-----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, M7CAaaz2QDWSCwYlnBGbFIUNEBy5zE7GS7z9UPvid8zBgDDhtGy8FBvyB/g28x+8 HLHNwveM3tjcA0nuoVC9rg== 0000950005-97-000943.txt : 19971117 0000950005-97-000943.hdr.sgml : 19971117 ACCESSION NUMBER: 0000950005-97-000943 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: 10QSB SEC ACT: SEC FILE NUMBER: 001-13636 FILM NUMBER: 97721640 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 10QSB 1 FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------------- ----------------------- Commission file number: 1-13636 Mendocino Brewing Company, Inc. (Name of small business issuer in its charter) California 68-0318293 (State or other jurisdiction of (I.R.S. Employee Identification No.) incorporation or organization) 13351 South Highway 101, Hopland, CA 95449 (Address of principal executive offices) (Zip code) Issuer's telephone number: (707) 744-1015 Securities registered under Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, no par value The Pacific Stock Exchange Securities registered under Section 12(g) of the Act: Not applicable (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ The number of shares of the issuer's common stock outstanding as of September 30, 1997 is 2,341,548. (Does not include 300,000 shares issued subject to substantial restrictions as security for a forbearance. See Item 2 - Management's Discussion and Analysis -- Financing the New Brewery - Vendor Financing.) PART I Item 1. Financial Statements. MENDOCINO BREWING COMPANY, INC. BALANCE SHEET September 30,1997 (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 152,432 Accounts receivable 505,834 Inventories 429,320 Prepaid expenses and taxes 67,050 Refundable income taxes 116,500 Deferred income taxes 23,100 ---------- Total Current Assets: 1,294,236 ---------- Property and Equipment 11,128,642 ---------- Other Assets Deferred private placement costs 496,806 Deposits and other assets 100 Deferred income taxes 139,700 ---------- Total Other Assets: 636,606 ---------- Total Assets: $ 13,059,484 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Line of credit $ 600,000 Accounts payable 773,972 Accrued wages and related expense 148,690 Accrued construction costs 820,454 Accrued liabilities 436,075 Refundable deposit 964,000 Notes payable 3,563,057 Current maturities of obligation under capital lease 164,460 ---------- Total Current Liabilities: 7,470,708 Obligation under capital lease, less current maturities 1,622,592 Deferred income taxes 18,100 ---------- Total Liabilities: 9,111,400 Stockholders' Equity Common stock, no par value; 20,000,000 shares authorized; 2,341,548 shares issued and outstanding 3,869,569 Preferred stock, 2,000,000 shares authorized, 227,600 of which are designated Series A, no par value, with aggregate liquidation preference of $227,600; 227,600 Series A shares issued and outstanding 227,600 Accumulated deficit (149,085) ---------- Total Stockholders' Equity 3,948,084 ---------- Total Liabilities and Stockholders' Equity: $ 13,059,484 ========== The accompanying notes are an integral part of these financial statements -1- MENDOCINO BREWING COMPANY, INC. STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Sales $ 1,467,724 $ 1,111,044 $ 3,792,203 $ 3,022,417 Less excise taxes 79,269 47,050 198,683 118,033 ----------- ----------- ----------- ----------- Net sales 1,388,455 1,063,994 3,593,520 2,904,384 ----------- ----------- ----------- ----------- Cost of goods sold 899,746 543,545 2,240,583 1,413,995 ----------- ----------- ----------- ----------- Gross profit 488,709 520,449 1,352,937 1,490,389 ----------- ----------- ----------- ----------- Operating expenses Retail operations 196,616 191,255 531,204 563,540 Marketing and distribution 184,171 200,846 615,035 493,666 General and administrative 216,848 151,175 605,995 490,791 ----------- ----------- ----------- ----------- 597,635 543,276 1,752,234 1,547,997 ----------- ----------- ----------- ----------- Income (loss) from operations (108,926) (22,827) (399,297) (57,608) ----------- ----------- ----------- ----------- Other income (expense) Interest income 1,298 210 4,404 11,029 Interest expense (44,018) - (73,639) - Write off of deferred offering costs - - (141,006) - Other income (expense) 7,141 (907) 12,782 (48,269) ----------- ----------- ----------- ----------- (35,579) (697) (197,459) (37,240) ----------- ----------- ----------- ----------- Loss before income taxes (144,505) (23,524) (596,756) (94,848) ----------- ----------- ----------- ----------- Benefit from income taxes (131,000) (3,086) (244,600) (23,786) ----------- ----------- ----------- ----------- Net loss $ (13,505) $ (20,438) $ (352,156) $ (71,062) =========== =========== =========== =========== Loss per share $(0.01) $ (0.01) $(0.15) $(0.03) =========== =========== =========== =========== Weighted average common shares outstanding 2,341,548 2,322,222 2,335,106 2,322,222 =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements.
-2- MENDOCINO BREWING COMPANY, INC. STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended Nine Months Ended
September 30, September 30, ---------------------------- ---------------------------- 1997 1996 1997 1996 ----------- ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (13,505) $ (20,438) $ (352,156) $ (71,062) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization 126,913 12,182 237,569 35,190 Loss on sale of assets - 346 - 346 Gain on sale of assets - (3,915) - (3,915) Deferred income taxes (111,600) 4,000 (135,200) (17,500) Changes in: Accounts receivable (23,155) 237,477 (123,622) 145,973 Inventories (126,268) 20,059 (48,819) (187,219) Prepaid expenses and taxes 618 (15,918) (8,510) (41,910) Refundable income tax (19,400) - (109,400) - Accounts payable (97,815) (4,846) 206,415 257,456 Accrued wages and related expense 11,191 1,746 30,422 (22,620) Accrued profit sharing - (30,000) - (30,000) Accrued liabilities 384,178 (11,673) 419,972 (3) Income taxes payable - - - (34,200) ----------- ----------- ----------- ----------- Net cash provided by operating activities: 131,157 189,020 116,671 30,536 ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (264,667) (1,212,905) (1,925,872) (4,226,070) Deposits and other assets 40 (12,203) 13,965 2,362 Proceeds from sale of fixed assets - 3,569 - 3,569 ----------- ----------- ----------- ----------- Net cash used by investing activities: (264,627) (1,221,539) (1,911,907) (4,220,139) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from short-term borrowing (1,300) (56,900) 797,693 298,416 Principal payments on long-term debt - (31,328) - (31,327) Proceeds from obligation under capital lease - 750,000 - 750,000 Payments on obligation under capital lease (38,700) - (89,890) - Refundable deposit 464,000 - 964,000 - Accrued construction costs 25,896 641,339 75,985 1,822,157 Proceeds from sale of common stock - - 164,271 - Deferred stock offering costs - (49,615) 37,687 (103,549) Deferred private placement costs (415,020) - (496,806) - ----------- ----------- ----------- ----------- Net cash provided by financing activities: 34,876 1,253,496 1,452,940 2,735,697 ----------- ----------- ----------- ----------- INCREASE (DECREASE) IN CASH (98,594) 220,977 (342,296) (1,453,906) ----------- ----------- ----------- ----------- CASH, BEGINNING OF PERIOD 251,026 21,226 494,728 1,696,109 ----------- ----------- ----------- ----------- CASH, END OF PERIOD $ 152,432 $ 242,203 $ 152,432 $ 242,203 =========== =========== =========== =========== Supplemental Cash Flow Information Includes the Following: Cash Paid During the Period for: Interest $ 154,441 $ 28,284 $ 402,284 $ 77,202 Income taxes $ - $ - $ - $ 52,500 =========== =========== =========== =========== Non-cash investing and financing activities for the nine month period ending September 30,1997, consisted of acquiring fixed assets of $19,573 through a capital lease. The accompanying notes are an integral part of these financial statements.
-3- MENDOCINO BREWING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) 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 Subsequent Event On October 24, 1997, the Company entered into an investment agreement with United Breweries of America, Inc., a Delaware corporation ("UBA"), whereby (a) the Company issued 1,600,000 shares of common stock to UBA at a purchase price of $4.25 per share in exchange for $1,800,000 cash and $5,000,000 in assets in the form of 100% of the outstanding interests of Releta Brewing Company LLC, a limited liability company formed by UBA for the purpose of acquiring a brewery in Saratoga Springs, New York; and (b) UBA unconditionally agreed to purchase an additional 517,647 shares for cash at $4.25 per share ($2,200,000 in the aggregate) on or before November 30, 1997. The brewery is approximately one year old and was built for a total investment of $8.7 million. Commencement of brewing operations at the Saratoga Springs brewery is contingent upon obtaining appropriate alcoholic beverage licenses, applications for which are in process. UBA also agreed to provide funding for the working capital requirements of Releta in an amount not to exceed $1 million until October 24, 1999 or until Releta's operations are profitable, whichever comes first. Professional expenses and investment banker fees associated with the transaction (private placement costs) were approximately $500,000, resulting in net proceeds of approximately $3.5 million. Note 3 Short-Term Borrowing The Company has a $600,000 term line of credit from a bank with variable interest at the bank's index rate plus 1.5%, maturing November 30, 1997. The note is secured by receivables and inventory. The bank has issued a commitment letter to convert the loan to a revolving line of credit upon full funding of the investment agreement with UBA. Note 4 Notes Payable Note payable (construction loan) to bank of $2,404,313, with interest at the bank's index rate plus 2%; secured by substantially all of the Company's assets; note matures January 1, 1998. The bank has issued a commitment letter to convert the loan to long-term debt upon full funding of the investment agreement with UBA. Note payable to contractor of $900,000, with interest at 12%; due the later of January 31, 1997 or 30 days after completion of the brewery; secured by common stock and a second deed of trust on the brewery and subordinated to bank debt. - 4 - MENDOCINO BREWING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) Note payable to certain individuals of $260,044, due in monthly payments of $2,380, including interest at 9%; matured June 1997 with a verbal extension until October 1997, and a balloon payment; secured by real property and subordinated to bank debt. Note 5 Renegotiation of Obligation under Capital Lease In June 1997 the Company renegotiated its capital lease to retroactively reduce the amount of the lease commitment from approximately $2.1 million to $1.8 million. The excess of lease payments previously paid over the recalculated lease payments has been credited against future payments. Note 6 Direct Public Offering On November 6, 1996, the Company filed a registration statement with the Securities and Exchange Commission to sell 600,000 shares of its no par value common stock at a proposed offering price of $8.50 per share. In August 1997, the offering was terminated after having sold 19,326 shares for $164,271. All stock transactions occurred prior to June 30, 1997. As of June 30, 1997, the Company had incurred $305,277 of offering costs related to this offering. Of that amount, $164,271 was offset against the stock sale proceeds in Stockholders' Equity and the balance of $141,006 was expensed in the quarter ended June 30, 1997. - 5 - Item 2. Management's Discussion and Analysis. The following discussion and analysis should be read in conjunction with the Financial Statements and the Notes thereto included as Item 1 in this Report. The discussion of results and trends does not necessarily imply that these results and trends will continue. Forward-Looking Information The Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-QSB contain forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking information involves risks and uncertainties that are based on current expectations, estimates, and projections about the Company's business, management's beliefs, and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar expressions are intended to identify such forward-looking information. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking information due to numerous factors, including, but not limited to, availability of financing for operations, successful performance of internal operations, impact of competition, changes in distributor relationships or performance, full funding of the investment agreement with United Breweries of America, Inc., and other risks detailed below as well as those discussed elsewhere in this Form 10-QSB and from time to time in the Company's Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic economic conditions. Overview The third quarter of 1997 was highlighted by the commencement of bottling operations at the new brewery in Ukiah. Brewing commenced in mid-second quarter. The Ukiah brewery has given the Company the ability to offer its brews in draft form to distributors and retail accounts for the first time. The third quarter also saw the introduction of Black Hawk Stout(R) in 12 oz. six packs with a new, award-winning label, for the first time. The Company now offers three brands in 12 oz. six packs. In October 1997 the Company concluded a definitive investment agreement with United Breweries of America, Inc. which provided for a $4 million cash investment in the Company and the contribution to the Company of a new brewery in Saratoga Springs, New York. See "Liquidity and Capital Resources -- Investment by United Breweries of America, Inc." Commencement of brewing operations at the Saratoga Springs brewery is contingent upon obtaining appropriate alcoholic beverage licenses, applications for which are in process. Increased net sales for the nine-month period (up 23.7% over the same period in 1996) were achieved in significant part through increased marketing efforts which were begun mid-second quarter in 1996. The limit on the Company's brewing capacity (which was relieved by commencement of operations in Ukiah), increased marketing expenses associated with increased productive capacity, increased fixed cost associated with the new facility, and a one-time $141,000 write off of public offering expenses contributed to a $352,200 loss for the nine month period. During October 1997, the new brewery was operating at a rate of approximately 48,000 bbl. per year, more than double the maximum capacity of the old Hopland facility. The bottling line from the Hopland facility was moved in mid July 1997. The Company relocated seven of its eleven smaller fermenting tanks from its Hopland facility to Ukiah for production of the - 6 - Company's seasonal ales, which are brewed in smaller quantities than Red Tail Ale(R) and Blue Heron(R) Pale Ale. This will permit the Company to further expand production to a possible 60,000 bbl. per year rate, as required by demand, while still producing its seasonal ales. Results of Operations Nine Months Ending September 30, 1997 Compared to Nine Months Ending September 30, 1996. The following discussion sets forth information for the nine-month periods ending September 30, 1996 and 1997. This information has been derived from unaudited interim financial statements of the Company contained elsewhere herein and reflects, in Management's opinion, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for these periods. Results of operations for any interim period are not necessarily indicative of results to be expected for the full fiscal year. The following table sets forth, as a percentage of net sales, certain items included in the Company's Statements of Operations. See Financial Statements elsewhere in this Report, for the periods indicated:
Nine Months Ended September 30, ----------------------------------------------- 1997 1996 ------------ ------------ Statements of Income Data: Sales........................................... 105.53% 104.06% Excise taxes.................................... 5.53 4.06 ------ ------ Net sales....................................... 100.00 100.00 Costs of sales.................................. 62.35 48.68 ------ ------ Gross profit.................................... 37.65 51.32 ------ ------ Retail operating expense........................ 14.78 19.40 Marketing and distribution expense.............. 17.12 17.00 General and administrative expense.............. 16.86 16.90 ------ ------ Total operating expenses........................ 48.76 53.30 ------ ------ Loss from operations............................ (11.11) (1.98) Other expense................................... (5.49) (1.28) ------ ------ Loss before income taxes........................ (16.61) (3.27) Benefit from income taxes....................... (6.81) (0.82) ------ ------ Net loss........................................ (9.80)% (2.45)% ====== ======
- 7 -
At September 30, ----------------------------------------------- 1997 1996 ------------- -------------- Balance Sheet Data: Cash and cash equivalents....................... $ 152,400 $ 242,200 Working capital (deficit)....................... (6,176,500) (3,240,300) Property and equipment.......................... 11,128,600 8,151,000 Deposits and other assets....................... 100 158,000 Total assets.................................... 13,059,500 9,452,800 Long-term debt.................................. 1,622,600 718,700 Total liabilities............................... 9,111,400 5,099,700 Shareholder's equity............................ 3,948,100 4,353,100
Net Sales. Net sales for the first nine months of 1997 were $3,593,520 compared to $2,904,384 for the first nine months of 1996, and increase of 23.7%. Management attributes the growth in sales to the implementation of new marketing strategies, including new point of sale materials and additional field sales representatives, and the commencement of operations at the new Ukiah facility, beginning in the second quarter of 1996. Wholesale beer shipments increased by 65.9% in the first nine months of 1997 compared to the same period in 1996. Increases attributable to additional unit sales were offset by a wholesale price reduction implemented in September 1996. Management attributes approximately 60% of the sales increase to increased sales to existing distributors and geographic expansion begun in the second half of 1996 and the remaining 40% to sales of draft beer from the new brewery, which began for the first time in May 1997. Retail sales at the Hopland Brewery brewpub and merchandise store were up 5.1% for the first nine months of 1997 compared to 1996. Management attributes the increase to merchandise sales resulting from tourist traffic generated by the Company's marketing efforts. Cost of goods sold. Cost of goods sold as a percentage of net sales increased 13.7 percentage points from the first nine months of 1996 to 62.4% in the same period in 1997. Management attributes the increase to higher fixed costs associated with the new Ukiah brewing facility. Gross profit. Gross profit decreased 9.2% from the first nine months of 1996 to $1,353,000 in the same period in 1997. As a percentage of net sales, gross profit decreased 13.7 percentage points from the first nine months of 1996 to 37.7% in the same period in 1997. The decrease in gross profit as percentage of net sales is attributable to the increase in cost of goods sold and a wholesale price reduction implemented in September 1996. Operating expenses. Operating expenses were $1,752,200, representing an increase of 13.2% from the first nine months of 1996. Operating expenses consist of retail operating expense, marketing and distribution, and general and administrative expense. Retail operating expenses were $531,200, representing a decrease of $32,300, or 5.7%, from the first nine months of 1996. The decrease reflects a decrease in supply and repairs costs of $15,000, a decrease in labor costs of $11,300, and a decrease in net other expenses of $6,000. Marketing and distribution expenses were $615,000, representing an increase of $121,400, or 24.6%, from the first nine months of 1996. As a percentage of net sales, marketing and distribution expenses were essentially unchanged. Promotional/advertising costs (including point of sales and packaging/label development costs) increased by $90,400, marketing and sales labor increased by $58,200, travel and lodging expenses (incurred in supporting new geographic markets) increased by $26,900, the reserve for bad debts decreased by $31,100, the Company established a $30,000 reserve in connection with a dispute with a distributor, net other distribution expenses decreased by $66,000, and net miscellaneous expenses increased by $13,000. - 8 - General and administrative expense was $606,000, representing an increase of $115,200, or 23.5%, from the first nine months of 1996. As a percentage of net sales, general and administrative expense was essentially unchanged. Taxes and insurance costs associated with the new Ukiah brewery increased by $68,400, professional fees increased by $24,700, costs associated with being a public company increased by $11,700, and net miscellaneous expenses increased by $10,400. Other income (expense). Other expense was $197,500, representing an increase of $160,200 in expense in the first nine months 1997 compared to the same period for 1996. This was primarily as a result of writing off $141,000 in costs of the direct public offering (net of proceeds raised) and additional net interest expense of $73,600, offset by the non-recurrence of a $38,300 write off of costs associated with a proposed alliance in 1996 and $16,100 in net additional miscellaneous income. Net loss. Increased fixed cost as the Company began production at the new brewery in mid-quarter, increased marketing and distribution expense as the Company continued to implement the marketing program began mid-quarter a year ago, and the net effect of certain one time occurrences, offset by a tax benefit of $244,600, produced a net loss in the nine months ended September 30, 1997 which was $281,100 higher than in the comparable 1996 nine month period. Segment Information Mendocino Brewing's business presently consists of two segments. The first is brewing for wholesale to distributors and other retailers. This segment accounted for 78.9% of the Company's first nine months 1997 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 21.1% of the Company's sales for the first nine months of 1997. Mendocino Brewing began producing draft beer at its new brewery in Ukiah in May 1997. The initial annual capacity of the new brewery is 60,000 bbl. The bottling line from the Hopland facility was moved to Ukiah in mid July 1997 and seven of the eleven 70 - 120 bbl. fermenting tanks were moved to Ukiah in mid August. 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. Seasonality Beer consumption nationwide has historically increased by approximately 20% during the summer months. It is not clear to what extent seasonality will affect the Company as it expands its capacity and its geographic markets. Financing the New Brewery. New Brewery Cost. Although the Company has commenced brewing operations at the Ukiah facility, construction is not yet completed. The Company has yet - 9 - to complete the build-out of its administrative space and the exterior landscaping. The presently estimated cost of the new brewery at its initial annual capacity of 60,000 bbl. is $12.2 million. This includes $0.8 million for the land, $7.3 million for improvements to the real estate, $3.4 million for equipment, and $0.7 million for financing costs. Of this amount, approximately $10.9 million has been paid or provided for from cash raised in the Company's initial direct public offering, the proceeds of debt described below, cash provided by the investment agreement with United Breweries of America, Inc., and cash from operations. Of the remaining balance of approximately $1.3 million, approximately $0.3 million is expected to be funded through the investment agreement with United Breweries of America, Inc. See "Investment by United Breweries of America, Inc." below. The $1 million balance will be funded from operations or other sources or will be deferred. The Ukiah brewery is presently operating under a temporary certificate of occupancy from the City of Ukiah. Completion of construction is a condition to the issuance of a final certificate of occupancy. Failure to complete construction and obtain a final certificate of occupancy could have a material adverse effect on the Company's business, financial condition, and results of operations. Construction Financing. Mendocino Brewing has obtained a $2.7 million construction loan secured by a first priority deed of trust on the Ukiah land and improvements. The loan is fully funded. The construction loan bears interest at the lender's prime plus 2% (initially 10.25%), payable monthly, and matures on January 1, 1998. In October 1997 the bank issued a new written commitment to convert the construction loan to a 15 year term loan upon full funding of the investment agreement with UBA. The commitment provides that upon conversion, the loan will bear interest at 1.5% over prime. The minimum annual interest rate is to be 7.5%. The loan is to be amortized over 25 years with a balloon payment upon maturity in 15 years. 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 and conditions to be agreed upon at that time. [The commitment letter does not legally obligate the bank to convert the construction loan to permanent financing. Failure to find a lender to refinance the construction loan could have a material adverse impact on the Company's business, financial condition, and results of operations.] Equipment Lease. FINOVA Capital Corporation has leased new brewing equipment with a total cost of approximately $1.78 million to Mendocino Brewing for a term of 7 years with monthly rental payments of approximately $27,100 each. 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% nor 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 $39,000 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. Seller Financing of Ukiah Real Estate. 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 September 30, 1997 of approximately $258,700 at 9% annual interest payable in monthly installments of principal and interest of $2,380 with the balance due at maturity in October 1997 per a verbal agreement with the spokesman for the lending group. The Company expects to repay the loan with the proceeds of the investment agreement with UBA. WestAmerica Loan. WestAmerica Bank of Santa Rosa, California has loaned Mendocino Brewing $600,000 secured by Mendocino Brewing's accounts receivable and inventory. The loan is fully funded and bears interest at the bank's index rate plus 1.5% payable monthly and matures on November 30, 1997. In October 1997, WestAmerica Bank provided the Company with commitment letter to convert the $600,000 term loan to a revolving line of credit with an advance - 10 - rate of 80% of qualified accounts receivable and 25% of inventory upon full funding of the investment agreement with United Breweries of America, Inc. The commitment letter does not legally obligate the bank to convert the loan. To the extent that the loan is not extended or refinanced, the Company will be required to repay the loan. Failure to find a lender to refinance the loan could have a material adverse effect on the Company's business, financial condition, and results of operations. Vendor Financing. The general contractor for the new brewery, BDM Construction Co., Inc. ("BDM"), 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. As of November 12, 1997, approximately $0.9 million was due to BDM. No written modifications have been made to the deferral arrangement to address the current circumstances. 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 the 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. BDM has the right to require the Company to register the shares issued for its account for sale to the public. As of November 11, 1997, BDM has not taken any action to enforce the Company's obligations to it. The Company presently anticipates that payment of its obligation to BDM will be funded with the proceeds of the investment agreement with United Breweries of America, Inc. See "Investment by United Breweries of America, Inc." below. Failure to repay BDM could have a material adverse effect on the Company's business, financial condition, and results of operations. Keg Management Arrangement. The Company has entered into a keg management agreement with MicroStar Keg Management LLC. Under this arrangement, MicroStar provides the Company with half-barrel kegs for which the Company pays a filling fee. Distributors return the kegs to MicroStar instead of the Company. MicroStar then supplies the Company with additional kegs. If the agreement terminates, the Company is required to purchase a certain number of kegs from MicroStar. The Company would probably finance the purchase through debt or lease financing, if available. 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. Saratoga Springs Brewery. The acquisition of the additional brewery in Saratoga Springs, New York will place additional demands on the - 11 - Company's assets, liabilities, commitments for capital expenditures, and liquidity. UBA has agreed to provide funding for the working capital requirements of the Saratoga Springs brewery in an amount not to exceed $1 million until October 24, 1999 or until the brewery's operations are profitable, whichever comes first. Commencement of brewing operations at the Saratoga Springs brewery is contingent upon obtaining appropriate alcholic beverage licenses, applications for which are in process. The Company's ratio of current assets to current liabilities on September 30, 1997 was 0.17 to 1.0 and its ratio of assets to liabilities was 1.43 to 1.0. New Brewery. See "-- Financing the New Brewery" above. 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 pay the cost of additional sales and marketing activities and staff, production personnel, and administrative staff and to fund increased purchases of supplies. There will be a lag between the time the Company must incur some or all of these costs and the time the Company realizes revenue from increased sales. Working capital for day to day business operations had historically been provided primarily through operations. Beginning approximately with the second quarter of 1997, proceeds from operations have not been able to provide sufficient working capital for day to day operations as the Company expands. The investment agreement with UBA is expected to provide approximately $700,000 in working capital. In addition, UBA has agreed to provide funding for the working capital requirements of the Saratoga Springs brewery in an amount not to exceed $1 million until October 24, 1999 or until the brewery's operations are profitable, whichever comes first. Investment by United Breweries of America, Inc. On October 24, 1997, the Company entered into an investment agreement with United Breweries of America, Inc., a Delaware corporation ("UBA"), whereby (a) the Company issued 1,600,000 shares of common stock to UBA at a purchase price of $4.25 per share in exchange for $1,800,000 cash and $5,000,000 in assets in the form of 100% of the outstanding interests of Releta Brewing Company LLC, a limited liability company formed by UBA for the purpose of acquiring the brewery in Saratoga Springs, New York; and (b) UBA unconditionally agreed to purchase an additional 517,647 shares for cash at $4.25 per share ($2,200,000 in the aggregate) on or before November 30, 1997. The brewery is approximately one year old and was built with a total investment of $8.7 million. Professional expenses and investment banker fees associated with the transaction were approximately $500,000, resulting in net proceeds of approximately $3.5 million. UBA also agreed to provide funding for the working capital requirements of Releta in an amount not to exceed $1 million until October 24, 1999 or until Releta's operations are profitable, whichever comes first. PART II Item 6. Exhibits and Reports on Form 8-K. Exhibit Number Description of Document - ------- ------------------------------- 3.1 (A) Articles of Incorporation, as amended, of the Company 3.2 (B) Bylaws of the Company 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.) - 12 - Exhibit Number Description of Document - ------- ------------------------------- 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.) 10.1 (A) Mendocino Brewing Company Profit Sharing Plan. 10.2 (A) 1994 Stock Option Plan (previously filed as Exhibit 99.6). 10.3 Employment Agreement with H. Michael Laybourn. 10.4 Employment Agreement with Norman Franks 10.5 (A) Wholesale Distribution Agreement between the Company and Bay Area Distributing. 10.6 (A) Wholesale Distribution Agreement between the Company and Golden Gate Distributing. 10.7 (A) Sales Contract between the Company and John I. Hass, Inc. 10.8 (F) Liquid Sediment Removal Services Agreement with Cold Creek Compost, Inc. 10.9 (A) Lease Agreement between the Company and Kohn Properties. 10.10 (C) Commercial Real Estate Purchase Contract and Receipt for Deposit (previously filed as Exhibit 19.2). 10.11 (D) Installment Note between Ukiah Redevelopment Agency and Langley et al. (previously filed as Exhibit 19.5). 10.12 (F) Promissory Note for $76,230 in favor of Langley et al. 10.13 (G) Agreement to modify note and deed of trust dated June 6, 1995 with Langley, et al. 10.14 (G) Agreement to modify note dated June 6, 1995 with Langley, et al. 10.15 (G) Amendment to installment note payable to Langley, et al. 10.16 Commercial Lease Between Stewart's Ice Cream Company, Inc. and Releta Brewing Company LLC. 10.17 Agreement between United Breweries of America, Inc. and Releta Brewing Company LLC regarding payment of certain liens. 10.18 (F) Standard Form of Agreement Between Owner and Architect for Designated Services between the Company and Victor Lopes. 10.19 (G) Construction agreement with BDM Construction Company, Inc. 10.20 (J) Letter Agreement Concerning Use of Proceeds with BDM Construction Co., Inc. 10.21 (J) $900,000 Note in favor of BDM Construction Co., Inc. 10.22 (G) Consulting Agreement with Daniel R. Moldenhauer. 10.23 (C) Brewery Fixtures Construction Agreement with Enerfab, Inc. (previously filed as Exhibit 19.3). 10.24 (K)+ Keg Management Agreement with MicroStar Keg Management LLC. 10.25 (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). 10.26 (G) Manufacturing Business Expansion and Relocation Agreement with the City of Ukiah. 10.27 (G) Manufacturing Business Expansion and Relocation Agreement with the Ukiah Redevelopment Agency. - 13 - 10.28 (H) Business Loan Agreement with WestAmerica Bank. 10.29 (J) Letter Agreement Concerning Use of Proceeds with WestAmerica Bank. 10.30 Commitment Letter/extention agreement from WestAmerica Bank dated October 21, 1997. 10.31 (J) Construction Loan Agreement with the Savings Bank of Mendocino County. 10.32 (J) Business Loan Agreement with the Savings Bank of Mendocino County. 10.33 (J) $2,700,000 Note in favor of the Savings Bank of Mendocino County. 10.34 (J) Assignment of Deposit Account in favor of the Savings Bank of Mendocino County. 10.35 Change in Terms Agreement with the Savings Bank of Mendocino County dated November 5, 1997. 10.36 (J) Commitment Letter from the Savings Bank of Mendocino County dated September 13, 1996. 10.37 Commitment Letter from the Savings Bank of Mendocino County dated October 15, 1997. 10.38 Letter Agreement with the Savings Bank of Mendocino County dated October 23, 1997. 10.39 (J) Equipment Lease with FINOVA Capital Corporation. 10.40 (J) Tri-Election Rider to Equipment Lease with FINOVA Capital Corporation. 10.41 (J) Master Lease Schedule with FINOVA Capital Corporation. 10.42 (J) Advance and Subordination Agreement among the Company, FINOVA Capital Corporation, and Enerfab, Inc. 10.43 (L) Investment Agreement with United Breweries of America, Inc. 10.44 (L) Shareholders' Agreement Among the Company, United Breweries of America, Inc., Michael Laybourn, Norman Franks, Michael Lovett, John Scahill, and Don Barkley 10.45 (L) Registration Rights Agreement Among the Company, United Breweries of America, Inc., Michael Laybourn, Norman Franks, Michael Lovett, John Scahill, and Don Barkley 27 Financial Data Schedule - -------------------------------------- (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. - 14 - (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. (J) Incorporated by reference from the Company's Registration Statement dated February 6, 1997, as amended, previously filed with the Commission, Registration No. 333-15673. (K) Incorporated by referenced from the Company's Report on Form 10-KSB for the annual period ended December 31, 1996 previously filed with the Commission. (L) Incorporated by reference from the Schedule 13D filed with the Commission on November 3, 1997 by United Breweries of America, Inc. and Vijay Mallya. + Portions of this Exhibit were omitted pursuant to an application for an order declaring confidential treatment filed with the Securities and Exchange Commission. No reports on Form 8-K were filed during the quarter for which this report is filed. SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized. Mendocino Brewing Company, Inc. (Registrant) Date November 13, 1997 /s/ H. Michael Laybourn ---------------------------- ----------------------------------------- H. Michael Laybourn, President Date November 13, 1997 /s/ Norman H. Franks ---------------------------- ----------------------------------------- Norman H. Franks, Chief Financial Officer - 15 - EX-10.3 2 EXECUTIVE EMPLOYMENT AGREEMENT EXECUTIVE EMPLOYMENT AGREEMENT EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") made as of this 24th day of October, 1997, between Mendocino Brewing Company, Inc., a California corporation, having its principal place of business at 13351 South Highway 101, Hopland, California ("Company"), and H. Michael Laybourn ("Executive"). W I T N E S S E T H: WHEREAS, Executive possesses a detailed knowledge of the business and affairs of Company, its policies, methods, personnel and customers; and WHEREAS, Company recognizes Executive's importance to the growth and success of Company and desires to assure Executive's continued contribution and to compensate him in a manner which it has determined will reinforce and encourage his continued attention and dedication; and WHEREAS, Executive is desirous of committing himself to serve Company on the terms herein provided; NOW, THEREFORE, in consideration of the foregoing, and of the respective covenants and agreements of the parties herein contained, the parties hereto hereby agree as follows: 1. Employment. (a) Company hereby employs Executive to serve as President of Company, for the period commencing on the date of this Agreement and ending fourteen (14) months from the date of this Agreement, unless such employment is sooner terminated as provided in this Agreement. Company, in its discretion, may extend the term of this Agreement until as late as December 31, 1999 on the same terms and conditions. In the event Executive continues in the full-time employment of Company after the end of such term, such continued employment shall be on a month-to-month basis terminable at any time, with or without cause, by Executive or Company upon 30 days' notice. (b) Executive hereby accepts employment under this Agreement and agrees to devote all his best efforts and his full time and attention exclusively to the business and affairs of Company, all pursuant to the general direction of the Board of Directors of Company (the "Board") and the Chairman of the Board and Chief Executive Officer (the "Chairman and CEO"). During the term of this Agreement, Executive shall perform such duties and responsibilities as may be assigned to him by the Chairman and CEO. Executive shall report directly to the Chairman and CEO. Company shall retain full direction and control of the manner, means and methods by which Executive performs the services for which he is employed hereunder and of the place or places at which such services shall be rendered. Notwithstanding the foregoing, Executive's principal office shall be in the Hopland/Ukiah, California area. (c) Executive shall observe and comply with Company's rules and regulations as provided in any employee policy manual of the Company. (d) Executive acknowledges that this Agreement supersedes any previous employment agreements he may have had with the Company and such previous agreements are deemed terminated as of the date of this Agreement. 2. Compensation. (e) Base Salary. Executive shall be paid, for his employment hereunder, a base salary at the annual rate of One Hundred Twenty Thousand Dollars ($120,000) during the term of this Agreement, payable in accordance with the Company's standard payroll practices as in effect from time to time, prorated in any partial year of employment. Executive shall be eligible for a salary increase after the first year of the term of this Agreement, such increase, if any, to be determined by the Company in its sole discretion. (f) No Obligation to Use Services. Even though the Company is obligated to pay Executive the compensation specified in Section 2(a), the Company shall not be obligated to use the Executive's services during the term of this Agreement, and shall not be liable to the Executive in any way for failure to do so in whole or in part. So long as the Company continues to pay Executive the compensation set forth in Section 2(a) and provide the benefits set forth in Section 2(g), Executive shall remain subject to the noncompetition requirements of Section 5. If, at any point during the remaining term of this Agreement, Executive breaches the noncompetition requirements of Section 5(a), Company may immediately terminate making such payments and providing such benefits with no further obligation to Executive. (g) Reimbursements. Executive shall be entitled to reimbursement for reasonable travel and other business expenses incurred in the performance of his duties under this Agreement in accordance with the general policy of Company, as it may change from time to time, provided that Executive provides an itemized account together with supporting receipts for such expenditures in accordance with the requirements set forth in the Internal Revenue Code of 1986, as amended, and related regulations, subject to the right of Company at any time to place reasonable limitations on such expenses thereafter to be incurred or reimbursed. (h) Withholding. Company shall be entitled to withhold from any compensation paid or payable hereunder such amounts on account of payroll taxes, income taxes and other similar matters as are required to be withheld by applicable law. (i) Insurance. Company may, at its discretion, secure at its own expense a "key-man" life insurance policy upon the life of Executive, payable to Company in the event of Executive's death. Executive agrees that any such insurance policy shall be for Company's benefit only, and acknowledges that no person claiming by or through Executive shall have any right to the proceeds of such insurance policy. Executive agrees to execute all documents and 2 take all acts reasonably requested by Company to secure and enjoy the benefits of such insurance policy. The Company shall not terminate any policy of life, disability, health or other insurance on Executive (other than group insurance) without first offering to transfer such policy to Executive; provided, however, that the Company shall have no further obligations under such policy. (j) Vacation. Executive shall be entitled to a number of paid vacation days in each calendar year in accordance with Company policy as in effect from time to time. Such paid time off shall be taken at times which do not interfere with the normal operation of Company's business. (k) Benefit Plans. Subject to any limitations imposed by applicable law, Executive shall be eligible to participate in all Company employee benefit programs, including without limitation, medical and dental coverage, life insurance, profit sharing, retirement, pension and tax-qualified plans, in substantially the same manner and to substantially the same extent as other Company employees. Nothing in this agreement shall preclude Company or any affiliate of Company from terminating or amending any employee benefit plan or program at any time or from time to time. (l) Bonuses. Executive shall be entitled to periodic bonuses in amounts and on such terms as the Company may from time to time determine in its sole discretion. (m) Registration Rights. Executive shall be entitled to registration rights in accordance with the terms of the Registration Rights Agreement dated as of the date hereof regardless of any termination of Executive's employment. Executive hereby waives any registration rights the Company may previously have granted him. (n) Benefits Retained by Company. All rights, assets, opportunities, and other benefits accruing as a result of Executive's performance hereunder shall be deemed the property of Company, including without limitation, accounts, leads, reciprocal actions promised by third parties, and gratuities from vendors, prospective vendors, business associates, and prospective business associates. 3. Executive's Business Activities. (o) Executive shall devote his entire professional time, attention and energy exclusively to the performance of his duties and responsibilities for Company and its affiliates. Executive shall not, directly or indirectly, (i) substantially be engaged in or concerned with any other commercial duties or pursuits, (ii) render services to any third party for compensation or other benefit, or (iii) engage in any other business activity; provided, however, that nothing in this Agreement restricts Executive from continuing his existing involvement with trade and community organizations, becoming involved with similar trade and community organizations, or assuming greater leadership responsibilities within such organizations so long as such activities do not materially interfere with the performance of Executive's duties hereunder. (p) Executive agrees that during the term of his employment under this 3 Agreement, he will engage in no business or other activities, directly or indirectly, which are or may be competitive with or which might place him in a competing position to that of Company without obtaining the prior written consent of Company. Nothing in this Agreement restricts Executive from engaging in reasonable consumer education (such as teaching the art of brewing) and trade association or professional activities, provided such activities do not materially interfere with the performance of Executive's duties hereunder. The Company shall be entitled to any honoraria, stipend or other income Executive may receive from such activities provided that the Company pays all of Executive's reasonable expenses in connection with such activities. 4. Termination of Employment by Company (q) For Cause. Notwithstanding anything herein to the contrary, Company may terminate this Agreement and Executive's employment hereunder at any time, with or without notice, for cause. Termination of this Agreement and Executive's employment hereunder shall be deemed to be "for cause" in the event that Executive (i) violates any provision of this Agreement, (ii) demonstrates bad faith with intent to harm or indifference toward potential harm to the Company, willful misconduct or negligence in the performance of his obligations hereunder, (iii) violates any laws or regulations, including, without limitation, any rules or regulations of the Bureau of Alcohol, Tobacco and Firearms or any state or local beverage control authority or agency other than immaterial violations which are not likely to adversely affect the Company, (iv) engages in actions constituting misconduct, dishonesty or neglect in the performance of his duties and responsibilities, a refusal to follow directions from the Board or the Chairman, or a dereliction of his duties or responsibilities hereunder, or (v) engages in conduct that, when viewed objectively, is likely to materially adversely affect Company's reputation, including, without limitation, dishonesty, illegal use of drugs or abuse of drugs or alcohol. Upon said termination, Company shall be under no obligation to Executive, except to pay his accrued and unpaid base salary and benefits through the date of termination and vacation pay to the date of said termination. (r) Without Cause. Notwithstanding anything herein to the contrary, Company may terminate this Agreement and Executive's employment hereunder at any time, with or without notice, without cause. Upon any such termination without cause, Executive shall be paid the remaining amount owed under this Agreement on the ordinary payroll schedule to ensure compliance with the requirements of Section 5(a). If, at any point during the remaining term of this Agreement, Executive breaches the non-competition requirements of Section 5(a), among its other remedies Company may immediately terminate making such payments with no further obligation to Executive. (s) Alternative Termination Benefit. If the Company terminates Executive's employment at any time after eight (8) months from the date of this Agreement without following the Grievance Process (as defined below) or, if the Executive has taken the Specific Actions (as defined below) but still has been terminated and not for cause (as defined in Section 4(a) above), then Company shall pay Executive a severance benefit equal to up to six (6) months of Executive's base salary. The amount of such payment shall be reduced by any payments for services Executive receives from other employers during such six-month period. In addition, no such benefit will be payable for any months with respect to which Executive is paid pursuant to 4 Section 4(b) above. For example, if Executive's employment was terminated without following the Grievance Process and without cause ten (10) months after the date of this Agreement, Executive would receive payments pursuant to Section 4(b) for the four months remaining under the term of this Agreement and after the term of this Agreement has expired, unless the Covenant Period is extended as provided in Section 5(b), Executive would be entitled to two (2) months of base salary as provided in this subsection (c). For purposes of this subsection (c), the "Grievance Process" shall mean the Company (i) advises Executive in writing of the nature of the Company's dissatisfaction with Executive's performance and the consequences thereof, (ii) meets with the Executive to discuss such matters, (iii) prepares a written summary of the meeting with specific actions Executive is to take to remedy the Company's dissatisfaction (the "Specific Actions"), and (iv) terminates Executive's employment or takes other disciplinary action if Executive fails to take the Specific Actions within the time specified and to the Company's satisfaction. Nothing in this subsection (c) relating to the Grievance Process or the Specific Actions shall in any way limit the ability of the Company to terminate Executive's employment hereunder, with or without notice, without cause as set forth in Section 4(b) above. 5. Non-Competition. (t) Requirements. During the Covenant Period, as defined below, Executive shall not: (i) For material compensation, directly or indirectly engage in the Craft Brewing Business, as defined below, or any part thereof, in the Covenant Area, as defined below, whether as a director, officer, employee, consultant, adviser, independent contractor or otherwise; or (ii) Hold a legal or beneficial interest in any person other than Company which is engaged in the Craft Brewing Business or any part thereof in the Covenant Area, whether such interest is as an owner, investor, partner, creditor (other than as a trade creditor in the ordinary course of business), joint venturer or otherwise; provided, however, that nothing in the foregoing shall prevent the Employee from owning not more than five percent of the outstanding capital stock or other equity interests in any person with shares or other equity interests registered pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended; or (iii) Solicit, divert or attempt to divert from Company, any subsidiary, partner or parent of Company or any person deriving title to the goodwill of any of the foregoing (an "Affiliate") any business in the Covenant Area, or any customer in the Covenant Area, of any part of the Craft Brewing Business then conducted by Company or any Affiliate. (u) Definitions. For purposes of this Agreement, "Covenant Period" shall mean the term of Executive's employment hereunder; provided, however, that this Covenant Period will be extended to December 31, 1999 if either (i) the Company at its election extends this Agreement and pays Executive his base salary through such date, or (ii) Executive during the term hereof sells a majority of his Company shares. For purposes of this Agreement, "Covenant Area" shall mean the California counties listed on Schedule 5(b) hereto, together with any other 5 county or portion of California or any other state or country in which Company, its predecessors and subsidiaries have done business in the past three (3) years. For purposes of this Agreement, "Craft Brewing Business" shall mean the development, brewing, marketing or distribution of premium quality specialty beers, ciders or other brewed alcoholic beverages. Categories of Craft Brewing include, but are not limited to: contract brews, regional craft brews, microbrews, large brewer craft-style brews, and brewpub brews. 6. Termination of Employment by Executive. After six months from the date hereof, Executive may terminate Executive's employment hereunder, with or without notice. Upon any such termination, Executive shall be paid the remaining amount owed under this Agreement on the ordinary payroll schedule to ensure compliance with the requirements of Section 5(a). If, at any point during the remaining term of this Agreement, Executive breaches the noncompetition requirements of Section 5(a), among its other remedies Company may immediately terminate making such payments with no further obligation to Executive. 7. Beer Allowance. Upon Executive's termination other than for cause, Executive will be entitled to a post-termination beer allowance of one case per week for five years from the date of termination. 8. Disability. In the event Executive shall become unable to perform his duties in substantially the manner, and to the extent required hereunder, due to physical or mental illness or disability, from any cause, and such failure to perform said duties shall continue for the period of time required for Executive to be entitled to benefits for total disability available under any long term disability plan that the Company provides to its employees and all applicable federal and state disability benefit programs, then Company may give Executive notice of termination of this Agreement. The termination of this Agreement will become effective upon receipt by Executive of the notice of termination. Executive's salary payable hereunder shall be paid up through the date on which the termination of this Agreement pursuant to this Section 8 becomes effective. 9. Death of Executive. In the event of the death of Executive during the period of his employment hereunder, Executive's salary payable hereunder shall be paid up through the end of the month in which the date of death occurs, and thereafter Company's obligations hereunder shall cease and this Agreement shall terminate. 10. Assignment and Transfer. (v) Executive's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, and any purported assignment, transfer, or delegation thereof shall be void. (w) This Agreement shall inure to the benefit of, and be enforceable by, any purchaser of substantially all of Company's assets, any corporate successor to Company or any assignee thereof. 11. Obligations Surviving Expiration or Termination. Executive's obligations under 6 Section 5, Section 13, Section 14, Section 15 and Section 16(k) of this Agreement shall survive expiration or termination of this Agreement and termination of employment hereunder for any reason to the extent therein provided. All such obligations shall be binding upon Executive's heirs and personal representatives and shall inure to the benefit of Company's successors and assigns. 12. No Inconsistent Obligations. Executive represents and warrants that there exist no obligations, legal or otherwise, inconsistent with the terms of this Agreement or with his undertaking employment with Company. Executive will not disclose to Company, or use, or induce Company to use, any proprietary information or trade secrets of others. 13. Obligations of or to Other Entities. Executive represents and warrants that there exist no obligations or liabilities of or claims against, and that Executive has no obligation of any kind to, any corporation, partnership or other business entity, of which Executive is or was a principal shareholder, partner or principal owner, other than those that have been disclosed in writing to Company. 14. Non-Solicitation. For a period of one year from and after the termination of his employment hereunder for any reason, Executive shall not, without the prior written consent of Company, directly or indirectly employ, solicit for employment, or advise or recommend to any other person that such other person employ or solicit for employment, any full-time employee of the Company or any of its affiliates during the period of such employment. Neither shall Executive, during the same period, induce or attempt to induce any officer, consultant, full-time or part-time employee, agent or independent contractor to leave the employ of the Company or any of its affiliates or to cease to provide the services then provided to Company or any of its affiliates. Additionally, Executive shall not employ any full-time employee of the Company or any of its affiliates until at least three months after such employee's voluntary, or involuntary but without cause, termination from Company or any of its affiliates. 15. Existence of Confidential Information. The Company owns and has developed and compiled, and will develop and compile, certain proprietary techniques and confidential information which have great value to its business (referred to in this Agreement collectively as "Confidential Information"). Confidential Information includes not only information disclosed by the Company to Executive, but also information developed or learned by Executive as a direct result of his engagement by the Company under this Agreement. Confidential Information is to be broadly defined, and includes all information which is in fact confidential that has or could have commercial value or other utility in the business in which the Company is engaged or contemplates engaging, and all information of which the unauthorized disclosure could be detrimental to the interests of the Company, whether or not such information is identified as Confidential Information by the Company. By example and without limitation, Confidential Information includes any and all confidential information concerning trade secrets, techniques, processes, formulas, marketing plans, business plans, strategies, forecasts, unpublished financial information, budgets, projections, customer and supplier identities, characteristics, and agreements. Executive shall keep the Company's Confidential Information confidential. 7 16. Miscellaneous. (x) Attorneys' Fees. Should either party hereto, or any heir, personal representative, successor or assign of either party hereto, resort to litigation or arbitration to enforce this Agreement, the party or parties prevailing in such litigation shall be entitled, in addition to such other relief as may be granted, to recover its or their reasonable attorneys fees and costs in such litigation from the party or parties against whom enforcement was sought. (y) Governing Law. This Agreement shall be governed by and construed according to the laws of the State of California without regard to the principles thereof regarding conflict of laws. (z) Entire Agreement. This Agreement contains the entire agreement and understanding between the parties hereto and supersedes any prior or contemporaneous written or oral agreements between them respecting the subject matter hereof. (aa) Amendment. This Agreement may be amended only by a writing signed by Executive and by Company's Chairman. (bb) Severability. If any term, provision, covenant, or condition of this Agreement, or the application thereof to any person, place or circumstance, shall be held to be invalid, unenforceable, or void, the remainder of this Agreement and such term, provision, covenant, or condition as applied to other persons, places and circumstances shall remain in full force and effect. (cc) Construction. The headings and captions of this Agreement are provided for convenience only and are intended to have no effect in construing or interpreting this Agreement. The language in all parts of this Agreement shall be in all cases construed according to its fair meaning and not strictly for or against Company or Executive. (dd) Rights Cumulative. The rights and remedies provided by this Agreement are cumulative, and the exercise of any right or remedy by either party hereto (or by its successor), whether pursuant to this Agreement, to any other agreement, or to law, shall not preclude or waive its right to exercise any or all other rights and remedies. (ee) Nonwaiver. No failure or neglect of either party hereto to any instance to exercise any right, power or privilege hereunder or under law shall constitute a waiver of any other right, power or privilege or of the same right, power or privilege in any other instance. All waivers by either party hereto must be contained in a written instrument signed by the party to be charged and, in the case of Company, by Company's Chairman. (ff) Remedy for Breach. The parties hereto agree that, in the event of breach or threatened breach of any covenants of Executive, the damage or imminent damage to the value and the goodwill of Company's business are not capable of quantification, and that therefore any remedy at law or in damages shall be inadequate. Accordingly, the parties hereto agree that Company shall be entitled to injunctive relief against Executive in the event of any breach or 8 threatened breach of any of such provisions by Executive, in addition to any other relief available to Company under this Agreement or under law. (gg) Notices. Any notice, request, consent or approval required or permitted to be given under this Agreement or pursuant to law shall be sufficient if in writing, and if and when delivered personally, by facsimile or sent by certified mail, with postage prepaid, to Executive's residence (as noted in Company's records), or to Company's principal executive office, as the case may be. (hh) Assistance in Litigation. Executive shall, during and after termination of employment, upon reasonable notice, furnish such information and proper assistance to Company as may reasonably be required by Company in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party. (ii) Arbitration. Any controversy, claim or dispute arising out of or relating to this Agreement or to Executive's employment with the Company, including claims for discrimination, unpaid wages, claims based on common law or statute, either during the existence of the employment relationship or afterwards, between the parties hereto, their assignees, their affiliates, their attorneys, or agents, shall be settled by arbitration. Arbitration shall be conducted in accordance with the then prevailing labor arbitration rules of the American Arbitration Association (the "AAA"), with the following exceptions if in conflict: (a) one neutral arbitrator shall be selected in accordance with the AAA rules; (b) each party to the arbitration will pay 50% of the expenses and fees of the arbitrators; and (c) arbitration may proceed in the absence of any party if written notice (pursuant to the American Arbitration Association's rules and regulations) of the proceedings has been given to such party. The location of the arbitration shall be in San Francisco, California. The parties agree to abide by all decisions and awards rendered in such proceedings. Such decisions and awards rendered by the arbitrator shall be final and conclusive and may be entered in any court having jurisdiction thereof as a basis of judgment and of the issuance of execution for its collection. All such controversies, claims or disputes shall be settled in this manner in lieu of any action at law or equity; provided however, that nothing in this subsection shall be construed as precluding the Company or Executive from bringing an action for injunctive relief or other equitable relief. The parties shall keep confidential the existence of the claim, controversy or disputes from third parties (other than arbitrator), and the determination thereof, unless otherwise required by law. (jj) Action by the Company. Whenever this Agreement refers to a decision or action to be taken by the Company, such action shall be taken on behalf of the Company by the Board of Directors, or by a duly authorized person. (kk) Role of Enterprise Law Group. Executive acknowledges that Enterprise Law Group, Inc., counsel to the Company, has not represented Executive in connection with any aspect of this Agreement, and has not undertaken to perform any services on behalf of Executive. Executive has obtained any desire to legal advice from separate counsel of Executive's own choosing or has freely chosen not to do so. 9 [REST OF PAGE INTENTIONALLY LEFT BLANK] 10 IN WITNESS WHEREOF, the undersigned have executed this Agreement on the date set forth above. EXECUTIVE /s/ H. Michael Laybourn - ------------------------------- H. Michael Laybourn MENDOCINO BREWING COMPANY, INC. By: /s/ Norman Franks - ------------------------------- Name: Norman Franks Title: Chief Financial Officer and Vice President 11 SCHEDULE 5(b) Alameda Marin San Mateo Alpine Mariposa Santa Barbara Amador Mendocino Santa Clara Butte Merced Santa Cruz Calaveras Modoc Shasta Colusa Mono Sierra Contra Costa Monterey Siskiyou Del Norte Napa Solano El Dorado Nevada Sonoma Fresno Orange Stanislaus Glenn Placer Sutter Humboldt Plumas Tehama Imperial Riverside Trinity Inyo Sacramento Tulare Kern San Benito Tuolumne Kings San Bernardino Ventura Lake San Diego Yolo Lassen San Francisco Yuba Los Angeles San Joaquin Madera San Luis Obispo 12 EX-10.4 3 EXECUTIVE EMPLOYMENT AGREEMENT WITH NORMAN FRANKS EXECUTIVE EMPLOYMENT AGREEMENT EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") made as of this 24th day of October, 1997, between Mendocino Brewing Company, Inc., a California corporation, having its principal place of business at 13351 South Highway 101, Hopland, California ("Company"), and Norman Franks ("Executive"). W I T N E S S E T H: WHEREAS, Executive possesses a detailed knowledge of the business and affairs of Company, its policies, methods, personnel and customers; and WHEREAS, Company recognizes Executive's importance to the growth and success of Company and desires to assure Executive's continued contribution and to compensate him in a manner which it has determined will reinforce and encourage his continued attention and dedication; and WHEREAS, Executive is desirous of committing himself to serve Company on the terms herein provided; NOW, THEREFORE, in consideration of the foregoing, and of the respective covenants and agreements of the parties herein contained, the parties hereto hereby agree as follows: 1. Employment. ---------- (a) Company hereby employs Executive for the period commencing on the date of this Agreement and ending fourteen (14) months from the date of this Agreement, unless such employment is sooner terminated as provided in this Agreement. In the event Executive continues in the full-time employment of Company after the end of such term, such continued employment shall be on a month-to-month basis terminable at any time, with or without cause, by Executive or Company upon 30 days' notice. (b) Executive hereby accepts employment under this Agreement and agrees to devote all his best efforts and his full time and attention exclusively to the business and affairs of Company. During the term of this Agreement, Executive shall report to, and shall perform such duties and responsibilities as may be assigned to him by, the Chief Executive Officer or such other person as the Chief Executive Officer or Chairman may designate. Company shall retain full direction and control of the manner, means and methods by which Executive performs the services for which he is employed hereunder and of the place or places at which such services shall be rendered. Notwithstanding the foregoing, Executive's principal office shall be in the Hopland/Ukiah, California area. (c) Executive shall observe and comply with Company's rules and regulations as provided in any employee policy manual of the Company. (d) Executive acknowledges that this Agreement supersedes any previous employment agreements he may have had with the Company and such previous employment agreements are deemed terminated as of the date of this Agreement. 2. Compensation. (e) Base Salary. Executive shall be paid, for his employment hereunder, a base salary at the annual rate of Seventy-Nine Thousand and Eight Dollars ($79,008) during the term of this Agreement, payable in accordance with the Company's standard payroll practices as in effect from time to time, prorated in any partial year of employment. Executive shall be eligible for a salary increase after the first year of the term of this Agreement, such increase, if any, to be determined by the Company in its sole discretion. (f) No Obligation to Use Services. Even though the Company is obligated to pay Executive the compensation specified in Section 2(a), the Company shall not be obligated to use the Executive's services during the term of this Agreement, and shall not be liable to the Executive in any way for failure to do so in whole or in part. (g) Reimbursements. Executive shall be entitled to reimbursement for reasonable travel and other business expenses incurred in the performance of his duties under this Agreement in accordance with the general policy of Company, as it may change from time to time, provided that Executive provides an itemized account together with supporting receipts for such expenditures in accordance with the requirements set forth in the Internal Revenue Code of 1986, as amended, and related regulations, subject to the right of Company at any time to place reasonable limitations on such expenses thereafter to be incurred or reimbursed. (h) Withholding. Company shall be entitled to withhold from any compensation paid or payable hereunder such amounts on account of payroll taxes, income taxes and other similar matters as are required to be withheld by applicable law. (i) Insurance. Company may, at its discretion, secure at its own expense a "key-man" life insurance policy upon the life of Executive, payable to Company in the event of Executive's death. Executive agrees that any such insurance policy shall be for Company's benefit only, and acknowledges that no person claiming by or through Executive shall have any right to the proceeds of such insurance policy. Executive agrees to execute all documents and take all acts reasonably requested by Company to secure and enjoy the benefits of such insurance policy. The Company shall not terminate any policy of life, disability, health or other insurance on Executive (other than group insurance) without first offering to transfer such policy to Executive; provided, however, that the Company shall have no further obligations under such policy. (j) Vacation. Executive shall be entitled to a number of paid vacation days in each calendar year in accordance with Company policy as in effect from time to time. Such paid 2 time off shall be taken at times which do not interfere with the normal operation of Company's business. (k) Benefit Plans. Subject to any limitations imposed by applicable law, Executive shall be eligible to participate in all Company employee benefit programs, including without limitation, medical and dental coverage, life insurance, profit sharing, retirement, pension and tax-qualified plans, in substantially the same manner and to substantially the same extent as other Company employees. Nothing in this agreement shall preclude Company or any affiliate of Company from terminating or amending any employee benefit plan or program at any time or from time to time. (l) Bonuses. Executive shall be entitled to periodic bonuses in amounts and on such terms as the Company may from time to time determine in its sole discretion. (m) Registration Rights. Executive shall be entitled to registration rights in accordance with the terms of the Registration Rights Agreement dated as of the date hereof regardless of any termination of Executive's employment. Executive hereby waives any registration rights the Company may previously have granted to him. (n) Benefits Retained by Company. All rights, assets, opportunities, and other benefits accruing as a result of Executive's performance hereunder shall be deemed the property of Company, including without limitation, accounts, leads, reciprocal actions promised by third parties, and gratuities from vendors, prospective vendors, business associates, and prospective business associates. 3. Executive's Business Activities. (o) Executive shall devote his entire professional time, attention and energy exclusively to the performance of his duties and responsibilities for Company and its affiliates. Executive shall not, directly or indirectly, (i) substantially be engaged in or concerned with any other commercial duties or pursuits, (ii) render services to any third party for compensation or other benefit, or (iii) engage in any other business activity; provided, however, that nothing in this Agreement restricts Executive from continuing his existing involvement with trade and community organizations, becoming involved with similar trade and community organizations, or assuming greater leadership responsibilities within such organizations so long as such activities do not materially interfere with the performance of Executive's duties hereunder. (p) Executive agrees that during the term of his employment under this Agreement, he will engage in no business or other activities, directly or indirectly, which are or may be competitive with or which might place him in a competing position to that of Company without obtaining the prior written consent of Company. Nothing in this Agreement restricts Executive from engaging in reasonable consumer education (such as teaching the art of brewing) and trade association or professional activities, provided such activities do not materially interfere with the performance of Executive's duties hereunder. The Company shall be entitled to any honoraria, stipend or other income Executive may receive from such activities provided that the Company pays all of Executive's reasonable expenses in connection with such activities. 3 4. Termination of Employment by Company. (q) For Cause. Notwithstanding anything herein to the contrary, Company may terminate this Agreement and Executive's employment hereunder at any time, with or without notice, for cause. Termination of this Agreement and Executive's employment hereunder shall be deemed to be "for cause" in the event that Executive (i) violates any provision of this Agreement, (ii) demonstrates bad faith with intent to harm or indifference toward potential harm to the Company, willful misconduct or negligence in the performance of his obligations hereunder, (iii) violates any laws or regulations, including, without limitation, any rules or regulations of the Bureau of Alcohol, Tobacco and Firearms or any state or local beverage control authority or agency other than immaterial violations which are not likely to adversely affect the Company, (iv) engages in actions constituting misconduct, dishonesty or neglect in the performance of his duties and responsibilities, a refusal to follow directions from the Board or the Chairman, or a dereliction of his duties or responsibilities hereunder, or (v) engages in conduct that, when viewed objectively, is likely to materially adversely affect Company's reputation, including, without limitation, dishonesty, illegal use of drugs or abuse of drugs or alcohol. Upon said termination, Company shall be under no obligation to Executive, except to pay his accrued and unpaid base salary and benefits through the date of termination and vacation pay to the date of said termination. (r) Without Cause. Company may terminate this Agreement and Executive's employment hereunder at any time, with or without notice, without cause. Upon any such termination without cause, Executive shall be paid the remaining amount owed under this Agreement in one lump sum at an 8% discount. (s) Alternative Termination Benefit. If the Company terminates Executive's employment at any time after eight (8) months from the date of this Agreement without following the Grievance Process (as defined below) or, if the Executive has taken the Specific Actions (as defined below) but still has been terminated and not for cause (as defined in Section 4(a) above), then Company shall pay Executive a severance benefit equal to up to six (6) months of Executive's base salary. The amount of such payment shall be reduced by any payments for services Executive receives from other employers during such six-month period. In addition, no such benefit will be payable for any months with respect to which Executive is paid pursuant to Section 4(b) above. For example, if Executive's employment was terminated without following the Grievance Process and without cause ten (10) months after the date of this Agreement, Executive would receive a lump sum payment pursuant to Section 4(b) for the four months remaining under the term of this Agreement and after the term of this Agreement has expired, Executive would be entitled to two (2) months of base salary as provided in this subsection (c). For purposes of this subsection (c), the "Grievance Process" shall mean the Company (i) advises Executive in writing of the nature of the Company's dissatisfaction with Executive's performance and the consequences thereof, (ii) meets with the Executive to discuss such matters, (iii) prepares a written summary of the meeting with specific actions Executive is to take to remedy the Company's dissatisfaction (the "Specific Actions"), and (iv) terminates Executive's employment or takes other disciplinary action if Executive fails to take the Specific Actions within the time specified and to the Company's satisfaction. Nothing in this subsection (c) relating to the Grievance Process or the Specific Actions shall in any way limit the ability of the 4 Company to terminate Executive's employment hereunder, with or without notice, without cause as set forth in Section 4(b) above. 5. Termination of Employment by Executive. After three months from the date hereof, Executive may terminate this Agreement and Executive's employment hereunder, with or without notice. Upon any such termination, Executive shall be paid the remaining amount owed under this Agreement in one lump sum at an 8% discount. 6. Beer Allowance. Upon Executive's termination other than for cause, Executive will be entitled to a post-termination beer allowance of one case per week for five years from the date of termination. 7. Disability. In the event Executive shall become unable to perform his duties in substantially the manner, and to the extent required hereunder, due to physical or mental illness or disability, from any cause, and such failure to perform said duties shall continue for the period of time required for Executive to be entitled to benefits for total disability available under any long term disability plan that the Company provides to its employees and all applicable federal and state disability benefit programs, then Company may give Executive notice of termination of this Agreement. The termination of this Agreement will become effective upon receipt by Executive of the notice of termination. Executive's salary payable hereunder shall be paid up through the date on which the termination of this Agreement pursuant to this Section 7 becomes effective. 8. Death of Executive. In the event of the death of Executive during the period of his employment hereunder, Executive's salary payable hereunder shall be paid up through the end of the month in which the date of death occurs, and thereafter Company's obligations hereunder shall cease and this Agreement shall terminate. 9. Assignment and Transfer. (t) Executive's rights and obligations under this Agreement shall not be transferable by assignment or otherwise, and any purported assignment, transfer, or delegation thereof shall be void. (u) This Agreement shall inure to the benefit of, and be enforceable by, any purchaser of substantially all of Company's assets, any corporate successor to Company or any assignee thereof. 10. Obligations Surviving Expiration or Termination. Executive's obligations under Section 12, Section 13, Section 14 and Section 15(k) of this Agreement shall survive expiration or termination of this Agreement and termination of employment hereunder for any reason to the extent therein provided. All such obligations shall be binding upon Executive's heirs and personal representatives and shall inure to the benefit of Company's successors and assigns. 11. No Inconsistent Obligations. Executive represents and warrants that there exist no obligations, legal or otherwise, inconsistent with the terms of this Agreement or with his 5 undertaking employment with Company. Executive will not disclose to Company, or use, or induce Company to use, any proprietary information or trade secrets of others. 12. Obligations of or to Other Entities. Executive represents and warrants that there exist no obligations or liabilities of or claims against, and that Executive has no obligation of any kind to, any corporation, partnership or other business entity, of which Executive is or was a principal shareholder, partner or principal owner, other than those that have been disclosed in writing to Company. 13. Non-Solicitation. For a period of one year from and after the termination of his employment hereunder for any reason, Executive shall not, without the prior written consent of Company, directly or indirectly employ, solicit for employment, or advise or recommend to any other person that such other person employ or solicit for employment, any full-time employee of the Company or any of its affiliates during the period of such employment. Neither shall Executive, during the same period, induce or attempt to induce any officer, consultant, full-time or part-time employee, agent or independent contractor to leave the employ of the Company or any of its affiliates or to cease to provide the services then provided to Company or any of its affiliates. Additionally, Executive shall not employ any full-time employee of the Company or any of its affiliates until at least three months after such employee's voluntary, or involuntary but without cause, termination from Company or any of its affiliates. 14. Existence of Confidential Information. The Company owns and has developed and compiled, and will develop and compile, certain proprietary techniques and confidential information which have great value to its business (referred to in this Agreement collectively as "Confidential Information"). Confidential Information includes not only information disclosed by the Company to Executive, but also information developed or learned by Executive as a direct result of his engagement by the Company under this Agreement. Confidential Information is to be broadly defined, and includes all information which is in fact confidential that has or could have commercial value or other utility in the business in which the Company is engaged or contemplates engaging, and all information of which the unauthorized disclosure could be detrimental to the interests of the Company, whether or not such information is identified as Confidential Information by the Company. By example and without limitation, Confidential Information includes any and all confidential information concerning trade secrets, techniques, processes, formulas, marketing plans, business plans, strategies, forecasts, unpublished financial information, budgets, projections, customer and supplier identities, characteristics, and agreements. Executive shall keep the Company's Confidential Information confidential. 15. Miscellaneous. (v) Attorneys' Fees. Should either party hereto, or any heir, personal representative, successor or assign of either party hereto, resort to litigation or arbitration to enforce this Agreement, the party or parties prevailing in such litigation shall be entitled, in addition to such other relief as may be granted, to recover its or their reasonable attorneys fees and costs in such litigation from the party or parties against whom enforcement was sought. 6 (w) Governing Law. This Agreement shall be governed by and construed according to the laws of the State of California without regard to the principles thereof regarding conflict of laws. (x) Entire Agreement. This Agreement contains the entire agreement and understanding between the parties hereto and supersedes any prior or contemporaneous written or oral agreements between them respecting the subject matter hereof. (y) Amendment. This Agreement may be amended only by a writing signed by Executive and by Company's Chairman. (z) Severability. If any term, provision, covenant, or condition of this Agreement, or the application thereof to any person, place or circumstance, shall be held to be invalid, unenforceable, or void, the remainder of this Agreement and such term, provision, covenant, or condition as applied to other persons, places and circumstances shall remain in full force and effect. (aa) Construction. The headings and captions of this Agreement are provided for convenience only and are intended to have no effect in construing or interpreting this Agreement. The language in all parts of this Agreement shall be in all cases construed according to its fair meaning and not strictly for or against Company or Executive. (bb) Rights Cumulative. The rights and remedies provided by this Agreement are cumulative, and the exercise of any right or remedy by either party hereto (or by its successor), whether pursuant to this Agreement, to any other agreement, or to law, shall not preclude or waive its right to exercise any or all other rights and remedies. (cc) Nonwaiver. No failure or neglect of either party hereto to any instance to exercise any right, power or privilege hereunder or under law shall constitute a waiver of any other right, power or privilege or of the same right, power or privilege in any other instance. All waivers by either party hereto must be contained in a written instrument signed by the party to be charged and, in the case of Company, by Company's Chairman. (dd) Remedy for Breach. The parties hereto agree that, in the event of breach or threatened breach of any covenants of Executive, the damage or imminent damage to the value and the goodwill of Company's business are not capable of quantification, and that therefore any remedy at law or in damages shall be inadequate. Accordingly, the parties hereto agree that Company shall be entitled to injunctive relief against Executive in the event of any breach or threatened breach of any of such provisions by Executive, in addition to any other relief available to Company under this Agreement or under law. (ee) Notices. Any notice, request, consent or approval required or permitted to be given under this Agreement or pursuant to law shall be sufficient if in writing, and if and when delivered personally, by facsimile or sent by certified or registered mail, with postage prepaid, to Executive's residence (as noted in Company's records), or to Company's principal executive office, as the case may be. 7 (ff) Assistance in Litigation. Executive shall, during and after termination of employment, upon reasonable notice, furnish such information and proper assistance to Company as may reasonably be required by Company in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party. (gg) Arbitration. Any controversy, claim or dispute arising out of or relating to this Agreement or to Executive's employment with the Company, including claims for discrimination, unpaid wages, claims based on common law or statute, either during the existence of the employment relationship or afterwards, between the parties hereto, their assignees, their affiliates, their attorneys, or agents, shall be settled by arbitration. Arbitration shall be conducted in accordance with the then prevailing labor arbitration rules of the American Arbitration Association (the "AAA"), with the following exceptions if in conflict: (a) one neutral arbitrator shall be selected in accordance with the AAA rules; (b) each party to the arbitration will pay 50% of the expenses and fees of the arbitrator; and (c) arbitration may proceed in the absence of any party if written notice (pursuant to the American Arbitration Association's rules and regulations) of the proceedings has been given to such party. The location of the arbitration shall be in San Francisco, California. The parties agree to abide by all decisions and awards rendered in such proceedings. Such decisions and awards rendered by the arbitrator shall be final and conclusive and may be entered in any court having jurisdiction thereof as a basis of judgment and of the issuance of execution for its collection. All such controversies, claims or disputes shall be settled in this manner in lieu of any action at law or equity; provided however, that nothing in this subsection shall be construed as precluding the Company or Executive from bringing an action for injunctive relief or other equitable relief. The parties shall keep confidential the existence of the claim, controversy or disputes from third parties (other than arbitrator), and the determination thereof, unless otherwise required by law. (hh) Action by the Company. Whenever this Agreement refers to a decision or action to be taken by the Company, such action shall be taken on behalf of the Company by the Board of Directors, or by a duly authorized person. (ii) Role of Enterprise Law Group. Executive acknowledges that Enterprise Law Group, Inc., counsel to the Company, has not represented Executive in connection with any aspect of this Agreement, and has not undertaken to perform any services on behalf of Executive. Executive has obtained any desire to legal advice from separate counsel of Executive's own choosing or has freely chosen not to do so. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date set forth above. EXECUTIVE /s/ Norman Franks - ------------------------------- Norman Franks 8 MENDOCINO BREWING COMPANY, INC. By: /s/ H. Michael Laybourn --------------------------------------------- Name: H. Michael Laybourn Title: Chairman and Chief Executive Officer EX-10.17 4 EXHIBIT 10.17 AGREEMENT THIS AGREEMENT is made as of October 24, 1997, between United Breweries of America, Inc. ("UBA") and Releta Brewing Company LLC ("Releta"). WHEREAS, Releta has entered into a lease (the "Lease") dated October __, 1997 with Stewart's Ice Cream Company, Inc. (the `Landlord") for the brewing facility located in Saratoga Springs, New York; WHEREAS, as consideration for the Landlord entering into the Lease, Releta has agreed to assume the right and obligation to release the liens listed on Exhibit B to the Lease from the property that is the subject of the Lease; WHEREAS, UBA has entered into an Investment Agreement (the "Investment Agreement") with Mendocino Brewing Company, Inc. ("Mendocino"), dated as of October 24, 1997; WHEREAS, as a further inducement to Mendocino entering into the Investment Agreement, UBA desires to enter into this Agreement; and WHEREAS, the execution and delivery of this Agreement is a condition precedent to the closing of the transactions contemplated by the Investment Agreement. NOW, THEREFORE, in consideration of the foregoing and the promises and covenants hereinafter contained, the parties hereto hereby agree as follows: 1. UBA agrees to assume from Releta the right and obligation to release the liens listed on Exhibit B to the Lease from the property that is the subject of the Lease as set forth in Section 2.4 of the Lease. 2. Each of the parties to this Agreement agrees that at any time and from time to time, upon the request of any other party, it will execute and deliver such further acts and things as any such party may reasonably request in order to effectuate the purposes of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first written above. UNITED BREWERIES OF AMERICA, INC. By: /s/ Vijay Mallya --------------------------------------- Name: Vijay Mallya Title: Chairman and Chief Executive Officer RELETA BREWING COMPANY LLC By: /s/ Vijay Mallya --------------------------------------- Name: Vijay Mallya Title: Chairman and Chief Executive Officer EX-10.30 5 EXHIBIT 10.30 Exhibit 10.30 [GRAPHIC OMITTED] WESTAMERICA BANK SONOMA REGION CREDIT ADMINISTRATION October 21, 1997 Michael Laybourn, President Mendocino Brewing Company, Inc. P.O. Box 400 Hopland, CA 95449 Dear Michael, 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 November 30, 1997. This commitment is subject to the Bank's review of the executed Investment Agreement between Mendocino Brewing Company, Inc. and United Brewers of America, Inc. and the completion of a collateral field audit satisfactory to Bank. The basic terms of the credit are 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. Increases to the line can be considered as revenues grow and profits return. 3. Forms of Utilization: Cash advances, including direct deposits to your checking account. 4. Interest Rate: Westamerica Bank index plus 1.50% floating. Interest will accrue daily on the basis of a (365/360-day) year and actual days elapsed. 31 D STREET . SANTA ROSA CA 95404 (707) 576-3625 Michael Laybourn, President October 21, 1997 Page 2 5. Expiration and/or Maturity Date: ------------------------------- May 31, 1998. Prior to maturity, the December 31, 1997 Financial statement will be reviewed by Bank. Subsequent line renewals will be for one year. 6. Borrowing Base: -------------- 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). 7. Collateral: ---------- Perfected security interest of first 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: .25% per annum anticipated. 10. Repayment: --------- Interest payable (monthly) with all accrued interest and unpaid principal to be due at maturity. 11. Loan Documentation: ------------------ 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: Michael Laybourn, President October 21, 1997 Page 3 Business Loan Agreement. Among other terms, this agreement will contain various financial and other covenants, agreements and conditions to be mutually agreed upon. 12. Banking Relationship: Primary banking relationship must be maintained with Westamerica Bank. This commitment is also subject to such additional terms, conditions and requirements as may be provided in Bank's credit documents of otherwise required by Bank or its counsel. Sincerely, /s/ Dwight Davenport Dwight Davenport Vice President and Manager DD/ju EX-10.35 6 EXHIBIT 10.35 Savings Bank OF MENDOCINO COUNTY A Full Service Commercial Bank CHANGE IN TERMS AGREEMENT
- ------------------------------------------------------------------------------------------------------------------------------------ Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $2,700,000.00 01-01-1998 962256R MJL - ------------------------------------------------------------------------------------------------------------------------------------ References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - ------------------------------------------------------------------------------------------------------------------------------------ Borrower: Mendocino Brewing Company, a California Lender: SAVINGS BANK OF MENDOCINO COUNTY Corporation MAIN OFFICE P.O. Box 400 P.O. Box 3600 Hopland, CA 95449 200 N. School Street Ukiah, CA 95482 ====================================================================================================================================
Principal Amount: $2,700,000.00 Date of Agreement: November 1, 1997 DESCRIPTION OF EXISTING INDEBTEDNESS. EXISTING LOAN NUMBER 8010962256R IN THE ORIGINAL AMOUNT OF $2,700,000.00, DATED 9/25/96 WITH AN OUTSTANDING BALANCE ON 11/1/97 IN THE AMOUNT OF $2,404,313.57, WITH INTEREST PAID TO 11/1/97. DESCRIPTION OF COLLATERAL. 1. The existing obligation continues to be secured by a security interest in the property described in a Deed of Trust dated 9/25/96, recorded 10/7/96 in Book 2366, Page 544 of Official Records, Mendocino County. DESCRIPTION OF CHANGE IN TERMS. 1. Final maturity of the loan is hereby extended to 1/1/98. 2. Interest continues to be payable monthly commencing 12/1/97 and monthly thereafter. 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, a California Corporation By:/s/ Michael Laybourn By:/s/ Norman Franks ----------------------- ----------------------- Michael Laybourn, Norman Franks, Chief Executive Officer Chief Executive Officer EX-10.37 7 EXHIBIT 10.37 Savings Bank OF MENDOCINO COUNTY ================================================================================ P.O. BOX 3600 . UKIAH, CALIFORNIA 95462 TELEPHONE (707) 462-6613 Exhibit 10.3 October 15, 1997 Mr. Michael Laybourn Mendocino Brewing Company Inc. Post Office Box 400 Hopland, CA 95449 Dear Michael: Following up our earlier telephone conversation, the Savings Bank of Mendocino County is prepared to convert our $2,700,000.00 construction loan to a permanent financing loan package on substantially the same terms and conditions specified in the now-lapsed take-out commitment issued September 13, 1996. With the exception of the substitution of the expiration date specified below, the only loan terms which are modified are as follows: 1) Origination Fee--in lieu of the one-half percent origination fee originally negotiated, you will be required to pay to the Bank a one and one-half (1-1/2) percent origination fee. As previously expressed, we have unexpectedly expended considerably more time and expense over the past year for which we would like to obtain reimbursement. 2) Interest Rate--the original commitment provided for an interest rate floor of eight and one-half (8-1/2) percent. In lieu of the foregoing, the interest rate floor will be lowered to seven and one-half (7-1/2) percent. Michael, we recognize that the investment agreement reached with United Breweries of America, Inc. substantially strengthens Mendocino Brewing Company and understand that it is in everyone's best interest to work together to facilitate consummation of the contemplated transaction. In spite of the foregoing, we believe it is premature to lower the interest rate from the level originally committed until such time as we are satisfied that our risk has been mitigated by demonstrations of sustained profitability, stable sales growth and confirmation of ongoing production efficiency. It is my additional understanding that Mendocino Brewing Company is or will in the near future be negotiating alliances that could significantly enhance the company's profitability and/or capital structure. The relationship with Mendocino Brewery is very important to our Bank and we want you to know that we are very willing to consider any future requests to lower the interest rate pricing. In addition to the conditions specified previously, our commitment is further conditioned upon: 1) Our being satisfied that there are no outstanding payables owed to the prime contractor, BDM Construction, or any subcontractor that provided goods and/or services in association with your construction project. 2) Receipt of a signed copy of the investment agreement between Mendocino Brewing and United Breweries of America. The agreement must be in form and substance satisfactory to Bank and its council. 3) Written confirmation that Westamerica Bank has agreed to renew its loan commitment to Mendocino Brewing and our determination that the negotiated terms are acceptable to us. 4) Confirmation that your promissory note obligations to BDM Construction and Cordes Langley et al have been fully satisfied. 5) Confirmation that in addition to the four million dollars in cash contributions, United Breweries of America has contributed all of their Sarasota Springs Brewery Inc. assets into Mendocino Brewing Company Inc. It is my understanding that the value of these assets approximate seven and one-half (7-1/2) million dollars. It goes without mention that the requirement stipulated in our original commitment letter relating to your public offering and the related deposit of proceeds into a bank account are no longer relevant. The take-out loan must be completely negotiated, documented and closed by December 1, 1997 or our commitment will expire. Should any of the foregoing require any clarification, don't hesitate contacting me at your earliest convenience. Sincerely, /s/ Martin J. Lombardi Martin J. Lombardi Vice President EX-10.38 8 EXHIBIT 10.38 Exhibit 10.38 United Breweries of America, Inc. October 23, 1997 Martin J. Lombardi Vice President Savings Bank of Mendocino County P.O. Box 3600 Ukiah, Ca. 95449 Dear Marty, It was very nice speaking with you yesterday. As I shared with you, we certainly appreciate your cooperation and the support of the Savings Bank of Mendocino with regard to United Breweries of America's proposed investment in the Mendocino Brewing Company ("MBC"). Pursuant to your request, I am writing you this note in order to formalize our understanding with respect to your Commitment Letter dated October 15, 1997, which references the terms and conditions of your Commitment Letter dated September 13, 1997, to Michael Laybourn and Norman Franks of Mendocino Brewing Company. 1. The proposed Interest Rate for the permanent financing is one and one half (1-1/2) percent over the Prime Rate. 2. Paragraph 5 b. Referencing collateral. You agree to omit the "as well as inventory, chattel paper, accounts, equipment, general intangibles etc.". 3. Section 5. Referencing collateral. As you reference in your Commitment Letter dated, October 15, 1997; you will omit all language with reference to the Public Offering. 4. Paragraph 7f. Referencing lease financing. You agree to omit complete paragraph, as it is no longer applicable. 5. Paragraph 7G. Regarding Dean Strupp & Associates Appraisals, you agree to waive this requirement. 6. It is agreed that the bank terms, covenants and/or requirements with respect to this permanent financing loan facility, will allow MBC the ability to do the following without triggering any default provisions; Martin J. Lombardi Vice President Savings Bank of Mendocino County Page 2. a. Should we choose to, buy back the preferred shareholders in an amount of $180,000. b. In light of the transaction proposed between UBA and MBC, to write off certain items, if we feel it is in the best interest of the company. Such items are accounting related items in the amount of $200,000 and a potential distributor claim in the amount of $400,000. UBA obviously is not assuming any of MBC's liabilities to the Savings Bank of Mendocino. Our interest in discussing these matters with you is to confirm our understanding of the financial terms and conditions of MBC's banking facilities and our understanding of the status of MBC's relationship with the Savings Bank of Mendocino. If the above represents your understanding of our conversation, please sign below. Kindest Regards, /s/ Jerome G. Merchant - ---------------------------------- Jerome G. Merchant Director Strategic Planning /s/ Martin J. Lombardi - ---------------------------------- Martin J. Lombardi Vice President Savings Bank of Mendocino County EX-27 9 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 The unaudited financial statements of Mendocino Brewing Company, Inc. as of September 30, 1997 [TYPE] FDS 3-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 152,400 0 505,800 0 429,300 1,294,200 11,888,900 760,300 13,059,500 7,470,700 0 3,869,600 0 227,600 (149,100) 13,059,500 3,593,500 3,792,200 2,240,600 2,439,300 (197,500) 0 (73,600) (596,800) (244,600) (352,200) 0 0 0 (352,200) (0.15) 0
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