AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1996
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MENDOCINO BREWING COMPANY, INC.
(Exact name of registrant as specified in its charter)
California 2082 680318293
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification
or organization) Code Number) Number)
13351 South Highway 101
Hopland, CA 95449-0400
(707) 744-1015
(Address and telephone number of registrant's principal executive offices)
H. Michael Laybourn
Chief Executive Officer
Mendocino Brewing Company, Inc.
13351 South Highway 101
Hopland, CA 95449-0400
(707) 744-1015
(Name, address and telephone number of agent for service)
Copy to
Nelson D. Crandall, Esq.
Enterprise Law Group, Inc.
Menlo Oaks Corporate Center
4400 Bohannon Drive, Suite 280
Menlo Park, CA 94025-1041
Tel: (415) 462-4700
Fax: (415) 462-4747
Approximate date of proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<TABLE>
CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
Proposed maximum Proposed maximum
Title of each class of securities Amount to be offering price per aggregate offering Amount of
to be registered registered security price registration fee
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value 600,000 $8.50 $5,100,000 $1,758.62
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED NOVEMBER 6, 1996
600,000 SHARES
[COMPANY LOGO]
MENDOCINO BREWING COMPANY, INC.
COMMON STOCK
--------------
All of the 600,000 shares of no par value Common Stock (the "Shares")
offered by this Prospectus are being sold directly by Mendocino Brewing Company,
Inc. ("Mendocino Brewing" or the "Company"). The public offering price has been
determined by the Company based on the trading history of the Common Stock on
the Pacific Stock Exchange and certain other factors that the Company deems
relevant. See "Plan of Distribution." The minimum purchase is 100 Shares
($850.00).
This offering is being made on a "best-efforts" basis. Properly
completed subscriptions will be accepted on a first come, first served basis,
except that record holders of the Company's Common Stock as of October 25, 1996
(the "Record Date") will be given priority to purchase the Shares provided that
the Company receives their properly completed subscriptions within 15 days after
the effective date of this Prospectus. The offering shall terminate upon the
earlier of (a) the date on which all of the Shares have been sold;
(b)_____________, unless such date is extended by the Company; or (c) the date
on which the Company terminates the offering. See "Plan of Distribution." The
Company reserves the right to reject any subscription in full or in part.
The Shares offered by this Prospectus involve a high degree of risk.
See "Risk Factors" beginning on page 5 of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==========================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
-------- -------------- -------------
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $8.50 None $8.50
- ------------------------------------------------------------------------------------------
Minimum Offering N/A None N/A
- ------------------------------------------------------------------------------------------
Minimum Subscription: 100 Shares $850.00 None $850.00
- ------------------------------------------------------------------------------------------
Maximum Offering: 600,000 Shares $5,100,000 None $5,100,000
==========================================================================================
<FN>
1 The Shares are being sold directly by the Company through a designated
executive officer who is registered as a sales representative, where
required, and shall not receive any commission. See "Plan of Distribution."
2 Before deducting estimated expenses of $400,000 payable by the Company,
including registration fees, transfer agent fees, printing and engraving,
copying, postage, and other offering costs, in addition to legal, accounting,
and consultant fees.
</FN>
</TABLE>
-------------
The date of this Prospectus is _________ ___, 1996
<PAGE>
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus. If given or made, any such information and representations must
not be relied upon as having been authorized by the Company. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy
securities to any person in any jurisdiction in which such offer or solicitation
is unlawful. Neither the delivery of this Prospectus nor any sale made after the
date of this Prospectus shall, under any circumstances, create any implication
that the information contained in this Prospectus is correct as of any date
after the date of this Prospectus.
Mendocino Brewing's principal executive offices are located at 13351
South Highway 101, P.O. Box 400, Hopland, California 95449-0400. The Company's
telephone numbers are 1-800-733-3871 and 1-707-744-1015.
The Common Stock of Mendocino Brewing Company, Inc. is listed on the
Pacific Stock Exchange under the symbol MBR. Reports and other information
concerning the Company can be inspected at such exchange.
[COMPANY LOGO]
TABLE OF CONTENTS
Page
----
Prospectus Summary .................................................. 3
Risk Factors ........................................................ 5
Priority of Existing Stockholders ................................... 8
Use of Proceeds ..................................................... 8
Price Range of Common Stock and Dividend Policy ..................... 9
Capitalization ...................................................... 10
Selected Financial Data ............................................. 11
Management's Discussion & Analysis of
Financial Condition and Results of Operations ..................... 12
Business ............................................................ 17
Management .......................................................... 25
Certain Transactions ................................................ 27
Principal Stockholders .............................................. 28
Description of Capital Stock ........................................ 29
Shares Eligible for Future Resale ................................... 30
Plan of Distribution ................................................ 30
Legal Matters ....................................................... 31
Experts ............................................................. 31
Additional Information .............................................. 32
Index to Financial Statements ....................................... 32
----------------
Until [25 days after the date of this Prospectus], all dealers effecting
transactions in the registered securities, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
The Company will provide to each person who receives a prospectus, upon
written or oral request of such person, a copy of any of the information that is
incorporated by reference in the this Prospectus (not including exhibits to the
information that is incorporated by reference unless the exhibits are themselves
specifically incorporated by reference), if there is any.
www.MENDOBREW.com
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety and should be read in
conjunction with the more detailed information and Financial Statements and the
Notes thereto appearing elsewhere in this Prospectus.
Mendocino Brewing Company, Inc. brews Red Tail Ale along with five other
ales, one stout, and one porter for the domestic craft beer market. A "craft
beer" is a full-flavored beer brewed in the traditional style. Mendocino Brewing
is one of the first modern craft brewers, and is considered to be an industry
leader for its innovations. Mendocino Brewing's objective is to transform itself
from the country's leading microbrewery to a major national craft brewer
offering among the highest quality craft beers available anywhere in America.
Mendocino Brewing competes in the domestic craft beer segment of the US
beer market. The domestic craft beer segment has grown at a rate of
approximately 40% per year for several years while overall domestic beer market
sales have been relatively flat. Many industry analysts believe that the craft
beer segment will grow from 1.9% of the total domestic beer market in 1995 to 5%
- - 6% by the year 2000.
In 1994 and 1995 Mendocino Brewing raised net proceeds of $3.3 million to
finance construction of a brewery with an annual production capacity of 50,000
bbl., expandable to 130,000 bbl. At that time, the Company intended to finance
future growth primarily through operations and debt financing. Management
believes that following the successful completion of its initial public
offering, the continued growth in the domestic craft beer segment gave rise to a
qualitative shift in the public's awareness of craft beers, and that this shift
now gives the Company an opportunity to enter new markets at a time when many
consumers are discovering craft brews for the first time. In completing the
plans for the new brewery, Management also concluded that it could realize
certain cost efficiencies and overall cost reductions by designing a plant with
an initial production capacity of 60,000 bbl. per year (20% greater than
originally planned) and an ultimate capacity of 200,000 bbl. per year (54%
greater than originally planned).
Accordingly, Mendocino Brewing changed the configuration of the new brewery
and modified its growth and marketing plans to call for accelerated introduction
of additional products into existing markets, penetration of new regional
markets, and greatly increasing the total availability of its products.
Management expects the Company to complete its new brewery in Ukiah,
California (110 miles north of San Francisco) in January or February 1997.
Proceeds from this offering will be used to finance the increase in capacity
from 50,000 bbl. to 60,000 bbl., pay certain cost increases resulting from
design changes and inclement weather, and, if the maximum number of Shares is
sold, expand annual production capacity to approximately 75,000 bbl., depending
on the mix of products brewed. Proceeds from the offering of the Shares will
also be used to implement an expanded marketing plan and to provide working
capital. See "Use of Proceeds."
For fiscal year 1996, Management expects Mendocino Brewing to realize
increases in sales over 1995 of up to 10%. Management expects that annual sales
could triple from 1995 levels by the time the Company reaches production of
60,000 bbl. per year at the Ukiah facility, depending on the mix of bottled and
draft beer produced and future pricing. These forward looking statements are
subject to risks and uncertainties. The Company's actual results could differ
materially if, among other causes, the Company fails to complete construction of
the new brewery on time, fails to sell its increased production, materially
reduces the price of its products, experiences unanticipated difficulty in
transferring bottling operations from Hopland to Ukiah, or experiences any of
the other circumstances discussed in "Risk Factors."
Mendocino Brewing intends to continue to compete primarily on the basis of
product quality and image. The Company's marketing plan emphasizes introducing
Red Tail Ale and its other brews in draft form; introducing Blue Heron Pale Ale
and Black Hawk Stout in 12 oz. six packs using the same high quality graphics
and packaging as has contributed to the success of Red Tail Ale; and introducing
the Company's brews into new geographic regions.
Mendocino Brewing operates a retail brewpub and merchandise store under the
name the Hopland Brewery. Management does not expect the Company's expansion
plans to materially increase or decrease the results of operations of the
brewpub. See "Business - The Hopland Brewery Brewpub and Merchandise Store."
-3-
<PAGE>
Mendocino Brewing was founded in March 1983 as a California limited
partnership (the "Partnership"). On January 1, 1994, the business incorporated
by transferring all of the Partnership's assets, including its name, to a newly
formed California corporation in exchange for all of the Common and Preferred
Stock of the corporation. The Partnership distributed these shares to its
partners on January 3, 1994. As used hereafter, references to the "Company" and
"Mendocino Brewing" include the business operations of the Partnership before
their incorporation.
Mendocino Brewing's principal executive offices are located at 13351 South
Highway 101, P.O. Box 400, Hopland, California 95449-0400. The Company's
telephone numbers are (800) 733-3871 and (707) 744-1015. The Company's e-mail
address is [email protected].
The Offering
Shareholders of record as of October 25, 1996 have the first right to
purchase Shares pursuant to this offering on a first come, first served basis.
The minimum purchase is 100 Shares ($850.00). Shares that remain unsold 15 days
after the effective date of this Prospectus, if any, will be offered to the
general public and sold in the order in which fully completed subscriptions are
received at the Company. For more information concerning subscription
procedures, see "Plan of Distribution -- Subscription Procedure."
<TABLE>
<S> <C>
Common Stock offered................................... 600,000 Shares
Common Stock outstanding before the offering........... 2,322,222 Shares(1)
Use of Proceeds........................................ To finance expansion of the Company's brewing capacity,
marketing, and working capital. See "Use of Proceeds."
Pacific Stock Exchange Symbol.......................... MBR
</TABLE>
<TABLE>
Summary Financial and Operating Data
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
------------------------------ ------------------------------
1994 1995 1995 1996
---- ---- ---- ----
Statements of Income Data: (unaudited)
<S> <C> <C> <C> <C>
Sales.............................. $ 3,523,000 $ 3,735,100 $ 1,675,200 $ 1,911,400
Gross profit....................... 1,524,700 1,720,000 693,000 970,000
Income (loss) from operations...... 200,000 182,700 (27,500) (34,700)
Net income (loss).................. $ 153,300 $ 173,700 $ 32,500 $ (50,600)
=========== =========== ============ ============
Earnings (loss) per share.......... $ .08 $ .08 $ .01 $ (.02)
=========== =========== ============ ============
Weighted average common
shares outstanding............... 1,814,403 2,307,074 2,294,148 2,322,222
=========== =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
June 30, 1996 (unaudited)
-------------------------------------------
Balance Sheet Data: Actual Pro Forma As Adjusted(2)
------ ------------------------
<S> <C> <C>
Working capital (deficit)....................... $(2,125,400) $ 1,782,500
Total assets.................................... 8,214,900 15,041,100
Long term debt, including current portion....... 560,700 4,810,000
Shareholders' equity............................ 4,373,500 9,073,500
<FN>
- ----------------
(1) Does not include 300,000 shares issued to the general contractor for the
new brewery as security for an obligation. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations - Liquidity and
Capital Resources."
(2) As adjusted to give effect to the sale of 600,000 Shares (the maximum
number of Shares offered by this Prospectus) and the application of the
estimated net proceeds therefrom. Also assumes that the Company's $2.7
million construction loan has been converted to long-term debt upon
completion of the new brewery. See "Use of Proceeds," "Capitalization," and
"Management's Discussion and Analysis of Financial Conditions and Results
of Operations."
</FN>
</TABLE>
-4-
<PAGE>
RISK FACTORS
An investment in the Shares being offered by this Prospectus involves a
high degree of risk. Prospective investors should consider carefully the
following risk factors, in addition to other information concerning Mendocino
Brewing and its business contained in this Prospectus, before purchasing Shares.
Expansion Plan
Mendocino Brewing's expansion plan is subject to risk and management
challenges. Growth depends upon completing construction of the new brewery,
expanding the production capacity of the new brewery, and selling additional
beer by introducing new brands and draft beer into existing and new regional
markets. The Company's expansion program has created and will continue to create
additional expense for the Company, although the Company will not realize
additional revenues from expansion until the initial production from the new
brewery is shipped and paid for, which is not likely to occur before March or
April 1997. Management believes Mendocino Brewing has built its current customer
base primarily on consumer loyalty to Red Tail Ale plus goodwill generated
through customer visits to the Hopland Brewery. Management has limited
experience in promoting products on a large scale, and there is no assurance
that the Company's other brands will be as widely accepted as Red Tail Ale, or
that consumers in new geographic markets will be receptive to the Company's
products. See "Business -- Strategy;" "-- New Product Offerings;" and "--
Regional Expansion" and "Management's Discussion and Analysis of Financial
Conditions and Results of Operations -- Material Commitments - Expansion Plan"
and "- Liquidity and Capital Resources."
Domestic Craft Beer Segment Growth Rate
The domestic craft beer segment of the highly competitive U.S. beer market
has been characterized by more than ten years of steady growth. The overall
growth rate was 44% in 1995. The growth rate may vary from region to region, and
there is no assurance that the rate of growth will continue. See "Business -
Industry Overview Domestic Craft Beer Segment."
Competition
Certain competitors in the domestic craft beer segment have large
advertising budgets, substantial financial resources, and/or access to the
distribution networks of major national and international brewers. Several of
Mendocino Brewing's primary competitors are expanding or have recently expanded
their production capacity. The amount of supermarket shelf space that can be
devoted to any class of products is limited. See "Business Industry Overview -
Domestic Craft Beer Segment."
No Minimum
The offering of the Shares is not contingent upon the sale of any specified
minimum number of Shares. Mendocino Brewing must sell a minimum number of Shares
to recover the expense of the offering. See "Plan of Distribution." Management
plans to pay between $900,000 and $1,165,000 of the Company's short term
indebtedness out of the net proceeds of this offering. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations -
Liquidity and Capital Resources."
New Construction
Construction of the new brewery broke ground in September 1995 and as of
September 1996 was approximately 70% complete. New construction is subject to
the risk of cost increases due to plan changes and delays from sources such as
local government approval processes, inclement weather, unexpected geologic
conditions, shortages of or increases in the price of materials such as steel,
funding delays, and cooperation and coordination among various parties to the
project such as the architect, general contractor, and equipment manufacturer,
and timing of cash flow. The new brewery has experienced cost increases and
delays, to some degree, from each of the above causes. Interest rates and
general economic conditions can also have an effect the project. While
Management believes that the sources of previous delays have been addressed,
many factors are inherently uncertain and/or beyond the reasonable control of
the Company. There can be no assurance that further delays in completion of
construction will not occur or that local government agencies will construct
certain infrastructure improvements that they have committed to construct.
Management has limited experience in managing construction projects.
Future Capital Needs -- Additional Future Funding and Reliance on
Growth Strategy
If the net proceeds of this offering, together with existing debt financing
and funds generated by operations, are not sufficient to fund Mendocino
Brewing's expansion plans, the Company may need to raise additional funds from
public or private sources or enter into a strategic alliance or joint venture.
See "Management's Discussion and
-5-
<PAGE>
Analysis of Financial Conditions and Results of Operations - Liquidity and
Capital Resources." Issuance of additional equity would likely dilute the
investments of existing shareholders. Additional borrowing would increase
interest expense and debt service requirements. The amount of additional
financing the Company might require will depend in part upon the success of the
Company's growth strategy. There can be no assurances as to the success of the
Company's growth strategy. There is no assurance that the Company will be able
to obtain additional financing from any source if needed. If adequate funds are
not available, the Company could be required to curtail implementation of its
expansion plans.
Risks of Debt
Mendocino Brewing has incurred approximately $6.5 million in debt to
finance the acquisition of real estate, construction of the new brewery, and
purchase of new brewing equipment. The ratio of the Company's long-term debt to
equity as of June 30, 1996, when adjusted to include all long term debt added
after June 30 and before the date of this Prospectus, is 1.10 to 1. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Conditions and Results of Operations -- Liquidity and Capital Resources." Loan
and lease payments must be paid regardless of the Company's revenue. Failure to
make payments could lead to foreclosure and sale of all or an important part of
the Company's assets.
Geographic and Distributor Concentration
Mendocino Brewing's wholesale distributions have historically been
concentrated in Northern California. The Company's two largest distributors,
both in Northern California, accounted for 40% of 1995 wholesale distributions.
The distributors that the Company relies upon may also market competing imported
and domestic craft beers. Although by law distributors are independent of any
brewer, a distributor can be controlled if it relies on one or two large brewers
who account for the majority of its sales. The Company has formal written
distribution agreements with its distributors which may be terminated by either
party with 30-day written notice. The laws of some states, however, may restrict
the Company's ability to terminate its agreements with distributors in those
states. Inability to terminate a distributor who is performing poorly could have
a material adverse effect on the Company's business, financial condition, and
results of operations. See "Business -- Product Distribution."
Dividends
Management does not have any present intention to declare or pay dividends
on the Common Stock, but expects the Company to retain earnings for use in its
business. The Company's agreements with its lenders prohibit the payment of
dividends during the term of the loans. In addition, the Company is required to
pay a $1.00 cash dividend on 227,600 shares of Series A Preferred Stock
($227,600 total) before cash dividends may be paid on the Common Stock. See
"Dividend Policy" and "Description of Capital Stock."
Trading Market for the Shares
Mendocino Brewing's Common Stock is publicly traded on the Pacific Stock
Exchange under the symbol MBR. Trading volume to date has been light. In the
absence of a more active trading market, investors may find it difficult to sell
their Shares and purchases or sales of relatively small numbers of shares may
have a disproportionately large influence on the reported price of the stock.
The Company's stock price may also be materially adversely affected by factors
affecting the entire market or the Company's industry that may be unrelated to
the operating performance of the Company. There can be no assurance that the
market price of the Common Stock will not decline below the public offering
price or experience volatility. See "Price Range of Common Stock and Dividend
Policy."
Dependence on Key Personnel
Mendocino Brewing's success may depend to a significant extent upon the
continued service of President Michael Laybourn, Master Brewer Donald Barkley,
and other members of the Company's executive management. The loss of any key
employee could have a material adverse effect upon the Company's business,
financial condition, and results of operations. Furthermore, the Company's
future performance depends on its ability to identify, recruit, motivate, and
retain additional key management personnel, including executive, marketing, and
production managers and other personnel. The failure to attract and retain key
management personnel could have a material adverse effect on the Company's
business, financial condition, and results of operations. See "Management" and
"Principal Shareholders."
Potential Control Groups
Mendocino Brewing's officers, directors, and founders and their spouses
own, in the aggregate, 970,222 shares of the Company's outstanding Common Stock,
which represents 41.8% of the Common Stock outstanding at the commencement of
this offering and will represent 33.2% of the Common Stock outstanding if the
maximum number
-6-
<PAGE>
of Shares offered by this Prospectus is sold. As a result, in some
circumstances, these shareholders, acting together, might be able to determine
matters requiring approval of the shareholders of the Company, including the
election of the Company's directors or a change in control of the Company. See
"Management" and "Principal Shareholders." The above percentages do not take
into account 300,000 shares of Common Stock the Company has issued to the
general contractor for the new brewery as security for payment of $900,000 of
its fees. The Common Stock collateral is subject to the restrictions that the
shares shall be canceled if the fees owed the contractor are paid in full, that
if the Company is in default, the shares must be sold in a commercially
reasonable manner as specified in the California Commercial Code, and that any
shares not needed to be sold to satisfy the obligation to the contractor shall
be canceled. Under California law, the contractor may not retain the shares in
satisfaction of the obligation without the written consent of the Company given
after an event of default. Management plans to pay the Company's obligation to
the contractor out of the proceeds of this offering, but there is no assurance
that the net proceeds will be sufficient. If the Company were to agree to permit
the contractor to retain the shares in satisfaction of the Company's debt, or if
the contractor were to sell the shares to a single purchaser or a single group
of purchasers, the new shareholder would own 11.4% and the officers, directors,
and founders and their spouses would own 37.0% of the outstanding Common Stock,
respectively, if none of the Shares offered pursuant to this Prospectus are
sold, and will own 9.3% and 30.1% of the outstanding Common Stock, respectively,
if all 600,000 Shares are sold pursuant to this offering. (The foregoing
percentages do not take into account 8,333 shares of Common Stock previously
acquired by the general contractor, except to include them in the outstanding
shares.) While the general contractor has the present right to vote the 300,000
shares, no shareholder votes are scheduled or anticipated before the due date of
the indebtedness. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations Liquidity and Capital Resources."
Shares Available for Future Sale
Open market sales of Common Stock that is outstanding at the start of this
offering may adversely affect the market price of the Shares during or after
this offering. Other than restrictions imposed by S.E.C. Rule 144, there are no
material restrictions on the transferability of the 1,453,330 shares of Common
Stock held by non-affiliates of the Company. See "Shares Eligible for Future
Resale."
Excise Taxes
Alcoholic beverages are subject to substantial federal and state excise
taxes. The federal rate of taxation increases from $7.00 per bbl. to $18.00 per
bbl. for annual production in excess of 60,000 bbl. Alcoholic beverages have in
recent years been targets of attempts to increase so-called "sin taxes." If
excise taxes are increased, the Company could have to raise prices to maintain
profit margins. Historically, price increases due to additional excise taxes
have not reduced unit sales, but past experience does not necessarily indicate
future effects, and the actual effect is likely to depend on the amount of the
increase, general economic conditions, and other factors. While higher taxes may
reduce overall demand for beer, they would likely also lower the relative price
difference between Mendocino Brewing's products and its less expensive
competitors. Management believes that the Company's position as a high quality
craft brewer whose products are already priced at or near the top of its market
segment will enable it to withstand tax increases in the near future. These
forward looking statements concerning the possible effect of future excise tax
increases are subject to risks and uncertainties. These include general economic
conditions, competition, and evolving consumer preferences and attitudes toward
adult beverages.
Dramshop Liability
Serving alcohol to an intoxicated or minor patron is a violation of
California law. A server who sells alcoholic beverages to an intoxicated or
minor patron may also be liable to third parties for the acts of the patron.
Although Mendocino Brewing has implemented procedures to minimize the liability
associated with serving alcoholic beverages to intoxicated or minor patrons,
there can be no assurance that intoxicated or minor patrons will not be served
or that the Company will not be subject to liability for the acts of such
patrons. The Company maintains general liability insurance which includes liquor
and host liquor liability coverage, currently limited to $1,000,000 per
occurrence and $2,000,000 in the aggregate annually, with $4,000,000 in
additional secondary coverage. The Company intends to continue such coverage if
coverage remains available at an affordable cost. Future increases in premiums
could make it prohibitive for the Company to maintain adequate insurance. A
large uninsured damage award could adversely affect the Company's business,
financial condition, and results of operations.
Product Liability
Mendocino Brewing's products are not heat pasteurized, irradiated, or
chemically treated. In addition, the Company's brewing operations are subject to
certain hazards such as contamination. The Company maintains
-7-
<PAGE>
product liability insurance, and no such claims have been made in the Company's
thirteen-year history and such claims are rare in the industry. The Company
carries general product liability insurance, currently limited to $1,000,000 per
occurrence and $2,000,000 in the aggregate annually, with $4,000,000 in
additional secondary coverage. The Company intends to continue such coverage if
it remains available at an affordable cost. Future increases in premiums could
make it prohibitive for the Company to maintain adequate insurance coverage. A
large uninsured damage award could adversely affect the Company's financial
condition.
Environmental Hazards
As a user of real estate, the possibility exists that Mendocino Brewing
could be held responsible for any contamination of the earth beneath it,
regardless of whether the Company in any way caused such contamination. Although
the seller of the Company's real estate has agreed to indemnify the Company
against any pre-existing contamination liability, there can be no assurance that
the seller will have the willingness or financial wherewithal to perform its
indemnification obligation.
Primary Production Facility and Uninsured Losses
After completing the new brewery, Mendocino Brewing will cease using the
Hopland facility for wholesale production and will rely primarily or exclusively
on the new brewery. The Company has obtained comprehensive insurance, including
liability, fire, and extended coverage, as is customarily obtained for
businesses similar to the Company. Certain types of catastrophic losses,
however, such as losses resulting from floods, tornadoes, thunderstorms, and
earthquakes, are either uninsurable or not economically insurable to the full
extent of potential loss. Such "Acts of God," work stoppages, regulatory
actions, and other causes could interrupt production and adversely affect the
Company's business, financial condition, and results of operations. The Ukiah
facility is located in a 100-year flood plain, although the base of the building
has been elevated above the plain. The Company intends to purchase flood
insurance if it is economically feasible to do so.
Energy and Supply Shortages and Allocations
Shortages or increased costs of fuel, water, raw materials, power, or
building materials, or allocations by suppliers or governmental regulatory
bodies, could materially delay the expansion of the brewery, hinder the
operations of the Hopland brewing facility and/or the brewpub, or otherwise
adversely affect the ability of Mendocino Brewing to meet its objectives.
PRIORITY OF EXISTING SHAREHOLDERS
Shareholders of record as of October 25, 1996 have the first right to
purchase Shares pursuant to this offering on a first come, first served basis.
The minimum purchase is 100 Shares ($850.00). Shares that remain unsold 15 days
after the date of this Prospectus, if any, will be offered to the public and
sold in the order in which fully completed subscriptions are received. For more
information concerning subscription procedures, see "Plan of Distribution --
Subscription Procedure."
USE OF PROCEEDS
The maximum net proceeds to Mendocino Brewing from the sale of the Shares
in this offering are estimated to be approximately $4,700,000, after deducting
selling and other offering expenses. Proceeds from this offering will be used to
finance the increase in capacity from 50,000 bbl. to 60,000 bbl., pay certain
cost increases resulting from design changes and inclement weather, and, if the
maximum number of Shares is sold, to expand the annual production capacity of
the new brewery to 75,000 bbl. or more, depending on the mix of products brewed.
Management presently estimates that the additional costs associated with
expanding annual capacity to approximately 75,000 bbl. will be approximately
$0.5 million. No decisions have been made with respect to the vendors of
additional brewing equipment. Management has designated an additional $700,000
to fund increased marketing efforts and to provide working capital.
The Company and its various lenders have agreed that the net proceeds of
the offering will be applied first to the addition of $300,000 to the Company's
working capital, second to construction of $600,000 worth of tenant improvements
to the brewery (primarily consisting of office space and landscaping), third to
payment of $500,000 in accrued fees to the general contractor for the new
brewery otherwise due on January 31, 1997 bearing interest at 12% per annum from
January 1, 1997; fourth, to payment of $400,000 of a $600,000 short term loan
(which
-8-
<PAGE>
Management expects the Company to replace with a revolving line of credit
secured by accounts receivable and inventory, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources") bearing interest at prime plus 1.5% and maturing on April
30, 1997, and finally to payment of the remaining $400,000 in accrued fees to
the general contractor for the new brewery. The Savings Bank of Mendocino
County, in its commitment letter for conversion of the construction loan to a
15-year term loan, proposed to require the Company to pledge all proceeds of
this offering in excess of $2.5 million as collateral for the term loan, with
the provision that the Bank will release the funds from the pledge to purchase
additional equipment if the Company is meeting its sales and revenue objectives.
See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Liquidity and Capital Resources." Subject to the approval of the
Savings Bank of Mendocino County, if and to the extent required under the
definitive documentation for the 15-year term loan, Management has also
designated approximately $265,000 toward repayment of seller financing on the
real estate bearing interest at 9% per annum and due on June 27, 1997.
Pending the above uses, Mendocino Brewing intends to invest the net
proceeds from this offering in short-term investment-grade interest bearing
securities.
<TABLE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Mendocino Brewing's Common Stock was listed on the Pacific Stock Exchange
(symbol MBR) on February 21, 1995. Before February 21, 1995, there was no public
trading market for the Company's Common Stock. The high and low closing sales
prices for the Common Stock on the Pacific Stock Exchange are set forth below
for the quarters indicated:
<CAPTION>
1995 1996
------------------------------------------------------------ ------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
High $13.50 $9.25 $8.75 $8.12 $7.38 $10.82 $10.00
Low $7.62 $7.12 $7.75 $7.00 $5.50 $5.82 $7.38
</TABLE>
There were approximately 2,496 shareholders of record as of June 30, 1996.
Management intends to retain Mendocino Brewing's earnings for use in the
business and does not expect the Company to pay cash dividends in the
foreseeable future. The Company's credit agreements provide that the Company
shall not declare or pay any dividend or other distribution on its Common Stock
(other than a stock dividend) or purchase or redeem any Common Stock, without
the lender's prior written consent. The holders of the Company's 227,600
outstanding shares of Series A Preferred Stock are entitled to aggregate cash
dividends and liquidation proceeds of $1.00 per share before any dividend may be
paid with respect to the Common Stock. See "Capitalization" and "Description of
Capital Stock."
-9-
<PAGE>
CAPITALIZATION
<TABLE>
The following table sets forth the actual capitalization of Mendocino
Brewing on June 30, 1996, and also provides the pro forma capitalization of the
Company as of June 30, 1996, after giving effect to the sale of the maximum
(600,000 Shares) number of Shares offered by the Company in this offering at the
public offering price of $8.50 per share and the application of the estimated
net proceeds:
<CAPTION>
June 30, 1996
-------------------------------------
Pro Forma
Actual As Adjusted
------ -----------
<S> <C> <C>
Short-term obligations:
Short term debt ......................................... $ 360,000 $ 600,000(1)
Current maturities of long-term debt .................... 10,000 32,400(2)
Current portion of equipment financing .................. 0 196,800(3)
----------- -----------
Total short-term commitments ................... 370,000 829,200
Long-term obligations:
Long-term debt, less current portion .................... 550,700 2,677,600(2)
Equipment financing, less current portion ............... 0 1,903,200(3)
----------- -----------
Total long-term commitments .................... 550,700 4,580,800
Shareholders' equity:
Common Stock, no par value,
20,000,000 shares authorized;
2,322,222 shares outstanding; 2,722,222
shares outstanding pro forma ...................... 3,869,600 8,569,600
Preferred Stock, no par value
2,000,000 shares authorized
227,600 shares designated Series A
227,600 Series A shares outstanding with a preferred
dividend equal to $1.00 per share; shares cancel
upon the aggregate payment of entire preferred
dividend ......................................... 227,600 227,600
Retained Earnings ................................... 276,300 276,300
----------- -----------
Total shareholders' equity .......................... 4,373,500 9,073,500
----------- -----------
Total capitalization ......................... $ 4,934,200 $11,783,500
=========== ===========
<FN>
(1) The pro forma balance sheet reflects the conversion of Mendocino Brewing's
short-term loan from WestAmerica Bank ($300,000 outstanding at June 30,
1996; $600,000 outstanding as of the date of this Prospectus) to a
revolving line of credit secured by inventory and accounts payable of at
least $600,000 and the retirement of $900,000 in short-term financing
provided after June 30, 1996 by the general contractor for the new brewery.
The Company repaid a separate $60,000 short term loan after June 30, 1996.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
(2) Long term debt consists of a $2.7 million construction loan from the
Savings Bank of Mendocino County. Although the construction loan is due and
payable upon completion of construction, the Savings Bank has given
Mendocino Brewing a written commitment to convert the construction loan to
permanent financing upon the satisfaction of certain conditions.
(3) Mendocino Brewing has an equipment lease from FINOVA Capital Corporation
which the Company has used to finance the acquisition of approximately
$2.07 million in cost of new brewing equipment.
</FN>
</TABLE>
-10-
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
The following selected financial data have been derived from the Financial
Statements and Notes to Financial Statements, audited by Moss Adams LLP,
independent auditors, whose report thereon is also included. The selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and the Financial
Statements and Notes thereto included elsewhere in this Prospectus.
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
------------------------------ ------------------------------
1994 1995 1995 1996
---- ---- ---- ----
Statements of Income Data: (unaudited)
<S> <C> <C> <C> <C>
Sales.............................. $ 3,523,000 $ 3,735,100 $ 1,675,200 $ 1,911,400
Less excise taxes.................. 157,400 168,600 74,500 71,000
----------- ----------- ------------ ------------
Net sales.......................... 3,365,600 3,566,500 1,600,700 1,840,400
Cost of goods sold................. 1,840,900 1,846,500 907,800 870,400
----------- ----------- ------------ ------------
Gross profit....................... 1,524,700 1,720,000 693,000 970,000
Operating expenses................. 1,342,700 1,537,300 720,500 1,004,700
----------- ----------- ------------ ------------
Income (loss) from operations...... 200,000 182,700 (27,500) (34,700)
Interest income, net............... 21,800 129,100 74,800 10,800
Other income (expense)............. 3,000 14,800 6,000 (47,400)
----------- ----------- ------------ ------------
Income (loss) before income taxes.. 224,800 326,600 53,300 (71,300)
Provision for (benefit from)
income taxes..................... 71,500 152,900 20,800 (20,700)
----------- ----------- ------------ ------------
Net income (loss).................. $ 153,300 $ 173,700 $ 32,500 $ (50,600)
=========== =========== ============ ============
Earnings (loss) per share.......... $ .08 $ .08 $ .01 $ (.02)
=========== =========== ============ ============
Weighted average common
shares outstanding............... 1,814,403 2,307,074 2,294,148 2,322,222
=========== =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data: December 31, 1995 June 30, 1996
----------------- -------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents....................... $ 1,696,100 $ 21,200
Working capital (deficit)....................... 959,100 (2,125,600)(1)
Property and equipment.......................... 3,954,100 6,947,700
Deposits and other assets....................... 71,000 98,400
Total assets.................................... 6,514,000 8,214,900
Long term debt, including current portion....... 554,900 560,700
Total liabilities............................... 2,089,800 3,841,400
Shareholders' equity............................ 4,424,200 4,373,500
<FN>
- ----------------
(1) After June 30, 1996, Mendocino Brewing obtained a $2.7 million construction
loan with a commitment to convert the loan to a long term loan, subject to
certain conditions, form the Savings Bank of Mendocino County, plus an
equipment lease agreement with FINOVA Capital Corporation for up to
approximately $2.07 million of new brewing equipment, plus short term
financing from the general contractor for the new brewery in the amount of
$900,000. See "Management's Discussion and Analysis of Financial Conditions
and Results of Operations - Liquidity and Capital Resources."
</FN>
</TABLE>
-11-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Financial Statements and the Notes thereto and other financial information
included elsewhere in this Prospectus. The discussion of results and trends does
not necessarily imply that these results and trends will continue.
Overview
Mendocino Brewing's financial performance from 1994 through the first six
months of 1996 has been characterized by increased sales and gross profits from
brewing operations offset by increased administrative expenses attributable to
the Company's expansion plan and the cost of being a public company and the
aggregate net effect of certain one-time gains, certain one-time losses, and
interest from the net proceeds of the Company's initial public offering. The
increase in sales is attributable to increased production resulting from adding
an additional bottling tank and implementing a 24 hour brewing schedule in
September 1995, implementing certain marketing strategies, including new point
of sale materials and field sales representatives, beginning in the second
quarter of 1996, and retail price increases at the Hopland Brewery brewpub. The
improvements to brewing operations increased production capacity by 32% and
significantly reduced cost of goods as a percentage of sales.
Comparing 1995 to 1994, sales were up 6%, cost of goods sold was flat, and
gross profit was up 17.4%. Comparing the first six months of 1996 to the same
period in 1995, sales are up 14.1%, cost of goods sold is down 4.1%, and gross
profit is up 40%. In 1995, increased administrative expenses resulted in an 8.6%
decline in income from operations over 1994, but a $119,100 increase in other
income due to interest on the public offering proceeds plus a one time worker's
compensation dividend resulted in a 45.3% increase in income before income
taxes. In 1996, the bankruptcy of a distributor, increased expenses associated
with the operation of the Hopland Brewery, and increased marketing expenses
resulted in a 39.4% increase in operating expenses but only $7,200 in additional
losses from operations compared to the same period in 1995. While Management
plans to continue marketing expenses at a high level, Management has taken
actions to control expenses at the Hopland Brewery and will not incur any
additional losses attributable to the bankrupt distributor. Management's
decision to write off $38,000 in expenses incurred in exploring an alliance with
a mid-western distribution company (classified as "other expense"), when
combined with a $64,000 decrease in interest earnings as the Company spent the
cash proceeds from the public offering, further reduced pre-tax income to a
$50,600 loss for the first six months of 1996 compared to income of $32,500 for
the same period in 1995.
For fiscal year 1996, Management expects Mendocino Brewing to realize
increases in sales over 1995 of up to 10% as a result of its increased capacity
over 1995, after taking into consideration wholesale beer price incentives and
reductions to stimulate distributor interest. Management does anticipate,
however, that the Company will be required to cease production of bottled beer
for approximately two weeks while its bottling operation is transferred from
Hopland to Ukiah, and Management expects to continue to increase the Company's
marketing expense in anticipation of substantially increased capacity.
Management expects the Company to begin realizing revenues from the new brewery
April 1997. Any improvement in results of operations for fiscal 1996 are
therefore likely to be attributable to increased production from the Hopland
facility and not to completion of the new brewery. Management expects that by
the time the Company reaches production of 60,000 bbl. per year at the Ukiah
facility, depending on the mix of bottled and draft beer produced and future
pricing, annual sales could triple from 1995 levels. These forward looking
statements are subject to risks and uncertainties. The Company's actual results
could differ materially if, among other causes, the Company fails to complete
construction of the new brewery on time, fails to sell its increased production,
materially reduces the price of its products, experiences difficulty in
transferring bottling operations from Hopland to Ukiah, or experiences any of
the other circumstances discussed in "Risk Factors."
-12-
<PAGE>
Results of Operations
The following tables set forth, as a percentage of net sales, certain items
included in Mendocino Brewing's Statements of Income. See Financial Statements
and Notes thereto elsewhere in this Prospectus, for the periods indicated.
Year Ended Six Months Ended
December 31, June 30
---------------- -------------------
1994 1995 1995 1996
Statements of Income Data:
Sales ........................... 104.68% 104.73% 104.65% 103.86%
Less Excise Taxes ............... 4.68 4.73 4.65 3.86
------ ------ ------ ------
Net Sales ....................... 100.00 100.00 100.00 100.00
Costs of goods sold ............. 54.70 51.77 56.71 47.30
------ ------ ------ ------
Gross profit .................... 45.30 48.23 43.29 52.70
Operating expenses .............. 39.36 43.10 45.01 54.59
------ ------ ------ ------
Income (loss) from operations ... 5.94 5.12 (1.72) (1.89)
Other income (expense) .......... 0.98 4.24 5.05 (1.99)
------ ------ ------ ------
Income before income taxes ...... 6.68 9.16 3.32 (3.88)
Provision for income taxes ...... 2.12 4.29 1.30 (1.12)
------ ------ ------ ------
Net income ...................... 4.55% 4.87% 2.03% (2.75)%
====== ====== ====== ======
Sales. Sales increased 6.0% from $3,523,000 in 1994 to $3,735,100 in 1995
and 14.1% from $1,675,200 for the six month period ended June 30, 1995 to
$1,911,400 for the comparable period in 1996. Growth in sales was attributable
to increased production resulting from adding an additional bottling tank and
implementing a 24 hour brewing schedule in September 1995, implementing certain
marketing strategies, including new point of sale materials and field sales
representatives, beginning in the second quarter of 1996, and retail price
increases at the Hopland Brewery brewpub. A decrease in sales in the first
quarter of 1996 compared to 1995 was offset by an increase in sales in the
second quarter of 1996 compared to 1995. Management attributes the decrease in
the first quarter of 1996 to delays in implementing a new marketing plan and the
increase in the second quarter of 1996 to the implementation of the marketing
plan plus expansion into new geographic market. Management attributes
approximately half of the sales increase in the second quarter to increased
sales to existing distributors with the other half attributable to geographic
expansion. Retail sales at the Hopland Brewery brewpub and merchandise store
increased 3.3% from 1994 to 1995 and 6.0% from the six month period ended June
30, 1995 to the comparable period in 1996. Management attributes the increase in
brewpub sales to a busy summer in 1995 due to increased tourist trade and an
increased awareness of MBC's products. These factors more than offset a decrease
in beer and food sales in the first quarter of 1995 compared to 1994 which
Management attributed to heavy rains and flooding in nearby areas.
Cost of goods sold. Cost of goods sold decreased as a percentage of net
sales by 2.93 percentage points from 1994 to 1995 and by 9.41 percentage points
from the six month period ended June 30, 1995 to the same period in 1996. The
implementation of 24-hour brewing in September 1995 significantly improved
production efficiencies. The cost of bottles also dropped in the third quarter
of 1995.
Gross profit. Gross profit increased 17.4% from $898,400 in 1994 to
$1,054,600 in 1995 and 40.0% from $693,000 for the six month period ended June
30, 1995 to $970,000 for the comparable period in 1996.
Operating expenses. Operating expenses increased 14.5% from $1,342,700 in
1994 to $1,537,300 in 1995 and 39.4% from $720,500 for the six month period
ended June 30, 1995 to $1,004,700 for the comparable period in 1996. Several
factors contributed to the increases. Marketing expenses have increased partly
because of the increase in production capacity that occurred in September 1995
and partly in anticipation of the opening of the new brewery. Management expects
the Company to further increase marketing expenses in the balance of 1996 and
into 1997. These marketing expenses take the form of point of sale and other
promotional costs, periodic price discount specials to distributors, and labor
expenses. Retail operating expenses increased due primarily to higher labor
costs, increased utilities, increased repairs and maintenance, and during the
first two quarters of 1996, increased promotional expenses. The Company wrote
off $38,000 in bad debts in the second quarter of 1996 after a California
distributor went out of business. Finally, general and administrative expense
increased due to legal fees related to growth and trademark issues, payment of
directors fees and expenses to the outside directors, costs associated with
-13-
<PAGE>
being a public company, increased labor costs (due to the addition of a human
resources director and a shareholder relations coordinator in 1994), and payment
of performance bonuses in 1995. This increase was partially offset by a reduced
contribution to the Company's profit sharing retirement plan.
Other income (expense). Other income (expense) increased in 1995 over 1994.
In 1995 Mendocino Brewing benefited from an increase of $106,800 in interest
earnings attributable to interest on the proceeds of the Company's public
offering of its Common Stock. In addition, one time refunds of worker's
compensation premiums for prior years were paid as a result of rate adjustments
in those years. In the first quarter of 1995 the Company wrote off an equipment
deposit of $15,000 made in 1993. Other income (expense) decreased by $117,300 in
the six months ended June 30, 1996 compared to the same period for 1995 as a
result of a write-off of approximately $38,000 in expenses incurred in exploring
an alliance with a mid-western distribution company and a decrease of $64,000 in
interest earnings as cash from the initial direct public offering was used for
the expansion project.
Provision for (benefit from) income taxes. The provision for income taxes
in 1995 was $81,400 more than the provision for income tax in 1994 primarily
because of Mendocino Brewing's higher net income and timing differences
resulting in more deferred income taxes. See "Notes to Financial Statements,
Note 1(h) - Description of Operations and Summary of Significant Accounting
Policies and Note 11 - Income Taxes." The Company recognized a benefit from
income taxes in the first six months of 1996 of $20,700 compared to a tax
provision in approximately the same amount for the same period in 1995.
Net income. Net income increased 13.3% in 1995 over 1994 primarily due to
increased sales and lower cost of goods sold as a percentage of sales resulting
from process improvements in brewing operations. For the six month period ended
June 30, 1996 compared to the same period for 1995, net income was down $83,100
for a net loss of $50,624 compared to net income of $32,500. Operating results
for the first two quarters of 1996 are not necessarily indicative of operating
results for the full year. For at least the past three fiscal years, operating
results for the first two quarters have not been indicative of operating results
for the entire year. In 1995, net income for the first two quarters was 18.7% of
net income for the year; in 1994, it was 22.5%; and in 1993, it was 15.4% (on a
pro forma basis assuming that the Partnership had paid income taxes at the
corporate rates then in effect).
Segment Information
Mendocino Brewing's business presently consists of two primary segments.
The first segment is brewing for wholesale to distributors and other retailers.
This segment accounted for 74% of the Company's 1995 annual sales. The second
segment consists of brewing beer for sale along with food and merchandise at the
Company's brewpub and retail merchandise store, the Hopland Brewery. This
segment accounted for 26% of the Company's 1995 annual sales, 11% of which
consisted of the sale of draft and bottled beer, and the remaining 15% of which
consisted of sales of food and merchandise. Wholesale and retail beer sales in
both segments combined comprised 85% of the Company's annual sales in 1995. See
"Notes to Financial Statements, Note 7 - Segment Information."
Mendocino Brewing is now in the process of increasing its brewing capacity
by more than three times (18,000 bbl. to 60,000 bbl.). Proceeds from the sale of
all of the stock offered by this Prospectus would permit the Company to expand
its operations to up to 75,000 bbl. per year, an aggregate increase from the
Company's current capacity of 18,000 bbl. of more than 4.2four times. (See "Use
of Proceeds.") As the Company does not intend to expand its brewpub operations,
Management expects that retail sales, as a percentage of total sales, will
decrease proportionally to the expected increase in the Company's wholesale
sales. Retail beer sales for off-site consumption may decrease as the Company's
brews become more widely available.
Seasonality
Beer consumption nationwide has historically increased by approximately 20%
during the summer months. Mendocino Brewing's wholesale distributors were on an
allocation basis while the Company's annual production was capped at 13,600
bbl., so seasonality had little effect on wholesale sales through late 1995. It
is not clear to what extent seasonality will affect the Company as it expands
its production capacity. The Company brews four seasonal beers: Springtide Ale
in March, Eye of the Hawk Special Ale from July through October, Frolic
Shipwreck Ale 1850 in July, and Yuletide Porter in November and December. These
seasonal beers tend to augment sales during the periods in which they are
available. Retail operations, which depend largely on tourist traffic,
historically have been higher in the third and fourth quarters.
-14-
<PAGE>
Material Commitments - Expansion Plan
Mendocino Brewing is building a 62,000 sq. ft. custom designed turn-key
brewery on nine acres of land in Ukiah, California. See "Business - New Brewery"
and "Liquidity and Capital Resources."
Liquidity and Capital Resources
Generally. The expansion now underway has had and will continue to have a
material impact on Mendocino Brewing's assets, liabilities, commitments for
capital expenditures, and liquidity.
Capital resources for the expansion plan have been supplied by the net
proceeds of Mendocino Brewing's initial public offering and debt and equipment
financing as described below. Working capital for day to day business operations
to date has been provided primarily through operations.
Financing the New Brewery. The presently estimated cost of the new brewery
at its initial annual production capacity of 60,000 bbl. is $11.1 million. This
includes $0.8 million for the land, $6.7 million for improvements to the real
estate, $3.2 million for equipment, and $0.4 for financing costs. Increasing the
initial annual production capacity of the new brewery to 75,000 bbl. will
require an additional expenditure for equipment of approximately $0.5 million.
Of this amount, approximately $3.3 million has been paid from the net proceeds
of Mendocino Brewing's initial public offering completed in February 1995.
Mendocino Brewing has obtained a $2.7 million construction loan secured by
a first priority deed of trust on the Ukiah land and improvements and the
proceeds of this offering from the Savings Bank of Mendocino County along with a
written commitment to convert the construction loan to a 15 year term loan upon
successful completion of the new brewery, subject to certain conditions. The
construction loan bears interest at the lender's prime plus 2% (initially
10.25%), payable monthly, and matures on February 2, 1997. Upon conversion, the
loan will bear interest at the then prevailing 5 Year Treasury Constant Maturity
Index (but not less than 10%), with a maximum for the first five years at 2%
above the initial fully indexed rate, and a maximum during the remaining term of
the loan at 3% above the initial fully indexed rate at the beginning of the
remaining term. The minimum annual interest rate is 8%. The loan will be over 25
years with a balloon payment upon maturity. The lender's commitment letter
states that the lender will convert the unpaid principal at maturity to a fully
amortized 10-year loan subject to terms an conditions to be agreed upon at that
time. The commitment letter proposes to require the Company to pledge all
proceeds of this offering in excess of $2.5 million as collateral for the
15-year term loan, with the provision that the Bank will release the funds from
the pledge to purchase additional equipment if the Company is meeting its sales
and revenue objectives.
FINOVA Capital Corporation has also agreed to lease new brewing equipment
with a total cost of approximately $2.07 million to Mendocino Brewing for a term
of 7 years with monthly rental payments of approximately $29,000 each. The lease
is to commence when the brewing equipment is operational. Until that time,
FINOVA has loaned $750,000 to the Company with interest at the Citibank prime
plus 3%. At expiration of the initial term of the lease, the Company may
purchase the equipment at its then current fair market value but not less than
25% or more than 30% of the original cost of the equipment, or at the Company's
option, may extend the term of the lease for an additional year at approximately
$45,600 per month with an option to purchase the equipment at the end of the
year at then current fair market value. The lease is not pre-payable.
The seller of the Ukiah land has a note, secured by a third priority deed
of trust on the land, with a remaining principal balance as of August 1, 1996 of
approximately $265,000 at 9% annual interest payable in monthly installments of
principal and interest of $2,380 with the balance due at maturity on June 27,
1997.
WestAmerica Bank of Santa Rosa, California has loaned Mendocino Brewing
$600,000 secured by Mendocino Brewing's accounts receivable and other tangible
personal property located at its Hopland facility. The loan bears interest at a
variable interest rate of prime plus 1.5% payable monthly and matures on April
27, 1997. The Company anticipates that it will convert this amount with a new
revolving line of credit secured by accounts receivable and inventory, and has
received a commitment letter from WestAmerica Bank to convert the $600,000 term
loan to a revolving line of credit with an advance rate of 80% of qualified
accounts receivable and 25% of inventory. As the Company's sales and production
continue to expand, the amount of inventory and receivables financing available
should increase proportionately. These forward looking statements are subject to
risks and uncertainties. Even if the Company's accounts receivable and inventory
grows in quantity, credit may be unavailable for other reasons relating either
to the Company's business, financial condition, and results of operations, the
craft brew industry, the lending industry, or economic conditions in general. To
the extent that the loan is not extended or refinanced, the
-15-
<PAGE>
Company will be required to repay the loan out of cash from operations, the net
proceeds of this offering, or the proceeds of another debt or equity financing,
a strategic alliance, or a joint venture.
The general contractor for the new brewery, BDM Construction Co., Inc.
("BDM"), has agreed to defer up to $900,000 in fees otherwise owed or to become
payable on December 31, 1996, subject to performance by BDM of its obligations
under the construction contract, until January 31, 1997 with interest at 12% per
annum. The deferral arrangement is secured by a second priority deed of trust on
the Ukiah land and improvements, and by 300,000 shares of Mendocino Brewing's
Common Stock. In the event of default, BDM is required to proceed against the
Common Stock before initiating any proceeding against the real estate. The
Common Stock collateral was issued to BDM by the Company pursuant to Section
4(2) of the Securities Act of 1933 subject to the restrictions (a) that the
shares shall be canceled if the amounts owed BDM are paid in full, (b) that if
full amount owed BDM is not paid, the shares must be sold in a commercially
reasonable manner as specified in the California Commercial Code, and (c) that
any shares not needed to be sold to satisfy the obligation to BDM shall be
canceled. Under California law, BDM may not retain the shares in satisfaction of
the obligation without the written consent of the Company given after an event
of default. Management plans to pay the Company's obligation to BDM out of the
proceeds of this offering, but there is no assurance that the Company will raise
net proceeds sufficient to do so at the time required. See "Use of Proceeds." To
the extent that the proceeds of the offering are insufficient, the Company will
be required to pay the obligation out of cash from operations, proceeds from the
sale of the shares held as collateral, or the proceeds of another debt or equity
financing, strategic alliance, or a joint venture.
Of the balance of the anticipated cost of the new brewery (approximately
$1.26 million for a 60,000 bbl. brewery and $1.76 million for a 75,000 bbl.
brewery), a portion has already been paid from operations, but Management
expects most of the remainder to come from the proceeds of this offering, or if
such proceeds are insufficient, vendor financing, future operations, other debt
or equity financing, or a strategic alliance or joint venture.
Debt to Equity Ratio. Upon completion of the new brewery, and after taking
into account the sale of the maximum number of Shares offered by this
Prospectus, Mendocino Brewing will have long-term debt and equipment financing
commitments of at least $4.8 million. The exact amount to be financed will
depend on the amount raised in this offering, the amount and type of any
additional equipment purchased, and the extent to which the Company obtains debt
or lease financing for additional equipment. On a pro forma basis, assuming that
$4.8 million in long-term debt had been added as of June 30, 1996 to the
Company's then existing long-term debt of $0.55 million, but without assuming
the sale of any additional shares of Common Stock, the Company's ratio of
long-term debt to shareholder's equity, which was actually 0.13 to 1 on June 30,
1996, would have been 1.10 to 1.
Impact of Expansion on Cash Flow. Mendocino Brewing must make timely
payment of its debt and lease commitment to continue in operation. Increased
capacity will also place additional demands on the Company's working capital to
fund increased purchases of supplies and pay the cost of additional production
and administrative staff and additional sales and marketing staff and
activities. There will be a lag between the time the Company must incur some or
all of these costs and the time the Company generates revenue from sale of
increased production. Working capital to fund these expenses will be provided by
trade terms offered by suppliers and vendors, the proceeds of this offering,
additional debt or equity from other sources, and/or deferral of certain
expenses.
Strategic Alliances and Joint Ventures. The rapid growth of the craft beer
industry has been characterized in part by a variety of consolidations,
strategic alliances, and joint ventures. Mendocino Brewing and its President,
Michael Laybourn, are very visible within the craft brew segment because of the
Company's place in the history of modern craft brewing, the distinctiveness of
its Red Tail Ale label, and Mr. Laybourn's leadership positions in industry
trade groups. See "Management." From time to time Mendocino Brewing has received
indications of interest in forming a strategic alliance, joint venture, or other
relationship. To date, only one such proposal evolved beyond a term sheet before
the Company withdrew from negotiations. The Company is, however, carrying on
discussions with certain parties that could result in a strategic alliance or
joint venture. The Company's current goals in any such arrangement would be to
obtain additional capital to expand the production capacity of the new brewery
to 200,000 bbl per year, to enter into an arrangement for sharing the expanded
brewery to provide optimal utilization of overhead and thereby reduce unit
costs, and to access additional channels of domestic and/or international
distribution. Creating additional value for shareholders is an important
objective of these goals, but providing liquidity by way of a sale or merger is
not. The Company offers no assurances or estimates of the possibility that the
Company might enter into such a strategic alliance or joint venture at any time
in the foreseeable future.
-16-
<PAGE>
BUSINESS
Overview
Mendocino Brewing Company, Inc. brews Red Tail Ale along with five other
ales, one stout, and one porter for the domestic craft beer market. A "craft
beer" is a full-flavored beer brewed in the traditional style. Mendocino Brewing
is one of the first of the modern craft brewers, and is considered to be an
industry leader for its innovations. Mendocino Brewing's objective is to
transform itself from the country's leading microbrewery (i.e., a brewery with
annual capacity of less than 15,000 bbl. per year) to a major national craft
brewer offering among the highest quality craft beers available anywhere in
America.
To accomplish this goal, Mendocino Brewing is building a new brewery in
Ukiah, California (110 miles north of San Francisco), which Management presently
expects to be completed in January or February of 1997. The new brewery will
have an initial annual capacity of approximately 60,000 bbl., which is more than
four times the Company's annual capacity from 1993 - 1995 of 13,600 bbl.
Proceeds from this offering, if the maximum number of Shares is sold, will be
used to further expand the new brewery's annual capacity to approximately 75,000
bbl., depending on the mix of products brewed. See "Use of Proceeds."
Ultimately, the facility can expand to 200,000 bbl. per year.
Company Background
Mendocino Brewing Company was originally formed in March 1983 as a
California limited partnership (the "Partnership"). On January 1, 1994, the
business was incorporated by transferring all of the Partnership's assets,
including its name, to a newly formed California corporation in exchange for all
of the Common and Preferred Stock of the corporation. The Partnership
distributed these shares to its partners on January 3, 1994. As used hereafter,
references to the "Company" and "Mendocino Brewing" include the business
operations of the Partnership before its incorporation.
Mendocino Brewing first bottled its flagship brand, Red Tail Ale, in
December 1983. In February 1995, Mendocino Brewing completed a $3.6 million
direct public offering at $6 per share. The Company purchased nine acres of land
in Ukiah, California in 1995 and broke ground on the new brewery in September
1995. Seeking to maximize the production of the Hopland facility in the interim,
the Company added an additional bottling tank in the Fall of 1995, which
permitted the Company to begin 24 hour brewing operations. This increased the
annual capacity of the Hopland facility to 18,000 bbl., technically taking the
Company out of the microbrewery category. The Company's products are sold in
over 1,500 retail outlets in Northern California and in selected locations
throughout the United States. See "Product Distribution."
Mendocino Brewing is recognized as a leader in the craft brewing industry
and enjoys a national and international reputation. The Company's distinctive
and award winning Red Tail Ale label is frequently featured in calendars,
posters, and literature concerning the craft beer industry. The Company enjoys
good visibility within the industry as well, due in part to the leadership its
officers have provided within various industry trade groups. See "Management."
Industry Overview
Domestic Beer Market. According to Modern Brewery Age's 1995 Statistical
Report, overall domestic beer sales in 1995 was 177 million bbl. (down 1.5% from
1994). A barrel equals approximately 13.78 cases of 331 twelve ounce bottles;
177 million bbl. is therefore the approximate equivalent of 58.5 billion twelve
ounce bottles of beer.
<TABLE>
The U.S. beer market may be divided into five segments:
<CAPTION>
Representative Suggested
Segment Est. Market Share Top Brands Retail Price/6-pack
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Low-Priced 60.0% Busch, Milwaukee's Best, Old Milwaukee $2.80
Premium 31.4% Budweiser, Miller Lite, Bud Light, Coors Light $4.05
Super-Premium 1.2% Michelob, Lowenbrau $4.67
European Import 5.5% Heineken, Guinness, Bass $7.90
Domestic Craft 1.9% Samuel Adams, Pete's, Sierra Nevada, Red Tail Ale $5.99 to $6.99
</TABLE>
-17-
<PAGE>
Domestic Craft Beer Segment. While overall beer sales have been basically
flat for several years, domestic craft beer sales in 1995 were up 44% to 3.8
million bbl. and a 1.9% market share. Many industry analysts predict that craft
beer sales will continue to increase until they achieve a market share of 5%-6%
by the year 2000.
Craft beers are characterized by their full-flavor and are usually produced
along traditional European brewing styles. The majority of craft beers are ales,
although some are malt lagers. Wheat beers and fruit flavored ales and lagers
have enjoyed recent popularity among craft beer consumers.
Competition
The craft beer category consists of:
o Contract brews -- any style brew produced by one brewer for sale under
the label of someone else who does not have a brewery or whose brewery
does not have sufficient capacity .
o Regional craft brews -- "hand-crafted" brews, primarily ales, sold
under the label of the brewery that produced it.
o Microbrews -- "hand-crafted" brews, primarily ales, sold under the
label of the brewery that produced it, if the capacity of the brewery
does not exceed 15,000 bbl. per year.
o Large brewer craft- style brews -- a brand brewed by a national brewer
which may only imitate the style of a craft beer. These craft-style
brews are often sold under the label of a brewery that does not exist
or the label of a brewpub with no bottling capacity. The term "phantom
brewery" is sometimes used to describe such brands.
o Brewpub brews -- "hand-crafted" brews produced for sale and
consumption at the brewery, which is normally connected with a
restaurant/saloon. Brewpub brews are not normally sold for off-site
consumption in significant quantities.
Mendocino Brewing competes against all of the above brewers primarily on
the basis of product quality and image.
Of the approximately 3.7 million bbl. of craft beer produced in America in
1995, contract brews (led by Samuel Adams Boston Lager, Pete's Wicked Ale, and
their respective related brands) accounted for approximately 1.5 million bbl.,
or 41% of the total; regional craft brands (led by Sierra Nevada, Redhook,
Pyramid (Hart Brewing, Inc.), Anchor, and Full Sail) represented approximately
1.25 million bbl., or 34% of the total; and microbrews (led by Red Tail Ale)
represented approximately 910,000 bbl., or 25% of the total. Mendocino Brewing's
annual capacity grew slightly beyond 15,000 bbl. to 18,000 bbl. in 1995, and
technically ceased to be a microbrew at that time.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
1994 & 1995 Domestic Craft Beer Market
1994 1995
Largest Craft Brewers in Mendocino Total Sales Annual Total Sales Annual
Brewing's Primary & Target Markets (x 1,000 bbl.) Growth (x 1,000 bbl.) Growth
----------------------------------------------------- -------------- ------ -------------- ------
<S> <C> <C> <C> <C>
1. Boston Beer Co. (Boston, MA) 700 56% 961 37%
2. Pete's Brewing Co. (Palo Alto, CA) 182 43 348 91
3. Sierra Nevada Brewing Co. (Chico, CA) 156 50 205 31
4. Redhook Ale Brewery (Seattle, WA) 94 27 159 69
5. Hart Brewing Co. (Kalma, WA) 72 118 123 71
6. Anchor Brewing Co. (S.F., CA) 103 12 104 1
7. Full Sail Brewing Co. (Hood River, OR) 53 39 71 36
8. Widmer Brewing Co. (Portland, OR) 50 25 70 40
9. Portland Brewing Co. (Portland, OR) 34 N/A 62 82
10. Bridgeport Brewing Co. (Portland, OR) 18 12 N/A N/A
11. Mendocino Brewing Co. (Hopland, CA) 13 4 14 8
Remaining Domestic Craft Brewers (approx. 800) 1,154 N/A 1,663 44
----- --- ----- ---
Total Domestic Specialty Segment Production 2,629 N/A 3,780 44%
- ---------------------------------------------------------------------------------------------------------------
<FN>
Source: Modern Brewery Age
</FN>
</TABLE>
-18-
<PAGE>
Products
Mendocino Brewing brews three ales and a stout year-round, three seasonal
ales, and a seasonal porter:
o RED TAIL ALE, a full flavored amber ale, is the flagship brand of
Mendocino Brewing.
o BLUE HERON PALE ALE is a golden ale with a full body and a distinctive
hop character.
o BLACK HAWK STOUT is the fullest in flavor and body of the Company's
brews.
o EYE OF THE HAWK SELECT ALE is a high gravity deep amber summer ale.
o YULETIDE PORTER is a deep brown Holiday brew with a traditionally
rich, creamy flavor.
o PEREGRINE PALE ALE is brewed year-round with a more delicate flavor
and character.
o SPRINGTIDE ALE is brewed around St. Patrick's Day and appears as a
fresh, flowery, spicy golden ale.
o FROLIC SHIPWRECK ALE 1850, a Scottish-style ale brewed around July,
was introduced in 1994 as an annual fund-raiser at the request of the
Mendocino County Museum to commemorate the wreck of the clipper ship
Frolic, with its cargo of Scottish ale, on the Mendocino coast in
1850. Salvage efforts were abandoned when workers, upon sighting the
previously unreported big trees of Mendocino County, launched the
timber industry which has characterized the area ever since.
Mendocino Brewing uses an ale yeast strain that was first introduced at New
Albion Brewing Co. in the late 1970s. Management knows of no other brewery that
ferments its beer with this particular strain of yeast, which is no longer
available commercially elsewhere. Mendocino Brewing is among a minority of
brewers who use whole hop flowers instead of processed hop pellets in their
brewing processes. This technique contributes to the distinctive characteristics
of the brews. The Company adds active fermenting beer (Krausen) after the beer
is bottled, which produces a pleasant amount of natural carbonation. The thin
layer of brewer's yeast in the bottom of the bottle is a natural characteristic
of bottle conditioned ale.
Mendocino Brewing's distinctive brews have been very well received in the
market and within the industry. Eye of the Hawk Select Ale won a gold medal at
the 1991 Great American Beer Festival after winning a silver in 1990, and also
won a bronze in 1992. Blue Heron Pale Ale also won a bronze medal at the 1991
Great American Beer Festival.
The Hopland Brewery Brewpub and Merchandise Store
To date, Mendocino Brewing's major marketing tool has been the Hopland
Brewery. Located on a major tourist route in Hopland, California, 100 miles
north of San Francisco, the Hopland Brewery, which opened in 1983, was the first
brewpub to open in California and the second in the United States since the
repeal of Prohibition.
The brewpub is housed in a 100 year-old brick building that was once known
as the Hop Vine Saloon. The inside walls are trimmed with the original
turn-of-the-century ornamental stamped tin. Works of local artists are featured
on a rotating basis. The bar is hand-crafted early California style blond oak
and brass that complements the tradition of the tavern and the Company's brews.
The pub includes a dart room and a stage. Patrons can view the brewing process
through windows in the adjoining brewhouse. An outdoor Beer Garden includes a
shaded grape arbor, flowers, trellised hops in the summer, picnic tables, and a
sandbox for the kids.
Beverages served include Red Tail Ale, Blue Heron Pale Ale, Black Hawk
Stout, Peregrine Pale Ale, and a seasonal brew on tap, along with local wines,
Hopland Seltzer Water, local apple juice, and soft drinks. The brewpub also
features hand pumped cask conditioned ales. The menu features home-style
cooking, spicy beer sausages, legendary hamburgers, Red Tail chili, fresh
salads, snacks, vegetarian entrees, and daily specials at moderate prices. The
brewpub operates days and evenings, with live music on Saturdays and for special
events, such as the Company's annual Anniversary Party in August and its
Oktoberfest in October.
The adjacent Merchandise Store sells off-sale packages of the Company's
brews (including gift packs) and merchandise such as hand-screened label
T-shirts, posters, engraved pint glasses and mugs, logo caps, books about
brewing, gift packs, and other brewery-related gifts.
Management plans to continue bottling operations at the Hopland facility
until the Company can no longer keep up with demand, and will then transfer the
bottling operations to the Ukiah facility. The Company will continue to operate
the Hopland facility to provide special occasion draft beers for the brewpub; to
research, develop, and test-market new craft brews; and as a brewing education
and training site.
-19-
<PAGE>
Strategy
Mendocino Brewing's objective is to transform itself from the country's
leading microbrewery to a nationally known and respected craft brewer that
offers among the highest quality craft beers available anywhere in America.
Management believes that the continued growth in the domestic craft beer segment
(see "-- Industry Overview") has given rise to a qualitative shift in the
public's awareness of craft beers, and that this shift now gives the Company an
opportunity to enter new markets at a time when many consumers are discovering
craft brews for the first time. Increasing capacity by building a new brewery
has been a necessary step in achieving this objective. Management believes that
an equally important step is to position Mendocino Brewing's products as
offering superior quality with very high perceived value and distinctive brand
images, even when compared with other craft brews. Management plans to
accomplish this objective by making the Company's most popular brews available
in 12 oz. six packs and draft, increasing the Company's brand development
efforts, and entering new geographic markets.
New Product Offerings
Until recently, Mendocino Brewing's capacity limitations and marketing
considerations dictated that the bulk of the Company's production be Red Tail
Ale in 12 oz. six packs. Draft beer has been limited to production for sale at
the Hopland Brewery, and other brews, such as Blue Heron Pale Ale, Black Hawk
Stout, Eye of the Hawk Special Ale, Yuletide Porter, and Frolic Shipwreck Ale
1850 have been available only in limited quantities of 750 ml or 22 oz. bottles.
A key element of the Company's strategy is to make more of its products
available in 12 oz. six-packs and draft. The new products are:
o Blue Heron Pale Ale. Blue Heron Pale Ale is now available at selected
retail outlets in 12 oz. six packs. The bottles and carrier pack
feature a colorful new label depicting a blue heron in flight over a
river valley. The design has already won awards for graphics and
packaging, including a Northern California Addy.
o Black Hawk Stout 12 oz. six-packs. Management plans to introduce Black
Hawk Stout in 12 oz. six following completion of its new label
development, which Management expects to occur in 1997. This forward
looking statement is subject to risks and uncertainties. Among other
things, the task of completing the new brewery may divert Management's
attention from matters such as label development. The speed with which
new Black Hawk Stout labels are developed will also depend, in part,
on the amount of proceeds raised in this offering. The Black Hawk
Stout label presently consists of the basic Mendocino Brewing Company
logo with the words BLACK HAWK STOUT and is distributed in 22 oz.
bottles in limited quantities.
o Draft brews in half barrel. kegs. Management presently intends to make
draft production of Red Tail Ale, Blue Heron Pale Ale, Black Hawk
Stout, and Peregrine Pale Ale in half barrel kegs the first priority
of the new brewery. Historically in the beer industry, introducing
draft products into restaurants and other establishments has driven
bottle sales which in turn increased demand for draft products in
locations not served. The Company is designing special tap handles and
other marketing materials for its draft products. These forward
looking statements are subject to risks and uncertainty. Among other
things, there is no assurance that sale of the Company's brews will
help it achieve the critical mass that Management seeks.
Brand Development
Management believes that consumers of the Company's brews are like the
typical craft beer consumer described in the H.C. Wainwright & Co. industry
report of October 12, 1995. According to this report, the typical craft beer
consumer is interested in "upscale and diversified" products with a "distinctive
brand image" and "full flavored taste." Craft beer consumers also tend to be
consumers of gourmet coffees, fine wines, all-natural products, and other
"affordable luxuries." A survey conducted by ICR of Media, PA found that the
following percentages of people had tried a craft beer:
* 25% of all U.S. beer drinkers
* 23% of women beer drinkers
* 26% of male beer drinkers
* 51% of people with annual incomes of $75,000 +
* (Greater Than) 50% of college educated people
* 38% of adults 25-34 years old
* 10% of adults 45 years and older
* 32% of beer drinkers in the Northeast
* 28% of beer drinkers in the West
* 26% of beer drinkers in the Midwest
* 17% of beer drinkers in the South
One of the ways Mendocino Brewing projects its quality and corporate values
to consumers is through its Red Tail Ale, Eye of the Hawk Special Ale, and Blue
Heron Pale Ale labels. The Company has used nationally-known
-20-
<PAGE>
wildlife artists including Randy Johnson and Lee Jayred for its label designs.
In 1990, Mendocino Brewing received the Paperboard Packaging Council's Silver
Award for Excellence in Packaging and Award for Excellence in Graphic Design and
a Northern California Addy Award for its Red Tail Ale packaging. This year, the
Company received a Northern California Addy Award for its Blue Heron Pale Ale
packaging. It is Management's experience that distributors and retailers realize
the importance of superior packaging graphics and appreciate the Company's
offerings for that reason.
Management believes that the Red Tail Ale label successfully communicates
the value of Mendocino Brewing's products with the label's respectful depiction
of a red tail hawk flaring its wings as it prepares to land with clusters of
hops and barley in its talons. The illustrations Mendocino Brewing uses with its
Eye of the Hawk Select Ale and Blue Heron Pale Ale labels are intended to evoke
similar responses, as will be the illustrations for Black Hawk Stout and
Peregrine Pale Ale when introduced.
The popularity of Mendocino Brewing's logos and trademarks is evidenced by
the success of the merchandise store at the Hopland Brewery and also by the
success of the merchandise catalogue the Company introduced in 1994. As part of
its marketing efforts, therefore, the Company intends to implement a brand
marketing development program that will emphasize:
o Point-of-sale promotional materials including brochures, signage,
table tents, coasters, tap handles, and glassware.
o Clothing (caps, T-shirts, polo shirts, sweatshirts, etc.).
o Signage for distributor trucks to create "moving billboards."
Mendocino Brewing's emphasis on separate, distinctive illustrations
for its various brands enables it to produce a variety of images to
create consumer interest.
o World Wide Web Page. Mendocino Brewing's web page is located at
http://mendobrew.com and features information about the Company and
the Hopland Brewery brewpub, the Company's brewing process, the
Company's brands, the Hopland area, Company merchandise, and
shareholder information. The web page address is featured prominently
on Company marketing materials.
o Continued use of the Brewsletter beyond its current mailing list of
12,000. The Brewsletter is a newsletter Mendocino Brewing publishes
and distributes to educate subscribers about the brewing industry and
the Company's products and to promote the Company's image and
corporate values.
o Strong visual presence at beer shows and tasting competitions,
including the Great America Beer Festival in Denver, the Portland
Brewers Festival, and the KQED Beer Festival in San Francisco.
Regional Expansion
Mendocino Brewing's goal is to become a nationally known and respected
craft brewer. In addition to California, the Company's products are distributed
in limited quantities in the metropolitan areas of Washington D.C., Boston,
Seattle, Phoenix, Chicago, Milwaukee, New York, Atlanta, and North Carolina, and
throughout Texas, Oregon and Colorado at selected accounts. The Company plans to
add distributors in New Jersey, Maryland, Virginia, and the metropolitan areas
of Minneapolis/St. Paul and Philadelphia in the near future. Increased
production will make it possible for the Company to sell greater quantities of
its products in these and other locations. Northern California is the Company's
most important market, and Management anticipates that it will remain so for the
foreseeable future. The Company's two largest distributors, Bay Area
Distributing (San Francisco and the East San Francisco Bay Area) and Golden Gate
Distributing (Sonoma and Marin Counties) accounted for 21% and 19%,
respectively, of the Company's wholesale distribution in 1995. The percentage of
the Company's sales for which these distributors have accounted has decreased,
and will continue to decrease, as the Company adds new distributors and supplies
them with more product.
Pricing Strategy
Mendocino Brewing's products are priced at or near the top of the market
and have been for several years. Recently, in anticipation of substantially
increased production, the Company reduced its suggested retail price for a
six-pack of Red Tail Ale from $7.43 to $6.99. The Company has noticed that the
price range of 12 oz six packs of the major craft brew brands has narrowed in
the last two years and appears to be converging on $6.50 per six pack, with no
major craft brew brands at less than $6.45 per six pack. Management believes
that the Company's products will continue to command prices that will be on at
least a par with other major regional craft brewers. These forward
-21-
<PAGE>
looking statements are subject to risks and uncertainties. Retail prices are
subject to many factors most of which are beyond the control of the Company.
These factors include general economic conditions, competition and
consolidation, and ability to anticipate and respond to evolving consumer
preferences and attitudes toward adult beverages. Management anticipates that
the Company will periodically give temporary price reductions through special
promotions in response to market conditions. Frequent price reductions can
condition consumers to expect such reductions, which may increase or reduce
overall unit sales depending on the circumstances.
Social Responsibility
Part of Mendocino Brewing's mission is to be viewed as a community,
regional, and national asset and as a positive example of how a business should
be operated. Management believes that the Company's customers require products
with high intrinsic value; that product quality alone is not sufficient; and
that a product must distinguish itself from the competition with the values it
communicates. These values include commitment to employees, community
involvement, and environmental responsibility. Management attempts to instill
these values in Company personnel and operations and to communicate to customers
the commitment of the Company to act responsibly. The Company encourages
employees and distributors to share ownership and mission with Management as
well as a sense of pride in the Company's products. Although part of the
Company's strategy is to grow through expanded production and sales, it promotes
its brews as beverages of moderation whose distinctive taste and high quality
give the consumer satisfaction.
New Brewery
Mendocino Brewing is building a 62,000 sq. ft. custom designed turn-key
brewery on nine acres of land in Ukiah, California, approximately 10 miles north
of the original brewery. The facility was approximately 70% complete in
September 1996. The facility is planned to feature new fermenting tanks, kegs,
and packaging and other miscellaneous equipment to be installed with the
Company's existing bottling line. Certain features of the new brewery have been
specially designed for the Company's brewing methods, such as equipment for
using whole hops and designated space for bottle conditioning. The facility will
initially open with an annual capacity of 60,000 bbl. per year. The Company had
originally planned a 50,000 bbl. facility, but was able to take advantage of
certain economies by revising its plans to 60,000 bbl. per year (20% greater
than originally planned). The facility has been designed to allow for expansion
in stages up to a maximum capacity of 200,000 bbl. per year (54% greater than
originally planned). The Company also elected to construct an extensive water
treatment facility as part of its commitment to the environment and to reduce
the over-all cost of disposing of its waste water. Management expects the sale
of the maximum number of Shares offered by this Prospectus will be sufficient to
permit the Company to purchase additional equipment to increase the plant's
annual capacity to approximately 75,000 bbl., depending on the products brewed.
Mendocino Brewing anticipates that it may have to cease production for
approximately two weeks to move its bottling equipment from Hopland to the Ukiah
facility. The Company intends to build up sufficient inventory of bottled
product to maintain its then existing sales levels during the transition. These
forward looking statements are subject to risks and uncertainties. The time
required to relocate the bottling equipment could be subject to several factors,
including problems or delays in disassembling, moving, reassembling, installing,
and integrating the equipment. If the hiatus between shut down and re-start is
extended, or if the build-up of inventory is inadequate for that or any other
reason, the Company could find itself unable to meet demand, which could have an
adverse effect on the Company's goodwill. If the inventory is built up too much,
there is a possibility that the Company will not be able to sell the entire
inventory before the end of its shelf-life of 90 days, although inventory
rotation will reduce such a possibility.
Product Distribution
Mendocino Brewing's beers are sold through distributors to consumers in
bottles at supermarkets, warehouse stores, liquor stores, taverns and bars,
restaurants, and convenience stores. As production capacity expands, the Company
intends to make its brews available in draft form and may add additional kinds
of outlets, such as sporting events. The Company's products are delivered to
retail outlets by independent distributors whose principal business is the
distribution of beer and in some cases other alcoholic beverages, and who
typically also distribute one or more national beer brands. The Company,
together with its distributors, markets its products to retail outlets and
relies on its distributors to provide regular deliveries, to maintain retail
shelf space, and to oversee timely rotation of inventory. The Company also
offers its products directly to consumers at the Hopland Brewery. Of the
Company's
-22-
<PAGE>
total sales for 1995, 74% (87% of total beer sales) constituted sales to
independent distributors and 11% (13% of total beer sales) constituted sales at
the Hopland Brewery brewpub and merchandise store. Beer sales (wholesale and
retail combined) constituted 85% of the Company's total sales in 1995, with food
and merchandise retail and catalogue sales constituting the balance. As the
Company's production capacity increases, Management expects sales to independent
distributors to increase materially as a percentage of total sales.
Suppliers
The Company's major suppliers are Great Western Malting Co., Yakima,
Washington (malt); John I. Haas, Co., New York, New York (hops); and California
Glass Company, Oakland, California and Vitro Packaging, Inc., Dallas, Texas
(bottles). The City of Ukiah will supply power and water to the new brewery.
Employees
As of September 30, 1996, the Company employed 43 full-time and 42
part-time individuals including 10 in management and administration, 25 in
brewing operations, and 50 in retail and brewpub operations. Upon the completion
of its expansion, Management expects the Company to increase four current
employees to full-time status and to hire five additional management and
administrative employees, three marketing employees and five employees in
operations. Management believes that the Company's relations with its employees
is excellent. None of its work force is unionized. The Company has agreed with
the City of Ukiah that for two years it will give preference in its hiring to
residents of Mendocino County.
Properties/Facilities
The Company currently leases a 15,500 square foot building in Hopland. The
lease expires on September 1, 2004. Additionally, the Company leases a 4,000 sq.
ft. portion of a warehouse, located approximately two miles from the Hopland
facility. The Company owns nine acres of land in Ukiah, California on which the
Company has begun construction of its new brewery.
Patents and Trademarks
The Company has federal trademark registrations of the word marks MENDOCINO
BREWING COMPANY (Reg. No. 1,785,745), BLUE HERON (Reg. No. 1,820,076), PEREGRINE
PALE ALE (Reg. No. 1,667,796), EYE OF THE HAWK SELECT ALE (Reg. No. 1,673,594),
BLACK HAWK STOUT (Reg. No. 1,791,807), YULETIDE PORTER (Reg. No. 1,666,891), and
BREWSLETTER (Reg. No. 1,768,639). The Company's registration for the word mark
RED TALE ALE (Reg. No. 1,575,386) became subject to automatic cancellation on
January 2, 1996. The Company has pending a special application for a new
registration of that mark. In addition, the Company has pending applications for
registration of its Blue Heron Pale Ale design (Serial No. 74/734782), its Eye
of the Hawk Anniversary Ale design (Serial No. 74/734781), its Eye of the Hawk
Select Ale design (Serial No. 74/734784), its Red Tail Ale design (Serial No.
74/734783), and its FROLIC SHIPWRECK ALE 1850 word mark and design (Serial No.
75/019,867). The bird design marks were published for opposition on August 6,
1996.
The registration of the word mark BLUE HERON is a concurrent use
registration which gives the Company the exclusive right to use the word mark
BLUE HERON throughout the United States with the exception of Oregon, Idaho,
Washington, and Montana. BridgePort Brewing Company, the other concurrent owner,
has the exclusive right to use the word mark BLUE HERON in those states. The
BridgePort Pale Ale label used in other states depicts a blue heron wading in a
marsh although the words BLUE HERON do not appear.
Mendocino Brewing's use of the word mark BLACK HAWK STOUT is, by agreement
with Hiram Walker & Sons, Inc., subject to the restriction that it be used only
in conjunction with the words "Mendocino Brewing Company".
Mendocino Brewing does not consider its recipes, techniques, processes, or
equipment to be proprietary or necessary to protect.
Legal Proceedings
Mendocino Brewing is not currently involved in any material litigation or
proceeding and is not aware of any material litigation or proceeding against it.
-23-
<PAGE>
Government Regulation
Mendocino Brewing is licensed to manufacture and sell beer by the
California Department of Alcoholic Beverage Control ("ABC"). A "Small Beer
Manufacturer's License" allows the Company to brew up to 1,000,000 bbl. per
year, to conduct wholesale sales, and to sell beer and wine for consumption both
on and off the premises. A federal permit from the Bureau of Alcohol, Tobacco,
and Firearms ("BATF") allows the Company to manufacture fermented malt
beverages. To keep these licenses and permits in force the Company must pay
annual fees and submit timely production reports and excise tax returns. Prompt
notice of any changes in the operations, ownership, or company structure must
also be made to these regulatory agencies. BATF must also approve all product
labels, which must include an alcohol use warning. These agencies require that
individuals owning equity securities in aggregate of 10% or more in the Company
be investigated as to their suitability.
Taxation of alcohol has increased significantly in recent years. Currently,
the Federal tax rate is $7.00 per bbl. for up to 60,000 bbl. per year and $18.00
per bbl. for over 60,000 bbl. The California tax rate is $6.20 per bbl.
The Hopland Brewery's brewpub is regulated by the Mendocino County Health
Department, which requires an annual permit and conducts spot inspections to
monitor compliance with applicable health codes.
The Company's production operations must also comply with the Occupational
Safety and Health Administration's workplace safety and worker health
regulations and applicable state laws thereunder. Management believes that the
Company presently is in compliance with the aforementioned laws and regulations
and has implemented its own voluntary safety program.
Environmental Regulation.
The Company is subject to various federal, state, and local environmental
laws which regulate the use, storage, handling, and disposal of various
substances.
The Company's waste products consist of water, spent grains and hops, and
glass and cardboard. The Company has instituted a recycling program for its
office paper, newspapers, magazines, glass, and cardboard at minimal cost to the
Company. The Company pays approximately $1,000 per month in sewage fees relating
to waste water from its Hopland facility. The Company gives its spent grain to
local cattle ranchers, who pick up the spent grain at their expense. The Company
has not purchased any special equipment and does not incur any identifiable fees
in connection with its environmental compliance at its Hopland site.
Management anticipates that Mendocino Brewing will continue its recycling
program at the new brewery. Because of the increased quantities involved,
Management expects the Company to sell the spent grain from the Ukiah location
to ranchers and/or dairy farmers rather than give it away. The Company has built
its own waste water treatment plant for the Ukiah facility. As a consequence,
the Company will not be required to incur sewer hook-up fees at that location.
If the Company's discharge exceeds 55,000 gallons per day, which Management does
not expect to occur until annual capacity exceeds 100,000 bbl., the Company will
be required to pay additional fees. The estimated cost of the waste water
treatment facility is approximately $900,000, and the estimated cost of
operating the plant is between $6,000 and $10,000 per month. The cost may
increase with increased production. The Company is exploring various methods of
recycling treated waste water and could realize some revenue from doing so. The
Company has contracted to have the liquid sediment that remains from the treated
waste water to be trucked to a local composting facility for essentially the
cost of transportation. A Mendocino County Air Quality Control Permit will be
required to operate the natural gas fired boiler at the new facility.
The Company has not received any notice from any governmental agency that
it is a potentially responsible person under any environmental law.
Research and Development
The Company did not engage in material research and development activities
in 1994. In 1995 the Company began research into low-alcohol and non-alcoholic
ale and will continue to explore these and other new products. The Company
intends to use its original brewing facility at the Hopland Brewery to develop
and test market new brews after completion of the new facility.
Qualified Small Business Issuer
Federal and California tax laws provide a 50% exclusion of any gain from
the sale of "qualified small business stock." For the Shares offered by this
Prospectus to qualify for the exclusion, several tests must be met. For
-24-
<PAGE>
instance, the Shares must be purchased directly from the Company, not in any
later trading market, and the Shares must be held for at least five years.
A "qualified small business" must not have more than $50 million in assets,
at least 80% of which are used in a qualified trade or business throughout the
holding period. A "qualified trade or business" does not include "operating a
hotel, motel, restaurant, or similar business." It is uncertain whether the
Company's operation of the Hopland Brewery currently prevents it from meeting
the definition of "qualified small business", as the brewing equipment in
Hopland is presently used in both wholesale and retail operations. Management
believes, after consulting with its accountants, that completing the new brewery
will reduce the assets of the Company used in the operation of the brewpub to
well below 20%, but Management does not intend to request any opinions or
rulings on this issue at the present time.
The Company intends to submit reports if and to the extent any are required
under the law to make the 50% exclusion from capital gains available. There are
limitations on the persons who may use any exclusion. Prospective investors
should consult their own tax advisors concerning the possible applicability of
these exclusions.
<TABLE>
MANAGEMENT
Executive Officers, Directors, and Significant Employees
The executive officers, directors, and significant employees of the
Company, and their ages as of June 30, 1996, are as follows:
<CAPTION>
Name Age Position
---------------------- --- ----------------------------------------------------------------
<S> <C> <C>
H. Michael Laybourn 58 Chief Executive Officer, President, and Chairman of the Board
Norman H. Franks 49 Chief Financial Officer, Vice President, Treasurer, and Director
Michael F. Lovett 49 Marketing Director, Secretary, and Director
Eric G. Bradley* 59 Director
Daniel R. Moldenhauer* 62 Director
John Scahill 57 Facilities Manager
Donald Barkley 42 Master Brewer
<FN>
- ----------
*Member of the Compensation and Audit Committees
</FN>
</TABLE>
H. Michael Laybourn, co-founder, has served as the Company's Chief
Executive Officer and President since its inception in 1982. Mr. Laybourn was
elected a director in November 1993 when the Company began the process of
converting from a limited partnership to a corporation and Chairman of the Board
in June 1994. Before co-founding Mendocino Brewing, Mr. Laybourn co-owned and
operated Thunder Road Design and Construction. Mr. Laybourn is a Vice President
of the California Small Brewers Association and Chairman of the Board of
Directors of the Brewers Association of America. Mr. Laybourn holds a Bachelor
of Fine Arts degree from Arizona State University.
Norman H. Franks, co-founder, has served as the Company's Chief Financial
Officer and Vice President since its inception in 1982. Mr. Franks was elected a
director in November 1993 when the Company began the process of converting from
a limited partnership to a corporation. Before co-founding Mendocino Brewing,
Mr. Franks co-owned and operated Thunder Road Design and Construction. Mr.
Franks holds a B.S. degree in mechanical engineering from the University of
California, Berkeley.
Michael F. Lovett joined the Company in 1983 as Assistant Master Brewer and
became Marketing Director in 1987, serving since that time under that or other
titles. Mr. Lovett was elected a director in November 1993 when the Company
began the process of converting from a limited partnership to a corporation and
was appointed Secretary in June 1994. Between 1980 and 1983, Mr. Lovett was Vice
President Quality Control of New Albion Brewing Co. From 1976 to 1980, Mr.
Lovett was Production Superintendent at Farm Foods in San Francisco. He is the
immediate past Membership Chairman and a past Technical Chairman of the Master
Brewers Association of the Americas. Mr. Lovett holds a B.A. degree in
Psychology from San Francisco State College.
Eric G. Bradley became a director in June 1994. Mr. Bradley has been a
business and financial consultant since 1988. For the preceding 20 years, he was
employed by Kaiser Aluminum & Chemical Corp., in positions
-25-
<PAGE>
rising from Division Controller to Business Manager. Mr. Bradley is a Fellow of
the Institute of Chartered Accountants (UK) and a Certified Personal Financial
Planner.
Daniel R. Moldenhauer became a director in June 1994. Mr. Moldenhauer is a
management consultant. He was president of Conex Products Inc. of Dublin,
California from 1988 to 1990, a company formed from assets divested by Kaiser
Aluminum & Chemical Corp. and later sold to Coleman Cable Systems. Mr.
Moldenhauer served in several capacities with Kaiser Aluminum & Chemical Corp.
from 1971 to 1988, most recently as general manager of a subsidiary.
John Scahill, co-founder, has served as the Company's Facilities Manager
since its inception. Before co-founding the Company Mr. Scahill was a
self-employed rancher. Mr. Scahill has a background in construction and
counseling and holds a B.S. degree in sociology from the University of
California, Berkeley.
Donald Barkley joined the Company in 1983 as Master Brewer. Immediately
before joining the Company, Mr. Barkley was the Head Brewer and Plant Manager at
New Albion Brewing Co. from 1981 to 1983. Mr. Barkley joined New Albion Brewing
Co. in 1978 and held several positions. In 1993 Mr. Barkley was the President
and representative to the national board of governors of the Master Brewers
Association of the Americas District, Northern California District. Mr. Barkley
holds a B.S. degree in fermentation science from the University of California,
Davis.
Indemnification of Officers and Directors
The Articles of Incorporation of the Company provide for the
indemnification of its directors, officers, employees, and other agents to the
maximum extent permitted by the California Corporations Code except in
circumstances where the person is making a claim against the Company. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 (the
"Securities Act") may be permitted to directors, officers, and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
Director Term of Office
Directors are elected at each annual meeting of shareholders to server
until their successors are elected and qualified at the next annual meeting of
shareholders.
Director Compensation
The Company's inside directors do not receive any cash compensation for
their service on the Board of Directors. Outside directors receive $600 per
meeting. No additional fees are paid for attending Compensation or Audit
Committee meetings. Directors may be compensated for certain expenses in
connection with their attendance at Board meetings. Since July 1996, Director
Daniel R. Moldenhauer has acted as a project management consultant for the
Company with respect to its ongoing construction project.
Executive Compensation
The following table sets forth, for the fiscal years ended December 31,
1994 and December 31, 1995, annual compensation, including salary, bonuses, and
certain other compensation, paid by the Company to the Company's Chief Executive
Officer, Chief Financial Officer, and to all executive officers as a group. None
of the Company's other executive officers' total compensation exceeded $100,000
for fiscal 1995.
Annual Compensation
Fiscal ------------------- All Other
Name and Principal Position Year Salary Bonus Compensation*
- --------------------------- ---- ------ ----- -------------
H. Michael Laybourn ............... 1994 $59,520 $24,780 $13,529
Chief Executive Officer ...... 1995 89,016 22,255 9,804
Norman H. Franks .................. 1994 $56,016 $18,884 $13,228
Chief Financial Officer ...... 1995 79,008 23,702 5,835
- -----------
* Includes an allowance for health insurance, life insurance, disability
insurance, and participation in the Company's profit sharing retirement
plan (annual discretionary contributions by the Company of up to 15% of
gross compensation).
-26-
<PAGE>
Employment Agreements and Change in Control Arrangements
The Company has entered into employment agreements with its President,
Chief Financial Officer, and Marketing Director. The agreements call for minimum
annual base salary of $89,000, $79,000, and $55,000 respectively. The agreements
provide for bonus awards of a percentage of their respective base salaries upon
the satisfaction of performance objectives established by the Compensation
Committee (subject to the inherent oversight powers of the Board) and approved
by the employee. The agreements specify that the performance objectives must be
reasonably attainable, must not be probable of attainment without significant
effort, and must reflect or indicate that value has been created for the
shareholders. The Compensation Committee may award a bonus regardless of whether
previously specified objectives are realized if, as a result of an employee's
efforts or leadership, the Company has achieved other goals that reflect or
indicate that value has been created for the shareholders.
The agreements also award options to purchase up to 20,000, 20,000, and
10,000 shares of Company Common Stock pursuant to the Company's 1994 Stock
Option Plan at exercise prices of $9.2125, $9.2125, and $8.375 per share,
respectively. The options vest in equal monthly increments over five years. The
option agreements have terms of 5 years, 5 years, and 10 years, respectively.
The agreements do not provide for any benefits as a result of resignation
or retirement. The Board of Directors has discussed the subject of, and might in
the future grant, retirement benefits to Mendocino Brewing's founders in
addition to their participation in the Company's profit sharing plan.
The agreements provide for severance benefits in the form of 36, 36, and 18
months of salary continuation if the Company actually or constructively
terminates the employee's employment without cause as defined in the agreement.
If the actual or constructive termination occurs within one year after a change
in control as defined in the agreement, the agreements provide for an additional
lump sum benefit of up to $500,000, $500,000, and $250,000 respectively. Any
amount payable pursuant to these severance provisions will be deferred
indefinitely and without interest to the extent the amount would otherwise
constitute an excess parachute payment as defined in Section 280G of the
Internal Revenue Code. Amounts so deferred may be paid at such time in the
future, if any, that no portion of the payment will be considered an excess
parachute payment.
CERTAIN TRANSACTIONS
There have been no transactions during the last two years, and there are
now, no proposed transactions involving more than $60,000 between the Company
and any executive officer, director, nominee, 5% beneficial owner of any class
of the Company's securities, or member of the immediate family of any of the
foregoing persons, in which one or the foregoing individuals or entities had a
material interest, except as follows:
On October 11, 1996, the Company granted President Michael Laybourn a
5-year option to purchase 12,500 shares of Common Stock of the Company at an
exercise price of $8.80 per share in recognition of the Mr. Laybourn's personal
guaranty of the equipment lease with FINOVA Capital Corporation described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." Mr. Laybourn's guaranty
automatically terminates when FINOVA makes the final payment for the purchase
price of the equipment to the manufacturer following certification by an
independent engineer acceptable to FINOVA that the equipment is fully installed,
accepted, and fully operational.
The Company has entered into written employment agreements with its
President, Chief Financial Officer, and Marketing Director as described in
"Management -- Employment Agreements and Change in Control Arrangements."
-27-
<PAGE>
<TABLE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Company's Common Stock and Series A
Preferred Stock as of June 30, 1996, and as adjusted to reflect the sale of the
Shares offered by this Prospectus, for (a) each shareholder known by the Company
to own beneficially 5% or more of the outstanding shares of its Common Stock or
Series A Preferred Stock; (b) each director; and (c) all directors and executive
officers of the Company as a group. Except as otherwise noted, Management
believes that the beneficial owners of the Common Stock and Series A Preferred
Stock listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.
<CAPTION>
COMMON STOCK:
Percentage of Shares Outstanding(1)
Directors, Executive Officers, Shares Beneficially Before Offering Maximum Sold
and 5% Shareholders Owned 2,322,222 shares 2,922,222 shares
------------------------------ --------------- ---------------- ----------------
<S> <C> <C> <C>
H. Michael Laybourn* ...................................... 272,367 11.73% 9.32%
Norman H. Franks*(2)+ ..................................... 244,428 10.53% 8.36%
Michael F. Lovett*(3) ..................................... 101,559 4.37% 3.48%
Eric G. Bradley ........................................... 1,000 0.04% 0.03%
1056 Park Lane, Piedmont, CA 94610
Daniel R. Moldenhauer ..................................... 500 0.02% 0.02%
662 St. Ives Court
Walnut Creek, CA 94598
John Scahill* ............................................. 248,809 10.71% 8.51%
All directors and executive
officers as a group (5 persons) ......................... 619,938 26.70% 21.21%
SERIES A PREFERRED STOCK:
Directors, Executive Officers, Shares Beneficially Percentage of
and 5% Shareholders Owned Shares Outstanding
------------------------------- ----------------- ------------------
H. Michael Laybourn........................................ 6,100 2.68%
All directors and executive
officers as a group (five persons) ...................... 6,100 2.68%
* c/o Mendocino Brewing Company, Inc.
13351 Hwy. 101 South
Hopland, CA 95449-0400
<FN>
- -----------------
(1) Does not include 300,000 shares issued to BDM Construction Co., Inc.
("BDM") as security for the payment of up to $900,000 owed or to be owed to
BDM for general contractor services in connection with the new brewery. The
300,000 shares will be canceled if the Company timely pays the amounts owed
to BDM. BDM is not entitled to retain the shares as payment for the
obligation but must sell the shares in satisfaction of the debt in a
commercially reasonable manner unless the Company agrees, after a default,
to permit BDM to retain the shares. To the extent that any of the shares
are not required to be sold to satisfy the obligation, they will be
canceled. The obligation is also secured by a second priority security
interest on the Company's Ukiah real estate, but BDM has agreed to exhaust
its remedies against the 300,000 shares before proceeding against the real
estate collateral. Although BDM presently has the power to vote the 300,000
shares, no shareholder votes are contemplated until after the due date of
the obligation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
(2) Does not include 145 shares owned by Mr. Franks's wife. Mr. Franks
disclaims any beneficial ownership of shares held in the name of his wife.
(3) Mr. Lovett's shares are pledged to a commercial bank as security for a
personal loan.
</FN>
</TABLE>
-28-
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, without par value, and 2,000,000 shares of Preferred Stock,
without par value, 227,600 of which are designated Series A Preferred Stock.
Common Stock
At June 30, 1996, there were 2,322,222 shares of Common Stock outstanding
and held of record by approximately 2,496 shareholders. The holders of Common
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of the shareholders, except that upon giving the legally
required notice, shareholders may cumulate their votes in the election of
directors. The Company may pay dividends only at the times and extent declared
by the Board of Directors, and with respect to the Common Stock if and only if
the Company has paid an aggregate amount of $1.00 each on the Series A Preferred
Stock. The Company may at any time declare and pay a dividend with respect to
the Common Stock payable solely in Common Stock. Dividends are only payable out
of assets legally available for that purpose. See "Dividend Policy." Upon
liquidation or dissolution of the Company, holders of Common Stock are entitled
to share ratably in all assets remaining after payment of liabilities and
payment of an aggregate amount of $1.00 each in dividends and liquidation
proceeds on the Series A Preferred Stock. The Common Stock has no preemptive or
other subscription rights, and there are no conversion rights or redemption or
sinking fund provisions with respect to the Common Stock. All outstanding shares
of Common Stock are, and the Shares offered by this Prospectus will upon
completion of this offering be, fully paid and nonassessable.
Preferred Stock
As of the date of this Prospectus, there are outstanding 227,600 shares of
Series A Preferred Stock held of record by 43 shareholders. The Series A
Preferred Stock is not convertible into Common Stock. The holders of Series A
Preferred Stock have the right to receive cash dividends and/or liquidation
proceeds equal in the aggregate to $1.00 per share Series A Preferred Stock
before any cash dividends or liquidation proceeds may be paid on Common Stock or
any other series of Preferred Stock. The Series A Preferred Stock does not
entitle its holders to any voting rights, although the California Corporations
Code requires that certain matters be approved by the share of each class,
regardless of whether such shares otherwise have voting rights. When the entire
dividend/liquidation preference has been paid, the Series A Preferred Stock will
cease to be outstanding, and the Series A Preferred Stock will resume the status
of authorized but unissued and undesignated Preferred Stock.
The Board of Directors has the authority, without further action by the
shareholders, to issue all or part of the remaining 1,772,400 shares of
Preferred Stock in one or more series and to determine and alter the rights,
preferences, privileges, and restrictions granted to and imposed upon any wholly
unissued series of Preferred Stock, to fix the number of any series of Preferred
Stock, and to set the designation of any series of Preferred Stock. Dividends do
not cumulate, and do not accrue until declared by the Board of Directors. Except
as otherwise required by law, Preferred Stock does not vote on any matter. The
issuance of additional Preferred Stock could adversely affect the likelihood
that holders of Common Stock will receive dividend payments and/or payments upon
liquidation, and could have the effect of delaying, deferring, or preventing a
change of control of the Company. The issuance of Preferred Stock with
conversion rights may adversely affect the voting power of the holders of Common
Stock. The Company has no present plan to issue any additional shares of
Preferred Stock.
Registration Rights
There are no agreements between current holders of Common Stock or Series A
Preferred Stock and the Company obligating the Company to register such shares
under the Securities Act except for the employment agreements between Mendocino
Brewing and its President, Chief Financial Officer, Marketing Director, and
certain other employees holding an aggregate of 968,577 shares of Common Stock.
Under the terms of the agreements, the holders are entitled to include the
Common Stock they own with any registration by the Company of its securities
under the Securities Act, either for its own account or for the account of other
securities holders exercising registration rights who may acquire such rights in
the future. The holders may also require the Company to file and use its best
efforts to effect a registration statement under the Securities Act at the
Company's expense with respect to their shares of Common Stock. The holders may
further require the Company to file registration statements on Form S-3 with
respect to their shares at the Company's expense when such form becomes
available for use to the
-29-
<PAGE>
Company. The registration rights are subject to certain conditions and
limitations, including the right of any underwriters of an offering to limit the
number of shares to be included in the registration.
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Common Stock is Boston
EquiServe, 150 Royall Street, MS 45-02-63, Canton, MA 02021 (Telephone:
617-575-2804).
SHARES ELIGIBLE FOR FUTURE RESALE
Upon completion of this offering, assuming that the maximum amount of
Shares offered by this Prospectus is sold, the Company will have outstanding
2,922,222 shares of Common Stock.(1) Of these shares, approximately 1,020,697
shares will be freely tradable without restriction or further registration under
the Securities Act unless purchased by "affiliates" of the Company, as that term
is defined in Rule 144 under the Securities Act ("Rule 144") described below.
The restrictions of Rule 144 on shares held by persons other than affiliates
will expire completely on January 3, 1997.
Approximately 1,701,525 of the shares of Common Stock outstanding prior to
this offering are "restricted securities" and may not be sold in a public
distribution except in compliance with the registration requirements of the
Securities Act or an applicable exemption under the Securities Act, including an
exemption pursuant to Rule 144 thereunder.(2) All such restricted securities are
presently eligible for sale in the public market pursuant to Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for at least two years, is entitled to sell, within any three-month
period, a number of shares that does not exceed 1% of the then outstanding
shares of Common Stock. In addition, a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding the sale, and
who has beneficially owned the shares proposed to be sold for at least three
years, is entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. To the extent that shares were acquired from an
affiliate of the Company, such shareholder's holding period for the purposes of
effecting a sale under Rule 144 commences on the date of transfer from the
affiliate.
PLAN OF DISTRIBUTION
General
The Company is offering up to 600,000 Shares of its Common Stock on a "best
efforts" basis directly to the public. The minimum subscription is 100 Shares
($850.00). Shareholders of record as of October 25, 1996 ("Record Shareholders")
have the first right to purchase the Shares, provided that the Company receives
their properly completed subscription agreement and good funds for the purchase
price no later than fifteen days after the effective date of this Prospectus.
Thereafter, the Company will accept subscriptions for any remaining Shares from
the general public, subject only to the 100 Share minimum investment. Subject to
the priority of the Record Shareholders, subscriptions will be honored on a
first come, first served basis until all 600,000 Shares are sold or until the
Company terminates the offering. The offering is not contingent upon
subscriptions for any minimum number of Shares.
The Company has determined the public offering price of the Shares offered
by this Prospectus. Among factors considered in determining the public offering
price were the trading history of the Common Stock on the Pacific Stock
Exchange, growth in the industry segment, Management's assessments of the
results of operations and future prospects for the Company's business, and
recent sales growth.
- -----------
(1) This amount does not include the 300,000 shares of common stock issued to
BDM Construction Co., Inc. as security for payment of certain of its fees.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" and Note 1 to
"Principal Shareholders."
(2) This amount does not include the 300,000 shares of common stock issued to
BDM Construction Co., Inc. as security for payment of certain of its fees.
See Note 1 above.
-30-
<PAGE>
The Company will only effect offers and sales of Shares through its
designated sales representative, Michael F. Lovett, who also serves as the
Company's Marketing Director and Secretary and is a member of the Board of
Directors. Mr. Lovett is not subject to any of the statutory disqualifications
set forth in Section 3(a)(39) of the Exchange Act, nor is he an associated
person (partner, officer, director, or employee) of a broker or dealer. In
connection with the sale of the Shares offered by this Prospectus, Mr. Lovett
will not receive, directly or indirectly, any commissions, remuneration, or any
other compensation. Mr. Lovett has successfully passed the Series 63 -- Uniform
Securities Agent State Law Examination and is registered as a "sales
representative of the issuer" for this offering in those jurisdictions in which
such registration is required.
Subscription Procedure
The Shares are offered by the Company on a "best efforts" basis. The
offering shall terminate upon the earlier of (a) the date on which all of the
Shares have been sold; (b) __________________, unless such date is extended by
the Company; or (c) the date on which the Company terminates the offering. To
subscribe, investors must mail (a) the Subscription Agreement (or a photocopy
thereof), properly completed and signed, (b) a check or money order payable to
the order of "Mendocino Brewing Company, Inc." for the purchase price of $850.00
per share (minimum purchase 100 Shares), and (c) if the investor was a
beneficial owner of shares of the Company's Common Stock held of record as of
October 25, 1996 in the name of a nominee (i.e., a person other than the real
owner, such as a stock broker), written evidence of such beneficial ownership,
such as a copy of an account statement as of that date. Alternatively, the
nominee may subscribe for Shares in the nominee's name. Subscription documents
should be mailed or delivered to Mendocino Brewing Company, Inc., 13351 South
Highway 101, PO Box 400, Hopland, CA 95449-0400. Investors should not include
any other documents or correspondence. Since the number of Shares available is
limited and subscriptions will be accepted on a first come, first served basis,
with priority given to Record Shareholders, subscribers are advised to forward
the Subscription Agreement, payment for the Shares, and evidence of beneficial
ownership if required, as soon as possible.
Acceptance Procedure
The Company will first process properly completed subscriptions received
from Record Shareholders in the order in which they are received. Subscriptions
from other persons will be held until 15 days after the effective date of this
Prospectus. At that time, properly completed subscriptions received from such
other persons will also be processed in the order in which they are received.
Subscription Agreements received on the same date will be processed in the order
in which they are opened. Subscriptions are irrevocable. Subscriptions that are
not accepted for any reason will be returned without interest or any deduction
for expenses. Subscriptions accompanied by an overpayment which are otherwise
properly completed will be accepted and a check will be mailed to the subscriber
for the amount of the overpayment. The Company will assess a $25 charge for any
check that is returned by the bank.
Upon acceptance of a subscription, the Company will forward to the
subscriber a copy of the accepted subscription agreement and a copy of this
Prospectus (unless the Subscription Agreement indicates that the subscriber has
already received the final Prospectus or the subscriber elects to take delivery
of the Prospectus electronically over the Internet). At the same time, the
Company will forward an instruction to the transfer agent for the Shares, Boston
EquiServe, to prepare and forward a stock certificate directly to the
subscriber. Subscribers will not be deemed holders of the Shares purchased until
the stock certificate has been issued.
The Company reserves the right to terminate the offering at any time before
the sale of all 600,000 Shares.
LEGAL MATTERS
The legality of the Shares of Common Stock being offered by this Prospectus
will be passed upon for the Company by Enterprise Law Group, Inc., Menlo Park,
California.
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by Moss Adams LLP, independent public accountants, as indicated in
their report with respect thereto, in reliance upon the authority of Moss Adams
LLP as experts in accounting and auditing.
-31-
<PAGE>
ADDITIONAL INFORMATION
The Company has electronically filed a Registration Statement on Form SB-2
relating to the Shares offered by this Prospectus with the Securities and
Exchange Commission, Washington, D.C. This Prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Shares offered by this Prospectus, potential investors should refer to the
Registration Statement and its exhibits and schedules. The complete Registration
Statement and all amendments thereto will be available for viewing and
downloading without charge from the SEC's World Wide Web site located at
http://www.sec.gov shortly after being filed. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete. Copies of the Registration Statement and its amendments
may also be inspected by anyone without charge at the Commission's principal
office located at 450 Fifth Street, N.W., Washington, D.C. 20549, the
Commission's New York Regional Office located at 7 World Trade Center, 13th
Floor, New York, New York 10048, and the Commission's Chicago Regional Office
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of all or any part of the Registration Statement and
its amendments may also be obtained from the Public Reference Branch of the
Commission upon the payment of certain fees prescribed by the Commission.
INDEX TO FINANCIAL STATEMENTS
Page
----
INDEPENDENT AUDITOR'S REPORT .............................................. 33
FINANCIAL STATEMENTS
Balance sheet ............................................................. 34
Statements of income ...................................................... 35
Statements of partners'/shareholders' equity .............................. 36
Statements of cash flows .................................................. 37
Notes to financial statements ............................................. 38
Balance sheet (unaudited) ................................................. 46
Statements of income (unaudited) .......................................... 47
Statements of cash flows (unaudited) ...................................... 48
Notes to financial statements (unaudited) ................................. 49
-32-
<PAGE>
MOSS-ADAMS LLP
- --------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors
Mendocino Brewing Company, Inc.
We have audited the accompanying balance sheets of Mendocino Brewing Company,
Inc., as of December 31, 1995 and 1994, and the related statements of income,
equity and cash flows for each of the two years in the period then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mendocino Brewing Company,
Inc., as of December 31, 1995 and 1994, and the results of its operations and
its cash flows for each of the two years in the period then ended, in conformity
with generally accepted accounting principles.
/s/ MOSS ADAMS LLP
Santa Rosa, California
January 26, 1996
A member of
Moores
Rowland
INTERNATIONAL
An association of independent
accounting firms throughout the world.
-33-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
BALANCE SHEETS
December 31,
-----------------------
1995 1994
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents ........................ $1,696,100 $2,900,800
Accounts receivable .............................. 458,900 293,900
Inventories ...................................... 256,200 202,000
Prepaid expenses ................................. 47,100 13,500
Deferred income taxes ............................ 15,500 11,800
---------- ----------
Total current assets ...................... 2,473,800 3,422,000
---------- ----------
PROPERTY AND EQUIPMENT ............................... 3,954,100 301,000
---------- ----------
OTHER ASSETS
Label development costs, net of amortization ..... 15,100 14,700
Deferred offering costs .......................... -- 41,700
Deposits and other assets ........................ 71,000 254,600
Deferred income taxes ............................ -- 4,100
---------- ----------
86,100 315,100
---------- ----------
Total assets .............................. $6,514,000 $4,038,100
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ................................. $ 105,700 $ 144,700
Accrued wages and related expense ................ 129,800 84,200
Accrued construction costs ....................... 1,182,300 --
Accrued profit sharing ........................... 30,000 45,000
Accrued liabilities .............................. 22,300 20,600
Income taxes payable ............................. 34,200 12,400
Current maturities of long-term debt ............. 10,400 7,900
---------- ----------
Total current liabilities ................. 1,514,700 314,800
LONG-TERM DEBT, less current maturities .............. 554,900 --
DEFERRED INCOME TAXES ................................ 20,200 --
---------- ----------
Total liabilities ......................... 2,089,800 314,800
---------- ----------
COMMITMENTS .......................................... -- --
STOCKHOLDERS' EQUITY
Common stock, no par value; 20,000,000 shares,
authorized 2,322,222 and 2,220,445 shares
issued and outstanding ....................... 3,869,600 3,342,400
Preferred stock, Series A, no par value, with
aggregate liquidation preference of $227,600,
outstanding 227,600 shares authorized,
issued and outstanding ....................... 227,600 227,600
Retained earnings ................................ 327,000 153,300
---------- ----------
Total stockholders' equity ................ 4,424,200 3,723,300
---------- ----------
Total liabilities and stockholders'
equity ................................ $6,514,000 $4,038,100
========== ==========
The accompanying notes are an integral
part of these financial statements.
-34-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF INCOME
Year Ended
December 31,
----------------------------
1995 1994
---- ----
Sales .......................................... $ 3,735,100 $ 3,523,000
Less excise taxes .............................. 168,600 157,400
----------- -----------
Net sales ...................................... 3,566,500 3,365,600
Cost of goods sold ............................. 1,846,500 1,840,900
----------- -----------
Gross profit ................................... 1,720,000 1,524,700
----------- -----------
Operating expenses
Retail operating ........................... 649,200 594,300
Marketing .................................. 277,800 247,100
General and administrative ................. 610,300 483,300
----------- -----------
1,537,300 1,324,700
----------- -----------
Income from operations ......................... 182,700 200,000
----------- -----------
Other income (expense)
Interest income ............................ 132,800 26,000
Other income ............................... 14,800 3,000
Interest expense ........................... (3,700) (4,200)
----------- -----------
143,900 24,800
----------- -----------
Income before income taxes ..................... 326,600 224,800
Provision for income taxes ..................... 152,900 71,500
----------- -----------
Net income ..................................... $ 173,700 $ 153,300
=========== ===========
Earnings per share ............................. $ .08 $ .08
=========== ===========
Weighted average common shares outstanding ..... 2,307,074 1,814,403
=========== ===========
The accompanying notes are an integral
part of these financial statements.
-35-
<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF PARTNERS'/SHAREHOLDERS' EQUITY
Years Ended December 31, 1995 and 1994
<CAPTION>
Partnership Equity Series A
------------------------- Preferred Stock Common Stock
Limited General --------------- ------------------ Retained Total
Partners Partners Shares Amount Shares Amount Earnings Equity
-------- -------- ------ ------ ------ ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 776,200 $ 7,700 -- $ -- -- $ -- $ -- $ 783,900
Conversion of partnership
units to stock as a
result of incorporation (776,200) (7,700) 227,600 227,600 1,722,222 556,300 -- --
Issuance of common stock . -- -- -- -- 498,223 2,786,100 -- 2,786,100
Net income ............... -- -- -- -- -- -- 153,300 153,300
---------- ---------- ------- ---------- --------- ---------- ---------- ----------
Balance, December 31, 1994 -- -- 227,600 227,600 2,220,445 3,342,400 153,300 3,723,300
Issuance of common stock . -- -- -- -- 101,777 527,200 -- 527,200
Net income ............... -- -- -- -- -- -- 173,700 173,700
---------- ---------- ------- ---------- --------- ---------- ---------- ----------
Balance, December 31, 1995 $ -- $ -- 227,600 $ 227,600 2,322,222 $3,869,600 $ 327,000 $4,424,200
========== ========== ======= ========== ========= ========== ========== ==========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
-36-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF CASH FLOWS
Year Ended
December 31,
---------------------------
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................... $ 173,700 $ 153,300
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ......... 49,300 56,200
Loss (gain) on sale of assets ......... 500 (3,000)
Deferred income taxes ................. 20,600 (15,900)
Changes in:
Accounts receivable ................... (165,000) (24,900)
Inventories ........................... (54,200) (24,200)
Prepaid expenses ...................... (33,600) 800
Accounts payable ...................... (39,000) 42,100
Accrued wages and related expense ..... 45,600 44,400
Accrued profit sharing ................ (15,000) 20,000
Accrued liabilities ................... 1,700 (63,400)
Income taxes payable .................. 21,800 12,400
----------- -----------
Net cash provided by operating
activities ................... 6,400 197,800
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES ............. (2,923,300) (148,600)
Other assets ................................. (27,800) (197,200)
Proceeds from sale of fixed assets ........... 500 3,100
----------- -----------
Net cash used by investing
activities ................... (2,950,600) (342,700)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt ......... (11,700) (36,500)
Accrued construction costs ................... 1,182,300 --
Proceeds from sale of common stock ........... 568,900 2,786,200
----------- -----------
Net cash provided by financing
activities ................... 1,739,500 2,749,700
----------- -----------
INCREASE (DECREASE) IN CASH ...................... (1,204,700) 2,604,800
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ..... 2,900,800 296,000
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR ........... $ 1,696,100 $ 2,900,800
=========== ===========
The accompanying notes are an integral
part of these financial statements.
-37-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(a) Nature of business - Founded in 1983 as a limited
partnership, Mendocino Brewing Company, located in Hopland, California, operates
a microbrewery producing beer and malt beverages for the specialty beer market
and a brew pub and gift store. The majority of sales are in California.
Effective January 1, 1994, the Partnership incorporated by
contributing all of its assets and liabilities into the newly formed corporation
in exchange for common and preferred stock.
(b) Inventories - Inventories are stated at the lower-of-average
cost or market.
(c) Property and equipment - Property and equipment are stated at
cost and depreciated or amortized using straight-line and accelerated methods
over the assets' estimated useful lives. Capitalized interest was $15,200 in
1995. Costs of maintenance and repairs are charged to expense as incurred;
significant renewals and betterments are capitalized. Estimated useful lives are
as follows:
Machinery and equipment ................................ 5 to 7 years
Furniture and fixtures ................................. 5 to 7 years
Leasehold improvements ................................. 7 to 30 years
(d) Amortization - Label development costs are amortized on the
straight-line method over a three-year period.
(e) Deferred offering costs - Deferred offering costs consist of
legal and other costs incurred as part of the Company's public offering of
common stock.
(f) Deposits and other assets - Deposits and other assets consist
primarily of refundable deposits on the planned acquisition of brewing equipment
during 1996 and costs associated with developing a contract brewing alliance.
(g) Concentration of credit risks - Financial instruments that
potentially subject the Company to credit risk consist principally of trade
receivables and interest-bearing deposits. The Company's interest-bearing
deposits are placed with major financial institutions. Wholesale distributors
account for substantially all accounts receivable; therefore, this concentration
risk is limited due to the number of distributors and state laws regulating the
financial affairs of distributors of alcoholic beverages.
(h) Income taxes - The Company accounts for income taxes under
Statement of Financial Accounting Standards No. 109, "Accounting For Income
Taxes", which requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under FAS 109, the Company is allowed to
recognize currently future tax deductions of expenses previously recorded for
financial reporting purposes.
-38-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
(i) Cash equivalents - The Company considers all highly liquid
investments with a maturity of 90 days or less to be cash equivalents.
(j) Earnings per share - Earnings per share were computed by
dividing net income by the weighted average number of common shares outstanding.
There were no common stock equivalents.
(k) Use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires the Company
make estimates and assumptions affecting the reported amounts of assets,
liabilities, revenues and expenses, and disclosure of contingent assets and
liabilities.
The amounts estimated could differ from actual results.
(l) Stock-based compensation - The Financial Accounting Standards
Board has recently issued Statement of Financial Accounting Standards No. 123
(SFAS 123), Accounting for Stock-Based Compensation. This standard will become
effective for the year ending December 31, 1996, although earlier application is
permitted. The Company has determined that it will implement the new standard in
1996. Under SFAS 123, a fair value method is used to determine compensation cost
for stock options or similar equity instruments. Compensation is measured at the
grant date and is recognized over the service or vesting period. Under the
current accounting standard, compensation cost is the excess, if any, of the
quoted market price of the stock at a measurement date over the amount that must
be paid to acquire the stock.
The new standard would allow the Company to account for
stock-based compensation under the current standard, with disclosure of the
effects of the new standard, or adopt a fair value based method of accounting.
The Company has not yet decided which method will be utilized, nor has it
determined the impact, if any, that adoption of the new standard will have on
the financial condition and results of operations. However, management believes
the effect of the new accounting standard will not be significant.
(m) Fair value of financial instruments - The following methods
and assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in
the balance sheet for cash and cash equivalents approximates fair value.
Long-term debt: Based on the borrowing rates currently
available to the Company for loans with similar terms and average maturities,
the fair value of long-term debt approximates cost.
(n) Accrued construction costs - Accrued construction costs
consist of expenses incurred for the construction of the new brewery including
equipment.
(o) Reclassifications - Certain reclassifications have been made
to the 1994 financial statements to conform them to the 1995 presentation.
-39-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 2 - INVENTORIES
Inventories consist of the following:
December 31,
---------------------------
1995 1994
---- ----
Raw Materials .......................... $ 91,500 $ 66,500
Work-in-process ........................ 89,500 75,300
Finished goods ......................... 37,200 24,000
Merchandise ............................ 38,000 36,200
-------- --------
$256,200 $202,000
======== ========
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of:
the following: December 31,
----------------------------
1995 1994
---- ----
Equipment in progress ................ $2,031,800 $ --
Construction in progress ............. 921,700 26,200
Land ................................. 810,900 --
Machinery and equipment .............. 537,900 598,000
Leasehold improvements ............... 129,000 124,500
Furniture and fixtures ............... 19,800 19,800
---------- --------
4,451,100 768,500
Less accumulated depreciation
and amortization .............. 497,000 467,500
---------- --------
$3,954,100 $301,000
========== ========
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
------------------------
1995 1994
---- ----
Note payable to an individual, due in
monthly payments of $4,435,
including interest at 9%,
maturing June 1997,
secured by real property ........ $ 489,100 $ --
Note payable to an individual, due in
full December 1998, including
accrued interest at 9%, secured
by real property ................ 76,200 --
-40-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 4 - LONG-TERM DEBT (Continued)
December 31,
------------------------
1995 1994
---- ----
Note payable to bank, due in monthly
payments of $1,302, including
interest at 10.5%, matured
July 1995, secured by
fixed assets .................... -- 7,900
-------- -------
565,300 7,900
Less current maturities ................ 10,400 7,900
-------- -------
$554,900 $ --
======== =======
Maturities of long-term debt for succeeding years are as follows:
Year ending December 31,
------------------------
1996 ....................... $ 10,400
1997 ....................... 478,700
1998 ....................... 76,200
--------
$565,300
========
NOTE 5 - PROFIT-SHARING PLAN
The Company has a profit-sharing retirement plan under which it
may make employer contributions at the discretion of the Board of Directors;
although, no such contributions are required. The plan covers substantially all
full-time employees over age 21 with one year of service, and employer
contributions vest over a period of six years. Contributions totaled $30,000 and
$45,000 for the years ended December 31, 1995 and 1994, respectively.
NOTE 6 - COMMITMENTS
The Company leases its facilities under a noncancellable
operating lease expiring August 2004. The monthly lease payment is $2,014, to be
adjusted annually by increases in the Consumer Price Index, as defined in the
lease agreement. Additionally, the Company leases certain equipment under a
noncancellable operating lease which expires in 1997. Total rent expense was
$34,000 and $58,600 for the years ended December 31, 1995 and 1994,
respectively.
-41-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 6 - COMMITMENTS (Continued)
The following is a schedule of future minimum lease payments:
Year Ending December 31,
------------------------
1996 ......................... $ 26,700
1997 ......................... 25,700
1998 ......................... 24,200
1999 ......................... 24,200
2000 ......................... 24,200
Thereafter ...................... 88,600
--------
$213,600
========
NOTE 7 - BREWERY CONSTRUCTION
In late 1995, the Company began construction of it's new brewery
in Ukiah, California. At this time, the total cost of the brewery including
land, building and equipment is estimated to be $9.2 million. Funding for the
brewery is from a combination of proceeds from the stock sale, private party
financing for the land, bank financing for the building and a capital lease for
the equipment. The expected completion date is September 1996.
NOTE 8 - STOCKHOLDERS' EQUITY
Common Stock
On January 3, 1994, the Company issued 1,722,222 shares of no-par
value common stock in conjunction with the incorporation of the partnership.
Also during 1994, the Company began selling, in a public offering, shares of
no-par value common stock. As of December 31, 1995, 600,000 shares of stock had
been sold at $6 per share for total gross proceeds of $3,600,000. These proceeds
were reduced by $286,700 of offering costs. All shares of stock authorized to
sell in the first public offering have been issued.
Preferred Stock
The Company authorized 2,000,000 shares of preferred stock, of
which 227,600 have been designated as Series A. At the time of the incorporation
of the partnership, the Company issued 227,600 shares of non-voting, no-par
value Series A Preferred Stock in exchange for partnership interests. Series A
shareholders are entitled to receive cash dividends and/or liquidation proceeds
equal in the aggregate to $1.00 per share before any cash dividends are paid on
the Common Shares or any other series of Preferred Shares. When the entire
Series A dividend/liquidation proceeds have been paid, the Series A Shares shall
automatically be cancelled and cease to be outstanding.
-42-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 9 - STOCK OPTION PLAN
Under the 1994 Stock Option Plan, the Company may issue options
to purchase up to 200,000 shares of the Company's Common Stock. The plan
provides for both incentive stock options, as defined in Section 422 of the
Internal Revenue Code, and options that do not qualify as incentive stock
options. The Plan shall terminate upon the earlier of (a) the tenth anniversary
of its adoption by the Board or (b) the date on which all shares are available
for issuance under the Plan have been issued.
The exercise price of incentive options must be no less then the
fair-market value of such stock at the date the option is granted, while the
exercise price of nonstatutory options will be no less than 85% of the
fair-market value per share on the date of grant. With respect to options
granted to a person possessing more than 10% of the combined voting power of all
classes of the Company's stock, the exercise price will be no less than 110% of
the fair-market value of such share at the grant date. As of December 31, 1995,
no options had been granted, exercised, or cancelled under the Plan.
NOTE 10 - INCOME TAXES
The provision for income taxes consists of the following:
December 31,
---------------------------
1995 1994
---- ----
Current
Federal .................. $103,700 $ 67,200
State .................... 28,600 20,200
-------- --------
132,300 87,400
-------- --------
Deferred
Current .................. (3,700) (11,800)
Non-current .............. 24,300 (4,100)
-------- --------
20,600 (15,900)
-------- --------
$152,900 $ 71,500
======== ========
The difference between the actual income tax provision and the
tax provision computed by applying the statutory federal income tax rate to
earnings before taxes is attributable to the following:
Year Ended
December 31,
--------------------------
1995 1994
---- ----
Income tax provision at 34% ............ $105,300 $ 76,400
States taxes ........................... 28,100 20,900
Adjustment due to lower federal rates .. (1,100) (9,900)
Recognition of future tax (deductions) . 20,600 (15,900)
-------- --------
$152,900 $ 71,500
======== ========
-43-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 10 - INCOME TAXES (Continued)
Temporary differences and carryforwards which give rise to
deferred tax assets and liabilities at December 31st are as follows:
December 31,
--------------------
1995 1994
---- ----
Inventories .................................. $ 3,000 $ 800
Other ........................................ 12,500 11,000
-------- --------
Current deferred tax asset ................... $ 15,500 $ 11,800
======== ========
Depreciation and amortization ................ $ 21,000 $ (4,800)
Other ........................................ (800) 700
-------- --------
Non-current deferred tax liability (asset) ... $ 20,200 $ (4,100)
======== ========
<TABLE>
NOTE 11 - SEGMENT INFORMATION
The Company's business segments are brewing operations and a
retail establishment known as the Hopland Brewery. A summary of each segment is
as follows:
<CAPTION>
Year Ended December 31, 1995
---------------------------------------------------------------
Brewing Hopland Corporate
Operations Brewery and other Total
---------- ------- --------- -----
<S> <C> <C> <C> <C>
Sales ........................... $2,775,500 $959,600 $ -- $3,735,100
Operating profits ............... 758,400 34,600 -- 793,000
Identifiable assets ............. 4,633,900 109,500 1,770,600 6,514,000
Depreciation and
amortization ................. 30,700 8,300 10,300 49,300
Capital expenditures ............ 3,655,900 25,500 3,900 3,685,300
</TABLE>
-44-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 11 - SEGMENT INFORMATION (Continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1995
--------------------------------------------------------------
Brewing Hopland Corporate
Operations Brewery and other Total
---------- ------- --------- -----
<S> <C> <C> <C> <C>
Sales ........................... $2,594,300 $928,700 $ -- $3,523,000
Operating profits ............... 631,700 51,600 -- 683,300
Identifiable assets ............. 692,500 90,700 3,254,900 4,038,100
Depreciation and
amortization ................. 38,200 8,800 9,200 56,200
Capital expenditures ............ 122,200 2,500 23,900 148,600
</TABLE>
NOTE 12 - STATEMENT OF CASH FLOWS
Supplementary cash flow information includes the following:
December 31,
------------------------
1995 1994
---- ----
Cash paid during the year for:
Interest ............................ $ 18,900 $ 4,300
Income taxes ........................ $113,500 $75,000
Non-cash investing and financing activities for the year ended
December 31, 1995, consisted of land being acquired with seller financing of
$569,100, offering costs of $41,700 incurred in 1994 being offset against stock
proceeds and $207,100 of deposits being applied to equipment in progress.
-45-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
BALANCE SHEET
June 30, 1996
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................... $ 21,200
Accounts receivable ......................................... 550,400
Inventories ................................................. 463,500
Prepaid expenses and taxes .................................. 73,100
Deferred income taxes ....................................... 37,000
----------
Total current assets ................................. 1,145,200
----------
PROPERTY AND EQUIPMENT .......................................... 6,947,700
----------
OTHER ASSETS
Label development costs, net of amortization ................ 23,600
Deposits and other assets ................................... 98,400
----------
Total other assets ................................... 122,000
----------
Total assets ......................................... $8,214,900
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowing ........................................ $ 360,000
Accounts payable ............................................ 368,000
Accrued wages and related expense ........................... 105,500
Accrued construction costs .................................. 2,363,100
Accrued profit sharing ...................................... 30,000
Accrued liabilities ......................................... 33,900
Current maturities of long-term debt ........................ 10,000
----------
Total current liabilities ............................ 3,270,500
LONG-TERM DEBT, less current maturities ......................... 550,700
DEFERRED INCOME TAXES ........................................... 20,200
----------
Total liabilities .................................... 3,841,400
----------
COMMITMENTS ..................................................... --
STOCKHOLDERS' EQUITY
Common stock, no par value; 20,000,000 shares,
authorized 2,322,222 and 2,220,445 shares
issued and outstanding .................................. 3,869,600
Preferred stock, Series A, no par value, with
aggregate liquidation preference of $227,600,
227,600 shares authorized, issued and outstanding ....... 227,600
Retained earnings ........................................... 276,300
----------
Total stockholders' equity ........................... 4,373,500
----------
Total liabilities and stockholders' equity ........... $8,214,900
==========
The accompanying notes are an integral
part of these financial statements.
-46-
<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF INCOME
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales .......................................... $ 1,227,400 $ 870,700 $ 1,911,400 $ 1,675,200
Less excise taxes .............................. 18,100 36,500 71,000 74,500
----------- ----------- ----------- -----------
Net sales ...................................... 1,209,300 834,100 1,840,300 1,600,700
Cost of goods sold ............................. 545,700 465,600 870,500 907,800
----------- ----------- ----------- -----------
Gross profit ................................... 663,600 368,500 969,900 693,000
----------- ----------- ----------- -----------
Operating expenses
Retail operating ........................... 192,100 146,500 372,300 280,900
Marketing .................................. 199,800 66,500 292,800 126,400
General and administrative ................. 187,700 138,400 339,600 313,300
----------- ----------- ----------- -----------
579,600 351,400 1,004,700 720,500
----------- ----------- ----------- -----------
Income (loss)from operations ................... 84,000 17,200 (34,800) (27,600)
Other income (expense)
Interest income ............................ 300 37,900 10,800 74,800
Other income (expense) ..................... (43,500) 6,000 (47,400) 6,000
----------- ----------- ----------- -----------
(43,300) 43,900 (36,500) 80,800
----------- ----------- ----------- -----------
Income (loss) before
income taxes ................................ 40,700 61,100 (71,300) 53,200
Provision for (benefit from)
income taxes ................................ (21,500) 20,000 (20,700) 20,800
----------- ----------- ----------- -----------
Net income (loss) .............................. $ 62,200 $ 41,100 $ (50,600) $ 32,500
=========== =========== =========== ===========
Earnings (loss) per share ...................... $ 0.03 $ 0.02 $ (0.02) $ 0.01
=========== =========== =========== ===========
Weighted average common
shares outstanding ........................... 2,322,222 2,308,888 2,322,222 2,294,148
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
-47-
<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) ............................... $ 62,200 $ 41,100 $ (50,600) $ 32,500
Adjustments to reconcile
net income (loss) to net
cash provided (used) by
operating activities:
Depreciation and
amortization .............................. 11,800 11,400 23,000 22,400
Deferred income taxes ....................... (21,500) -- (21,500) --
Changes in:
Accounts receivable ........................... (300,300) 9,800 (91,500) (38,800)
Inventories ................................... (14,800) 39,100 (207,300) 34,500
Prepaid expenses and taxes .................... (20,700) 9,100 (26,000) (6,100)
Accounts payable .............................. 229,900 (19,600) 262,300 (31,900)
Accrued wages and
related expense ............................. 7,100 1,400 (24,400) (5,400)
Accrued profit sharing ........................ -- 11,300 -- (33,800)
Accrued liabilities ........................... 9,400 14,100 11,700 5,800
Income taxes payable .......................... -- -- (34,200) --
----------- ----------- ----------- -----------
Net cash provided (used)
by operating
activities: ............................. (37,100) 117,600 (158,500) (20,900)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of property and
equipment ..................................... (1,759,700) (965,400) (3,013,200) (1,265,800)
Deposits and other assets ....................... 23,100 44,000 14,600 255,400
Deferred offering costs ......................... (37,900) -- (53,900) --
Reduction of deferred
offering costs ................................ -- (77,200) -- (35,500)
----------- ----------- ----------- -----------
Net cash used by in-
vesting activities: ..................... (1,774,600) (998,500) (3,052,500) (1,045,900)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from (payments on)
short-term borrowings ......................... (40,000) -- 360,000 --
Proceeds from long-term debt .................... -- 492,900 -- 492,900
Principal payments on long-
term debt ..................................... (2,400) -- (4,700) (7,900)
Accrued construction costs ...................... 1,351,800 -- 1,180,800 --
Proceeds from sale of
common stock .................................. -- -- -- 527,100
----------- ----------- ----------- -----------
Net cash provided by
financing activities: ................... 1,309,500 492,900 1,536,100 1,012,100
DECREASE IN CASH ................................... (502,200) (388,000) (1,674,900) (54,800)
CASH, BEGINNING OF PERIOD .......................... 523,400 3,234,000 1,696,100 2,900,800
----------- ----------- ----------- -----------
CASH, END OF PERIOD ................................ $ 21,200 $ 2,846,000 $ 21,200 $ 2,846,000
=========== =========== =========== ===========
Supplemental cash flow
information includes the
following:
Cash paid during the
period for income taxes ..................... $ -- $ 800 $ 52,500 $ 34,900
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
-48-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
June 30, 1996 and 1995
NOTE 1 - BASIS OF PRESENTATION
The financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to such
rules and regulations. It is believed, however, that the disclosures are
adequate to make the information presented not misleading.
The financial statements, in the opinion of management, reflect
all adjustments necessary to fairly state the financial position and the results
of operations. These results are not necessarily to be considered indicative of
the results for the entire year.
NOTE 2 - LONG-TERM DEBT
Long-term debt consists of a note payable, due in monthly
installments of $4,435 including interest at 9%, maturing June 1997, and secured
by real property and a note payable, due in one lump sum of $76,200 plus
interest at 9%, maturing December 1998, and secured by real property.
NOTE 3 - SHORT-TERM BORROWING
The Company has a $600,000 term line of credit from a bank with a
variable interest rate of prime +1.5%, maturing December 1996. The note is
secured by receivables, inventory, and equipment.
NOTE 4 - NEW BREWERY FINANCING
A $2.7 million construction loan secured by a first priority deed
of trust on the Ukiah land and improvements and the proceeds of the proposed
common stock offering from the Savings Bank of Mendocino County along with a
written commitment to convert the construction loan to a 15 year term loan upon
successful completion of the new brewery, subject to certain conditions. The
construction loan bears interest at the lender's prime plus 2% (initially
10.25%), payable monthly, and matures on February 2, 1997. Upon conversion, the
loan will bear interest at the then prevailing 5 Year Treasury Constant Maturity
Index (but not less than 10%), with a maximum for the first five years at 2%
above the initial fully indexed rate, and a maximum during the remaining term of
the loan at 3% above the initial fully indexed rate at the beginning of the
remaining term. The minimum annual interest rate is 8%. The loan will be over 25
years with a balloon payment upon maturity. The lender's commitment letter
states that the lender will convert the unpaid principal at maturity to a fully
amortized 10-year loan subject to terms an conditions to be agreed upon at that
time. The commitment letter proposes to require the Company to pledge all
proceeds of this offering in excess of $2.5 million as collateral for the
15-year term loan, with the provision that the Bank will release the funds from
the pledge to purchase additional equipment if the Company is meeting its sales
and revenue objectives.
FINOVA Capital Corporation has also agreed to lease new brewing
equipment with a total cost of approximately $2.07 million to the Company for a
term of 7 years with monthly rental payments of approximately $29,000. The lease
is to commence when the brewing equipment is operational. Until that
-49-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
June 30, 1996 and 1995
time, FINOVA has loaned $750,000 to the Company with interest at the Citibank
prime plus 3%. At expiration of the initial term of the lease, the Company may
purchase the equipment at its then current fair market value but not less than
25% or more than 30% of the original cost of the equipment, or at the Company's
option, may extend the term of the lease for an additional year at approximately
$45,600 per month with an option to purchase the equipment at the end of the
year at then current fair market value. The lease is not pre-payable.
The seller of the Ukiah land has a note, secured by a third priority
deed of trust on the land, with a remaining principal balance as of August 1,
1996 of approximately $265,000 at 9% annual interest payable in monthly
installments of principal and interest of $2,380 with the balance due at
maturity on June 27, 1997.
The general contractor for the new brewery, BDM Construction Co., Inc.
("BDM"), has agreed to defer up to $900,000 in fees otherwise owed or to become
payable on December 31, 1996, subject to performance by BDM of its obligations
under the construction contract, until January 31, 1997 with interest at 12% per
annum. The deferral arrangement is secured by a second priority deed of trust on
the Ukiah land and improvements, and by 300,000 shares of Mendocino Brewing's
Common Stock. In the event of default, BDM is required to proceed against the
Common Stock before initiating any proceeding against the real estate. The
Common Stock collateral was issued to BDM by the Company pursuant to Section
4(2) of the Securities Act of 1933 subject to the restrictions (a) that the
shares shall be canceled if the amounts owed BDM are paid in full, (b) that if
full amount owed BDM is not paid, the shares must sold in a commercially
reasonable manner as specified in the California Commercial Code, and (c) that
any shares not needed to be sold to satisfy the obligation to BDM shall be
canceled.
-50-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 317 of the California Corporations Code authorizes a court to award,
or a corporation's Board of Directors to grant, indemnity to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act"). Article 8 of the Articles of Incorporation (Exhibit 3.1 hereto) provides
for the indemnification of the Company's directors, officers, employees, and
other agents to the maximum extent permitted by the California Corporations
Code. Article 11 of the Bylaws (Exhibit 3.2 hereto) requires the Company to so
indemnify its directors and officers and authorizes, but does not require, the
Company to so indemnify other persons.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an estimate of the expenses that will be
incurred by the Registrant in connection with the distribution of the securities
being registered hereby:
Securities and Exchange Commission filing fee .............. $ 1,758.62
State securities qualification fees and expenses ........... 20,000.00
Accounting fees and expenses ............................... 26,000.00
Consulting fees and expenses ............................... 44,000.00
Legal fees and expenses .................................... 123,000.00
Printing and engraving expenses ............................ 27,000.00
Transfer agent fees and expenses ........................... 15,000.00
Postage .................................................... 20,000.00
Marketing expenses.......................................... 96,000.00
Miscellaneous .............................................. 27,000.00
------------
Total.................................................. $ 399,758.62
============
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to all securities sold by the registrant or
any of its predecessors within the past three years prior to the filing of this
Form SB-2, without registration under the Securities Act:
On January 1, 1994, the Registrant issued 227,600 shares of Series A Preferred
Stock and 1,722,222 shares of Common Stock in exchange for all of the assets of
Mendocino Brewing Company, a California limited partnership (the Partnership).
The Partnership thereupon dissolved and distributed the shares to its partners,
and to the shareholders of the corporate sole general partner, in amounts
proportional to their relative ownership in the partnership (see Exhibits 2.1
and 2.2 to this Registration Statement). There was no underwriter and no public
offering was made.
The Registrant originally issued the above securities to the Partnership without
registration in reliance upon the exemption provided by Section 4(2) of the
Securities Act as a transaction not involving any public offering and in
reliance on Rules 505 and 506 included in Regulation D. The Partnership then
dissolved and distributed the above securities to its partners. The corporate
sole general partner of the Partnership adopted a plan of liquidation and
directed the Partnership to distribute the shares otherwise distributable to it
to its shareholders. The decision to incorporate the Partnership was made by the
general partner without a vote of the limited partners pursuant to the Agreement
of Limited Partnership. Substantially all of the partners of the Partnership had
been beneficial owners of
II-1
<PAGE>
securities in the Partnership for more than three years. Because the
incorporation of the Partnership and the subsequent liquidating distribution of
the shares was made without the consent of the limited partners, there was no
sale of the shares to the partners and the registration provisions of the
Securities Act did not apply. Names of the limited partners are set forth on
Exhibit 99.5 hereto.
On or about October 11, 1996, the Registrant issued 300,000 shares of its common
stock to BDM Construction Co., Inc. ("BDM") pursuant to Section 4(2) of the
Securities Act. BDM is the general contractor for the registrant's new brewery
and had purchased 8,333 shares of the Registrant's common stock in the
Registrant's initial public offering. The Registrant issued the shares as
security for the payment of up to $900,000 owed or to be owed to BDM for general
contractor services in connection with the new brewery. The 300,000 shares will
be canceled if the Company timely pays the amounts owed to BDM. BDM is not
entitled to retain the shares as payment for the obligation but must sell the
shares in satisfaction of the debt in a commercially reasonable manner unless
the Company agrees, after a default, to permit BDM to retain the shares. To the
extent that any of the shares are not required to be sold to satisfy the
obligation, they will be canceled. Although BDM presently has the power to vote
the 300,000 shares, no shareholder votes are contemplated until after the due
date of the obligation. The certificate for the 900,000 shares bears a legend
referencing the foregoing restrictions.
The share Certificates for all for the above shares bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT
AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933 OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY,
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT."
ITEM 27. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
Exhibit
Number Description of Document
- ------- -------------------------------
2.1 (A) Report to Limited Partners of Mendocino Brewing Company,
a California limited partnership
2.2 (A) Stock for Assets Incorporation Agreement
3.1 (A) Articles of Incorporation, as amended, of the Company
3.2 (B) Bylaws of the Company (Incorporated by referenced from the
Company's Report on Form 10-KSB for the annual period ended
December 31, 1994 previously filed with the Commission.)
4.1 Articles 5 and 6 of the Articles of Incorporation, as
amended, of the Company (Reference is made to Exhibit 3.1.)
4.2 Article 10 of the Restated Articles of Incorporation, as
amended, of the Company (Reference is made to Exhibit 3.2.)
4.3 (A) Form of Common Stock Certificate (Incorporated by reference
from the Company's Registration Statement dated June 15,
1994, as amended, previously filed with the Commission,
Registration No. 33-78390-LA.)
5 Opinion and consent of counsel with respect to the legality
of the securities being registered.
10.1 (A) Mendocino Brewing Company Profit Sharing Plan.
10.2 (A) Wholesale Distribution Agreement between the Company and
Bay Area Distributing.
10.3 (A) Wholesale Distribution Agreement between the Company and
Golden Gate Distributing.
10.4 (F) Letter of Intent with Vitro Packaging, Inc.
II-2
<PAGE>
Exhibit
Number Description of Document
- ------- -------------------------------
10.5 (A) Sales Contract between the Company and John I. Hass, Inc.
10.6 (A) Lease Agreement between the Company and Kohn Properties.
10.7 (A) Lease Agreement between the Company and Associated Vintage
Group, Inc.
10.8 (F) Commitment letter from Savings Bank of Mendocino County
(previously filed as Exhibit 19.9).
10.9 (A) Letter of intent from California Statewide Certified
Development Corporation.
10.10 (A) 1994 Stock Option Plan (previously filed as Exhibit 99.6).
10.11 (C) Commercial Real Estate Purchase Contract and Receipt for
Deposit (previously filed as Exhibit 19.2).
10.12 (B) Proposal from Warren Capital Corporation.
10.13 (C) Brewery Fixtures Construction Agreement with Enerfab, Inc.
(previously filed as Exhibit 19.3).
10.14 (D) Installment Note between Ukiah Redevelopment Agency and
Langley et al. (previously filed as Exhibit 19.5).
10.15 (E) Agreement to Implement Condition of Approval No. 37 of the
Site Development Permit 95-19 with the City of Ukiah,
California (previously filed as Exhibit 19.6).
10.16 (F) Standard Form of Agreement Between Owner and Architect for
Designated Services between the Company and Victor Lopes.
10.17 (F) Liquid Sediment Removal Services Agreement with Cold Creek
Compost, Inc.
10.18 (F) Promissory Note for $76,230 in favor of Langley et al.
10.19 (G) Construction agreement with BDM Construction Company, Inc.
10.20 (G) $60,000 Note payable to BDM Construction Company, Inc.
10.21 (G) Agreement to modify note and deed of trust dated June 6,
1995 with Langley, et al.
10.22 (G) Agreement to modify note dated June 6, 1995 with Langley,
et al.
10.23 (G) Amendment to installment note payable to Langley, et al.
10.24 (G) Manufacturing Business Expansion and Relocation Agreement
with the City of Ukiah.
10.25 (G) Manufacturing Business Expansion and Relocation Agreement
with the Ukiah Redevelopment Agency.
10.26 (G) Consulting Agreement with Daniel R. Moldenhauer.
10.27 (H) Business Loan Agreement with WestAmerica Bank.
10.28 Change in Terms Agreement with WestAmerica Bank.
10.29 Letter Agreement Concerning Use of Proceeds with
WestAmerica Bank.
10.30 Commitment Letter from WestAmerica Bank.
10.31 Business Loan Agreement with the Savings Bank of Mendocino
County.
10.32 Construction Loan Agreement with the Savings Bank of
Mendocino County.
10.33 $2,700,000 Note in favor of the Savings Bank of Mendocino
County.
10.34 Assignment of Deposit Account in favor of the Savings Bank
of Mendocino County.
10.35 Commitment Letter from the Savings Bank of Mendocino
County.
10.36 Equipment Lease with FINOVA Capital Corporation.
10.37 Tri-Election Rider to Equipment Lease with FINOVA Capital
Corporation.
10.38 Master Lease Schedule with FINOVA Capital Corporation.
II-3
<PAGE>
Exhibit
Number Description of Document
- ------- -------------------------------
10.39 Advance and Subordination Agreement among the Company,
FINOVA Capital Corporation, and Enerfab, Inc.
10.40 $900,000 Note in favor of BDM Construction Co., Inc.
10.41 Letter Agreement Concerning Use of Proceeds with BDM
Construction Co., Inc.
10.42 Employment Agreement with H. Michael Laybourn.
10.43 Employment Agreement with Norman H. Franks.
10.44 Employment Agreement with Michael F. Lovett.
10.45 Employment Agreement with John Scahill.
24.1 Consent of Moss Adams LLP.
24.2 Consent of Enterprise Law Group, Inc. (Reference is made to
Exhibit 5.)
99.1 Form of Stock Purchase Agreement
- --------------------------------
(A) Incorporated by reference from the Company's Registration
Statement dated June 15, 1994, as amended, previously filed
with the Commission, Registration No. 33-78390-LA.
(B) Incorporated by referenced from the Company's Report on
Form 10-KSB for the annual period ended December 31, 1994
previously filed with the Commission.
(C) Incorporated by referenced from the Company's Report on
Form 10-QSB for the quarter period ended March 31, 1995
previously filed with the Commission.
(D) Incorporated by referenced from the Company's Report on
Form 10-QSB for the quarter period ended June 30, 1995
previously filed with the Commission.
(E) Incorporated by referenced from the Company's Report on
Form 10-QSB for the quarter period ended September 30, 1995
previously filed with the Commission.
(F) Incorporated by referenced from the Company's Report on
Form 10-KSB for the annual period ended December 31, 1995
previously filed with the Commission.
(G) Incorporated by referenced from the Company's Report on
Form 10-QSB for the quarter period ended June 30, 1996
previously filed with the Commission.
(H) Incorporated by referenced from the Company's Report on
Form 10-QSB/A No. 1 for the quarter period ended June 30,
1996 previously filed with the Commission.
Item 28. Undertakings.
(a) The Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; and
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
II-4
<PAGE>
(e) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to meet all of the
requirements for filing on Form SB-2 and authorized this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Hopland, State of California, on November 4, 1996.
MENDOCINO BREWING COMPANY, INC.
By: /s/ H. MICHAEL LAYBOURN
-----------------------------------------
H. Michael Laybourn
Chief Executive Officer
Each of the undersigned hereby constitutes and appoints H. Michael Laybourn and
Norman H. Franks, and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place, and stead, in any and all capacities, to sign this Registration
Statement on Form SB-2 of Mendocino Brewing Company, Inc., and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
and hereby grants to such attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done, as full to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them or his or their substitute or substitutes may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------- ------ ------
<S> <C> <C>
/s/ H. MICHAEL LAYBOURN Chief Executive Officer, Director November 4, 1996
- --------------------------------------- (Principal Executive Officer)
H. Michael Laybourn
/s/ NORMAN H. FRANKS Vice President, Chief Financial Officer, Director November 4, 1996
- --------------------------------------- (Principal Financial and Accounting Officer)
Norman H. Franks
/s/ MICHAEL F. LOVETT Marketing Director, Director November 4, 1996
- ---------------------------------------
Michael F. Lovett
</TABLE>
II-5
EXHIBIT 5
TO
REGISTRATION STATEMENT ON FORM SB-2
-----------------------------------
OPINION AND CONSENT OF COUNSEL WITH RESPECT TO THE
LEGALITY OF THE SECURITIES BEING REGISTERED
<PAGE>
Enterprise Law Group, Inc.
MENLO OAKS CORPORATE CENTER TELEPHONE: (415) 462-4700
4400 BOHANNON DRIVE, SUITE 280 FACSIMILE: (415) 462-4747
MENLO PARK, CALIFORNIA 94025-1041 EMAIL: [email protected]
November 4, 1996
Mendocino Brewing Company, Inc.
P.O. Box 400
13351 South Highway 101
Hopland, CA 95449
Gentlemen:
We have acted as counsel to Mendocino Brewing Company, Inc., a
California corporation (the "Corporation") in connection with the preparation of
the Registration Statement on Form SB-2, which will be filed with the Securities
and Exchange Commission (the "Commission") on or about November 4, 1996 by the
Corporation under the Securities Act of 1933, as amended (the "Act"), and the
Prospectus to be used in conjunction therewith (the "Registration Statement"),
for registration under the Act of an aggregate of 600,000 shares of the
Corporation's no par value common stock (the "Shares"). This Opinion Letter is
provided to you pursuant to Item 5.1 of the Registration Statement. Except as
otherwise indicated herein, capitalized terms used in this Opinion Letter are
defined as set forth in the Accord (see below).
This Opinion Letter is governed by, and shall be interpreted in
accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section of
Business Law (1991). As a consequence, it is subject to a number of
qualifications, exceptions, definitions, limitations on coverage, and other
limitations, all as more particularly described in the Accord, and this Opinion
Letter should be read in conjunction therewith. The law covered by the opinions
expressed herein is limited to the Law of the State of California.
In connection with rendering this Opinion Letter, we have made
inquiries regarding such matters of fact and law as we believe law firms
ordinarily and customarily make and rely upon in connection with letters such as
this.
We advise you that Nelson D. Crandall, a principal of this law firm
who has actively participated in the preparation of this Opinion Letter, owns
100 shares of the common stock of the Corporation.
Based upon and subject to the foregoing, we are of the opinion that
when issued and delivered against payment therefor in accordance with the
Registration Statement, the Shares will be validly issued, fully paid, and
nonassessable.
This Opinion Letter may be filed as an exhibit to the Registration
Statement. We consent to the reference to this firm as having passed on the
validity of the Shares under the caption "Legal Matters" in the Prospectus
contained in the Registration Statement. In
EXHIBIT 5
<PAGE>
Mendocino Brewing Company, Inc.
November 4, 1996
Page 2 of 2
giving this consent, we make no admission that this firm is included in the
category of persons whose consent is required under Section 7 of the Act or the
rules and regulations of the Commission promulgated thereunder.
Very truly yours,
/s/ Enterprise Law Group, Inc.
NDC:wp
Ex05.doc
2
EXHIBIT 5
EXHIBIT 10.28
TO
REGISTRATION STATEMENT ON FORM SB-2
-----------------------------------
CHANGE IN TERMS AGREEMENT WITH WESTAMERICA BANK
<PAGE>
CHANGE IN TERMS AGREEMENT
Borrower: MENDOCINO BREWING COMPANY, INC.; P. O. BOX 400 HOPLAND, CA 95449
Lender: WESTAMERICA BANK SONOMA REGION CREDIT ADMINISTRATION 31 D STREET SECOND
FLOOR SANTA ROSA, CA 95404
Principal Amount: $600,000.00
Date of Agreement: October 1,1996
DESCRIPTION OF EXISTING INDEBTEDNESS.
THAT CERTAIN NOTE DATED MAY 17, 1996 IN THE ORIGINAL AMOUNT OF $600,000.00
CURRENTLY MATURING ON SEPTEMBER 30, 1996 WITH AN OUTSTANDING BALANCE AS OF THIS
DATE OF $600,000.00.
DESCRIPTION OF COLLATERAL
THIS NOTE IS SECURED BY THAT CERTAIN COMMERCIAL SECURITY AGREEMENT DATED MAY 17,
1996.
DESCRIPTION OF CHANGE IN TERMS.
EFFECTIVE THE DATE OF THIS AGREEMENT THE MATURITY DATE IS CHANGED FROM SEPTEMBER
30, 1996 TO APRIL 30, 1997.
ACCRUED INTEREST SHALL BE PAYABLE ON THE LAST DAY OF EACH MONTH BEGINNING
OCTOBER 31, 1996 AND ON APRIL 30, 1997 ALL OUTSTANDING PRINCIPAL PLUS ALL
ACCRUED BUT UNPAID INTEREST SHALL BE DUE AND PAYABLE.
EFFECTIVE THE DATE OF THIS AGREEMENT THE FOLLOWING PROVISIONS SHALL BE ADDED TO
THAT CERTAIN BUSINESS LOAN AGREEMENT DATED MAY 17, 1996:
1) BORROWER SHALL PROVIDE TO BANK WITHIN 45 DAYS OF EACH FISCAL QUARTER,
BORROWER'S BALANCE SHEET AND PROFIT AND LOSS STATEMENT FOR THE PERIOD ENDED.
2) BORROWER SHALL PROVIDE TO BANK WITHIN 90 DAYS OF EACH FISCAL YEAR END,
BORROWER'S BALANCE SHEET AND INCOME STATEMENT FOR THE YEAR ENDED, AUDITED BY A
CERTIFIED PUBLIC ACCOUNTANT SATISFACTORY TO LENDER.
BORROWER AGREES THAT UPON EXECUTION OF THIS AGREEMENT TO PAY ACCRUED INTEREST TO
SEPTEMBER 30,1996 IN THE AMOUNT OF $4,875.00 AND A DOCUMENTATION FEE OF $150.00.
EXHIBIT 10.28
<PAGE>
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of
the original obligation or obligations, including all agreements evidenced or
securing the obligation(s), remain unchanged and in full force and effect.
Consent by Lender to this Agreement does not waive Lender's right to strict
performance of the obligation(s) as changed, nor obligate Lender to make any
future change in terms. Nothing in this Agreement Will constitute a satisfaction
of the obligation(s). It is the intention of Lender to retain as liable parties
all makers and endorsers of the original obligation(s), including accommodation
parties, unless a party is expressly released by Lender in writing. Any maker or
endorser, including accommodation makers, Will not be released by virtue of this
Agreement. If any person who signed the original obligation does not sign this
Agreement below, then all persons signing below acknowledge that this Agreement
is given conditionally, based on the representation to Lender that the
non-signing party consents to the changes and provisions of this Agreement or
otherwise will not be released by it. This waiver applies not only to any
initial extension, modification or release, but also to all such subsequent
actions.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND
ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT.
BORROWER:
MENDOCINO BREWING COMPANY, INC.
By: /s/ H. Michael Laybourn
------------------------
H. Michael Laybourn, President
By: /s/ Norman H. Franks
--------------------
Norman H. Franks, Chief Financial Officer
EXHIBIT 10.28
- 2 -
EXHIBIT 10.29
TO
REGISTRATION STATEMENT ON FORM SB-2
-----------------------------------
LETTER AGREEMENT CONCERNING USE OF PROCEEDS WITH WESTAMERICA BANK
<PAGE>
[Mendocino Brewing Company, Inc. letterhead]
September 19, 1996
R. Dwight Davenport
West America Bank
31 D Street Second Floor
Santa Rosa, CA 95404
VIA FAX: 707-575-3546
Dear Mr. Davenport:
Savings Bank of Mendocino County has agreed to the following plan of
distribution and use of the first funds received from our proposed direct public
offering.
The list below shows, in order of priority, our proposed use of funds for the
first $2,500,000 of the proposed $4,000,000 (sic) direct public offering.
1) Cost of offering (estimated) $ 300,000
2) Working Capital 300,000
3) Completion of deferred building construction 600,000
4) Short term debt - BDM note 500,000
5) Short term debt - West America Bank 400,000
6) Short term debt - BDM note 400,000
----------
$2,500,000
The Savings Bank has asked that you signify your understanding of and agreement
with our intentions by signing at the bottom of this letter. After signing,
please fax this letter back to me as soon as possible. This should complete the
final requirement for our loan package with the bank.
Sincerely, West America Bank
/s/ Norman Franks /s/ R. Dwight Davenport
Norman Franks by: R. Dwight Davenport
CFO, Vice President Vice President and Manager
EXHIBIT 10.29
EXHIBIT 10.30
TO
REGISTRATION STATEMENT ON FORM SB-2
-----------------------------------
COMMITMENT LETTER FROM WESTAMERICA BANK
<PAGE>
[WestAmerica Bank letterhead]
Sonoma Region Credit Administration
October 30, 1996
Norman Franks, Vice President, CFO
Mendocino Brewing Company, Inc.
P.O. Box 400
Hopland, CA 95449
Dear Mr. Franks:
WestAmerica Bank is pleased to commit to the restructure of the existing
non-revolving line of credit into a revolving line of credit prior to the
expiration date of April 30, 1997. This commitment is subject to the Bank's
review of the 1996 fiscal year end financial statement, and involves the basic
terms outlined below:
1. Type Of Facility:
Revolving line of credit.
2. Maximum Principal Amount:
$600,000 or the maximum applicable Borrowing Base as may change from time
to time, as will be defined in the credit documentation.
3. Forms of Utilization:
Cash advances, including direct deposits to your checking account.
4. Interest Rate:
To be negotiated.
Interest will accrue daily on the basis of a (365/360-day) year and actual
days elapsed.
5. Expiration and/or Maturity Date:
April 30, 1997
6. Borrowing Bass:
80% of eligible accounts receivable (as will be defined in the credit
documents).
25% of eligible inventory to a maximum of $200,000 (as will be defined in
the credit documents).
EXHIBIT 10.30
<PAGE>
7. Collateral:
Perfected security interest of this priority in the following personal
property: Accounts Receivable and Inventory
8. Purpose of Line of Credit:
Finance trading assets.
9. Fees Payable On or Before Closing:
Loan Fee: To be negotiated.
10. Repayment:
Interest payable (monthly) with all accrued interest and unpaid principal
to be due at maturity.
11. Loan Document:
In addition to the documentation that will be required in connection with
the security interest to be given to Bank in the property which will serve
as collateral for this loan, the following documentation, in form and
substance satisfactory to Bank will be required:
Business Loan Agreement. Among other terms, this agreement will contain
various financial and other covenants, agreements and conditions to be
negotiated.
Loan and Security Agreement (Accounts Payable/Inventory).
This commitment is also subject to such additional terms as may be provided in
Bank's credit documents or otherwise required by Bank or its counsel.
Sincerely,
/s/ Dwight Davenport
Dwight Davenport
Vice President and Manager
EXHIBIT 10.30
- 2 -
EXHIBIT 10.31
TO
REGISTRATION STATEMENT ON FORM SB-2
-----------------------------------
BUSINESS LOAN AGREEMENT WITH THE SAVINGS BANK OF MENDOCINO COUNTY
<PAGE>
BUSINESS LOAN AGREEMENT
Borrower: Mendocino Brewing Company, a California Corporation PO Box 400
Hopland, CA 95449
Lender: SAVINGS BANK OF MENDOCINO COUNTY MAIN OFFICE PO. Box 3600 200 N. School
Street Ukiah, CA 95482
THIS BUSINESS LOAN AGREEMENT between Mendocino Brewing Company, a California
corporation ("Borrower") and SAVINGS BANK OF MENDOCINO COUNTY ("Lender") la made
and executed on the following terms and conditions. Borrower has received prior
commercial loans from Lender or has applied to Lender for a commercial loan or
loans and other financial accommodations, Including those which may be described
on any exhibit or schedule attached to this Agreement. All such loans and
financial accommodations, together with all future loans and financial
accommodations from Lender to Borrower, are referred to In this Agreement
Individually as the "Loan" and collectively as the "Loans." Borrower understands
and agrees tied: (a) In granting, renewing, or extending any Loan, Lender Is
relying upon Borrower's representations, warranties, and agreements, as set
forth In this Agreement; (b) the granting, renewing, or extending of any Loan by
Lender at all times shall be subject to Lender's sole Judgment and discretion;
and (c) all such Loans shall be and shall remain subject to the following terms
and conditions of this Agreement.
TERM. This Agreement shall be effective as of September 26, 1996, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Business Loan Agreement, as this
Business Loan Agreement may be amended or modified from time to time, together
with all exhibits and schedules attached to this Business Loan Agreement from
time to time.
Borrower. The word "Borrower" means Mendocino Brewing Company, a California
corporation. The word "Borrower" also includes, as applicable, all subsidiaries
and affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
Cash Flow. The words "Cash Flow" mean net income after taxes, and exclusive of
extraordinary gains and income, plus depreciation and amortization.
Collateral. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real or
personal property, whether granted
EXHIBIT 10.31
<PAGE>
directly or indirectly, whether granted now or in the future, and whether
granted in the form of a security interest, mortgage, deed of trust, assignment,
pledge, chattel mortgage, chattel trust, factor's lien, equipment trust,
conditional sale, trust receipt, lien, charge, lien or title retention contract,
lease or consignment intended as a security device, or any other security or
lien interest whatsoever, whether created by law, contract, or otherwise.
Debt. The word "Debt" means all of Borrower's liabilities excluding Subordinated
Debt.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section titled
"Events OF DEFAULT."
Grantor. The word "Grantor" means and includes without limitation each and all
of the persons or entities granting a Security Interest in any Collateral for
the Indebtedness, including without limitation all Borrowers granting such a
Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation each and
all of the guarantors, sureties, and accommodation parties in connection with
any Indebtedness.
Indebtedness. The word "indebtedness" means and includes without limitation all
Loans, together with all other obligations, debts and liabilities of Borrower to
Lender, or any one or more of them, as well as all claims by Lender against
Borrower, or any one or more of them; whether now or hereafter existing,
voluntary or involuntary, due or not due, absolute or contingent, liquidated or
unliquidated; whether Borrower may be liable individually or jointly with
others; whether Borrower may be obligated as a guarantor, surety, or otherwise;
whether recovery upon such Indebtedness may be or hereafter may become barred by
any statute of limitations; and whether such Indebtedness may be or hereafter
may become otherwise unenforceable.
Lender. The word "Lender" means SAVINGS BANK OF MENDOCINO COUNTY, its successors
and assigns.
Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand plus
Borrower's readily marketable securities.
Loan. The word "Loan" or "Loans" means and includes without limitation any and
all commercial loans and financial accommodations from Lender to Borrower,
whether now or hereafter existing, and however evidenced, including without
limitation those loans and financial accommodations described herein or
described on any exhibit or schedule attached to this Agreement from time to
time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan n obligations in
favor of Lender, as well as any substitute, replacement or refinancing note or
notes therefor.
EXHIBIT 10.31
- 2 -
<PAGE>
Permitted Liens. The words "Permitted Liens" mean: (a) liens and security
interests securing Indebtedness owed by Borrower to Lender; (b) liens for taxes,
assessments, or similar charges either not yet due or being contested in good
faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other
like liens arising in the ordinary course of business and securing obligations
which are not yet delinquent; (d) purchase money liens or purchase money
security interests upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the date of
this Agreement or permitted to be incurred under the paragraph of this Agreement
titled "Indebtedness and Liens"; (e) liens and security interests which, as of
the date of this Agreement, have been disclosed to and approved by the Lender in
writing; and (f)those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to the
net value of Borrower's assets.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds of
trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements understandings or
other agreements, whether created by law, contract, or otherwise, evidencing,
governing, representing, or creating a Security Interest.
Security Interest. The words "Security interest mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel
trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or
title retention contract, lease or consignment intended as a security device, or
any other security or lien interest whatsoever, whether created by law,
contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of
1986 as now or hereafter amended.
Subordinated Debt. The words "Subordinated Debt mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement to
indebtedness owed by Borrower to Lender in form and substance acceptable to
Lender.
Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total assets
excluding all intangible assets (i.e., goodwill, trademarks, patents,
copyrights, organizational expenses, and similar intangible items, but including
leaseholds and leasehold improvements) less total Debt.
Working Capital. The words "Working Capital" mean Borrower's current assets,
excluding prepaid expenses, less Borrower's current liabilities.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the
EXHIBIT 10.31
- 3 -
<PAGE>
fulfillment to Lender's satisfaction of all of the conditions set forth in this
Agreement and in the Related Documents.
Loan Documents. Borrower shall provide to Lender in form satisfactory to Lender
the following documents for the Loan: (a) the Note, (b) Security Agreements
granting to Lender security interests in the Collateral, (c) Financing
Statements perfecting Lender's Security Interests, (d) evidence of insurance as
required below; and (e) any other documents required under this Agreement or by
Lender or its counsel, including without limitation any subordinations described
below.
Borrower's Authorization. Borrower shall have provided in form and substance
satisfactory to Lender properly certified resolutions, duly authorizing the
execution and delivery of this Agreement, the Note and the Related Documents,
and such other authorizations and other documents and instruments as Lender or
its counsel, in their sole discretion, may require.
Payment of Fees and Expenses. Borrower shall have paid to Lender all fees,
charges, and other expenses which are then due and payable as specified in this
Agreement or any Related Document.
Representations and Warranties. The representations and warranties set forth in
this Agreement, in the Related Documents, and in any document or certificate
delivered to Lender under this Agreement are true and correct.
No Event of Default. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of California and is
validly existing and in good standing in all states in which Borrower is doing
business. Borrower has the full power and authority to own its properties and to
transact the businesses in which it is presently engaged or presently proposes
to engage. Borrower also is duly qualified as a foreign corporation and is in
good standing in all states in which the failure to so qualify would have a
material adverse effect on its businesses or financial condition.
Authorization. The execution, delivery, and performance of this Agreement and
all Related Documents by Borrower, to the extent to be executed, delivered or
performed by Borrower, have been duly authorized by all necessary action by
Borrower; do not require the consent or approval of any other person, regulatory
authority or governmental body; and do not conflict with, result in a violation
of, or constitute a default under (a) any provision of its articles of
incorporation or organization, or bylaws, or any agreement or other instrument
binding upon Borrower or (b) any law, governmental regulation, court decree, or
order applicable to Borrower.
EXHIBIT 10.31
- 4 -
<PAGE>
Financial Information. Each financial statement of Borrower supplied to Lender
truly and completely disclosed Borrower's financial condition as of the date of
the statement, and there has been no material adverse change in Borrower's
financial condition subsequent to the date of the most recent financial
statement supplied to Lender. Borrower has no material contingent obligations
except as disclosed in such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against Borrower in
accordance with their respective terms.
Properties. Except as contemplated by this Agreement or as previously disclosed
in Borrower's financial statements or in writing to Lender and as accepted by
Lender, and except for property tax liens for taxes not presently due and
payable, Borrower owns and has good title to all of Borrower's properties free
and clear of all Security Interests, and has not executed any security documents
or financing statements relating to such properties. All of Borrower's
properties are titled in Borrower's legal name, and Borrower has not used, or
filed a financing statement under, any other name for at least the last five (5)
years.
Hazardous Substances. The terms "hazardous waste,. "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5
through 7.7 of Division 20 of the California Health and Safety Code, Section
25100, et seq., or other applicable state or Federal laws, rules, or regulations
adopted pursuant to any of the foregoing. Except as disclosed to and
acknowledged by Lender in writing, Borrower represents and warrants that: (a)
During the period of Borrower's ownership of the properties, there has been no
use, generation, manufacture, storage, treatment, disposal, release or
threatened release of any hazardous waste or substance by any person on, under,
about or from any of the properties. (b) Borrower has no knowledge of, or reason
to believe that there has been (i) any use, generation, manufacture, storage,
treatment, disposal, release, or threatened release of any hazardous waste or
substance on, under, about or from the properties by any prior owners or
occupants of any of the properties, or (ii) any actual or threatened litigation
or claims of any kind by any person relating to such matters. (c) Neither
Borrower nor any tenant, contractor, agent or other authorized user of any of
the properties shall use, generate, manufacture, store, treat, dispose of, or
release any hazardous waste or substance on, under, about or from any of the
properties; and any such activity shall be conducted in compliance with all
applicable federal, state, and local laws, regulations, and ordinances,
including without limitation those laws, regulations and ordinances described
above. Borrower authorizes Lender and its agents to enter upon the properties to
make such inspections and tests as Lender may deem appropriate to determine
compliance of the properties with this section of the Agreement. Any inspections
or tests made by Lender shall be at Borrower's expense and for Lender's purposes
only and shall not be construed to create any responsibility or liability on the
part of Lender to Borrower or to any other person. The representations and
warranties contained herein are based on Borrower's due diligence in
investigating the properties for hazardous waste and hazardous substances.
Borrower hereby (a) releases and waives any future claims against Lender for
indemnity or contribution in the event Borrower becomes liable for cleanup or
other costs under any such laws, and (b) agrees
EXHIBIT 10.31
- 5 -
<PAGE>
to indemnify and hold harmless Lender against any and all claims, losses,
liabilities, damages, penalties, and expenses which Lender may directly or
indirectly sustain or suffer resulting from a breach of this section of the
Agreement or as a consequence of any use, generation, manufacture, storage
disposal, release or threatened release occurring prior to Borrower's ownership
or interest in the properties, whether or not the same was or should have been
known to Borrower. The provisions of this section of the Agreement, including
the obligation to indemnify, shall survive the payment of the Indebtedness and
the termination or expiration of this Agreement and shall not be affected by
Lender's acquisition of any interest in any of the properties, whether by
foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against Borrower
is pending or threatened, and no other event has occurred which may materially
adversely affect Borrower's financial condition or properties, other than
litigation, claims, or other events, if any, that have been disclosed to and
acknowledged by Lender in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all taxes,
assessments and other governmental charges have been paid in full, except those
presently being or to be contested by Borrower in good faith in the ordinary
course of business and for which adequate reserves have been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or permitted
the filing or attachment of any Security Interests on or affecting any of the
Collateral directly or indirectly securing repayment of Borrower's Loan and
Note, that would be prior or that may in any way be superior to Lender's
Security Interests and rights in and to such Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements directly or
indirectly securing repayment of Borrower's Loan and Note and all of the Related
Documents are binding upon Borrower as well as upon Borrower's successors,
representatives and assigns, and are legally enforceable in accordance with
their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which Borrower may have
any liability complies in all material respects with all applicable requirements
of law and regulations, and (i) no Reportable Event nor Prohibited Transaction
(as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower
has not withdrawn from any such plan or initiated steps to do so, (iii) no steps
have been taken to terminate any such plan, and (iv) there are no unfunded
liabilities other than those previously disclosed to Lender in writing.
Location of Borrower's Offices and Records. Borrower's place of business, or
Borrower's chief executive office, if Borrower has more than one place of
business, is located at PO Box 400,
EXHIBIT 10.31
- 6 -
<PAGE>
Hopland, CA 95449. Unless Borrower has designated otherwise in writing this
location is also the office or offices where Borrower keeps its records
concerning the Collateral.
Information All information heretofore or contemporaneously herewith furnished
by Borrower to Lender for the purposes of or in connection with this Agreement
or any transaction contemplated hereby is, and all information hereafter
furnished by or on behalf of Borrower to Lender will be, true and accurate in
every material respect on the date as of which such information is dated or
certified; and none of such information is or will be incomplete by omitting to
state any material fact necessary to make such information not misleading.
Survival of Representations and Warranties. Borrower understands and agrees that
Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower. Borrower
further agrees that the foregoing representations and warranties shall be
continuing in nature and shall remain in full force and effect until such time
as Borrower's Indebtedness shall be paid in full, or until this Agreement shall
be terminated in the manner provided above, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings or
similar actions affecting Borrower or any Guarantor which could materially
affect the financial condition of Borrower or the financial condition of any
Guarantor.
Financial Records. Maintain its books and records in accordance with generally
accepted accounting principles, applied on a consistent basis, and permit Lender
to examine and audit Borrower's books and records at all reasonable times.
Financial Statements. Furnish Lender with, as soon as available, but in no event
later than one hundred twenty (120) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended, audited by a
certified public accountant satisfactory to Lender, and, as soon as available,
but in no event later than thirty (30) days after the end of each month,
Borrower's balance sheet and profit and loss statement for the period ended,
prepared and certified as correct to the best knowledge and belief by Borrower's
chief financial officer or other officer or person acceptable to Lender. All
financial reports required to be provided under this Agreement shall be prepared
in accordance with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower as being true and correct.
Additional Information. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables, inventory
schedules, budgets, forecasts, tax returns, and other reports with respect to
Borrower's financial condition and business operations as Lender may request
from time to time.
Financial Covenants and Ratios. Comply with the following covenants and ratios:
Except as provided above, all computations made to determine compliance with the
requirements contained
EXHIBIT 10.31
- 7 -
<PAGE>
in this paragraph shall be made in accordance with generally accepted accounting
principles, applied on a consistent basis, and certified by Borrower as being
true and correct.
Insurance. Maintain fire and other risk insurance, public liability insurance,
and such other insurance as Lender may require with respect to Borrower's
properties and operations, in form, amounts, coverages and with insurance
companies reasonably acceptable to Lender. Borrower, upon request of Lender,
will deliver to Lender from time to time the policies or certificates of
insurance in form satisfactory to Lender, including stipulations that coverages
will not be cancelled or diminished without at least ten (10) days' prior
written notice to Lender. Each insurance policy also shall include an
endorsement providing that coverage in favor of Lender will not be impaired in
any way by any act, omission or default of Borrower or any other person. In
connection with all policies covering assets in which Lender holds or is offered
a security interest for the Loans, Borrower will provide Lender with such loss
payable or other endorsements as Lender may require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on each
existing insurance policy showing such information as Lender may reasonably
request, including without limitation the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties
insured; (e) the then current property values on the basis of which insurance
has been obtained, and the manner of determining those values; and (f) the
expiration date of the policy. In addition, upon request of Lender (however not
more not than annually), Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual cash value or
replacement cost of any Collateral. The cost of such appraisal shall be paid by
Borrower.
Subordination. Prior to disbursement of any Loan proceeds, deliver to Lender a
subordination agreement on Lender's forms, executed by Borrower's creditor named
below, subordinating all of Borrower's indebtedness to such creditor, or such
lesser amount as may be agreed to by Lender in writing, and any security
interests in collateral securing that indebtedness to the Loans and security
interests of Lender.
Name of Creditor
Amount
Cordes P. Langley, a married man on undivided 38/144 Interest; Philip G.
Langley, a married man, on undivided 38/144 Interest; Ellen J. Alexander, a
married woman, on undivided 38/144 Interest; and David C. Dutton, Jr. and Grey
M. Dutton, Trustees, The David C. Dutton, Jr. and Grey M. Dutton Revocable Trust
dated October 31,1989 on undivided 30/144 Interest $264,567.58
Other Agreements. Comply with all terms and conditions of all other agreements,
whether now or hereafter existing, between Borrower and any other party and
notify Lender immediately in writing of any default in connection with any other
such agreements.
EXHIBIT 10.31
- 8 -
<PAGE>
Loan Fees and Charges. In addition to all other agreed upon fees and charges,
pay the following: 2% construction loan origination fee and a 1 1/2% permanent
loan origination fee, $275.00 Loan Documentation Fee, $950.00 Inspection fee,
$2,500.00 Legal Reimbursement fee.
Loan Proceeds. Use all Loan proceeds solely for the following specific purposes:
construction of a 62000 sq. ft. Brewery facility which will be located at 1601
Airport Road, Ukiah, CA.
Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and
obligations, including without limitation all assessments, taxes, governmental
charges, levies and liens, of every kind and nature, imposed upon Borrower or
its properties, income, or profits, prior to the date on which penalties would
attach, and all lawful claims that, if unpaid, might become a lien or charge
upon any of Borrower's properties income, or profits. Provided however, Borrower
will not be required to pay and discharge any such assessment, tax, charge,
levy, lien or claim so long as (a) the legality of the same shall be contested
in good faith by appropriate proceedings, and (b) Borrower shall have
established on its books adequate reserves with respect to such contested
assessment, tax, charge, levy, lien, or claim in accordance with generally
accepted accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies, liens and
claims and will authorize the appropriate governmental official to deliver to
Lender at any time a written statement of any assessments, taxes, charges,
levies, liens and claims against Borrower's properties, income, or profits.
Performance. Perform and comply with all terms, conditions, and provisions set
forth in this Agreement and in the Related Documents in a timely manner, and
promptly notify Lender if Borrower learns of the occurrence of any event which
constitutes an Event of Default under this Agreement or under any of the Related
Documents.
Operations. Maintain executive and management personnel with substantially the
same qualifications and experience as the present executive and management
personnel; provide written notice to Lender of any change in executive and
management personnel; conduct its business affairs in a reasonable and prudent
manner and in compliance with all applicable federal, state and municipal laws,
ordinances, rules and regulations respecting its properties, charters,
businesses and operations, including without limitation, compliance with the
Americans With Disabilities Act and with all minimum funding standards and other
requirements of ERISA and other laws applicable to Borrower's employee benefit
plans.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records and
to make copies and memoranda of Borrower's books, accounts, and records. If
Borrower now or at any time hereafter maintains any records (including without
limitation computer generated records and computer software programs for the
generation of such records) in the possession of a third party, Borrower, upon
request of Lender, shall notify such party to permit Lender free access to such
records at all reasonable times and to provide Lender with copies of any records
it may request, all at Borrower's expense.
Compliance Certificate Unless waived in writing by Lender, provide Lender at
least annually and at the time of each disbursement of Loan proceeds with a
certificate executed by Borrower's chief
EXHIBIT 10.31
- 9 -
<PAGE>
financial officer, or other officer or person acceptable to Lender, certifying
that the representations and warranties set forth in this Agreement are true and
correct as of the date of the certificate and further certifying that, as of the
date of the certificate, no Event of Default exists under this Agreement.
Environmental Compliance and Reports. Borrower shall comply in all respects with
all environmental protection federal, state and local laws statutes, regulations
and ordinances; not cause or permit to exist, as a result of an intentional or
unintentional action or omission on its part or on the part of any third party,
on property owned and/or occupied by Borrower, any environmental activity where
damage may result to the environment, unless such environmental activity is
pursuant to and in compliance with the conditions of a permit issued by the
appropriate federal, state or local governmental authorities; shall furnish to
Lender promptly and in any event within thirty (30) days after receipt thereof a
copy of any notice, summons, lien, citation, directive, letter or other
communication from any governmental agency or instrumentality concerning any
intentional or unintentional action or omission on Borrower's part in connection
with any environmental activity whether or not there is damage to the
environment and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing statements,
instruments, documents and other agreements as Lender or its attorneys may
reasonably request to evidence and secure the Loans and to perfect all Security
Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related Documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Capital Expenditures. Make or contract to make capital expenditures, including
leasehold improvements, in any fiscal year in excess of $10,000.00 or incur
liability for rentals of property (including both real and personal property) in
an amount which, together with capital expenditures, shall in any fiscal year
exceed such sum. Indebtedness and for trade debt incurred in the normal course
of business and indebtedness to Lender contemplated by this Agreement,
EXHIBIT 10.31
- 10 -
<PAGE>
create, incur or assume indebtedness for borrowed money, including capital
leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage,
assign, pledge, lease, grant a security interest in, or encumber any of
Borrower's assets, or (c) sell with recourse any of Borrower's accounts, except
to Lender.
Continuity of Operations. (a) Engage in any business activities substantially
different than those in which Borrower is presently engaged, (b) cease
operations, liquidate, merge, transfer, acquire or consolidate with any other
entity, change ownership, change its name, dissolve or transfer or sell
Collateral out of the ordinary course of business, (c) pay any dividends on
Borrower's stock (other than dividends payable in its stock), provided, however
that notwithstanding the foregoing, but only so long as no Event of Default has
occurred and is continuing or would result from the payment of dividends, if
Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue
Code of 1986, as amended), Borrower may pay cash dividends on its stock to its
shareholders from time to time in amounts necessary to enable the shareholders
to pay income taxes and make estimated income tax payments to satisfy their
liabilities under federal and state law which arise solely from their status as
Shareholders of a Subchapter S Corporation because of their ownership of shares
of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding
shares or alter or amend Borrower's capital structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other enterprise or
entity, or (c) incur any obligation as surety or guarantor other than in the
ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; or (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when due on the
Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or to perform
when due any other term, obligation, covenant or condition contained in this
Agreement or in any of the Related Documents, or failure of Borrower to comply
with or to perform any other term, obligation, covenant or condition contained
in any other agreement between Lender and Borrower.
EXHIBIT 10.31
- 11 -
<PAGE>
Default In Favor of Third Parties. Should Borrower or any Grantor default under
any loan, extension of credit, security agreement, purchase or sales agreement,
or any other agreement, in favor of any other creditor or person that may
materially affect any of Borrower's property or Borrower's or any Grantor's
ability to repay the Loans or perform their respective obligations under this
Agreement or any of the Related Documents.
False Statements. Any warranty, representation or statement made or furnished to
Lender by or on behalf of Borrower or any Grantor under this Agreement or the
Related Documents is false or misleading in any material respect at the time
made or furnished, or becomes false or misleading at any time thereafter..
Detective Collateralization This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time and for
any reason.
Insolvency. The dissolution or termination of Borrower's existence as a going
business, the insolvency of Borrower, the appointment of a receiver for any part
of Borrower's property, any assignment for the benefit of creditors, any type of
creditor workout, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Borrower, any creditor of any Grantor against
any collateral securing the Indebtedness, or by any governmental agency. This
includes a garnishment, attachment, or levy on or of any of Borrower's deposit
accounts with Lender. However, this Event of Default shall not apply if there is
a good faith dispute by Borrower or Grantor, as the case may be, as to the
validity or reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding, and if Borrower or Grantor gives Lender written notice of
the creditor or forfeiture proceeding and furnishes reserves or a surety bond
for the creditor or forfeiture proceeding satisfactory to Lender.
Events Affecting Guarantor. Any of the preceding events occurs with respect to
any Guarantor of any of the Indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
Guaranty of the Indebtedness. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume unconditionally the
obligations arising under the guaranty in a manner satisfactory to Lender, and,
in doing so, cure the Event of Default.
Change In Ownership. Any change in ownership of twenty-five percent (25%) or
more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Right to Cure. If any default, other than a Default on Indebtedness, is curable
and if Borrower or Grantor, as the case may be, has not been given a notice of a
similar default within the preceding twelve (12) months, it may be cured (and no
Event of Default will have occurred) if Borrower or
EXHIBIT 10.31
- 12 -
<PAGE>
Grantor, as the case may be, after receiving written notice from Lender
demanding cure of such default: (a) cures the default within one (1) days; or
(b) if the cure requires more than one (1) days, immediately initiates steps
which Lender deems in Lender's sole discretion to be sufficient to cure the
default and thereafter continues and completes all reasonable and necessary
steps sufficient to produce compliance as soon as reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the 'insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents, constitutes the
entire understanding and agreement of the parties as to the matters set forth in
this Agreement. No alteration of or amendment to this Agreement shall be
effective unless given in writing and signed by the party or parties sought to
be charged or bound by the alteration or amendment. Applicable Law. This
Agreement has to Lender to Lender by Lender In the State the California It there
Is a lawsuit, Borrower agrees upon Lender's request to submit to the
jurisdiction of the courts of Mendocino County, the State of California This
Agreement stroll be governed by and construed In accordance with the laws of the
State of California
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
Multiple Parties; Corporate Authority. All obligations of Borrower under this
Agreement shall be joint and several, and all references to Borrower shall mean
each and every Borrower. This means that each of the Borrowers signing below is
responsible for all obligations in this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's sale or
transfer, whether now or later, of one or more participation interests in the
Loans to one or more purchasers, whether related or unrelated to Lender; Lender
may provide, without any limitation whatsoever, to any one or more purchasers,
or potential purchasers, any information or knowledge Lender may have about
Borrower or about any other matter relating to the Loan, and Borrower hereby
EXHIBIT 10.31
- 13 -
<PAGE>
waives any rights to privacy it may have with respect to such matters Borrower
additionally waives any and all notices of sale of participation interests, as
well as all notices of any repurchase of such participation interests. Borrower
also agrees that the purchasers of any such participation interests will be
considered as the absolute owners of such interests in the Loans and will have
all the rights granted under the participation agreement or agreements governing
the sale of such participation interests. Borrower further waives all rights of
offset or counterclaim that it may have now or later against Lender or against
any purchaser of such a participation interest and unconditionally agrees that
either Lender or such purchaser may enforce Borrower's obligation under the
Loans irrespective of the failure or insolvency of any holder of any interest in
the Loans. Borrower further agrees that the purchaser of any such participation
interests may enforce its interests irrespective of any personal claims or
defenses that Borrower may have against Lender.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's expenses,
including without limitation attorneys' fees, incurred in connection with the
preparation, execution, enforcement, modification and collection of this
Agreement or in connection with the Loans made pursuant to this Agreement.
Lender may pay someone else to help collect the Loans and to enforce this
Agreement, and Borrower will pay that amount. This includes, subject to any
limits under applicable law, Lender's attorneys' fees and Lender's legal
expenses, whether or not there is a lawsuit, including attorneys' fees for
bankruptcy proceedings (including efforts to modify or vacate any automatic shy
or injunction), appeals, and any anticipated post -judgment collection services.
Borrower also will pay any court costs, in addition to all other sums provided
by law.
Notices. All notices required to be given under this Agreement shall be given in
writing, may be sent by telefacsimilie, and shall be effective when actually
delivered or when deposited with a nationally recognized overnight courier or
deposited in the United States mail, first class, postage prepaid, addressed to
the party to whom the notice is to be given at the address shown above. Any
party may change its address for notices under this Agreement by giving formal
written notice to the other parties, specifying that the purpose of the notice
is to change the party's address. To the extent permitted by applicable law, if
there is more than one Borrower, notice to any Borrower will constitute notice
to all Borrowers. For notice purposes, Borrower will keep Lender informed at all
times of Borrower's current address(es).
Severability. If a court of competent jurisdiction finds any provision of this
Agreement to be invalid or unenforceable as to any person or circumstance, such
finding shall not render that provision invalid or unenforceable as to any other
persons or circumstances. If feasible, any such offending provision shall be
deemed to be modified to be within the limits of enforceability or validity;
however, if the offending provision cannot be so modified, it shall be stricken
and all other provisions of this Agreement in all other respects shall remain
valid and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the context of any
provisions of this Agreement makes it appropriate, including without limitation
any representation, warranty or covenant, the word "Borrower as used herein
shall include all subsidiaries and affiliates of Borrower. Notwithstanding the
foregoing however, under no circumstances shall this Agreement be construed to
require Lender to make any Loan or other financial accommodation to any
subsidiary or affiliate of Borrower.
EXHIBIT 10.31
- 14 -
<PAGE>
Successors and Assigns. All covenants and agreements contained by or on behalf
of Borrower shall bind its successors and assigns and shall inure to the benefit
of Lender, its successors and assigns. Borrower shall not, however, have the
right to assign its rights under this Agreement or any interest therein, without
the prior written consent of Lender.
Survival. All warranties, representations, and covenants made by Borrower in
this Agreement or in any certificate or other instrument delivered by Borrower
to Lender under this Agreement shall be considered to have been relied upon by
Lender and will survive the making of the Loan and delivery to Lender of the
Related Documents, regardless of any investigation made by Lender or on Lender's
behalf.
Time Is of the Essence. Time is of the essence in the performance of this
Agreement.
Waiver Lender shall not be deemed to have waived any rights under this Agreement
unless such waiver is given in writing and signed by Lender. No delay or
omission on the part of Lender in exercising any right shall operate as a waiver
of such right or any other right. A waiver by Lender of a provision of this
Agreement shall not prejudice or constitute a waiver of Lender's right otherwise
to demand strict compliance with that provision or any other provision of this
Agreement. No prior waiver by Lender, nor any course of dealing between Lender
and Borrower, or between Lender and any Grantor, shall constitute a waiver of
any of Lender's rights or of any obligations of Borrower or of any Grantor as to
any future transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent in subsequent instances where such consent is
required, and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
SEPTEMBER 25,1996.
BORROWER:
Mendocino Brewing Company, a California corporation
By: /s/ Norman Franks
Norman Franks, Chief Financial Officer
By: /s/ Michael Laybourn
Michael Laybourn, Chief Executive Officer
LENDER: SAVINGS BANK OF MENDOCINO COUNTY
By: /s/ Martin J. Lombardi
Authorized Officer
EXHIBIT 10.31
- 15 -
EXHIBIT 10.32
TO
REGISTRATION STATEMENT ON FORM SB-2
----------------------
CONSTRUCTION LOAN AGREEMENT WITH THE SAVINGS BANK OF MENDOCINO COUNTY
<PAGE>
Construction Loan Agreement
This Construction Loan Agreement is made as of September 25, 1996, between
Saving Bank of Mendocino County, a California banking corporation ("Bank") and
Mendocino Brewing Company, Inc., ("Borrower").
Section 1. Construction Loan
1.1 Improvement to Real Property. Borrower has or will have an ownership or
leasehold interest in the real property more fully described in Exhibit A
("Property"). Borrower will construct or cause to have constructed certain
improvements ("Improvements") to the Property in accordance with certain plans
and specifications ("Plans and Specifications") which have previously been
delivered to the Bank.
1.2 The Loan and Note. Bank has agreed to lend to Borrower up to the sum of
$2,700,000.00 ("Loan) subject to the terms and conditions of this Agreement.
Borrower will execute and deliver a promissory note ("Note") in the form of
Exhibit B to evidence this loan.
1.3 Security. The following collateral ("Collateral") will serve as security for
Borrower's obligations in connection with the Loan and this Agreement.
(a) Borrower will grant security interests in the Property, the Improvements,
all fixtures attached or to be attached thereto and in such other property as is
specified in Exhibit C attached hereto. The deed of trust covering the Property
and the Improvements ("Deed of Trust") and the security agreements evidencing
these security interests will be collectively called the "Security Agreements".
(b) Borrower hereby assigns to Bank all of its rights, title and interest in and
to (i) all monies deposited with any public or private utility for or to assure
utilities on or for the Property, (ii) the Plans and Specifications, (iii) the
Account created pursuant to Section 4.1 (a) and the monies placed therein, (iv)
if a construction contract is required to be delivered to Bank as a condition to
disbursement of the Loan, that construction contract ("Construction Contract")
and (v) any other agreement which, in the Bank's reasonable judgment, would
assist Bank in completing the improvements should Borrower be in default
hereunder.
(c) As additional security, Borrower hereby transfers and assigns to Bank all
right, title and interest in and to any and all monies deposited by Borrower or
deposited on behalf of Borrower with any city, county, public body or agency,
irrigation, sewer, or water district or company, gas or electric company,
telephone company, and any other body or agency for the installation, or to
secure the installation of, any utility by Borrower pertaining to the Property.
Section 2. Conditions to Loan Disbursement
Before Bank becomes obligated to make any advance connection with the Loan:
2.1 Bank must have received the Note, the Security Agreements and each other
document specified in Exhibit C and all other documents, information, warranties
and showings as Bank
EXHIBIT 10.32
<PAGE>
may require, all of which must be properly executed, if appropriate, and in a
form and substance acceptable to Bank.
2.2 Bank must have received the several amounts Borrower is required to pay to
Bank as a condition to or in connection with the Loan as specified herein and in
Exhibit C.
2.3 The request for the advance must be received by Bank prior to the maturity
date of the Note and must otherwise be authorized by this Agreement.
Section 3. Affirmative Covenants
Until the Loan and all related obligations are paid and discharged, Borrower
will, unless Bank waives compliance in writing:
3.1 Indemnity. Indemnify and hold Bank, its officers, employees, agents and
assigns harmless against all losses claims, demands, damages, response costs,
penalties, expenses (including court costs and Bank's attorney fees) and
liabilities (individually and collectively called "liability") which Bank, its
officers, employees, agents, successors or assigns may sustain or suffer by
reason of anything done or omitted on, under or about the property, whether or
not in connection with the construction of the Improvements pursuant to or as
contemplated by this Agreement or caused by the use of the proceeds of the Loan,
and including without limitation, liability based on strict liability in tort,
liability resulting from a finding that Bank and borrower are engaged in a joint
venture or partnership, and liability which Bank, its officers, employees,
agents, successors or assigns may directly or indirectly sustain or suffer as a
consequence of any inaccuracy or breach of any representation, warranty or
agreement made in this Agreement in connection with hazardous substances.
Notwithstanding the language of the preamble of this Section, this indemnity
covers claims asserted after the Loan and all related obligations are paid and
discharged, and the only exclusions relate to claims arising out of the
affirmative acts of the Bank or of a third party after borrower's interest in
the Property has terminated. For purposes of this Agreement, a "hazardous
substance" is a substance which has characteristics of ignitability,
corrosivity, toxicity, reactivity or radioactivity or has other characteristics
which render it dangerous to health, safety or the environment if such substance
is or becomes regulated by an federal, state or local law, regulation or
ordinance; the term includes, without limitation, substances defined as
"hazardous material", "toxic substances", "hazardous wastes" or "hazardous
substances" in the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"),
the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., and in
Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety
Code, Section 25100, et seq., and in the regulations adopted and publications
promulgated pursuant to said laws. The terms "disposal", "release", and
"threatened release" shall have the definitions assigned to them in CERCLA.
3.2 Maintain Insurance. Provide or cause each contractor, subcontractor and
materialman involved in the construction of the Improvements to provide and keep
in full force and effect any insurance policies specified in Exhibit C or
otherwise required by Bank and with insurers and in
EXHIBIT 10.32
- 2 -
<PAGE>
amounts and in form satisfactory to Bank. Each insurance policy must contain a
standard form non-contribution mortgagee's loss payable endorsement in favor of
Bank.
3.3 Reports and Further Documents. Deliver or cause to be delivered such other
statements, lists of property and accounts, budgets, forecasts or reports
relating to Borrower or any contractor or subcontractor involved in the
construction of the Improvements as Bank may reasonably request and perform or
cause to be performed on request of Bank such further acts as may be deemed
necessary or advisable by Bank either to perfect any security interest provided
for herein or to carry out the intent of this Agreement.
3.4 Proper Construction. Cause the construction of the Improvements, including
all grading, landscaping and off site work, to be prosecuted with diligence,
continuity, in accordance with the Plans and Specifications and of first class
materials in a good, substantial and workmanlike manner in strict compliance
with all applicable laws, ordinances, rules and regulations of federal, state
and local governments and agencies, such construction to commence within 30 days
from the date hereof and be completed within 300 days of the date of this
Agreement.
3.5 Inspection. Permit Bank, its officers, employees and agents to enter upon
the Property and inspect the work of construction, it being understood, however,
that Bank is under no obligation to supervise, inspect or inform Borrower of the
progress of construction, and borrower will not rely upon Bank therefor.
3.6 Mechanics Liens. Pay or cause to be paid in full and discharge or cause to
be discharged all claims for labor done and material and services furnished in
connection with the construction of the Improvements, file diligently or procure
the filing of a Notice of Completion upon completion of construction, file
diligently or procure the filing of a Notice of Cessation upon the event of a
cessation of labor for a continuous period of 30 days or more and take all other
reasonable steps to forestall the assertion of claims of lien against the
Property or of claims against the Account other than claims for labor, materials
or services which Borrower in good faith disputes and which Borrower, at its own
expense, is currently and diligently contesting; provided, however, that
Borrower will, within 20 days after filing of any claim or lien that is disputed
or contested by Borrower, record, or cause to be recorded, in the Office of the
appropriate County recorder, a surety bond sufficient to release said claim of
lien. Borrower will defend, indemnify and hold Bank harmless against any action
filed or claim asserted against Bank for any reason in connection with any such
lien claim, including the costs thereof and expenses related thereto. Such
expenses include, but are not limited to, court costs and attorneys fees. Bank
may recover sums due from Borrower under this section from the Account, upon
demand or, at Bank's option, Bank's payment may be treated as an advance under
the Note.
3.7 Incidental Expenses. Promptly pay all reasonable and necessary expenses
incidental to this transaction including, but not limited to, all pre-closing,
closing and post-closing expenses such as escrow fees, appraisal fees, legal
fees, title insurance premiums, premiums for hazard insurance and bonds,
architect's, surveyor's and engineer's fees, real property taxes and
assessments, recordation, filing and documentary or stamp taxes.
EXHIBIT 10.32
- 3 -
<PAGE>
3.8 Takeout Commitment. Insurance and Guarantee. If the indebtedness secured by
the Deed of Trust is to be insured or guaranteed by an governmental agency or is
to be paid by another lender and evidence of such third party's commitment with
regard thereto is required to be furnished pursuant to Exhibit C, maintain such
commitment and comply with all requirements specified therein and with all
rules, regulations and statutes relating thereto, as applicable.
3.9 Compliance with Applicable Laws. Cause all work on the Improvements to be
performed in strict compliance with all applicable laws, ordinances, rules and
regulations of federal, state, county or municipal governments or agencies now
in force or that may be enacted or promulgated hereafter, and with all
directions, rules and regulations of the fire marshal, health officer, building
inspector or other officers of every governmental agency now having or hereafter
acquiring jurisdiction. Without limiting the foregoing, to the extent that there
will be any use, generation, manufacture, storage, disposal or release of any
hazardous substance on, under or about the Property, the same shall be done in
conformity with all applicable federal, stated and local hazardous substances
laws, regulations ordinances and publications promulgated thereunder. The work
shall proceed only after procurement of each permit, license or other
authorization that may be required by any governmental agency having
jurisdiction, and Borrower shall be responsible to Bank for the procurement and
maintenance thereof, as may be required of Borrower and all persons engaged in
work on the Improvements. Borrower shall promptly notify Bank of (a) any changes
whatsoever in the existing covenants, conditions and restrictions defining and
limiting the use to which the Property and Improvements may be put, (b) any
threaten or actual release of a hazardous substance, and (c) any proposed or
threatened amendment to or termination of any permit or license heretofore or
hereafter acquired by Borrower, any contractor or any subcontractor or any
materialman concerning the construction of the Improvements.
3.10 General Cooperation. Cooperate with Bank in bringing about the expeditious
completion of the work of construction. Such cooperation shall include, without
limiting the generality of the foregoing, prompt execution of Construction
Contract change orders required or reasonably necessary to (a) resolve
ambiguities in the Plans and Specifications, working drawings or shop drawings,
(b) conform the work to prior changes or (c) resolve difficulties or
inefficiencies which would arise as a result of strict adherence to the Plans
and Specifications. Disputes with or between subcontractors, materialmen,
architects, engineers, supervisory personnel or any other persons working on or
supplying material to the work of construction shall, wherever possible, be
resolved (or handled pending final resolution) in a manner which will allow work
to proceed expeditiously.
3.11 Notification of Default. Promptly notify Bank in writing of any cessation
of work on the Improvements, the occurrence of any labor dispute, the filing of
any claim against the Loan proceeds, the Account or the Property, of the
occurrence of any default, failure of performance or condition or breach of
warranty under the Note, the Security Agreements or this Agreement.
Section 4. Account
4.1 Creation: Deposits. Bank will establish a non-interest bearing account
("Account"). Deposit to the Account will consist of the following;
EXHIBIT 10.32
- 4 -
<PAGE>
(a) The sum indicated in Exhibit C attached hereto to be deposited by Borrower.
Borrower represents that this amount, together with the Loan amount is
sufficient to pay the costs and charges and expenses in connection with the Loan
and all costs in completing the Improvements in accordance with the Plans and
Specifications.
(b) Such additional sums as Bank may hereafter require Borrower to deposit
pursuant to any of the terms hereof, which deposits will be made within 5 days
after Bank's written demand therefor.
4.2 Loan Disbursements and Disbursements from Account. The entire balance in the
Account shall be disbursed as provided in this section 4.2 prior to the making
of any disbursements of the Loan proceeds. All disbursements from the Account
and of the Loan proceeds will be for the purposes contemplated by this
Agreement. Disbursements will be (a) by checks drawn by Bank and payable to
Borrower or, at Bank's option, to a contractor, subcontractor, labor or
materialman or (b) to an account established by Borrower or such other payee as
is entitled to the payment, all in accordance with Exhibit D attached hereto.
Disbursement from the Account may also be made, at Bank's option, to pay any sum
due Bank from Borrower or to pay others as otherwise contemplated by this
Agreement. Bank shall not, in any way, be responsible for the proper use by
Borrower of funds disbursed hereunder.
4.3 Bank Option. The obligation of Bank to make any disbursement from the
Account or any Loan disbursement is, in addition to each other condition
precedent set forth herein, also subject to the condition that no determination
has been made by Bank, in its reasonable judgment, after ten (10) days written
notice to Borrower, that the amounts remaining in the Account and undisbursed
under the Note are not reasonably likely to be sufficient to pay all expenses
incurred or to be incurred in connection with the completion of the Improvements
and fulfillment of Borrower's obligations hereunder. Borrower understands that
Bank's failure to make a determination that the remaining amount in the Account
and undisbursed Loan proceeds is insufficient to cover completion of the project
shall not constitute a warranty by Bank that the remainder in the Account is
sufficient for that purpose.
Section 5. Negative Covenants
Until the Loan and all related obligations are paid and discharged, Borrower
will not, unless Bank waives compliance in writing:
5.1 Amend Other Documents. materially amend the Plans and specifications or any
contract (including but not limited to the Construction Contract, if one is
submitted to Bank pursuant to Exhibit C), working drawing or other document
required to be submitted hereunder for Bank's prior approval. For purposes of
this paragraph, "Materially amend" shall mean any single change of more that
$5,000, or the aggregate of all such changes or more than $25,000.00 The prior
written consent of any surety providing bond(s) to secure payment or performance
of the work in the Improvements shall be required in connection with any and all
changes, if the enforceability of its obligations under the bond(s) would be
adversely affected absent such prior consent.
EXHIBIT 10.32
- 5 -
<PAGE>
5.2 Purchase Money Encumbrances. Acquire any materials, equipment, fixtures or
any other part of the Improvements under an arrangement wherein the seller or
any other creditor reserves the right to remove or to repossess any such items
or to consider them personal property after their incorporation in the work of
construction.
5.3 Improvements District. Consent or vote to have any of the Property
incorporated within any improvement or other district area.
5.4 Use Qualified Contractors. etc. Utilize in connection with the construction
of the Improvements any contractor, subcontractor or materialman who, in Bank's
good faith determination, is deemed to be financially or otherwise unqualified.
5.5 Occupancy of Improvements. If the proceeds of the loan are to be used to
construct for-sale home(s) upon the Property, permit any occupancy of the
home(s) prior to the close of escrow on the sale of said home(s) and the Loan
principal reduction(s) as required herein.
Section 6. Default
The occurrence of any of the following events, after any applicable cure period,
(each of which being an (Event of Defaults shall constitute a default hereunder;
provided, however, that unless otherwise specified, Borrower shall be entitled,
after receipt of Bank's notice that an Event of Default shall have occurred, to
a ten (10) day cure period for any Event of Default involving monetary payments,
and a thirty (30) day cure period for all other Events of Default;
6.1 Failure to Make Payment. Any payment required under the Note or any payment
otherwise required hereunder or pursuant to the Security Agreements or any other
document contemplated herein is not made on or before its due date.
6.2 Action Against Property. All or a substantial portion of the Property is
condemned, seized or appropriated.
6.3 Breach of Warranty or Representation. Any representation or warranty of
Borrower or any guarantor of Borrower's obligations contained in this Agreement,
the Note, the Security Agreements, any Exhibit hereto or any other document,
statement, certificate or schedule required to be furnished by Borrower or a
guarantor including, but not limited to, loan applications financial statements
and other financial information regarding Borrower or a guarantor submitted to
Bank, proves to be untrue in any material respect or Borrower or a guarantor
conceals any material fact from Bank.
6.4 Insolvency. Receiver or Trustee. A court enters any decree or order
adjudging Borrower or a guarantor to be bankrupt or insolvent, approving a
petition seeking reorganization of Borrower or a guarantor or any arrangement
for Borrower or a guarantor under any debtor's relief law, appointing a
receiver, trustee, liquidator or assignee of Borrower or a guarantor in
bankruptcy or insolvency of or for it s property, or directing the winding up or
liquidation of Borrower or a guarantor, or Borrower or a guarantor is generally
unable to pay its debts as they fall due or voluntarily submits to or files a
petition seeking any decree or order of the nature described in this section, or
Borrower or a guarantor assigns its assets for the benefit of its creditors or
suffers
EXHIBIT 10.32
- 6 -
<PAGE>
sequestration or attachment of or execution on a substantial part of its
property unless the same is returned or released with 30 days thereafter or
prior to sooner sale pursuant to such sequestration, attachment or execution.
6.5 Judgments. Borrower fails to pay or to discharge any judgments against it
for the payment of money which in the aggregate exceed $10.000, unless such
judgments are satisfied or appeals are taken therefrom and enforcement of
such judgments are stayed within 10 days of their entry, or unless such
judgments are covered by a valid and binding insurance policy, in the opinion of
Borrower's counsel.
6.6 Sale or Transfer of Collateral. Borrower sells, transfer, removes, abandons,
assigns, hypothecates or encumbers, whether voluntarily or involuntarily, all or
any part of the collateral (except for personal property which requires
replacement by reason of wear and tear or obsolescence which is immediately
replaced upon sale or removal), or any interest therein or the attachment of any
lien thereon.
6.7 Lapse of Termination of Takeout Commitment. Any commitment of a governmental
agency or another lender to insure or to pay the indebtedness secured by the
Deed of Trust lapses or terminates.
6.8 Encroachment. Any encroachment to the Property or any encroachment to other
property as a result of the Improvements or their construction occurs and such
encroachment is not removed or corrected within 30 days.
6.9 Interruption of Construction. Work on the improvements ceases for a
continuous period of 30 days or more prior to completion thereof for causes
other than fire, earthquake, or other acts of God, acts of the public enemy,
riot, insurrection, governmental regulation of the sale of material and supplies
or the transportation thereof, or strikes directly affecting the work of
construction or shortages of material or labor resulting directly from
governmental controls or diversions; provided, however, that the total
permissible delay from all such enumerated cases will not exceed 45 days in the
aggregate throughout the entire period of construction of the Improvements.
Notwithstanding these time periods, if any bonds secure performance or payment
of the work in the Improvements and such bond or bonds stipulates a shorter
period or period, said shorter periods will be read into the preceding sentence.
6.10 Mechanics Lien. Any claim of lien is filed against the Property, the
Improvements or any part thereof of any interest or right made appurtenant
thereto, or any notice to withhold funds applicable to the Account or the Loan
is served and not released within 20 days, or Borrower has not, within said
period of time, recorded a surety bond sufficient to release said claim of lien.
6.11 Failure to Make Deposit to Account. Borrower fails to timely make any
required deposit to the Account.
6.12 Failure to Maintain Insurance. Borrower or any contractor or subcontractor
fails to obtain or maintain the several insurance coverages required by Bank
hereunder.
EXHIBIT 10.32
- 7 -
<PAGE>
6.13 Failure to Pay Taxes. Borrower fails to pay all real and personal property
taxes on the Collateral before the same shall become delinquent if payment of
the tax is or may become a lien against the Property or any other portion of the
Collateral.
6.14 Failure to Make Leasehold Payments. If the Property consists of a leasehold
interest, Borrower fails to pay all rental payments on or before their
respective due dates or such lease otherwise becomes in default.
6.15 Failure to Make Corrective Improvements. Borrower fails to commence
corrective improvements as called for in Section 8 hereto, within 15 days of
notice from Bank, and fails to complete said improvements in an expedient and
timely fashion.
6.16 Other Breach. Borrower breaches any other condition covenant, warranty,
promise or representation contained in this Agreement, the Note or the Security
Agreements not specifically set forth in this Section 6 as an Event of Default.
Section 7. Bank's Remedies Upon Default
7.1 General Remedies. Should an Event of Default occur, Bank may, at its option,
do any one or more of the following, all without demand, presentment or notice,
all of which are hereby expressly waived:
(a) Terminate its obligation to make advances in connection with the Loan or
disbursements from the Account.
(b) Declare all indebtedness of Borrower on the Note or otherwise relating to
the Loan immediately due and payable.
(c) Take possession of the Property.
(d) Complete the Improvements in accordance with the Plans and Specifications or
as Bank may otherwise deem appropriate. In no event shall Bank be obligated to
complete the Improvements if the funds in the Account and undisbursed amounts
under the Note are insufficient to complete the Improvements. However, Bank may
advance additional sums and add such sums to the unpaid balance of the Note or
to be repayable upon Bank's demand together with interest from the date of each
advance at the rate provided by the Note.
(e) Discharge and replace any contractor or subcontractor if such person is then
in default under the contract under which said person's services are retained.
(f) Employ guards and take other reasonable measures designed to assure the
security of the Property, Improvements, building materials, and all equipment,
machinery and other materials involved in the construction of the Improvements.
(g) Exercise all other remedies available to Bank under the Note, the Security
Agreements, this Agreement and the law.
EXHIBIT 10.32
- 8 -
<PAGE>
7.2 Bank's Right to Cure. Upon the happening of any Event of Default which maybe
cured by payment of money, Bank will have the right, but not the obligation, to
make such payment from the Account or as a Loan advance, thereby curing the
default. If as a result of the making of such a payment the sum of the remaining
amount of funds in the Account plus the then undisbursed loan proceeds is, in
Bank's opinion, insufficient to complete construction of the Improvements, the
shortfall will be deposited by Borrower to the account upon Bank's demand.
Borrower will have the right to contest in good faith any claim, demand, levy or
assessment the assertion of which would constitute an Event of Default
hereunder. Any such contest will be prosecuted diligently and in a manner
unprejudicial to Bank or the rights of Bank hereunder. Upon demand by Bank,
Borrower will make suitable provision by deposit of funds in the Account or by
bond or other assurance satisfactory to Bank for the possibility that the
contest will be unsuccessful. Such provision will be made within 10 days after
demand therefor, and if made by deposit of funds in the Account, the amount so
deposited will be disbursed in accordance with the resolution of the contest.
7.3 Notice of Default. If Bank determines that such action is desirable for the
preservation of its position, Bank may duly file for record a notice of default
under the Deed of Trust upon the happening of an Event of Default, after any
applicable curative period has expired.
Section 8. Other Right and Remedies of Bank
8.1 Disputes. If disputes arise which, in the reasonable opinion of Bank,
endanger timely completion of the Improvements of fulfillment of any condition
precedent or covenant herein or result in lien claims against the Property, Bank
may advance funds from the Loan or from the Account pursuant to Section 4 to
such person as Bank deems appropriate without prejudice to Borrower's rights, if
any, to recover said funds from the party so paid; provided, however, that prior
to advancing such funds, Bank must give Borrower ten (10) days' written notice
of Bank's intention to so advance such funds, and Borrower shall have the option
to release any such claims through the recording of a surety bank or bands
sufficient for said purpose. Without limiting the foregoing, such payments may
be to a title insurer with regard to possible assertion of lien claims, or to
pay disputed amounts to the person claiming the same if Borrower is unable or
unwilling to pay the same.
8.2 Correction of Improper Condition. If there are substantial deviations from
the Plans and Specifications, working drawings or shop drawings, or if the same
appear to be defective, or if defective workmanship or materials are being used
in the construction of the Improvements or if Bank has knowledge of
encroachments as to which there has been no consent, or if Bank in good faith
believes a violation of any applicable law, regulation or ordinance has occurred
or may occur on the Property or in connection with the construction of the
Improvements, Bank will have the right to order immediate stoppage of
construction and demand that the condition be corrected. After issuance of such
an order, no further advances from the Loan or from the Account shall be made by
Bank until the condition has been fully corrected.
8.3 Damage or Destruction of Improvements. If the Improvements or any part
thereof are damaged or destroyed by flood, earthquake, wind, fire or by other
means, Borrower shall promptly restore the Improvements to their prior
condition. Bank shall not be obligated to make
EXHIBIT 10.32
- 9 -
<PAGE>
any further disbursements of the Loan proceeds until such restoration is
completed to Bank's satisfaction. Any insurance proceeds by reason of such
damage or destruction that are received by Bank will be available to Borrower
upon presentation of bills covering any labor and material used in restoration
provided, in Bank's reasonable opinion, that sufficient funds are available to
complete that restoration.
8.4 Approval of Leases. Borrower shall obtain the prior written approval of Bank
as to the form and substance of any leases affecting the Property which are
proposed subsequent to the date of this Agreement, which approval shall not be
unreasonably withheld. Any approval by Bank may be conditioned upon receipt by
Bank of an assignment of the lease or lease rentals. In addition, Borrower shall
obtain the prior written approval of Bank to any modification, assignment,
amendment, supplement, or cancellation of any lease, which approval shall not be
unreasonably withheld. At the option of Bank, all leases shall be further
memorialized by means of executed Non-disturbance, Attornment, and Subordination
Agreements in form acceptable to Bank, prior to the execution of any new lease,
or thirty (30) days from any request by Bank. At the request of Bank, Borrower
agrees to provide Bank with executed Estoppel Certificates, at the time of any
new lease, or fifteen (15) days from any request by Bank.
Section 9. Miscellaneous
9.1 Release of Security Interest. Upon payment of all sums and performance of
all obligations secured under the Security Agreements and the assignments
provided by Section 1.3, Bank shall release its security interest therein. If
the Property is to be subdivided, partial releases of the Property shall be made
by the Bank in accordance with Exhibit G attached hereto, provided that Borrower
shall not then be in default hereunder.
9.2 Warranties. Borrower makes the representations and warranties listed on any
Exhibit attached hereto and agrees that these warranties survive the execution,
delivery, filing and recordation of this Agreement, the Note, the Security
Agreements and any document or instrument delivered pursuant thereto.
9.3 Cumulative Rights and Remedies. No right, power or remedy given Bank by the
terms of this Agreement, the Note or the Security Agreement is intended to be
exclusive of any other right, power or remedy, and each and every such right,
power or remedy will be cumulative and in addition to every other right, power
or remedy given to Bank by the terms of any instruments.
9.4 Time; No Waiver of Bank Rights. Time is of the essence of this Agreement. No
waiver of any default or breach by Borrower will be implied from any omission by
Bank to take action on account of such default whether or not such default
persists or is repeated. No express waiver will affect any default other than
the default specified in the waiver. Waivers of the breach of any term herein
will not be construed as a waiver of any subsequent breach of the same term. The
consent and approval by Bank to or of any act by Borrower or a contractor
requiring further consent or approval will not be deemed to waive or render
unnecessary the consent or approval to or of any subsequent similar act. The
exercise of any right, power or remedy will in no event constitute a cure or a
waiver of any Event of Default under this Agreement, nor will it invalidate any
act done pursuant to a notice of default or prejudice Bank in the exercise of
any right, power
EXHIBIT 10.32
- 10 -
<PAGE>
or remedy hereunder unless in the exercise of any such right, power or remedy
all obligations of Borrower to Bank are paid and discharged in full.
9.5 Notice. All notices under this Agreement must be in writing. Any notice
given by either Bank or Borrower hereunder will be effective upon personal
delivery or by certified mail delivery, return receipt requested, at the address
indicated below Bank and Borrower's respective signatures. Such addresses may be
changed by written notice to the other party.
9.6 Irrevocable Authority of Bank. Borrower irrevocably appoints, designates and
authorizes Bank as its agent to file for record any notice of completion,
cessation of labor, or any other notice that Bank deems necessary or desirable
to protect its interest.
9.7 Bank Action. Bank will have the right, but not the obligation, to commence,
appear in or defend any action or proceeding purporting to affect or enforce the
rights, duties or liabilities of either of the parties hereunder, or the
disbursement of any funds in the Account. In connection herewith, Bank may incur
and pay costs and expenses, including a reasonable attorney's fee. Borrower
agrees to pay to Bank on demand all such expenses, and Bank is authorized to
disburse funds from the Account or as a Loan advance for said purpose.
9.8 Fee Indemnity. Borrower will indemnify and hold Bank harmless from any
liability for the payment of any commission or brokerage fee payable in
connection with the Loan.
9.9 Placement of Signs and Publicity Releases. Borrower agrees that, during the
term of this Agreement, Bank may erect on the Property, at Bank's expense, such
signs as are appropriate to evidence the placement of financing through Bank.
Borrower also agrees that Bank may issue publicity releases to newspapers of
general limited circulation, or trade publications, or trade publications,
announcing issuance of such financing through Bank.
9.10 Exhibits: Present Agreement; Inconsistent Terms. Each Exhibit referenced
herein or therein is deemed to be incorporated into this Agreement as if fully
set forth herein. This Agreement, together with the exhibits and all other
documents specifically referred to herein and therein constitute the only
present agreements between the parties hereto and supersedes all prior
agreements between the parties pertaining to the transactions contemplated
herein including, without limitation, any commitment letter of Bank to Borrower.
No representations, warranties or inducements have been made by the Bank, except
as set forth herein. In the event of any inconsistency between the provisions
hereof and any other related writing this Agreement will be controlling.
9.11 Assignability. This Agreement is binding upon and inures to the benefit of
the successors and assigns of the parties hereto. However, any assignment by
Borrower without the prior written consent of Bank will be void. Bank may at any
time sell, grant participations in or otherwise dispose of in any way all or any
part of the indebtedness of Borrower outstanding under this Agreement. Borrower
shall, upon Bank's request, execute such further instructions as may in Bank's
opinion by necessary or advisable to effect such disposition, including, without
limitation, new notes to be issued in exchange for any notes required hereunder.
EXHIBIT 10.32
- 11 -
<PAGE>
9.12 Joint and Several Liability: Gender. If this Agreement is executed by more
than one person or entity as Borrower, all of Borrowers' obligations will be
joint and several. If any person signing this Agreement is a married person, all
community property of the borrower as well as his or her separate property will
be liable for repayment of all sums due hereunder. Whenever the context so
requires, the use within this Agreement of any gender includes each other
gender, and the singular or plural number includes the other.
9.13 California Law; Severability: Attorneys' Fees. This Agreement, the Note and
the Security Agreements and other instruments given pursuant hereto or in
connection herewith and the rights, powers and remedies of the parties hereunder
will be construed and enforced in accordance with the internal laws of the State
of California. Should any provision of this Agreement, the Security Agreements
or any other agreement contemplated hereby become unenforceable for any reason,
the remaining provisions of this and those agreements will nevertheless remain
effective. Borrower agrees to pay upon demand all of Bank's costs and expenses,
including attorneys' fees and Bank's legal expenses, incurred in connection with
the enforcement of this agreement or any of the loan documents. Bank may pay
someone else to help enforce these agreements, and borrower shall pay the costs
and expenses of such enforcement. Costs and expenses include but are not limited
to, Bank's attorneys fees and legal expenses whether or not there is a law suit,
and include attorneys fees and legal expenses for bankruptcy proceedings and
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgement collection services.
9.14 Loan Only. The relationship between Borrower and Bank will at all times
remain solely that of borrower and lender. Bank does not undertake any
responsibility or duty to Borrower to select, review, inspect, supervise , pass
judgement upon or inform Borrower of the quality, adequacy or suitability of:
(a) the Plans and Specifications or amendments, alterations and additions
thereto, (b) the architects, contractor, subcontractors and materialmen employed
or utilized in the construction, or (c) the progress or course of construction
and its conformance or nonconformance with the Plans and Specifications or
amendments, alterations and changes thereto. Bank owns no duty of care to
protect Borrower or any other person against negligent, faulty, inadequate or
defective building or construction, and borrower will indemnify and hold Bank
harmless from any such liability, loss or damage. The fact that Bank may have
reviewed and/or approved of such items as surveys, foundation reports, soil
reports and Plans and Specifications, as provided herein or otherwise, will have
no effect upon the agreements contained herein. Borrower understands that such
reviews and approvals are required and undertaken for Bank's protection only.
Borrower will perform its own reviews to assure that it is independently
satisfied with such items.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year herein first above written. This Agreement contains the following
Exhibits: A, B. C, D, (X) E,(X) F,(G) and NA_which are incorporated herein by
this reference.
Savings Bank of Mendocino County, A California Banking Corporation P.O. Box 3600
Ukiah, CA 95482
BY: /s/ Martin J. Lombardi
EXHIBIT 10.32
- 12 -
<PAGE>
Martin J. Lombardi, its Vice President
Mendocino Brewing Company Inc. P. O. Box 400 Hopland, CA 95449
BY: /s/ Michael Laybourn
Michael Laybourn its CEO & President
EXHIBIT 10.32
- 13 -
EXHIBIT 10.33
TO
REGISTRATION STATEMENT ON FORM SB-2
-------------------------------
$2,700,000 NOTE IN FAVOR OF THE SAVINGS BANK OF MENDOCINO COUNTY
<PAGE>
PROMISSORY NOTE
Borrower: Mendocino Brewing Company, a California Corporation PO Box 400
Hopland, CA 95449
Lender: SAVINGS BANK OF MENDOCINO COUNTY MAIN OFFICE PO Box 3600 200 N. School
Street Ukiah, CA 95482
Principal Amount: $2,700,000.00 Initial Rate: 10.250% Date of Note: September
25, 1996
PROMISE TO PAY. Mendocino Brewing Company, a California corporation ("Borrower")
promises to pay to SAVINGS BANK OF MENDOCINO COUNTY ("Lender"), or order, In
lawful money of the United States of America, the principal amount of Two
Million Seven Hundred Thousand & 00/100 Dollars ($2,700,000.00) or so much as
may be outstanding, together with interest on the unpaid outstanding principal
balance of each advance. Interest shall be calculated from the date of each
advance until repayment of each advance.
PAYMENT. Borrower will pay this loan In one payment of ail outstanding principal
plus all accrued unpaid Interest on February 2,1997. In addition, Borrower will
pay regular monthly payments of accrued unpaid Interest beginning October
1,1996, and ail subsequent interest payments are due on the same day of each
month after that. Interest on this Note is computed on a 365/365 simple interest
basis; that is, by applying the ratio of the annual interest rate over the
number of days in a year (366 during leap years), multiplied by the outstanding
principal balance, multiplied by the actual number of days the principal balance
is outstanding. Borrower will pay Lender at Lender's address shown above or at
such other place as Lender may designate in writing. Unless otherwise agreed or
required by applicable law, payments will be applied first to accrued unpaid
interest, then to principal, and any remaining amount to any unpaid collection
costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an index which is the Savings Bank of Mendocino
County's Base Commercial Rate (the "Index"). The Index is not necessarily the
lowest rate charged by Lender on its loans and is set by Lender in its sole
discretion. If the Index becomes unavailable during the term of this loan,
Lender may designate a substitute index after notifying Borrower. Lender will
tell Borrower the current Index rate upon Borrower's request. Borrower
understands that Lender may make loans based on other rates as well. The
interest rate change will not occur more often than each first and fifteenth of
each month. The Index currently is 8.250% per annum. The Interest rate to be
applied to the unpaid principal balance of this Note will be at a rate of 2.000
percentage points over the Index, resulting In an Initial rate of 10.250% per
annum. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. In any event, even upon
full prepayment of this Note, Borrower understands that
EXHIBIT 10.33
<PAGE>
Lender is entitled to a minimum Interest charge of $100.00. Other than
Borrower's obligation to pay any minimum interest charge, Borrower may pay
without penalty all or a portion of the amount owed earlier than it is due.
Early payments will not, unless agreed to by Lender in writing, relieve Borrower
of Borrower's obligation to continue to make payments of accrued unpaid
interest. Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 15 days or more late, Borrower will be charged
5.000% of the regularly scheduled payment.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with Lender.
(g) Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Note. (h) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the Indebtedness is impaired.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within one (1) days; or (b) if the
cure requires more than one (1) days, immediately initiates steps which Lender
deems in Lender's sole discretion to be sufficient to cure the default and
thereafter continues and completes all reasonable and necessary steps sufficient
to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due without
notice, and then Borrower will pay that amount. Lender may hire or pay someone
else to help collect this Note if Borrower does not pay. Borrower also will pay
Lender that amount. This includes, subject to any limits under applicable law,
Lender's attorneys' fees and Lender's legal expenses whether or not there is a
lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-Judgment collection services. Borrower also
will pay any court costs, in addition to all other
EXHIBIT 10.33
- 2 -
<PAGE>
sums provided by law. This Note has been delivered to Lender and accepted by
Lender In the State of California. It there Is a lawsuit, Borrower agrees upon
Lender's request to submit to the jurisdiction of the courts of Mendocino
County, the State of California This Note shall be governed by and construed In
accordance with the laws of the State of California
DISHONORED ITEM FEE. Borrower wilt pay a fee to Lender of $10.00 if Borrower
makes a payment on Borrower's loan and the check or pre-authorized charge with
which Borrower pays is later dishonored.
COLLATERAL. Borrower acknowledges this Note is secured by, in addition to any
other collateral, a Deed of Trust dated September 25, 1996, to a trustee in
favor of Lender on real property located in Mendocino County, State of
California. That agreement contains the following due on sale provision: Lender
may, at its option, declare immediately due and payable all sums secured by this
Deed of Trust upon the sale or transfer, without the Lender's prior written
consent, of all or any part of the Real Property, or any interest in the Real
Property. A "sale or transfer" means the conveyance of Real Property or any
right, title or interest therein; whether legal, beneficial or equitable;
whether voluntary or involuntary; whether by outright sale, deed, installment
sale contract, land contract, contract for deed, leasehold interest with a term
greater than three (3) years, lease-option contract, or by sale, assignment, or
transfer of any beneficial interest in or to any land trust holding title to the
Real Property, or by any other method of conveyance of Real Property interest.
If any trustor is a corporation, partnership or limited liability company,
transfer also includes any change in ownership of more than twenty-five percent
(25%) of the voting stock, partnership interests or limited liability company
interests, as the case may be, of Trustor. However, this option shall not be
exercised by Lender if such exercise is prohibited by applicable law.
LINE OF CREDIT. This Note evidences a straight line of credit. Once the total
amount of principal has been advanced, Borrower is not entitled to further loan
advances. Borrower agrees to be liable for all sums either: (a) advanced in
accordance with the instructions of an authorized person or (b) credited to any
of Borrower's accounts with Lender. The unpaid principal balance owing on this
Note at any time may be evidenced by endorsements on this Note or by Lender's
internal records, including daily computer print-outs.
ADDITIONAL PROVISIONS. THIS NOTE IS SECURED BY A DEED OF TRUST OF EVEN DATE
HEREWITH, A SECURITY AGREEMENT OF EVEN DATE HEREWITH AND AN ASSIGNMENT OF
DEPOSIT OF EVEN DATE HEREWITH.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive any
applicable statute of limitations, presentment, demand for payment, protest and
notice of dishonor. Upon any change in the terms of this Note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether as
maker, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lender's security
interest in the collateral; and take any other action deemed necessary by Lender
EXHIBIT 10.33
- 3 -
<PAGE>
without the consent of or notice to anyone. All such parties also agree that
Lender may modify this loan without the consent of or notice to anyone other
than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
Mendocino Brewing Company, a California corporation
By: /s/ Norman Franks
Norman Franks, Chief Financial Officer
By: /s/ Michael Laybourn
Michael Laybourn, Chief Executive Officer
EXHIBIT 10.33
- 4 -
EXHIBIT 10.34
TO
REGISTRATION STATEMENT ON FORM SB-2
------------------------------------
ASSIGNMENT OF DEPOSIT ACCOUNT IN FAVOR OF THE SAVINGS BANK OF MENDOCINO COUNTY
<PAGE>
ASSIGNMENT OF DEPOSIT ACCOUNT
Borrower: Mendocino Brewing Company, a California Corporation PO Box 400
Hopland, CA 95449
Lender: SAVINGS BANK OF MENDOCINO COUNTY MAIN OFFICE PO Box 3600 200 N. School
Street Ukiah, CA 95482
THIS ASSIGNMENT OF DEPOSIT ACCOUNT Is entered Into between Mendocino Brewing
Company, a California Corporation (referred to below as "Grantor"); and SAVINGS
BANK OF MENDOCINO COUNTY (referred to below as "Lender").
ASSIGNMENT. For valuable consideration, Grantor assigns and grants to Lender a
security interest in the Collateral, including without limitation the deposit
accounts described below, to secure the Indebtedness and agrees that Lender
shall have the rights stated in this Agreement with respect to the Collateral,
in addition to all other rights which Lender may have by law.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Account. The word "Account" means the deposit account described below in the
definition for "Collateral..
Agreement. The word "Agreement" means this Assignment of Deposit Account, as
this Assignment of Deposit Account may be amended or modified from time to time,
together with all exhibits and schedules attached to this Assignment of Deposit
Account from time to time.
Collateral. The word "Collateral" means the following described deposit account:
Savings Account #21-301341 Issued by Lender In an amount not less than $
together with (a) all interest, whether now accrued or hereafter accruing; (b)
all additional deposits hereafter made to the Account; (c) any and all proceeds
from the Account; and (d) all renewals, replacements and substitutions for any
of the foregoing.
In addition, the word "Collateral" includes all property of Grantor (however
owned if owned by more than one person), in the possession of Lender (or in the
possession of a third party subject to the control of Lender), whether existing
now or later and whether tangible or intangible in character, including without
limitation each and all of the following:
(a) All property to which Lender acquires title or documents of title. (b) All
property assigned to Lender.
(c) All promissory notes, bills of exchange, stock certificates, bonds, savings
passbooks, time certificates of deposit, Insurance policies, and an other
Instruments and evidences of an obligation.
EXHIBIT 10.34
<PAGE>
(d) All records relating to any of the properly described In this Collateral
section, whether In the form of writing, microfilm, microfiche, or electronic
media.
Event of Default. The words "Event of Defaults" mean and include without
limitation any of the Events of Default set forth below in the section titled
"Events of Default."
Grantor. The word "Grantor" means Mendocino Brewing Company, a California
corporation, its successors and assigns.
Guarantor. The word "Guarantor" means and includes without limitation each and
all of the guarantors, sureties, and accommodation parties in connection with
the Indebtedness.
Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the
Note, including all principal and interest, together with all other indebtedness
and costs and expenses for which Grantor is responsible under this Agreement or
under any of the Related Documents.
Lender. The word "Lender" means SAVINGS BANK OF MENDOCINO COUNTY, its successors
and assigns.
Note. The word "Note" means the note or credit agreement dated October 7, 1996,
in the principal amount of $2,700,000.00 from Mendocino Brewing Company, a
California Corporation to Lender, together with all renewals of, extensions of,
modifications of, re-financings of, consolidations of and substitutions for the
note or credit agreement.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds of
trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness.
GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE COLLATERAL. With
respect to the Collateral, Grantor represents and warrants to Lender that:
Ownership. Grantor is the lawful owner of the Collateral free and clear of all
loans, liens, encumbrances, and claims except as disclosed to and accepted by
Lender in writing.
Right to Grant Security Interest. Grantor has the full right, power, and
authority to enter into this Agreement and to assign the Collateral to Lender.
No Further Transfer. Grantor will not sell, assign, encumber, or otherwise
dispose of any of Grantor's rights in the Collateral except as provided in this
Agreement.
No Defaults. There are no defaults relating to the Collateral, and there are no
offsets or counterclaims to the same. Grantor will strictly and promptly do
everything required of Grantor under the terms, conditions, promises, and
agreements contained in or relating to the Collateral.
Proceeds. Any and all replacement or renewal certificates, instruments, or other
benefits or proceeds related to the Collateral that are received by Grantor
shall be held by Grantor in trust for
EXHIBIT 10.34
- 2 -
<PAGE>
Lender and immediately shall be delivered by Grantor to Lender to be held as
part of the Collateral.
LENDER'S RIGHTS AND OBLIGATIONS WITH RESPECT TO THE COLLATERAL. While this
Agreement is in effect, Lender may retain the rights to possession of the
Collateral, together with any and all evidence of the Collateral, such as
certificates. This Agreement will remain in effect until (a) there no longer is
any Indebtedness owing to Lender; (b) all other obligations secured by this
Agreement have been fulfilled; and (c) Grantor, in writing, has requested from
Lender a release of this Agreement.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
LIMITATIONS ON OBLIGATIONS OF LENDER. Lender shall use ordinary reasonable care
in the physical preservation and custody of any certificate or passbook for the
Collateral but shall have no other obligation to protect the Collateral or its
value. In particular, but without limitation, Lender shall have no
responsibility (a) for the collection or protection of any income on the
Collateral, (b) for the preservation of rights against issuers of the Collateral
or against third persons; (c) for ascertaining any maturities, conversions,
exchanges, offers, tenders, or similar matters relating to the Collateral; nor
(d) for informing the Grantor about any of the above, whether or not Lender has
or is deemed to have knowledge of such matters.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Grantor to make any payment when due on the
Indebtedness.
Other Defaults. Failure of Grantor to comply with or to perform any other term,
obligation, covenant or condition contained in this Agreement or in any of the
Related Documents or in any other agreement between Lender and Grantor.
Default In Favor of Third Parties. Should Borrower or any Grantor default under
any loan, extension of credit, security agreement, purchase or sales agreement,
or any other agreement, in favor of any other creditor or person that may
materially affect any of Borrower's property or
EXHIBIT 10.34
- 3 -
<PAGE>
Borrower's or any Grantor's ability to repay the Loans or perform their
respective obligations under this Agreement or any of the Related Documents.
False Statements. Any warranty, representation or statement made or furnished to
Lender by or on behalf of Grantor under this Agreement, the Note or the Related
Documents is false or misleading in any material respect, either now or at the
time made or furnished.
Detective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
documents to create a valid and perfected security interest or lien) at any time
and for any reason.
Insolvency. The dissolution or termination of Grantor's existence as a going
business, the insolvency of Grantor, the appointment of a receiver for any part
of Grantor's property, any assignment for the benefit of creditors, any type of
creditor workout, or the commencement of any proceeding under any bankruptcy or
insolvency laws by or against Grantor.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Grantor or by any governmental agency against
the Collateral or any other collateral securing the Indebtedness. This includes
a garnishment of any of Grantor's deposit accounts with Lender. However, this
Event of Default shall not apply if there is a good 0th dispute by Grantor as to
the validity or reasonableness of the claim which is the basis of the creditor
or forfeiture proceeding and if Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a surety
bond for the creditor or forfeiture proceeding, in an amount determined by
Lender, in its sole discretion, as being an adequate reserve or bond for the
dispute.
Events Affecting Guarantor. Any of the preceding events occurs with respect to
any Guarantor of any of the Indebtedness or such Guarantor dies or becomes
incompetent.
Adverse Change. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Right to Cure. If any default, other than a Default on Indebtedness, is curable
and if Grantor has not been given a prior notice of a breach of the same
provision of this Agreement, it may be cured (and no Event of Default will have
occurred) if Grantor, after Lender sends written notice demanding cure of such
default, (a) cures the default within one (1) days, or (b), if the cure requires
more than one (1) days, immediately initiates steps which Lender deems in
Lender's sole discretion to be sufficient to cure the default and thereafter
continues and completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. Upon the occurrence of an Event of Default, or
at any time thereafter, Lender may exercise any one or more of the following
rights and remedies, in addition to any rights or remedies that may be available
at law, in equity, or otherwise:
Accelerate Indebtedness. Lender may declare all Indebtedness of Grantor to
Lender immediately due and payable, without notice of any kind to Grantor.
EXHIBIT 10.34
- 4 -
<PAGE>
Application of Account Proceeds. Lender may obtain all funds in the Account from
the issuer of the Account and apply them to the Indebtedness in the same manner
as if the Account had been issued by Lender. If the Account is subject to an
early withdrawal penalty, that penalty shall be deducted from the Account before
its application to the Indebtedness, whether the Account is with Lender or some
other institution. Any excess funds remaining after application of the Account
proceeds to the Indebtedness win be paid to Grantor as the interests of Grantor
may appear. Grantor agrees, to the extent permitted by law, to pay any
deficiency after application of the proceeds of the Account to the Indebtedness.
Lender also shall have all the rights of a secured party under the California
Uniform Commercial Code, even if the Account is not otherwise subject to such
Code concerning security interests, and the parties to this Agreement agree that
the provisions of the Code giving rights to a secured party shall nonetheless be
a part of this Agreement.
Collect the Collateral Lender may collect any of the Collateral and, at Lender's
option and to the extent permitted by applicable law, may retain possession of
the Collateral while suing on the Indebtedness.
Sell the Collateral. Lender may sell the Collateral, at Lender's discretion, as
a unit or in parcels, at one or more public or private sales. Unless the
Collateral is perishable or threatens to decline speedily in value, Lender shall
give or mail to Grantor, or any of them, notice at least ten (10) days in
advance of the time and place of public sale, or of the date after which private
sale may be made. Grantor agrees that any requirement of reasonable notice is
satisfied if Lender mails notice by ordinary mail addressed to Grantor, or any
of them, at the last address Grantor has given Lender in writing. If public sale
is held, there shall be sufficient compliance with all requirements of notice to
the public by a single publication in any newspaper of general circulation in
the county where the Collateral is located, setting forth the time and place of
sale and a brief description of the properly to be sold.
Lender may be a purchaser at any public sale.
Register Securities. Lender may register any securities included in the
Collateral in Lender's name and exercise any rights normally incident to the
ownership of securities.
Sell Securities. may sell any securities included in the Collateral in a manner
consistent with applicable federal and state securities laws, notwithstanding
any other provision of this or any other agreement. If, because of restrictions
under such laws, Lender is or believes it is unable to sell the securities in an
open market transaction, Grantor agrees that (a) Lender shall have no obligation
to delay sale until the securities can be registered, (b) Lender may make a
private sale to a single person or restricted group of persons, even though such
sale may result in a price that is less favorable than might be obtained in an
open market transaction, and (c) such a sale shall be considered commercially
reasonable. If any securities held as Collateral are "restricted securities" as
defined in the Rules of the Securities and Exchange Commission (such as
Regulation D or Rule 144) or state securities departments under state "Blue Sky"
laws, or if Grantor, or any of them (if more than one), is an adulate of the
issuer of the securities, Grantor agrees that Grantor will neither sell nor
dispose of any securities of such issuer without obtaining Lender's prior
written consent.
EXHIBIT 10.34
- 5 -
<PAGE>
Transfer Title. Lender may effect transfer of title upon sale of all or part of
the Collateral. For this purpose, Grantor irrevocably appoints Lender as its
attorney-in-fact to execute endorsements, assignments and instruments in the
name of Grantor and each of them (if more than one) as shall be necessary or
reasonable.
Application of Proceeds. Lender may apply any cash which is part of the
Collateral, or which is received from the collection or sale of the Collateral,
to (a) reimbursement of any expenses, including any costs of any securities
registration, commissions incurred in connection with a sale, attorney fees as
provided below and court costs, whether or not there is a lawsuit and including
any fees on appeal, incurred by Lender in connection with the collection and
sale of such Collateral, and (b) to the payment of the Indebtedness of Grantor
to Lender, with any excess funds to be paid to Grantor as the interests of
Grantor may appear.
Other Rights and Remedies. Lender shall have and may exercise any or all of the
rights and remedies of a secured creditor under the provisions of the California
Uniform Commercial Code, at law, in equity, or otherwise.
Deficiency Judgment. If permitted by applicable law, Lender may obtain a
judgment for any deficiency remaining in the Indebtedness due to Lender after
application of all amounts received from the exercise of the rights provided in
this section.
Cumulative Remedies. All of Lender's rights and remedies, whether evidenced by
this Agreement or by any other writing, shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Grantor under this Agreement, after
Grantor's failure to perform, shall not affect Lender's right to declare a
default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents, constitutes the
entire understanding and agreement of the parties as to the matters set forth in
this Agreement. No alteration of or amendment to this Agreement shall be
effective unless given in writing and signed by the party or parties sought to
be charged or bound by the alteration or amendment.
Applicable Low. This Agreement has been delivered to Lender and accepted by
Lender in the State of California. If there is a lawsuit, Grantor agrees upon
Lender's request to submit to the jurisdiction of the courts of Mendocino
County, State of California. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of Lender's
costs and expenses, including attorneys' fees and Lender's legal expenses,
incurred in connection with the enforcement of this Agreement. Lender may pay
someone else to help enforce this Agreement, and Grantor shall pay the costs and
expenses of such enforcement. Costs and expenses include Lender's attorneys'
fees and legal expenses whether or not there is a lawsuit, including attorneys'
EXHIBIT 10.34
- 6 -
<PAGE>
fees and legal expenses for bankruptcy proceedings (and including efforts to
modify or vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Grantor also shall pay all court costs and
such additional fees as may be directed by the court.
Multiple Parties; Corporate Authority. All obligations of Grantor under this
Agreement shall be Joint and several, and all references to Grantor shall mean
each and every Grantor. This means that each of the Borrowers signing below is
responsible for all obligations in this Agreement.
Notices. All notices required to be given under this Agreement shall be given in
writing, may be sent by telefacsimilie, and shall be effective when actually
delivered or when deposited with a nationally recognized overnight courier or
deposited in the United Sates mail, first class, postage prepaid, addressed to
the party to whom the notice is to be given at the address shown above. Any
party may change its address for notices under this Agreement by giving formal
written notice to the other parties, specifying that the purpose of the notice
is to change the party's address. To the extent permitted by applicable law, if
there is more than one Grantor, notice to any Grantor will constitute notice to
all Grantors. For notice purposes, Grantor will keep Lender informed at all
times of Grantor's current address(es).
Power of Attorney. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive, receipt for, sue and recover all
sums of money or other property which may now or hereafter become due, owing or
payable from the Collateral; (b) to execute, sign and endorse any and all
claims, instruments, receipts, checks, drafts or warrants issued in payment for
the Collateral; (c) to settle or compromise any and all claims arising under the
Collateral, and, in the place and stead of Grantor, to execute and deliver its
release and settlement for the claim; and (d) to file any claim or claims or to
take any action or institute or take part in any proceedings, either in its own
name or in the name of Grantor, or otherwise, which in the discretion of Lender
may seem to be necessary or advisable. This power is given as security for the
Indebtedness, and the authority hereby conferred is and shall be irrevocable and
shall remain in full force and effect until renounced by Lender.
Severability. If a court of competent jurisdiction finds any provision of this
Agreement to be invalid or unenforceable as to any person or circumstance, such
finding shall not render that provision invalid or unenforceable as to any other
persons or circumstances. If feasible, any such offending provision shall be
deemed to be modified to be within the limits of enforceability or validity;
however, if the offending provision cannot be so modified, it shall be stricken
and all other provisions of this Agreement in all other respects shall remain
valid and enforceable.
Successor Interests. Subject to the limitations set forth above on transfer of
the Collateral, this Agreement shall be binding upon and inure to the benefit of
the parties, their successors and assigns.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No delay
or omission on the part of Lender in exercising any right shall operate as a
waiver of such right or any other right. A waiver by Lender of a provision of
this Agreement shall not prejudice or constitute a waiver of Lender's right
EXHIBIT 10.34
- 7 -
<PAGE>
otherwise to demand strict compliance with that provision or any other provision
of this Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Grantor, shall constitute a waiver of any of Lender's rights or of
any of Grantor's obligations as to any future transactions. Whenever the consent
of Lender is required under this Agreement, the granting of such consent by
Lender in any instance not constitute continuing consent to subsequent instances
where such consent is required and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS ASSIGNMENT OF
DEPOSIT ACCOUNT AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED SEPTEMBER
25,1996.
GRANTOR:
Mendocino Brewing Company, a California corporation
By: /s/ Norman Franks
Norman Franks, Chief Financial Officer
By: /s/ Michael Laybourn
Michael Laybourn, Chief Executive Officer
EXHIBIT 10.34
- 8 -
EXHIBIT 10.35
TO
REGISTRATION STATEMENT ON FORM SB-2
-----------------------
COMMITMENT LETTER FROM THE SAVINGS BANK OF MENDOCINO COUNTY
<PAGE>
Savings Bank OF MENDOCINO COUNTY
P. O. BOX 3600 ~ UKIAH, CALIFORNIA 95482 TELEPHONE (707) 462-6613
September 13, 1996
Mr. Michael Laybourn Mr. Norman Franks Mendocino Brewing Company, Inc. P.O. Box
400 Hopland, CA 95449
Dear Michael & Norman:
Confirming our earlier conversation and concurrent with the final funding of a
$2,700,000.00 construction loan (hereinafter referred to as the "Construction
Loan"), I am pleased to inform you that the Savings Bank of Mendocino County
(hereinafter referred as "Bank") will provide a first trust deed permanent
financing takeout for the 62,000 square foot brewery facility to be completed
with the proceeds of the construction loan. This commitment is subject to the
documentation, terms and conditions stated below:
1. Loan Principal & Term of Loan: Upon maturity of the construction loan, any
outstanding principal loan balance will be rewritten subject to a 25 year
amortized repayment schedule and a 15 year balloon maturity. It is understood
and providing that you are not in default of any term or condition contained in
the Permanent note or under any other obligation to Bank, loan agreement or deed
of trust upon maturity, the Bank will renew any outstanding principal loan
balance on a fully amortized basis for an additional 10 year period, subject to
terms and conditions which will be negotiated at the time of renewal.
2. Interest Rate: The permanent financing package shall be priced at a margin
above the then prevailing 5 Year Treasury Constant Maturity Index so as to
insure that the initial loan rate will be 10%. The permanent financing package
will further provide for an interest rate CAP of 2% above the initial fully
indexed interest rate at the time of the first interest rate adjustment (5 year
anniversary) and 3% above the initial fully indexed interest rate at the time of
the second projected interest rate adjustment (10 year anniversary). The note
will further provide for an interest rate floor of 8.50%.
3. Origination Fee: You will be required to pay to the Bank a 1/2 percent
origination fee on funding.
4. Prepayment Penalty: None.
5. Collateral: The loan shall be collateralized by the following:
a. A first deed of trust encumbering the property and improvements located at
1825 Airport Road, Ukiah, CA consisting of approximately 8 acres of land.
b. A first deed of trust encumbering the real property upon which the waste
water treatment facility is being constructed, which is approximately I acre in
size.
EXHIBIT 10.35
<PAGE>
The loan contemplated herein shall be additionally collateralized as specified
in a security agreement, in form and substance satisfactory to Bank and its
counsel, which covers but is not limited to all fixtures and/or improvements
which are located on the to be encumbered parcel of property as well as all
inventory, chattel paper, accounts, equipment, general intangibles etc.
It is our mutual understanding that Mendocino Brewing Company, Inc. is intending
to initiate a public offering and/or a subordinated capital note issue within
the next 365 days. It is further agreed that any monies realized from either
offering or any other source in excess of the $2,100,000.00 required to satisfy
payables due to West America Bank ($600,000.00), BDM Construction ($960,000.00)
and complete the $600,000.00 in deferred construction improvements (for which
the initial such sum will be used), shall be deposited into a savings account
with the Savings Bank of Mendocino County and that said account shall be pledged
as security against the aforementioned $2,700,000.00 permanent financing
package. It is understood that should the corporation meet its sales projection
objectives and decide to proceed with the equipment purchases contemplated in
Phase II of its Business Plan, the Savings Bank of Mendocino County will release
these monies, providing that it is determined that the capital expenditures are
motivated by sales demand and that the profitability projections have in fact
materialized.
6. Out of Pocket Expenses: All fees (title, recording, appraisal
re-certification, etc.) together with any other out of pocket expenses, incurred
by the Bank relating to this transaction are to be paid for by the Borrower. In
the event that we obtain legal assistance associated with the packaging of your
permanent loan, you will be required to reimburse us for any out of pocket legal
counsel fees which we may expend. In no circumstances, however, shall you be
required to reimburse the Bank in excess of $5,000.00 in legally related fees.
7. Additional Conditions Present: Prior to the closing date or at the option of
the Bank, there shall have been delivered to Bank, in form and substance
satisfactory to Bank and its counsel:
a. Evidence that all consents, permits and approvals from government authorities
required or advisable in connection with the occupancy of the improvements, have
been obtained by the Borrower.
b. There shall have been issued in form and substance satisfactory to Bank and
its counsel a Certificate of Occupancy or other written confirmation that the
improvements meet all requirements of all public agencies, including compliance
with structural and operating requirements set by all governmental agencies
regulating environmental controls and can be occupied in accordance with the
terms and conditions under which the improvements were appraised and receipt by
Bank of evidence that all utilities are available at the improvements.
c. Receipt by Bank of a Certificate of Completion signed by a licensed architect
or engineer, who will first have been approved by Bank, attesting to the
completion of the improvements in a good and workman like manner.
d. Receipt by Bank of an As Built Survey Report of a licensed engineer,
certified by a registered surveyor, in form and substance also satisfactory to
the title insurance company, showing that all
EXHIBIT 10.35
- 2 -
<PAGE>
improvements are within lot and building lines and showing all easements,
improvements, utilities and rights of way above or below ground as of the date
of certification, and showing the dimensions and total square foot area of the
interior outlines, if any, location of adjoining streets and the distance to and
names of the nearest intersection streets.
e. Evidence that an insurance policy providing fire and extended coverage for
replacement costs of the improvements, with a lenders loss payable endorsement,
for (438BFUNS) or its equivalent, have been obtained.
f. Confirmation that the Mendocino Brewing Company has received $2,100,000.00 in
lease financing. Our responsibility to provide the financial accommodations
overviewed in this correspondence is conditioned upon our approval of the
amount, terms, conditions, agreements, lease documents, etc. which pertain to
the lease financing package. Our responsibility to provide the financial
accommodations contemplated in this correspondence further conditioned on our
having been satisfied that the lease financing package has been fully negotiated
and all monies advanced.
g. Upon completion of the construction project, the Bank shall obtain at your
expense a re-certification of value from Dean Strupp and Associates Appraisals.
h. Confirmation that the Mendocino Brewing Company is not in default of any of
its existing obligations which include but are not limited to obligations owed
to West America Bank, BDM Construction and FINOVA Capital Corporation.
8. Approval of Documentation: All instruments evidencing and securing or
otherwise relating to the loan on the project, must be satisfactory to the Bank
and its counsel.
9. Title Insurance: You will be required to provide ALTA title insurance
coverage together with any other endorsements which the Bank might determine
necessary, for the full amount of the loan, containing no exceptions other than
those approved by the Bank which are usual and customary to such properties.
10. Indemnification: You will be required to indemnify the Bank against any and
all liabilities, obligations, losses/damages, penalties, claim actions, suits,
cost and expenses of whatever kind or nature which may be imposed on, incurred
by or asserted at any time against the Bank in any way relating to or arising in
connection with, construction of the improvements, the offer of sale and/or use,
occupation or operation of any of the property to be encumbered by the
construction deed of trust. Said indemnification shall also cover damages
arising from existing or future hazardous waste and/or substances located on the
property, including the cost to clean-up or detoxify the property. If for any
reason the Bank becomes concerned that there could be related environmental
liability risks associated with our liens on the real estate, we may consult
with an environmental specialist and may require an environmental audit to be
conducted and our commitment is conditioned upon our conclusion based thereon
that risks are acceptable to us. Your cost reimbursement will include such
consulting and audit fees.
EXHIBIT 10.35
- 3 -
<PAGE>
11. Assignment: You will be unable to assign this commitment letter or any of
its rights hereunder, to any other person or legal entity without specific
written approval of the Bank. The Bank may sell participations in the loan to
other banks.
12. Termination: Bank, at its option, may terminate this commitment letter and
its obligations hereunder, if (a) you shall fail to observe or comply with any
of the terms and provisions contained herein, or in any other document under
which you have an obligation to Bank, or (b) Bank shall find unacceptable or
shall not approve any document or agreement, or information or encumbrance
applicable to the project, or (c) you or parties involved in the project become
insolvent, or (d) bankruptcy, insolvency, reorganization, receivership,
dissolution arrangement or other similar proceedings are commenced by or against
you or your assets under any federal or state law, or (e) the take-out loan has
not been consummated by March 15, 1997.
It goes without mention that our commitment is subject to such additional terms,
conditions and requirements as may be provided in our loan documents or by Bank
counsel. Should any of the foregoing require clarification don't hesitate
contacting me at your earliest convenience.
Sincerely,
/s/ Martin J. Lombardi
Martin J. Lombardi
Vice President
ACKNOWLEDGMENT:
/s/ Michael Laybourn Date: 9/19/96
Michael Laybourn
/s/ Norman Franks Date: 9/19/96
Norman Franks
EXHIBIT 10.36
TO
REGISTRATION STATEMENT ON FORM SB-2
----------------------
EQUIPMENT LEASE WITH FINOVA CAPITAL CORPORATION
<PAGE>
FINOVA
FINOVA Capital Corporation 95 N. Route 17 South P.O. Box 907 Paramus, New Jersey
07653 Telephone (201) 712-3300
EQUIPMENT LEASE
No. 5754300
FINOVA Capital Corporation, (herein called "Lessor"), with its principal place
of business at Dial Tower, Dial Corporate Center, Phoenix, Arizona, hereby
agrees to lease to the Lessee named on the signature page hereof (herein called
"Lessee") and Lessee hereby agrees to lease and rent from Lessor, the equipment
described on any attached schedule(s), (herein with all replacement parts,
repairs, additions, and accessories called "Equipment"), on the terms and
conditions hereof and as set forth on any schedule (herein called "Schedule").
Lessee agrees that, at the option of Lessor, any Schedule shall be a separately
enforceable Lease which incorporates all of the terms and conditions set forth
herein.
1. ORDERING AND INSTALLATION OF EQUIPMENT. Lessee hereby requests Lessor to
order the Equipment from a supplier (herein called "Supplier"), and to arrange
for delivery thereof to Lessee at Lessee's expense. Lessee agrees to install or
cause the Equipment to be installed at the location set forth on the Schedule
thereof (the "Location") at Lessee's cost.
2. DISCLAIMER OF WARRANTIES AND WAIVER OF DEFENSES.
LESSOR, NEITHER BEING THE MANUFACTURER, NOR A SUPPLIER, NOR A DEALER IN THE
EQUIPMENT, MAKES NO WARRANTY, EXPRESS OR IMPLIED, TO ANYONE, AS TO DESIGN,
CONDITION, CAPACITY, PERFORMANCE OR ANY OTHER ASPECT OF THE EQUIPMENT OR ITS
MATERIAL OR WORKMANSHIP. LESSOR ALSO DISCLAIMS ANY WARRANTY OF MERCHANTABILITY
OR FITNESS FOR USE OR PURPOSE WHETHER ARISING BY OPERATION OF LAW OR OTHERWISE.
LESSOR FURTHER DISCLAIMS ANY LIABILITY FOR LOSS, DAMAGE OR INJURY TO LESSEE OR
THIRD PARTIES AS A RESULT OF ANY DEFECTS, LATENT OR OTHERWISE, IN THE EQUIPMENT
WHETHER ARISING FROM THE APPLICATION OF THE LAWS OF STRICT LIABILITY OR
OTHERWISE. AS TO THE LESSOR, LESSEE LEASES THE EQUIPMENT "AS IS". LESSEE
ACKNOWLEDGES THAT LESSEE HAS SELECTED THE SUPPLIER OF THE EQUIPMENT AND THAT
LESSOR HAS NOT RECOMMENDED SUPPLIER. LESSOR SHALL HAVE NO OBLIGATION TO INSTALL,
MAINTAIN, ERECT, TEST, ADJUST OR SERVICE THE EQUIPMENT. REGARDLESS OF CAUSE,
LESSEE AGREES NOT TO ASSERT ANY CLAIM WHATSOEVER AGAINST LESSOR FOR LOSS OF
ANTICIPATORY PROFITS OR ANY OTHER INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES,
NOR SHALL LESSOR BE RESPONSIBLE FOR ANY DAMAGES OR COSTS WHICH MAY BE ASSESSED
AGAINST LESSEE IN ANY ACTION FOR INFRINGEMENT OF ANY UNITED STATES LETTERS
PATENT. LESSOR MAKES NO WARRANTY AS TO THE TREATMENT OF THIS LEASE FOR TAX OR
ACCOUNTING PURPOSES. If the Equipment is unsatisfactory for any reason, Lessee
shall
EXHIBIT 10.36
<PAGE>
make claim on account thereof solely against the manufacturer, the Supplier or
any dealer and shall nevertheless pay Lessor all rent and other charges payable
under the Lease. Lessor hereby assigns to Lessee, any rights which Lessor may
have against the Supplier, the manufacturer or any dealer for breach of warranty
or other representations respecting the Equipment. Lessee understands and agrees
that neither the Manufacturer, the Supplier, any dealer nor any agent of the
foregoing is an agent of Lessor or is authorized to waive or alter any term or
condition of this Lease.
3. TERM AND RENT. The Lease term of each Schedule shall commence as of the date
that any of the Equipment under such Schedule is delivered to Lessee or Lessee's
Agent, or such later date as Lessor designates in writing (the "Commencement
Date.) and shall continue until the obligations of Lessee under this Lease shall
have been fully performed. Advance rentals shall not be refundable if the Lease
term for any reason does not commence or if this Lease or any Schedule is duly
terminated by Lessor. The sum of all periodic installments of rent indicated on
any Schedule shall constitute the aggregate rent reserved. The aggregate rent
reserved shall be payable periodically in advance, in the installments indicated
on any Schedule, the first such payment being due on the Commencement Date, or
such later date as Lessor designates in writing (the "First Payment Date.), and
subsequent payments shall be due on the same day of each successive rent period
thereafter until the balance of the rent and any charges or expenses payable by
Lessee under this Lease shall have been paid in full. If the First Payment Date
is later than the Commencement Date, Lessee shall, on the First Payment Date, in
addition to the periodic rent, pay Lessor interim rent from the Commencement
Date to the First Payment Date at a daily rate equal to the periodic installment
of rent divided by the number of days of the period. Lessee's obligation to pay
all rent shall be absolute and unconditional and not subject to any abatement,
set-off, defense or counterclaim for any reason whatsoever.
4. NON-CANCELABLE LEASE. NEITHER THE LEASE NOR ANY SCHEDULE CAN BE CANCELED BY
LESSEE DURING THE TERM HEREOF OR THEREOF.
5. LESSOR TERMINATION BEFORE EQUIPMENT ACCEPTANCE. If within ninety (90) days
from the date Lessor orders the Equipment, the same has not been delivered,
installed and accepted by Lessee (in form satisfactory to Lessor) for all
purposes of this Lease, Lessor may, on ten (10) days' written notice to Lessee,
terminate this Lease and the related Schedule and its obligations to Lessee.
6. TITLE, RECORDING, DOCUMENTATION, ADMINISTRATIVE FEES AND PERSONAL PROPERTY.
The Equipment is, and shall at all times remain, the property of Lessor, and
except as herein set forth, Lessee shall have no right, title or interest
therein. If Lessor supplies Lessee with labels indicating that the Equipment is
owned by Lessor, Lessee shall affix such labels to and keep them in a prominent
place on the Equipment. Lessee hereby authorizes Lessor to insert in this Lease
or any Schedule the serial numbers, and other identification data, of Equipment
when determined by Lessor. In order to perfect Lessor's security interest in the
Equipment in the event this Lease is determined to be a security agreement,
Lessee hereby grants Lessor a security interest in the Equipment and authorizes
Lessor, at Lessee's expense, to cause this Lease, or any statement or other
instrument in respect of this Lease showing the interest of Lessor in the
Equipment, including Uniform Commercial Code Financing Statements, to be filed
or recorded,
EXHIBIT 10.36
- 2 -
<PAGE>
and grants Lessor, where permitted, the right to execute Lessee's name thereto.
Lessee agrees to pay or reimburse Lessor for its costs and out of pocket
expenses relating to any searches undertaken by Lessor, or any filing,
recording, stamp fees or taxes arising from the filing or recording of any such
instrument or statement and any other costs, expenses or charges incurred by
Lessor in documenting, administering and terminating this Lease. Lessee shall,
at its expense, protect and defend Lessor's title to the Equipment against all
persons claiming against or through Lessee, at all times keeping the Equipment
free from any legal process or encumbrance whatsoever including but not limited
to liens, attachments, levies and executions, and shall give Lessor immediate
written notice thereof and shall indemnify Lessor from any loss caused thereby.
Upon Lessor's request, Lessee shall execute or obtain from third parties and
deliver to Lessor such further instruments and assurances as Lessor deems
necessary or advisable for the confirmation or perfection of Lessor's rights
hereunder. The Equipment is, and shall at all times be and remain, personal
property notwithstanding that the Equipment or any part thereof may now be, or
hereafter become, in any manner affixed or attached to real property or any
improvements thereon.
7. CARE, USE, LOCATION AND ALTERATION. Lessee shall, at its sole cost and
expense, service, repair, overhaul and maintain each item of Equipment in good
operating order and in the condition when delivered to Lessee, ordinary wear and
tear excepted. All such maintenance shall be consistent with prudent industry
practice and all maintenance practices recommended by the Supplier or
manufacturer and meet all legal and regulatory requirements. Upon request,
Lessee shall provide Lessor with evidence of such compliance. Lessee shall
maintain logs of the maintenance and service of the Equipment and permit Lessor,
on reasonable prior notice to inspect the Equipment and the right to make copies
of the logs and service reports. Lessee shall forthwith correct any deficiencies
disclosed by such inspection. Lessee shall use the Equipment solely for business
purposes, in compliance with all applicable laws, ordinances, regulations, and
the conditions of all insurance policies required to be maintained by Lessee
pursuant to the Lease. Lessee shall make all additions, modifications and
improvements to the Equipment required by applicable law and except for such
required changes, shall not alter the Equipment without Lessor's prior written
consent. Lessee shall replace all worn, lost, stolen or destroyed parts of the
Equipment with replacement parts at least meeting the standards required herein,
all of which shall become the property of Lessor, except for such additions,
modifications and improvements that can be readily removed without causing
damage to, or impairing the commercial value or utility of, such Equipment,
which shall remain Lessee's property and may be removed by Lessee at its expense
before the Equipment is surrendered to Lessor. Lessee shall repair all damage to
any item resulting from such installation or removal. If Lessee has not
purchased an item of Equipment pursuant to any option to purchase granted to
Lessee at the end of the Lease term for such item, Lessor shall be entitled to
purchase any such addition, modifications and improvements from Lessee for its
then fair market value. The Equipment shall not be removed from the Location
without Lessor's prior written consent.
8. NOTICE AND CONDITIONS OF REDELIVERY. Lessee shall provide Lessor not less
than One Hundred Twenty (120) days prior written notice of its intention to
exercise its option to purchase the Equipment if granted on the related Schedule
or return the Equipment to Lessor (the "Required Notice.). If Lessee shall have
timely provided such Required Notice and has elected to return the Equipment to
Lessor upon the expiration of the Term of the Schedule, Lessee shall, at
EXHIBIT 10.36
- 3 -
<PAGE>
its sole expense, return the Equipment covered thereby, freight prepaid, to
Lessor in a manner and to a location within the continental United States
designated by Lessor in the condition and repair required by the terms of this
Lease, free of all liens and advertising insignia. If Lessee shall fail to
return any item of Equipment as provided herein, Lessee shall be responsible for
all cost and expense incurred by Lessor in returning the Equipment to such
required condition or any reduction in value as a result thereof. If the
Equipment or its component parts were packed or crated for shipping when new,
Lessee shall pack or crate the same carefully and in accordance with any
recommendations of the Supplier or manufacturer before redelivering the item to
Lessor. Lessee shall also deliver to Lessor the plans, specifications, operating
manuals, software documentation, discs, warranties and other documents furnished
by the manufacturer or Supplier of the Equipment and such other documents in
Lessee's possession relating to the maintenance and method of operation of such
Equipment. At Lessor's written request, Lessee shall provide free storage for
any item of Equipment for a period not to exceed sixty (60) days after the
expiration of the Schedule term before returning such item to Lessor and permit
Lessor access to the Equipment for inspection and/or resale. If Lessee fails to
timely provide such Required Notice the Equipment shall continue to be held and
leased hereunder, and this Lease and the related Schedule term shall thereupon
be extended for a period ending one hundred twenty (120) days following receipt
by Lessor of Lessee's notice of intent to return the Equipment, for the fair
market rental value of the Equipment as determined by Lessor not to exceed the
periodic installment of rent with respect to such Equipment for such period. If
Lessee has timely provided the Required Notice but upon expiration Lessee does
not immediately return the Equipment to Lessor, (unless otherwise requested by
Lessor) the Equipment shall continue to be held and leased hereunder, and this
Lease and the related Schedule term shall thereupon be extended for successive
thirty (30) day periods at the fair market rental value of the Equipment as
determined by Lessor not to exceed the periodic installment of rent with respect
to such Equipment for such period.
9. RISK OF LOSS. Lessee shall bear all risks of loss of and damage to the
Equipment from any cause and the occurrence of such loss or damage shall not
relieve Lessee of any obligation hereunder. In the event of loss or damage,
Lessee, at its option, provided it is not in default hereunder, otherwise at
Lessor's option, shall: (a) place the damaged Equipment in good repair,
condition and working order; or (b) replace lost or damaged Equipment with like
equipment in good repair, condition and working order with documentation
creating clear title thereto in Lessor; or (c) pay to Lessor the then present
value computed at five (5 %) percent per annum of both the unpaid balance of the
aggregate rent reserved under the Lease and related Schedule and the value of
Lessor's residual interest in the Equipment. Upon Lessor's receipt of such
payment, Lessee and/or Lessee's insurer shall be entitled to Lessor's interest
in said item for salvage purposes, in its then condition and location, as is,
without warranty, express or implied.
10. INSURANCE. Until redelivered to Lessor, Lessee shall maintain and deliver
evidence to Lessor of such insurance required by, written by insurers, and in
amounts satisfactory to Lessor. Should Lessee fail to provide such insurance
coverage, Lessor may obtain coverage for part or all of the term of this Lease
or any Schedule or such period beyond the term as is required by the insurance
company issuing such coverage protecting interests of Lessor and Lessee or the
interest of Lessor only. The proceeds of such insurance, at the option of
Lessee, provided it is not in default hereunder, otherwise at Lessor's option,
shall be applied toward (i) the replacement,
EXHIBIT 10.36
- 4 -
<PAGE>
restoration or repair of the Equipment or (ii) payment of the obligations of
Lessee hereunder. Lessee hereby appoints Lessor as Lessee's attorney-in-fact to
make claims for, receive payment of, and execute and endorse all documents,
checks, or drafts for loss or damage under any said insurance policies.
11. NET LEASE; TAXES. Lessee intends the rental payments hereunder to be net to
Lessor, and Lessee shall pay all sales, use, excise, stamp, documentary and ad
valorem taxes, license and registration fees, assessments, fines, penalties and
similar charges imposed on the ownership, possession or use of the Equipment
during the term of this Lease or any Schedule; shall pay all taxes (except
Lessor's Federal or State net income taxes) imposed on Lessor or Lessee with
respect to the rental payments hereunder, and shall reimburse Lessor upon demand
for any taxes paid by or advanced by Lessor. Unless Lessee is otherwise directed
by Lessor, in writing, Lessor shall file for and pay all personal property taxes
assessed with respect to the Equipment during the term of this Lease and Lessee
shall, upon Lessor's demand, forthwith reimburse Lessor for the full amount of
such taxes without regard to any discounts obtained by Lessor due to early
payment or otherwise. Lessor may, if it elects, estimate such personal property
taxes and bill Lessee periodically in advance therefor.
12. INDEMNITY. Lessee shall hold Lessor harmless from, indemnify and defend
Lessor against, any and all claims, actions, suits, proceedings, costs,
expenses, damages and liabilities, including attorney's fees arising out of,
connected with or resulting from the Equipment or this Lease or any Schedule,
including, without limitation, the manufacture, selection, delivery, possession,
use, operation or return of the Equipment. These indemnities shall survive the
termination or expiration of this Lease or any Schedule.
13. DEFAULT AND REMEDIES. If (i) Lessee defaults in any payment required under
this Lease or any Schedules or under any other lease or agreement between Lessor
and Lessee, or (ii) Lessee breaches any of the representations or warranties
contained herein or fails to perform any of the terms, covenants or conditions
of this Lease or any Schedule or (iii) a petition in bankruptcy, arrangement,
insolvency or reorganization is filed by or against Lessee or any guarantor of
Lessee's obligations hereunder, or (iv) Lessee or any guarantor of Lessee's
obligations makes an assignment for the benefit of creditors, or (v) without
Lessor's written consent, which shall not be unreasonably withheld, Lessee sells
all or a substantial part of Lessee's assets or a majority of Lessee's voting
stock is transferred, or (vi) during the term of the Lease or any Schedule there
is a material adverse change in the financial condition of Lessee or any
guarantor of Lessee's obligations then Lessor may, to the extent permitted by
law, exercise any one or more of the following remedies: (a) to declare the
entire balance of rent for the full term of any or all Schedules covered hereby
immediately due and payable and to similarly accelerate the balances under any
other leases or agreements between Lessor and Lessee without notice or demand,
(b) to sue for and recover all rents, and other monies due and to become due
under any or all Schedules hereunder and the residual value of the Equipment
covered thereby discounted to the date of default at five (5%) percent per
annum; (c) to require Lessee at Lessee's expense, to assemble all the Equipment
at a place reasonably designated by Lessor, (d) to remove any physical
obstructions for removal of the Equipment from the place where the Equipment is
located and take possession of any or all items of Equipment, without demand or
notice, wherever same may be located, disconnecting separating all such
Equipment from any other
EXHIBIT 10.36
- 5 -
<PAGE>
property, with or without any court order or pre-taking hearing or other process
of law, it being understood that facility of repossession in the event of
default is a basis for the financial accommodation reflected by this Lease.
Lessee hereby waives any and all damages occasioned by such retaking. Lessor
may, at its option, use, ship, store, repair or lease all Equipment so removed
and sell or otherwise dispose of any such Equipment at a private or public sale.
Lessor may expose and resell the Equipment at Lessee's premises at reasonable
business hours without being required to remove the Equipment. In the event
Lessor takes possession of the Equipment, Lessor shall give Lessee credit for
any sums received by Lessor from the sale, or present value of the rental, of
the Equipment computed at the implicit rate of the Schedule after deduction of
the expenses of sale or rental. Lessee shall also be liable for and shall pay to
Lessor on demand (a) all expenses incurred by Lessor in connection with the
enforcement of any of Lessor's remedies, including all expenses of repossession,
storing, shipping, repairing and selling the Equipment, (b) Lessor's reasonable
attorney's fees and (c) interest on all sums due Lessor from the date of default
until paid at the rate of one and one-half (1.5%) percent per month, but only to
the extent permitted by law. Lessor and Lessee acknowledge the difficulty in
establishing a value for the unexpired Lease term and owing to such difficulty
agree that the provisions of this paragraph represent an agreed measure of
damages and are not to be deemed a forfeiture or penalty.
Whenever any payment hereunder is not made by Lessee within ten (10) days when
due, Lessee agrees to pay to Lessor, not later than one month thereafter, an
amount calculated at the rate of ten cents per one dollar of each such delayed
payment, as an administrative fee to offset Lessor's collection costs, but only
to the extent allowed by law. Such amount shall be payable in addition to all
amounts payable by Lessee as a result of exercise of any of the remedies herein
provided.
All remedies of Lessor hereunder are cumulative, are in addition to any other
remedies provided for by law, and may, to the extent permitted by law, be
exercised concurrently or separately. The exercise of any one remedy shall not
be deemed to be an election of such remedy or to preclude the exercise of any
other remedy. No failure on the part of the Lessor to exercise and no delay in
exercising any right or remedy shall operate as a waiver thereof or modify the
terms of this Lease. A waiver of default by Lessor on any one occasion shall not
be deemed a waiver of any other or subsequent default. In the event this Lease
is determined to be a security agreement, Lessor's recovery shall in no event
exceed the maximum permitted by law.
14. PERFORMANCE BY LESSOR OF LESSEE'S OBLIGATIONS. In the event Lessee fails to
comply with any provision of this Lease, Lessor shall have the right, but shall
not be obligated, to effect such compliance on behalf of Lessee upon ten (10)
days prior written notice to Lessee. In such event, all monies advanced or
expended by Lessor, and all expenses of Lessor in effecting such compliance,
shall be deemed to be additional rent, and shall be paid by Lessee to Lessor at
the time of the next periodic payment of rent.
15. ASSIGNMENT: QUIET ENJOYMENT. LESSOR MAY, WITHOUT LESSEE'S CONSENT, ASSIGN
THIS LEASE OR ANY SCHEDULE AND/OR THE RENTALS DUE THEREUNDER OR SELL OR GRANT A
SECURITY INTEREST IN THE EQUIPMENT AND LESSEE AGREES THAT NO ASSIGNEE OF LESSOR
SHALL BE BOUND TO PERFORM ANY DUTY, COVENANT OR CONDITION OR WARRANTY (EXPRESS
OR IMPLIED) ATTRIBUTABLE TO LESSOR AND LESSEE FURTHER AGREES NOT TO
EXHIBIT 10.36
- 6 -
<PAGE>
RAISE ANY CLAIM OR DEFENSE ARISING OUT OF THIS LEASE OR OTHERWISE AGAINST LESSOR
AS A DEFENSE, COUNTERCLAIM OR OFFSET TO ANY ACTION BY ANY ASSIGNEE HEREUNDER.
NOTWITHSTANDING ANY ASSIGNMENT BY LESSOR, PROVIDING LESSEE IS NOT IN DEFAULT
HEREUNDER, LESSEE SHALL QUIETLY ENJOY USE OF THE EQUIPMENT, SUBJECT TO THE TERMS
AND CONDITIONS OF THE LEASE.
WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, LESSEE SHALL NOT ASSIGN, TRANSFER,
PLEDGE, HYPOTHECATE OR OTHERWISE DISPOSE OF THE EQUIPMENT OR ANY INTEREST
THEREIN, OR SUBLET OR LEND EQUIPMENT OR PERMIT IT TO BE USED BY ANYONE OTHER
THAN LESSEE OR LESSEE'S EMPLOYEES.
16. NOTICES. Service of all notices under this Lease shall be sufficient if
given personally or mailed to the intended party at its respective address set
forth herein, or at such other address as said party may provide in writing from
time to time. Any such notice mailed to said address shall be effective three
(3) days following the date when deposited in the United States mail, duly
addressed and with postage prepaid.
17. REPRESENTATIONS AND COVENANTS OF LESSEE. Lessee represents that all
financial and other information furnished to Lessor was, at the time of
delivery, true and correct. During the term of the Lease, Lessee shall provide
Lessor, on an ongoing basis, audited annual financial statements within 120 days
of each fiscal year end and quarterly financial statements within sixty (60)
days of each quarter signed by Lessee's chief financial officer and such interim
financial statements as Lessor requests. Such financial and other information
shall be kept confidential except that Lessor may disclose such information to
its accountants, attorneys and employees and as may be required in accordance
with law. During the term of the Lease, Lessee shall not incur any additional
indebtedness other than the indebtedness incurred in the ordinary course of
business
18. GOVERNING LAW; JURISDICTION; VENUE; SERVICE OF PROCESS; WAIVER OF TRIAL BY
JURY. THIS LEASE SHALL BE BINDING WHEN ACCEPTED IN WRITING BY THE LESSOR AND
SHALL BE GOVERNED BY THE LAWS OF THE STATE OF ARIZONA, PROVIDED, HOWEVER, IN THE
EVENT THIS LEASE OR ANY PROVISION HEREOF IS NOT ENFORCEABLE UNDER THE LAWS OF
THE STATE OF ARIZONA THEN THE LAWS OF THE STATE WHERE THE EQUIPMENT IS LOCATED
SHALL GOVERN. ANY DISPUTE UNDER THIS LEASE SHALL BE LITIGATED BY LESSEE ONLY IN
FEDERAL OR STATE COURTS LOCATED IN MARICOPA COUNTY, ARIZONA, AND LESSEE
IRREVOCABLY SUBMITS TO THE PERSONAL JURISDICTION OF SUCH COURTS AND WAIVES ANY
OBJECTION THAT MAY EXIST AS TO VENUE OR CONVENIENCE OF SUCH FORUMS. NOTHING
CONTAINED HEREIN SHALL PRECLUDE LESSOR FROM COMMENCING ANY ACTION IN ANY COURT
HAVING JURISDICTION THEREOF. SERVICE OF PROCESS IN ANY SUCH ACTION SHALL BE
SUFFICIENT IF SERVED BY CERTIFIED MAIL RETURN RECEIPT REQUESTED TO THE ADDRESS
OF THE PARTY SET FORTH FOLLOWING THE SIGNATURES AT THE END OF THIS LEASE. TO THE
EXTENT PERMITTED BY LAW, LESSEE WAIVES TRIAL BY JURY IN ANY ACTION BY OR AGAINST
LESSOR HEREUNDER.
EXHIBIT 10.36
- 7 -
<PAGE>
19. GENERAL. This Lease inures to the benefit of and is binding upon the heirs,
legatees, personal representatives, successors and assigns of the parties
hereto. Time is of the essence of this Lease. This Lease and all Schedules
attached hereto contain the entire agreement between Lessor and Lessee, and no
modification of this Lease or any Schedule shall be effective unless in writing
and executed by an executive officer of Lessor. If more than one Lessee is named
in this Lease, the liability of each shall be joint and several. In the event
any provision of this Lease should be unenforceable, then such provision shall
be deemed deleted, however, no other provision hereof shall be affected thereby.
20. FINANCE LEASE STATUS. Lessor and Lessee agree that if Article 2A - Leases of
the Uniform Commercial Code ("Code") governs the terms of this Lease, then this
Lease will be deemed a "finance lease". By executing this Lease, Lessee
acknowledges that (a) Lessor has advised Lessee of (i) the identity of the
Supplier; (ii) that Lessee may have rights under the "supply contract" as
defined in the Code, pursuant to which Lessor is purchasing the Equipment, and
(iii) that Lessee may contact the Supplier for a description of any such rights.
TO THE EXTENT PERMUTED BY APPLICABLE LAW, LESSEE WAIVES ANY AND ALL RIGHTS AND
REMEDIES CONFERRED UPON A LESSEE BY THE CODE, INCLUDING SECTIONS 2A - 508
THROUGH 522 THEREOF.
21. PUBLICITY. Lessor is hereby authorized to issue appropriate press releases
and to cause a tombstone to be published announcing the consummation of this
transaction and the aggregate amount thereof.
LESSOR:
FINOVA CAPITAL CORPORATION
BY:
PRINTED NAME: PAM MARCHANT
TITLE: V.P.
ADDRESS: 95 N. ROUTE 17 SOUTH, P.O. BOX 907 PARAMUS, NEW JERSEY 07653
DATE ACCEPTED:
LESSEE:
MENDOCINO BREWING COMPANY, INC.
BY /s/ Norman Franks
PRINTED NAME: NORMAN FRANKS
TITLE: V. P.
Taxpayer Identification No.: 68-0318293
ADDRESS: 13551 SOUTH HIGHWAY 101 HOPLAND, CALIFORNIA 95449
DATED: 9/10/96
EXHIBIT 10.36
- 8 -
EXHIBIT 10.37
TO
REGISTRATION STATEMENT ON FORM SB-2
-------------------------
TRI-ELECTION RIDER TO EQUIPMENT LEASE WITH FINOVA CAPITAL CORPORATION
<PAGE>
TRI-ELECTION RIDER TO EQUIPMENT LEASE BETWEEN FINOVA CAPITAL CORPORATION
("LESSOR") AND MENDOCINO BREWING COMPANY, INC. ("LESSEE") Dated
Master Lease No. 5754300 Schedule No. 5754300 (the Master Lease and all
Schedules thereto is hereafter the "Lease")
1. Notwithstanding any provision contained in the Lease to the contrary,
including, but not limited to, the section of the Schedule entitled "Option to
Purchase., upon expiration of the term of the Schedule (the "Initial Lease
Term") and payment by Lessee of all rentals and other sums due as set forth in
the Schedule, and provided that no Event of Default (as defined in the Lease)
shall have occurred and be continuing, Lessee, at its option, may purchase all
of Lessor's right, title and interest in and to all, but not less than all, of
the equipment described in and covered by the Schedule (the "Equipment") for a
purchase price equal to the greater of (a) the then Fair Market Value of the
Equipment determined as hereinafter provided not to exceed thirty (30%) of the
actual Equipment Cost, or (b) twenty-five (25%) percent of the original cost of
the Equipment to Lessor. In order to exercise such option, Lessee shall notify
Lessor in writing of Lessee's intention to exercise such option at least one
hundred twenty (120) days prior to the expiration of the Initial Lease Term and
shall deliver to Lessor, on or before the expiration of the Initial Lease Term,
an appraisal and payment of the purchase price. For the purpose of this
Paragraph, the "Fair Market Value" of the Equipment shall be determined by an
independent third-party appraiser selected by Lessee and reasonably acceptable
to Lessor. The appraiser's report shall be in writing and delivered to Lessor
prior to the expiration of the Initial Lease Term. All fees and expenses of the
appraiser shall be paid by Lessee.
2. If the Lessee for any reason does not purchase the Equipment in accordance
with Paragraph 1 hereof, the Initial Lease Term set forth in the Schedule
applicable to the Equipment shall automatically be extended for an additional
term of twelve (12) months (the "Extended Term") at a monthly rental factor of
.0220 times the actual Equipment Cost which the parties acknowledge to be the
fair market rental value of the Equipment, the first such rental being due and
payable by Lessee on the expiration date of the Initial Lease Term. Upon
expiration of the Extended Term, in accordance with the terms of the Lease,
Lessee shall either return the Equipment to Lessor or purchase the Equipment for
its fair market value in accordance with the section of the Schedule entitled
"Option to Purchase".
3. Except as amended hereby, the Lease shall remain in full force and effect and
are, in all respects, hereby ratified and affirmed.
4. Notwithstanding anything to the contrary contained in the Lease, the Lessee
shall have no obligation to make any indemnity payments pursuant to the section
entitled "Tax Indemnity" to the extent that such indemnity obligations arise
solely from the acts or omissions of the Lessor. For purposes of this provision
however, the following shall not be deemed to be a Lessor's act or omission: (i)
those acts or omissions taken by the Lessor while the Lessee is in default
pursuant to the term of the Lease; (ii) those acts or omissions that are
required, permitted or contemplated by the Lease or any document relating
thereto; (iii) the execution, negotiation, overall structuring
EXHIBIT 10.37
<PAGE>
and documents relating to the transactions contemplated hereby and thereby; or
(iv) those acts or omissions taken with the consent of the Lessee.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers as of the day and year first above
written.
LESSOR:
FINOVA CORPORATION
BY
PRINTED NAME: PAM MARCHANT
TITLE: V.P.
DATE:
LESSEE:
MENDOCINO BREWING COMPANY, INC.
BY: /s/ Norman Franks
PRINTED NAME: NORMAN FRANKS
TITLE: V.P.
DATED: 9/5/96
EXHIBIT 10.37
- 2 -
EXHIBIT 10.38
TO
REGISTRATION STATEMENT ON FORM SB-2
------------------------------
MASTER LEASE SCHEDULE WITH FINOVA CAPITAL CORPORATION
<PAGE>
FINOVA Capital Corporation 95 N. Route 17 South P.O. Box 907 Paramus, New Jersey
07653
Telephone (201) 712-3300
MASTER LEASE SCHEDULE
NO. 5754301 TO EQUIPMENT LEASE NO. 5754300 (THE "LEASE")
EQUIPMENT LEASED:
See Schedule "A" attached hereto and made a part hereof.
LOCATION OF EQUIPMENT: Airport Park Drive, Ukiah, CA 95482
TERM OF SCHEDULE: 84 MONTHS
RENTAL PAYMENTS: $28.960.03
RENTAL PAYMENT FREQUENCY: X MONTHLY
SUPPLIER: Enerfab, Inc. 4955 Spring Grove Avenue, Cincinnati, OH 45232
ADVANCE RENTALS: $57,920.06 PAYABLE AT THE TIME OF SIGNING OF THIS SCHEDULE TO
BE APPLIED TO THE FIRST AND LAST ONE RENTAL PAYMENTS. ADDITIONAL TERMS AND
CONDITIONS
1. LEASE OF EQUIPMENT. Lessor hereby agrees to lease to Lessee, and Lessee
hereby agrees to lease and rent from Lessor the Equipment listed above, or on
any Schedule attached hereto, for the term and the rental payments provided
herein, all subject to the terms and conditions of the Lease.
2. OPTION TO PURCHASE. Provided Lessee is not in default hereunder or under any
other lease or agreement with Lessor, Lessee shall have the right, at the
expiration of the Term of this Schedule (the "Initial Term") or any extended
term hereof (the "Extended Term") upon not less than 120 days' prior written
notice to Lessor, to purchase the Equipment leased hereunder in whole and not in
part, on an as-is, where-is basis, for its then fair market value. For the
purposes of determining the fair market value of the Equipment it shall be
assumed that the Equipment will be used for its best intended purpose, is fully
assembled, in good operating condition and fully installed and operational on
the premises where the Equipment will be used. In the event Lessor and Lessee
cannot agree on a fair market value for the Equipment, an independent appraiser,
acceptable to both parties (or failing such agreement by an appraiser designated
by the American Arbitration Association in New York, NY), shall be selected to
determine fair market value on the equipment provided herein. The cost of such
appraisal shall be borne by Lessee. The purchase price for the Equipment shall
be payable upon the expiration of the Initial Term or Extended Term of this
Schedule as the case may be. Lessee shall also reimburse Lessor for its
administrative costs and out-of-pocket expenses incurred in transferring clear
title to the Equipment to Lessee.
3. TAX INDEMNITY. With respect to each item of Equipment leased hereunder,
Lessee agrees that Lessor shall be entitled to such deductions and other
benefits as are provided to an owner of personal property by the Internal
Revenue Code of 1986 (as defined in Section 2 of the Tax Reform Act of 1986), as
amended or superseded from time to time (hereinafter the "code"), including
without limitation depreciation deductions based upon the Accelerated Cost
Recovery System all at the maximum federal income tax rates applicable to
corporations in effect on the Commencement Date (hereinafter "Tax Benefits.). If
(i) Lessor shall lose; shall be delayed in claiming, shall not have a right to
claim, shall be required to recapture, or shall not be allowed all or any
portion of any Tax Benefits, under any circumstances, at any time, and for any
reason
EXHIBIT 10.38
<PAGE>
other than as a result of acts or omissions of Lessor, or (ii) there shall be a
change in the federal income tax rates applicable to corporations, or (iii) any
of the Tax Benefits shall be deemed to be attributable to foreign sources or
(iv) Lessor is required to include any other amounts arising from this Lease or
Schedule in its gross income other than Rental Payments in the amounts and at
the times specified in this Schedule, then upon Lessor's demand, Lessee shall
pay Lessor either (x) a lump sum amount which shall maintain the net economic
after-tax yield, cash-flow and rate of return Lessor anticipated receiving based
on the tax assumptions utilized by Lessor in calculating the rent payable
hereunder ("Lessor's Yield") or (y) such additional rent for the balance of the
term of this Schedule as will permit Lessor to maintain Lessor's Yield. For the
purposes of this indemnification, the term "Lessor" shall mean and include the
affiliated group of corporations within the meaning of Section 1504 of the Code,
of which Lessor is a member.
4. ADDITIONAL TERMS WITH RESPECT TO THE CARE AND USE OF THE EQUIPMENT. In
addition to Lessee's obligations under Paragraph 7 of the Lease, Lessee shall
(i) lubricate the Equipment on a basis that conforms to the maintenance manual
and/or lubrication schedule recommended by the manufacturer of the Equipment,
and (ii) purchase replacement parts only from sources approved by the
manufacturer. Copies of all purchase orders for such replacement parts are to be
retained in Lessee's file relating to the Equipment.
5. ADDITIONAL TERMS WITH RESPECT TO THE CONDITIONS OF REDELIVERY. In addition to
Lessee's obligations under Paragraph 8 of the Lease, Lessee shall (i) dismantle
and handle the Equipment in accordance with the manufacturer's specifications or
normal industry accepted practices for new equipment. Any special transportation
devices, such as metal skids, lifting slings, brackets, etc., which were with
the Equipment when it was delivered or equivalent devices must be used; (ii)
block all sliding members, secure all swinging doors, pendants and other
swinging components, wrap, box, band and label all components and documents in
an appropriate manner to facilitate the efficient reinstallation of the
components; (iii) remove all process fluids from the Equipment and dispose of
the same in accordance with prevailing waste disposal laws and regulations; (iv)
clean and dry sumps and tanks; (v) not ship any "Hazardous Waste. materials with
the equipment; (vi) fill all internal fluids such as lube oil and hydraulic oil
to operating levels, secure filler caps and seal disconnected hoses; (vii) wire
together all lock keys and secure the same to a major external component of the
equipment; (viii) cause the Equipment to be complete, fully functional with no
missing components or attachments, rust free with all boots, guards and seals
clean and with all batteries for control memories fully charged. Lessor shall
have the right to attempt to resell the Equipment at the Location for a period
of 120 days from the expiration of the Term of the Schedule or any extensions
thereof. During this period the Equipment must remain operational and Lessee
must provide adequate electrical power, lighting, heat, water and compressed
air, necessary to permit Lessor to demonstrate the Equipment to any potential
buyer. If an auction is necessary to dispose of the Equipment, Lessor shall be
permitted to auction the Equipment at the Location.
6. BASIS OF INDEXING. If on the Commencement Date, the highest yield on seven
(7) year Treasury Notes, as published in The Wall Street Journal, with a
maturity date on or closest to the maturity date of this Schedule (the "Index"),
exceeds 5.78% (the "Yield"), the Monthly Rental Payment provided herein shall
automatically be increased for the full term to reflect such increase in the
Yield. As soon as practicable thereafter, Lessor shall provide Lessee with
written
EXHIBIT 10.38
- 2 -
<PAGE>
notice of any increase in the Monthly Rental Payment. Lessor's calculations
shall be conclusive absent manifest error.
7. PUBLICITY. FINOVA is hereby authorized to issue appropriate press releases
and to cause a tombstone to be published announcing the consummation of this
transaction and the aggregate amount thereof.
LESSOR: FINOVA CAPITAL CORPORATION
BY:
PRINTED NAME: PAM MARCHANT
ADDRESS: 95 N. ROUTE 17 SOUTH, P.O. BOX 907 PARAMUS, NEW JERSEY 07653
DATE ACCEPTED: 9-30-96
LESSEE: MENDOCINO BREWING COMPANY, INC.
BY: /s/ Norman Franks
PRINTED NAME: Norman Franks
TITLE: CFO
ADDRESS: 13551 SOUTH HIGHWAY 101, HOPLAND, CALIFORNIA 95449
DATED: 9-23-96
EXHIBIT 10.38
- 3 -
<PAGE>
Schedule "A" to Master Lease Schedule No. 5754300 dated , 1996 to Equipment
Lease No. 5754301 dated , 1996 between FINOVA Capital Corporation as Lessor and
Mendocino Brewing Company, Inc. as Lessee.
Equipment Location: Airport Park Drive Ukiah, CA 95482
Supplier: Enerfab, Inc. 4955 Spring Grove Avenue Cincinnati, OH 45232
(1)Grains Handling Silos, Spent Grain Silo and Malt handling equipment
Pale malt silos Spent grain silo Pale malt silo to malt mill conveyor Bulk bag
unloading system Volumetric feeder Floveyor (bag station to mill) Dust collector
Malt mill hoper transition (top) Malt mill funnel (bottom) Malt mill support
structure Blower assembly blower Blower assembly malt lines Blower assembly
venturi Weigh hopper scale & outlet valve Weigh hopper bin vent filter Weigh
hopper rotary valve Weigh hopper to mash mixer conveyor Knife gate valve (1)
Malt Mill (1) Ponndorf Conveyor System (1) Steam boiler (1) Refrigeration system
(1) Water chiller (1) Wort cooler (1) Beer warmer (1) Air compressor (1) Beer
filter (1) Pumps (1) Control systems
Schedule "A" to Master Lease Schedule No. 5754300 dated , 1996 to Equipment
Lease No. 5754301 dated , 1996 between FINOVA Capital Corporation as Lessor and
Mendocino Brewing Company, Inc. as Lessee.
(10) Mash Tun
(1) Lauter Tun
(1) Brewkettle
(1) Hop Jack Vessel
(1) Hot Wort Tank
(1) Hot Water Tank
(4) CIP Tank Systems
(1) Chilled Water Tank
(10) 200 bbl Fermenter Tanks & Structural Support Grid
(2) Yeast Tanks
(1) Schenk Combi Filter System
(1) 200 bbl Bright beer tank
INITIAL /s/ NF
- 4 -
EXHIBIT 10.39
TO
REGISTRATION STATEMENT ON FORM SB-2
-----------------------------------
ADVANCE AND SUBORDINATION AGREEMENT AMONG THE COMPANY,
FINOVA CAPITAL CORPORATION, AND ENERFAB, INC.
<PAGE>
Agreement made this 30 day of September , 1996 between FINOVA Capital
Corporation (the "Lessor") and MENDOCINO Brewing Company, Inc. (the "Lessee")
and Enerfab (the "Supplier").
WHEREAS, Lessor and Lessee have entered into a Lease Agreement #5754300 Schedule
#5754301 (the "Lease")
WHEREAS, Lessor has agreed, under certain circumstances, to purchase certain
brewery equipment as set forth on the annexed Exhibit "A" (the "Equipment") from
the Supplier having a cost not to exceed $2,073,015.51 (the "Total Costs") and
to lease the Equipment to Lessee under the terms and conditions of the Lesser
WHEREAS, Supplier has already delivered the Equipment to the Lessee and Lessee
has left a deposit in the amount of $1,544,384.90 (the "Deposit") against the
Total Cost with the Supplier;
Whereas, Lessor's purchase orders (the "Purchase Orders") for the Equipment to
Supplier provide for payment of the balance of the Total Cost to the Supplier
upon final acceptance of the Equipment by the Lessee; and upon satisfaction of
certain ether terms and conditions under Lessor's Commitment dated August 1, 19
96 to Lessee ("the Commitment");
WHEREAS, Lessee has requested that lessor reimburse Lessee for a portion of the
Deposit in the amount of $750,000.00 (the "Advance") prior to the final
acceptance of the Equipment and prior to the satisfaction of the other terms and
conditions of the Commitment; and
WHEREAS, subject to the terms and conditions set forth herein, Lessor is willing
to make the Advance; and
NOW, THEREFORE, the parties agree as follows
1. Lessor shall, upon Lessee's written request, make the Advance as follows:
i. $750.000.00 to Lessee upon execution of this Agreement and receipt of
satisfactory evidence to lessor of Lessee's payment of the Deposit.
ii. The balance of the Total Cost to the Supplier upon receipt by Lessor of a
Delivery and Acceptance Receipt executed by Lessee, and upon satisfaction of all
other terms and conditions of the Commitment on or before October 21 1996 (the
"Outside Date").
2. Lessee agrees to pay to Lessor interest at the announced prime lending rate
of Citibank, N.A, New York ("Citibank") (the "Prime lending Rate") plus three
(3%) percent on a daily basis (but no more than the maximum rate allowed by low)
on all funds advanced hereunder from the date of such Advance until the
Commencement Date of the Lease (as that term is defined in the Lease). Prime
Rate shall be determined as of the date of the Advance and adjusted monthly on
the same day of the month thereafter. All accrued interest shall be payable on
the Commencement Date of the Lease.
EXHIBIT 10.39
<PAGE>
3. In the event Lessee (i) fails to obtain earthquake insurance in form and
amounts satisfactory to lessor within thirty days of the date hereof, or (ii)
fails to accept all of the Equipment on or before the Outside Date, or (iii)
fails to satisfy all other terms and conditions of the Commitment, Lessee shall
forthwith, upon Lessor's demand, refund to Lessor the Advance made by Lessor
together with accrued interest as set forth in Paragraph 3 above. In the event
Lessee fails to pay any such monies upon demand, interest shall accrue at a
default rate of three (3%) percent in addition to the interest provided herein
(but in no event more than the maximum rate permitted by law.
4. Lessee and Supplier acknowledges that title to the Equipment delivered to
Lessee shall be owned by Lessor, tree and clear of all liens and encumbrances,
subject to all of the terms and conditions of the Lease except as specifically
provided herein and any interest of Supplier in the Equipment is subject and
subordinated to Lessor's interest under the Lease and as otherwise provided
herein. The failure to pay any sums when due hereunder shall constitute an event
of default under the Lease and Lessor shall have all of its rights and remedies
contained therein.
5. In order to induce Lessor to enter into this agreement, and to secure
Lessee's indebtedness, liabilities and obligations to Lessor under this
Agreement, the Lease or otherwise Lessee hereby grants Lessor a first security
interest in all the furnishings, fixtures machinery and equipment located at
Airport Park Drive, Ukiah, California and all proceeds thereof including but not
limited to the Equipment. Lessee shall execute such UCC Financing Statements for
the Equipment as Lessor deems necessary.
6. Upon payment of the balance of the Total Cost, Supplier shall execute and
deliver to Lessor a release of any interest it may have in and to the Equipment
and such other documents as Lessor shall reasonably request.
7. Lessor acknowledges that Supplier has a first security interest in the
refrigeration system. Upon receipt of at least 95% of the Total Cost, Enerfab
will release its security interest in the refrigeration System in favor Of
Lessor.
FINOVA Capital Corporation
By: /s/ Pam Marchant; VP
Mendocino Brewing Company, Inc.
By: /s/ Norman Franks, V.P.
ENERFAB
By: /s/ Terry Pfeister, CFO
EXHIBIT 10.39
- 2 -
EXHIBIT 10.40
TO
REGISTRATION STATEMENT ON FORM SB-2
------------------------------
$900,000 NOTE IN FAVOR OF BDM CONSTRUCTION CO., INC.
<PAGE>
STRAIGHT NOTE
$900,000.00 Santa Rosa, California August 29, 1996
ALL DUE ON OR BEFORE JANUARY 31, 1997 after date, for value received, MENDOCINO
BREWING COMPANY, INC. promises to pay in lawful money of the United States of
America, to
BDM CONSTRUCTION CO. INC.
or order, at place designated by payee, the principal sum of NINE HUNDRED
THOUSAND AND NO/100THS DOLLARS with interest in like lawful money from DECEMBER
31, 1996, until paid at the rate of 12.0 PER CENT PER ANNUM payable AT MATURITY.
Prepayment Penalty: NONE
IT IS AGREED AND UNDERSTOOD BY THE UNDERSIGNED THAT THIS NOTE IS GIVEN IN
CONSIDERATION FOR THE DEFERMENT OF THE OBLIGATION HEREIN STATED AND PURSUANT TO
THE CONTRACT BY AND BETWEEN MENDOCINO BREWING CO., INC. ("MBC") AND BDM
CONSTRUCTION CO. INC. ("BDM") WHEREIN ALL OBLIGATIONS DUE UNDER SAID CONTRACT
WILL UPON SATISFACTION OF THE CONDITIONS THEREIN STATED BECOME DUE IN FULL ON
DECEMBER 31, 1996.
IT IS FURTHER AGREED THAT THE UNDERSIGNED WILL GIVE AND ACCEPT AS COLLATERAL THE
SUM OF 300,000 SHARES OF COMMON STOCK IN MBC FOR THIS NOTE. THE CERTIFICATE FOR
THE SHARES SHALL BEAR THE FOLLOWING LEGENDS:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933. THESE SECURITIES MAY NOT BE OFFERED,
SOLD, TRANSFERRED, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933,
COMPLIANCE WITH RULE 144 OR ITS SUCCESSOR RULE UNDER THE ACT, OR AN OPINION
OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT.
THE COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAS BEEN ISSUED AS
COLLATERAL FOR THE PAYMENT OF A $900,000.00 OBLIGATION TO BDM CONSTRUCTION
CO. INC. PURSUANT TO A PROMISSORY NOTE DATED AUGUST 29, 1996. BDM
CONSTRUCTION CO. INC. IS HOLDING THIS CERTIFICATE FOR ITSELF AS A SECURED
PARTY. UPON ANY DEFAULT BY THE COMPANY IN THE PAYMENT OF THE ABOVE
OBLIGATION, BDM CONSTRUCTION CO. INC. SHALL HAVE ALL THE REMEDIES OF A
SECURED CREDITOR AS ARE AVAILABLE UNDER THE CALIFORNIA UNIFORM COMMERCIAL
CODE, INCLUDING THE RIGHT TO RETAIN OWNERSHIP OF THE COMMON STOCK IN
SATISFACTION OF THE FOREGOING OBLIGATIONS
EXHIBIT 10.40
<PAGE>
UNDER THE CIRCUMSTANCES SPECIFIED THEREIN. THE HOLDER OF THE CERTIFICATE
SHALL NOT CAUSE MORE SHARES TO BE SOLD THAN IS NECESSARY TO PAY ALL THE
OBLIGATIONS SECURED BY THIS NOTE. UPON SUCH RETENTION, OR UPON ANY SALE OF
ALL OR ANY PORTION OF THE COMMON STOCK IN SATISFACTION OF THE OBLIGATION,
SUCH COMMON STOCK SHALL BE DULY AUTHORIZED, VALIDLY ISSUED, FULLY PAID,
NONASSESSABLE, AND OUTSTANDING, AND THIS LEGEND SHALL BE OF NO FURTHER
FORCE AND EFFECT AND SHALL, AT THE REQUEST OF THE HOLDER THEREOF, BE
REMOVED FROM ANY CERTIFICATE REPRESENTING THE COMMON STOCK SO RETAINED OR
SOLD. TO THE EXTENT THAT THE COMMON STOCK IS NOT RETAINED OR SOLD AS
PERMITTED BY THE CALIFORNIA UNIFORM COMMERCIAL CODE, THE SHARES SHALL BE
CANCELLED ON THE BOOKS OF THE COMPANY AND SHALL NOT BE OUTSTANDING AND THE
HOLDER SHALL SURRENDER THE CERTIFICATE TO THE COMPANY FOR CANCELLATION AND
SHALL INDEMNIFY THE COMPANY FOR FAILURE TO DO SO.
Principal and interest payable in lawful money of the United States of America.
Should default be made in payment of interest when due the whole sum of
principal and interest shall become immediately due at the option of the holder
of this Note. If action be instituted on this Note, MBC promises to pay such sum
as the Court may fix as attorney's fees.
As additional collateral, this Note is secured by a Deed of Trust of even date.
The Deed of Trust securing the within Note contains the following provisions:
"In the event the herein described property or any part thereof, or any interest
therein is sold, agreed to be sold, conveyed or alienated by the Trustor, or by
the operation of law or otherwise, all obligations secured by this instrument,
irrespective of the maturity dates expressed therein, at the option of the
holder hereof and without demand or notice shall immediately become due and
payable." The security interest of this Deed of Trust shall be second in
priority to a security interest in favor of the Savings Bank of Mendocino County
in the principal amount of $2,700,000.0.
MENDOCINO BREWING CO., INC. ("MBC")
BY: /s/ Norman Franks, V.P. /s/ Michael Laybourn
NORMAN FRANKS MICHAEL LAYBOURN
THE UNDERSIGNED AS PAYEE DOES HEREBY AGREE TO THE TERMS AND CONDITIONS OF THIS
NOTE.
BDM CONSTRUCTION CO. INC. ("BDM")
BY: /s/ Glenn R. McClish /s/ Sid Behler
GLENN R. McCLISH SID BEHLER
ADDENDUM
EXHIBIT 10.40
- 2 -
<PAGE>
Addendum dated September 23, 1996 to the Straight Note dated August 29, 1996
between Mendocino Brewing Company, Inc. as debtor and BDM Construction Co. Inc.
as payee.
WITNESSETH:
1 ) This addendum is to be attached to and made a part of the Straight Note
agreement between Mendocino Brewing Company, Inc. and BDM Construction Co. Inc.
dated August 29, 1996.
2) This addendum may be signed in counterpart.
3) Addendum: In the event of default by Mendocino Brewing Company, Inc., BDM
Construction Co. Inc. will first exercise its remedial rights with respect to
the Mendocino Brewing Company, Inc. Common Stock as collateral and only after
having exhausted this right can it pursue its rights with respect to the Real
Property.
The undersign hereby agrees to the addendum to the terms and conditions of the
Straight Note.
BDM Construction Co. Inc.
BY: /s/ Glenn R. McClish President
Glenn R. McClish Title
Mendocino Brewing Company, Inc.
BY: /s/ Michael Laybourn CEO
Michael Laybourn Title
EXHIBIT 10.40
- 3 -
EXHIBIT 10.41
TO
REGISTRATION STATEMENT ON FORM SB-2
------------------------------------
LETTER AGREEMENT CONCERNING USE OF PROCEEDS WITH BDM CONSTRUCTION CO., INC.
<PAGE>
September 19, 1996
Rick McClish
BDM Construction Company, Inc.
835 Piner Road Suite D
Santa Rosa, CA 95402-3847
VIA FAX: 707-526-4980
Dear Rick:
Savings Bank of Mendocino County has agreed to the following plan of
distribution and use of the first funds received from our proposed direct public
offering.
The list below shows, in order of priority, our proposed use of funds for the
first $2,500,000 of the proposed $4,000,000 direct public offering.
1) Cost of offering (estimated) $ 300,000
2) Working Capital 300,000
3) Completion of deferred building construction 600,000
4) Short term debt - BDM note 500,000
5) Short term debt - West America Bank 400,000
6) Short term debt - BDM note 400,000
----------
$2,500,000
The Savings Bank has asked that you signify your understanding of and agreement
with our intentions by signing at the bottom of this letter. After signing,
please fax this letter back to me as soon as possible. This should complete the
final requirement for our loan package with the bank.
Sincerely, BDM Construction Company, Inc.
/s/ Norman Franks /s/ Rick McClish
Norman Franks by: Rick McClish
CFO, Vice President
EXHIBIT 10.41
EXHIBIT 10.42
TO
REGISTRATION STATEMENT ON FORM SB-2
------------------------------
EMPLOYMENT AGREEMENT WITH H. MICHAEL LAYBOURN
<PAGE>
MENDOCINO BREWING COMPANY, INC.
EMPLOYMENT AGREEMENT
---------------------------
This Agreement is entered into at Hopland, California as of October 17, 1996
between MICHAEL LAYBOURN ("Employee") and MENDOCINO BREWING COMPANY, INC., a
California corporation (the "Company"), and is as follows:
1. DUTIES AND SCOPE OF EMPLOYMENT
1.1. Position.
The Company shall continue to employ Employee under the terms of this Agreement
in the position of President and Chief Executive Officer. Employee shall be the
principal executive officer of the Company, shall have full responsibility for
managing the Company, and shall report directly to the Board of Directors of the
Company.
1.2. Obligations.
During the term of this Agreement, Employee shall devote substantially most of
Employee's business efforts and time to the Company. The foregoing shall not,
however, preclude Employee from engaging in appropriate civic, charitable,
industry, or religious activities, consistent with Employee's past practices, or
from devoting a reasonable amount of time to private investments, as long as
such activities do not interfere or conflict with Employee's responsibilities to
the Company or are inconsistent with the Company's policies, as established by
the Board of Directors in writing from time to time.
1.3. Director.
Employee shall remain a member of the Company's Board of Directors. As long as
Employee serves as an officer of the Company, Employee shall be nominated to
serve on the Board of Directors in connection with any meeting to elect the
same.
2. COMPENSATION
2.1. Base Salary.
The Company shall pay Employee a base salary ("Base Compensation") of $89,016
per year, payable in accordance with the Company's payroll policies. The Board
of Directors or a committee thereof shall review Employee's performance and the
Company's financial and operating results on at least an annual basis and may
increase Employee's base salary as the Board or Committee deems appropriate
based on such review.
2.2. Bonus.
The Compensation Committee shall establish a bonus pool for each fiscal year of
the Company during which Employee is employed by the Company. Employee shall be
entitled to receive a bonus under the pool if Employee and/or the Company
achieve certain specified business
EXHIBIT 10.42
<PAGE>
objectives as determined by the Compensation Committee and communicated to and
accepted by Employee in writing within the first ninety (90) days after the
beginning of the fiscal year. Employee shall not withhold acceptance
unreasonably. The Compensation Committee shall specify objectives that (a) are
reasonably attainable, (b) are not probable of attainment without significant
effort, and (c) reflect or indicate that value has been created for the
shareholders. The Compensation Committee shall have the discretion to award
bonuses regardless of whether previously specified objectives are not realized
if, as a result of Employee's efforts or leadership, the Company has achieved
other goals that reflect or indicate that value has been created for the
shareholders. The amount of the annual bonus for which Employee shall be
eligible shall not be less than 50% of Employee's Base Salary.
2.3. Stock Option.
Pursuant to the Company's 1994 Stock Option Plan, Employee shall receive a stock
option ("Option") in the form prescribed by the Option Plan to purchase up to
20,000 shares of the Company's Common Stock made available for purchase under
the Plan at an exercise price equal to $9.2125 per share (the "Option Shares").
The Option shall become exercisable at a rate of 1 2/3% per entire month
beginning as of the date of this Agreement. The Option shall be an incentive
stock option to the extent permitted under Section 422 of the Internal Revenue
Code of 1986, as amended.
2.4. Employee Benefits.
During Employee's employment, Employee shall be entitled to the full benefits
for which Employee is eligible under the employee benefit plans and executive
compensation programs maintained by the Company, including without limitation
pension plans, savings or profit-sharing plans, deferred compensation plans,
supplemental retirement or excess-benefit plans, health, accident, and other
insurance programs, paid vacations and sabbaticals, and similar plans or
programs, subject in each case to the generally applicable terms and conditions
of the plan or program in question.
2.5. Vacation/Personal Time Off.
Employee shall continue to accrue vacation/personal time off at the rate at
which Employee accrued vacation/personal time off immediately before the date of
this Agreement.
2.6. Business Expenses and Travel.
During Employee's employment, Employee shall be authorized to incur necessary
and reasonable travel, entertainment, and other business expenses in connection
with Employee's duties. The Company shall reimburse Employee for such expenses
upon presentation of an itemized account and appropriate supporting
documentation, all in accordance with the Company's generally applicable
policies.
2.7. Insurance.
Provided that Employee is insurable at a reasonable cost, during Employee's
employment, the Company shall provide for Employee, and pay all premiums for,
(a) an insurance policy on Employee's life, with a death benefit of $200,000,
and Employee shall be permitted to designate all beneficiaries for said policy;
and (b) disability insurance with a monthly benefit to Employee in the maximum
amount permissible under such policies. The Company shall permit Employee
EXHIBIT 10.42
- 2 -
<PAGE>
to assume such policies at Employee's expense following any termination of
Employee's employment.
2.8. Return of Company Property.
Upon the termination of employment, or whenever requested by Company, Employee
shall immediately deliver to the Company all property in Employee's possession
or under Employee's control belonging to the Company.
3. TERM AND TERMINATION
3.1. Term of Employment.
3.1.1. Basic Rule.
The Company shall continue Employee's employment, and Employee shall
remain in the employ of the Company, until Employee's employment
terminates pursuant to the provisions of this Agreement.
3.1.2. "At Will" Employment.
Except as otherwise provided in this Agreement, Employee's employment
with Company is "at will" and the Company may terminate Employee's
employment at any time, for any reason or for no reason. Any oral or
written statements to the contrary are not binding upon the Company.
3.2. Death or Disability.
"Disability" means Employee's inability, at the time notice is given, to perform
Employee's duties under this Agreement for a period of not less than six (6)
consecutive months as the result of Employee's incapacity due to physical or
mental illness. Upon termination of Employee's employment because of Employee's
death or Disability, Employee shall receive payments as provided in the
Company's benefit and insurance plans provided or required to be provided to
Employee pursuant to this Agreement.
3.3. Voluntary Termination and Termination for Cause.
3.3.1. Voluntary Termination.
"Voluntary Termination" means any termination of employment with the
Company unless the termination (a) is for Cause (as defined below), (b)
results from a Change in Control (as defined in subsection 3.5.1), (c)
occurs within one year after a Change in Control, or (d) results from
Employee's death or Disability, or (d) occurs within three (3) months
after a Constructive Termination (as defined in subsection 3.4.1).
3.3.2. Cause.
"Cause" means (a) an act or acts of dishonesty undertaken by Employee
and intended to result in substantial gain or personal enrichment of
Employee at the expense of the Company, or (b) willful, deliberate, and
persistent failure by Employee to perform the duties and obligations of
Employee's employment which are not remedied in a reasonable period of
time after receipt of written notice from the Company.
EXHIBIT 10.42
- 3 -
<PAGE>
3.3.3. Voluntary Termination.
Employee may terminate Employee's employment voluntarily giving the
Company thirty (30) days' advance notice in writing. No termination of
employment occurring within three (3) months following a Constructive
Termination shall be deemed a Voluntary Termination unless agreed to in
a writing signed by the Employee which states the value of any rights
under this Agreement surrendered by Employee and supported by separate
consideration of at least $5,000.
3.4. Constructive and Other Termination.
3.4.1. Constructive Termination.
"Constructive Termination" means:
(a) a reduction in Employee's salary or a material reduction in
benefits not agreed to by Employee (except in connection with a
decrease to be applied because the Company's performance has
decreased and which is also applied on a comparable basis to other
officers, and excluding the substitution of substantially
equivalent compensation and benefits);
(b) Employee's removal from or failure to be reelected to the
Company's Board of Directors over Employee's objection;
(c) a change in Employee's position as set forth in Section 1.1 over
Employee's objection, unless such change occurs within 3 months
after the end of a fiscal year in which Employee has failed to
meet the objectives established for Employee by the Compensation
Committee pursuant to Section 2.2 for that year; or
(d) a material change in Employee's responsibilities over Employee's
objection, unless such change occurs within 3 months after the end
of a fiscal year in which Employee has failed to meet the
objectives established for Employee by the Compensation Committee
pursuant to Section 2.2 for that year.
3.4.2. Other Termination.
"Other Termination" means termination of employment with the Company
for any reason other than (a) Cause, (b) Constructive Termination, (c)
Employee's death or Disability, or (d) Voluntary Termination.
3.4.3. Severance Payment.
Upon any Constructive Termination or Other Termination, the Company
shall continue to pay to Employee Employee's Base Compensation for
thirty-six (36) months following the date Employee stops providing
full-time services to the Company. Base Compensation shall be
determined with reference to the Base Compensation in effect for the
month in which Employee stops providing full-time services, and shall
be paid in accordance with the Company's then-current policies for
payroll, as though Employee were still employed by the Company.
3.4.4. Acceleration and Extension of Stock Option.
Upon any Constructive Termination or Other Termination, the Option
shall become immediately exercisable in full. To the extent that the
Option is not exercised within the
EXHIBIT 10.42
- 4 -
<PAGE>
time following termination of employment specified in the written
option agreement, the Option shall remain exercisable as though
Employee's option had not terminated. In addition, in lieu of
exercising the Option for the consideration specified in the option
agreement, Employee may from time to time convert the Option, in whole
or in part, into a number of shares determined by dividing (a) the
aggregate fair market value of the shares otherwise issuable upon
exercise of the Option minus the aggregate exercise price of such
shares by (b) the fair market value of one share. Fair market value
shall be deemed to be the closing price of the Company's common stock
on the stock exchange on which the shares are traded as of the last
trading day before Employee exercises the Option.
3.4.5. Continuation of Benefits.
Upon any Constructive Termination or Other Termination, Employee shall
be entitled to receive the same employment benefits during the time
Employee is receiving payments pursuant to subsection 3.4.3 as though
Employee were still employed by the Company, except that Employee shall
not accrue any vacation pay, personal time off, or compensation under
any ERISA or ERISA-type plan after termination of employment.
3.4.6. Registration Rights.
Upon any Constructive Termination or Other Termination, Employee shall
have unlimited piggyback registration rights, two (2) demand
registration rights, and unlimited S-3 registration rights, at the
expense of the Company, in such form, on such terms, and subject to
such conditions as are customarily granted to the most well-known
venture capitalists in the portions of the San Francisco Bay Area known
as "Silicon Valley" as of the date of termination.
3.4.7. Beverage Allowance.
Upon any Constructive Termination or Other Termination, the Company
shall provide to Employee, without further charge, one case of the
Company's beverages per week, delivered within the continental United
States, as Employee may request, for the remainder of Employee's life.
Employee must renew the request annually. This right is personal and
not transferable, and the request may not be made by a guardian,
custodian, personal representative, attorney at law, attorney in fact,
or other proxy on Employee's behalf, or in circumstances where Employee
is incapable of consuming malt beverages personally.
3.5. Termination Resulting from Change of Control.
3.5.1. Change in Control.
"Change in Control" means (a) any merger or consolidation of the
Company with, or any sale of all or substantially all of the Company's
assets to, any other corporation or entity, unless as a result of such
merger, consolidation, or sale of assets the holders of the Company's
voting securities prior thereto hold at least fifty percent (50%) of
the total voting power represented by the voting securities of the
surviving or successor corporation or entity after such transaction, or
(b) the acquisition by any Person as Beneficial Owner (as such terms
are defined in the Securities Exchange Act of 1934, as amended, or the
rules and regulations thereunder, or in ss.280G of the Internal Revenue
EXHIBIT 10.42
- 5 -
<PAGE>
Code of 1986, as amended, and the regulations thereunder), directly or
indirectly, of securities of the Company representing twenty percent
(20%) or more of the total voting power represented by the Company's
then outstanding voting securities, or (c) any sale of a substantial
portion (as "substantial portion" is used and interpreted in ss.280G of
the Internal Revenue Code of 1986, as amended, and the regulations
thereunder) of the Company's assets to any other corporation or entity,
or (d) the replacement of a majority of the members of the Company's
Board of Directors during any twelve month period by directors whose
appointment or election was not endorsed by a majority of the then
authorized Board members before the date of said appointment or
election.
3.5.2. Additional Payment.
If the Company terminates Employee's employment without Cause as a
result of, or within one year after, a Change in Control, the Company
shall pay Employee, in addition to any and all other compensation and
benefits then due Employee, the sum of $500,000. The Company shall pay
said termination compensation to Employee at the same time as Employee
receives any other compensation then due Employee, or within three
business days after Employee's employment terminates, whichever is
earlier.
3.6. Benefit Rollover.
Upon termination of Employee's employment with Company, Employee shall have the
right to roll over or otherwise convert any amounts attributable to Employee in
any of Company's deferred compensation, insurance, or other benefit plans to
other such plans as may be allowed by such plans and applicable law. The Company
shall have no obligation to inform Employee of any rights or responsibilities
Employee may have in connection with converting, rolling over, or continuing
benefits under, such plans, except as may be required under applicable law.
3.7. Compliance with Internal Revenue Code ss.280G.
The Company may defer, and at the written request of Employee shall defer, the
amount of any payment pursuant to this Agreement (a "Deferred Amount") which if
and when paid will constitute an "excess parachute payment" (as defined in
ss.280G of the Internal Revenue Code of 1986, as amended) subject to material
adverse federal or state income tax consequences to the person initiating the
deferral, after taking into account the known facts and circumstances at the
time of the payment ("EPP"). The Company shall give Employee reasonable advance
written notice of any planned deferral, but failure to give such notice shall
not restrict the Company's ability to make the deferral. The Deferred Amount
shall be payable, without interest, in one or more installments at such time or
times that no portion of the installment will constitute EPP. The Company shall
restructure the obligations of the Company under this Agreement in a manner
requested in writing by Employee if no portion of the restructured payments will
constitute EPP and the restructure does not materially increase any adverse
effect the Company's obligations under this Agreement may have on the current or
future net worth or net income (both determined in accordance with generally
accepted accounting principles consistently applied) or cash flow of the
Company.
EXHIBIT 10.42
- 6 -
<PAGE>
4. MISCELLANEOUS
4.1. Further Matters.
Each party agrees to perform such additional acts and execute such additional
documents as are necessary or appropriate to carry out this Agreement.
4.2. Successors and Assigns.
4.2.1. Generally.
This Agreement shall bind, and inure to the benefit of, the parties
hereto and their respective successors and assigns.
4.2.2. Company's Successors.
Any successor to the Company (whether directly or indirectly and
whether by purchase, lease, merger, consolidation, liquidation, or
otherwise to all or substantially all of the Company's business and/or
assets) shall assume this Agreement and agree expressly to perform this
Agreement in the same manner and to the same extent as the Company
would be required to perform it in the absence of a succession. For all
purposes under this Agreement, the term "Company" shall include without
limitation any successor to the Company's business and/or assets which
executes and delivers an assumption agreement or which becomes bound by
this Agreement by operation of law.
4.2.3. Employee's Successors.
This Agreement and all rights of Employee hereunder shall inure to the
benefit of, and be enforceable by, Employee's personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees, and legatees.
4.2.4. No Assignment of Benefits.
The rights of any person to payments or benefits under this Agreement
shall not be made subject to option or assignment, either by voluntary
or involuntary assignment or by operation of law, including without
limitation bankruptcy, garnishment, attachment, or other creditor's
process, and any action in violation of this subsection 4.2.4 shall be
voidable at the option of the Company.
4.3. No Third-Party Beneficiaries.
Except as expressly provided in this Agreement, nothing in this Agreement shall
(a) confer any rights or remedies on any persons other than the parties and
their respective successors and assigns, (b) relieve or discharge the obligation
of any third person to any party, or (c) give any third person any right of
subrogation or action against any party.
4.4. Notice.
Any notice, instruction, or communication required or permitted to be given
under this Agreement to any party shall be in writing (which may include
telecopier or other similar form of reproduction followed by a mailed hard copy,
but not electronic mail) and shall be deemed given when actually received or, if
earlier, five days after deposit in the United States Mail by certified or
express mail, return receipt requested, postage prepaid, addressed to the
principal office of such party or to such other address as such party may
request by written notice. Each party shall
EXHIBIT 10.42
- 7 -
<PAGE>
make an ordinary, good faith effort to ensure that the person to be given notice
actually receives such notice. Each party shall ensure that the other parties to
this Agreement have a current address, fax number, and telephone number for the
purpose of giving notice.
4.5. Governing Law.
The rights and obligations of the parties shall be governed by, and this
Agreement shall be construed and enforced in accordance with, the laws of the
State of California, excluding its conflict of laws rules to the extent such
rules would apply the law of another jurisdiction.
4.6. Jurisdiction and Venue.
The parties hereto consent to the jurisdiction of all federal and state courts
in California, and agree that venue shall lie exclusively in Mendocino County,
California.
4.7. Entire Agreement.
This Agreement constitutes the entire agreement between the parties with respect
to the employment of Employee and the covenants contained in this Agreement, and
there have been, and there are now, no agreements, representations, or
warranties among the parties other than those set forth herein or herein
provided for. Employee agrees that the remedies specified in this Agreement
shall be liquidated damages for any claim by Employee that the Company has
wrongfully terminated Employee's employment with the Company. In addition,
Employee hereby waives any right Employee may have to seek involuntary
dissolution of the Company pursuant to California Corporations Code ss.1800, and
shall not join with any other shareholders of the Company to seek such relief.
4.8. Amendments, Waivers, and Consents.
This Agreement shall not be changed or modified, in whole or in part, except by
supplemental agreement signed by the parties or as otherwise provided in this
Agreement. Either party may waive compliance by any other party with any of the
covenants or conditions of this Agreement, but except as provided in this
Agreement, no waiver shall be binding unless executed in writing by the party
making the waiver. No waiver of any provision of this Agreement shall be deemed,
or shall constitute, a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. Any consent under this
Agreement shall be in writing and shall be effective only to the extent
specifically set forth in such writing. For the protection of all parties,
amendments, waivers, and consents that are not in writing and executed by the
party to be bound may be enforced only if they are detrimentally relied upon and
proved by clear and convincing evidence. Such evidence may not include the
alleged reliance.
4.9. Specific Performance.
The parties hereby declare that it is impossible to measure in money the damages
that will result from a failure to perform any of the obligations under this
Agreement. Therefore, each party hereto shall be entitled as a matter of right
to injunctive and other relief to enforce the provisions of this Agreement. Each
party hereto waives the claim or defense that an adequate remedy at law exists
in any action or proceeding brought to enforce the provisions.
EXHIBIT 10.42
- 8 -
<PAGE>
4.10. Dispute Resolution.
4.10.1. Notice.
A party who desires money damages or equitable relief from the other
party because of a claim relating to the subject matter of this
Agreement shall give written notice to the other party of the facts
constituting the breach or default (a "Dispute Notice"). This Section
4.10 is intended to cover all aspects of the relationship between the
parties with respect to the subject matter of this Agreement, including
any claims based on tort or other theories. Any additional claims the
parties have against each other shall also be subject to this Section
4.10.
4.10.2. Negotiation.
For fifteen (15) days following delivery of a Dispute Notice (the
"Negotiation Period") the parties shall negotiate to resolve the
dispute in good faith.
4.10.3. Mediation.
After the end of the Negotiation Period, either party may request
non-binding mediation with the assistance of a neutral mediator from a
recognized mediation service. The party requesting the mediation shall
arrange for the mediation services, subject to the approval of the
other party which the other party shall not withhold unreasonably.
Mediation shall take place in Mendocino County, California. Mediation
may be scheduled to begin any time after expiration of the Negotiation
Period, but with at least 10 days notice to all parties. The parties
shall participate in the mediation in good faith and shall devote
reasonable time and energy to the mediation so as to promptly resolve
the dispute or conclude that they cannot resolve the dispute. The
party's shall share the cost of mediation except as provided elsewhere
in this Agreement.
4.10.4. Arbitration.
If thirty (30) days after beginning mediation the parties have not
resolved the dispute, either party may submit the dispute to final and
binding arbitration pursuant to the commercial rules of the American
Arbitration Association. The arbitrator(s) shall apply the substantive
law of the State of California to the dispute, and shall have the power
to interpret such law to the extent it is unclear. At the request of
any party, the arbitrators, attorneys, parties to the arbitration,
witnesses, experts, court reporters, or other persons present at the
arbitration shall agree in writing to maintain the strict
confidentiality of the arbitration proceedings. At the election of any
party, arbitration shall be conducted by three neutral arbitrators
appointed in accordance with the commercial rules of the American
Arbitration Association if (a) the amount in controversy is greater
than $50,000 (exclusive of interest and attorney's fees), or (b) a
party sought to be enjoined disputes that he or it has engaged in, or
asserts that he or it should be able to engage in, the actions sought
to be enjoined. In all other cases, the matter shall be arbitrated by a
single neutral arbitrator. The parties surrender and waive the right to
submit any dispute to a court or jury, or to appeal to a higher court.
There shall be no arbitration of any claim that would otherwise be
barred by a statute of limitations if the claim were to be brought in a
court of law. The arbitrator shall not have the power to award
punitive, consequential, indirect, or special damages. The arbitrators
shall have the power to determine what disputes between the parties are
the proper subject of arbitration.
EXHIBIT 10.42
- 9 -
<PAGE>
4.10.5. Costs and Attorney's Fees.
If the arbitrator determines that the actions of a party or its counsel
have unreasonably or unnecessarily delayed the resolution of the
matter, the arbitrator may in its discretion require such party to pay
all or part of cost of the mediation and arbitration proceedings
payable by the other party and may require such party to pay all or
part of the attorney's fees of the other party. This provision permits
an award of attorney's fees against a party regardless of which party
is the prevailing party. Otherwise, the parties shall share bear the
costs of arbitration equally.
4.10.6. Enforcement.
The award of the arbitrator shall be enforceable according to the
applicable provisions of the California Code of Civil Procedure,
sections 1280 et seq. A party who fails to participate in a
negotiation, mediation, or arbitration instituted under this Section
4.10, or who admits to liability and the amount of damage, shall be
deemed to have defaulted. Such default may be entered and enforced the
same manner as a default in a civil lawsuit.
4.11. Headings.
The subject headings of the Articles, Sections, and subsections of this
Agreement are included for purposes of convenience only, and shall not affect
the construction or interpretation of any of its provisions.
4.12. Counterparts.
This Agreement may be executed in two or more counterparts by signing and
delivering the signature page hereto. Each such counterpart shall be an original
and together with the other counterparts shall be deemed one document.
4.13. Role of Company Counsel.
Employee acknowledges that Enterprise Law Group, Inc., counsel to the Company,
has not represented Employee in connection with any aspect of this Agreement,
and has not undertaken to perform any services on behalf of Employee. Employee
has obtained any desired legal advice from separate counsel of his own choosing
or has freely chosen not to do so.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case
of the Company by its duly authorized officer, as of the day and year first
above written.
"COMPANY" "EMPLOYEE"
Mendocino Brewing Company, Inc.,
a California corporation
By /s/ Norman Franks /s/ Michael Laybourn
----------------------------------- -------------------------
Norman Franks, Vice President Michael Laybourn
EXHIBIT 10.42
- 10 -
EXHIBIT 10.43
TO
REGISTRATION STATEMENT ON FORM SB-2
----------------------------
EMPLOYMENT AGREEMENT WITH NORMAN H. FRANKS
<PAGE>
MENDOCINO BREWING COMPANY, INC.
EMPLOYMENT AGREEMENT
---------------------------
This Agreement is entered into at Hopland, California as of October 17, 1996
between NORMAN FRANKS ("Employee") and MENDOCINO BREWING COMPANY, INC., a
California corporation (the "Company"), and is as follows:
1. DUTIES AND SCOPE OF EMPLOYMENT
1.1. Position.
The Company shall continue to employ Employee under the terms of this Agreement
in the position of Vice President and Chief Financial Officer . Employee shall
have such duties as are commonly associated with the above job title, and shall
report directly to the President.
1.2. Obligations.
During the term of this Agreement, Employee shall devote substantially most of
Employee's business efforts and time to the Company. The foregoing shall not,
however, preclude Employee from engaging in appropriate civic, charitable,
industry, or religious activities, consistent with Employee's past practices, or
from devoting a reasonable amount of time to private investments, as long as
such activities do not interfere or conflict with Employee's responsibilities to
the Company or are inconsistent with the Company's policies, as established by
the Board of Directors in writing from time to time.
1.3. Director.
Employee shall remain a member of the Company's Board of Directors. As long as
Employee serves as an officer of the Company, Employee shall be nominated to
serve on the Board of Directors in connection with any meeting to elect the
same.
2. COMPENSATION
2.1. Base Salary.
The Company shall pay Employee a base salary ("Base Compensation") of $79,008
per year, payable in accordance with the Company's payroll policies. The Board
of Directors or a committee thereof shall review Employee's performance and the
Company's financial and operating results on at least an annual basis and may
increase Employee's base salary as the Board or Committee deems appropriate
based on such review.
2.2. Bonus.
The Compensation Committee shall establish a bonus pool for each fiscal year of
the Company during which Employee is employed by the Company. Employee shall be
entitled to receive a bonus under the pool if Employee and/or the Company
achieve certain specified business objectives as determined by the Compensation
Committee and communicated to and accepted by
EXHIBIT 10.43
<PAGE>
Employee in writing within the first ninety (90) days after the beginning of the
fiscal year. Employee shall not withhold acceptance unreasonably. The
Compensation Committee shall specify objectives that (a) are reasonably
attainable, (b) are not probable of attainment without significant effort, and
(c) reflect or indicate that value has been created for the shareholders. The
Compensation Committee shall have the discretion to award bonuses regardless of
whether previously specified objectives are not realized if, as a result of
Employee's efforts or leadership, the Company has achieved other goals that
reflect or indicate that value has been created for the shareholders. The amount
of the annual bonus for which Employee shall be eligible shall not be less than
40% of Employee's Base Salary.
2.3. Stock Option.
Pursuant to the Company's 1994 Stock Option Plan, Employee shall receive a stock
option ("Option") in the form prescribed by the Option Plan to purchase up to
20,000 shares of the Company's Common Stock made available for purchase under
the Plan at an exercise price equal to $9.2125 per share (the "Option Shares").
The Option shall become exercisable at a rate of 1 2/3% per entire month
beginning as of the date of this Agreement. The Option shall be an incentive
stock option to the extent permitted under Section 422 of the Internal Revenue
Code of 1986, as amended.
2.4. Employee Benefits.
During Employee's employment, Employee shall be entitled to the full benefits
for which Employee is eligible under the employee benefit plans and executive
compensation programs maintained by the Company, including without limitation
pension plans, savings or profit-sharing plans, deferred compensation plans,
supplemental retirement or excess-benefit plans, health, accident, and other
insurance programs, paid vacations and sabbaticals, and similar plans or
programs, subject in each case to the generally applicable terms and conditions
of the plan or program in question.
2.5. Vacation/Personal Time Off.
Employee shall continue to accrue vacation/personal time off at the rate at
which Employee accrued vacation/personal time off immediately before the date of
this Agreement.
2.6. Business Expenses and Travel.
During Employee's employment, Employee shall be authorized to incur necessary
and reasonable travel, entertainment, and other business expenses in connection
with Employee's duties. The Company shall reimburse Employee for such expenses
upon presentation of an itemized account and appropriate supporting
documentation, all in accordance with the Company's generally applicable
policies.
2.7. Insurance.
Provided that Employee is insurable at a reasonable cost, during Employee's
employment, the Company shall provide for Employee, and pay all premiums for,
(a) an insurance policy on Employee's life, with a death benefit of $200,000,
and Employee shall be permitted to designate all beneficiaries for said policy;
and (b) disability insurance with a monthly benefit to Employee in the maximum
amount permissible under such policies. The Company shall permit Employee
EXHIBIT 10.43
- 2 -
<PAGE>
to assume such policies at Employee's expense following any termination of
Employee's employment.
2.8. Return of Company Property.
Upon the termination of employment, or whenever requested by Company, Employee
shall immediately deliver to the Company all property in Employee's possession
or under Employee's control belonging to the Company.
3. TERM AND TERMINATION
3.1. Term of Employment.
3.1.1. Basic Rule.
The Company shall continue Employee's employment, and Employee shall
remain in the employ of the Company, until Employee's employment
terminates pursuant to the provisions of this Agreement.
3.1.2. "At Will" Employment.
Except as otherwise provided in this Agreement, Employee's employment
with Company is "at will" and the Company may terminate Employee's
employment at any time, for any reason or for no reason. Any oral or
written statements to the contrary are not binding upon the Company.
3.2. Death or Disability.
"Disability" means Employee's inability, at the time notice is given, to perform
Employee's duties under this Agreement for a period of not less than six (6)
consecutive months as the result of Employee's incapacity due to physical or
mental illness. Upon termination of Employee's employment because of Employee's
death or Disability, Employee shall receive payments as provided in the
Company's benefit and insurance plans provided or required to be provided to
Employee pursuant to this Agreement.
3.3. Voluntary Termination and Termination for Cause.
3.3.1. Voluntary Termination.
"Voluntary Termination" means any termination of employment with the
Company unless the termination (a) is for Cause (as defined below), (b)
results from a Change in Control (as defined in subsection 3.5.1), (c)
occurs within one year after a Change in Control, or (d) results from
Employee's death or Disability, or (d) occurs within three (3) months
after a Constructive Termination (as defined in subsection 3.4.1).
3.3.2. Cause.
"Cause" means (a) an act or acts of dishonesty undertaken by Employee
and intended to result in substantial gain or personal enrichment of
Employee at the expense of the Company, or (b) willful, deliberate, and
persistent failure by Employee to perform the duties and obligations of
Employee's employment which are not remedied in a reasonable period of
time after receipt of written notice from the Company.
EXHIBIT 10.43
- 3 -
<PAGE>
3.3.3. Voluntary Termination.
Employee may terminate Employee's employment voluntarily giving the
Company thirty (30) days' advance notice in writing. No termination of
employment occurring within three (3) months following a Constructive
Termination shall be deemed a Voluntary Termination unless agreed to in
a writing signed by the Employee which states the value of any rights
under this Agreement surrendered by Employee and supported by separate
consideration of at least $5,000.
3.4. Constructive and Other Termination.
3.4.1. Constructive Termination.
"Constructive Termination" means:
(a) a reduction in Employee's salary or a material reduction in
benefits not agreed to by Employee (except in connection with a
decrease to be applied because the Company's performance has
decreased and which is also applied on a comparable basis to other
officers, and excluding the substitution of substantially
equivalent compensation and benefits);
(b) Employee's removal from or failure to be reelected to the
Company's Board of Directors over Employee's objection;
(c) a change in Employee's position as set forth in Section 1.1 over
Employee's objection, unless such change occurs within 3 months
after the end of a fiscal year in which Employee has failed to
meet the objectives established for Employee by the Compensation
Committee pursuant to Section 2.2 for that year; or
(d) a material change in Employee's responsibilities over Employee's
objection, unless such change occurs within 3 months after the end
of a fiscal year in which Employee has failed to meet the
objectives established for Employee by the Compensation Committee
pursuant to Section 2.2 for that year.
3.4.2. Other Termination.
"Other Termination" means termination of employment with the Company
for any reason other than (a) Cause, (b) Constructive Termination, (c)
Employee's death or Disability, or (d) Voluntary Termination.
3.4.3. Severance Payment.
Upon any Constructive Termination or Other Termination, the Company
shall continue to pay to Employee Employee's Base Compensation for
thirty-six (36) months following the date Employee stops providing
full-time services to the Company. Base Compensation shall be
determined with reference to the Base Compensation in effect for the
month in which Employee stops providing full-time services, and shall
be paid in accordance with the Company's then-current policies for
payroll, as though Employee were still employed by the Company.
3.4.4. Acceleration and Extension of Stock Option.
Upon any Constructive Termination or Other Termination, the Option
shall become immediately exercisable in full. To the extent that the
Option is not exercised within the
EXHIBIT 10.43
- 4 -
<PAGE>
time following termination of employment specified in the written
option agreement, the Option shall remain exercisable as though
Employee's option had not terminated. In addition, in lieu of
exercising the Option for the consideration specified in the option
agreement, Employee may from time to time convert the Option, in whole
or in part, into a number of shares determined by dividing (a) the
aggregate fair market value of the shares otherwise issuable upon
exercise of the Option minus the aggregate exercise price of such
shares by (b) the fair market value of one share. Fair market value
shall be deemed to be the closing price of the Company's common stock
on the stock exchange on which the shares are traded as of the last
trading day before Employee exercises the Option.
3.4.5. Continuation of Benefits.
Upon any Constructive Termination or Other Termination, Employee shall
be entitled to receive the same employment benefits during the time
Employee is receiving payments pursuant to subsection 3.4.3 as though
Employee were still employed by the Company, except that Employee shall
not accrue any vacation pay, personal time off, or compensation under
any ERISA or ERISA-type plan after termination of employment.
3.4.6. Registration Rights.
Upon any Constructive Termination or Other Termination, Employee shall
have unlimited piggyback registration rights, two (2) demand
registration rights, and unlimited S-3 registration rights, at the
expense of the Company, in such form, on such terms, and subject to
such conditions as are customarily granted to the most well-known
venture capitalists in the portions of the San Francisco Bay Area known
as "Silicon Valley" as of the date of termination.
3.4.7. Beverage Allowance.
Upon any Constructive Termination or Other Termination, the Company
shall provide to Employee, without further charge, one case of the
Company's beverages per week, delivered within the continental United
States, as Employee may request, for the remainder of Employee's life.
Employee must renew the request annually. This right is personal and
not transferable, and the request may not be made by a guardian,
custodian, personal representative, attorney at law, attorney in fact,
or other proxy on Employee's behalf, or in circumstances where Employee
is incapable of consuming malt beverages personally.
3.5. Termination Resulting from Change of Control.
3.5.1. Change in Control.
"Change in Control" means (a) any merger or consolidation of the
Company with, or any sale of all or substantially all of the Company's
assets to, any other corporation or entity, unless as a result of such
merger, consolidation, or sale of assets the holders of the Company's
voting securities prior thereto hold at least fifty percent (50%) of
the total voting power represented by the voting securities of the
surviving or successor corporation or entity after such transaction, or
(b) the acquisition by any Person as Beneficial Owner (as such terms
are defined in the Securities Exchange Act of 1934, as amended, or the
rules and regulations thereunder, or in ss.280G of the Internal Revenue
EXHIBIT 10.43
- 5 -
<PAGE>
Code of 1986, as amended, and the regulations thereunder), directly or
indirectly, of securities of the Company representing twenty percent
(20%) or more of the total voting power represented by the Company's
then outstanding voting securities, or (c) any sale of a substantial
portion (as "substantial portion" is used and interpreted in ss.280G of
the Internal Revenue Code of 1986, as amended, and the regulations
thereunder) of the Company's assets to any other corporation or entity,
or (d) the replacement of a majority of the members of the Company's
Board of Directors during any twelve month period by directors whose
appointment or election was not endorsed by a majority of the then
authorized Board members before the date of said appointment or
election.
3.5.2. Additional Payment.
If the Company terminates Employee's employment without Cause as a
result of, or within one year after, a Change in Control, the Company
shall pay Employee, in addition to any and all other compensation and
benefits then due Employee, the sum of $500,000. The Company shall pay
said termination compensation to Employee at the same time as Employee
receives any other compensation then due Employee, or within three
business days after Employee's employment terminates, whichever is
earlier.
3.6. Benefit Rollover.
Upon termination of Employee's employment with Company, Employee shall have the
right to roll over or otherwise convert any amounts attributable to Employee in
any of Company's deferred compensation, insurance, or other benefit plans to
other such plans as may be allowed by such plans and applicable law. The Company
shall have no obligation to inform Employee of any rights or responsibilities
Employee may have in connection with converting, rolling over, or continuing
benefits under, such plans, except as may be required under applicable law.
3.7. Compliance with Internal Revenue Code ss.280G.
The Company may defer, and at the written request of Employee shall defer, the
amount of any payment pursuant to this Agreement (a "Deferred Amount") which if
and when paid will constitute an "excess parachute payment" (as defined in
ss.280G of the Internal Revenue Code of 1986, as amended) subject to material
adverse federal or state income tax consequences to the person initiating the
deferral, after taking into account the known facts and circumstances at the
time of the payment ("EPP"). The Company shall give Employee reasonable advance
written notice of any planned deferral, but failure to give such notice shall
not restrict the Company's ability to make the deferral. The Deferred Amount
shall be payable, without interest, in one or more installments at such time or
times that no portion of the installment will constitute EPP. The Company shall
restructure the obligations of the Company under this Agreement in a manner
requested in writing by Employee if no portion of the restructured payments will
constitute EPP and the restructure does not materially increase any adverse
effect the Company's obligations under this Agreement may have on the current or
future net worth or net income (both determined in accordance with generally
accepted accounting principles consistently applied) or cash flow of the
Company.
EXHIBIT 10.43
- 6 -
<PAGE>
4. MISCELLANEOUS
4.1. Further Matters.
Each party agrees to perform such additional acts and execute such additional
documents as are necessary or appropriate to carry out this Agreement.
4.2. Successors and Assigns.
4.2.1. Generally.
This Agreement shall bind, and inure to the benefit of, the parties
hereto and their respective successors and assigns.
4.2.2. Company's Successors.
Any successor to the Company (whether directly or indirectly and
whether by purchase, lease, merger, consolidation, liquidation, or
otherwise to all or substantially all of the Company's business and/or
assets) shall assume this Agreement and agree expressly to perform this
Agreement in the same manner and to the same extent as the Company
would be required to perform it in the absence of a succession. For all
purposes under this Agreement, the term "Company" shall include without
limitation any successor to the Company's business and/or assets which
executes and delivers an assumption agreement or which becomes bound by
this Agreement by operation of law.
4.2.3. Employee's Successors.
This Agreement and all rights of Employee hereunder shall inure to the
benefit of, and be enforceable by, Employee's personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees, and legatees.
4.2.4. No Assignment of Benefits.
The rights of any person to payments or benefits under this Agreement
shall not be made subject to option or assignment, either by voluntary
or involuntary assignment or by operation of law, including without
limitation bankruptcy, garnishment, attachment, or other creditor's
process, and any action in violation of this subsection 4.2.4 shall be
voidable at the option of the Company.
4.3. No Third-Party Beneficiaries.
Except as expressly provided in this Agreement, nothing in this Agreement shall
(a) confer any rights or remedies on any persons other than the parties and
their respective successors and assigns, (b) relieve or discharge the obligation
of any third person to any party, or (c) give any third person any right of
subrogation or action against any party.
4.4. Notice.
Any notice, instruction, or communication required or permitted to be given
under this Agreement to any party shall be in writing (which may include
telecopier or other similar form of reproduction followed by a mailed hard copy,
but not electronic mail) and shall be deemed given when actually received or, if
earlier, five days after deposit in the United States Mail by certified or
express mail, return receipt requested, postage prepaid, addressed to the
principal office of such party or to such other address as such party may
request by written notice. Each party shall
EXHIBIT 10.43
- 7 -
<PAGE>
make an ordinary, good faith effort to ensure that the person to be given notice
actually receives such notice. Each party shall ensure that the other parties to
this Agreement have a current address, fax number, and telephone number for the
purpose of giving notice.
4.5. Governing Law.
The rights and obligations of the parties shall be governed by, and this
Agreement shall be construed and enforced in accordance with, the laws of the
State of California, excluding its conflict of laws rules to the extent such
rules would apply the law of another jurisdiction.
4.6. Jurisdiction and Venue.
The parties hereto consent to the jurisdiction of all federal and state courts
in California, and agree that venue shall lie exclusively in Mendocino County,
California.
4.7. Entire Agreement.
This Agreement constitutes the entire agreement between the parties with respect
to the employment of Employee and the covenants contained in this Agreement, and
there have been, and there are now, no agreements, representations, or
warranties among the parties other than those set forth herein or herein
provided for. Employee agrees that the remedies specified in this Agreement
shall be liquidated damages for any claim by Employee that the Company has
wrongfully terminated Employee's employment with the Company. In addition,
Employee hereby waives any right Employee may have to seek involuntary
dissolution of the Company pursuant to California Corporations Code ss.1800, and
shall not join with any other shareholders of the Company to seek such relief.
4.8. Amendments, Waivers, and Consents.
This Agreement shall not be changed or modified, in whole or in part, except by
supplemental agreement signed by the parties or as otherwise provided in this
Agreement. Either party may waive compliance by any other party with any of the
covenants or conditions of this Agreement, but except as provided in this
Agreement, no waiver shall be binding unless executed in writing by the party
making the waiver. No waiver of any provision of this Agreement shall be deemed,
or shall constitute, a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. Any consent under this
Agreement shall be in writing and shall be effective only to the extent
specifically set forth in such writing. For the protection of all parties,
amendments, waivers, and consents that are not in writing and executed by the
party to be bound may be enforced only if they are detrimentally relied upon and
proved by clear and convincing evidence. Such evidence may not include the
alleged reliance.
4.9. Specific Performance.
The parties hereby declare that it is impossible to measure in money the damages
that will result from a failure to perform any of the obligations under this
Agreement. Therefore, each party hereto shall be entitled as a matter of right
to injunctive and other relief to enforce the provisions of this Agreement. Each
party hereto waives the claim or defense that an adequate remedy at law exists
in any action or proceeding brought to enforce the provisions.
EXHIBIT 10.43
- 8 -
<PAGE>
4.10. Dispute Resolution.
4.10.1. Notice.
A party who desires money damages or equitable relief from the other
party because of a claim relating to the subject matter of this
Agreement shall give written notice to the other party of the facts
constituting the breach or default (a "Dispute Notice"). This Section
4.10 is intended to cover all aspects of the relationship between the
parties with respect to the subject matter of this Agreement, including
any claims based on tort or other theories. Any additional claims the
parties have against each other shall also be subject to this Section
4.10.
4.10.2. Negotiation.
For fifteen (15) days following delivery of a Dispute Notice (the
"Negotiation Period") the parties shall negotiate to resolve the
dispute in good faith.
4.10.3. Mediation.
After the end of the Negotiation Period, either party may request
non-binding mediation with the assistance of a neutral mediator from a
recognized mediation service. The party requesting the mediation shall
arrange for the mediation services, subject to the approval of the
other party which the other party shall not withhold unreasonably.
Mediation shall take place in Mendocino County, California. Mediation
may be scheduled to begin any time after expiration of the Negotiation
Period, but with at least 10 days notice to all parties. The parties
shall participate in the mediation in good faith and shall devote
reasonable time and energy to the mediation so as to promptly resolve
the dispute or conclude that they cannot resolve the dispute. The
party's shall share the cost of mediation except as provided elsewhere
in this Agreement.
4.10.4. Arbitration.
If thirty (30) days after beginning mediation the parties have not
resolved the dispute, either party may submit the dispute to final and
binding arbitration pursuant to the commercial rules of the American
Arbitration Association. The arbitrator(s) shall apply the substantive
law of the State of California to the dispute, and shall have the power
to interpret such law to the extent it is unclear. At the request of
any party, the arbitrators, attorneys, parties to the arbitration,
witnesses, experts, court reporters, or other persons present at the
arbitration shall agree in writing to maintain the strict
confidentiality of the arbitration proceedings. At the election of any
party, arbitration shall be conducted by three neutral arbitrators
appointed in accordance with the commercial rules of the American
Arbitration Association if (a) the amount in controversy is greater
than $50,000 (exclusive of interest and attorney's fees), or (b) a
party sought to be enjoined disputes that he or it has engaged in, or
asserts that he or it should be able to engage in, the actions sought
to be enjoined. In all other cases, the matter shall be arbitrated by a
single neutral arbitrator. The parties surrender and waive the right to
submit any dispute to a court or jury, or to appeal to a higher court.
There shall be no arbitration of any claim that would otherwise be
barred by a statute of limitations if the claim were to be brought in a
court of law. The arbitrator shall not have the power to award
punitive, consequential, indirect, or special damages. The arbitrators
shall have the power to determine what disputes between the parties are
the proper subject of arbitration.
EXHIBIT 10.43
- 9 -
<PAGE>
4.10.5. Costs and Attorney's Fees.
If the arbitrator determines that the actions of a party or its counsel
have unreasonably or unnecessarily delayed the resolution of the
matter, the arbitrator may in its discretion require such party to pay
all or part of cost of the mediation and arbitration proceedings
payable by the other party and may require such party to pay all or
part of the attorney's fees of the other party. This provision permits
an award of attorney's fees against a party regardless of which party
is the prevailing party. Otherwise, the parties shall share bear the
costs of arbitration equally.
4.10.6. Enforcement.
The award of the arbitrator shall be enforceable according to the
applicable provisions of the California Code of Civil Procedure,
sections 1280 et seq. A party who fails to participate in a
negotiation, mediation, or arbitration instituted under this Section
4.10, or who admits to liability and the amount of damage, shall be
deemed to have defaulted. Such default may be entered and enforced the
same manner as a default in a civil lawsuit.
4.11. Headings.
The subject headings of the Articles, Sections, and subsections of this
Agreement are included for purposes of convenience only, and shall not affect
the construction or interpretation of any of its provisions.
4.12. Counterparts.
This Agreement may be executed in two or more counterparts by signing and
delivering the signature page hereto. Each such counterpart shall be an original
and together with the other counterparts shall be deemed one document.
4.13. Role of Company Counsel.
Employee acknowledges that Enterprise Law Group, Inc., counsel to the Company,
has not represented Employee in connection with any aspect of this Agreement,
and has not undertaken to perform any services on behalf of Employee. Employee
has obtained any desired legal advice from separate counsel of his own choosing
or has freely chosen not to do so.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case
of the Company by its duly authorized officer, as of the day and year first
above written.
"COMPANY" "EMPLOYEE"
Mendocino Brewing Company, Inc.,
a California corporation
By /s/ Michael Laybourn /s/ Norman Franks
------------------------------------- --------------------------
Michael Laybourn, President Norman Franks
EXHIBIT 10.43
- 10 -
EXHIBIT 10.44
TO
REGISTRATION STATEMENT ON FORM SB-2
------------------------------------
EMPLOYMENT AGREEMENT WITH MICHAEL F. LOVETT
<PAGE>
MENDOCINO BREWING COMPANY, INC.
EMPLOYMENT AGREEMENT
---------------------------
This Agreement is entered into at Hopland, California as of October 17, 1996
between MICHAEL LOVETT ("Employee") and MENDOCINO BREWING COMPANY, INC., a
California corporation (the "Company"), and is as follows:
1. DUTIES AND SCOPE OF EMPLOYMENT
1.1. Position.
The Company shall continue to employ Employee under the terms of this Agreement
in the position of Marketing Director . Employee shall have such duties as are
commonly associated with the above job title, and shall report directly to the
President.
1.2. Obligations.
During the term of this Agreement, Employee shall devote substantially most of
Employee's business efforts and time to the Company. The foregoing shall not,
however, preclude Employee from engaging in appropriate civic, charitable,
industry, or religious activities, consistent with Employee's past practices, or
from devoting a reasonable amount of time to private investments, as long as
such activities do not interfere or conflict with Employee's responsibilities to
the Company or are inconsistent with the Company's policies, as established by
the Board of Directors in writing from time to time.
2. COMPENSATION
2.1. Base Salary.
The Company shall pay Employee a base salary ("Base Compensation") of $55,440
per year, payable in accordance with the Company's payroll policies. The Board
of Directors or a committee thereof shall review Employee's performance and the
Company's financial and operating results on at least an annual basis and may
increase Employee's base salary as the Board or Committee deems appropriate
based on such review.
2.2. Bonus.
The Compensation Committee shall establish a bonus pool for each fiscal year of
the Company during which Employee is employed by the Company. Employee shall be
entitled to receive a bonus under the pool if Employee and/or the Company
achieve certain specified business objectives as determined by the Compensation
Committee and communicated to and accepted by Employee in writing within the
first ninety (90) days after the beginning of the fiscal year. Employee shall
not withhold acceptance unreasonably. The Compensation Committee shall specify
objectives that (a) are reasonably attainable, (b) are not probable of
attainment without significant effort, and (c) reflect or indicate that value
has been created for the shareholders. The Compensation Committee shall have the
discretion to award bonuses regardless of whether
EXHIBIT 10.44
<PAGE>
previously specified objectives are not realized if, as a result of Employee's
efforts or leadership, the Company has achieved other goals that reflect or
indicate that value has been created for the shareholders.
2.3. Stock Option.
Pursuant to the Company's 1994 Stock Option Plan, Employee shall receive a stock
option ("Option") in the form prescribed by the Option Plan to purchase up to
10,000 shares of the Company's Common Stock made available for purchase under
the Plan at an exercise price equal to $8.375 per share (the "Option Shares").
The Option shall become exercisable at a rate of 1 2/3% per entire month
beginning as of the date of this Agreement. The Option shall be an incentive
stock option to the extent permitted under Section 422 of the Internal Revenue
Code of 1986, as amended.
2.4. Employee Benefits.
During Employee's employment, Employee shall be entitled to the full benefits
for which Employee is eligible under the employee benefit plans and executive
compensation programs maintained by the Company, including without limitation
pension plans, savings or profit-sharing plans, deferred compensation plans,
supplemental retirement or excess-benefit plans, health, accident, and other
insurance programs, paid vacations and sabbaticals, and similar plans or
programs, subject in each case to the generally applicable terms and conditions
of the plan or program in question.
2.5. Vacation/Personal Time Off.
Employee shall continue to accrue vacation/personal time off at the rate at
which Employee accrued vacation/personal time off immediately before the date of
this Agreement.
2.6. Business Expenses and Travel.
During Employee's employment, Employee shall be authorized to incur necessary
and reasonable travel, entertainment, and other business expenses in connection
with Employee's duties. The Company shall reimburse Employee for such expenses
upon presentation of an itemized account and appropriate supporting
documentation, all in accordance with the Company's generally applicable
policies.
2.7. Insurance.
Provided that Employee is insurable at a reasonable cost, during Employee's
employment, the Company shall provide for Employee, and pay all premiums for,
(a) an insurance policy on Employee's life, with a death benefit of $200,000,
and Employee shall be permitted to designate all beneficiaries for said policy;
and (b) disability insurance with a monthly benefit to Employee in the maximum
amount permissible under such policies. The Company shall permit Employee to
assume such policies at Employee's expense following any termination of
Employee's employment.
2.8. Return of Company Property.
Upon the termination of employment, or whenever requested by Company, Employee
shall immediately deliver to the Company all property in Employee's possession
or under Employee's control belonging to the Company.
EXHIBIT 10.44
- 2 -
<PAGE>
3. TERM AND TERMINATION
3.1. Term of Employment.
3.1.1. Basic Rule.
The Company shall continue Employee's employment, and Employee shall
remain in the employ of the Company, until Employee's employment
terminates pursuant to the provisions of this Agreement.
3.1.2. "At Will" Employment.
Except as otherwise provided in this Agreement, Employee's employment
with Company is "at will" and the Company may terminate Employee's
employment at any time, for any reason or for no reason. Any oral or
written statements to the contrary are not binding upon the Company.
3.2. Death or Disability.
"Disability" means Employee's inability, at the time notice is given, to perform
Employee's duties under this Agreement for a period of not less than six (6)
consecutive months as the result of Employee's incapacity due to physical or
mental illness. Upon termination of Employee's employment because of Employee's
death or Disability, Employee shall receive payments as provided in the
Company's benefit and insurance plans provided or required to be provided to
Employee pursuant to this Agreement.
3.3. Voluntary Termination and Termination for Cause.
3.3.1. Voluntary Termination.
"Voluntary Termination" means any termination of employment with the
Company unless the termination (a) is for Cause (as defined below), (b)
results from a Change in Control (as defined in subsection 3.5.1), (c)
occurs within one year after a Change in Control, or (d) results from
Employee's death or Disability, or (d) occurs within three (3) months
after a Constructive Termination (as defined in subsection 3.4.1).
3.3.2. Cause.
"Cause" means (a) an act or acts of dishonesty undertaken by Employee
and intended to result in substantial gain or personal enrichment of
Employee at the expense of the Company, or (b) willful, deliberate, and
persistent failure by Employee to perform the duties and obligations of
Employee's employment which are not remedied in a reasonable period of
time after receipt of written notice from the Company.
3.3.3. Voluntary Termination.
Employee may terminate Employee's employment voluntarily giving the
Company thirty (30) days' advance notice in writing. No termination of
employment occurring within three (3) months following a Constructive
Termination shall be deemed a Voluntary Termination unless agreed to in
a writing signed by the Employee which states the value of any rights
under this Agreement surrendered by Employee and supported by separate
consideration of at least $5,000.
EXHIBIT 10.44
- 3 -
<PAGE>
3.4. Constructive and Other Termination.
3.4.1. Constructive Termination.
"Constructive Termination" means:
(a) a reduction in Employee's salary or a material reduction in
benefits not agreed to by Employee (except in connection with a
decrease to be applied because the Company's performance has
decreased and which is also applied on a comparable basis to other
officers, and excluding the substitution of substantially
equivalent compensation and benefits);
(b) a change in Employee's position as set forth in Section 1.1 over
Employee's objection, unless such change occurs within 3 months
after the end of a fiscal year in which Employee has failed to
meet the objectives established for Employee by the Compensation
Committee pursuant to Section 2.2 for that year; or
(c) a material change in Employee's responsibilities over Employee's
objection, unless such change occurs within 3 months after the end
of a fiscal year in which Employee has failed to meet the
objectives established for Employee by the Compensation Committee
pursuant to Section 2.2 for that year.
3.4.2. Other Termination.
"Other Termination" means termination of employment with the Company
for any reason other than (a) Cause, (b) Constructive Termination, (c)
Employee's death or Disability, or (d) Voluntary Termination.
3.4.3. Severance Payment.
Upon any Constructive Termination or Other Termination, the Company
shall continue to pay to Employee Employee's Base Compensation for
eighteen (18) months following the date Employee stops providing
full-time services to the Company. Base Compensation shall be
determined with reference to the Base Compensation in effect for the
month in which Employee stops providing full-time services, and shall
be paid in accordance with the Company's then-current policies for
payroll, as though Employee were still employed by the Company.
3.4.4. Acceleration and Extension of Stock Option.
Upon any Constructive Termination or Other Termination, the Option
shall become immediately exercisable in full. To the extent that the
Option is not exercised within the time following termination of
employment specified in the written option agreement, the Option shall
remain exercisable as though Employee's option had not terminated. In
addition, in lieu of exercising the Option for the consideration
specified in the option agreement, Employee may from time to time
convert the Option, in whole or in part, into a number of shares
determined by dividing (a) the aggregate fair market value of the
shares otherwise issuable upon exercise of the Option minus the
aggregate exercise price of such shares by (b) the fair market value of
one share. Fair market value shall be deemed to be the closing price of
the Company's common stock on the stock exchange on which the shares
are traded as of the last trading day before Employee exercises the
Option.
EXHIBIT 10.44
- 4 -
<PAGE>
3.4.5. Continuation of Benefits.
Upon any Constructive Termination or Other Termination, Employee shall
be entitled to receive the same employment benefits during the time
Employee is receiving payments pursuant to subsection 3.4.3 as though
Employee were still employed by the Company, except that Employee shall
not accrue any vacation pay, personal time off, or compensation under
any ERISA or ERISA-type plan after termination of employment.
3.4.6. Registration Rights.
Upon any Constructive Termination or Other Termination, Employee shall
have unlimited piggyback registration rights, two (2) demand
registration rights, and unlimited S-3 registration rights, at the
expense of the Company, in such form, on such terms, and subject to
such conditions as are customarily granted to the most well-known
venture capitalists in the portions of the San Francisco Bay Area known
as "Silicon Valley" as of the date of termination.
3.4.7. Beverage Allowance.
Upon any Constructive Termination or Other Termination, the Company
shall provide to Employee, without further charge, one case of the
Company's beverages per week, delivered within the continental United
States, as Employee may request, for the remainder of Employee's life.
Employee must renew the request annually. This right is personal and
not transferable, and the request may not be made by a guardian,
custodian, personal representative, attorney at law, attorney in fact,
or other proxy on Employee's behalf, or in circumstances where Employee
is incapable of consuming malt beverages personally.
3.5. Termination Resulting from Change of Control.
3.5.1. Change in Control.
"Change in Control" means (a) any merger or consolidation of the
Company with, or any sale of all or substantially all of the Company's
assets to, any other corporation or entity, unless as a result of such
merger, consolidation, or sale of assets the holders of the Company's
voting securities prior thereto hold at least fifty percent (50%) of
the total voting power represented by the voting securities of the
surviving or successor corporation or entity after such transaction, or
(b) the acquisition by any Person as Beneficial Owner (as such terms
are defined in the Securities Exchange Act of 1934, as amended, or the
rules and regulations thereunder, or in ss.280G of the Internal Revenue
Code of 1986, as amended, and the regulations thereunder), directly or
indirectly, of securities of the Company representing twenty percent
(20%) or more of the total voting power represented by the Company's
then outstanding voting securities, or (c) any sale of a substantial
portion (as "substantial portion" is used and interpreted in ss.280G of
the Internal Revenue Code of 1986, as amended, and the regulations
thereunder) of the Company's assets to any other corporation or entity,
or (d) the replacement of a majority of the members of the Company's
Board of Directors during any twelve month period by directors whose
appointment or election was not endorsed by a majority of the then
authorized Board members before the date of said appointment or
election.
EXHIBIT 10.44
- 5 -
<PAGE>
3.5.2. Additional Payment.
If the Company terminates Employee's employment without Cause as a
result of, or within one year after, a Change in Control, the Company
shall pay Employee, in addition to any and all other compensation and
benefits then due Employee, the sum of $250,000. The Company shall pay
said termination compensation to Employee at the same time as Employee
receives any other compensation then due Employee, or within three
business days after Employee's employment terminates, whichever is
earlier.
3.6. Benefit Rollover.
Upon termination of Employee's employment with Company, Employee shall have the
right to roll over or otherwise convert any amounts attributable to Employee in
any of Company's deferred compensation, insurance, or other benefit plans to
other such plans as may be allowed by such plans and applicable law. The Company
shall have no obligation to inform Employee of any rights or responsibilities
Employee may have in connection with converting, rolling over, or continuing
benefits under, such plans, except as may be required under applicable law.
3.7. Compliance with Internal Revenue Code ss.280G.
The Company may defer, and at the written request of Employee shall defer, the
amount of any payment pursuant to this Agreement (a "Deferred Amount") which if
and when paid will constitute an "excess parachute payment" (as defined in
ss.280G of the Internal Revenue Code of 1986, as amended) subject to material
adverse federal or state income tax consequences to the person initiating the
deferral, after taking into account the known facts and circumstances at the
time of the payment ("EPP"). The Company shall give Employee reasonable advance
written notice of any planned deferral, but failure to give such notice shall
not restrict the Company's ability to make the deferral. The Deferred Amount
shall be payable, without interest, in one or more installments at such time or
times that no portion of the installment will constitute EPP. The Company shall
restructure the obligations of the Company under this Agreement in a manner
requested in writing by Employee if no portion of the restructured payments will
constitute EPP and the restructure does not materially increase any adverse
effect the Company's obligations under this Agreement may have on the current or
future net worth or net income (both determined in accordance with generally
accepted accounting principles consistently applied) or cash flow of the
Company.
4. MISCELLANEOUS
4.1. Further Matters.
Each party agrees to perform such additional acts and execute such additional
documents as are necessary or appropriate to carry out this Agreement.
4.2. Successors and Assigns.
4.2.1. Generally.
This Agreement shall bind, and inure to the benefit of, the parties
hereto and their respective successors and assigns.
EXHIBIT 10.44
- 6 -
<PAGE>
4.2.2. Company's Successors.
Any successor to the Company (whether directly or indirectly and
whether by purchase, lease, merger, consolidation, liquidation, or
otherwise to all or substantially all of the Company's business and/or
assets) shall assume this Agreement and agree expressly to perform this
Agreement in the same manner and to the same extent as the Company
would be required to perform it in the absence of a succession. For all
purposes under this Agreement, the term "Company" shall include without
limitation any successor to the Company's business and/or assets which
executes and delivers an assumption agreement or which becomes bound by
this Agreement by operation of law.
4.2.3. Employee's Successors.
This Agreement and all rights of Employee hereunder shall inure to the
benefit of, and be enforceable by, Employee's personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees, and legatees.
4.2.4. No Assignment of Benefits.
The rights of any person to payments or benefits under this Agreement
shall not be made subject to option or assignment, either by voluntary
or involuntary assignment or by operation of law, including without
limitation bankruptcy, garnishment, attachment, or other creditor's
process, and any action in violation of this subsection 4.2.4 shall be
voidable at the option of the Company.
4.3. No Third-Party Beneficiaries.
Except as expressly provided in this Agreement, nothing in this Agreement shall
(a) confer any rights or remedies on any persons other than the parties and
their respective successors and assigns, (b) relieve or discharge the obligation
of any third person to any party, or (c) give any third person any right of
subrogation or action against any party.
4.4. Notice.
Any notice, instruction, or communication required or permitted to be given
under this Agreement to any party shall be in writing (which may include
telecopier or other similar form of reproduction followed by a mailed hard copy,
but not electronic mail) and shall be deemed given when actually received or, if
earlier, five days after deposit in the United States Mail by certified or
express mail, return receipt requested, postage prepaid, addressed to the
principal office of such party or to such other address as such party may
request by written notice. Each party shall make an ordinary, good faith effort
to ensure that the person to be given notice actually receives such notice. Each
party shall ensure that the other parties to this Agreement have a current
address, fax number, and telephone number for the purpose of giving notice.
4.5. Governing Law.
The rights and obligations of the parties shall be governed by, and this
Agreement shall be construed and enforced in accordance with, the laws of the
State of California, excluding its conflict of laws rules to the extent such
rules would apply the law of another jurisdiction.
EXHIBIT 10.44
- 7 -
<PAGE>
4.6. Jurisdiction and Venue.
The parties hereto consent to the jurisdiction of all federal and state courts
in California, and agree that venue shall lie exclusively in Mendocino County,
California.
4.7. Entire Agreement.
This Agreement constitutes the entire agreement between the parties with respect
to the employment of Employee and the covenants contained in this Agreement, and
there have been, and there are now, no agreements, representations, or
warranties among the parties other than those set forth herein or herein
provided for. Employee agrees that the remedies specified in this Agreement
shall be liquidated damages for any claim by Employee that the Company has
wrongfully terminated Employee's employment with the Company. In addition,
Employee hereby waives any right Employee may have to seek involuntary
dissolution of the Company pursuant to California Corporations Code ss.1800, and
shall not join with any other shareholders of the Company to seek such relief.
4.8. Amendments, Waivers, and Consents.
This Agreement shall not be changed or modified, in whole or in part, except by
supplemental agreement signed by the parties or as otherwise provided in this
Agreement. Either party may waive compliance by any other party with any of the
covenants or conditions of this Agreement, but except as provided in this
Agreement, no waiver shall be binding unless executed in writing by the party
making the waiver. No waiver of any provision of this Agreement shall be deemed,
or shall constitute, a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. Any consent under this
Agreement shall be in writing and shall be effective only to the extent
specifically set forth in such writing. For the protection of all parties,
amendments, waivers, and consents that are not in writing and executed by the
party to be bound may be enforced only if they are detrimentally relied upon and
proved by clear and convincing evidence. Such evidence may not include the
alleged reliance.
4.9. Specific Performance.
The parties hereby declare that it is impossible to measure in money the damages
that will result from a failure to perform any of the obligations under this
Agreement. Therefore, each party hereto shall be entitled as a matter of right
to injunctive and other relief to enforce the provisions of this Agreement. Each
party hereto waives the claim or defense that an adequate remedy at law exists
in any action or proceeding brought to enforce the provisions.
4.10. Dispute Resolution.
4.10.1. Notice.
A party who desires money damages or equitable relief from the other
party because of a claim relating to the subject matter of this
Agreement shall give written notice to the other party of the facts
constituting the breach or default (a "Dispute Notice"). This Section
4.10 is intended to cover all aspects of the relationship between the
parties with respect to the subject matter of this Agreement, including
any claims based on tort or other theories. Any additional claims the
parties have against each other shall also be subject to this Section
4.10.
EXHIBIT 10.44
- 8 -
<PAGE>
4.10.2. Negotiation.
For fifteen (15) days following delivery of a Dispute Notice (the
"Negotiation Period") the parties shall negotiate to resolve the
dispute in good faith.
4.10.3. Mediation.
After the end of the Negotiation Period, either party may request
non-binding mediation with the assistance of a neutral mediator from a
recognized mediation service. The party requesting the mediation shall
arrange for the mediation services, subject to the approval of the
other party which the other party shall not withhold unreasonably.
Mediation shall take place in Mendocino County, California. Mediation
may be scheduled to begin any time after expiration of the Negotiation
Period, but with at least 10 days notice to all parties. The parties
shall participate in the mediation in good faith and shall devote
reasonable time and energy to the mediation so as to promptly resolve
the dispute or conclude that they cannot resolve the dispute. The
party's shall share the cost of mediation except as provided elsewhere
in this Agreement.
4.10.4. Arbitration.
If thirty (30) days after beginning mediation the parties have not
resolved the dispute, either party may submit the dispute to final and
binding arbitration pursuant to the commercial rules of the American
Arbitration Association. The arbitrator(s) shall apply the substantive
law of the State of California to the dispute, and shall have the power
to interpret such law to the extent it is unclear. At the request of
any party, the arbitrators, attorneys, parties to the arbitration,
witnesses, experts, court reporters, or other persons present at the
arbitration shall agree in writing to maintain the strict
confidentiality of the arbitration proceedings. At the election of any
party, arbitration shall be conducted by three neutral arbitrators
appointed in accordance with the commercial rules of the American
Arbitration Association if (a) the amount in controversy is greater
than $50,000 (exclusive of interest and attorney's fees), or (b) a
party sought to be enjoined disputes that he or it has engaged in, or
asserts that he or it should be able to engage in, the actions sought
to be enjoined. In all other cases, the matter shall be arbitrated by a
single neutral arbitrator. The parties surrender and waive the right to
submit any dispute to a court or jury, or to appeal to a higher court.
There shall be no arbitration of any claim that would otherwise be
barred by a statute of limitations if the claim were to be brought in a
court of law. The arbitrator shall not have the power to award
punitive, consequential, indirect, or special damages. The arbitrators
shall have the power to determine what disputes between the parties are
the proper subject of arbitration.
4.10.5. Costs and Attorney's Fees.
If the arbitrator determines that the actions of a party or its counsel
have unreasonably or unnecessarily delayed the resolution of the
matter, the arbitrator may in its discretion require such party to pay
all or part of cost of the mediation and arbitration proceedings
payable by the other party and may require such party to pay all or
part of the attorney's fees of the other party. This provision permits
an award of attorney's fees against a party regardless of which party
is the prevailing party. Otherwise, the parties shall share bear the
costs of arbitration equally.
EXHIBIT 10.44
- 9 -
<PAGE>
4.10.6. Enforcement.
The award of the arbitrator shall be enforceable according to the
applicable provisions of the California Code of Civil Procedure,
sections 1280 et seq. A party who fails to participate in a
negotiation, mediation, or arbitration instituted under this Section
4.10, or who admits to liability and the amount of damage, shall be
deemed to have defaulted. Such default may be entered and enforced the
same manner as a default in a civil lawsuit.
4.11. Headings.
The subject headings of the Articles, Sections, and subsections of this
Agreement are included for purposes of convenience only, and shall not affect
the construction or interpretation of any of its provisions.
4.12. Counterparts.
This Agreement may be executed in two or more counterparts by signing and
delivering the signature page hereto. Each such counterpart shall be an original
and together with the other counterparts shall be deemed one document.
4.13. Role of Company Counsel.
Employee acknowledges that Enterprise Law Group, Inc., counsel to the Company,
has not represented Employee in connection with any aspect of this Agreement,
and has not undertaken to perform any services on behalf of Employee. Employee
has obtained any desired legal advice from separate counsel of his own choosing
or has freely chosen not to do so.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case
of the Company by its duly authorized officer, as of the day and year first
above written.
"COMPANY" "EMPLOYEE"
Mendocino Brewing Company, Inc.,
a California corporation
By /s/ Michael Laybourn /s/ Michael Lovett
------------------------------------ -------------------------
Michael Laybourn, President Michael Lovett
EXHIBIT 10.44
- 10 -
EXHIBIT 10.45
TO
REGISTRATION STATEMENT ON FORM SB-2
-----------------------------------------
EMPLOYMENT AGREEMENT WITH JOHN SCAHILL
<PAGE>
MENDOCINO BREWING COMPANY, INC.
EMPLOYMENT AGREEMENT
-------------------------------
This Agreement is entered into at Hopland, California as of October 17, 1996
between JOHN SCAHILL ("Employee") and MENDOCINO BREWING COMPANY, INC., a
California corporation (the "Company"), and is as follows:
1. DUTIES AND SCOPE OF EMPLOYMENT
1.1. Position.
The Company shall continue to employ Employee under the terms of this Agreement
in the position of Maintenance Manager. Employee shall have such duties as are
commonly associated with the above job title, and shall report directly to the
President.
1.2. Obligations.
During the term of this Agreement, Employee shall devote substantially most of
Employee's business efforts and time to the Company. The foregoing shall not,
however, preclude Employee from engaging in appropriate civic, charitable,
industry, or religious activities, consistent with Employee's past practices, or
from devoting a reasonable amount of time to private investments, as long as
such activities do not interfere or conflict with Employee's responsibilities to
the Company or are inconsistent with the Company's policies, as established by
the Board of Directors in writing from time to time.
2. COMPENSATION
2.1. Base Salary.
The Company shall pay Employee a base salary ("Base Compensation") of $39,816
per year, payable in accordance with the Company's payroll policies. The Board
of Directors or a committee thereof shall review Employee's performance and the
Company's financial and operating results on at least an annual basis and may
increase Employee's base salary as the Board or Committee deems appropriate
based on such review.
2.2. Bonus.
The Compensation Committee shall establish a bonus pool for each fiscal year of
the Company during which Employee is employed by the Company. Employee shall be
entitled to receive a bonus under the pool if Employee and/or the Company
achieve certain specified business objectives as determined by the Compensation
Committee and communicated to and accepted by Employee in writing within the
first ninety (90) days after the beginning of the fiscal year. Employee shall
not withhold acceptance unreasonably. The Compensation Committee shall specify
objectives that (a) are reasonably attainable, (b) are not probable of
attainment without significant effort, and (c) reflect or indicate that value
has been created for the shareholders. The Compensation Committee shall have the
discretion to award bonuses regardless of whether
EXHIBIT 10.45
<PAGE>
previously specified objectives are not realized if, as a result of Employee's
efforts or leadership, the Company has achieved other goals that reflect or
indicate that value has been created for the shareholders.
2.3. Stock Option.
Pursuant to the Company's 1994 Stock Option Plan, Employee shall receive a stock
option ("Option") in the form prescribed by the Option Plan to purchase up to
10,000 shares of the Company's Common Stock made available for purchase under
the Plan at an exercise price equal to $9.2125 per share (the "Option Shares").
The Option shall become exercisable at a rate of 1 2/3% per entire month
beginning as of the date of this Agreement. The Option shall be an incentive
stock option to the extent permitted under Section 422 of the Internal Revenue
Code of 1986, as amended.
2.4. Employee Benefits.
During Employee's employment, Employee shall be entitled to the full benefits
for which Employee is eligible under the employee benefit plans and executive
compensation programs maintained by the Company, including without limitation
pension plans, savings or profit-sharing plans, deferred compensation plans,
supplemental retirement or excess-benefit plans, health, accident, and other
insurance programs, paid vacations and sabbaticals, and similar plans or
programs, subject in each case to the generally applicable terms and conditions
of the plan or program in question.
2.5. Vacation/Personal Time Off.
Employee shall continue to accrue vacation/personal time off at the rate at
which Employee accrued vacation/personal time off immediately before the date of
this Agreement.
2.6. Business Expenses and Travel.
During Employee's employment, Employee shall be authorized to incur necessary
and reasonable travel, entertainment, and other business expenses in connection
with Employee's duties. The Company shall reimburse Employee for such expenses
upon presentation of an itemized account and appropriate supporting
documentation, all in accordance with the Company's generally applicable
policies.
2.7. Insurance.
Provided that Employee is insurable at a reasonable cost, during Employee's
employment, the Company shall provide for Employee, and pay all premiums for,
(a) an insurance policy on Employee's life, with a death benefit of $200,000,
and Employee shall be permitted to designate all beneficiaries for said policy;
and (b) disability insurance with a monthly benefit to Employee in the maximum
amount permissible under such policies. The Company shall permit Employee to
assume such policies at Employee's expense following any termination of
Employee's employment.
2.8. Return of Company Property.
Upon the termination of employment, or whenever requested by Company, Employee
shall immediately deliver to the Company all property in Employee's possession
or under Employee's control belonging to the Company.
EXHIBIT 10.45
- 2 -
<PAGE>
3. TERM AND TERMINATION
3.1. Term of Employment.
3.1.1. Basic Rule.
The Company shall continue Employee's employment, and Employee shall
remain in the employ of the Company, until Employee's employment
terminates pursuant to the provisions of this Agreement.
3.1.2. "At Will" Employment.
Except as otherwise provided in this Agreement, Employee's employment
with Company is "at will" and the Company may terminate Employee's
employment at any time, for any reason or for no reason. Any oral or
written statements to the contrary are not binding upon the Company.
3.2. Death or Disability.
"Disability" means Employee's inability, at the time notice is given, to perform
Employee's duties under this Agreement for a period of not less than six (6)
consecutive months as the result of Employee's incapacity due to physical or
mental illness. Upon termination of Employee's employment because of Employee's
death or Disability, Employee shall receive payments as provided in the
Company's benefit and insurance plans provided or required to be provided to
Employee pursuant to this Agreement.
3.3. Voluntary Termination and Termination for Cause.
3.3.1. Voluntary Termination.
"Voluntary Termination" means any termination of employment with the
Company unless the termination (a) is for Cause (as defined below), (b)
results from a Change in Control (as defined in subsection 3.5.1), (c)
occurs within one year after a Change in Control, or (d) results from
Employee's death or Disability, or (d) occurs within three (3) months
after a Constructive Termination (as defined in subsection 3.4.1).
3.3.2. Cause.
"Cause" means (a) an act or acts of dishonesty undertaken by Employee
and intended to result in substantial gain or personal enrichment of
Employee at the expense of the Company, or (b) willful, deliberate, and
persistent failure by Employee to perform the duties and obligations of
Employee's employment which are not remedied in a reasonable period of
time after receipt of written notice from the Company.
3.3.3. Voluntary Termination.
Employee may terminate Employee's employment voluntarily giving the
Company thirty (30) days' advance notice in writing. No termination of
employment occurring within three (3) months following a Constructive
Termination shall be deemed a Voluntary Termination unless agreed to in
a writing signed by the Employee which states the value of any rights
under this Agreement surrendered by Employee and supported by separate
consideration of at least $5,000.
EXHIBIT 10.45
- 3 -
<PAGE>
3.4. Constructive and Other Termination.
3.4.1. Constructive Termination.
"Constructive Termination" means:
(a) a reduction in Employee's salary or a material reduction in
benefits not agreed to by Employee (except in connection with a
decrease to be applied because the Company's performance has
decreased and which is also applied on a comparable basis to other
officers, and excluding the substitution of substantially
equivalent compensation and benefits);
(b) a change in Employee's position as set forth in Section 1.1 over
Employee's objection, unless such change occurs within 3 months
after the end of a fiscal year in which Employee has failed to
meet the objectives established for Employee by the Compensation
Committee pursuant to Section 2.2 for that year; or
(c) a material change in Employee's responsibilities over Employee's
objection, unless such change occurs within 3 months after the end
of a fiscal year in which Employee has failed to meet the
objectives established for Employee by the Compensation Committee
pursuant to Section 2.2 for that year.
3.4.2. Other Termination.
"Other Termination" means termination of employment with the Company
for any reason other than (a) Cause, (b) Constructive Termination, (c)
Employee's death or Disability, or (d) Voluntary Termination.
3.4.3. Severance Payment.
Upon any Constructive Termination or Other Termination, the Company
shall continue to pay to Employee Employee's Base Compensation for
eighteen (18) months following the date Employee stops providing
full-time services to the Company. Base Compensation shall be
determined with reference to the Base Compensation in effect for the
month in which Employee stops providing full-time services, and shall
be paid in accordance with the Company's then-current policies for
payroll, as though Employee were still employed by the Company.
3.4.4. Acceleration and Extension of Stock Option.
Upon any Constructive Termination or Other Termination, the Option
shall become immediately exercisable in full. To the extent that the
Option is not exercised within the time following termination of
employment specified in the written option agreement, the Option shall
remain exercisable as though Employee's option had not terminated. In
addition, in lieu of exercising the Option for the consideration
specified in the option agreement, Employee may from time to time
convert the Option, in whole or in part, into a number of shares
determined by dividing (a) the aggregate fair market value of the
shares otherwise issuable upon exercise of the Option minus the
aggregate exercise price of such shares by (b) the fair market value of
one share. Fair market value shall be deemed to be the closing price of
the Company's common stock on the stock exchange on which the shares
are traded as of the last trading day before Employee exercises the
Option.
EXHIBIT 10.45
- 4 -
<PAGE>
3.4.5. Continuation of Benefits.
Upon any Constructive Termination or Other Termination, Employee shall
be entitled to receive the same employment benefits during the time
Employee is receiving payments pursuant to subsection 3.4.3 as though
Employee were still employed by the Company, except that Employee shall
not accrue any vacation pay, personal time off, or compensation under
any ERISA or ERISA-type plan after termination of employment.
3.4.6. Registration Rights.
Upon any Constructive Termination or Other Termination, Employee shall
have unlimited piggyback registration rights, two (2) demand
registration rights, and unlimited S-3 registration rights, at the
expense of the Company, in such form, on such terms, and subject to
such conditions as are customarily granted to the most well-known
venture capitalists in the portions of the San Francisco Bay Area known
as "Silicon Valley" as of the date of termination.
3.4.7. Beverage Allowance.
Upon any Constructive Termination or Other Termination, the Company
shall provide to Employee, without further charge, one case of the
Company's beverages per week, delivered within the continental United
States, as Employee may request, for the remainder of Employee's life.
Employee must renew the request annually. This right is personal and
not transferable, and the request may not be made by a guardian,
custodian, personal representative, attorney at law, attorney in fact,
or other proxy on Employee's behalf, or in circumstances where Employee
is incapable of consuming malt beverages personally.
3.5. Termination Resulting from Change of Control.
3.5.1. Change in Control.
"Change in Control" means (a) any merger or consolidation of the
Company with, or any sale of all or substantially all of the Company's
assets to, any other corporation or entity, unless as a result of such
merger, consolidation, or sale of assets the holders of the Company's
voting securities prior thereto hold at least fifty percent (50%) of
the total voting power represented by the voting securities of the
surviving or successor corporation or entity after such transaction, or
(b) the acquisition by any Person as Beneficial Owner (as such terms
are defined in the Securities Exchange Act of 1934, as amended, or the
rules and regulations thereunder, or in ss.280G of the Internal Revenue
Code of 1986, as amended, and the regulations thereunder), directly or
indirectly, of securities of the Company representing twenty percent
(20%) or more of the total voting power represented by the Company's
then outstanding voting securities, or (c) any sale of a substantial
portion (as "substantial portion" is used and interpreted in ss.280G of
the Internal Revenue Code of 1986, as amended, and the regulations
thereunder) of the Company's assets to any other corporation or entity,
or (d) the replacement of a majority of the members of the Company's
Board of Directors during any twelve month period by directors whose
appointment or election was not endorsed by a majority of the then
authorized Board members before the date of said appointment or
election.
EXHIBIT 10.45
- 5 -
<PAGE>
3.5.2. Additional Payment.
If the Company terminates Employee's employment without Cause as a
result of, or within one year after, a Change in Control, the Company
shall pay Employee, in addition to any and all other compensation and
benefits then due Employee, the sum of $250,000. The Company shall pay
said termination compensation to Employee at the same time as Employee
receives any other compensation then due Employee, or within three
business days after Employee's employment terminates, whichever is
earlier.
3.6. Benefit Rollover.
Upon termination of Employee's employment with Company, Employee shall have the
right to roll over or otherwise convert any amounts attributable to Employee in
any of Company's deferred compensation, insurance, or other benefit plans to
other such plans as may be allowed by such plans and applicable law. The Company
shall have no obligation to inform Employee of any rights or responsibilities
Employee may have in connection with converting, rolling over, or continuing
benefits under, such plans, except as may be required under applicable law.
3.7. Compliance with Internal Revenue Code ss.280G.
The Company may defer, and at the written request of Employee shall defer, the
amount of any payment pursuant to this Agreement (a "Deferred Amount") which if
and when paid will constitute an "excess parachute payment" (as defined in
ss.280G of the Internal Revenue Code of 1986, as amended) subject to material
adverse federal or state income tax consequences to the person initiating the
deferral, after taking into account the known facts and circumstances at the
time of the payment ("EPP"). The Company shall give Employee reasonable advance
written notice of any planned deferral, but failure to give such notice shall
not restrict the Company's ability to make the deferral. The Deferred Amount
shall be payable, without interest, in one or more installments at such time or
times that no portion of the installment will constitute EPP. The Company shall
restructure the obligations of the Company under this Agreement in a manner
requested in writing by Employee if no portion of the restructured payments will
constitute EPP and the restructure does not materially increase any adverse
effect the Company's obligations under this Agreement may have on the current or
future net worth or net income (both determined in accordance with generally
accepted accounting principles consistently applied) or cash flow of the
Company.
4. MISCELLANEOUS
4.1. Further Matters.
Each party agrees to perform such additional acts and execute such additional
documents as are necessary or appropriate to carry out this Agreement.
4.2. Successors and Assigns.
4.2.1. Generally.
This Agreement shall bind, and inure to the benefit of, the parties
hereto and their respective successors and assigns.
EXHIBIT 10.45
- 6 -
<PAGE>
4.2.2. Company's Successors.
Any successor to the Company (whether directly or indirectly and
whether by purchase, lease, merger, consolidation, liquidation, or
otherwise to all or substantially all of the Company's business and/or
assets) shall assume this Agreement and agree expressly to perform this
Agreement in the same manner and to the same extent as the Company
would be required to perform it in the absence of a succession. For all
purposes under this Agreement, the term "Company" shall include without
limitation any successor to the Company's business and/or assets which
executes and delivers an assumption agreement or which becomes bound by
this Agreement by operation of law.
4.2.3. Employee's Successors.
This Agreement and all rights of Employee hereunder shall inure to the
benefit of, and be enforceable by, Employee's personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees, and legatees.
4.2.4. No Assignment of Benefits.
The rights of any person to payments or benefits under this Agreement
shall not be made subject to option or assignment, either by voluntary
or involuntary assignment or by operation of law, including without
limitation bankruptcy, garnishment, attachment, or other creditor's
process, and any action in violation of this subsection 4.2.4 shall be
voidable at the option of the Company.
4.3. No Third-Party Beneficiaries.
Except as expressly provided in this Agreement, nothing in this Agreement shall
(a) confer any rights or remedies on any persons other than the parties and
their respective successors and assigns, (b) relieve or discharge the obligation
of any third person to any party, or (c) give any third person any right of
subrogation or action against any party.
4.4. Notice.
Any notice, instruction, or communication required or permitted to be given
under this Agreement to any party shall be in writing (which may include
telecopier or other similar form of reproduction followed by a mailed hard copy,
but not electronic mail) and shall be deemed given when actually received or, if
earlier, five days after deposit in the United States Mail by certified or
express mail, return receipt requested, postage prepaid, addressed to the
principal office of such party or to such other address as such party may
request by written notice. Each party shall make an ordinary, good faith effort
to ensure that the person to be given notice actually receives such notice. Each
party shall ensure that the other parties to this Agreement have a current
address, fax number, and telephone number for the purpose of giving notice.
4.5. Governing Law.
The rights and obligations of the parties shall be governed by, and this
Agreement shall be construed and enforced in accordance with, the laws of the
State of California, excluding its conflict of laws rules to the extent such
rules would apply the law of another jurisdiction.
EXHIBIT 10.45
- 7 -
<PAGE>
4.6. Jurisdiction and Venue.
The parties hereto consent to the jurisdiction of all federal and state courts
in California, and agree that venue shall lie exclusively in Mendocino County,
California.
4.7. Entire Agreement.
This Agreement constitutes the entire agreement between the parties with respect
to the employment of Employee and the covenants contained in this Agreement, and
there have been, and there are now, no agreements, representations, or
warranties among the parties other than those set forth herein or herein
provided for. Employee agrees that the remedies specified in this Agreement
shall be liquidated damages for any claim by Employee that the Company has
wrongfully terminated Employee's employment with the Company. In addition,
Employee hereby waives any right Employee may have to seek involuntary
dissolution of the Company pursuant to California Corporations Code ss.1800, and
shall not join with any other shareholders of the Company to seek such relief.
4.8. Amendments, Waivers, and Consents.
This Agreement shall not be changed or modified, in whole or in part, except by
supplemental agreement signed by the parties or as otherwise provided in this
Agreement. Either party may waive compliance by any other party with any of the
covenants or conditions of this Agreement, but except as provided in this
Agreement, no waiver shall be binding unless executed in writing by the party
making the waiver. No waiver of any provision of this Agreement shall be deemed,
or shall constitute, a waiver of any other provision, whether or not similar,
nor shall any waiver constitute a continuing waiver. Any consent under this
Agreement shall be in writing and shall be effective only to the extent
specifically set forth in such writing. For the protection of all parties,
amendments, waivers, and consents that are not in writing and executed by the
party to be bound may be enforced only if they are detrimentally relied upon and
proved by clear and convincing evidence. Such evidence may not include the
alleged reliance.
4.9. Specific Performance.
The parties hereby declare that it is impossible to measure in money the damages
that will result from a failure to perform any of the obligations under this
Agreement. Therefore, each party hereto shall be entitled as a matter of right
to injunctive and other relief to enforce the provisions of this Agreement. Each
party hereto waives the claim or defense that an adequate remedy at law exists
in any action or proceeding brought to enforce the provisions.
4.10. Dispute Resolution.
4.10.1. Notice.
A party who desires money damages or equitable relief from the other
party because of a claim relating to the subject matter of this
Agreement shall give written notice to the other party of the facts
constituting the breach or default (a "Dispute Notice"). This Section
4.10 is intended to cover all aspects of the relationship between the
parties with respect to the subject matter of this Agreement, including
any claims based on tort or other theories. Any additional claims the
parties have against each other shall also be subject to this Section
4.10.
EXHIBIT 10.45
- 8 -
<PAGE>
4.10.2. Negotiation.
For fifteen (15) days following delivery of a Dispute Notice (the
"Negotiation Period") the parties shall negotiate to resolve the
dispute in good faith.
4.10.3. Mediation.
After the end of the Negotiation Period, either party may request
non-binding mediation with the assistance of a neutral mediator from a
recognized mediation service. The party requesting the mediation shall
arrange for the mediation services, subject to the approval of the
other party which the other party shall not withhold unreasonably.
Mediation shall take place in Mendocino County, California. Mediation
may be scheduled to begin any time after expiration of the Negotiation
Period, but with at least 10 days notice to all parties. The parties
shall participate in the mediation in good faith and shall devote
reasonable time and energy to the mediation so as to promptly resolve
the dispute or conclude that they cannot resolve the dispute. The
party's shall share the cost of mediation except as provided elsewhere
in this Agreement.
4.10.4. Arbitration.
If thirty (30) days after beginning mediation the parties have not
resolved the dispute, either party may submit the dispute to final and
binding arbitration pursuant to the commercial rules of the American
Arbitration Association. The arbitrator(s) shall apply the substantive
law of the State of California to the dispute, and shall have the power
to interpret such law to the extent it is unclear. At the request of
any party, the arbitrators, attorneys, parties to the arbitration,
witnesses, experts, court reporters, or other persons present at the
arbitration shall agree in writing to maintain the strict
confidentiality of the arbitration proceedings. At the election of any
party, arbitration shall be conducted by three neutral arbitrators
appointed in accordance with the commercial rules of the American
Arbitration Association if (a) the amount in controversy is greater
than $50,000 (exclusive of interest and attorney's fees), or (b) a
party sought to be enjoined disputes that he or it has engaged in, or
asserts that he or it should be able to engage in, the actions sought
to be enjoined. In all other cases, the matter shall be arbitrated by a
single neutral arbitrator. The parties surrender and waive the right to
submit any dispute to a court or jury, or to appeal to a higher court.
There shall be no arbitration of any claim that would otherwise be
barred by a statute of limitations if the claim were to be brought in a
court of law. The arbitrator shall not have the power to award
punitive, consequential, indirect, or special damages. The arbitrators
shall have the power to determine what disputes between the parties are
the proper subject of arbitration.
4.10.5. Costs and Attorney's Fees.
If the arbitrator determines that the actions of a party or its counsel
have unreasonably or unnecessarily delayed the resolution of the
matter, the arbitrator may in its discretion require such party to pay
all or part of cost of the mediation and arbitration proceedings
payable by the other party and may require such party to pay all or
part of the attorney's fees of the other party. This provision permits
an award of attorney's fees against a party regardless of which party
is the prevailing party. Otherwise, the parties shall share bear the
costs of arbitration equally.
EXHIBIT 10.45
- 9 -
<PAGE>
4.10.6. Enforcement.
The award of the arbitrator shall be enforceable according to the
applicable provisions of the California Code of Civil Procedure,
sections 1280 et seq. A party who fails to participate in a
negotiation, mediation, or arbitration instituted under this Section
4.10, or who admits to liability and the amount of damage, shall be
deemed to have defaulted. Such default may be entered and enforced the
same manner as a default in a civil lawsuit.
4.11. Headings.
The subject headings of the Articles, Sections, and subsections of this
Agreement are included for purposes of convenience only, and shall not affect
the construction or interpretation of any of its provisions.
4.12. Counterparts.
This Agreement may be executed in two or more counterparts by signing and
delivering the signature page hereto. Each such counterpart shall be an original
and together with the other counterparts shall be deemed one document.
4.13. Role of Company Counsel.
Employee acknowledges that Enterprise Law Group, Inc., counsel to the Company,
has not represented Employee in connection with any aspect of this Agreement,
and has not undertaken to perform any services on behalf of Employee. Employee
has obtained any desired legal advice from separate counsel of his own choosing
or has freely chosen not to do so.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case
of the Company by its duly authorized officer, as of the day and year first
above written.
"COMPANY" "EMPLOYEE"
Mendocino Brewing Company, Inc.,
a California corporation
By /s/ Michael Laybourn /s/ John Scahill
-------------------------------- ------------------------
Michael Laybourn, President John Scahill
EXHIBIT 10.45
- 10 -
EXHIBIT 24.1
TO
REGISTRATION STATEMENT ON FORM SB-2
---------------------------------------
CONSENT OF MOSS ADAMS LLP
<PAGE>
[LETTERHEAD OF MOSS ADAMS LLP]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use of our report dated January 26, 1996, on our audit of the
financial statements of Mendocino Brewing Company, Inc., included in the
registration statement on Form SB-2 in connection with the offering of common
stock of Mendocino Brewing Company, Inc. We also consent to the reference to our
Firm under the caption "Experts".
/s/ MOSS ADAMS LLP
Santa Rosa, California
October 30, 1996
EXHIBIT 24.1
EXHIBIT 99.1
TO
REGISTRATION STATEMENT ON FORM SB-2
FORM OF STOCK PURCHASE AGREEMENT
<PAGE>
MENDOCINO BREWING COMPANY, INC.
Stock Purchase Agreement
To: Mendocino Brewing Company, Inc.
P.O. Box 400
Hopland, CA 95449-0400
1-800-733-3871
Please issue the number of shares of Mendocino Brewing Company, Inc. Common
Stock shown below in the name(s) shown below. The signature below acknowledges
receipt and opportunity to read the Prospectus by which the shares are offered.
Signature:___________________________________________ Date:____________________
Enclosed is a check for ___________________ shares, at $8.50 per share, totaling
(100 share minimum)
$_______________
($850.00 minimum)
MAKE CHECK PAYABLE TO: Mendocino Brewing Company, Inc.
Register the shares in the following name(s) and amount:
Name_______________________________________ Number of shares _________
Name_______________________________________
I/we will hold the shares as (circle one):
Individual Community Property Joint Tenants Trust
Tenants in Common Corporation Other _____________________
For the person(s) who will be the registered stockholder(s), please provide:
Mailing Address:________________________________________________________________
City, State & Zip Code:_________________________________________________________
Telephone Numbers: Work: (____)_______________ Home (____)________________
Social Security or Taxpayer ID number(s):_______________________________________
(Please attach any special mailing instructions if the share certificates are to
be sent to other than to the address shown above.)
NO OFFER TO PURCHASE IS ACCEPTED UNTIL SIGNED BY THE COMPANY'S REPRESENTATIVE
(You will be mailed a signed and numbered copy of this agreement
to retain for your records)
Offer to purchase accepted by Mendocino Brewing Company, Inc. by its undersigned
sales representative:
_______________________________________ Dated:_______________________________
Michael Lovett, Secretary
Exhibit 99.1
