below is responsible for all obligations in this Agreement. Consent to Loan Participation. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender; Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby EXHIBIT 10.31 - 13 - waives any rights to privacy it may have with respect to such matters Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loans irrespective of the failure or insolvency of any holder of any interest in the Loans. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. Costs and Expenses. Borrower agrees to pay upon demand all of Lender's expenses, including without limitation attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic shy or injunction), appeals, and any anticipated post -judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. Notices. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimilie, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current address(es). Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower as used herein shall include all subsidiaries and affiliates of Borrower. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary or affiliate of Borrower. EXHIBIT 10.31 - 14 - Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. Survival. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. Time Is of the Essence. Time is of the essence in the performance of this Agreement. Waiver Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF SEPTEMBER 25,1996. BORROWER: Mendocino Brewing Company, a California corporation By: /s/ Norman Franks Norman Franks, Chief Financial Officer By: /s/ Michael Laybourn Michael Laybourn, Chief Executive Officer LENDER: SAVINGS BANK OF MENDOCINO COUNTY By: /s/ Martin J. Lombardi Authorized Officer EXHIBIT 10.31 - 15 - EX-10.32 7 EXHIBIT 10.32 EXHIBIT 10.32 TO REGISTRATION STATEMENT ON FORM SB-2 ---------------------- CONSTRUCTION LOAN AGREEMENT WITH THE SAVINGS BANK OF MENDOCINO COUNTY Construction Loan Agreement This Construction Loan Agreement is made as of September 25, 1996, between Saving Bank of Mendocino County, a California banking corporation ("Bank") and Mendocino Brewing Company, Inc., ("Borrower"). Section 1. Construction Loan 1.1 Improvement to Real Property. Borrower has or will have an ownership or leasehold interest in the real property more fully described in Exhibit A ("Property"). Borrower will construct or cause to have constructed certain improvements ("Improvements") to the Property in accordance with certain plans and specifications ("Plans and Specifications") which have previously been delivered to the Bank. 1.2 The Loan and Note. Bank has agreed to lend to Borrower up to the sum of $2,700,000.00 ("Loan) subject to the terms and conditions of this Agreement. Borrower will execute and deliver a promissory note ("Note") in the form of Exhibit B to evidence this loan. 1.3 Security. The following collateral ("Collateral") will serve as security for Borrower's obligations in connection with the Loan and this Agreement. (a) Borrower will grant security interests in the Property, the Improvements, all fixtures attached or to be attached thereto and in such other property as is specified in Exhibit C attached hereto. The deed of trust covering the Property and the Improvements ("Deed of Trust") and the security agreements evidencing these security interests will be collectively called the "Security Agreements". (b) Borrower hereby assigns to Bank all of its rights, title and interest in and to (i) all monies deposited with any public or private utility for or to assure utilities on or for the Property, (ii) the Plans and Specifications, (iii) the Account created pursuant to Section 4.1 (a) and the monies placed therein, (iv) if a construction contract is required to be delivered to Bank as a condition to disbursement of the Loan, that construction contract ("Construction Contract") and (v) any other agreement which, in the Bank's reasonable judgment, would assist Bank in completing the improvements should Borrower be in default hereunder. (c) As additional security, Borrower hereby transfers and assigns to Bank all right, title and interest in and to any and all monies deposited by Borrower or deposited on behalf of Borrower with any city, county, public body or agency, irrigation, sewer, or water district or company, gas or electric company, telephone company, and any other body or agency for the installation, or to secure the installation of, any utility by Borrower pertaining to the Property. Section 2. Conditions to Loan Disbursement Before Bank becomes obligated to make any advance connection with the Loan: 2.1 Bank must have received the Note, the Security Agreements and each other document specified in Exhibit C and all other documents, information, warranties and showings as Bank EXHIBIT 10.32 may require, all of which must be properly executed, if appropriate, and in a form and substance acceptable to Bank. 2.2 Bank must have received the several amounts Borrower is required to pay to Bank as a condition to or in connection with the Loan as specified herein and in Exhibit C. 2.3 The request for the advance must be received by Bank prior to the maturity date of the Note and must otherwise be authorized by this Agreement. Section 3. Affirmative Covenants Until the Loan and all related obligations are paid and discharged, Borrower will, unless Bank waives compliance in writing: 3.1 Indemnity. Indemnify and hold Bank, its officers, employees, agents and assigns harmless against all losses claims, demands, damages, response costs, penalties, expenses (including court costs and Bank's attorney fees) and liabilities (individually and collectively called "liability") which Bank, its officers, employees, agents, successors or assigns may sustain or suffer by reason of anything done or omitted on, under or about the property, whether or not in connection with the construction of the Improvements pursuant to or as contemplated by this Agreement or caused by the use of the proceeds of the Loan, and including without limitation, liability based on strict liability in tort, liability resulting from a finding that Bank and borrower are engaged in a joint venture or partnership, and liability which Bank, its officers, employees, agents, successors or assigns may directly or indirectly sustain or suffer as a consequence of any inaccuracy or breach of any representation, warranty or agreement made in this Agreement in connection with hazardous substances. Notwithstanding the language of the preamble of this Section, this indemnity covers claims asserted after the Loan and all related obligations are paid and discharged, and the only exclusions relate to claims arising out of the affirmative acts of the Bank or of a third party after borrower's interest in the Property has terminated. For purposes of this Agreement, a "hazardous substance" is a substance which has characteristics of ignitability, corrosivity, toxicity, reactivity or radioactivity or has other characteristics which render it dangerous to health, safety or the environment if such substance is or becomes regulated by an federal, state or local law, regulation or ordinance; the term includes, without limitation, substances defined as "hazardous material", "toxic substances", "hazardous wastes" or "hazardous substances" in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), 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., and in Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., and in the regulations adopted and publications promulgated pursuant to said laws. The terms "disposal", "release", and "threatened release" shall have the definitions assigned to them in CERCLA. 3.2 Maintain Insurance. Provide or cause each contractor, subcontractor and materialman involved in the construction of the Improvements to provide and keep in full force and effect any insurance policies specified in Exhibit C or otherwise required by Bank and with insurers and in EXHIBIT 10.32 - 2 - amounts and in form satisfactory to Bank. Each insurance policy must contain a standard form non-contribution mortgagee's loss payable endorsement in favor of Bank. 3.3 Reports and Further Documents. Deliver or cause to be delivered such other statements, lists of property and accounts, budgets, forecasts or reports relating to Borrower or any contractor or subcontractor involved in the construction of the Improvements as Bank may reasonably request and perform or cause to be performed on request of Bank such further acts as may be deemed necessary or advisable by Bank either to perfect any security interest provided for herein or to carry out the intent of this Agreement. 3.4 Proper Construction. Cause the construction of the Improvements, including all grading, landscaping and off site work, to be prosecuted with diligence, continuity, in accordance with the Plans and Specifications and of first class materials in a good, substantial and workmanlike manner in strict compliance with all applicable laws, ordinances, rules and regulations of federal, state and local governments and agencies, such construction to commence within 30 days from the date hereof and be completed within 300 days of the date of this Agreement. 3.5 Inspection. Permit Bank, its officers, employees and agents to enter upon the Property and inspect the work of construction, it being understood, however, that Bank is under no obligation to supervise, inspect or inform Borrower of the progress of construction, and borrower will not rely upon Bank therefor. 3.6 Mechanics Liens. Pay or cause to be paid in full and discharge or cause to be discharged all claims for labor done and material and services furnished in connection with the construction of the Improvements, file diligently or procure the filing of a Notice of Completion upon completion of construction, file diligently or procure the filing of a Notice of Cessation upon the event of a cessation of labor for a continuous period of 30 days or more and take all other reasonable steps to forestall the assertion of claims of lien against the Property or of claims against the Account other than claims for labor, materials or services which Borrower in good faith disputes and which Borrower, at its own expense, is currently and diligently contesting; provided, however, that Borrower will, within 20 days after filing of any claim or lien that is disputed or contested by Borrower, record, or cause to be recorded, in the Office of the appropriate County recorder, a surety bond sufficient to release said claim of lien. Borrower will defend, indemnify and hold Bank harmless against any action filed or claim asserted against Bank for any reason in connection with any such lien claim, including the costs thereof and expenses related thereto. Such expenses include, but are not limited to, court costs and attorneys fees. Bank may recover sums due from Borrower under this section from the Account, upon demand or, at Bank's option, Bank's payment may be treated as an advance under the Note. 3.7 Incidental Expenses. Promptly pay all reasonable and necessary expenses incidental to this transaction including, but not limited to, all pre-closing, closing and post-closing expenses such as escrow fees, appraisal fees, legal fees, title insurance premiums, premiums for hazard insurance and bonds, architect's, surveyor's and engineer's fees, real property taxes and assessments, recordation, filing and documentary or stamp taxes. EXHIBIT 10.32 - 3 - 3.8 Takeout Commitment. Insurance and Guarantee. If the indebtedness secured by the Deed of Trust is to be insured or guaranteed by an governmental agency or is to be paid by another lender and evidence of such third party's commitment with regard thereto is required to be furnished pursuant to Exhibit C, maintain such commitment and comply with all requirements specified therein and with all rules, regulations and statutes relating thereto, as applicable. 3.9 Compliance with Applicable Laws. Cause all work on the Improvements to be performed in strict compliance with all applicable laws, ordinances, rules and regulations of federal, state, county or municipal governments or agencies now in force or that may be enacted or promulgated hereafter, and with all directions, rules and regulations of the fire marshal, health officer, building inspector or other officers of every governmental agency now having or hereafter acquiring jurisdiction. Without limiting the foregoing, to the extent that there will be any use, generation, manufacture, storage, disposal or release of any hazardous substance on, under or about the Property, the same shall be done in conformity with all applicable federal, stated and local hazardous substances laws, regulations ordinances and publications promulgated thereunder. The work shall proceed only after procurement of each permit, license or other authorization that may be required by any governmental agency having jurisdiction, and Borrower shall be responsible to Bank for the procurement and maintenance thereof, as may be required of Borrower and all persons engaged in work on the Improvements. Borrower shall promptly notify Bank of (a) any changes whatsoever in the existing covenants, conditions and restrictions defining and limiting the use to which the Property and Improvements may be put, (b) any threaten or actual release of a hazardous substance, and (c) any proposed or threatened amendment to or termination of any permit or license heretofore or hereafter acquired by Borrower, any contractor or any subcontractor or any materialman concerning the construction of the Improvements. 3.10 General Cooperation. Cooperate with Bank in bringing about the expeditious completion of the work of construction. Such cooperation shall include, without limiting the generality of the foregoing, prompt execution of Construction Contract change orders required or reasonably necessary to (a) resolve ambiguities in the Plans and Specifications, working drawings or shop drawings, (b) conform the work to prior changes or (c) resolve difficulties or inefficiencies which would arise as a result of strict adherence to the Plans and Specifications. Disputes with or between subcontractors, materialmen, architects, engineers, supervisory personnel or any other persons working on or supplying material to the work of construction shall, wherever possible, be resolved (or handled pending final resolution) in a manner which will allow work to proceed expeditiously. 3.11 Notification of Default. Promptly notify Bank in writing of any cessation of work on the Improvements, the occurrence of any labor dispute, the filing of any claim against the Loan proceeds, the Account or the Property, of the occurrence of any default, failure of performance or condition or breach of warranty under the Note, the Security Agreements or this Agreement. Section 4. Account 4.1 Creation: Deposits. Bank will establish a non-interest bearing account ("Account"). Deposit to the Account will consist of the following; EXHIBIT 10.32 - 4 - (a) The sum indicated in Exhibit C attached hereto to be deposited by Borrower. Borrower represents that this amount, together with the Loan amount is sufficient to pay the costs and charges and expenses in connection with the Loan and all costs in completing the Improvements in accordance with the Plans and Specifications. (b) Such additional sums as Bank may hereafter require Borrower to deposit pursuant to any of the terms hereof, which deposits will be made within 5 days after Bank's written demand therefor. 4.2 Loan Disbursements and Disbursements from Account. The entire balance in the Account shall be disbursed as provided in this section 4.2 prior to the making of any disbursements of the Loan proceeds. All disbursements from the Account and of the Loan proceeds will be for the purposes contemplated by this Agreement. Disbursements will be (a) by checks drawn by Bank and payable to Borrower or, at Bank's option, to a contractor, subcontractor, labor or materialman or (b) to an account established by Borrower or such other payee as is entitled to the payment, all in accordance with Exhibit D attached hereto. Disbursement from the Account may also be made, at Bank's option, to pay any sum due Bank from Borrower or to pay others as otherwise contemplated by this Agreement. Bank shall not, in any way, be responsible for the proper use by Borrower of funds disbursed hereunder. 4.3 Bank Option. The obligation of Bank to make any disbursement from the Account or any Loan disbursement is, in addition to each other condition precedent set forth herein, also subject to the condition that no determination has been made by Bank, in its reasonable judgment, after ten (10) days written notice to Borrower, that the amounts remaining in the Account and undisbursed under the Note are not reasonably likely to be sufficient to pay all expenses incurred or to be incurred in connection with the completion of the Improvements and fulfillment of Borrower's obligations hereunder. Borrower understands that Bank's failure to make a determination that the remaining amount in the Account and undisbursed Loan proceeds is insufficient to cover completion of the project shall not constitute a warranty by Bank that the remainder in the Account is sufficient for that purpose. Section 5. Negative Covenants Until the Loan and all related obligations are paid and discharged, Borrower will not, unless Bank waives compliance in writing: 5.1 Amend Other Documents. materially amend the Plans and specifications or any contract (including but not limited to the Construction Contract, if one is submitted to Bank pursuant to Exhibit C), working drawing or other document required to be submitted hereunder for Bank's prior approval. For purposes of this paragraph, "Materially amend" shall mean any single change of more that $5,000, or the aggregate of all such changes or more than $25,000.00 The prior written consent of any surety providing bond(s) to secure payment or performance of the work in the Improvements shall be required in connection with any and all changes, if the enforceability of its obligations under the bond(s) would be adversely affected absent such prior consent. EXHIBIT 10.32 - 5 - 5.2 Purchase Money Encumbrances. Acquire any materials, equipment, fixtures or any other part of the Improvements under an arrangement wherein the seller or any other creditor reserves the right to remove or to repossess any such items or to consider them personal property after their incorporation in the work of construction. 5.3 Improvements District. Consent or vote to have any of the Property incorporated within any improvement or other district area. 5.4 Use Qualified Contractors. etc. Utilize in connection with the construction of the Improvements any contractor, subcontractor or materialman who, in Bank's good faith determination, is deemed to be financially or otherwise unqualified. 5.5 Occupancy of Improvements. If the proceeds of the loan are to be used to construct for-sale home(s) upon the Property, permit any occupancy of the home(s) prior to the close of escrow on the sale of said home(s) and the Loan principal reduction(s) as required herein. Section 6. Default The occurrence of any of the following events, after any applicable cure period, (each of which being an (Event of Defaults shall constitute a default hereunder; provided, however, that unless otherwise specified, Borrower shall be entitled, after receipt of Bank's notice that an Event of Default shall have occurred, to a ten (10) day cure period for any Event of Default involving monetary payments, and a thirty (30) day cure period for all other Events of Default; 6.1 Failure to Make Payment. Any payment required under the Note or any payment otherwise required hereunder or pursuant to the Security Agreements or any other document contemplated herein is not made on or before its due date. 6.2 Action Against Property. All or a substantial portion of the Property is condemned, seized or appropriated. 6.3 Breach of Warranty or Representation. Any representation or warranty of Borrower or any guarantor of Borrower's obligations contained in this Agreement, the Note, the Security Agreements, any Exhibit hereto or any other document, statement, certificate or schedule required to be furnished by Borrower or a guarantor including, but not limited to, loan applications financial statements and other financial information regarding Borrower or a guarantor submitted to Bank, proves to be untrue in any material respect or Borrower or a guarantor conceals any material fact from Bank. 6.4 Insolvency. Receiver or Trustee. A court enters any decree or order adjudging Borrower or a guarantor to be bankrupt or insolvent, approving a petition seeking reorganization of Borrower or a guarantor or any arrangement for Borrower or a guarantor under any debtor's relief law, appointing a receiver, trustee, liquidator or assignee of Borrower or a guarantor in bankruptcy or insolvency of or for it s property, or directing the winding up or liquidation of Borrower or a guarantor, or Borrower or a guarantor is generally unable to pay its debts as they fall due or voluntarily submits to or files a petition seeking any decree or order of the nature described in this section, or Borrower or a guarantor assigns its assets for the benefit of its creditors or suffers EXHIBIT 10.32 - 6 - sequestration or attachment of or execution on a substantial part of its property unless the same is returned or released with 30 days thereafter or prior to sooner sale pursuant to such sequestration, attachment or execution. 6.5 Judgments. Borrower fails to pay or to discharge any judgments against it for the payment of money which in the aggregate exceed $10.000, unless such judgments are satisfied or appeals are taken therefrom and enforcement of such judgments are stayed within 10 days of their entry, or unless such judgments are covered by a valid and binding insurance policy, in the opinion of Borrower's counsel. 6.6 Sale or Transfer of Collateral. Borrower sells, transfer, removes, abandons, assigns, hypothecates or encumbers, whether voluntarily or involuntarily, all or any part of the collateral (except for personal property which requires replacement by reason of wear and tear or obsolescence which is immediately replaced upon sale or removal), or any interest therein or the attachment of any lien thereon. 6.7 Lapse of Termination of Takeout Commitment. Any commitment of a governmental agency or another lender to insure or to pay the indebtedness secured by the Deed of Trust lapses or terminates. 6.8 Encroachment. Any encroachment to the Property or any encroachment to other property as a result of the Improvements or their construction occurs and such encroachment is not removed or corrected within 30 days. 6.9 Interruption of Construction. Work on the improvements ceases for a continuous period of 30 days or more prior to completion thereof for causes other than fire, earthquake, or other acts of God, acts of the public enemy, riot, insurrection, governmental regulation of the sale of material and supplies or the transportation thereof, or strikes directly affecting the work of construction or shortages of material or labor resulting directly from governmental controls or diversions; provided, however, that the total permissible delay from all such enumerated cases will not exceed 45 days in the aggregate throughout the entire period of construction of the Improvements. Notwithstanding these time periods, if any bonds secure performance or payment of the work in the Improvements and such bond or bonds stipulates a shorter period or period, said shorter periods will be read into the preceding sentence. 6.10 Mechanics Lien. Any claim of lien is filed against the Property, the Improvements or any part thereof of any interest or right made appurtenant thereto, or any notice to withhold funds applicable to the Account or the Loan is served and not released within 20 days, or Borrower has not, within said period of time, recorded a surety bond sufficient to release said claim of lien. 6.11 Failure to Make Deposit to Account. Borrower fails to timely make any required deposit to the Account. 6.12 Failure to Maintain Insurance. Borrower or any contractor or subcontractor fails to obtain or maintain the several insurance coverages required by Bank hereunder. EXHIBIT 10.32 - 7 - 6.13 Failure to Pay Taxes. Borrower fails to pay all real and personal property taxes on the Collateral before the same shall become delinquent if payment of the tax is or may become a lien against the Property or any other portion of the Collateral. 6.14 Failure to Make Leasehold Payments. If the Property consists of a leasehold interest, Borrower fails to pay all rental payments on or before their respective due dates or such lease otherwise becomes in default. 6.15 Failure to Make Corrective Improvements. Borrower fails to commence corrective improvements as called for in Section 8 hereto, within 15 days of notice from Bank, and fails to complete said improvements in an expedient and timely fashion. 6.16 Other Breach. Borrower breaches any other condition covenant, warranty, promise or representation contained in this Agreement, the Note or the Security Agreements not specifically set forth in this Section 6 as an Event of Default. Section 7. Bank's Remedies Upon Default 7.1 General Remedies. Should an Event of Default occur, Bank may, at its option, do any one or more of the following, all without demand, presentment or notice, all of which are hereby expressly waived: (a) Terminate its obligation to make advances in connection with the Loan or disbursements from the Account. (b) Declare all indebtedness of Borrower on the Note or otherwise relating to the Loan immediately due and payable. (c) Take possession of the Property. (d) Complete the Improvements in accordance with the Plans and Specifications or as Bank may otherwise deem appropriate. In no event shall Bank be obligated to complete the Improvements if the funds in the Account and undisbursed amounts under the Note are insufficient to complete the Improvements. However, Bank may advance additional sums and add such sums to the unpaid balance of the Note or to be repayable upon Bank's demand together with interest from the date of each advance at the rate provided by the Note. (e) Discharge and replace any contractor or subcontractor if such person is then in default under the contract under which said person's services are retained. (f) Employ guards and take other reasonable measures designed to assure the security of the Property, Improvements, building materials, and all equipment, machinery and other materials involved in the construction of the Improvements. (g) Exercise all other remedies available to Bank under the Note, the Security Agreements, this Agreement and the law. EXHIBIT 10.32 - 8 - 7.2 Bank's Right to Cure. Upon the happening of any Event of Default which maybe cured by payment of money, Bank will have the right, but not the obligation, to make such payment from the Account or as a Loan advance, thereby curing the default. If as a result of the making of such a payment the sum of the remaining amount of funds in the Account plus the then undisbursed loan proceeds is, in Bank's opinion, insufficient to complete construction of the Improvements, the shortfall will be deposited by Borrower to the account upon Bank's demand. Borrower will have the right to contest in good faith any claim, demand, levy or assessment the assertion of which would constitute an Event of Default hereunder. Any such contest will be prosecuted diligently and in a manner unprejudicial to Bank or the rights of Bank hereunder. Upon demand by Bank, Borrower will make suitable provision by deposit of funds in the Account or by bond or other assurance satisfactory to Bank for the possibility that the contest will be unsuccessful. Such provision will be made within 10 days after demand therefor, and if made by deposit of funds in the Account, the amount so deposited will be disbursed in accordance with the resolution of the contest. 7.3 Notice of Default. If Bank determines that such action is desirable for the preservation of its position, Bank may duly file for record a notice of default under the Deed of Trust upon the happening of an Event of Default, after any applicable curative period has expired. Section 8. Other Right and Remedies of Bank 8.1 Disputes. If disputes arise which, in the reasonable opinion of Bank, endanger timely completion of the Improvements of fulfillment of any condition precedent or covenant herein or result in lien claims against the Property, Bank may advance funds from the Loan or from the Account pursuant to Section 4 to such person as Bank deems appropriate without prejudice to Borrower's rights, if any, to recover said funds from the party so paid; provided, however, that prior to advancing such funds, Bank must give Borrower ten (10) days' written notice of Bank's intention to so advance such funds, and Borrower shall have the option to release any such claims through the recording of a surety bank or bands sufficient for said purpose. Without limiting the foregoing, such payments may be to a title insurer with regard to possible assertion of lien claims, or to pay disputed amounts to the person claiming the same if Borrower is unable or unwilling to pay the same. 8.2 Correction of Improper Condition. If there are substantial deviations from the Plans and Specifications, working drawings or shop drawings, or if the same appear to be defective, or if defective workmanship or materials are being used in the construction of the Improvements or if Bank has knowledge of encroachments as to which there has been no consent, or if Bank in good faith believes a violation of any applicable law, regulation or ordinance has occurred or may occur on the Property or in connection with the construction of the Improvements, Bank will have the right to order immediate stoppage of construction and demand that the condition be corrected. After issuance of such an order, no further advances from the Loan or from the Account shall be made by Bank until the condition has been fully corrected. 8.3 Damage or Destruction of Improvements. If the Improvements or any part thereof are damaged or destroyed by flood, earthquake, wind, fire or by other means, Borrower shall promptly restore the Improvements to their prior condition. Bank shall not be obligated to make EXHIBIT 10.32 - 9 - any further disbursements of the Loan proceeds until such restoration is completed to Bank's satisfaction. Any insurance proceeds by reason of such damage or destruction that are received by Bank will be available to Borrower upon presentation of bills covering any labor and material used in restoration provided, in Bank's reasonable opinion, that sufficient funds are available to complete that restoration. 8.4 Approval of Leases. Borrower shall obtain the prior written approval of Bank as to the form and substance of any leases affecting the Property which are proposed subsequent to the date of this Agreement, which approval shall not be unreasonably withheld. Any approval by Bank may be conditioned upon receipt by Bank of an assignment of the lease or lease rentals. In addition, Borrower shall obtain the prior written approval of Bank to any modification, assignment, amendment, supplement, or cancellation of any lease, which approval shall not be unreasonably withheld. At the option of Bank, all leases shall be further memorialized by means of executed Non-disturbance, Attornment, and Subordination Agreements in form acceptable to Bank, prior to the execution of any new lease, or thirty (30) days from any request by Bank. At the request of Bank, Borrower agrees to provide Bank with executed Estoppel Certificates, at the time of any new lease, or fifteen (15) days from any request by Bank. Section 9. Miscellaneous 9.1 Release of Security Interest. Upon payment of all sums and performance of all obligations secured under the Security Agreements and the assignments provided by Section 1.3, Bank shall release its security interest therein. If the Property is to be subdivided, partial releases of the Property shall be made by the Bank in accordance with Exhibit G attached hereto, provided that Borrower shall not then be in default hereunder. 9.2 Warranties. Borrower makes the representations and warranties listed on any Exhibit attached hereto and agrees that these warranties survive the execution, delivery, filing and recordation of this Agreement, the Note, the Security Agreements and any document or instrument delivered pursuant thereto. 9.3 Cumulative Rights and Remedies. No right, power or remedy given Bank by the terms of this Agreement, the Note or the Security Agreement is intended to be exclusive of any other right, power or remedy, and each and every such right, power or remedy will be cumulative and in addition to every other right, power or remedy given to Bank by the terms of any instruments. 9.4 Time; No Waiver of Bank Rights. Time is of the essence of this Agreement. No waiver of any default or breach by Borrower will be implied from any omission by Bank to take action on account of such default whether or not such default persists or is repeated. No express waiver will affect any default other than the default specified in the waiver. Waivers of the breach of any term herein will not be construed as a waiver of any subsequent breach of the same term. The consent and approval by Bank to or of any act by Borrower or a contractor requiring further consent or approval will not be deemed to waive or render unnecessary the consent or approval to or of any subsequent similar act. The exercise of any right, power or remedy will in no event constitute a cure or a waiver of any Event of Default under this Agreement, nor will it invalidate any act done pursuant to a notice of default or prejudice Bank in the exercise of any right, power EXHIBIT 10.32 - 10 - or remedy hereunder unless in the exercise of any such right, power or remedy all obligations of Borrower to Bank are paid and discharged in full. 9.5 Notice. All notices under this Agreement must be in writing. Any notice given by either Bank or Borrower hereunder will be effective upon personal delivery or by certified mail delivery, return receipt requested, at the address indicated below Bank and Borrower's respective signatures. Such addresses may be changed by written notice to the other party. 9.6 Irrevocable Authority of Bank. Borrower irrevocably appoints, designates and authorizes Bank as its agent to file for record any notice of completion, cessation of labor, or any other notice that Bank deems necessary or desirable to protect its interest. 9.7 Bank Action. Bank will have the right, but not the obligation, to commence, appear in or defend any action or proceeding purporting to affect or enforce the rights, duties or liabilities of either of the parties hereunder, or the disbursement of any funds in the Account. In connection herewith, Bank may incur and pay costs and expenses, including a reasonable attorney's fee. Borrower agrees to pay to Bank on demand all such expenses, and Bank is authorized to disburse funds from the Account or as a Loan advance for said purpose. 9.8 Fee Indemnity. Borrower will indemnify and hold Bank harmless from any liability for the payment of any commission or brokerage fee payable in connection with the Loan. 9.9 Placement of Signs and Publicity Releases. Borrower agrees that, during the term of this Agreement, Bank may erect on the Property, at Bank's expense, such signs as are appropriate to evidence the placement of financing through Bank. Borrower also agrees that Bank may issue publicity releases to newspapers of general limited circulation, or trade publications, or trade publications, announcing issuance of such financing through Bank. 9.10 Exhibits: Present Agreement; Inconsistent Terms. Each Exhibit referenced herein or therein is deemed to be incorporated into this Agreement as if fully set forth herein. This Agreement, together with the exhibits and all other documents specifically referred to herein and therein constitute the only present agreements between the parties hereto and supersedes all prior agreements between the parties pertaining to the transactions contemplated herein including, without limitation, any commitment letter of Bank to Borrower. No representations, warranties or inducements have been made by the Bank, except as set forth herein. In the event of any inconsistency between the provisions hereof and any other related writing this Agreement will be controlling. 9.11 Assignability. This Agreement is binding upon and inures to the benefit of the successors and assigns of the parties hereto. However, any assignment by Borrower without the prior written consent of Bank will be void. Bank may at any time sell, grant participations in or otherwise dispose of in any way all or any part of the indebtedness of Borrower outstanding under this Agreement. Borrower shall, upon Bank's request, execute such further instructions as may in Bank's opinion by necessary or advisable to effect such disposition, including, without limitation, new notes to be issued in exchange for any notes required hereunder. EXHIBIT 10.32 - 11 - 9.12 Joint and Several Liability: Gender. If this Agreement is executed by more than one person or entity as Borrower, all of Borrowers' obligations will be joint and several. If any person signing this Agreement is a married person, all community property of the borrower as well as his or her separate property will be liable for repayment of all sums due hereunder. Whenever the context so requires, the use within this Agreement of any gender includes each other gender, and the singular or plural number includes the other. 9.13 California Law; Severability: Attorneys' Fees. This Agreement, the Note and the Security Agreements and other instruments given pursuant hereto or in connection herewith and the rights, powers and remedies of the parties hereunder will be construed and enforced in accordance with the internal laws of the State of California. Should any provision of this Agreement, the Security Agreements or any other agreement contemplated hereby become unenforceable for any reason, the remaining provisions of this and those agreements will nevertheless remain effective. Borrower agrees to pay upon demand all of Bank's costs and expenses, including attorneys' fees and Bank's legal expenses, incurred in connection with the enforcement of this agreement or any of the loan documents. Bank may pay someone else to help enforce these agreements, and borrower shall pay the costs and expenses of such enforcement. Costs and expenses include but are not limited to, Bank's attorneys fees and legal expenses whether or not there is a law suit, and include attorneys fees and legal expenses for bankruptcy proceedings and (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgement collection services. 9.14 Loan Only. The relationship between Borrower and Bank will at all times remain solely that of borrower and lender. Bank does not undertake any responsibility or duty to Borrower to select, review, inspect, supervise , pass judgement upon or inform Borrower of the quality, adequacy or suitability of: (a) the Plans and Specifications or amendments, alterations and additions thereto, (b) the architects, contractor, subcontractors and materialmen employed or utilized in the construction, or (c) the progress or course of construction and its conformance or nonconformance with the Plans and Specifications or amendments, alterations and changes thereto. Bank owns no duty of care to protect Borrower or any other person against negligent, faulty, inadequate or defective building or construction, and borrower will indemnify and hold Bank harmless from any such liability, loss or damage. The fact that Bank may have reviewed and/or approved of such items as surveys, foundation reports, soil reports and Plans and Specifications, as provided herein or otherwise, will have no effect upon the agreements contained herein. Borrower understands that such reviews and approvals are required and undertaken for Bank's protection only. Borrower will perform its own reviews to assure that it is independently satisfied with such items. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year herein first above written. This Agreement contains the following Exhibits: A, B. C, D, (X) E,(X) F,(G) and NA_which are incorporated herein by this reference. Savings Bank of Mendocino County, A California Banking Corporation P.O. Box 3600 Ukiah, CA 95482 BY: /s/ Martin J. Lombardi EXHIBIT 10.32 - 12 - Martin J. Lombardi, its Vice President Mendocino Brewing Company Inc. P. O. Box 400 Hopland, CA 95449 BY: /s/ Michael Laybourn Michael Laybourn its CEO & President EXHIBIT 10.32 - 13 - EX-10.33 8 EXHIBIT 10.33 EXHIBIT 10.33 TO REGISTRATION STATEMENT ON FORM SB-2 ------------------------------- $2,700,000 NOTE IN FAVOR OF THE SAVINGS BANK OF MENDOCINO COUNTY PROMISSORY NOTE Borrower: Mendocino Brewing Company, a California Corporation PO Box 400 Hopland, CA 95449 Lender: SAVINGS BANK OF MENDOCINO COUNTY MAIN OFFICE PO Box 3600 200 N. School Street Ukiah, CA 95482 Principal Amount: $2,700,000.00 Initial Rate: 10.250% Date of Note: September 25, 1996 PROMISE TO PAY. Mendocino Brewing Company, a California corporation ("Borrower") promises to pay to SAVINGS BANK OF MENDOCINO COUNTY ("Lender"), or order, In lawful money of the United States of America, the principal amount of Two Million Seven Hundred Thousand & 00/100 Dollars ($2,700,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan In one payment of ail outstanding principal plus all accrued unpaid Interest on February 2,1997. In addition, Borrower will pay regular monthly payments of accrued unpaid Interest beginning October 1,1996, and ail subsequent interest payments are due on the same day of each month after that. Interest on this Note is computed on a 365/365 simple interest basis; that is, by applying the ratio of the annual interest rate over the number of days in a year (366 during leap years), multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an index which is the Savings Bank of Mendocino County's Base Commercial Rate (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans and is set by Lender in its sole discretion. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each first and fifteenth of each month. The Index currently is 8.250% per annum. The Interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 2.000 percentage points over the Index, resulting In an Initial rate of 10.250% per annum. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. In any event, even upon full prepayment of this Note, Borrower understands that EXHIBIT 10.33 Lender is entitled to a minimum Interest charge of $100.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. LATE CHARGE. If a payment is 15 days or more late, Borrower will be charged 5.000% of the regularly scheduled payment. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the Related Documents. (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Note. (h) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within one (1) days; or (b) if the cure requires more than one (1) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due without notice, and then Borrower will pay that amount. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-Judgment collection services. Borrower also will pay any court costs, in addition to all other EXHIBIT 10.33 - 2 - sums provided by law. This Note has been delivered to Lender and accepted by Lender In the State of California. It there Is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Mendocino County, the State of California This Note shall be governed by and construed In accordance with the laws of the State of California DISHONORED ITEM FEE. Borrower wilt pay a fee to Lender of $10.00 if Borrower makes a payment on Borrower's loan and the check or pre-authorized charge with which Borrower pays is later dishonored. COLLATERAL. Borrower acknowledges this Note is secured by, in addition to any other collateral, a Deed of Trust dated September 25, 1996, to a trustee in favor of Lender on real property located in Mendocino County, State of California. That agreement contains the following due on sale provision: 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, beneficial 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, partnership or limited liability company, transfer also includes any change in ownership of more than twenty-five percent (25%) of the voting stock, partnership interests or limited liability company 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. LINE OF CREDIT. This Note evidences a straight line of credit. Once the total amount of principal has been advanced, Borrower is not entitled to further loan advances. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. ADDITIONAL PROVISIONS. THIS NOTE IS SECURED BY A DEED OF TRUST OF EVEN DATE HEREWITH, A SECURITY AGREEMENT OF EVEN DATE HEREWITH AND AN ASSIGNMENT OF DEPOSIT OF EVEN DATE HEREWITH. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender EXHIBIT 10.33 - 3 - without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: Mendocino Brewing Company, a California corporation By: /s/ Norman Franks Norman Franks, Chief Financial Officer By: /s/ Michael Laybourn Michael Laybourn, Chief Executive Officer EXHIBIT 10.33 - 4 - EX-10.34 9 EXHIBIT 10.34 EXHIBIT 10.34 TO REGISTRATION STATEMENT ON FORM SB-2 ------------------------------------ ASSIGNMENT OF DEPOSIT ACCOUNT IN FAVOR OF THE SAVINGS BANK OF MENDOCINO COUNTY ASSIGNMENT OF DEPOSIT ACCOUNT Borrower: Mendocino Brewing Company, a California Corporation PO Box 400 Hopland, CA 95449 Lender: SAVINGS BANK OF MENDOCINO COUNTY MAIN OFFICE PO Box 3600 200 N. School Street Ukiah, CA 95482 THIS ASSIGNMENT OF DEPOSIT ACCOUNT Is entered Into between Mendocino Brewing Company, a California Corporation (referred to below as "Grantor"); and SAVINGS BANK OF MENDOCINO COUNTY (referred to below as "Lender"). ASSIGNMENT. For valuable consideration, Grantor assigns and grants to Lender a security interest in the Collateral, including without limitation the deposit accounts described below, to secure the Indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Account. The word "Account" means the deposit account described below in the definition for "Collateral.. Agreement. The word "Agreement" means this Assignment of Deposit Account, as this Assignment of Deposit Account may be amended or modified from time to time, together with all exhibits and schedules attached to this Assignment of Deposit Account from time to time. Collateral. The word "Collateral" means the following described deposit account: Savings Account #21-301341 Issued by Lender In an amount not less than $ together with (a) all interest, whether now accrued or hereafter accruing; (b) all additional deposits hereafter made to the Account; (c) any and all proceeds from the Account; and (d) all renewals, replacements and substitutions for any of the foregoing. In addition, the word "Collateral" includes all property of Grantor (however owned if owned by more than one person), in the possession of Lender (or in the possession of a third party subject to the control of Lender), whether existing now or later and whether tangible or intangible in character, including without limitation each and all of the following: (a) All property to which Lender acquires title or documents of title. (b) All property assigned to Lender. (c) All promissory notes, bills of exchange, stock certificates, bonds, savings passbooks, time certificates of deposit, Insurance policies, and an other Instruments and evidences of an obligation. EXHIBIT 10.34 (d) All records relating to any of the properly described In this Collateral section, whether In the form of writing, microfilm, microfiche, or electronic media. Event of Default. The words "Event of Defaults" mean and include without limitation any of the Events of Default set forth below in the section titled "Events of Default." Grantor. The word "Grantor" means Mendocino Brewing Company, a California corporation, its successors and assigns. Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with the Indebtedness. Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note, including all principal and interest, together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. Lender. The word "Lender" means SAVINGS BANK OF MENDOCINO COUNTY, its successors and assigns. Note. The word "Note" means the note or credit agreement dated October 7, 1996, in the principal amount of $2,700,000.00 from Mendocino Brewing Company, a California Corporation to Lender, together with all renewals of, extensions of, modifications of, re-financings of, consolidations of and substitutions for the note or credit agreement. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With respect to the Collateral, Grantor represents and warrants to Lender that: Ownership. Grantor is the lawful owner of the Collateral free and clear of all loans, liens, encumbrances, and claims except as disclosed to and accepted by Lender in writing. Right to Grant Security Interest. Grantor has the full right, power, and authority to enter into this Agreement and to assign the Collateral to Lender. No Further Transfer. Grantor will not sell, assign, encumber, or otherwise dispose of any of Grantor's rights in the Collateral except as provided in this Agreement. No Defaults. There are no defaults relating to the Collateral, and there are no offsets or counterclaims to the same. Grantor will strictly and promptly do everything required of Grantor under the terms, conditions, promises, and agreements contained in or relating to the Collateral. Proceeds. Any and all replacement or renewal certificates, instruments, or other benefits or proceeds related to the Collateral that are received by Grantor shall be held by Grantor in trust for EXHIBIT 10.34 - 2 - Lender and immediately shall be delivered by Grantor to Lender to be held as part of the Collateral. LENDER'S RIGHTS AND OBLIGATIONS WITH RESPECT TO THE COLLATERAL. While this Agreement is in effect, Lender may retain the rights to possession of the Collateral, together with any and all evidence of the Collateral, such as certificates. This Agreement will remain in effect until (a) there no longer is any Indebtedness owing to Lender; (b) all other obligations secured by this Agreement have been fulfilled; and (c) Grantor, in writing, has requested from Lender a release of this Agreement. EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but shall not be obligated to) discharge or pay any amounts required to be discharged or paid by Grantor under this Agreement, including without limitation all taxes, liens, security interests, encumbrances, and other claims, at any time levied or placed on the Collateral. Lender also may (but shall not be obligated to) pay all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses shall become a part of the Indebtedness and, at Lender's option, will (a) be payable on demand, (b) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (i) the term of any applicable insurance policy or (ii) the remaining term of the Note, or (c) be treated as a balloon payment which will be due and payable at the Note's maturity. This Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon the occurrence of an Event of Default. LIMITATIONS ON OBLIGATIONS OF LENDER. Lender shall use ordinary reasonable care in the physical preservation and custody of any certificate or passbook for the Collateral but shall have no other obligation to protect the Collateral or its value. In particular, but without limitation, Lender shall have no responsibility (a) for the collection or protection of any income on the Collateral, (b) for the preservation of rights against issuers of the Collateral or against third persons; (c) for ascertaining any maturities, conversions, exchanges, offers, tenders, or similar matters relating to the Collateral; nor (d) for informing the Grantor about any of the above, whether or not Lender has or is deemed to have knowledge of such matters. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Grantor to make any payment when due on the Indebtedness. Other Defaults. Failure of Grantor to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or in any other agreement between Lender and Grantor. Default In Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or EXHIBIT 10.34 - 3 - Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by or on behalf of Grantor under this Agreement, the Note or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished. Detective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral documents to create a valid and perfected security interest or lien) at any time and for any reason. Insolvency. The dissolution or termination of Grantor's existence as a going business, the insolvency of Grantor, the appointment of a receiver for any part of Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Grantor. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against the Collateral or any other collateral securing the Indebtedness. This includes a garnishment of any of Grantor's deposit accounts with Lender. However, this Event of Default shall not apply if there is a good 0th dispute by Grantor as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Grantor gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or such Guarantor dies or becomes incompetent. Adverse Change. A material adverse change occurs in Grantor's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. Right to Cure. If any default, other than a Default on Indebtedness, is curable and if Grantor has not been given a prior notice of a breach of the same provision of this Agreement, it may be cured (and no Event of Default will have occurred) if Grantor, after Lender sends written notice demanding cure of such default, (a) cures the default within one (1) days, or (b), if the cure requires more than one (1) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. RIGHTS AND REMEDIES ON DEFAULT. Upon the occurrence of an Event of Default, or at any time thereafter, Lender may exercise any one or more of the following rights and remedies, in addition to any rights or remedies that may be available at law, in equity, or otherwise: Accelerate Indebtedness. Lender may declare all Indebtedness of Grantor to Lender immediately due and payable, without notice of any kind to Grantor. EXHIBIT 10.34 - 4 - Application of Account Proceeds. Lender may obtain all funds in the Account from the issuer of the Account and apply them to the Indebtedness in the same manner as if the Account had been issued by Lender. If the Account is subject to an early withdrawal penalty, that penalty shall be deducted from the Account before its application to the Indebtedness, whether the Account is with Lender or some other institution. Any excess funds remaining after application of the Account proceeds to the Indebtedness win be paid to Grantor as the interests of Grantor may appear. Grantor agrees, to the extent permitted by law, to pay any deficiency after application of the proceeds of the Account to the Indebtedness. Lender also shall have all the rights of a secured party under the California Uniform Commercial Code, even if the Account is not otherwise subject to such Code concerning security interests, and the parties to this Agreement agree that the provisions of the Code giving rights to a secured party shall nonetheless be a part of this Agreement. Collect the Collateral Lender may collect any of the Collateral and, at Lender's option and to the extent permitted by applicable law, may retain possession of the Collateral while suing on the Indebtedness. Sell the Collateral. Lender may sell the Collateral, at Lender's discretion, as a unit or in parcels, at one or more public or private sales. Unless the Collateral is perishable or threatens to decline speedily in value, Lender shall give or mail to Grantor, or any of them, notice at least ten (10) days in advance of the time and place of public sale, or of the date after which private sale may be made. Grantor agrees that any requirement of reasonable notice is satisfied if Lender mails notice by ordinary mail addressed to Grantor, or any of them, at the last address Grantor has given Lender in writing. If public sale is held, there shall be sufficient compliance with all requirements of notice to the public by a single publication in any newspaper of general circulation in the county where the Collateral is located, setting forth the time and place of sale and a brief description of the properly to be sold. Lender may be a purchaser at any public sale. Register Securities. Lender may register any securities included in the Collateral in Lender's name and exercise any rights normally incident to the ownership of securities. Sell Securities. may sell any securities included in the Collateral in a manner consistent with applicable federal and state securities laws, notwithstanding any other provision of this or any other agreement. If, because of restrictions under such laws, Lender is or believes it is unable to sell the securities in an open market transaction, Grantor agrees that (a) Lender shall have no obligation to delay sale until the securities can be registered, (b) Lender may make a private sale to a single person or restricted group of persons, even though such sale may result in a price that is less favorable than might be obtained in an open market transaction, and (c) such a sale shall be considered commercially reasonable. If any securities held as Collateral are "restricted securities" as defined in the Rules of the Securities and Exchange Commission (such as Regulation D or Rule 144) or state securities departments under state "Blue Sky" laws, or if Grantor, or any of them (if more than one), is an adulate of the issuer of the securities, Grantor agrees that Grantor will neither sell nor dispose of any securities of such issuer without obtaining Lender's prior written consent. EXHIBIT 10.34 - 5 - Transfer Title. Lender may effect transfer of title upon sale of all or part of the Collateral. For this purpose, Grantor irrevocably appoints Lender as its attorney-in-fact to execute endorsements, assignments and instruments in the name of Grantor and each of them (if more than one) as shall be necessary or reasonable. Application of Proceeds. Lender may apply any cash which is part of the Collateral, or which is received from the collection or sale of the Collateral, to (a) reimbursement of any expenses, including any costs of any securities registration, commissions incurred in connection with a sale, attorney fees as provided below and court costs, whether or not there is a lawsuit and including any fees on appeal, incurred by Lender in connection with the collection and sale of such Collateral, and (b) to the payment of the Indebtedness of Grantor to Lender, with any excess funds to be paid to Grantor as the interests of Grantor may appear. Other Rights and Remedies. Lender shall have and may exercise any or all of the rights and remedies of a secured creditor under the provisions of the California Uniform Commercial Code, at law, in equity, or otherwise. Deficiency Judgment. If permitted by applicable law, Lender may obtain a judgment for any deficiency remaining in the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this section. Cumulative Remedies. All of Lender's rights and remedies, whether evidenced by this Agreement or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Low. This Agreement has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit, Grantor agrees upon Lender's request to submit to the jurisdiction of the courts of Mendocino County, State of California. This Agreement shall be governed by and construed in accordance with the laws of the State of California. Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of Lender's costs and expenses, including attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' EXHIBIT 10.34 - 6 - fees and legal expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court. Multiple Parties; Corporate Authority. All obligations of Grantor under this Agreement shall be Joint and several, and all references to Grantor shall mean each and every Grantor. This means that each of the Borrowers signing below is responsible for all obligations in this Agreement. Notices. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimilie, and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United Sates mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Grantor, notice to any Grantor will constitute notice to all Grantors. For notice purposes, Grantor will keep Lender informed at all times of Grantor's current address(es). Power of Attorney. Grantor hereby appoints Lender as its true and lawful attorney-in-fact, irrevocably, with full power of substitution to do the following: (a) to demand, collect, receive, receipt for, sue and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral; (b) to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral; (c) to settle or compromise any and all claims arising under the Collateral, and, in the place and stead of Grantor, to execute and deliver its release and settlement for the claim; and (d) to file any claim or claims or to take any action or institute or take part in any proceedings, either in its own name or in the name of Grantor, or otherwise, which in the discretion of Lender may seem to be necessary or advisable. This power is given as security for the Indebtedness, and the authority hereby conferred is and shall be irrevocable and shall remain in full force and effect until renounced by Lender. Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Successor Interests. Subject to the limitations set forth above on transfer of the Collateral, this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right EXHIBIT 10.34 - 7 - otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS ASSIGNMENT OF DEPOSIT ACCOUNT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED SEPTEMBER 25,1996. GRANTOR: Mendocino Brewing Company, a California corporation By: /s/ Norman Franks Norman Franks, Chief Financial Officer By: /s/ Michael Laybourn Michael Laybourn, Chief Executive Officer EXHIBIT 10.34 - 8 - EX-10.35 10 EXHBIT 10.35 EXHIBIT 10.35 TO REGISTRATION STATEMENT ON FORM SB-2 ----------------------- COMMITMENT LETTER FROM THE SAVINGS BANK OF MENDOCINO COUNTY Savings Bank OF MENDOCINO COUNTY P. O. BOX 3600 ~ UKIAH, CALIFORNIA 95482 TELEPHONE (707) 462-6613 September 13, 1996 Mr. Michael Laybourn Mr. Norman Franks Mendocino Brewing Company, Inc. P.O. Box 400 Hopland, CA 95449 Dear Michael & Norman: Confirming our earlier conversation and concurrent with the final funding of a $2,700,000.00 construction loan (hereinafter referred to as the "Construction Loan"), I am pleased to inform you that the Savings Bank of Mendocino County (hereinafter referred as "Bank") will provide a first trust deed permanent financing takeout for the 62,000 square foot brewery facility to be completed with the proceeds of the construction loan. This commitment is subject to the documentation, terms and conditions stated below: 1. Loan Principal & Term of Loan: Upon maturity of the construction loan, any outstanding principal loan balance will be rewritten subject to a 25 year amortized repayment schedule and a 15 year balloon maturity. It is understood and providing that you are not in default of any term or condition contained in the Permanent note or under any other obligation to Bank, loan agreement or deed of trust upon maturity, the Bank will renew any outstanding principal loan balance on a fully amortized basis for an additional 10 year period, subject to terms and conditions which will be negotiated at the time of renewal. 2. Interest Rate: The permanent financing package shall be priced at a margin above the then prevailing 5 Year Treasury Constant Maturity Index so as to insure that the initial loan rate will be 10%. The permanent financing package will further provide for an interest rate CAP of 2% above the initial fully indexed interest rate at the time of the first interest rate adjustment (5 year anniversary) and 3% above the initial fully indexed interest rate at the time of the second projected interest rate adjustment (10 year anniversary). The note will further provide for an interest rate floor of 8.50%. 3. Origination Fee: You will be required to pay to the Bank a 1/2 percent origination fee on funding. 4. Prepayment Penalty: None. 5. Collateral: The loan shall be collateralized by the following: a. A first deed of trust encumbering the property and improvements located at 1825 Airport Road, Ukiah, CA consisting of approximately 8 acres of land. b. A first deed of trust encumbering the real property upon which the waste water treatment facility is being constructed, which is approximately I acre in size. EXHIBIT 10.35 The loan contemplated herein shall be additionally collateralized as specified in a security agreement, in form and substance satisfactory to Bank and its counsel, which covers but is not limited to all fixtures and/or improvements which are located on the to be encumbered parcel of property as well as all inventory, chattel paper, accounts, equipment, general intangibles etc. It is our mutual understanding that Mendocino Brewing Company, Inc. is intending to initiate a public offering and/or a subordinated capital note issue within the next 365 days. It is further agreed that any monies realized from either offering or any other source in excess of the $2,100,000.00 required to satisfy payables due to West America Bank ($600,000.00), BDM Construction ($960,000.00) and complete the $600,000.00 in deferred construction improvements (for which the initial such sum will be used), shall be deposited into a savings account with the Savings Bank of Mendocino County and that said account shall be pledged as security against the aforementioned $2,700,000.00 permanent financing package. It is understood that should the corporation meet its sales projection objectives and decide to proceed with the equipment purchases contemplated in Phase II of its Business Plan, the Savings Bank of Mendocino County will release these monies, providing that it is determined that the capital expenditures are motivated by sales demand and that the profitability projections have in fact materialized. 6. Out of Pocket Expenses: All fees (title, recording, appraisal re-certification, etc.) together with any other out of pocket expenses, incurred by the Bank relating to this transaction are to be paid for by the Borrower. In the event that we obtain legal assistance associated with the packaging of your permanent loan, you will be required to reimburse us for any out of pocket legal counsel fees which we may expend. In no circumstances, however, shall you be required to reimburse the Bank in excess of $5,000.00 in legally related fees. 7. Additional Conditions Present: Prior to the closing date or at the option of the Bank, there shall have been delivered to Bank, in form and substance satisfactory to Bank and its counsel: a. Evidence that all consents, permits and approvals from government authorities required or advisable in connection with the occupancy of the improvements, have been obtained by the Borrower. b. There shall have been issued in form and substance satisfactory to Bank and its counsel a Certificate of Occupancy or other written confirmation that the improvements meet all requirements of all public agencies, including compliance with structural and operating requirements set by all governmental agencies regulating environmental controls and can be occupied in accordance with the terms and conditions under which the improvements were appraised and receipt by Bank of evidence that all utilities are available at the improvements. c. Receipt by Bank of a Certificate of Completion signed by a licensed architect or engineer, who will first have been approved by Bank, attesting to the completion of the improvements in a good and workman like manner. d. Receipt by Bank of an As Built Survey Report of a licensed engineer, certified by a registered surveyor, in form and substance also satisfactory to the title insurance company, showing that all EXHIBIT 10.35 - 2 - improvements are within lot and building lines and showing all easements, improvements, utilities and rights of way above or below ground as of the date of certification, and showing the dimensions and total square foot area of the interior outlines, if any, location of adjoining streets and the distance to and names of the nearest intersection streets. e. Evidence that an insurance policy providing fire and extended coverage for replacement costs of the improvements, with a lenders loss payable endorsement, for (438BFUNS) or its equivalent, have been obtained. f. Confirmation that the Mendocino Brewing Company has received $2,100,000.00 in lease financing. Our responsibility to provide the financial accommodations overviewed in this correspondence is conditioned upon our approval of the amount, terms, conditions, agreements, lease documents, etc. which pertain to the lease financing package. Our responsibility to provide the financial accommodations contemplated in this correspondence further conditioned on our having been satisfied that the lease financing package has been fully negotiated and all monies advanced. g. Upon completion of the construction project, the Bank shall obtain at your expense a re-certification of value from Dean Strupp and Associates Appraisals. h. Confirmation that the Mendocino Brewing Company is not in default of any of its existing obligations which include but are not limited to obligations owed to West America Bank, BDM Construction and FINOVA Capital Corporation. 8. Approval of Documentation: All instruments evidencing and securing or otherwise relating to the loan on the project, must be satisfactory to the Bank and its counsel. 9. Title Insurance: You will be required to provide ALTA title insurance coverage together with any other endorsements which the Bank might determine necessary, for the full amount of the loan, containing no exceptions other than those approved by the Bank which are usual and customary to such properties. 10. Indemnification: You will be required to indemnify the Bank against any and all liabilities, obligations, losses/damages, penalties, claim actions, suits, cost and expenses of whatever kind or nature which may be imposed on, incurred by or asserted at any time against the Bank in any way relating to or arising in connection with, construction of the improvements, the offer of sale and/or use, occupation or operation of any of the property to be encumbered by the construction deed of trust. Said indemnification shall also cover damages arising from existing or future hazardous waste and/or substances located on the property, including the cost to clean-up or detoxify the property. If for any reason the Bank becomes concerned that there could be related environmental liability risks associated with our liens on the real estate, we may consult with an environmental specialist and may require an environmental audit to be conducted and our commitment is conditioned upon our conclusion based thereon that risks are acceptable to us. Your cost reimbursement will include such consulting and audit fees. EXHIBIT 10.35 - 3 - 11. Assignment: You will be unable to assign this commitment letter or any of its rights hereunder, to any other person or legal entity without specific written approval of the Bank. The Bank may sell participations in the loan to other banks. 12. Termination: Bank, at its option, may terminate this commitment letter and its obligations hereunder, if (a) you shall fail to observe or comply with any of the terms and provisions contained herein, or in any other document under which you have an obligation to Bank, or (b) Bank shall find unacceptable or shall not approve any document or agreement, or information or encumbrance applicable to the project, or (c) you or parties involved in the project become insolvent, or (d) bankruptcy, insolvency, reorganization, receivership, dissolution arrangement or other similar proceedings are commenced by or against you or your assets under any federal or state law, or (e) the take-out loan has not been consummated by March 15, 1997. It goes without mention that our commitment is subject to such additional terms, conditions and requirements as may be provided in our loan documents or by Bank counsel. Should any of the foregoing require clarification don't hesitate contacting me at your earliest convenience. Sincerely, /s/ Martin J. Lombardi Martin J. Lombardi Vice President ACKNOWLEDGMENT: /s/ Michael Laybourn Date: 9/19/96 Michael Laybourn /s/ Norman Franks Date: 9/19/96 Norman Franks EX-10.36 11 EXHIBIT 10.36 EXHIBIT 10.36 TO REGISTRATION STATEMENT ON FORM SB-2 ---------------------- EQUIPMENT LEASE WITH FINOVA CAPITAL CORPORATION FINOVA FINOVA Capital Corporation 95 N. Route 17 South P.O. Box 907 Paramus, New Jersey 07653 Telephone (201) 712-3300 EQUIPMENT LEASE No. 5754300 FINOVA Capital Corporation, (herein called "Lessor"), with its principal place of business at Dial Tower, Dial Corporate Center, Phoenix, Arizona, hereby agrees to lease to the Lessee named on the signature page hereof (herein called "Lessee") and Lessee hereby agrees to lease and rent from Lessor, the equipment described on any attached schedule(s), (herein with all replacement parts, repairs, additions, and accessories called "Equipment"), on the terms and conditions hereof and as set forth on any schedule (herein called "Schedule"). Lessee agrees that, at the option of Lessor, any Schedule shall be a separately enforceable Lease which incorporates all of the terms and conditions set forth herein. 1. ORDERING AND INSTALLATION OF EQUIPMENT. Lessee hereby requests Lessor to order the Equipment from a supplier (herein called "Supplier"), and to arrange for delivery thereof to Lessee at Lessee's expense. Lessee agrees to install or cause the Equipment to be installed at the location set forth on the Schedule thereof (the "Location") at Lessee's cost. 2. DISCLAIMER OF WARRANTIES AND WAIVER OF DEFENSES. LESSOR, NEITHER BEING THE MANUFACTURER, NOR A SUPPLIER, NOR A DEALER IN THE EQUIPMENT, MAKES NO WARRANTY, EXPRESS OR IMPLIED, TO ANYONE, AS TO DESIGN, CONDITION, CAPACITY, PERFORMANCE OR ANY OTHER ASPECT OF THE EQUIPMENT OR ITS MATERIAL OR WORKMANSHIP. LESSOR ALSO DISCLAIMS ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR USE OR PURPOSE WHETHER ARISING BY OPERATION OF LAW OR OTHERWISE. LESSOR FURTHER DISCLAIMS ANY LIABILITY FOR LOSS, DAMAGE OR INJURY TO LESSEE OR THIRD PARTIES AS A RESULT OF ANY DEFECTS, LATENT OR OTHERWISE, IN THE EQUIPMENT WHETHER ARISING FROM THE APPLICATION OF THE LAWS OF STRICT LIABILITY OR OTHERWISE. AS TO THE LESSOR, LESSEE LEASES THE EQUIPMENT "AS IS". LESSEE ACKNOWLEDGES THAT LESSEE HAS SELECTED THE SUPPLIER OF THE EQUIPMENT AND THAT LESSOR HAS NOT RECOMMENDED SUPPLIER. LESSOR SHALL HAVE NO OBLIGATION TO INSTALL, MAINTAIN, ERECT, TEST, ADJUST OR SERVICE THE EQUIPMENT. REGARDLESS OF CAUSE, LESSEE AGREES NOT TO ASSERT ANY CLAIM WHATSOEVER AGAINST LESSOR FOR LOSS OF ANTICIPATORY PROFITS OR ANY OTHER INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES, NOR SHALL LESSOR BE RESPONSIBLE FOR ANY DAMAGES OR COSTS WHICH MAY BE ASSESSED AGAINST LESSEE IN ANY ACTION FOR INFRINGEMENT OF ANY UNITED STATES LETTERS PATENT. LESSOR MAKES NO WARRANTY AS TO THE TREATMENT OF THIS LEASE FOR TAX OR ACCOUNTING PURPOSES. If the Equipment is unsatisfactory for any reason, Lessee shall EXHIBIT 10.36 make claim on account thereof solely against the manufacturer, the Supplier or any dealer and shall nevertheless pay Lessor all rent and other charges payable under the Lease. Lessor hereby assigns to Lessee, any rights which Lessor may have against the Supplier, the manufacturer or any dealer for breach of warranty or other representations respecting the Equipment. Lessee understands and agrees that neither the Manufacturer, the Supplier, any dealer nor any agent of the foregoing is an agent of Lessor or is authorized to waive or alter any term or condition of this Lease. 3. TERM AND RENT. The Lease term of each Schedule shall commence as of the date that any of the Equipment under such Schedule is delivered to Lessee or Lessee's Agent, or such later date as Lessor designates in writing (the "Commencement Date.) and shall continue until the obligations of Lessee under this Lease shall have been fully performed. Advance rentals shall not be refundable if the Lease term for any reason does not commence or if this Lease or any Schedule is duly terminated by Lessor. The sum of all periodic installments of rent indicated on any Schedule shall constitute the aggregate rent reserved. The aggregate rent reserved shall be payable periodically in advance, in the installments indicated on any Schedule, the first such payment being due on the Commencement Date, or such later date as Lessor designates in writing (the "First Payment Date.), and subsequent payments shall be due on the same day of each successive rent period thereafter until the balance of the rent and any charges or expenses payable by Lessee under this Lease shall have been paid in full. If the First Payment Date is later than the Commencement Date, Lessee shall, on the First Payment Date, in addition to the periodic rent, pay Lessor interim rent from the Commencement Date to the First Payment Date at a daily rate equal to the periodic installment of rent divided by the number of days of the period. Lessee's obligation to pay all rent shall be absolute and unconditional and not subject to any abatement, set-off, defense or counterclaim for any reason whatsoever. 4. NON-CANCELABLE LEASE. NEITHER THE LEASE NOR ANY SCHEDULE CAN BE CANCELED BY LESSEE DURING THE TERM HEREOF OR THEREOF. 5. LESSOR TERMINATION BEFORE EQUIPMENT ACCEPTANCE. If within ninety (90) days from the date Lessor orders the Equipment, the same has not been delivered, installed and accepted by Lessee (in form satisfactory to Lessor) for all purposes of this Lease, Lessor may, on ten (10) days' written notice to Lessee, terminate this Lease and the related Schedule and its obligations to Lessee. 6. TITLE, RECORDING, DOCUMENTATION, ADMINISTRATIVE FEES AND PERSONAL PROPERTY. The Equipment is, and shall at all times remain, the property of Lessor, and except as herein set forth, Lessee shall have no right, title or interest therein. If Lessor supplies Lessee with labels indicating that the Equipment is owned by Lessor, Lessee shall affix such labels to and keep them in a prominent place on the Equipment. Lessee hereby authorizes Lessor to insert in this Lease or any Schedule the serial numbers, and other identification data, of Equipment when determined by Lessor. In order to perfect Lessor's security interest in the Equipment in the event this Lease is determined to be a security agreement, Lessee hereby grants Lessor a security interest in the Equipment and authorizes Lessor, at Lessee's expense, to cause this Lease, or any statement or other instrument in respect of this Lease showing the interest of Lessor in the Equipment, including Uniform Commercial Code Financing Statements, to be filed or recorded, EXHIBIT 10.36 - 2 - and grants Lessor, where permitted, the right to execute Lessee's name thereto. Lessee agrees to pay or reimburse Lessor for its costs and out of pocket expenses relating to any searches undertaken by Lessor, or any filing, recording, stamp fees or taxes arising from the filing or recording of any such instrument or statement and any other costs, expenses or charges incurred by Lessor in documenting, administering and terminating this Lease. Lessee shall, at its expense, protect and defend Lessor's title to the Equipment against all persons claiming against or through Lessee, at all times keeping the Equipment free from any legal process or encumbrance whatsoever including but not limited to liens, attachments, levies and executions, and shall give Lessor immediate written notice thereof and shall indemnify Lessor from any loss caused thereby. Upon Lessor's request, Lessee shall execute or obtain from third parties and deliver to Lessor such further instruments and assurances as Lessor deems necessary or advisable for the confirmation or perfection of Lessor's rights hereunder. The Equipment is, and shall at all times be and remain, personal property notwithstanding that the Equipment or any part thereof may now be, or hereafter become, in any manner affixed or attached to real property or any improvements thereon. 7. CARE, USE, LOCATION AND ALTERATION. Lessee shall, at its sole cost and expense, service, repair, overhaul and maintain each item of Equipment in good operating order and in the condition when delivered to Lessee, ordinary wear and tear excepted. All such maintenance shall be consistent with prudent industry practice and all maintenance practices recommended by the Supplier or manufacturer and meet all legal and regulatory requirements. Upon request, Lessee shall provide Lessor with evidence of such compliance. Lessee shall maintain logs of the maintenance and service of the Equipment and permit Lessor, on reasonable prior notice to inspect the Equipment and the right to make copies of the logs and service reports. Lessee shall forthwith correct any deficiencies disclosed by such inspection. Lessee shall use the Equipment solely for business purposes, in compliance with all applicable laws, ordinances, regulations, and the conditions of all insurance policies required to be maintained by Lessee pursuant to the Lease. Lessee shall make all additions, modifications and improvements to the Equipment required by applicable law and except for such required changes, shall not alter the Equipment without Lessor's prior written consent. Lessee shall replace all worn, lost, stolen or destroyed parts of the Equipment with replacement parts at least meeting the standards required herein, all of which shall become the property of Lessor, except for such additions, modifications and improvements that can be readily removed without causing damage to, or impairing the commercial value or utility of, such Equipment, which shall remain Lessee's property and may be removed by Lessee at its expense before the Equipment is surrendered to Lessor. Lessee shall repair all damage to any item resulting from such installation or removal. If Lessee has not purchased an item of Equipment pursuant to any option to purchase granted to Lessee at the end of the Lease term for such item, Lessor shall be entitled to purchase any such addition, modifications and improvements from Lessee for its then fair market value. The Equipment shall not be removed from the Location without Lessor's prior written consent. 8. NOTICE AND CONDITIONS OF REDELIVERY. Lessee shall provide Lessor not less than One Hundred Twenty (120) days prior written notice of its intention to exercise its option to purchase the Equipment if granted on the related Schedule or return the Equipment to Lessor (the "Required Notice.). If Lessee shall have timely provided such Required Notice and has elected to return the Equipment to Lessor upon the expiration of the Term of the Schedule, Lessee shall, at EXHIBIT 10.36 - 3 - its sole expense, return the Equipment covered thereby, freight prepaid, to Lessor in a manner and to a location within the continental United States designated by Lessor in the condition and repair required by the terms of this Lease, free of all liens and advertising insignia. If Lessee shall fail to return any item of Equipment as provided herein, Lessee shall be responsible for all cost and expense incurred by Lessor in returning the Equipment to such required condition or any reduction in value as a result thereof. If the Equipment or its component parts were packed or crated for shipping when new, Lessee shall pack or crate the same carefully and in accordance with any recommendations of the Supplier or manufacturer before redelivering the item to Lessor. Lessee shall also deliver to Lessor the plans, specifications, operating manuals, software documentation, discs, warranties and other documents furnished by the manufacturer or Supplier of the Equipment and such other documents in Lessee's possession relating to the maintenance and method of operation of such Equipment. At Lessor's written request, Lessee shall provide free storage for any item of Equipment for a period not to exceed sixty (60) days after the expiration of the Schedule term before returning such item to Lessor and permit Lessor access to the Equipment for inspection and/or resale. If Lessee fails to timely provide such Required Notice the Equipment shall continue to be held and leased hereunder, and this Lease and the related Schedule term shall thereupon be extended for a period ending one hundred twenty (120) days following receipt by Lessor of Lessee's notice of intent to return the Equipment, for the fair market rental value of the Equipment as determined by Lessor not to exceed the periodic installment of rent with respect to such Equipment for such period. If Lessee has timely provided the Required Notice but upon expiration Lessee does not immediately return the Equipment to Lessor, (unless otherwise requested by Lessor) the Equipment shall continue to be held and leased hereunder, and this Lease and the related Schedule term shall thereupon be extended for successive thirty (30) day periods at the fair market rental value of the Equipment as determined by Lessor not to exceed the periodic installment of rent with respect to such Equipment for such period. 9. RISK OF LOSS. Lessee shall bear all risks of loss of and damage to the Equipment from any cause and the occurrence of such loss or damage shall not relieve Lessee of any obligation hereunder. In the event of loss or damage, Lessee, at its option, provided it is not in default hereunder, otherwise at Lessor's option, shall: (a) place the damaged Equipment in good repair, condition and working order; or (b) replace lost or damaged Equipment with like equipment in good repair, condition and working order with documentation creating clear title thereto in Lessor; or (c) pay to Lessor the then present value computed at five (5 %) percent per annum of both the unpaid balance of the aggregate rent reserved under the Lease and related Schedule and the value of Lessor's residual interest in the Equipment. Upon Lessor's receipt of such payment, Lessee and/or Lessee's insurer shall be entitled to Lessor's interest in said item for salvage purposes, in its then condition and location, as is, without warranty, express or implied. 10. INSURANCE. Until redelivered to Lessor, Lessee shall maintain and deliver evidence to Lessor of such insurance required by, written by insurers, and in amounts satisfactory to Lessor. Should Lessee fail to provide such insurance coverage, Lessor may obtain coverage for part or all of the term of this Lease or any Schedule or such period beyond the term as is required by the insurance company issuing such coverage protecting interests of Lessor and Lessee or the interest of Lessor only. The proceeds of such insurance, at the option of Lessee, provided it is not in default hereunder, otherwise at Lessor's option, shall be applied toward (i) the replacement, EXHIBIT 10.36 - 4 - restoration or repair of the Equipment or (ii) payment of the obligations of Lessee hereunder. Lessee hereby appoints Lessor as Lessee's attorney-in-fact to make claims for, receive payment of, and execute and endorse all documents, checks, or drafts for loss or damage under any said insurance policies. 11. NET LEASE; TAXES. Lessee intends the rental payments hereunder to be net to Lessor, and Lessee shall pay all sales, use, excise, stamp, documentary and ad valorem taxes, license and registration fees, assessments, fines, penalties and similar charges imposed on the ownership, possession or use of the Equipment during the term of this Lease or any Schedule; shall pay all taxes (except Lessor's Federal or State net income taxes) imposed on Lessor or Lessee with respect to the rental payments hereunder, and shall reimburse Lessor upon demand for any taxes paid by or advanced by Lessor. Unless Lessee is otherwise directed by Lessor, in writing, Lessor shall file for and pay all personal property taxes assessed with respect to the Equipment during the term of this Lease and Lessee shall, upon Lessor's demand, forthwith reimburse Lessor for the full amount of such taxes without regard to any discounts obtained by Lessor due to early payment or otherwise. Lessor may, if it elects, estimate such personal property taxes and bill Lessee periodically in advance therefor. 12. INDEMNITY. Lessee shall hold Lessor harmless from, indemnify and defend Lessor against, any and all claims, actions, suits, proceedings, costs, expenses, damages and liabilities, including attorney's fees arising out of, connected with or resulting from the Equipment or this Lease or any Schedule, including, without limitation, the manufacture, selection, delivery, possession, use, operation or return of the Equipment. These indemnities shall survive the termination or expiration of this Lease or any Schedule. 13. DEFAULT AND REMEDIES. If (i) Lessee defaults in any payment required under this Lease or any Schedules or under any other lease or agreement between Lessor and Lessee, or (ii) Lessee breaches any of the representations or warranties contained herein or fails to perform any of the terms, covenants or conditions of this Lease or any Schedule or (iii) a petition in bankruptcy, arrangement, insolvency or reorganization is filed by or against Lessee or any guarantor of Lessee's obligations hereunder, or (iv) Lessee or any guarantor of Lessee's obligations makes an assignment for the benefit of creditors, or (v) without Lessor's written consent, which shall not be unreasonably withheld, Lessee sells all or a substantial part of Lessee's assets or a majority of Lessee's voting stock is transferred, or (vi) during the term of the Lease or any Schedule there is a material adverse change in the financial condition of Lessee or any guarantor of Lessee's obligations then Lessor may, to the extent permitted by law, exercise any one or more of the following remedies: (a) to declare the entire balance of rent for the full term of any or all Schedules covered hereby immediately due and payable and to similarly accelerate the balances under any other leases or agreements between Lessor and Lessee without notice or demand, (b) to sue for and recover all rents, and other monies due and to become due under any or all Schedules hereunder and the residual value of the Equipment covered thereby discounted to the date of default at five (5%) percent per annum; (c) to require Lessee at Lessee's expense, to assemble all the Equipment at a place reasonably designated by Lessor, (d) to remove any physical obstructions for removal of the Equipment from the place where the Equipment is located and take possession of any or all items of Equipment, without demand or notice, wherever same may be located, disconnecting separating all such Equipment from any other EXHIBIT 10.36 - 5 - property, with or without any court order or pre-taking hearing or other process of law, it being understood that facility of repossession in the event of default is a basis for the financial accommodation reflected by this Lease. Lessee hereby waives any and all damages occasioned by such retaking. Lessor may, at its option, use, ship, store, repair or lease all Equipment so removed and sell or otherwise dispose of any such Equipment at a private or public sale. Lessor may expose and resell the Equipment at Lessee's premises at reasonable business hours without being required to remove the Equipment. In the event Lessor takes possession of the Equipment, Lessor shall give Lessee credit for any sums received by Lessor from the sale, or present value of the rental, of the Equipment computed at the implicit rate of the Schedule after deduction of the expenses of sale or rental. Lessee shall also be liable for and shall pay to Lessor on demand (a) all expenses incurred by Lessor in connection with the enforcement of any of Lessor's remedies, including all expenses of repossession, storing, shipping, repairing and selling the Equipment, (b) Lessor's reasonable attorney's fees and (c) interest on all sums due Lessor from the date of default until paid at the rate of one and one-half (1.5%) percent per month, but only to the extent permitted by law. Lessor and Lessee acknowledge the difficulty in establishing a value for the unexpired Lease term and owing to such difficulty agree that the provisions of this paragraph represent an agreed measure of damages and are not to be deemed a forfeiture or penalty. Whenever any payment hereunder is not made by Lessee within ten (10) days when due, Lessee agrees to pay to Lessor, not later than one month thereafter, an amount calculated at the rate of ten cents per one dollar of each such delayed payment, as an administrative fee to offset Lessor's collection costs, but only to the extent allowed by law. Such amount shall be payable in addition to all amounts payable by Lessee as a result of exercise of any of the remedies herein provided. All remedies of Lessor hereunder are cumulative, are in addition to any other remedies provided for by law, and may, to the extent permitted by law, be exercised concurrently or separately. The exercise of any one remedy shall not be deemed to be an election of such remedy or to preclude the exercise of any other remedy. No failure on the part of the Lessor to exercise and no delay in exercising any right or remedy shall operate as a waiver thereof or modify the terms of this Lease. A waiver of default by Lessor on any one occasion shall not be deemed a waiver of any other or subsequent default. In the event this Lease is determined to be a security agreement, Lessor's recovery shall in no event exceed the maximum permitted by law. 14. PERFORMANCE BY LESSOR OF LESSEE'S OBLIGATIONS. In the event Lessee fails to comply with any provision of this Lease, Lessor shall have the right, but shall not be obligated, to effect such compliance on behalf of Lessee upon ten (10) days prior written notice to Lessee. In such event, all monies advanced or expended by Lessor, and all expenses of Lessor in effecting such compliance, shall be deemed to be additional rent, and shall be paid by Lessee to Lessor at the time of the next periodic payment of rent. 15. ASSIGNMENT: QUIET ENJOYMENT. LESSOR MAY, WITHOUT LESSEE'S CONSENT, ASSIGN THIS LEASE OR ANY SCHEDULE AND/OR THE RENTALS DUE THEREUNDER OR SELL OR GRANT A SECURITY INTEREST IN THE EQUIPMENT AND LESSEE AGREES THAT NO ASSIGNEE OF LESSOR SHALL BE BOUND TO PERFORM ANY DUTY, COVENANT OR CONDITION OR WARRANTY (EXPRESS OR IMPLIED) ATTRIBUTABLE TO LESSOR AND LESSEE FURTHER AGREES NOT TO EXHIBIT 10.36 - 6 - RAISE ANY CLAIM OR DEFENSE ARISING OUT OF THIS LEASE OR OTHERWISE AGAINST LESSOR AS A DEFENSE, COUNTERCLAIM OR OFFSET TO ANY ACTION BY ANY ASSIGNEE HEREUNDER. NOTWITHSTANDING ANY ASSIGNMENT BY LESSOR, PROVIDING LESSEE IS NOT IN DEFAULT HEREUNDER, LESSEE SHALL QUIETLY ENJOY USE OF THE EQUIPMENT, SUBJECT TO THE TERMS AND CONDITIONS OF THE LEASE. WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, LESSEE SHALL NOT ASSIGN, TRANSFER, PLEDGE, HYPOTHECATE OR OTHERWISE DISPOSE OF THE EQUIPMENT OR ANY INTEREST THEREIN, OR SUBLET OR LEND EQUIPMENT OR PERMIT IT TO BE USED BY ANYONE OTHER THAN LESSEE OR LESSEE'S EMPLOYEES. 16. NOTICES. Service of all notices under this Lease shall be sufficient if given personally or mailed to the intended party at its respective address set forth herein, or at such other address as said party may provide in writing from time to time. Any such notice mailed to said address shall be effective three (3) days following the date when deposited in the United States mail, duly addressed and with postage prepaid. 17. REPRESENTATIONS AND COVENANTS OF LESSEE. Lessee represents that all financial and other information furnished to Lessor was, at the time of delivery, true and correct. During the term of the Lease, Lessee shall provide Lessor, on an ongoing basis, audited annual financial statements within 120 days of each fiscal year end and quarterly financial statements within sixty (60) days of each quarter signed by Lessee's chief financial officer and such interim financial statements as Lessor requests. Such financial and other information shall be kept confidential except that Lessor may disclose such information to its accountants, attorneys and employees and as may be required in accordance with law. During the term of the Lease, Lessee shall not incur any additional indebtedness other than the indebtedness incurred in the ordinary course of business 18. GOVERNING LAW; JURISDICTION; VENUE; SERVICE OF PROCESS; WAIVER OF TRIAL BY JURY. THIS LEASE SHALL BE BINDING WHEN ACCEPTED IN WRITING BY THE LESSOR AND SHALL BE GOVERNED BY THE LAWS OF THE STATE OF ARIZONA, PROVIDED, HOWEVER, IN THE EVENT THIS LEASE OR ANY PROVISION HEREOF IS NOT ENFORCEABLE UNDER THE LAWS OF THE STATE OF ARIZONA THEN THE LAWS OF THE STATE WHERE THE EQUIPMENT IS LOCATED SHALL GOVERN. ANY DISPUTE UNDER THIS LEASE SHALL BE LITIGATED BY LESSEE ONLY IN FEDERAL OR STATE COURTS LOCATED IN MARICOPA COUNTY, ARIZONA, AND LESSEE IRREVOCABLY SUBMITS TO THE PERSONAL JURISDICTION OF SUCH COURTS AND WAIVES ANY OBJECTION THAT MAY EXIST AS TO VENUE OR CONVENIENCE OF SUCH FORUMS. NOTHING CONTAINED HEREIN SHALL PRECLUDE LESSOR FROM COMMENCING ANY ACTION IN ANY COURT HAVING JURISDICTION THEREOF. SERVICE OF PROCESS IN ANY SUCH ACTION SHALL BE SUFFICIENT IF SERVED BY CERTIFIED MAIL RETURN RECEIPT REQUESTED TO THE ADDRESS OF THE PARTY SET FORTH FOLLOWING THE SIGNATURES AT THE END OF THIS LEASE. TO THE EXTENT PERMITTED BY LAW, LESSEE WAIVES TRIAL BY JURY IN ANY ACTION BY OR AGAINST LESSOR HEREUNDER. EXHIBIT 10.36 - 7 - 19. GENERAL. This Lease inures to the benefit of and is binding upon the heirs, legatees, personal representatives, successors and assigns of the parties hereto. Time is of the essence of this Lease. This Lease and all Schedules attached hereto contain the entire agreement between Lessor and Lessee, and no modification of this Lease or any Schedule shall be effective unless in writing and executed by an executive officer of Lessor. If more than one Lessee is named in this Lease, the liability of each shall be joint and several. In the event any provision of this Lease should be unenforceable, then such provision shall be deemed deleted, however, no other provision hereof shall be affected thereby. 20. FINANCE LEASE STATUS. Lessor and Lessee agree that if Article 2A - Leases of the Uniform Commercial Code ("Code") governs the terms of this Lease, then this Lease will be deemed a "finance lease". By executing this Lease, Lessee acknowledges that (a) Lessor has advised Lessee of (i) the identity of the Supplier; (ii) that Lessee may have rights under the "supply contract" as defined in the Code, pursuant to which Lessor is purchasing the Equipment, and (iii) that Lessee may contact the Supplier for a description of any such rights. TO THE EXTENT PERMUTED BY APPLICABLE LAW, LESSEE WAIVES ANY AND ALL RIGHTS AND REMEDIES CONFERRED UPON A LESSEE BY THE CODE, INCLUDING SECTIONS 2A - 508 THROUGH 522 THEREOF. 21. PUBLICITY. Lessor is hereby authorized to issue appropriate press releases and to cause a tombstone to be published announcing the consummation of this transaction and the aggregate amount thereof. LESSOR: FINOVA CAPITAL CORPORATION BY: PRINTED NAME: PAM MARCHANT TITLE: V.P. ADDRESS: 95 N. ROUTE 17 SOUTH, P.O. BOX 907 PARAMUS, NEW JERSEY 07653 DATE ACCEPTED: LESSEE: MENDOCINO BREWING COMPANY, INC. BY /s/ Norman Franks PRINTED NAME: NORMAN FRANKS TITLE: V. P. Taxpayer Identification No.: 68-0318293 ADDRESS: 13551 SOUTH HIGHWAY 101 HOPLAND, CALIFORNIA 95449 DATED: 9/10/96 EXHIBIT 10.36 - 8 - EX-10.37 12 EXHIBIT 10.37 EXHIBIT 10.37 TO REGISTRATION STATEMENT ON FORM SB-2 ------------------------- TRI-ELECTION RIDER TO EQUIPMENT LEASE WITH FINOVA CAPITAL CORPORATION TRI-ELECTION RIDER TO EQUIPMENT LEASE BETWEEN FINOVA CAPITAL CORPORATION ("LESSOR") AND MENDOCINO BREWING COMPANY, INC. ("LESSEE") Dated Master Lease No. 5754300 Schedule No. 5754300 (the Master Lease and all Schedules thereto is hereafter the "Lease") 1. Notwithstanding any provision contained in the Lease to the contrary, including, but not limited to, the section of the Schedule entitled "Option to Purchase., upon expiration of the term of the Schedule (the "Initial Lease Term") and payment by Lessee of all rentals and other sums due as set forth in the Schedule, and provided that no Event of Default (as defined in the Lease) shall have occurred and be continuing, Lessee, at its option, may purchase all of Lessor's right, title and interest in and to all, but not less than all, of the equipment described in and covered by the Schedule (the "Equipment") for a purchase price equal to the greater of (a) the then Fair Market Value of the Equipment determined as hereinafter provided not to exceed thirty (30%) of the actual Equipment Cost, or (b) twenty-five (25%) percent of the original cost of the Equipment to Lessor. In order to exercise such option, Lessee shall notify Lessor in writing of Lessee's intention to exercise such option at least one hundred twenty (120) days prior to the expiration of the Initial Lease Term and shall deliver to Lessor, on or before the expiration of the Initial Lease Term, an appraisal and payment of the purchase price. For the purpose of this Paragraph, the "Fair Market Value" of the Equipment shall be determined by an independent third-party appraiser selected by Lessee and reasonably acceptable to Lessor. The appraiser's report shall be in writing and delivered to Lessor prior to the expiration of the Initial Lease Term. All fees and expenses of the appraiser shall be paid by Lessee. 2. If the Lessee for any reason does not purchase the Equipment in accordance with Paragraph 1 hereof, the Initial Lease Term set forth in the Schedule applicable to the Equipment shall automatically be extended for an additional term of twelve (12) months (the "Extended Term") at a monthly rental factor of .0220 times the actual Equipment Cost which the parties acknowledge to be the fair market rental value of the Equipment, the first such rental being due and payable by Lessee on the expiration date of the Initial Lease Term. Upon expiration of the Extended Term, in accordance with the terms of the Lease, Lessee shall either return the Equipment to Lessor or purchase the Equipment for its fair market value in accordance with the section of the Schedule entitled "Option to Purchase". 3. Except as amended hereby, the Lease shall remain in full force and effect and are, in all respects, hereby ratified and affirmed. 4. Notwithstanding anything to the contrary contained in the Lease, the Lessee shall have no obligation to make any indemnity payments pursuant to the section entitled "Tax Indemnity" to the extent that such indemnity obligations arise solely from the acts or omissions of the Lessor. For purposes of this provision however, the following shall not be deemed to be a Lessor's act or omission: (i) those acts or omissions taken by the Lessor while the Lessee is in default pursuant to the term of the Lease; (ii) those acts or omissions that are required, permitted or contemplated by the Lease or any document relating thereto; (iii) the execution, negotiation, overall structuring EXHIBIT 10.37 and documents relating to the transactions contemplated hereby and thereby; or (iv) those acts or omissions taken with the consent of the Lessee. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their duly authorized officers as of the day and year first above written. LESSOR: FINOVA CORPORATION BY PRINTED NAME: PAM MARCHANT TITLE: V.P. DATE: LESSEE: MENDOCINO BREWING COMPANY, INC. BY: /s/ Norman Franks PRINTED NAME: NORMAN FRANKS TITLE: V.P. DATED: 9/5/96 EXHIBIT 10.37 - 2 - EX-10.38 13 EXHIBIT 10.38 EXHIBIT 10.38 TO REGISTRATION STATEMENT ON FORM SB-2 ------------------------------ MASTER LEASE SCHEDULE WITH FINOVA CAPITAL CORPORATION FINOVA Capital Corporation 95 N. Route 17 South P.O. Box 907 Paramus, New Jersey 07653 Telephone (201) 712-3300 MASTER LEASE SCHEDULE NO. 5754301 TO EQUIPMENT LEASE NO. 5754300 (THE "LEASE") EQUIPMENT LEASED: See Schedule "A" attached hereto and made a part hereof. LOCATION OF EQUIPMENT: Airport Park Drive, Ukiah, CA 95482 TERM OF SCHEDULE: 84 MONTHS RENTAL PAYMENTS: $28.960.03 RENTAL PAYMENT FREQUENCY: X MONTHLY SUPPLIER: Enerfab, Inc. 4955 Spring Grove Avenue, Cincinnati, OH 45232 ADVANCE RENTALS: $57,920.06 PAYABLE AT THE TIME OF SIGNING OF THIS SCHEDULE TO BE APPLIED TO THE FIRST AND LAST ONE RENTAL PAYMENTS. ADDITIONAL TERMS AND CONDITIONS 1. LEASE OF EQUIPMENT. Lessor hereby agrees to lease to Lessee, and Lessee hereby agrees to lease and rent from Lessor the Equipment listed above, or on any Schedule attached hereto, for the term and the rental payments provided herein, all subject to the terms and conditions of the Lease. 2. OPTION TO PURCHASE. Provided Lessee is not in default hereunder or under any other lease or agreement with Lessor, Lessee shall have the right, at the expiration of the Term of this Schedule (the "Initial Term") or any extended term hereof (the "Extended Term") upon not less than 120 days' prior written notice to Lessor, to purchase the Equipment leased hereunder in whole and not in part, on an as-is, where-is basis, for its then fair market value. For the purposes of determining the fair market value of the Equipment it shall be assumed that the Equipment will be used for its best intended purpose, is fully assembled, in good operating condition and fully installed and operational on the premises where the Equipment will be used. In the event Lessor and Lessee cannot agree on a fair market value for the Equipment, an independent appraiser, acceptable to both parties (or failing such agreement by an appraiser designated by the American Arbitration Association in New York, NY), shall be selected to determine fair market value on the equipment provided herein. The cost of such appraisal shall be borne by Lessee. The purchase price for the Equipment shall be payable upon the expiration of the Initial Term or Extended Term of this Schedule as the case may be. Lessee shall also reimburse Lessor for its administrative costs and out-of-pocket expenses incurred in transferring clear title to the Equipment to Lessee. 3. TAX INDEMNITY. With respect to each item of Equipment leased hereunder, Lessee agrees that Lessor shall be entitled to such deductions and other benefits as are provided to an owner of personal property by the Internal Revenue Code of 1986 (as defined in Section 2 of the Tax Reform Act of 1986), as amended or superseded from time to time (hereinafter the "code"), including without limitation depreciation deductions based upon the Accelerated Cost Recovery System all at the maximum federal income tax rates applicable to corporations in effect on the Commencement Date (hereinafter "Tax Benefits.). If (i) Lessor shall lose; shall be delayed in claiming, shall not have a right to claim, shall be required to recapture, or shall not be allowed all or any portion of any Tax Benefits, under any circumstances, at any time, and for any reason EXHIBIT 10.38 other than as a result of acts or omissions of Lessor, or (ii) there shall be a change in the federal income tax rates applicable to corporations, or (iii) any of the Tax Benefits shall be deemed to be attributable to foreign sources or (iv) Lessor is required to include any other amounts arising from this Lease or Schedule in its gross income other than Rental Payments in the amounts and at the times specified in this Schedule, then upon Lessor's demand, Lessee shall pay Lessor either (x) a lump sum amount which shall maintain the net economic after-tax yield, cash-flow and rate of return Lessor anticipated receiving based on the tax assumptions utilized by Lessor in calculating the rent payable hereunder ("Lessor's Yield") or (y) such additional rent for the balance of the term of this Schedule as will permit Lessor to maintain Lessor's Yield. For the purposes of this indemnification, the term "Lessor" shall mean and include the affiliated group of corporations within the meaning of Section 1504 of the Code, of which Lessor is a member. 4. ADDITIONAL TERMS WITH RESPECT TO THE CARE AND USE OF THE EQUIPMENT. In addition to Lessee's obligations under Paragraph 7 of the Lease, Lessee shall (i) lubricate the Equipment on a basis that conforms to the maintenance manual and/or lubrication schedule recommended by the manufacturer of the Equipment, and (ii) purchase replacement parts only from sources approved by the manufacturer. Copies of all purchase orders for such replacement parts are to be retained in Lessee's file relating to the Equipment. 5. ADDITIONAL TERMS WITH RESPECT TO THE CONDITIONS OF REDELIVERY. In addition to Lessee's obligations under Paragraph 8 of the Lease, Lessee shall (i) dismantle and handle the Equipment in accordance with the manufacturer's specifications or normal industry accepted practices for new equipment. Any special transportation devices, such as metal skids, lifting slings, brackets, etc., which were with the Equipment when it was delivered or equivalent devices must be used; (ii) block all sliding members, secure all swinging doors, pendants and other swinging components, wrap, box, band and label all components and documents in an appropriate manner to facilitate the efficient reinstallation of the components; (iii) remove all process fluids from the Equipment and dispose of the same in accordance with prevailing waste disposal laws and regulations; (iv) clean and dry sumps and tanks; (v) not ship any "Hazardous Waste. materials with the equipment; (vi) fill all internal fluids such as lube oil and hydraulic oil to operating levels, secure filler caps and seal disconnected hoses; (vii) wire together all lock keys and secure the same to a major external component of the equipment; (viii) cause the Equipment to be complete, fully functional with no missing components or attachments, rust free with all boots, guards and seals clean and with all batteries for control memories fully charged. Lessor shall have the right to attempt to resell the Equipment at the Location for a period of 120 days from the expiration of the Term of the Schedule or any extensions thereof. During this period the Equipment must remain operational and Lessee must provide adequate electrical power, lighting, heat, water and compressed air, necessary to permit Lessor to demonstrate the Equipment to any potential buyer. If an auction is necessary to dispose of the Equipment, Lessor shall be permitted to auction the Equipment at the Location. 6. BASIS OF INDEXING. If on the Commencement Date, the highest yield on seven (7) year Treasury Notes, as published in The Wall Street Journal, with a maturity date on or closest to the maturity date of this Schedule (the "Index"), exceeds 5.78% (the "Yield"), the Monthly Rental Payment provided herein shall automatically be increased for the full term to reflect such increase in the Yield. As soon as practicable thereafter, Lessor shall provide Lessee with written EXHIBIT 10.38 - 2 - notice of any increase in the Monthly Rental Payment. Lessor's calculations shall be conclusive absent manifest error. 7. PUBLICITY. FINOVA is hereby authorized to issue appropriate press releases and to cause a tombstone to be published announcing the consummation of this transaction and the aggregate amount thereof. LESSOR: FINOVA CAPITAL CORPORATION BY: PRINTED NAME: PAM MARCHANT ADDRESS: 95 N. ROUTE 17 SOUTH, P.O. BOX 907 PARAMUS, NEW JERSEY 07653 DATE ACCEPTED: 9-30-96 LESSEE: MENDOCINO BREWING COMPANY, INC. BY: /s/ Norman Franks PRINTED NAME: Norman Franks TITLE: CFO ADDRESS: 13551 SOUTH HIGHWAY 101, HOPLAND, CALIFORNIA 95449 DATED: 9-23-96 EXHIBIT 10.38 - 3 - Schedule "A" to Master Lease Schedule No. 5754300 dated , 1996 to Equipment Lease No. 5754301 dated , 1996 between FINOVA Capital Corporation as Lessor and Mendocino Brewing Company, Inc. as Lessee. Equipment Location: Airport Park Drive Ukiah, CA 95482 Supplier: Enerfab, Inc. 4955 Spring Grove Avenue Cincinnati, OH 45232 (1)Grains Handling Silos, Spent Grain Silo and Malt handling equipment Pale malt silos Spent grain silo Pale malt silo to malt mill conveyor Bulk bag unloading system Volumetric feeder Floveyor (bag station to mill) Dust collector Malt mill hoper transition (top) Malt mill funnel (bottom) Malt mill support structure Blower assembly blower Blower assembly malt lines Blower assembly venturi Weigh hopper scale & outlet valve Weigh hopper bin vent filter Weigh hopper rotary valve Weigh hopper to mash mixer conveyor Knife gate valve (1) Malt Mill (1) Ponndorf Conveyor System (1) Steam boiler (1) Refrigeration system (1) Water chiller (1) Wort cooler (1) Beer warmer (1) Air compressor (1) Beer filter (1) Pumps (1) Control systems Schedule "A" to Master Lease Schedule No. 5754300 dated , 1996 to Equipment Lease No. 5754301 dated , 1996 between FINOVA Capital Corporation as Lessor and Mendocino Brewing Company, Inc. as Lessee. (10) Mash Tun (1) Lauter Tun (1) Brewkettle (1) Hop Jack Vessel (1) Hot Wort Tank (1) Hot Water Tank (4) CIP Tank Systems (1) Chilled Water Tank (10) 200 bbl Fermenter Tanks & Structural Support Grid (2) Yeast Tanks (1) Schenk Combi Filter System (1) 200 bbl Bright beer tank INITIAL /s/ NF - 4 - EX-10.39 14 EXHIBIT 10.39 EXHIBIT 10.39 TO REGISTRATION STATEMENT ON FORM SB-2 ----------------------------------- ADVANCE AND SUBORDINATION AGREEMENT AMONG THE COMPANY, FINOVA CAPITAL CORPORATION, AND ENERFAB, INC. Agreement made this 30 day of September , 1996 between FINOVA Capital Corporation (the "Lessor") and MENDOCINO Brewing Company, Inc. (the "Lessee") and Enerfab (the "Supplier"). WHEREAS, Lessor and Lessee have entered into a Lease Agreement #5754300 Schedule #5754301 (the "Lease") WHEREAS, Lessor has agreed, under certain circumstances, to purchase certain brewery equipment as set forth on the annexed Exhibit "A" (the "Equipment") from the Supplier having a cost not to exceed $2,073,015.51 (the "Total Costs") and to lease the Equipment to Lessee under the terms and conditions of the Lesser WHEREAS, Supplier has already delivered the Equipment to the Lessee and Lessee has left a deposit in the amount of $1,544,384.90 (the "Deposit") against the Total Cost with the Supplier; Whereas, Lessor's purchase orders (the "Purchase Orders") for the Equipment to Supplier provide for payment of the balance of the Total Cost to the Supplier upon final acceptance of the Equipment by the Lessee; and upon satisfaction of certain ether terms and conditions under Lessor's Commitment dated August 1, 19 96 to Lessee ("the Commitment"); WHEREAS, Lessee has requested that lessor reimburse Lessee for a portion of the Deposit in the amount of $750,000.00 (the "Advance") prior to the final acceptance of the Equipment and prior to the satisfaction of the other terms and conditions of the Commitment; and WHEREAS, subject to the terms and conditions set forth herein, Lessor is willing to make the Advance; and NOW, THEREFORE, the parties agree as follows 1. Lessor shall, upon Lessee's written request, make the Advance as follows: i. $750.000.00 to Lessee upon execution of this Agreement and receipt of satisfactory evidence to lessor of Lessee's payment of the Deposit. ii. The balance of the Total Cost to the Supplier upon receipt by Lessor of a Delivery and Acceptance Receipt executed by Lessee, and upon satisfaction of all other terms and conditions of the Commitment on or before October 21 1996 (the "Outside Date"). 2. Lessee agrees to pay to Lessor interest at the announced prime lending rate of Citibank, N.A, New York ("Citibank") (the "Prime lending Rate") plus three (3%) percent on a daily basis (but no more than the maximum rate allowed by low) on all funds advanced hereunder from the date of such Advance until the Commencement Date of the Lease (as that term is defined in the Lease). Prime Rate shall be determined as of the date of the Advance and adjusted monthly on the same day of the month thereafter. All accrued interest shall be payable on the Commencement Date of the Lease. EXHIBIT 10.39 3. In the event Lessee (i) fails to obtain earthquake insurance in form and amounts satisfactory to lessor within thirty days of the date hereof, or (ii) fails to accept all of the Equipment on or before the Outside Date, or (iii) fails to satisfy all other terms and conditions of the Commitment, Lessee shall forthwith, upon Lessor's demand, refund to Lessor the Advance made by Lessor together with accrued interest as set forth in Paragraph 3 above. In the event Lessee fails to pay any such monies upon demand, interest shall accrue at a default rate of three (3%) percent in addition to the interest provided herein (but in no event more than the maximum rate permitted by law. 4. Lessee and Supplier acknowledges that title to the Equipment delivered to Lessee shall be owned by Lessor, tree and clear of all liens and encumbrances, subject to all of the terms and conditions of the Lease except as specifically provided herein and any interest of Supplier in the Equipment is subject and subordinated to Lessor's interest under the Lease and as otherwise provided herein. The failure to pay any sums when due hereunder shall constitute an event of default under the Lease and Lessor shall have all of its rights and remedies contained therein. 5. In order to induce Lessor to enter into this agreement, and to secure Lessee's indebtedness, liabilities and obligations to Lessor under this Agreement, the Lease or otherwise Lessee hereby grants Lessor a first security interest in all the furnishings, fixtures machinery and equipment located at Airport Park Drive, Ukiah, California and all proceeds thereof including but not limited to the Equipment. Lessee shall execute such UCC Financing Statements for the Equipment as Lessor deems necessary. 6. Upon payment of the balance of the Total Cost, Supplier shall execute and deliver to Lessor a release of any interest it may have in and to the Equipment and such other documents as Lessor shall reasonably request. 7. Lessor acknowledges that Supplier has a first security interest in the refrigeration system. Upon receipt of at least 95% of the Total Cost, Enerfab will release its security interest in the refrigeration System in favor Of Lessor. FINOVA Capital Corporation By: /s/ Pam Marchant; VP Mendocino Brewing Company, Inc. By: /s/ Norman Franks, V.P. ENERFAB By: /s/ Terry Pfeister, CFO EXHIBIT 10.39 - 2 - EX-10.40 15 EXHIBIT 10.40 EXHIBIT 10.40 TO REGISTRATION STATEMENT ON FORM SB-2 ------------------------------ $900,000 NOTE IN FAVOR OF BDM CONSTRUCTION CO., INC. STRAIGHT NOTE $900,000.00 Santa Rosa, California August 29, 1996 ALL DUE ON OR BEFORE JANUARY 31, 1997 after date, for value received, MENDOCINO BREWING COMPANY, INC. promises to pay in lawful money of the United States of America, to BDM CONSTRUCTION CO. INC. or order, at place designated by payee, the principal sum of NINE HUNDRED THOUSAND AND NO/100THS DOLLARS with interest in like lawful money from DECEMBER 31, 1996, until paid at the rate of 12.0 PER CENT PER ANNUM payable AT MATURITY. Prepayment Penalty: NONE IT IS AGREED AND UNDERSTOOD BY THE UNDERSIGNED THAT THIS NOTE IS GIVEN IN CONSIDERATION FOR THE DEFERMENT OF THE OBLIGATION HEREIN STATED AND PURSUANT TO THE CONTRACT BY AND BETWEEN MENDOCINO BREWING CO., INC. ("MBC") AND BDM CONSTRUCTION CO. INC. ("BDM") WHEREIN ALL OBLIGATIONS DUE UNDER SAID CONTRACT WILL UPON SATISFACTION OF THE CONDITIONS THEREIN STATED BECOME DUE IN FULL ON DECEMBER 31, 1996. IT IS FURTHER AGREED THAT THE UNDERSIGNED WILL GIVE AND ACCEPT AS COLLATERAL THE SUM OF 300,000 SHARES OF COMMON STOCK IN MBC FOR THIS NOTE. THE CERTIFICATE FOR THE SHARES SHALL BEAR THE FOLLOWING LEGENDS: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THESE SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, COMPLIANCE WITH RULE 144 OR ITS SUCCESSOR RULE UNDER THE ACT, OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT. THE COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAS BEEN ISSUED AS COLLATERAL FOR THE PAYMENT OF A $900,000.00 OBLIGATION TO BDM CONSTRUCTION CO. INC. PURSUANT TO A PROMISSORY NOTE DATED AUGUST 29, 1996. BDM CONSTRUCTION CO. INC. IS HOLDING THIS CERTIFICATE FOR ITSELF AS A SECURED PARTY. UPON ANY DEFAULT BY THE COMPANY IN THE PAYMENT OF THE ABOVE OBLIGATION, BDM CONSTRUCTION CO. INC. SHALL HAVE ALL THE REMEDIES OF A SECURED CREDITOR AS ARE AVAILABLE UNDER THE CALIFORNIA UNIFORM COMMERCIAL CODE, INCLUDING THE RIGHT TO RETAIN OWNERSHIP OF THE COMMON STOCK IN SATISFACTION OF THE FOREGOING OBLIGATIONS EXHIBIT 10.40 UNDER THE CIRCUMSTANCES SPECIFIED THEREIN. THE HOLDER OF THE CERTIFICATE SHALL NOT CAUSE MORE SHARES TO BE SOLD THAN IS NECESSARY TO PAY ALL THE OBLIGATIONS SECURED BY THIS NOTE. UPON SUCH RETENTION, OR UPON ANY SALE OF ALL OR ANY PORTION OF THE COMMON STOCK IN SATISFACTION OF THE OBLIGATION, SUCH COMMON STOCK SHALL BE DULY AUTHORIZED, VALIDLY ISSUED, FULLY PAID, NONASSESSABLE, AND OUTSTANDING, AND THIS LEGEND SHALL BE OF NO FURTHER FORCE AND EFFECT AND SHALL, AT THE REQUEST OF THE HOLDER THEREOF, BE REMOVED FROM ANY CERTIFICATE REPRESENTING THE COMMON STOCK SO RETAINED OR SOLD. TO THE EXTENT THAT THE COMMON STOCK IS NOT RETAINED OR SOLD AS PERMITTED BY THE CALIFORNIA UNIFORM COMMERCIAL CODE, THE SHARES SHALL BE CANCELLED ON THE BOOKS OF THE COMPANY AND SHALL NOT BE OUTSTANDING AND THE HOLDER SHALL SURRENDER THE CERTIFICATE TO THE COMPANY FOR CANCELLATION AND SHALL INDEMNIFY THE COMPANY FOR FAILURE TO DO SO. Principal and interest payable in lawful money of the United States of America. Should default be made in payment of interest when due the whole sum of principal and interest shall become immediately due at the option of the holder of this Note. If action be instituted on this Note, MBC promises to pay such sum as the Court may fix as attorney's fees. As additional collateral, this Note is secured by a Deed of Trust of even date. The Deed of Trust securing the within Note contains the following provisions: "In the event the herein described property or any part thereof, or any interest therein is sold, agreed to be sold, conveyed or alienated by the Trustor, or by the operation of law or otherwise, all obligations secured by this instrument, irrespective of the maturity dates expressed therein, at the option of the holder hereof and without demand or notice shall immediately become due and payable." The security interest of this Deed of Trust shall be second in priority to a security interest in favor of the Savings Bank of Mendocino County in the principal amount of $2,700,000.0. MENDOCINO BREWING CO., INC. ("MBC") BY: /s/ Norman Franks, V.P. /s/ Michael Laybourn NORMAN FRANKS MICHAEL LAYBOURN THE UNDERSIGNED AS PAYEE DOES HEREBY AGREE TO THE TERMS AND CONDITIONS OF THIS NOTE. BDM CONSTRUCTION CO. INC. ("BDM") BY: /s/ Glenn R. McClish /s/ Sid Behler GLENN R. McCLISH SID BEHLER ADDENDUM EXHIBIT 10.40 - 2 - Addendum dated September 23, 1996 to the Straight Note dated August 29, 1996 between Mendocino Brewing Company, Inc. as debtor and BDM Construction Co. Inc. as payee. WITNESSETH: 1 ) This addendum is to be attached to and made a part of the Straight Note agreement between Mendocino Brewing Company, Inc. and BDM Construction Co. Inc. dated August 29, 1996. 2) This addendum may be signed in counterpart. 3) Addendum: In the event of default by Mendocino Brewing Company, Inc., BDM Construction Co. Inc. will first exercise its remedial rights with respect to the Mendocino Brewing Company, Inc. Common Stock as collateral and only after having exhausted this right can it pursue its rights with respect to the Real Property. The undersign hereby agrees to the addendum to the terms and conditions of the Straight Note. BDM Construction Co. Inc. BY: /s/ Glenn R. McClish President Glenn R. McClish Title Mendocino Brewing Company, Inc. BY: /s/ Michael Laybourn CEO Michael Laybourn Title EXHIBIT 10.40 - 3 - EX-10.41 16 EXHIBIT 10.41 EXHIBIT 10.41 TO REGISTRATION STATEMENT ON FORM SB-2 ------------------------------------ LETTER AGREEMENT CONCERNING USE OF PROCEEDS WITH BDM CONSTRUCTION CO., INC. September 19, 1996 Rick McClish BDM Construction Company, Inc. 835 Piner Road Suite D Santa Rosa, CA 95402-3847 VIA FAX: 707-526-4980 Dear Rick: Savings Bank of Mendocino County has agreed to the following plan of distribution and use of the first funds received from our proposed direct public offering. The list below shows, in order of priority, our proposed use of funds for the first $2,500,000 of the proposed $4,000,000 direct public offering. 1) Cost of offering (estimated) $ 300,000 2) Working Capital 300,000 3) Completion of deferred building construction 600,000 4) Short term debt - BDM note 500,000 5) Short term debt - West America Bank 400,000 6) Short term debt - BDM note 400,000 ---------- $2,500,000 The Savings Bank has asked that you signify your understanding of and agreement with our intentions by signing at the bottom of this letter. After signing, please fax this letter back to me as soon as possible. This should complete the final requirement for our loan package with the bank. Sincerely, BDM Construction Company, Inc. /s/ Norman Franks /s/ Rick McClish Norman Franks by: Rick McClish CFO, Vice President EXHIBIT 10.41 EX-10.42 17 EXHIBIT 10.42 EXHIBIT 10.42 TO REGISTRATION STATEMENT ON FORM SB-2 ------------------------------ EMPLOYMENT AGREEMENT WITH H. MICHAEL LAYBOURN MENDOCINO BREWING COMPANY, INC. EMPLOYMENT AGREEMENT --------------------------- This Agreement is entered into at Hopland, California as of October 17, 1996 between MICHAEL LAYBOURN ("Employee") and MENDOCINO BREWING COMPANY, INC., a California corporation (the "Company"), and is as follows: 1. DUTIES AND SCOPE OF EMPLOYMENT 1.1. Position. The Company shall continue to employ Employee under the terms of this Agreement in the position of President and Chief Executive Officer. Employee shall be the principal executive officer of the Company, shall have full responsibility for managing the Company, and shall report directly to the Board of Directors of the Company. 1.2. Obligations. During the term of this Agreement, Employee shall devote substantially most of Employee's business efforts and time to the Company. The foregoing shall not, however, preclude Employee from engaging in appropriate civic, charitable, industry, or religious activities, consistent with Employee's past practices, or from devoting a reasonable amount of time to private investments, as long as such activities do not interfere or conflict with Employee's responsibilities to the Company or are inconsistent with the Company's policies, as established by the Board of Directors in writing from time to time. 1.3. Director. Employee shall remain a member of the Company's Board of Directors. As long as Employee serves as an officer of the Company, Employee shall be nominated to serve on the Board of Directors in connection with any meeting to elect the same. 2. COMPENSATION 2.1. Base Salary. The Company shall pay Employee a base salary ("Base Compensation") of $89,016 per year, payable in accordance with the Company's payroll policies. The Board of Directors or a committee thereof shall review Employee's performance and the Company's financial and operating results on at least an annual basis and may increase Employee's base salary as the Board or Committee deems appropriate based on such review. 2.2. Bonus. The Compensation Committee shall establish a bonus pool for each fiscal year of the Company during which Employee is employed by the Company. Employee shall be entitled to receive a bonus under the pool if Employee and/or the Company achieve certain specified business EXHIBIT 10.42 objectives as determined by the Compensation Committee and communicated to and accepted by Employee in writing within the first ninety (90) days after the beginning of the fiscal year. Employee shall not withhold acceptance unreasonably. The Compensation Committee shall specify objectives that (a) are reasonably attainable, (b) are not probable of attainment without significant effort, and (c) reflect or indicate that value has been created for the shareholders. The Compensation Committee shall have the discretion to award bonuses regardless of whether previously specified objectives are not realized if, as a result of Employee's efforts or leadership, the Company has achieved other goals that reflect or indicate that value has been created for the shareholders. The amount of the annual bonus for which Employee shall be eligible shall not be less than 50% of Employee's Base Salary. 2.3. Stock Option. Pursuant to the Company's 1994 Stock Option Plan, Employee shall receive a stock option ("Option") in the form prescribed by the Option Plan to purchase up to 20,000 shares of the Company's Common Stock made available for purchase under the Plan at an exercise price equal to $9.2125 per share (the "Option Shares"). The Option shall become exercisable at a rate of 1 2/3% per entire month beginning as of the date of this Agreement. The Option shall be an incentive stock option to the extent permitted under Section 422 of the Internal Revenue Code of 1986, as amended. 2.4. Employee Benefits. During Employee's employment, Employee shall be entitled to the full benefits for which Employee is eligible under the employee benefit plans and executive compensation programs maintained by the Company, including without limitation pension plans, savings or profit-sharing plans, deferred compensation plans, supplemental retirement or excess-benefit plans, health, accident, and other insurance programs, paid vacations and sabbaticals, and similar plans or programs, subject in each case to the generally applicable terms and conditions of the plan or program in question. 2.5. Vacation/Personal Time Off. Employee shall continue to accrue vacation/personal time off at the rate at which Employee accrued vacation/personal time off immediately before the date of this Agreement. 2.6. Business Expenses and Travel. During Employee's employment, Employee shall be authorized to incur necessary and reasonable travel, entertainment, and other business expenses in connection with Employee's duties. The Company shall reimburse Employee for such expenses upon presentation of an itemized account and appropriate supporting documentation, all in accordance with the Company's generally applicable policies. 2.7. Insurance. Provided that Employee is insurable at a reasonable cost, during Employee's employment, the Company shall provide for Employee, and pay all premiums for, (a) an insurance policy on Employee's life, with a death benefit of $200,000, and Employee shall be permitted to designate all beneficiaries for said policy; and (b) disability insurance with a monthly benefit to Employee in the maximum amount permissible under such policies. The Company shall permit Employee EXHIBIT 10.42 - 2 - to assume such policies at Employee's expense following any termination of Employee's employment. 2.8. Return of Company Property. Upon the termination of employment, or whenever requested by Company, Employee shall immediately deliver to the Company all property in Employee's possession or under Employee's control belonging to the Company. 3. TERM AND TERMINATION 3.1. Term of Employment. 3.1.1. Basic Rule. The Company shall continue Employee's employment, and Employee shall remain in the employ of the Company, until Employee's employment terminates pursuant to the provisions of this Agreement. 3.1.2. "At Will" Employment. Except as otherwise provided in this Agreement, Employee's employment with Company is "at will" and the Company may terminate Employee's employment at any time, for any reason or for no reason. Any oral or written statements to the contrary are not binding upon the Company. 3.2. Death or Disability. "Disability" means Employee's inability, at the time notice is given, to perform Employee's duties under this Agreement for a period of not less than six (6) consecutive months as the result of Employee's incapacity due to physical or mental illness. Upon termination of Employee's employment because of Employee's death or Disability, Employee shall receive payments as provided in the Company's benefit and insurance plans provided or required to be provided to Employee pursuant to this Agreement. 3.3. Voluntary Termination and Termination for Cause. 3.3.1. Voluntary Termination. "Voluntary Termination" means any termination of employment with the Company unless the termination (a) is for Cause (as defined below), (b) results from a Change in Control (as defined in subsection 3.5.1), (c) occurs within one year after a Change in Control, or (d) results from Employee's death or Disability, or (d) occurs within three (3) months after a Constructive Termination (as defined in subsection 3.4.1). 3.3.2. Cause. "Cause" means (a) an act or acts of dishonesty undertaken by Employee and intended to result in substantial gain or personal enrichment of Employee at the expense of the Company, or (b) willful, deliberate, and persistent failure by Employee to perform the duties and obligations of Employee's employment which are not remedied in a reasonable period of time after receipt of written notice from the Company. EXHIBIT 10.42 - 3 - 3.3.3. Voluntary Termination. Employee may terminate Employee's employment voluntarily giving the Company thirty (30) days' advance notice in writing. No termination of employment occurring within three (3) months following a Constructive Termination shall be deemed a Voluntary Termination unless agreed to in a writing signed by the Employee which states the value of any rights under this Agreement surrendered by Employee and supported by separate consideration of at least $5,000. 3.4. Constructive and Other Termination. 3.4.1. Constructive Termination. "Constructive Termination" means: (a) a reduction in Employee's salary or a material reduction in benefits not agreed to by Employee (except in connection with a decrease to be applied because the Company's performance has decreased and which is also applied on a comparable basis to other officers, and excluding the substitution of substantially equivalent compensation and benefits); (b) Employee's removal from or failure to be reelected to the Company's Board of Directors over Employee's objection; (c) a change in Employee's position as set forth in Section 1.1 over Employee's objection, unless such change occurs within 3 months after the end of a fiscal year in which Employee has failed to meet the objectives established for Employee by the Compensation Committee pursuant to Section 2.2 for that year; or (d) a material change in Employee's responsibilities over Employee's objection, unless such change occurs within 3 months after the end of a fiscal year in which Employee has failed to meet the objectives established for Employee by the Compensation Committee pursuant to Section 2.2 for that year. 3.4.2. Other Termination. "Other Termination" means termination of employment with the Company for any reason other than (a) Cause, (b) Constructive Termination, (c) Employee's death or Disability, or (d) Voluntary Termination. 3.4.3. Severance Payment. Upon any Constructive Termination or Other Termination, the Company shall continue to pay to Employee Employee's Base Compensation for thirty-six (36) months following the date Employee stops providing full-time services to the Company. Base Compensation shall be determined with reference to the Base Compensation in effect for the month in which Employee stops providing full-time services, and shall be paid in accordance with the Company's then-current policies for payroll, as though Employee were still employed by the Company. 3.4.4. Acceleration and Extension of Stock Option. Upon any Constructive Termination or Other Termination, the Option shall become immediately exercisable in full. To the extent that the Option is not exercised within the EXHIBIT 10.42 - 4 - time following termination of employment specified in the written option agreement, the Option shall remain exercisable as though Employee's option had not terminated. In addition, in lieu of exercising the Option for the consideration specified in the option agreement, Employee may from time to time convert the Option, in whole or in part, into a number of shares determined by dividing (a) the aggregate fair market value of the shares otherwise issuable upon exercise of the Option minus the aggregate exercise price of such shares by (b) the fair market value of one share. Fair market value shall be deemed to be the closing price of the Company's common stock on the stock exchange on which the shares are traded as of the last trading day before Employee exercises the Option. 3.4.5. Continuation of Benefits. Upon any Constructive Termination or Other Termination, Employee shall be entitled to receive the same employment benefits during the time Employee is receiving payments pursuant to subsection 3.4.3 as though Employee were still employed by the Company, except that Employee shall not accrue any vacation pay, personal time off, or compensation under any ERISA or ERISA-type plan after termination of employment. 3.4.6. Registration Rights. Upon any Constructive Termination or Other Termination, Employee shall have unlimited piggyback registration rights, two (2) demand registration rights, and unlimited S-3 registration rights, at the expense of the Company, in such form, on such terms, and subject to such conditions as are customarily granted to the most well-known venture capitalists in the portions of the San Francisco Bay Area known as "Silicon Valley" as of the date of termination. 3.4.7. Beverage Allowance. Upon any Constructive Termination or Other Termination, the Company shall provide to Employee, without further charge, one case of the Company's beverages per week, delivered within the continental United States, as Employee may request, for the remainder of Employee's life. Employee must renew the request annually. This right is personal and not transferable, and the request may not be made by a guardian, custodian, personal representative, attorney at law, attorney in fact, or other proxy on Employee's behalf, or in circumstances where Employee is incapable of consuming malt beverages personally. 3.5. Termination Resulting from Change of Control. 3.5.1. Change in Control. "Change in Control" means (a) any merger or consolidation of the Company with, or any sale of all or substantially all of the Company's assets to, any other corporation or entity, unless as a result of such merger, consolidation, or sale of assets the holders of the Company's voting securities prior thereto hold at least fifty percent (50%) of the total voting power represented by the voting securities of the surviving or successor corporation or entity after such transaction, or (b) the acquisition by any Person as Beneficial Owner (as such terms are defined in the Securities Exchange Act of 1934, as amended, or the rules and regulations thereunder, or in ss.280G of the Internal Revenue EXHIBIT 10.42 - 5 - Code of 1986, as amended, and the regulations thereunder), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the total voting power represented by the Company's then outstanding voting securities, or (c) any sale of a substantial portion (as "substantial portion" is used and interpreted in ss.280G of the Internal Revenue Code of 1986, as amended, and the regulations thereunder) of the Company's assets to any other corporation or entity, or (d) the replacement of a majority of the members of the Company's Board of Directors during any twelve month period by directors whose appointment or election was not endorsed by a majority of the then authorized Board members before the date of said appointment or election. 3.5.2. Additional Payment. If the Company terminates Employee's employment without Cause as a result of, or within one year after, a Change in Control, the Company shall pay Employee, in addition to any and all other compensation and benefits then due Employee, the sum of $500,000. The Company shall pay said termination compensation to Employee at the same time as Employee receives any other compensation then due Employee, or within three business days after Employee's employment terminates, whichever is earlier. 3.6. Benefit Rollover. Upon termination of Employee's employment with Company, Employee shall have the right to roll over or otherwise convert any amounts attributable to Employee in any of Company's deferred compensation, insurance, or other benefit plans to other such plans as may be allowed by such plans and applicable law. The Company shall have no obligation to inform Employee of any rights or responsibilities Employee may have in connection with converting, rolling over, or continuing benefits under, such plans, except as may be required under applicable law. 3.7. Compliance with Internal Revenue Code ss.280G. The Company may defer, and at the written request of Employee shall defer, the amount of any payment pursuant to this Agreement (a "Deferred Amount") which if and when paid will constitute an "excess parachute payment" (as defined in ss.280G of the Internal Revenue Code of 1986, as amended) subject to material adverse federal or state income tax consequences to the person initiating the deferral, after taking into account the known facts and circumstances at the time of the payment ("EPP"). The Company shall give Employee reasonable advance written notice of any planned deferral, but failure to give such notice shall not restrict the Company's ability to make the deferral. The Deferred Amount shall be payable, without interest, in one or more installments at such time or times that no portion of the installment will constitute EPP. The Company shall restructure the obligations of the Company under this Agreement in a manner requested in writing by Employee if no portion of the restructured payments will constitute EPP and the restructure does not materially increase any adverse effect the Company's obligations under this Agreement may have on the current or future net worth or net income (both determined in accordance with generally accepted accounting principles consistently applied) or cash flow of the Company. EXHIBIT 10.42 - 6 - 4. MISCELLANEOUS 4.1. Further Matters. Each party agrees to perform such additional acts and execute such additional documents as are necessary or appropriate to carry out this Agreement. 4.2. Successors and Assigns. 4.2.1. Generally. This Agreement shall bind, and inure to the benefit of, the parties hereto and their respective successors and assigns. 4.2.2. Company's Successors. Any successor to the Company (whether directly or indirectly and whether by purchase, lease, merger, consolidation, liquidation, or otherwise to all or substantially all of the Company's business and/or assets) shall assume this Agreement and agree expressly to perform this Agreement in the same manner and to the same extent as the Company would be required to perform it in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include without limitation any successor to the Company's business and/or assets which executes and delivers an assumption agreement or which becomes bound by this Agreement by operation of law. 4.2.3. Employee's Successors. This Agreement and all rights of Employee hereunder shall inure to the benefit of, and be enforceable by, Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. 4.2.4. No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including without limitation bankruptcy, garnishment, attachment, or other creditor's process, and any action in violation of this subsection 4.2.4 shall be voidable at the option of the Company. 4.3. No Third-Party Beneficiaries. Except as expressly provided in this Agreement, nothing in this Agreement shall (a) confer any rights or remedies on any persons other than the parties and their respective successors and assigns, (b) relieve or discharge the obligation of any third person to any party, or (c) give any third person any right of subrogation or action against any party. 4.4. Notice. Any notice, instruction, or communication required or permitted to be given under this Agreement to any party shall be in writing (which may include telecopier or other similar form of reproduction followed by a mailed hard copy, but not electronic mail) and shall be deemed given when actually received or, if earlier, five days after deposit in the United States Mail by certified or express mail, return receipt requested, postage prepaid, addressed to the principal office of such party or to such other address as such party may request by written notice. Each party shall EXHIBIT 10.42 - 7 - make an ordinary, good faith effort to ensure that the person to be given notice actually receives such notice. Each party shall ensure that the other parties to this Agreement have a current address, fax number, and telephone number for the purpose of giving notice. 4.5. Governing Law. The rights and obligations of the parties shall be governed by, and this Agreement shall be construed and enforced in accordance with, the laws of the State of California, excluding its conflict of laws rules to the extent such rules would apply the law of another jurisdiction. 4.6. Jurisdiction and Venue. The parties hereto consent to the jurisdiction of all federal and state courts in California, and agree that venue shall lie exclusively in Mendocino County, California. 4.7. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the employment of Employee and the covenants contained in this Agreement, and there have been, and there are now, no agreements, representations, or warranties among the parties other than those set forth herein or herein provided for. Employee agrees that the remedies specified in this Agreement shall be liquidated damages for any claim by Employee that the Company has wrongfully terminated Employee's employment with the Company. In addition, Employee hereby waives any right Employee may have to seek involuntary dissolution of the Company pursuant to California Corporations Code ss.1800, and shall not join with any other shareholders of the Company to seek such relief. 4.8. Amendments, Waivers, and Consents. This Agreement shall not be changed or modified, in whole or in part, except by supplemental agreement signed by the parties or as otherwise provided in this Agreement. Either party may waive compliance by any other party with any of the covenants or conditions of this Agreement, but except as provided in this Agreement, no waiver shall be binding unless executed in writing by the party making the waiver. No waiver of any provision of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. Any consent under this Agreement shall be in writing and shall be effective only to the extent specifically set forth in such writing. For the protection of all parties, amendments, waivers, and consents that are not in writing and executed by the party to be bound may be enforced only if they are detrimentally relied upon and proved by clear and convincing evidence. Such evidence may not include the alleged reliance. 4.9. Specific Performance. The parties hereby declare that it is impossible to measure in money the damages that will result from a failure to perform any of the obligations under this Agreement. Therefore, each party hereto shall be entitled as a matter of right to injunctive and other relief to enforce the provisions of this Agreement. Each party hereto waives the claim or defense that an adequate remedy at law exists in any action or proceeding brought to enforce the provisions. EXHIBIT 10.42 - 8 - 4.10. Dispute Resolution. 4.10.1. Notice. A party who desires money damages or equitable relief from the other party because of a claim relating to the subject matter of this Agreement shall give written notice to the other party of the facts constituting the breach or default (a "Dispute Notice"). This Section 4.10 is intended to cover all aspects of the relationship between the parties with respect to the subject matter of this Agreement, including any claims based on tort or other theories. Any additional claims the parties have against each other shall also be subject to this Section 4.10. 4.10.2. Negotiation. For fifteen (15) days following delivery of a Dispute Notice (the "Negotiation Period") the parties shall negotiate to resolve the dispute in good faith. 4.10.3. Mediation. After the end of the Negotiation Period, either party may request non-binding mediation with the assistance of a neutral mediator from a recognized mediation service. The party requesting the mediation shall arrange for the mediation services, subject to the approval of the other party which the other party shall not withhold unreasonably. Mediation shall take place in Mendocino County, California. Mediation may be scheduled to begin any time after expiration of the Negotiation Period, but with at least 10 days notice to all parties. The parties shall participate in the mediation in good faith and shall devote reasonable time and energy to the mediation so as to promptly resolve the dispute or conclude that they cannot resolve the dispute. The party's shall share the cost of mediation except as provided elsewhere in this Agreement. 4.10.4. Arbitration. If thirty (30) days after beginning mediation the parties have not resolved the dispute, either party may submit the dispute to final and binding arbitration pursuant to the commercial rules of the American Arbitration Association. The arbitrator(s) shall apply the substantive law of the State of California to the dispute, and shall have the power to interpret such law to the extent it is unclear. At the request of any party, the arbitrators, attorneys, parties to the arbitration, witnesses, experts, court reporters, or other persons present at the arbitration shall agree in writing to maintain the strict confidentiality of the arbitration proceedings. At the election of any party, arbitration shall be conducted by three neutral arbitrators appointed in accordance with the commercial rules of the American Arbitration Association if (a) the amount in controversy is greater than $50,000 (exclusive of interest and attorney's fees), or (b) a party sought to be enjoined disputes that he or it has engaged in, or asserts that he or it should be able to engage in, the actions sought to be enjoined. In all other cases, the matter shall be arbitrated by a single neutral arbitrator. The parties surrender and waive the right to submit any dispute to a court or jury, or to appeal to a higher court. There shall be no arbitration of any claim that would otherwise be barred by a statute of limitations if the claim were to be brought in a court of law. The arbitrator shall not have the power to award punitive, consequential, indirect, or special damages. The arbitrators shall have the power to determine what disputes between the parties are the proper subject of arbitration. EXHIBIT 10.42 - 9 - 4.10.5. Costs and Attorney's Fees. If the arbitrator determines that the actions of a party or its counsel have unreasonably or unnecessarily delayed the resolution of the matter, the arbitrator may in its discretion require such party to pay all or part of cost of the mediation and arbitration proceedings payable by the other party and may require such party to pay all or part of the attorney's fees of the other party. This provision permits an award of attorney's fees against a party regardless of which party is the prevailing party. Otherwise, the parties shall share bear the costs of arbitration equally. 4.10.6. Enforcement. The award of the arbitrator shall be enforceable according to the applicable provisions of the California Code of Civil Procedure, sections 1280 et seq. A party who fails to participate in a negotiation, mediation, or arbitration instituted under this Section 4.10, or who admits to liability and the amount of damage, shall be deemed to have defaulted. Such default may be entered and enforced the same manner as a default in a civil lawsuit. 4.11. Headings. The subject headings of the Articles, Sections, and subsections of this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. 4.12. Counterparts. This Agreement may be executed in two or more counterparts by signing and delivering the signature page hereto. Each such counterpart shall be an original and together with the other counterparts shall be deemed one document. 4.13. Role of Company Counsel. Employee acknowledges that Enterprise Law Group, Inc., counsel to the Company, has not represented Employee in connection with any aspect of this Agreement, and has not undertaken to perform any services on behalf of Employee. Employee has obtained any desired legal advice from separate counsel of his own choosing or has freely chosen not to do so. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. "COMPANY" "EMPLOYEE" Mendocino Brewing Company, Inc., a California corporation By /s/ Norman Franks /s/ Michael Laybourn ----------------------------------- ------------------------- Norman Franks, Vice President Michael Laybourn EXHIBIT 10.42 - 10 - EX-10.43 18 EXHIBIT 10.43 EXHIBIT 10.43 TO REGISTRATION STATEMENT ON FORM SB-2 ---------------------------- EMPLOYMENT AGREEMENT WITH NORMAN H. FRANKS MENDOCINO BREWING COMPANY, INC. EMPLOYMENT AGREEMENT --------------------------- This Agreement is entered into at Hopland, California as of October 17, 1996 between NORMAN FRANKS ("Employee") and MENDOCINO BREWING COMPANY, INC., a California corporation (the "Company"), and is as follows: 1. DUTIES AND SCOPE OF EMPLOYMENT 1.1. Position. The Company shall continue to employ Employee under the terms of this Agreement in the position of Vice President and Chief Financial Officer . Employee shall have such duties as are commonly associated with the above job title, and shall report directly to the President. 1.2. Obligations. During the term of this Agreement, Employee shall devote substantially most of Employee's business efforts and time to the Company. The foregoing shall not, however, preclude Employee from engaging in appropriate civic, charitable, industry, or religious activities, consistent with Employee's past practices, or from devoting a reasonable amount of time to private investments, as long as such activities do not interfere or conflict with Employee's responsibilities to the Company or are inconsistent with the Company's policies, as established by the Board of Directors in writing from time to time. 1.3. Director. Employee shall remain a member of the Company's Board of Directors. As long as Employee serves as an officer of the Company, Employee shall be nominated to serve on the Board of Directors in connection with any meeting to elect the same. 2. COMPENSATION 2.1. Base Salary. The Company shall pay Employee a base salary ("Base Compensation") of $79,008 per year, payable in accordance with the Company's payroll policies. The Board of Directors or a committee thereof shall review Employee's performance and the Company's financial and operating results on at least an annual basis and may increase Employee's base salary as the Board or Committee deems appropriate based on such review. 2.2. Bonus. The Compensation Committee shall establish a bonus pool for each fiscal year of the Company during which Employee is employed by the Company. Employee shall be entitled to receive a bonus under the pool if Employee and/or the Company achieve certain specified business objectives as determined by the Compensation Committee and communicated to and accepted by EXHIBIT 10.43 Employee in writing within the first ninety (90) days after the beginning of the fiscal year. Employee shall not withhold acceptance unreasonably. The Compensation Committee shall specify objectives that (a) are reasonably attainable, (b) are not probable of attainment without significant effort, and (c) reflect or indicate that value has been created for the shareholders. The Compensation Committee shall have the discretion to award bonuses regardless of whether previously specified objectives are not realized if, as a result of Employee's efforts or leadership, the Company has achieved other goals that reflect or indicate that value has been created for the shareholders. The amount of the annual bonus for which Employee shall be eligible shall not be less than 40% of Employee's Base Salary. 2.3. Stock Option. Pursuant to the Company's 1994 Stock Option Plan, Employee shall receive a stock option ("Option") in the form prescribed by the Option Plan to purchase up to 20,000 shares of the Company's Common Stock made available for purchase under the Plan at an exercise price equal to $9.2125 per share (the "Option Shares"). The Option shall become exercisable at a rate of 1 2/3% per entire month beginning as of the date of this Agreement. The Option shall be an incentive stock option to the extent permitted under Section 422 of the Internal Revenue Code of 1986, as amended. 2.4. Employee Benefits. During Employee's employment, Employee shall be entitled to the full benefits for which Employee is eligible under the employee benefit plans and executive compensation programs maintained by the Company, including without limitation pension plans, savings or profit-sharing plans, deferred compensation plans, supplemental retirement or excess-benefit plans, health, accident, and other insurance programs, paid vacations and sabbaticals, and similar plans or programs, subject in each case to the generally applicable terms and conditions of the plan or program in question. 2.5. Vacation/Personal Time Off. Employee shall continue to accrue vacation/personal time off at the rate at which Employee accrued vacation/personal time off immediately before the date of this Agreement. 2.6. Business Expenses and Travel. During Employee's employment, Employee shall be authorized to incur necessary and reasonable travel, entertainment, and other business expenses in connection with Employee's duties. The Company shall reimburse Employee for such expenses upon presentation of an itemized account and appropriate supporting documentation, all in accordance with the Company's generally applicable policies. 2.7. Insurance. Provided that Employee is insurable at a reasonable cost, during Employee's employment, the Company shall provide for Employee, and pay all premiums for, (a) an insurance policy on Employee's life, with a death benefit of $200,000, and Employee shall be permitted to designate all beneficiaries for said policy; and (b) disability insurance with a monthly benefit to Employee in the maximum amount permissible under such policies. The Company shall permit Employee EXHIBIT 10.43 - 2 - to assume such policies at Employee's expense following any termination of Employee's employment. 2.8. Return of Company Property. Upon the termination of employment, or whenever requested by Company, Employee shall immediately deliver to the Company all property in Employee's possession or under Employee's control belonging to the Company. 3. TERM AND TERMINATION 3.1. Term of Employment. 3.1.1. Basic Rule. The Company shall continue Employee's employment, and Employee shall remain in the employ of the Company, until Employee's employment terminates pursuant to the provisions of this Agreement. 3.1.2. "At Will" Employment. Except as otherwise provided in this Agreement, Employee's employment with Company is "at will" and the Company may terminate Employee's employment at any time, for any reason or for no reason. Any oral or written statements to the contrary are not binding upon the Company. 3.2. Death or Disability. "Disability" means Employee's inability, at the time notice is given, to perform Employee's duties under this Agreement for a period of not less than six (6) consecutive months as the result of Employee's incapacity due to physical or mental illness. Upon termination of Employee's employment because of Employee's death or Disability, Employee shall receive payments as provided in the Company's benefit and insurance plans provided or required to be provided to Employee pursuant to this Agreement. 3.3. Voluntary Termination and Termination for Cause. 3.3.1. Voluntary Termination. "Voluntary Termination" means any termination of employment with the Company unless the termination (a) is for Cause (as defined below), (b) results from a Change in Control (as defined in subsection 3.5.1), (c) occurs within one year after a Change in Control, or (d) results from Employee's death or Disability, or (d) occurs within three (3) months after a Constructive Termination (as defined in subsection 3.4.1). 3.3.2. Cause. "Cause" means (a) an act or acts of dishonesty undertaken by Employee and intended to result in substantial gain or personal enrichment of Employee at the expense of the Company, or (b) willful, deliberate, and persistent failure by Employee to perform the duties and obligations of Employee's employment which are not remedied in a reasonable period of time after receipt of written notice from the Company. EXHIBIT 10.43 - 3 - 3.3.3. Voluntary Termination. Employee may terminate Employee's employment voluntarily giving the Company thirty (30) days' advance notice in writing. No termination of employment occurring within three (3) months following a Constructive Termination shall be deemed a Voluntary Termination unless agreed to in a writing signed by the Employee which states the value of any rights under this Agreement surrendered by Employee and supported by separate consideration of at least $5,000. 3.4. Constructive and Other Termination. 3.4.1. Constructive Termination. "Constructive Termination" means: (a) a reduction in Employee's salary or a material reduction in benefits not agreed to by Employee (except in connection with a decrease to be applied because the Company's performance has decreased and which is also applied on a comparable basis to other officers, and excluding the substitution of substantially equivalent compensation and benefits); (b) Employee's removal from or failure to be reelected to the Company's Board of Directors over Employee's objection; (c) a change in Employee's position as set forth in Section 1.1 over Employee's objection, unless such change occurs within 3 months after the end of a fiscal year in which Employee has failed to meet the objectives established for Employee by the Compensation Committee pursuant to Section 2.2 for that year; or (d) a material change in Employee's responsibilities over Employee's objection, unless such change occurs within 3 months after the end of a fiscal year in which Employee has failed to meet the objectives established for Employee by the Compensation Committee pursuant to Section 2.2 for that year. 3.4.2. Other Termination. "Other Termination" means termination of employment with the Company for any reason other than (a) Cause, (b) Constructive Termination, (c) Employee's death or Disability, or (d) Voluntary Termination. 3.4.3. Severance Payment. Upon any Constructive Termination or Other Termination, the Company shall continue to pay to Employee Employee's Base Compensation for thirty-six (36) months following the date Employee stops providing full-time services to the Company. Base Compensation shall be determined with reference to the Base Compensation in effect for the month in which Employee stops providing full-time services, and shall be paid in accordance with the Company's then-current policies for payroll, as though Employee were still employed by the Company. 3.4.4. Acceleration and Extension of Stock Option. Upon any Constructive Termination or Other Termination, the Option shall become immediately exercisable in full. To the extent that the Option is not exercised within the EXHIBIT 10.43 - 4 - time following termination of employment specified in the written option agreement, the Option shall remain exercisable as though Employee's option had not terminated. In addition, in lieu of exercising the Option for the consideration specified in the option agreement, Employee may from time to time convert the Option, in whole or in part, into a number of shares determined by dividing (a) the aggregate fair market value of the shares otherwise issuable upon exercise of the Option minus the aggregate exercise price of such shares by (b) the fair market value of one share. Fair market value shall be deemed to be the closing price of the Company's common stock on the stock exchange on which the shares are traded as of the last trading day before Employee exercises the Option. 3.4.5. Continuation of Benefits. Upon any Constructive Termination or Other Termination, Employee shall be entitled to receive the same employment benefits during the time Employee is receiving payments pursuant to subsection 3.4.3 as though Employee were still employed by the Company, except that Employee shall not accrue any vacation pay, personal time off, or compensation under any ERISA or ERISA-type plan after termination of employment. 3.4.6. Registration Rights. Upon any Constructive Termination or Other Termination, Employee shall have unlimited piggyback registration rights, two (2) demand registration rights, and unlimited S-3 registration rights, at the expense of the Company, in such form, on such terms, and subject to such conditions as are customarily granted to the most well-known venture capitalists in the portions of the San Francisco Bay Area known as "Silicon Valley" as of the date of termination. 3.4.7. Beverage Allowance. Upon any Constructive Termination or Other Termination, the Company shall provide to Employee, without further charge, one case of the Company's beverages per week, delivered within the continental United States, as Employee may request, for the remainder of Employee's life. Employee must renew the request annually. This right is personal and not transferable, and the request may not be made by a guardian, custodian, personal representative, attorney at law, attorney in fact, or other proxy on Employee's behalf, or in circumstances where Employee is incapable of consuming malt beverages personally. 3.5. Termination Resulting from Change of Control. 3.5.1. Change in Control. "Change in Control" means (a) any merger or consolidation of the Company with, or any sale of all or substantially all of the Company's assets to, any other corporation or entity, unless as a result of such merger, consolidation, or sale of assets the holders of the Company's voting securities prior thereto hold at least fifty percent (50%) of the total voting power represented by the voting securities of the surviving or successor corporation or entity after such transaction, or (b) the acquisition by any Person as Beneficial Owner (as such terms are defined in the Securities Exchange Act of 1934, as amended, or the rules and regulations thereunder, or in ss.280G of the Internal Revenue EXHIBIT 10.43 - 5 - Code of 1986, as amended, and the regulations thereunder), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the total voting power represented by the Company's then outstanding voting securities, or (c) any sale of a substantial portion (as "substantial portion" is used and interpreted in ss.280G of the Internal Revenue Code of 1986, as amended, and the regulations thereunder) of the Company's assets to any other corporation or entity, or (d) the replacement of a majority of the members of the Company's Board of Directors during any twelve month period by directors whose appointment or election was not endorsed by a majority of the then authorized Board members before the date of said appointment or election. 3.5.2. Additional Payment. If the Company terminates Employee's employment without Cause as a result of, or within one year after, a Change in Control, the Company shall pay Employee, in addition to any and all other compensation and benefits then due Employee, the sum of $500,000. The Company shall pay said termination compensation to Employee at the same time as Employee receives any other compensation then due Employee, or within three business days after Employee's employment terminates, whichever is earlier. 3.6. Benefit Rollover. Upon termination of Employee's employment with Company, Employee shall have the right to roll over or otherwise convert any amounts attributable to Employee in any of Company's deferred compensation, insurance, or other benefit plans to other such plans as may be allowed by such plans and applicable law. The Company shall have no obligation to inform Employee of any rights or responsibilities Employee may have in connection with converting, rolling over, or continuing benefits under, such plans, except as may be required under applicable law. 3.7. Compliance with Internal Revenue Code ss.280G. The Company may defer, and at the written request of Employee shall defer, the amount of any payment pursuant to this Agreement (a "Deferred Amount") which if and when paid will constitute an "excess parachute payment" (as defined in ss.280G of the Internal Revenue Code of 1986, as amended) subject to material adverse federal or state income tax consequences to the person initiating the deferral, after taking into account the known facts and circumstances at the time of the payment ("EPP"). The Company shall give Employee reasonable advance written notice of any planned deferral, but failure to give such notice shall not restrict the Company's ability to make the deferral. The Deferred Amount shall be payable, without interest, in one or more installments at such time or times that no portion of the installment will constitute EPP. The Company shall restructure the obligations of the Company under this Agreement in a manner requested in writing by Employee if no portion of the restructured payments will constitute EPP and the restructure does not materially increase any adverse effect the Company's obligations under this Agreement may have on the current or future net worth or net income (both determined in accordance with generally accepted accounting principles consistently applied) or cash flow of the Company. EXHIBIT 10.43 - 6 - 4. MISCELLANEOUS 4.1. Further Matters. Each party agrees to perform such additional acts and execute such additional documents as are necessary or appropriate to carry out this Agreement. 4.2. Successors and Assigns. 4.2.1. Generally. This Agreement shall bind, and inure to the benefit of, the parties hereto and their respective successors and assigns. 4.2.2. Company's Successors. Any successor to the Company (whether directly or indirectly and whether by purchase, lease, merger, consolidation, liquidation, or otherwise to all or substantially all of the Company's business and/or assets) shall assume this Agreement and agree expressly to perform this Agreement in the same manner and to the same extent as the Company would be required to perform it in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include without limitation any successor to the Company's business and/or assets which executes and delivers an assumption agreement or which becomes bound by this Agreement by operation of law. 4.2.3. Employee's Successors. This Agreement and all rights of Employee hereunder shall inure to the benefit of, and be enforceable by, Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. 4.2.4. No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including without limitation bankruptcy, garnishment, attachment, or other creditor's process, and any action in violation of this subsection 4.2.4 shall be voidable at the option of the Company. 4.3. No Third-Party Beneficiaries. Except as expressly provided in this Agreement, nothing in this Agreement shall (a) confer any rights or remedies on any persons other than the parties and their respective successors and assigns, (b) relieve or discharge the obligation of any third person to any party, or (c) give any third person any right of subrogation or action against any party. 4.4. Notice. Any notice, instruction, or communication required or permitted to be given under this Agreement to any party shall be in writing (which may include telecopier or other similar form of reproduction followed by a mailed hard copy, but not electronic mail) and shall be deemed given when actually received or, if earlier, five days after deposit in the United States Mail by certified or express mail, return receipt requested, postage prepaid, addressed to the principal office of such party or to such other address as such party may request by written notice. Each party shall EXHIBIT 10.43 - 7 - make an ordinary, good faith effort to ensure that the person to be given notice actually receives such notice. Each party shall ensure that the other parties to this Agreement have a current address, fax number, and telephone number for the purpose of giving notice. 4.5. Governing Law. The rights and obligations of the parties shall be governed by, and this Agreement shall be construed and enforced in accordance with, the laws of the State of California, excluding its conflict of laws rules to the extent such rules would apply the law of another jurisdiction. 4.6. Jurisdiction and Venue. The parties hereto consent to the jurisdiction of all federal and state courts in California, and agree that venue shall lie exclusively in Mendocino County, California. 4.7. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the employment of Employee and the covenants contained in this Agreement, and there have been, and there are now, no agreements, representations, or warranties among the parties other than those set forth herein or herein provided for. Employee agrees that the remedies specified in this Agreement shall be liquidated damages for any claim by Employee that the Company has wrongfully terminated Employee's employment with the Company. In addition, Employee hereby waives any right Employee may have to seek involuntary dissolution of the Company pursuant to California Corporations Code ss.1800, and shall not join with any other shareholders of the Company to seek such relief. 4.8. Amendments, Waivers, and Consents. This Agreement shall not be changed or modified, in whole or in part, except by supplemental agreement signed by the parties or as otherwise provided in this Agreement. Either party may waive compliance by any other party with any of the covenants or conditions of this Agreement, but except as provided in this Agreement, no waiver shall be binding unless executed in writing by the party making the waiver. No waiver of any provision of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. Any consent under this Agreement shall be in writing and shall be effective only to the extent specifically set forth in such writing. For the protection of all parties, amendments, waivers, and consents that are not in writing and executed by the party to be bound may be enforced only if they are detrimentally relied upon and proved by clear and convincing evidence. Such evidence may not include the alleged reliance. 4.9. Specific Performance. The parties hereby declare that it is impossible to measure in money the damages that will result from a failure to perform any of the obligations under this Agreement. Therefore, each party hereto shall be entitled as a matter of right to injunctive and other relief to enforce the provisions of this Agreement. Each party hereto waives the claim or defense that an adequate remedy at law exists in any action or proceeding brought to enforce the provisions. EXHIBIT 10.43 - 8 - 4.10. Dispute Resolution. 4.10.1. Notice. A party who desires money damages or equitable relief from the other party because of a claim relating to the subject matter of this Agreement shall give written notice to the other party of the facts constituting the breach or default (a "Dispute Notice"). This Section 4.10 is intended to cover all aspects of the relationship between the parties with respect to the subject matter of this Agreement, including any claims based on tort or other theories. Any additional claims the parties have against each other shall also be subject to this Section 4.10. 4.10.2. Negotiation. For fifteen (15) days following delivery of a Dispute Notice (the "Negotiation Period") the parties shall negotiate to resolve the dispute in good faith. 4.10.3. Mediation. After the end of the Negotiation Period, either party may request non-binding mediation with the assistance of a neutral mediator from a recognized mediation service. The party requesting the mediation shall arrange for the mediation services, subject to the approval of the other party which the other party shall not withhold unreasonably. Mediation shall take place in Mendocino County, California. Mediation may be scheduled to begin any time after expiration of the Negotiation Period, but with at least 10 days notice to all parties. The parties shall participate in the mediation in good faith and shall devote reasonable time and energy to the mediation so as to promptly resolve the dispute or conclude that they cannot resolve the dispute. The party's shall share the cost of mediation except as provided elsewhere in this Agreement. 4.10.4. Arbitration. If thirty (30) days after beginning mediation the parties have not resolved the dispute, either party may submit the dispute to final and binding arbitration pursuant to the commercial rules of the American Arbitration Association. The arbitrator(s) shall apply the substantive law of the State of California to the dispute, and shall have the power to interpret such law to the extent it is unclear. At the request of any party, the arbitrators, attorneys, parties to the arbitration, witnesses, experts, court reporters, or other persons present at the arbitration shall agree in writing to maintain the strict confidentiality of the arbitration proceedings. At the election of any party, arbitration shall be conducted by three neutral arbitrators appointed in accordance with the commercial rules of the American Arbitration Association if (a) the amount in controversy is greater than $50,000 (exclusive of interest and attorney's fees), or (b) a party sought to be enjoined disputes that he or it has engaged in, or asserts that he or it should be able to engage in, the actions sought to be enjoined. In all other cases, the matter shall be arbitrated by a single neutral arbitrator. The parties surrender and waive the right to submit any dispute to a court or jury, or to appeal to a higher court. There shall be no arbitration of any claim that would otherwise be barred by a statute of limitations if the claim were to be brought in a court of law. The arbitrator shall not have the power to award punitive, consequential, indirect, or special damages. The arbitrators shall have the power to determine what disputes between the parties are the proper subject of arbitration. EXHIBIT 10.43 - 9 - 4.10.5. Costs and Attorney's Fees. If the arbitrator determines that the actions of a party or its counsel have unreasonably or unnecessarily delayed the resolution of the matter, the arbitrator may in its discretion require such party to pay all or part of cost of the mediation and arbitration proceedings payable by the other party and may require such party to pay all or part of the attorney's fees of the other party. This provision permits an award of attorney's fees against a party regardless of which party is the prevailing party. Otherwise, the parties shall share bear the costs of arbitration equally. 4.10.6. Enforcement. The award of the arbitrator shall be enforceable according to the applicable provisions of the California Code of Civil Procedure, sections 1280 et seq. A party who fails to participate in a negotiation, mediation, or arbitration instituted under this Section 4.10, or who admits to liability and the amount of damage, shall be deemed to have defaulted. Such default may be entered and enforced the same manner as a default in a civil lawsuit. 4.11. Headings. The subject headings of the Articles, Sections, and subsections of this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. 4.12. Counterparts. This Agreement may be executed in two or more counterparts by signing and delivering the signature page hereto. Each such counterpart shall be an original and together with the other counterparts shall be deemed one document. 4.13. Role of Company Counsel. Employee acknowledges that Enterprise Law Group, Inc., counsel to the Company, has not represented Employee in connection with any aspect of this Agreement, and has not undertaken to perform any services on behalf of Employee. Employee has obtained any desired legal advice from separate counsel of his own choosing or has freely chosen not to do so. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. "COMPANY" "EMPLOYEE" Mendocino Brewing Company, Inc., a California corporation By /s/ Michael Laybourn /s/ Norman Franks ------------------------------------- -------------------------- Michael Laybourn, President Norman Franks EXHIBIT 10.43 - 10 - EX-10.44 19 EXHIBIT 10.44 EXHIBIT 10.44 TO REGISTRATION STATEMENT ON FORM SB-2 ------------------------------------ EMPLOYMENT AGREEMENT WITH MICHAEL F. LOVETT MENDOCINO BREWING COMPANY, INC. EMPLOYMENT AGREEMENT --------------------------- This Agreement is entered into at Hopland, California as of October 17, 1996 between MICHAEL LOVETT ("Employee") and MENDOCINO BREWING COMPANY, INC., a California corporation (the "Company"), and is as follows: 1. DUTIES AND SCOPE OF EMPLOYMENT 1.1. Position. The Company shall continue to employ Employee under the terms of this Agreement in the position of Marketing Director . Employee shall have such duties as are commonly associated with the above job title, and shall report directly to the President. 1.2. Obligations. During the term of this Agreement, Employee shall devote substantially most of Employee's business efforts and time to the Company. The foregoing shall not, however, preclude Employee from engaging in appropriate civic, charitable, industry, or religious activities, consistent with Employee's past practices, or from devoting a reasonable amount of time to private investments, as long as such activities do not interfere or conflict with Employee's responsibilities to the Company or are inconsistent with the Company's policies, as established by the Board of Directors in writing from time to time. 2. COMPENSATION 2.1. Base Salary. The Company shall pay Employee a base salary ("Base Compensation") of $55,440 per year, payable in accordance with the Company's payroll policies. The Board of Directors or a committee thereof shall review Employee's performance and the Company's financial and operating results on at least an annual basis and may increase Employee's base salary as the Board or Committee deems appropriate based on such review. 2.2. Bonus. The Compensation Committee shall establish a bonus pool for each fiscal year of the Company during which Employee is employed by the Company. Employee shall be entitled to receive a bonus under the pool if Employee and/or the Company achieve certain specified business objectives as determined by the Compensation Committee and communicated to and accepted by Employee in writing within the first ninety (90) days after the beginning of the fiscal year. Employee shall not withhold acceptance unreasonably. The Compensation Committee shall specify objectives that (a) are reasonably attainable, (b) are not probable of attainment without significant effort, and (c) reflect or indicate that value has been created for the shareholders. The Compensation Committee shall have the discretion to award bonuses regardless of whether EXHIBIT 10.44 previously specified objectives are not realized if, as a result of Employee's efforts or leadership, the Company has achieved other goals that reflect or indicate that value has been created for the shareholders. 2.3. Stock Option. Pursuant to the Company's 1994 Stock Option Plan, Employee shall receive a stock option ("Option") in the form prescribed by the Option Plan to purchase up to 10,000 shares of the Company's Common Stock made available for purchase under the Plan at an exercise price equal to $8.375 per share (the "Option Shares"). The Option shall become exercisable at a rate of 1 2/3% per entire month beginning as of the date of this Agreement. The Option shall be an incentive stock option to the extent permitted under Section 422 of the Internal Revenue Code of 1986, as amended. 2.4. Employee Benefits. During Employee's employment, Employee shall be entitled to the full benefits for which Employee is eligible under the employee benefit plans and executive compensation programs maintained by the Company, including without limitation pension plans, savings or profit-sharing plans, deferred compensation plans, supplemental retirement or excess-benefit plans, health, accident, and other insurance programs, paid vacations and sabbaticals, and similar plans or programs, subject in each case to the generally applicable terms and conditions of the plan or program in question. 2.5. Vacation/Personal Time Off. Employee shall continue to accrue vacation/personal time off at the rate at which Employee accrued vacation/personal time off immediately before the date of this Agreement. 2.6. Business Expenses and Travel. During Employee's employment, Employee shall be authorized to incur necessary and reasonable travel, entertainment, and other business expenses in connection with Employee's duties. The Company shall reimburse Employee for such expenses upon presentation of an itemized account and appropriate supporting documentation, all in accordance with the Company's generally applicable policies. 2.7. Insurance. Provided that Employee is insurable at a reasonable cost, during Employee's employment, the Company shall provide for Employee, and pay all premiums for, (a) an insurance policy on Employee's life, with a death benefit of $200,000, and Employee shall be permitted to designate all beneficiaries for said policy; and (b) disability insurance with a monthly benefit to Employee in the maximum amount permissible under such policies. The Company shall permit Employee to assume such policies at Employee's expense following any termination of Employee's employment. 2.8. Return of Company Property. Upon the termination of employment, or whenever requested by Company, Employee shall immediately deliver to the Company all property in Employee's possession or under Employee's control belonging to the Company. EXHIBIT 10.44 - 2 - 3. TERM AND TERMINATION 3.1. Term of Employment. 3.1.1. Basic Rule. The Company shall continue Employee's employment, and Employee shall remain in the employ of the Company, until Employee's employment terminates pursuant to the provisions of this Agreement. 3.1.2. "At Will" Employment. Except as otherwise provided in this Agreement, Employee's employment with Company is "at will" and the Company may terminate Employee's employment at any time, for any reason or for no reason. Any oral or written statements to the contrary are not binding upon the Company. 3.2. Death or Disability. "Disability" means Employee's inability, at the time notice is given, to perform Employee's duties under this Agreement for a period of not less than six (6) consecutive months as the result of Employee's incapacity due to physical or mental illness. Upon termination of Employee's employment because of Employee's death or Disability, Employee shall receive payments as provided in the Company's benefit and insurance plans provided or required to be provided to Employee pursuant to this Agreement. 3.3. Voluntary Termination and Termination for Cause. 3.3.1. Voluntary Termination. "Voluntary Termination" means any termination of employment with the Company unless the termination (a) is for Cause (as defined below), (b) results from a Change in Control (as defined in subsection 3.5.1), (c) occurs within one year after a Change in Control, or (d) results from Employee's death or Disability, or (d) occurs within three (3) months after a Constructive Termination (as defined in subsection 3.4.1). 3.3.2. Cause. "Cause" means (a) an act or acts of dishonesty undertaken by Employee and intended to result in substantial gain or personal enrichment of Employee at the expense of the Company, or (b) willful, deliberate, and persistent failure by Employee to perform the duties and obligations of Employee's employment which are not remedied in a reasonable period of time after receipt of written notice from the Company. 3.3.3. Voluntary Termination. Employee may terminate Employee's employment voluntarily giving the Company thirty (30) days' advance notice in writing. No termination of employment occurring within three (3) months following a Constructive Termination shall be deemed a Voluntary Termination unless agreed to in a writing signed by the Employee which states the value of any rights under this Agreement surrendered by Employee and supported by separate consideration of at least $5,000. EXHIBIT 10.44 - 3 - 3.4. Constructive and Other Termination. 3.4.1. Constructive Termination. "Constructive Termination" means: (a) a reduction in Employee's salary or a material reduction in benefits not agreed to by Employee (except in connection with a decrease to be applied because the Company's performance has decreased and which is also applied on a comparable basis to other officers, and excluding the substitution of substantially equivalent compensation and benefits); (b) a change in Employee's position as set forth in Section 1.1 over Employee's objection, unless such change occurs within 3 months after the end of a fiscal year in which Employee has failed to meet the objectives established for Employee by the Compensation Committee pursuant to Section 2.2 for that year; or (c) a material change in Employee's responsibilities over Employee's objection, unless such change occurs within 3 months after the end of a fiscal year in which Employee has failed to meet the objectives established for Employee by the Compensation Committee pursuant to Section 2.2 for that year. 3.4.2. Other Termination. "Other Termination" means termination of employment with the Company for any reason other than (a) Cause, (b) Constructive Termination, (c) Employee's death or Disability, or (d) Voluntary Termination. 3.4.3. Severance Payment. Upon any Constructive Termination or Other Termination, the Company shall continue to pay to Employee Employee's Base Compensation for eighteen (18) months following the date Employee stops providing full-time services to the Company. Base Compensation shall be determined with reference to the Base Compensation in effect for the month in which Employee stops providing full-time services, and shall be paid in accordance with the Company's then-current policies for payroll, as though Employee were still employed by the Company. 3.4.4. Acceleration and Extension of Stock Option. Upon any Constructive Termination or Other Termination, the Option shall become immediately exercisable in full. To the extent that the Option is not exercised within the time following termination of employment specified in the written option agreement, the Option shall remain exercisable as though Employee's option had not terminated. In addition, in lieu of exercising the Option for the consideration specified in the option agreement, Employee may from time to time convert the Option, in whole or in part, into a number of shares determined by dividing (a) the aggregate fair market value of the shares otherwise issuable upon exercise of the Option minus the aggregate exercise price of such shares by (b) the fair market value of one share. Fair market value shall be deemed to be the closing price of the Company's common stock on the stock exchange on which the shares are traded as of the last trading day before Employee exercises the Option. EXHIBIT 10.44 - 4 - 3.4.5. Continuation of Benefits. Upon any Constructive Termination or Other Termination, Employee shall be entitled to receive the same employment benefits during the time Employee is receiving payments pursuant to subsection 3.4.3 as though Employee were still employed by the Company, except that Employee shall not accrue any vacation pay, personal time off, or compensation under any ERISA or ERISA-type plan after termination of employment. 3.4.6. Registration Rights. Upon any Constructive Termination or Other Termination, Employee shall have unlimited piggyback registration rights, two (2) demand registration rights, and unlimited S-3 registration rights, at the expense of the Company, in such form, on such terms, and subject to such conditions as are customarily granted to the most well-known venture capitalists in the portions of the San Francisco Bay Area known as "Silicon Valley" as of the date of termination. 3.4.7. Beverage Allowance. Upon any Constructive Termination or Other Termination, the Company shall provide to Employee, without further charge, one case of the Company's beverages per week, delivered within the continental United States, as Employee may request, for the remainder of Employee's life. Employee must renew the request annually. This right is personal and not transferable, and the request may not be made by a guardian, custodian, personal representative, attorney at law, attorney in fact, or other proxy on Employee's behalf, or in circumstances where Employee is incapable of consuming malt beverages personally. 3.5. Termination Resulting from Change of Control. 3.5.1. Change in Control. "Change in Control" means (a) any merger or consolidation of the Company with, or any sale of all or substantially all of the Company's assets to, any other corporation or entity, unless as a result of such merger, consolidation, or sale of assets the holders of the Company's voting securities prior thereto hold at least fifty percent (50%) of the total voting power represented by the voting securities of the surviving or successor corporation or entity after such transaction, or (b) the acquisition by any Person as Beneficial Owner (as such terms are defined in the Securities Exchange Act of 1934, as amended, or the rules and regulations thereunder, or in ss.280G of the Internal Revenue Code of 1986, as amended, and the regulations thereunder), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the total voting power represented by the Company's then outstanding voting securities, or (c) any sale of a substantial portion (as "substantial portion" is used and interpreted in ss.280G of the Internal Revenue Code of 1986, as amended, and the regulations thereunder) of the Company's assets to any other corporation or entity, or (d) the replacement of a majority of the members of the Company's Board of Directors during any twelve month period by directors whose appointment or election was not endorsed by a majority of the then authorized Board members before the date of said appointment or election. EXHIBIT 10.44 - 5 - 3.5.2. Additional Payment. If the Company terminates Employee's employment without Cause as a result of, or within one year after, a Change in Control, the Company shall pay Employee, in addition to any and all other compensation and benefits then due Employee, the sum of $250,000. The Company shall pay said termination compensation to Employee at the same time as Employee receives any other compensation then due Employee, or within three business days after Employee's employment terminates, whichever is earlier. 3.6. Benefit Rollover. Upon termination of Employee's employment with Company, Employee shall have the right to roll over or otherwise convert any amounts attributable to Employee in any of Company's deferred compensation, insurance, or other benefit plans to other such plans as may be allowed by such plans and applicable law. The Company shall have no obligation to inform Employee of any rights or responsibilities Employee may have in connection with converting, rolling over, or continuing benefits under, such plans, except as may be required under applicable law. 3.7. Compliance with Internal Revenue Code ss.280G. The Company may defer, and at the written request of Employee shall defer, the amount of any payment pursuant to this Agreement (a "Deferred Amount") which if and when paid will constitute an "excess parachute payment" (as defined in ss.280G of the Internal Revenue Code of 1986, as amended) subject to material adverse federal or state income tax consequences to the person initiating the deferral, after taking into account the known facts and circumstances at the time of the payment ("EPP"). The Company shall give Employee reasonable advance written notice of any planned deferral, but failure to give such notice shall not restrict the Company's ability to make the deferral. The Deferred Amount shall be payable, without interest, in one or more installments at such time or times that no portion of the installment will constitute EPP. The Company shall restructure the obligations of the Company under this Agreement in a manner requested in writing by Employee if no portion of the restructured payments will constitute EPP and the restructure does not materially increase any adverse effect the Company's obligations under this Agreement may have on the current or future net worth or net income (both determined in accordance with generally accepted accounting principles consistently applied) or cash flow of the Company. 4. MISCELLANEOUS 4.1. Further Matters. Each party agrees to perform such additional acts and execute such additional documents as are necessary or appropriate to carry out this Agreement. 4.2. Successors and Assigns. 4.2.1. Generally. This Agreement shall bind, and inure to the benefit of, the parties hereto and their respective successors and assigns. EXHIBIT 10.44 - 6 - 4.2.2. Company's Successors. Any successor to the Company (whether directly or indirectly and whether by purchase, lease, merger, consolidation, liquidation, or otherwise to all or substantially all of the Company's business and/or assets) shall assume this Agreement and agree expressly to perform this Agreement in the same manner and to the same extent as the Company would be required to perform it in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include without limitation any successor to the Company's business and/or assets which executes and delivers an assumption agreement or which becomes bound by this Agreement by operation of law. 4.2.3. Employee's Successors. This Agreement and all rights of Employee hereunder shall inure to the benefit of, and be enforceable by, Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. 4.2.4. No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including without limitation bankruptcy, garnishment, attachment, or other creditor's process, and any action in violation of this subsection 4.2.4 shall be voidable at the option of the Company. 4.3. No Third-Party Beneficiaries. Except as expressly provided in this Agreement, nothing in this Agreement shall (a) confer any rights or remedies on any persons other than the parties and their respective successors and assigns, (b) relieve or discharge the obligation of any third person to any party, or (c) give any third person any right of subrogation or action against any party. 4.4. Notice. Any notice, instruction, or communication required or permitted to be given under this Agreement to any party shall be in writing (which may include telecopier or other similar form of reproduction followed by a mailed hard copy, but not electronic mail) and shall be deemed given when actually received or, if earlier, five days after deposit in the United States Mail by certified or express mail, return receipt requested, postage prepaid, addressed to the principal office of such party or to such other address as such party may request by written notice. Each party shall make an ordinary, good faith effort to ensure that the person to be given notice actually receives such notice. Each party shall ensure that the other parties to this Agreement have a current address, fax number, and telephone number for the purpose of giving notice. 4.5. Governing Law. The rights and obligations of the parties shall be governed by, and this Agreement shall be construed and enforced in accordance with, the laws of the State of California, excluding its conflict of laws rules to the extent such rules would apply the law of another jurisdiction. EXHIBIT 10.44 - 7 - 4.6. Jurisdiction and Venue. The parties hereto consent to the jurisdiction of all federal and state courts in California, and agree that venue shall lie exclusively in Mendocino County, California. 4.7. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the employment of Employee and the covenants contained in this Agreement, and there have been, and there are now, no agreements, representations, or warranties among the parties other than those set forth herein or herein provided for. Employee agrees that the remedies specified in this Agreement shall be liquidated damages for any claim by Employee that the Company has wrongfully terminated Employee's employment with the Company. In addition, Employee hereby waives any right Employee may have to seek involuntary dissolution of the Company pursuant to California Corporations Code ss.1800, and shall not join with any other shareholders of the Company to seek such relief. 4.8. Amendments, Waivers, and Consents. This Agreement shall not be changed or modified, in whole or in part, except by supplemental agreement signed by the parties or as otherwise provided in this Agreement. Either party may waive compliance by any other party with any of the covenants or conditions of this Agreement, but except as provided in this Agreement, no waiver shall be binding unless executed in writing by the party making the waiver. No waiver of any provision of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. Any consent under this Agreement shall be in writing and shall be effective only to the extent specifically set forth in such writing. For the protection of all parties, amendments, waivers, and consents that are not in writing and executed by the party to be bound may be enforced only if they are detrimentally relied upon and proved by clear and convincing evidence. Such evidence may not include the alleged reliance. 4.9. Specific Performance. The parties hereby declare that it is impossible to measure in money the damages that will result from a failure to perform any of the obligations under this Agreement. Therefore, each party hereto shall be entitled as a matter of right to injunctive and other relief to enforce the provisions of this Agreement. Each party hereto waives the claim or defense that an adequate remedy at law exists in any action or proceeding brought to enforce the provisions. 4.10. Dispute Resolution. 4.10.1. Notice. A party who desires money damages or equitable relief from the other party because of a claim relating to the subject matter of this Agreement shall give written notice to the other party of the facts constituting the breach or default (a "Dispute Notice"). This Section 4.10 is intended to cover all aspects of the relationship between the parties with respect to the subject matter of this Agreement, including any claims based on tort or other theories. Any additional claims the parties have against each other shall also be subject to this Section 4.10. EXHIBIT 10.44 - 8 - 4.10.2. Negotiation. For fifteen (15) days following delivery of a Dispute Notice (the "Negotiation Period") the parties shall negotiate to resolve the dispute in good faith. 4.10.3. Mediation. After the end of the Negotiation Period, either party may request non-binding mediation with the assistance of a neutral mediator from a recognized mediation service. The party requesting the mediation shall arrange for the mediation services, subject to the approval of the other party which the other party shall not withhold unreasonably. Mediation shall take place in Mendocino County, California. Mediation may be scheduled to begin any time after expiration of the Negotiation Period, but with at least 10 days notice to all parties. The parties shall participate in the mediation in good faith and shall devote reasonable time and energy to the mediation so as to promptly resolve the dispute or conclude that they cannot resolve the dispute. The party's shall share the cost of mediation except as provided elsewhere in this Agreement. 4.10.4. Arbitration. If thirty (30) days after beginning mediation the parties have not resolved the dispute, either party may submit the dispute to final and binding arbitration pursuant to the commercial rules of the American Arbitration Association. The arbitrator(s) shall apply the substantive law of the State of California to the dispute, and shall have the power to interpret such law to the extent it is unclear. At the request of any party, the arbitrators, attorneys, parties to the arbitration, witnesses, experts, court reporters, or other persons present at the arbitration shall agree in writing to maintain the strict confidentiality of the arbitration proceedings. At the election of any party, arbitration shall be conducted by three neutral arbitrators appointed in accordance with the commercial rules of the American Arbitration Association if (a) the amount in controversy is greater than $50,000 (exclusive of interest and attorney's fees), or (b) a party sought to be enjoined disputes that he or it has engaged in, or asserts that he or it should be able to engage in, the actions sought to be enjoined. In all other cases, the matter shall be arbitrated by a single neutral arbitrator. The parties surrender and waive the right to submit any dispute to a court or jury, or to appeal to a higher court. There shall be no arbitration of any claim that would otherwise be barred by a statute of limitations if the claim were to be brought in a court of law. The arbitrator shall not have the power to award punitive, consequential, indirect, or special damages. The arbitrators shall have the power to determine what disputes between the parties are the proper subject of arbitration. 4.10.5. Costs and Attorney's Fees. If the arbitrator determines that the actions of a party or its counsel have unreasonably or unnecessarily delayed the resolution of the matter, the arbitrator may in its discretion require such party to pay all or part of cost of the mediation and arbitration proceedings payable by the other party and may require such party to pay all or part of the attorney's fees of the other party. This provision permits an award of attorney's fees against a party regardless of which party is the prevailing party. Otherwise, the parties shall share bear the costs of arbitration equally. EXHIBIT 10.44 - 9 - 4.10.6. Enforcement. The award of the arbitrator shall be enforceable according to the applicable provisions of the California Code of Civil Procedure, sections 1280 et seq. A party who fails to participate in a negotiation, mediation, or arbitration instituted under this Section 4.10, or who admits to liability and the amount of damage, shall be deemed to have defaulted. Such default may be entered and enforced the same manner as a default in a civil lawsuit. 4.11. Headings. The subject headings of the Articles, Sections, and subsections of this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. 4.12. Counterparts. This Agreement may be executed in two or more counterparts by signing and delivering the signature page hereto. Each such counterpart shall be an original and together with the other counterparts shall be deemed one document. 4.13. Role of Company Counsel. Employee acknowledges that Enterprise Law Group, Inc., counsel to the Company, has not represented Employee in connection with any aspect of this Agreement, and has not undertaken to perform any services on behalf of Employee. Employee has obtained any desired legal advice from separate counsel of his own choosing or has freely chosen not to do so. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. "COMPANY" "EMPLOYEE" Mendocino Brewing Company, Inc., a California corporation By /s/ Michael Laybourn /s/ Michael Lovett ------------------------------------ ------------------------- Michael Laybourn, President Michael Lovett EXHIBIT 10.44 - 10 - EX-10.45 20 EXHIBIT 10.45 EXHIBIT 10.45 TO REGISTRATION STATEMENT ON FORM SB-2 ----------------------------------------- EMPLOYMENT AGREEMENT WITH JOHN SCAHILL MENDOCINO BREWING COMPANY, INC. EMPLOYMENT AGREEMENT ------------------------------- This Agreement is entered into at Hopland, California as of October 17, 1996 between JOHN SCAHILL ("Employee") and MENDOCINO BREWING COMPANY, INC., a California corporation (the "Company"), and is as follows: 1. DUTIES AND SCOPE OF EMPLOYMENT 1.1. Position. The Company shall continue to employ Employee under the terms of this Agreement in the position of Maintenance Manager. Employee shall have such duties as are commonly associated with the above job title, and shall report directly to the President. 1.2. Obligations. During the term of this Agreement, Employee shall devote substantially most of Employee's business efforts and time to the Company. The foregoing shall not, however, preclude Employee from engaging in appropriate civic, charitable, industry, or religious activities, consistent with Employee's past practices, or from devoting a reasonable amount of time to private investments, as long as such activities do not interfere or conflict with Employee's responsibilities to the Company or are inconsistent with the Company's policies, as established by the Board of Directors in writing from time to time. 2. COMPENSATION 2.1. Base Salary. The Company shall pay Employee a base salary ("Base Compensation") of $39,816 per year, payable in accordance with the Company's payroll policies. The Board of Directors or a committee thereof shall review Employee's performance and the Company's financial and operating results on at least an annual basis and may increase Employee's base salary as the Board or Committee deems appropriate based on such review. 2.2. Bonus. The Compensation Committee shall establish a bonus pool for each fiscal year of the Company during which Employee is employed by the Company. Employee shall be entitled to receive a bonus under the pool if Employee and/or the Company achieve certain specified business objectives as determined by the Compensation Committee and communicated to and accepted by Employee in writing within the first ninety (90) days after the beginning of the fiscal year. Employee shall not withhold acceptance unreasonably. The Compensation Committee shall specify objectives that (a) are reasonably attainable, (b) are not probable of attainment without significant effort, and (c) reflect or indicate that value has been created for the shareholders. The Compensation Committee shall have the discretion to award bonuses regardless of whether EXHIBIT 10.45 previously specified objectives are not realized if, as a result of Employee's efforts or leadership, the Company has achieved other goals that reflect or indicate that value has been created for the shareholders. 2.3. Stock Option. Pursuant to the Company's 1994 Stock Option Plan, Employee shall receive a stock option ("Option") in the form prescribed by the Option Plan to purchase up to 10,000 shares of the Company's Common Stock made available for purchase under the Plan at an exercise price equal to $9.2125 per share (the "Option Shares"). The Option shall become exercisable at a rate of 1 2/3% per entire month beginning as of the date of this Agreement. The Option shall be an incentive stock option to the extent permitted under Section 422 of the Internal Revenue Code of 1986, as amended. 2.4. Employee Benefits. During Employee's employment, Employee shall be entitled to the full benefits for which Employee is eligible under the employee benefit plans and executive compensation programs maintained by the Company, including without limitation pension plans, savings or profit-sharing plans, deferred compensation plans, supplemental retirement or excess-benefit plans, health, accident, and other insurance programs, paid vacations and sabbaticals, and similar plans or programs, subject in each case to the generally applicable terms and conditions of the plan or program in question. 2.5. Vacation/Personal Time Off. Employee shall continue to accrue vacation/personal time off at the rate at which Employee accrued vacation/personal time off immediately before the date of this Agreement. 2.6. Business Expenses and Travel. During Employee's employment, Employee shall be authorized to incur necessary and reasonable travel, entertainment, and other business expenses in connection with Employee's duties. The Company shall reimburse Employee for such expenses upon presentation of an itemized account and appropriate supporting documentation, all in accordance with the Company's generally applicable policies. 2.7. Insurance. Provided that Employee is insurable at a reasonable cost, during Employee's employment, the Company shall provide for Employee, and pay all premiums for, (a) an insurance policy on Employee's life, with a death benefit of $200,000, and Employee shall be permitted to designate all beneficiaries for said policy; and (b) disability insurance with a monthly benefit to Employee in the maximum amount permissible under such policies. The Company shall permit Employee to assume such policies at Employee's expense following any termination of Employee's employment. 2.8. Return of Company Property. Upon the termination of employment, or whenever requested by Company, Employee shall immediately deliver to the Company all property in Employee's possession or under Employee's control belonging to the Company. EXHIBIT 10.45 - 2 - 3. TERM AND TERMINATION 3.1. Term of Employment. 3.1.1. Basic Rule. The Company shall continue Employee's employment, and Employee shall remain in the employ of the Company, until Employee's employment terminates pursuant to the provisions of this Agreement. 3.1.2. "At Will" Employment. Except as otherwise provided in this Agreement, Employee's employment with Company is "at will" and the Company may terminate Employee's employment at any time, for any reason or for no reason. Any oral or written statements to the contrary are not binding upon the Company. 3.2. Death or Disability. "Disability" means Employee's inability, at the time notice is given, to perform Employee's duties under this Agreement for a period of not less than six (6) consecutive months as the result of Employee's incapacity due to physical or mental illness. Upon termination of Employee's employment because of Employee's death or Disability, Employee shall receive payments as provided in the Company's benefit and insurance plans provided or required to be provided to Employee pursuant to this Agreement. 3.3. Voluntary Termination and Termination for Cause. 3.3.1. Voluntary Termination. "Voluntary Termination" means any termination of employment with the Company unless the termination (a) is for Cause (as defined below), (b) results from a Change in Control (as defined in subsection 3.5.1), (c) occurs within one year after a Change in Control, or (d) results from Employee's death or Disability, or (d) occurs within three (3) months after a Constructive Termination (as defined in subsection 3.4.1). 3.3.2. Cause. "Cause" means (a) an act or acts of dishonesty undertaken by Employee and intended to result in substantial gain or personal enrichment of Employee at the expense of the Company, or (b) willful, deliberate, and persistent failure by Employee to perform the duties and obligations of Employee's employment which are not remedied in a reasonable period of time after receipt of written notice from the Company. 3.3.3. Voluntary Termination. Employee may terminate Employee's employment voluntarily giving the Company thirty (30) days' advance notice in writing. No termination of employment occurring within three (3) months following a Constructive Termination shall be deemed a Voluntary Termination unless agreed to in a writing signed by the Employee which states the value of any rights under this Agreement surrendered by Employee and supported by separate consideration of at least $5,000. EXHIBIT 10.45 - 3 - 3.4. Constructive and Other Termination. 3.4.1. Constructive Termination. "Constructive Termination" means: (a) a reduction in Employee's salary or a material reduction in benefits not agreed to by Employee (except in connection with a decrease to be applied because the Company's performance has decreased and which is also applied on a comparable basis to other officers, and excluding the substitution of substantially equivalent compensation and benefits); (b) a change in Employee's position as set forth in Section 1.1 over Employee's objection, unless such change occurs within 3 months after the end of a fiscal year in which Employee has failed to meet the objectives established for Employee by the Compensation Committee pursuant to Section 2.2 for that year; or (c) a material change in Employee's responsibilities over Employee's objection, unless such change occurs within 3 months after the end of a fiscal year in which Employee has failed to meet the objectives established for Employee by the Compensation Committee pursuant to Section 2.2 for that year. 3.4.2. Other Termination. "Other Termination" means termination of employment with the Company for any reason other than (a) Cause, (b) Constructive Termination, (c) Employee's death or Disability, or (d) Voluntary Termination. 3.4.3. Severance Payment. Upon any Constructive Termination or Other Termination, the Company shall continue to pay to Employee Employee's Base Compensation for eighteen (18) months following the date Employee stops providing full-time services to the Company. Base Compensation shall be determined with reference to the Base Compensation in effect for the month in which Employee stops providing full-time services, and shall be paid in accordance with the Company's then-current policies for payroll, as though Employee were still employed by the Company. 3.4.4. Acceleration and Extension of Stock Option. Upon any Constructive Termination or Other Termination, the Option shall become immediately exercisable in full. To the extent that the Option is not exercised within the time following termination of employment specified in the written option agreement, the Option shall remain exercisable as though Employee's option had not terminated. In addition, in lieu of exercising the Option for the consideration specified in the option agreement, Employee may from time to time convert the Option, in whole or in part, into a number of shares determined by dividing (a) the aggregate fair market value of the shares otherwise issuable upon exercise of the Option minus the aggregate exercise price of such shares by (b) the fair market value of one share. Fair market value shall be deemed to be the closing price of the Company's common stock on the stock exchange on which the shares are traded as of the last trading day before Employee exercises the Option. EXHIBIT 10.45 - 4 - 3.4.5. Continuation of Benefits. Upon any Constructive Termination or Other Termination, Employee shall be entitled to receive the same employment benefits during the time Employee is receiving payments pursuant to subsection 3.4.3 as though Employee were still employed by the Company, except that Employee shall not accrue any vacation pay, personal time off, or compensation under any ERISA or ERISA-type plan after termination of employment. 3.4.6. Registration Rights. Upon any Constructive Termination or Other Termination, Employee shall have unlimited piggyback registration rights, two (2) demand registration rights, and unlimited S-3 registration rights, at the expense of the Company, in such form, on such terms, and subject to such conditions as are customarily granted to the most well-known venture capitalists in the portions of the San Francisco Bay Area known as "Silicon Valley" as of the date of termination. 3.4.7. Beverage Allowance. Upon any Constructive Termination or Other Termination, the Company shall provide to Employee, without further charge, one case of the Company's beverages per week, delivered within the continental United States, as Employee may request, for the remainder of Employee's life. Employee must renew the request annually. This right is personal and not transferable, and the request may not be made by a guardian, custodian, personal representative, attorney at law, attorney in fact, or other proxy on Employee's behalf, or in circumstances where Employee is incapable of consuming malt beverages personally. 3.5. Termination Resulting from Change of Control. 3.5.1. Change in Control. "Change in Control" means (a) any merger or consolidation of the Company with, or any sale of all or substantially all of the Company's assets to, any other corporation or entity, unless as a result of such merger, consolidation, or sale of assets the holders of the Company's voting securities prior thereto hold at least fifty percent (50%) of the total voting power represented by the voting securities of the surviving or successor corporation or entity after such transaction, or (b) the acquisition by any Person as Beneficial Owner (as such terms are defined in the Securities Exchange Act of 1934, as amended, or the rules and regulations thereunder, or in ss.280G of the Internal Revenue Code of 1986, as amended, and the regulations thereunder), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the total voting power represented by the Company's then outstanding voting securities, or (c) any sale of a substantial portion (as "substantial portion" is used and interpreted in ss.280G of the Internal Revenue Code of 1986, as amended, and the regulations thereunder) of the Company's assets to any other corporation or entity, or (d) the replacement of a majority of the members of the Company's Board of Directors during any twelve month period by directors whose appointment or election was not endorsed by a majority of the then authorized Board members before the date of said appointment or election. EXHIBIT 10.45 - 5 - 3.5.2. Additional Payment. If the Company terminates Employee's employment without Cause as a result of, or within one year after, a Change in Control, the Company shall pay Employee, in addition to any and all other compensation and benefits then due Employee, the sum of $250,000. The Company shall pay said termination compensation to Employee at the same time as Employee receives any other compensation then due Employee, or within three business days after Employee's employment terminates, whichever is earlier. 3.6. Benefit Rollover. Upon termination of Employee's employment with Company, Employee shall have the right to roll over or otherwise convert any amounts attributable to Employee in any of Company's deferred compensation, insurance, or other benefit plans to other such plans as may be allowed by such plans and applicable law. The Company shall have no obligation to inform Employee of any rights or responsibilities Employee may have in connection with converting, rolling over, or continuing benefits under, such plans, except as may be required under applicable law. 3.7. Compliance with Internal Revenue Code ss.280G. The Company may defer, and at the written request of Employee shall defer, the amount of any payment pursuant to this Agreement (a "Deferred Amount") which if and when paid will constitute an "excess parachute payment" (as defined in ss.280G of the Internal Revenue Code of 1986, as amended) subject to material adverse federal or state income tax consequences to the person initiating the deferral, after taking into account the known facts and circumstances at the time of the payment ("EPP"). The Company shall give Employee reasonable advance written notice of any planned deferral, but failure to give such notice shall not restrict the Company's ability to make the deferral. The Deferred Amount shall be payable, without interest, in one or more installments at such time or times that no portion of the installment will constitute EPP. The Company shall restructure the obligations of the Company under this Agreement in a manner requested in writing by Employee if no portion of the restructured payments will constitute EPP and the restructure does not materially increase any adverse effect the Company's obligations under this Agreement may have on the current or future net worth or net income (both determined in accordance with generally accepted accounting principles consistently applied) or cash flow of the Company. 4. MISCELLANEOUS 4.1. Further Matters. Each party agrees to perform such additional acts and execute such additional documents as are necessary or appropriate to carry out this Agreement. 4.2. Successors and Assigns. 4.2.1. Generally. This Agreement shall bind, and inure to the benefit of, the parties hereto and their respective successors and assigns. EXHIBIT 10.45 - 6 - 4.2.2. Company's Successors. Any successor to the Company (whether directly or indirectly and whether by purchase, lease, merger, consolidation, liquidation, or otherwise to all or substantially all of the Company's business and/or assets) shall assume this Agreement and agree expressly to perform this Agreement in the same manner and to the same extent as the Company would be required to perform it in the absence of a succession. For all purposes under this Agreement, the term "Company" shall include without limitation any successor to the Company's business and/or assets which executes and delivers an assumption agreement or which becomes bound by this Agreement by operation of law. 4.2.3. Employee's Successors. This Agreement and all rights of Employee hereunder shall inure to the benefit of, and be enforceable by, Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. 4.2.4. No Assignment of Benefits. The rights of any person to payments or benefits under this Agreement shall not be made subject to option or assignment, either by voluntary or involuntary assignment or by operation of law, including without limitation bankruptcy, garnishment, attachment, or other creditor's process, and any action in violation of this subsection 4.2.4 shall be voidable at the option of the Company. 4.3. No Third-Party Beneficiaries. Except as expressly provided in this Agreement, nothing in this Agreement shall (a) confer any rights or remedies on any persons other than the parties and their respective successors and assigns, (b) relieve or discharge the obligation of any third person to any party, or (c) give any third person any right of subrogation or action against any party. 4.4. Notice. Any notice, instruction, or communication required or permitted to be given under this Agreement to any party shall be in writing (which may include telecopier or other similar form of reproduction followed by a mailed hard copy, but not electronic mail) and shall be deemed given when actually received or, if earlier, five days after deposit in the United States Mail by certified or express mail, return receipt requested, postage prepaid, addressed to the principal office of such party or to such other address as such party may request by written notice. Each party shall make an ordinary, good faith effort to ensure that the person to be given notice actually receives such notice. Each party shall ensure that the other parties to this Agreement have a current address, fax number, and telephone number for the purpose of giving notice. 4.5. Governing Law. The rights and obligations of the parties shall be governed by, and this Agreement shall be construed and enforced in accordance with, the laws of the State of California, excluding its conflict of laws rules to the extent such rules would apply the law of another jurisdiction. EXHIBIT 10.45 - 7 - 4.6. Jurisdiction and Venue. The parties hereto consent to the jurisdiction of all federal and state courts in California, and agree that venue shall lie exclusively in Mendocino County, California. 4.7. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the employment of Employee and the covenants contained in this Agreement, and there have been, and there are now, no agreements, representations, or warranties among the parties other than those set forth herein or herein provided for. Employee agrees that the remedies specified in this Agreement shall be liquidated damages for any claim by Employee that the Company has wrongfully terminated Employee's employment with the Company. In addition, Employee hereby waives any right Employee may have to seek involuntary dissolution of the Company pursuant to California Corporations Code ss.1800, and shall not join with any other shareholders of the Company to seek such relief. 4.8. Amendments, Waivers, and Consents. This Agreement shall not be changed or modified, in whole or in part, except by supplemental agreement signed by the parties or as otherwise provided in this Agreement. Either party may waive compliance by any other party with any of the covenants or conditions of this Agreement, but except as provided in this Agreement, no waiver shall be binding unless executed in writing by the party making the waiver. No waiver of any provision of this Agreement shall be deemed, or shall constitute, a waiver of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. Any consent under this Agreement shall be in writing and shall be effective only to the extent specifically set forth in such writing. For the protection of all parties, amendments, waivers, and consents that are not in writing and executed by the party to be bound may be enforced only if they are detrimentally relied upon and proved by clear and convincing evidence. Such evidence may not include the alleged reliance. 4.9. Specific Performance. The parties hereby declare that it is impossible to measure in money the damages that will result from a failure to perform any of the obligations under this Agreement. Therefore, each party hereto shall be entitled as a matter of right to injunctive and other relief to enforce the provisions of this Agreement. Each party hereto waives the claim or defense that an adequate remedy at law exists in any action or proceeding brought to enforce the provisions. 4.10. Dispute Resolution. 4.10.1. Notice. A party who desires money damages or equitable relief from the other party because of a claim relating to the subject matter of this Agreement shall give written notice to the other party of the facts constituting the breach or default (a "Dispute Notice"). This Section 4.10 is intended to cover all aspects of the relationship between the parties with respect to the subject matter of this Agreement, including any claims based on tort or other theories. Any additional claims the parties have against each other shall also be subject to this Section 4.10. EXHIBIT 10.45 - 8 - 4.10.2. Negotiation. For fifteen (15) days following delivery of a Dispute Notice (the "Negotiation Period") the parties shall negotiate to resolve the dispute in good faith. 4.10.3. Mediation. After the end of the Negotiation Period, either party may request non-binding mediation with the assistance of a neutral mediator from a recognized mediation service. The party requesting the mediation shall arrange for the mediation services, subject to the approval of the other party which the other party shall not withhold unreasonably. Mediation shall take place in Mendocino County, California. Mediation may be scheduled to begin any time after expiration of the Negotiation Period, but with at least 10 days notice to all parties. The parties shall participate in the mediation in good faith and shall devote reasonable time and energy to the mediation so as to promptly resolve the dispute or conclude that they cannot resolve the dispute. The party's shall share the cost of mediation except as provided elsewhere in this Agreement. 4.10.4. Arbitration. If thirty (30) days after beginning mediation the parties have not resolved the dispute, either party may submit the dispute to final and binding arbitration pursuant to the commercial rules of the American Arbitration Association. The arbitrator(s) shall apply the substantive law of the State of California to the dispute, and shall have the power to interpret such law to the extent it is unclear. At the request of any party, the arbitrators, attorneys, parties to the arbitration, witnesses, experts, court reporters, or other persons present at the arbitration shall agree in writing to maintain the strict confidentiality of the arbitration proceedings. At the election of any party, arbitration shall be conducted by three neutral arbitrators appointed in accordance with the commercial rules of the American Arbitration Association if (a) the amount in controversy is greater than $50,000 (exclusive of interest and attorney's fees), or (b) a party sought to be enjoined disputes that he or it has engaged in, or asserts that he or it should be able to engage in, the actions sought to be enjoined. In all other cases, the matter shall be arbitrated by a single neutral arbitrator. The parties surrender and waive the right to submit any dispute to a court or jury, or to appeal to a higher court. There shall be no arbitration of any claim that would otherwise be barred by a statute of limitations if the claim were to be brought in a court of law. The arbitrator shall not have the power to award punitive, consequential, indirect, or special damages. The arbitrators shall have the power to determine what disputes between the parties are the proper subject of arbitration. 4.10.5. Costs and Attorney's Fees. If the arbitrator determines that the actions of a party or its counsel have unreasonably or unnecessarily delayed the resolution of the matter, the arbitrator may in its discretion require such party to pay all or part of cost of the mediation and arbitration proceedings payable by the other party and may require such party to pay all or part of the attorney's fees of the other party. This provision permits an award of attorney's fees against a party regardless of which party is the prevailing party. Otherwise, the parties shall share bear the costs of arbitration equally. EXHIBIT 10.45 - 9 - 4.10.6. Enforcement. The award of the arbitrator shall be enforceable according to the applicable provisions of the California Code of Civil Procedure, sections 1280 et seq. A party who fails to participate in a negotiation, mediation, or arbitration instituted under this Section 4.10, or who admits to liability and the amount of damage, shall be deemed to have defaulted. Such default may be entered and enforced the same manner as a default in a civil lawsuit. 4.11. Headings. The subject headings of the Articles, Sections, and subsections of this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. 4.12. Counterparts. This Agreement may be executed in two or more counterparts by signing and delivering the signature page hereto. Each such counterpart shall be an original and together with the other counterparts shall be deemed one document. 4.13. Role of Company Counsel. Employee acknowledges that Enterprise Law Group, Inc., counsel to the Company, has not represented Employee in connection with any aspect of this Agreement, and has not undertaken to perform any services on behalf of Employee. Employee has obtained any desired legal advice from separate counsel of his own choosing or has freely chosen not to do so. IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written. "COMPANY" "EMPLOYEE" Mendocino Brewing Company, Inc., a California corporation By /s/ Michael Laybourn /s/ John Scahill -------------------------------- ------------------------ Michael Laybourn, President John Scahill EXHIBIT 10.45 - 10 - EX-24.1 21 EXHIBIT 24.1 EXHIBIT 24.1 TO REGISTRATION STATEMENT ON FORM SB-2 --------------------------------------- CONSENT OF MOSS ADAMS LLP [LETTERHEAD OF MOSS ADAMS LLP] CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the use of our report dated January 26, 1996, on our audit of the financial statements of Mendocino Brewing Company, Inc., included in the registration statement on Form SB-2 in connection with the offering of common stock of Mendocino Brewing Company, Inc. We also consent to the reference to our Firm under the caption "Experts". /s/ MOSS ADAMS LLP Santa Rosa, California October 30, 1996 EXHIBIT 24.1 EX-99.1 22 EXHIBIT 99.1 EXHIBIT 99.1 TO REGISTRATION STATEMENT ON FORM SB-2 FORM OF STOCK PURCHASE AGREEMENT MENDOCINO BREWING COMPANY, INC. Stock Purchase Agreement To: Mendocino Brewing Company, Inc. P.O. Box 400 Hopland, CA 95449-0400 1-800-733-3871 Please issue the number of shares of Mendocino Brewing Company, Inc. Common Stock shown below in the name(s) shown below. The signature below acknowledges receipt and opportunity to read the Prospectus by which the shares are offered. Signature:___________________________________________ Date:____________________ Enclosed is a check for ___________________ shares, at $8.50 per share, totaling (100 share minimum) $_______________ ($850.00 minimum) MAKE CHECK PAYABLE TO: Mendocino Brewing Company, Inc. Register the shares in the following name(s) and amount: Name_______________________________________ Number of shares _________ Name_______________________________________ I/we will hold the shares as (circle one): Individual Community Property Joint Tenants Trust Tenants in Common Corporation Other _____________________ For the person(s) who will be the registered stockholder(s), please provide: Mailing Address:________________________________________________________________ City, State & Zip Code:_________________________________________________________ Telephone Numbers: Work: (____)_______________ Home (____)________________ Social Security or Taxpayer ID number(s):_______________________________________ (Please attach any special mailing instructions if the share certificates are to be sent to other than to the address shown above.) NO OFFER TO PURCHASE IS ACCEPTED UNTIL SIGNED BY THE COMPANY'S REPRESENTATIVE (You will be mailed a signed and numbered copy of this agreement to retain for your records) Offer to purchase accepted by Mendocino Brewing Company, Inc. by its undersigned sales representative: _______________________________________ Dated:_______________________________ Michael Lovett, Secretary Exhibit 99.1 -----END PRIVACY-ENHANCED MESSAGE-----