MENDOCINO BREWING CO INC, 10QSB, 1997-11-14

MENDOCINO BREWING CO INC
10QSB, 1997-11-14
MALT BEVERAGES

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended September 30, 1997

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to
---------------------- -----------------------
Commission file number: 1-13636

Mendocino Brewing Company, Inc.
(Name of small business issuer in its charter)

California 68-0318293
(State or other jurisdiction of (I.R.S. Employee Identification No.)
incorporation or organization)

13351 South Highway 101, Hopland, CA 95449
(Address of principal executive offices) (Zip code)

Issuer's telephone number: (707) 744-1015

Securities registered under Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
Common Stock, no par value The Pacific Stock Exchange

Securities registered under Section 12(g) of the Act:

Not applicable
(Title of class)

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- ------

The number of shares of the issuer's common stock outstanding as of
September 30, 1997 is 2,341,548. (Does not include 300,000 shares issued subject
to substantial restrictions as security for a forbearance. See Item 2 -
Management's Discussion and Analysis -- Financing the New Brewery - Vendor
Financing.)

<PAGE>

PART I

Item 1. Financial Statements.

MENDOCINO BREWING COMPANY, INC.
BALANCE SHEET
September 30,1997
(Unaudited)

ASSETS

Current Assets

Cash and cash equivalents $ 152,432
Accounts receivable 505,834
Inventories 429,320
Prepaid expenses and taxes 67,050
Refundable income taxes 116,500
Deferred income taxes 23,100
----------
Total Current Assets: 1,294,236
----------
Property and Equipment 11,128,642
----------

Other Assets

Deferred private placement costs 496,806
Deposits and other assets 100
Deferred income taxes 139,700
----------
Total Other Assets: 636,606
----------
Total Assets: $ 13,059,484
==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities

Line of credit $ 600,000
Accounts payable 773,972
Accrued wages and related expense 148,690
Accrued construction costs 820,454
Accrued liabilities 436,075
Refundable deposit 964,000
Notes payable 3,563,057
Current maturities of
obligation under capital lease 164,460
----------
Total Current Liabilities: 7,470,708

Obligation under capital lease, less
current maturities 1,622,592
Deferred income taxes 18,100
----------
Total Liabilities: 9,111,400

Stockholders' Equity Common stock, no par
value; 20,000,000 shares authorized;
2,341,548 shares issued and outstanding 3,869,569

Preferred stock, 2,000,000 shares authorized,
227,600 of which are designated Series A,
no par value, with aggregate liquidation
preference of $227,600; 227,600 Series A
shares issued and outstanding 227,600
Accumulated deficit (149,085)
----------
Total Stockholders' Equity 3,948,084
----------
Total Liabilities and Stockholders' Equity: $ 13,059,484
==========

The accompanying notes are an integral
part of these financial statements

-1-

<PAGE>

<TABLE>

MENDOCINO BREWING COMPANY, INC.

STATEMENTS OF OPERATIONS
(unaudited)

<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
----------- ----------- ----------- -----------
Sales $ 1,467,724 $ 1,111,044 $ 3,792,203 $ 3,022,417
Less excise taxes 79,269 47,050 198,683 118,033
----------- ----------- ----------- -----------
Net sales 1,388,455 1,063,994 3,593,520 2,904,384
----------- ----------- ----------- -----------
Cost of goods sold 899,746 543,545 2,240,583 1,413,995
----------- ----------- ----------- -----------
Gross profit 488,709 520,449 1,352,937 1,490,389
----------- ----------- ----------- -----------
Operating expenses
Retail operations 196,616 191,255 531,204 563,540
Marketing and distribution 184,171 200,846 615,035 493,666
General and administrative 216,848 151,175 605,995 490,791
----------- ----------- ----------- -----------
597,635 543,276 1,752,234 1,547,997
----------- ----------- ----------- -----------
Income (loss) from operations (108,926) (22,827) (399,297) (57,608)
----------- ----------- ----------- -----------
Other income (expense)
Interest income 1,298 210 4,404 11,029
Interest expense (44,018) - (73,639) -
Write off of deferred offering costs - - (141,006) -
Other income (expense) 7,141 (907) 12,782 (48,269)
----------- ----------- ----------- -----------
(35,579) (697) (197,459) (37,240)
----------- ----------- ----------- -----------
Loss before income taxes (144,505) (23,524) (596,756) (94,848)
----------- ----------- ----------- -----------
Benefit from income taxes (131,000) (3,086) (244,600) (23,786)
----------- ----------- ----------- -----------
Net loss $ (13,505) $ (20,438) $ (352,156) $ (71,062)
=========== =========== =========== ===========
Loss per share $(0.01) $ (0.01) $(0.15) $(0.03)
=========== =========== =========== ===========
Weighted average common shares
outstanding 2,341,548 2,322,222 2,335,106 2,322,222
=========== =========== =========== ===========

<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>

-2-

MENDOCINO BREWING COMPANY, INC.

STATEMENTS OF CASH FLOWS
(unaudited)

Three Months Ended Nine Months Ended
<CAPTION>
September 30, September 30,
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (13,505) $ (20,438) $ (352,156) $ (71,062)
Adjustments to reconcile net loss to
net cash provided (used) by operating
activities:
Depreciation and amortization 126,913 12,182 237,569 35,190
Loss on sale of assets - 346 - 346
Gain on sale of assets - (3,915) - (3,915)
Deferred income taxes (111,600) 4,000 (135,200) (17,500)
Changes in:
Accounts receivable (23,155) 237,477 (123,622) 145,973
Inventories (126,268) 20,059 (48,819) (187,219)
Prepaid expenses and taxes 618 (15,918) (8,510) (41,910)
Refundable income tax (19,400) - (109,400) -
Accounts payable (97,815) (4,846) 206,415 257,456
Accrued wages and related expense 11,191 1,746 30,422 (22,620)
Accrued profit sharing - (30,000) - (30,000)
Accrued liabilities 384,178 (11,673) 419,972 (3)
Income taxes payable - - - (34,200)
----------- ----------- ----------- -----------
Net cash provided by operating
activities: 131,157 189,020 116,671 30,536
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (264,667) (1,212,905) (1,925,872) (4,226,070)
Deposits and other assets 40 (12,203) 13,965 2,362
Proceeds from sale of fixed assets - 3,569 - 3,569
----------- ----------- ----------- -----------
Net cash used by investing activities: (264,627) (1,221,539) (1,911,907) (4,220,139)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowing (1,300) (56,900) 797,693 298,416
Principal payments on long-term debt - (31,328) - (31,327)
Proceeds from obligation under capital
lease - 750,000 - 750,000
Payments on obligation under capital
lease (38,700) - (89,890) -
Refundable deposit 464,000 - 964,000 -
Accrued construction costs 25,896 641,339 75,985 1,822,157
Proceeds from sale of common stock - - 164,271 -
Deferred stock offering costs - (49,615) 37,687 (103,549)
Deferred private placement costs (415,020) - (496,806) -
----------- ----------- ----------- -----------
Net cash provided by financing
activities: 34,876 1,253,496 1,452,940 2,735,697
----------- ----------- ----------- -----------
INCREASE (DECREASE) IN CASH (98,594) 220,977 (342,296) (1,453,906)
----------- ----------- ----------- -----------
CASH, BEGINNING OF PERIOD 251,026 21,226 494,728 1,696,109
----------- ----------- ----------- -----------
CASH, END OF PERIOD $ 152,432 $ 242,203 $ 152,432 $ 242,203
=========== =========== =========== ===========

Supplemental Cash Flow Information Includes the Following:
Cash Paid During the Period for:
Interest $ 154,441 $ 28,284 $ 402,284 $ 77,202
Income taxes $ - $ - $ - $ 52,500
=========== =========== =========== ===========
Non-cash investing and financing activities for the nine month period ending
September 30,1997, consisted of acquiring fixed assets of $19,573 through a
capital lease.
<FN>

The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>

-3-

<PAGE>

MENDOCINO BREWING COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Note 1 Basis of Presentation

The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules and
regulations. It is believed, however, that the disclosures are adequate to make
the information presented not misleading.

The financial statements, in the opinion of management, reflect all adjustments
necessary to fairly state the financial position and the results of operations.
These results are not necessarily to be considered indicative of the results for
the entire year.

Note 2 Subsequent Event

On October 24, 1997, the Company entered into an investment agreement with
United Breweries of America, Inc., a Delaware corporation ("UBA"), whereby (a)
the Company issued 1,600,000 shares of common stock to UBA at a purchase price
of $4.25 per share in exchange for $1,800,000 cash and $5,000,000 in assets in
the form of 100% of the outstanding interests of Releta Brewing Company LLC, a
limited liability company formed by UBA for the purpose of acquiring a brewery
in Saratoga Springs, New York; and (b) UBA unconditionally agreed to purchase an
additional 517,647 shares for cash at $4.25 per share ($2,200,000 in the
aggregate) on or before November 30, 1997. The brewery is approximately one year
old and was built for a total investment of $8.7 million. Commencement of
brewing operations at the Saratoga Springs brewery is contingent upon obtaining
appropriate alcoholic beverage licenses, applications for which are in process.
UBA also agreed to provide funding for the working capital requirements of
Releta in an amount not to exceed $1 million until October 24, 1999 or until
Releta's operations are profitable, whichever comes first. Professional expenses
and investment banker fees associated with the transaction (private placement
costs) were approximately $500,000, resulting in net proceeds of approximately
$3.5 million.

Note 3 Short-Term Borrowing

The Company has a $600,000 term line of credit from a bank with variable
interest at the bank's index rate plus 1.5%, maturing November 30, 1997. The
note is secured by receivables and inventory. The bank has issued a commitment
letter to convert the loan to a revolving line of credit upon full funding of
the investment agreement with UBA.

Note 4 Notes Payable

Note payable (construction loan) to bank of $2,404,313, with interest at the
bank's index rate plus 2%; secured by substantially all of the Company's assets;
note matures January 1, 1998. The bank has issued a commitment letter to convert
the loan to long-term debt upon full funding of the investment agreement with
UBA.

Note payable to contractor of $900,000, with interest at 12%; due the later of
January 31, 1997 or 30 days after completion of the brewery; secured by common
stock and a second deed of trust on the brewery and subordinated to bank debt.

- 4 -
<PAGE>

MENDOCINO BREWING COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Note payable to certain individuals of $260,044, due in monthly payments of
$2,380, including interest at 9%; matured June 1997 with a verbal extension
until October 1997, and a balloon payment; secured by real property and
subordinated to bank debt.

Note 5 Renegotiation of Obligation under Capital Lease

In June 1997 the Company renegotiated its capital lease to retroactively reduce
the amount of the lease commitment from approximately $2.1 million to $1.8
million. The excess of lease payments previously paid over the recalculated
lease payments has been credited against future payments.

Note 6 Direct Public Offering

On November 6, 1996, the Company filed a registration statement with the
Securities and Exchange Commission to sell 600,000 shares of its no par value
common stock at a proposed offering price of $8.50 per share. In August 1997,
the offering was terminated after having sold 19,326 shares for $164,271. All
stock transactions occurred prior to June 30, 1997. As of June 30, 1997, the
Company had incurred $305,277 of offering costs related to this offering. Of
that amount, $164,271 was offset against the stock sale proceeds in
Stockholders' Equity and the balance of $141,006 was expensed in the quarter
ended June 30, 1997.

- 5 -

<PAGE>

Item 2. Management's Discussion and Analysis.

The following discussion and analysis should be read in conjunction with the
Financial Statements and the Notes thereto included as Item 1 in this Report.
The discussion of results and trends does not necessarily imply that these
results and trends will continue.

Forward-Looking Information

The Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-QSB contain forward-looking
information within the meaning of the Private Securities Litigation Reform Act
of 1995. The forward-looking information involves risks and uncertainties that
are based on current expectations, estimates, and projections about the
Company's business, management's beliefs, and assumptions made by management.
Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," and variations of such words and similar expressions are intended
to identify such forward-looking information. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking information due to numerous factors, including, but not limited
to, availability of financing for operations, successful performance of internal
operations, impact of competition, changes in distributor relationships or
performance, full funding of the investment agreement with United Breweries of
America, Inc., and other risks detailed below as well as those discussed
elsewhere in this Form 10-QSB and from time to time in the Company's Securities
and Exchange Commission filings and reports. In addition, such statements could
be affected by general industry and market conditions and growth rates, and
general domestic economic conditions.

Overview

The third quarter of 1997 was highlighted by the commencement of bottling
operations at the new brewery in Ukiah. Brewing commenced in mid-second quarter.
The Ukiah brewery has given the Company the ability to offer its brews in draft
form to distributors and retail accounts for the first time. The third quarter
also saw the introduction of Black Hawk Stout(R) in 12 oz. six packs with a new,
award-winning label, for the first time. The Company now offers three brands in
12 oz. six packs.

In October 1997 the Company concluded a definitive investment agreement with
United Breweries of America, Inc. which provided for a $4 million cash
investment in the Company and the contribution to the Company of a new brewery
in Saratoga Springs, New York. See "Liquidity and Capital Resources --
Investment by United Breweries of America, Inc." Commencement of brewing
operations at the Saratoga Springs brewery is contingent upon obtaining
appropriate alcoholic beverage licenses, applications for which are in process.

Increased net sales for the nine-month period (up 23.7% over the same period in
1996) were achieved in significant part through increased marketing efforts
which were begun mid-second quarter in 1996. The limit on the Company's brewing
capacity (which was relieved by commencement of operations in Ukiah), increased
marketing expenses associated with increased productive capacity, increased
fixed cost associated with the new facility, and a one-time $141,000 write off
of public offering expenses contributed to a $352,200 loss for the nine month
period.

During October 1997, the new brewery was operating at a rate of approximately
48,000 bbl. per year, more than double the maximum capacity of the old Hopland
facility. The bottling line from the Hopland facility was moved in mid July
1997. The Company relocated seven of its eleven smaller fermenting tanks from
its Hopland facility to Ukiah for production of the

- 6 -

<PAGE>

Company's seasonal ales, which are brewed in smaller quantities than Red Tail
Ale(R) and Blue Heron(R) Pale Ale. This will permit the Company to further
expand production to a possible 60,000 bbl. per year rate, as required by
demand, while still producing its seasonal ales.

Results of Operations

Nine Months Ending September 30, 1997 Compared to Nine Months Ending September
30, 1996. The following discussion sets forth information for the nine-month
periods ending September 30, 1996 and 1997. This information has been derived
from unaudited interim financial statements of the Company contained elsewhere
herein and reflects, in Management's opinion, all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
results of operations for these periods. Results of operations for any interim
period are not necessarily indicative of results to be expected for the full
fiscal year.

<TABLE>
The following table sets forth, as a percentage of net sales, certain items
included in the Company's Statements of Operations. See Financial Statements
elsewhere in this Report, for the periods indicated:

<CAPTION>
Nine Months Ended September 30,
-----------------------------------------------
<S> <C> <C>
1997 1996
------------ ------------
Statements of Income Data:
Sales........................................... 105.53% 104.06%
Excise taxes.................................... 5.53 4.06
------ ------
Net sales....................................... 100.00 100.00
Costs of sales.................................. 62.35 48.68
------ ------
Gross profit.................................... 37.65 51.32
------ ------
Retail operating expense........................ 14.78 19.40
Marketing and distribution expense.............. 17.12 17.00
General and administrative expense.............. 16.86 16.90
------ ------
Total operating expenses........................ 48.76 53.30
------ ------
Loss from operations............................ (11.11) (1.98)
Other expense................................... (5.49) (1.28)
------ ------
Loss before income taxes........................ (16.61) (3.27)
Benefit from income taxes....................... (6.81) (0.82)
------ ------
Net loss........................................ (9.80)% (2.45)%
====== ======
</TABLE>

- 7 -
<PAGE>
<TABLE>
<CAPTION>

At September 30,
-----------------------------------------------
<S> <C> <C>
1997 1996
------------- --------------
Balance Sheet Data:
Cash and cash equivalents....................... $ 152,400 $ 242,200
Working capital (deficit)....................... (6,176,500) (3,240,300)
Property and equipment.......................... 11,128,600 8,151,000
Deposits and other assets....................... 100 158,000
Total assets.................................... 13,059,500 9,452,800
Long-term debt.................................. 1,622,600 718,700
Total liabilities............................... 9,111,400 5,099,700
Shareholder's equity............................ 3,948,100 4,353,100
</TABLE>

Net Sales. Net sales for the first nine months of 1997 were $3,593,520 compared
to $2,904,384 for the first nine months of 1996, and increase of 23.7%.
Management attributes the growth in sales to the implementation of new marketing
strategies, including new point of sale materials and additional field sales
representatives, and the commencement of operations at the new Ukiah facility,
beginning in the second quarter of 1996. Wholesale beer shipments increased by
65.9% in the first nine months of 1997 compared to the same period in 1996.
Increases attributable to additional unit sales were offset by a wholesale price
reduction implemented in September 1996. Management attributes approximately 60%
of the sales increase to increased sales to existing distributors and geographic
expansion begun in the second half of 1996 and the remaining 40% to sales of
draft beer from the new brewery, which began for the first time in May 1997.
Retail sales at the Hopland Brewery brewpub and merchandise store were up 5.1%
for the first nine months of 1997 compared to 1996. Management attributes the
increase to merchandise sales resulting from tourist traffic generated by the
Company's marketing efforts.

Cost of goods sold. Cost of goods sold as a percentage of net sales increased
13.7 percentage points from the first nine months of 1996 to 62.4% in the same
period in 1997. Management attributes the increase to higher fixed costs
associated with the new Ukiah brewing facility.

Gross profit. Gross profit decreased 9.2% from the first nine months of 1996 to
$1,353,000 in the same period in 1997. As a percentage of net sales, gross
profit decreased 13.7 percentage points from the first nine months of 1996 to
37.7% in the same period in 1997. The decrease in gross profit as percentage of
net sales is attributable to the increase in cost of goods sold and a wholesale
price reduction implemented in September 1996.

Operating expenses. Operating expenses were $1,752,200, representing an increase
of 13.2% from the first nine months of 1996. Operating expenses consist of
retail operating expense, marketing and distribution, and general and
administrative expense. Retail operating expenses were $531,200, representing a
decrease of $32,300, or 5.7%, from the first nine months of 1996. The decrease
reflects a decrease in supply and repairs costs of $15,000, a decrease in labor
costs of $11,300, and a decrease in net other expenses of $6,000.

Marketing and distribution expenses were $615,000, representing an increase of
$121,400, or 24.6%, from the first nine months of 1996. As a percentage of net
sales, marketing and distribution expenses were essentially unchanged.
Promotional/advertising costs (including point of sales and packaging/label
development costs) increased by $90,400, marketing and sales labor increased by
$58,200, travel and lodging expenses (incurred in supporting new geographic
markets) increased by $26,900, the reserve for bad debts decreased by $31,100,
the Company established a $30,000 reserve in connection with a dispute with a
distributor, net other distribution expenses decreased by $66,000, and net
miscellaneous expenses increased by $13,000.

- 8 -
<PAGE>

General and administrative expense was $606,000, representing an increase of
$115,200, or 23.5%, from the first nine months of 1996. As a percentage of net
sales, general and administrative expense was essentially unchanged. Taxes and
insurance costs associated with the new Ukiah brewery increased by $68,400,
professional fees increased by $24,700, costs associated with being a public
company increased by $11,700, and net miscellaneous expenses increased by
$10,400.

Other income (expense). Other expense was $197,500, representing an increase of
$160,200 in expense in the first nine months 1997 compared to the same period
for 1996. This was primarily as a result of writing off $141,000 in costs of the
direct public offering (net of proceeds raised) and additional net interest
expense of $73,600, offset by the non-recurrence of a $38,300 write off of costs
associated with a proposed alliance in 1996 and $16,100 in net additional
miscellaneous income.

Net loss. Increased fixed cost as the Company began production at the new
brewery in mid-quarter, increased marketing and distribution expense as the
Company continued to implement the marketing program began mid-quarter a year
ago, and the net effect of certain one time occurrences, offset by a tax benefit
of $244,600, produced a net loss in the nine months ended September 30, 1997
which was $281,100 higher than in the comparable 1996 nine month period.

Segment Information

Mendocino Brewing's business presently consists of two segments. The first is
brewing for wholesale to distributors and other retailers. This segment
accounted for 78.9% of the Company's first nine months 1997 sales. The second
segment consists of brewing beer for sale along with food and merchandise at the
Company's brewpub and retail merchandise store, the Hopland Brewery. This
segment accounted for 21.1% of the Company's sales for the first nine months of
1997.

Mendocino Brewing began producing draft beer at its new brewery in Ukiah in May
1997. The initial annual capacity of the new brewery is 60,000 bbl. The bottling
line from the Hopland facility was moved to Ukiah in mid July 1997 and seven of
the eleven 70 - 120 bbl. fermenting tanks were moved to Ukiah in mid August. As
the Company does not intend to expand its brewpub operations, Management expects
that retail sales, as a percentage of total sales, will decrease proportionally
to the expected increase in the Company's wholesale sales.

Seasonality

Beer consumption nationwide has historically increased by approximately 20%
during the summer months. It is not clear to what extent seasonality will affect
the Company as it expands its capacity and its geographic markets.

Financing the New Brewery.

New Brewery Cost. Although the Company has commenced brewing operations at the
Ukiah facility, construction is not yet completed. The Company has yet

- 9 -
<PAGE>

to complete the build-out of its administrative space and the exterior
landscaping.

The presently estimated cost of the new brewery at its initial annual capacity
of 60,000 bbl. is $12.2 million. This includes $0.8 million for the land, $7.3
million for improvements to the real estate, $3.4 million for equipment, and
$0.7 million for financing costs. Of this amount, approximately $10.9 million
has been paid or provided for from cash raised in the Company's initial direct
public offering, the proceeds of debt described below, cash provided by the
investment agreement with United Breweries of America, Inc., and cash from
operations. Of the remaining balance of approximately $1.3 million,
approximately $0.3 million is expected to be funded through the investment
agreement with United Breweries of America, Inc. See "Investment by United
Breweries of America, Inc." below. The $1 million balance will be funded from
operations or other sources or will be deferred. The Ukiah brewery is presently
operating under a temporary certificate of occupancy from the City of Ukiah.
Completion of construction is a condition to the issuance of a final certificate
of occupancy. Failure to complete construction and obtain a final certificate of
occupancy could have a material adverse effect on the Company's business,
financial condition, and results of operations.

Construction Financing. Mendocino Brewing has obtained a $2.7 million
construction loan secured by a first priority deed of trust on the Ukiah land
and improvements. The loan is fully funded. The construction loan bears interest
at the lender's prime plus 2% (initially 10.25%), payable monthly, and matures
on January 1, 1998.

In October 1997 the bank issued a new written commitment to convert the
construction loan to a 15 year term loan upon full funding of the investment
agreement with UBA. The commitment provides that upon conversion, the loan will
bear interest at 1.5% over prime. The minimum annual interest rate is to be
7.5%. The loan is to be amortized over 25 years with a balloon payment upon
maturity in 15 years. The lender's commitment letter states that the lender will
convert the unpaid principal at maturity to a fully amortized 10-year loan
subject to terms and conditions to be agreed upon at that time. [The commitment
letter does not legally obligate the bank to convert the construction loan to
permanent financing. Failure to find a lender to refinance the construction loan
could have a material adverse impact on the Company's business, financial
condition, and results of operations.]

Equipment Lease. FINOVA Capital Corporation has leased new brewing equipment
with a total cost of approximately $1.78 million to Mendocino Brewing for a term
of 7 years with monthly rental payments of approximately $27,100 each. At
expiration of the initial term of the lease, the Company may purchase the
equipment at its then current fair market value but not less than 25% nor more
than 30% of the original cost of the equipment, or at the Company's option, may
extend the term of the lease for an additional year at approximately $39,000 per
month with an option to purchase the equipment at the end of the year at then
current fair market value. The lease is not pre-payable.

Seller Financing of Ukiah Real Estate. The seller of the Ukiah land has a note,
secured by a third priority deed of trust on the land, with a remaining
principal balance as of September 30, 1997 of approximately $258,700 at 9%
annual interest payable in monthly installments of principal and interest of
$2,380 with the balance due at maturity in October 1997 per a verbal agreement
with the spokesman for the lending group. The Company expects to repay the loan
with the proceeds of the investment agreement with UBA.

WestAmerica Loan. WestAmerica Bank of Santa Rosa, California has loaned
Mendocino Brewing $600,000 secured by Mendocino Brewing's accounts receivable
and inventory. The loan is fully funded and bears interest at the bank's index
rate plus 1.5% payable monthly and matures on November 30, 1997. In October
1997, WestAmerica Bank provided the Company with commitment letter to convert
the $600,000 term loan to a revolving line of credit with an advance

- 10 -

<PAGE>

rate of 80% of qualified accounts receivable and 25% of inventory upon full
funding of the investment agreement with United Breweries of America, Inc. The
commitment letter does not legally obligate the bank to convert the loan. To the
extent that the loan is not extended or refinanced, the Company will be required
to repay the loan. Failure to find a lender to refinance the loan could have a
material adverse effect on the Company's business, financial condition, and
results of operations.

Vendor Financing. The general contractor for the new brewery, BDM Construction
Co., Inc. ("BDM"), agreed to defer up to $900,000 in fees otherwise owed or to
become payable on December 31, 1996, subject to performance by BDM of its
obligations under the construction contract, until January 31, 1997 with
interest at 12% per annum. As of November 12, 1997, approximately $0.9 million
was due to BDM. No written modifications have been made to the deferral
arrangement to address the current circumstances. The deferral arrangement is
secured by a second priority deed of trust on the Ukiah land and improvements,
and by 300,000 shares of Mendocino Brewing's Common Stock. In the event of
default, BDM is required to proceed against the Common Stock before initiating
any proceeding against the real estate. The Common Stock collateral was issued
to BDM by the Company pursuant to Section 4(2) of the Securities Act of 1933
subject to the restrictions (a) that the shares shall be canceled if the amounts
owed BDM are paid in full, (b) that if the full amount owed BDM is not paid, the
shares must be sold in a commercially reasonable manner as specified in the
California Commercial Code, and (c) that any shares not needed to be sold to
satisfy the obligation to BDM shall be canceled. Under California law, BDM may
not retain the shares in satisfaction of the obligation without the written
consent of the Company given after an event of default. BDM has the right to
require the Company to register the shares issued for its account for sale to
the public. As of November 11, 1997, BDM has not taken any action to enforce the
Company's obligations to it. The Company presently anticipates that payment of
its obligation to BDM will be funded with the proceeds of the investment
agreement with United Breweries of America, Inc. See "Investment by United
Breweries of America, Inc." below. Failure to repay BDM could have a material
adverse effect on the Company's business, financial condition, and results of
operations.

Keg Management Arrangement. The Company has entered into a keg management
agreement with MicroStar Keg Management LLC. Under this arrangement, MicroStar
provides the Company with half-barrel kegs for which the Company pays a filling
fee. Distributors return the kegs to MicroStar instead of the Company. MicroStar
then supplies the Company with additional kegs. If the agreement terminates, the
Company is required to purchase a certain number of kegs from MicroStar. The
Company would probably finance the purchase through debt or lease financing, if
available.

Liquidity and Capital Resources

Generally. The expansion now underway has had and will continue to have a
material impact on Mendocino Brewing's assets, liabilities, commitments for
capital expenditures, and liquidity.

Saratoga Springs Brewery. The acquisition of the additional brewery in Saratoga
Springs, New York will place additional demands on the

- 11 -

<PAGE>

Company's assets, liabilities, commitments for capital expenditures, and
liquidity. UBA has agreed to provide funding for the working capital
requirements of the Saratoga Springs brewery in an amount not to exceed $1
million until October 24, 1999 or until the brewery's operations are profitable,
whichever comes first. Commencement of brewing operations at the Saratoga
Springs brewery is contingent upon obtaining appropriate alcholic beverage
licenses, applications for which are in process.

The Company's ratio of current assets to current liabilities on September 30,
1997 was 0.17 to 1.0 and its ratio of assets to liabilities was 1.43 to 1.0.

New Brewery. See "-- Financing the New Brewery" above.

Impact of Expansion on Cash Flow. Mendocino Brewing must make timely payment of
its debt and lease commitment to continue in operation. Increased capacity will
also place additional demands on the Company's working capital to pay the cost
of additional sales and marketing activities and staff, production personnel,
and administrative staff and to fund increased purchases of supplies. There will
be a lag between the time the Company must incur some or all of these costs and
the time the Company realizes revenue from increased sales. Working capital for
day to day business operations had historically been provided primarily through
operations. Beginning approximately with the second quarter of 1997, proceeds
from operations have not been able to provide sufficient working capital for day
to day operations as the Company expands. The investment agreement with UBA is
expected to provide approximately $700,000 in working capital. In addition, UBA
has agreed to provide funding for the working capital requirements of the
Saratoga Springs brewery in an amount not to exceed $1 million until October 24,
1999 or until the brewery's operations are profitable, whichever comes first.

Investment by United Breweries of America, Inc. On October 24, 1997, the Company
entered into an investment agreement with United Breweries of America, Inc., a
Delaware corporation ("UBA"), whereby (a) the Company issued 1,600,000 shares of
common stock to UBA at a purchase price of $4.25 per share in exchange for
$1,800,000 cash and $5,000,000 in assets in the form of 100% of the outstanding
interests of Releta Brewing Company LLC, a limited liability company formed by
UBA for the purpose of acquiring the brewery in Saratoga Springs, New York; and
(b) UBA unconditionally agreed to purchase an additional 517,647 shares for cash
at $4.25 per share ($2,200,000 in the aggregate) on or before November 30, 1997.
The brewery is approximately one year old and was built with a total investment
of $8.7 million. Professional expenses and investment banker fees associated
with the transaction were approximately $500,000, resulting in net proceeds of
approximately $3.5 million. UBA also agreed to provide funding for the working
capital requirements of Releta in an amount not to exceed $1 million until
October 24, 1999 or until Releta's operations are profitable, whichever comes
first.

PART II

Item 6. Exhibits and Reports on Form 8-K.

Exhibit
Number Description of Document
- ------- -------------------------------
3.1 (A) Articles of Incorporation, as amended, of the Company

3.2 (B) Bylaws of the Company

4.1 Articles 5 and 6 of the Articles of Incorporation, as amended, of
the Company (Reference is made to Exhibit 3.1.)

4.2 Article 10 of the Restated Articles of Incorporation, as amended,
of the Company (Reference is made to Exhibit 3.2.)

- 12 -
<PAGE>
Exhibit
Number Description of Document
- ------- -------------------------------
4.3 (A) Form of Common Stock Certificate (Incorporated by reference
from the Company's Registration Statement dated June 15,
1994, as amended, previously filed with the Commission,
Registration No. 33-78390-LA.)

10.1 (A) Mendocino Brewing Company Profit Sharing Plan.

10.2 (A) 1994 Stock Option Plan (previously filed as Exhibit 99.6).

10.3 Employment Agreement with H. Michael Laybourn.

10.4 Employment Agreement with Norman Franks

10.5 (A) Wholesale Distribution Agreement between the Company and Bay
Area Distributing.

10.6 (A) Wholesale Distribution Agreement between the Company and
Golden Gate Distributing.

10.7 (A) Sales Contract between the Company and John I. Hass, Inc.

10.8 (F) Liquid Sediment Removal Services Agreement with Cold Creek
Compost, Inc.

10.9 (A) Lease Agreement between the Company and Kohn Properties.

10.10 (C) Commercial Real Estate Purchase Contract and Receipt for
Deposit (previously filed as Exhibit 19.2).

10.11 (D) Installment Note between Ukiah Redevelopment Agency and
Langley et al. (previously filed as Exhibit 19.5).

10.12 (F) Promissory Note for $76,230 in favor of Langley et al.

10.13 (G) Agreement to modify note and deed of trust dated June 6, 1995
with Langley, et al.

10.14 (G) Agreement to modify note dated June 6, 1995 with Langley, et
al.

10.15 (G) Amendment to installment note payable to Langley, et al.

10.16 Commercial Lease Between Stewart's Ice Cream Company, Inc.
and Releta Brewing Company LLC.

10.17 Agreement between United Breweries of America, Inc. and
Releta Brewing Company LLC regarding payment of certain
liens.

10.18 (F) Standard Form of Agreement Between Owner and Architect for
Designated Services between the Company and Victor Lopes.

10.19 (G) Construction agreement with BDM Construction Company, Inc.

10.20 (J) Letter Agreement Concerning Use of Proceeds with BDM
Construction Co., Inc.

10.21 (J) $900,000 Note in favor of BDM Construction Co., Inc.

10.22 (G) Consulting Agreement with Daniel R. Moldenhauer.

10.23 (C) Brewery Fixtures Construction Agreement with Enerfab, Inc.
(previously filed as Exhibit 19.3).

10.24 (K)+ Keg Management Agreement with MicroStar Keg Management LLC.

10.25 (E) Agreement to Implement Condition of Approval No. 37 of the
Site Development Permit 95-19 with the City of Ukiah,
California (previously filed as Exhibit 19.6).

10.26 (G) Manufacturing Business Expansion and Relocation Agreement
with the City of Ukiah.

10.27 (G) Manufacturing Business Expansion and Relocation Agreement
with the Ukiah Redevelopment Agency.

- 13 -
<PAGE>
10.28 (H) Business Loan Agreement with WestAmerica Bank.

10.29 (J) Letter Agreement Concerning Use of Proceeds with WestAmerica
Bank.

10.30 Commitment Letter/extention agreement from WestAmerica Bank
dated October 21, 1997.

10.31 (J) Construction Loan Agreement with the Savings Bank of
Mendocino County.

10.32 (J) Business Loan Agreement with the Savings Bank of Mendocino
County.

10.33 (J) $2,700,000 Note in favor of the Savings Bank of Mendocino
County.

10.34 (J) Assignment of Deposit Account in favor of the Savings Bank of
Mendocino County.

10.35 Change in Terms Agreement with the Savings Bank of Mendocino
County dated November 5, 1997.

10.36 (J) Commitment Letter from the Savings Bank of Mendocino County
dated September 13, 1996.

10.37 Commitment Letter from the Savings Bank of Mendocino County
dated October 15, 1997.

10.38 Letter Agreement with the Savings Bank of Mendocino County
dated October 23, 1997.

10.39 (J) Equipment Lease with FINOVA Capital Corporation.

10.40 (J) Tri-Election Rider to Equipment Lease with FINOVA Capital
Corporation.

10.41 (J) Master Lease Schedule with FINOVA Capital Corporation.

10.42 (J) Advance and Subordination Agreement among the Company, FINOVA
Capital Corporation, and Enerfab, Inc.

10.43 (L) Investment Agreement with United Breweries of America, Inc.

10.44 (L) Shareholders' Agreement Among the Company, United Breweries
of America, Inc., Michael Laybourn, Norman Franks, Michael
Lovett, John Scahill, and Don Barkley

10.45 (L) Registration Rights Agreement Among the Company, United
Breweries of America, Inc., Michael Laybourn, Norman Franks,
Michael Lovett, John Scahill, and Don Barkley

27 Financial Data Schedule

- --------------------------------------
(A) Incorporated by reference from the Company's Registration
Statement dated June 15, 1994, as amended, previously filed
with the Commission, Registration No. 33-78390-LA.

(B) Incorporated by referenced from the Company's Report on
Form 10-KSB for the annual period ended December 31, 1994
previously filed with the Commission.

(C) Incorporated by referenced from the Company's Report on
Form 10-QSB for the quarter period ended March 31, 1995
previously filed with the Commission.

(D) Incorporated by referenced from the Company's Report on
Form 10-QSB for the quarter period ended June 30, 1995
previously filed with the Commission.

(E) Incorporated by referenced from the Company's Report on
Form 10-QSB for the quarter period ended September 30, 1995
previously filed with the Commission.

- 14 -
<PAGE>

(F) Incorporated by referenced from the Company's Report on
Form 10-KSB for the annual period ended December 31, 1995
previously filed with the Commission.

(G) Incorporated by referenced from the Company's Report on
Form 10-QSB for the quarter period ended June 30, 1996
previously filed with the Commission.

(H) Incorporated by referenced from the Company's Report on
Form 10-QSB/A No. 1 for the quarter period ended June 30,
1996 previously filed with the Commission.

(J) Incorporated by reference from the Company's Registration
Statement dated February 6, 1997, as amended, previously
filed with the Commission, Registration No. 333-15673.

(K) Incorporated by referenced from the Company's Report on
Form 10-KSB for the annual period ended December 31, 1996
previously filed with the Commission.

(L) Incorporated by reference from the Schedule 13D filed with
the Commission on November 3, 1997 by United Breweries of
America, Inc. and Vijay Mallya.

+ Portions of this Exhibit were omitted pursuant to an
application for an order declaring confidential treatment
filed with the Securities and Exchange Commission.

No reports on Form 8-K were filed during the quarter for which this report is
filed.

SIGNATURE

In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.

Mendocino Brewing Company, Inc.
(Registrant)

Date November 13, 1997 /s/ H. Michael Laybourn
---------------------------- -----------------------------------------
H. Michael Laybourn, President

Date November 13, 1997 /s/ Norman H. Franks
---------------------------- -----------------------------------------
Norman H. Franks, Chief Financial Officer

- 15 -

EXECUTIVE EMPLOYMENT AGREEMENT

EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") made as of
this 24th day of October, 1997, between Mendocino Brewing Company, Inc., a
California corporation, having its principal place of business at 13351 South
Highway 101, Hopland, California ("Company"), and H. Michael Laybourn
("Executive").

W I T N E S S E T H:

WHEREAS, Executive possesses a detailed knowledge of the
business and affairs of Company, its policies, methods, personnel and customers;
and

WHEREAS, Company recognizes Executive's importance to the
growth and success of Company and desires to assure Executive's continued
contribution and to compensate him in a manner which it has determined will
reinforce and encourage his continued attention and dedication; and

WHEREAS, Executive is desirous of committing himself to serve
Company on the terms herein provided;

NOW, THEREFORE, in consideration of the foregoing, and of the
respective covenants and agreements of the parties herein contained, the parties
hereto hereby agree as follows:

1. Employment.

(a) Company hereby employs Executive to serve as President of
Company, for the period commencing on the date of this Agreement and ending
fourteen (14) months from the date of this Agreement, unless such employment is
sooner terminated as provided in this Agreement. Company, in its discretion, may
extend the term of this Agreement until as late as December 31, 1999 on the same
terms and conditions. In the event Executive continues in the full-time
employment of Company after the end of such term, such continued employment
shall be on a month-to-month basis terminable at any time, with or without
cause, by Executive or Company upon 30 days' notice.

(b) Executive hereby accepts employment under this Agreement
and agrees to devote all his best efforts and his full time and attention
exclusively to the business and affairs of Company, all pursuant to the general
direction of the Board of Directors of Company (the "Board") and the Chairman of
the Board and Chief Executive Officer (the "Chairman and CEO"). During the term
of this Agreement, Executive shall perform such duties and responsibilities as
may be assigned to him by the Chairman and CEO. Executive shall report directly
to the Chairman and CEO. Company shall retain full direction and control of the
manner, means and methods by which Executive performs the services for which he
is employed hereunder and of

<PAGE>

the place or places at which such services shall be rendered. Notwithstanding
the foregoing, Executive's principal office shall be in the Hopland/Ukiah,
California area.

(c) Executive shall observe and comply with Company's rules
and regulations as provided in any employee policy manual of the Company.

(d) Executive acknowledges that this Agreement supersedes any
previous employment agreements he may have had with the Company and such
previous agreements are deemed terminated as of the date of this Agreement.

2. Compensation.

(e) Base Salary. Executive shall be paid, for his employment
hereunder, a base salary at the annual rate of One Hundred Twenty Thousand
Dollars ($120,000) during the term of this Agreement, payable in accordance with
the Company's standard payroll practices as in effect from time to time,
prorated in any partial year of employment. Executive shall be eligible for a
salary increase after the first year of the term of this Agreement, such
increase, if any, to be determined by the Company in its sole discretion.

(f) No Obligation to Use Services. Even though the Company is
obligated to pay Executive the compensation specified in Section 2(a), the
Company shall not be obligated to use the Executive's services during the term
of this Agreement, and shall not be liable to the Executive in any way for
failure to do so in whole or in part. So long as the Company continues to pay
Executive the compensation set forth in Section 2(a) and provide the benefits
set forth in Section 2(g), Executive shall remain subject to the noncompetition
requirements of Section 5. If, at any point during the remaining term of this
Agreement, Executive breaches the noncompetition requirements of Section 5(a),
Company may immediately terminate making such payments and providing such
benefits with no further obligation to Executive.

(g) Reimbursements. Executive shall be entitled to
reimbursement for reasonable travel and other business expenses incurred in the
performance of his duties under this Agreement in accordance with the general
policy of Company, as it may change from time to time, provided that Executive
provides an itemized account together with supporting receipts for such
expenditures in accordance with the requirements set forth in the Internal
Revenue Code of 1986, as amended, and related regulations, subject to the right
of Company at any time to place reasonable limitations on such expenses
thereafter to be incurred or reimbursed.

(h) Withholding. Company shall be entitled to withhold from
any compensation paid or payable hereunder such amounts on account of payroll
taxes, income taxes and other similar matters as are required to be withheld by
applicable law.

2
<PAGE>

take all acts reasonably requested by Company to secure and enjoy the benefits
of such insurance policy. The Company shall not terminate any policy of life,
disability, health or other insurance on Executive (other than group insurance)
without first offering to transfer such policy to Executive; provided, however,
that the Company shall have no further obligations under such policy.

(j) Vacation. Executive shall be entitled to a number of paid
vacation days in each calendar year in accordance with Company policy as in
effect from time to time. Such paid time off shall be taken at times which do
not interfere with the normal operation of Company's business.

(k) Benefit Plans. Subject to any limitations imposed by
applicable law, Executive shall be eligible to participate in all Company
employee benefit programs, including without limitation, medical and dental
coverage, life insurance, profit sharing, retirement, pension and tax-qualified
plans, in substantially the same manner and to substantially the same extent as
other Company employees. Nothing in this agreement shall preclude Company or any
affiliate of Company from terminating or amending any employee benefit plan or
program at any time or from time to time.

(l) Bonuses. Executive shall be entitled to periodic bonuses
in amounts and on such terms as the Company may from time to time determine in
its sole discretion.

(m) Registration Rights. Executive shall be entitled to
registration rights in accordance with the terms of the Registration Rights
Agreement dated as of the date hereof regardless of any termination of
Executive's employment. Executive hereby waives any registration rights the
Company may previously have granted him.

(n) Benefits Retained by Company. All rights, assets,
opportunities, and other benefits accruing as a result of Executive's
performance hereunder shall be deemed the property of Company, including without
limitation, accounts, leads, reciprocal actions promised by third parties, and
gratuities from vendors, prospective vendors, business associates, and
prospective business associates.

3. Executive's Business Activities.

(o) Executive shall devote his entire professional time,
attention and energy exclusively to the performance of his duties and
responsibilities for Company and its affiliates. Executive shall not, directly
or indirectly, (i) substantially be engaged in or concerned with any other
commercial duties or pursuits, (ii) render services to any third party for
compensation or other benefit, or (iii) engage in any other business activity;
provided, however, that nothing in this Agreement restricts Executive from
continuing his existing involvement with trade and community organizations,
becoming involved with similar trade and community organizations, or assuming
greater leadership responsibilities within such organizations so long as such
activities do not materially interfere with the performance of Executive's
duties hereunder.

(p) Executive agrees that during the term of his employment
under this

<PAGE>

Agreement, he will engage in no business or other activities, directly or
indirectly, which are or may be competitive with or which might place him in a
competing position to that of Company without obtaining the prior written
consent of Company. Nothing in this Agreement restricts Executive from engaging
in reasonable consumer education (such as teaching the art of brewing) and trade
association or professional activities, provided such activities do not
materially interfere with the performance of Executive's duties hereunder. The
Company shall be entitled to any honoraria, stipend or other income Executive
may receive from such activities provided that the Company pays all of
Executive's reasonable expenses in connection with such activities.

4. Termination of Employment by Company

(q) For Cause. Notwithstanding anything herein to the
contrary, Company may terminate this Agreement and Executive's employment
hereunder at any time, with or without notice, for cause. Termination of this
Agreement and Executive's employment hereunder shall be deemed to be "for cause"
in the event that Executive (i) violates any provision of this Agreement, (ii)
demonstrates bad faith with intent to harm or indifference toward potential harm
to the Company, willful misconduct or negligence in the performance of his
obligations hereunder, (iii) violates any laws or regulations, including,
without limitation, any rules or regulations of the Bureau of Alcohol, Tobacco
and Firearms or any state or local beverage control authority or agency other
than immaterial violations which are not likely to adversely affect the Company,
(iv) engages in actions constituting misconduct, dishonesty or neglect in the
performance of his duties and responsibilities, a refusal to follow directions
from the Board or the Chairman, or a dereliction of his duties or
responsibilities hereunder, or (v) engages in conduct that, when viewed
objectively, is likely to materially adversely affect Company's reputation,
including, without limitation, dishonesty, illegal use of drugs or abuse of
drugs or alcohol. Upon said termination, Company shall be under no obligation to
Executive, except to pay his accrued and unpaid base salary and benefits through
the date of termination and vacation pay to the date of said termination.

(r) Without Cause. Notwithstanding anything herein to the
contrary, Company may terminate this Agreement and Executive's employment
hereunder at any time, with or without notice, without cause. Upon any such
termination without cause, Executive shall be paid the remaining amount owed
under this Agreement on the ordinary payroll schedule to ensure compliance with
the requirements of Section 5(a). If, at any point during the remaining term of
this Agreement, Executive breaches the non-competition requirements of Section
5(a), among its other remedies Company may immediately terminate making such
payments with no further obligation to Executive.

<PAGE>

Section 4(b) above. For example, if Executive's employment was terminated
without following the Grievance Process and without cause ten (10) months after
the date of this Agreement, Executive would receive payments pursuant to Section
4(b) for the four months remaining under the term of this Agreement and after
the term of this Agreement has expired, unless the Covenant Period is extended
as provided in Section 5(b), Executive would be entitled to two (2) months of
base salary as provided in this subsection (c). For purposes of this subsection
(c), the "Grievance Process" shall mean the Company (i) advises Executive in
writing of the nature of the Company's dissatisfaction with Executive's
performance and the consequences thereof, (ii) meets with the Executive to
discuss such matters, (iii) prepares a written summary of the meeting with
specific actions Executive is to take to remedy the Company's dissatisfaction
(the "Specific Actions"), and (iv) terminates Executive's employment or takes
other disciplinary action if Executive fails to take the Specific Actions within
the time specified and to the Company's satisfaction. Nothing in this subsection
(c) relating to the Grievance Process or the Specific Actions shall in any way
limit the ability of the Company to terminate Executive's employment hereunder,
with or without notice, without cause as set forth in Section 4(b) above.

5. Non-Competition.

(t) Requirements. During the Covenant Period, as defined
below, Executive shall not:

(i) For material compensation, directly or indirectly
engage in the Craft Brewing Business, as defined below, or any part thereof, in
the Covenant Area, as defined below, whether as a director, officer, employee,
consultant, adviser, independent contractor or otherwise; or

(ii) Hold a legal or beneficial interest in any person
other than Company which is engaged in the Craft Brewing Business or any part
thereof in the Covenant Area, whether such interest is as an owner, investor,
partner, creditor (other than as a trade creditor in the ordinary course of
business), joint venturer or otherwise; provided, however, that nothing in the
foregoing shall prevent the Employee from owning not more than five percent of
the outstanding capital stock or other equity interests in any person with
shares or other equity interests registered pursuant to Section 12(b) or 12(g)
of the Securities Exchange Act of 1934, as amended; or

(iii) Solicit, divert or attempt to divert from Company,
any subsidiary, partner or parent of Company or any person deriving title to the
goodwill of any of the foregoing (an "Affiliate") any business in the Covenant
Area, or any customer in the Covenant Area, of any part of the Craft Brewing
Business then conducted by Company or any Affiliate.

(u) Definitions. For purposes of this Agreement, "Covenant
Period" shall mean the term of Executive's employment hereunder; provided,
however, that this Covenant Period will be extended to December 31, 1999 if
either (i) the Company at its election extends this Agreement and pays Executive
his base salary through such date, or (ii) Executive during the term hereof
sells a majority of his Company shares. For purposes of this Agreement,
"Covenant Area" shall mean the California counties listed on Schedule 5(b)
hereto, together with any other

5
<PAGE>

county or portion of California or any other state or country in which Company,
its predecessors and subsidiaries have done business in the past three (3)
years. For purposes of this Agreement, "Craft Brewing Business" shall mean the
development, brewing, marketing or distribution of premium quality specialty
beers, ciders or other brewed alcoholic beverages. Categories of Craft Brewing
include, but are not limited to: contract brews, regional craft brews,
microbrews, large brewer craft-style brews, and brewpub brews.

6. Termination of Employment by Executive. After six months from the
date hereof, Executive may terminate Executive's employment hereunder, with or
without notice. Upon any such termination, Executive shall be paid the remaining
amount owed under this Agreement on the ordinary payroll schedule to ensure
compliance with the requirements of Section 5(a). If, at any point during the
remaining term of this Agreement, Executive breaches the noncompetition
requirements of Section 5(a), among its other remedies Company may immediately
terminate making such payments with no further obligation to Executive.

7. Beer Allowance. Upon Executive's termination other than for cause,
Executive will be entitled to a post-termination beer allowance of one case per
week for five years from the date of termination.

8. Disability. In the event Executive shall become unable to perform
his duties in substantially the manner, and to the extent required hereunder,
due to physical or mental illness or disability, from any cause, and such
failure to perform said duties shall continue for the period of time required
for Executive to be entitled to benefits for total disability available under
any long term disability plan that the Company provides to its employees and all
applicable federal and state disability benefit programs, then Company may give
Executive notice of termination of this Agreement. The termination of this
Agreement will become effective upon receipt by Executive of the notice of
termination. Executive's salary payable hereunder shall be paid up through the
date on which the termination of this Agreement pursuant to this Section 8
becomes effective.

9. Death of Executive. In the event of the death of Executive during
the period of his employment hereunder, Executive's salary payable hereunder
shall be paid up through the end of the month in which the date of death occurs,
and thereafter Company's obligations hereunder shall cease and this Agreement
shall terminate.

10. Assignment and Transfer.

(v) Executive's rights and obligations under this Agreement
shall not be transferable by assignment or otherwise, and any purported
assignment, transfer, or delegation thereof shall be void.

(w) This Agreement shall inure to the benefit of, and be
enforceable by, any purchaser of substantially all of Company's assets, any
corporate successor to Company or any assignee thereof.

11. Obligations Surviving Expiration or Termination. Executive's
obligations under

6
<PAGE>

Section 5, Section 13, Section 14, Section 15 and Section
16(k) of this Agreement shall survive expiration or termination of this
Agreement and termination of employment hereunder for any reason to the extent
therein provided. All such obligations shall be binding upon Executive's heirs
and personal representatives and shall inure to the benefit of Company's
successors and assigns.

12. No Inconsistent Obligations. Executive represents and warrants that
there exist no obligations, legal or otherwise, inconsistent with the terms of
this Agreement or with his undertaking employment with Company. Executive will
not disclose to Company, or use, or induce Company to use, any proprietary
information or trade secrets of others.

13. Obligations of or to Other Entities. Executive represents and
warrants that there exist no obligations or liabilities of or claims against,
and that Executive has no obligation of any kind to, any corporation,
partnership or other business entity, of which Executive is or was a principal
shareholder, partner or principal owner, other than those that have been
disclosed in writing to Company.

14. Non-Solicitation. For a period of one year from and after the
termination of his employment hereunder for any reason, Executive shall not,
without the prior written consent of Company, directly or indirectly employ,
solicit for employment, or advise or recommend to any other person that such
other person employ or solicit for employment, any full-time employee of the
Company or any of its affiliates during the period of such employment. Neither
shall Executive, during the same period, induce or attempt to induce any
officer, consultant, full-time or part-time employee, agent or independent
contractor to leave the employ of the Company or any of its affiliates or to
cease to provide the services then provided to Company or any of its affiliates.
Additionally, Executive shall not employ any full-time employee of the Company
or any of its affiliates until at least three months after such employee's
voluntary, or involuntary but without cause, termination from Company or any of
its affiliates.

15. Existence of Confidential Information. The Company owns and has
developed and compiled, and will develop and compile, certain proprietary
techniques and confidential information which have great value to its business
(referred to in this Agreement collectively as "Confidential Information").
Confidential Information includes not only information disclosed by the Company
to Executive, but also information developed or learned by Executive as a direct
result of his engagement by the Company under this Agreement. Confidential
Information is to be broadly defined, and includes all information which is in
fact confidential that has or could have commercial value or other utility in
the business in which the Company is engaged or contemplates engaging, and all
information of which the unauthorized disclosure could be detrimental to the
interests of the Company, whether or not such information is identified as
Confidential Information by the Company. By example and without limitation,
Confidential Information includes any and all confidential information
concerning trade secrets, techniques, processes, formulas, marketing plans,
business plans, strategies, forecasts, unpublished financial information,
budgets, projections, customer and supplier identities, characteristics, and
agreements.
Executive shall keep the Company's Confidential Information confidential.

<PAGE>

16. Miscellaneous.

(x) Attorneys' Fees. Should either party hereto, or any heir,
personal representative, successor or assign of either party hereto, resort to
litigation or arbitration to enforce this Agreement, the party or parties
prevailing in such litigation shall be entitled, in addition to such other
relief as may be granted, to recover its or their reasonable attorneys fees and
costs in such litigation from the party or parties against whom enforcement was
sought.

(y) Governing Law. This Agreement shall be governed by and
construed according to the laws of the State of California without regard to the
principles thereof regarding conflict of laws.

(z) Entire Agreement. This Agreement contains the entire
agreement and understanding between the parties hereto and supersedes any prior
or contemporaneous written or oral agreements between them respecting the
subject matter hereof.

(aa) Amendment. This Agreement may be amended only by a
writing signed by Executive and by Company's Chairman.

(bb) Severability. If any term, provision, covenant, or
condition of this Agreement, or the application thereof to any person, place or
circumstance, shall be held to be invalid, unenforceable, or void, the remainder
of this Agreement and such term, provision, covenant, or condition as applied to
other persons, places and circumstances shall remain in full force and effect.

(cc) Construction. The headings and captions of this Agreement
are provided for convenience only and are intended to have no effect in
construing or interpreting this Agreement. The language in all parts of this
Agreement shall be in all cases construed according to its fair meaning and not
strictly for or against Company or Executive.

(dd) Rights Cumulative. The rights and remedies provided by
this Agreement are cumulative, and the exercise of any right or remedy by either
party hereto (or by its successor), whether pursuant to this Agreement, to any
other agreement, or to law, shall not preclude or waive its right to exercise
any or all other rights and remedies.

(ee) Nonwaiver. No failure or neglect of either party hereto
to any instance to exercise any right, power or privilege hereunder or under law
shall constitute a waiver of any other right, power or privilege or of the same
right, power or privilege in any other instance. All waivers by either party
hereto must be contained in a written instrument signed by the party to be
charged and, in the case of Company, by Company's Chairman.

(ff) Remedy for Breach. The parties hereto agree that, in the
event of breach or threatened breach of any covenants of Executive, the damage
or imminent damage to the value and the goodwill of Company's business are not
capable of quantification, and that therefore any remedy at law or in damages
shall be inadequate. Accordingly, the parties hereto agree that Company shall be
entitled to injunctive relief against Executive in the event of any breach or

8
<PAGE>

threatened breach of any of such provisions by Executive, in addition to any
other relief available to Company under this Agreement or under law.

(gg) Notices. Any notice, request, consent or approval
required or permitted to be given under this Agreement or pursuant to law shall
be sufficient if in writing, and if and when delivered personally, by facsimile
or sent by certified mail, with postage prepaid, to Executive's residence (as
noted in Company's records), or to Company's principal executive office, as the
case may be.

(hh) Assistance in Litigation. Executive shall, during and
after termination of employment, upon reasonable notice, furnish such
information and proper assistance to Company as may reasonably be required by
Company in connection with any litigation in which it or any of its subsidiaries
or affiliates is, or may become, a party.

(ii) Arbitration. Any controversy, claim or dispute arising
out of or relating to this Agreement or to Executive's employment with the
Company, including claims for discrimination, unpaid wages, claims based on
common law or statute, either during the existence of the employment
relationship or afterwards, between the parties hereto, their assignees, their
affiliates, their attorneys, or agents, shall be settled by arbitration.
Arbitration shall be conducted in accordance with the then prevailing labor
arbitration rules of the American Arbitration Association (the "AAA"), with the
following exceptions if in conflict: (a) one neutral arbitrator shall be
selected in accordance with the AAA rules; (b) each party to the arbitration
will pay 50% of the expenses and fees of the arbitrators; and (c) arbitration
may proceed in the absence of any party if written notice (pursuant to the
American Arbitration Association's rules and regulations) of the proceedings has
been given to such party. The location of the arbitration shall be in San
Francisco, California. The parties agree to abide by all decisions and awards
rendered in such proceedings. Such decisions and awards rendered by the
arbitrator shall be final and conclusive and may be entered in any court having
jurisdiction thereof as a basis of judgment and of the issuance of execution for
its collection. All such controversies, claims or disputes shall be settled in
this manner in lieu of any action at law or equity; provided however, that
nothing in this subsection shall be construed as precluding the Company or
Executive from bringing an action for injunctive relief or other equitable
relief. The parties shall keep confidential the existence of the claim,
controversy or disputes from third parties (other than arbitrator), and the
determination thereof, unless otherwise required by law.

(jj) Action by the Company. Whenever this Agreement refers to
a decision or action to be taken by the Company, such action shall be taken on
behalf of the Company by the Board of Directors, or by a duly authorized person.

(kk) Role of Enterprise Law Group. Executive acknowledges that
Enterprise Law Group, Inc., counsel to the Company, has not represented
Executive in connection with any aspect of this Agreement, and has not
undertaken to perform any services on behalf of Executive. Executive has
obtained any desire to legal advice from separate counsel of Executive's own
choosing or has freely chosen not to do so.

9
<PAGE>

[REST OF PAGE INTENTIONALLY LEFT BLANK]

10
<PAGE>

IN WITNESS WHEREOF, the undersigned have executed this
Agreement on the date set forth above.

EXECUTIVE

/s/ H. Michael Laybourn
- -------------------------------
H. Michael Laybourn

MENDOCINO BREWING COMPANY, INC.

By: /s/ Norman Franks
- -------------------------------
Name: Norman Franks
Title: Chief Financial Officer and Vice President

<PAGE>

SCHEDULE 5(b)

Alameda Marin San Mateo
Alpine Mariposa Santa Barbara
Amador Mendocino Santa Clara
Butte Merced Santa Cruz
Calaveras Modoc Shasta
Colusa Mono Sierra
Contra Costa Monterey Siskiyou
Del Norte Napa Solano
El Dorado Nevada Sonoma
Fresno Orange Stanislaus
Glenn Placer Sutter
Humboldt Plumas Tehama
Imperial Riverside Trinity
Inyo Sacramento Tulare
Kern San Benito Tuolumne
Kings San Bernardino Ventura
Lake San Diego Yolo
Lassen San Francisco Yuba
Los Angeles San Joaquin
Madera San Luis Obispo

EXECUTIVE EMPLOYMENT AGREEMENT

W I T N E S S E T H:

WHEREAS, Executive possesses a detailed knowledge of the
business and affairs of Company, its policies, methods, personnel and customers;
and

WHEREAS, Executive is desirous of committing himself to serve
Company on the terms herein provided;

NOW, THEREFORE, in consideration of the foregoing, and of the
respective covenants and agreements of the parties herein contained, the parties
hereto hereby agree as follows:

1. Employment.
----------

(a) Company hereby employs Executive for the period commencing
on the date of this Agreement and ending fourteen (14) months from the date of
this Agreement, unless such employment is sooner terminated as provided in this
Agreement. In the event Executive continues in the full-time employment of
Company after the end of such term, such continued employment shall be on a
month-to-month basis terminable at any time, with or without cause, by Executive
or Company upon 30 days' notice.

(b) Executive hereby accepts employment under this Agreement
and agrees to devote all his best efforts and his full time and attention
exclusively to the business and affairs of Company. During the term of this
Agreement, Executive shall report to, and shall perform such duties and
responsibilities as may be assigned to him by, the Chief Executive Officer or
such other person as the Chief Executive Officer or Chairman may designate.
Company shall retain full direction and control of the manner, means and methods
by which Executive performs the services for which he is employed hereunder and
of the place or places at which such services shall be rendered. Notwithstanding
the foregoing, Executive's principal office shall be in the Hopland/Ukiah,
California area.

<PAGE>

(c) Executive shall observe and comply with Company's rules
and regulations as provided in any employee policy manual of the Company.

(d) Executive acknowledges that this Agreement supersedes any
previous employment agreements he may have had with the Company and such
previous employment agreements are deemed terminated as of the date of this
Agreement.

2. Compensation.

(e) Base Salary. Executive shall be paid, for his employment
hereunder, a base salary at the annual rate of Seventy-Nine Thousand and Eight
Dollars ($79,008) during the term of this Agreement, payable in accordance with
the Company's standard payroll practices as in effect from time to time,
prorated in any partial year of employment. Executive shall be eligible for a
salary increase after the first year of the term of this Agreement, such
increase, if any, to be determined by the Company in its sole discretion.

(i) Insurance. Company may, at its discretion, secure at its
own expense a "key-man" life insurance policy upon the life of Executive,
payable to Company in the event of Executive's death. Executive agrees that any
such insurance policy shall be for Company's benefit only, and acknowledges that
no person claiming by or through Executive shall have any right to the proceeds
of such insurance policy. Executive agrees to execute all documents and take all
acts reasonably requested by Company to secure and enjoy the benefits of such
insurance policy. The Company shall not terminate any policy of life,
disability, health or other insurance on Executive (other than group insurance)
without first offering to transfer such policy to Executive; provided, however,
that the Company shall have no further obligations under such policy.

(j) Vacation. Executive shall be entitled to a number of paid
vacation days in each calendar year in accordance with Company policy as in
effect from time to time. Such paid

2
<PAGE>

time off shall be taken at times which do not interfere with the normal
operation of Company's business.

(l) Bonuses. Executive shall be entitled to periodic bonuses
in amounts and on such terms as the Company may from time to time determine in
its sole discretion.

3. Executive's Business Activities.

(p) Executive agrees that during the term of his employment
under this Agreement, he will engage in no business or other activities,
directly or indirectly, which are or may be competitive with or which might
place him in a competing position to that of Company without obtaining the prior
written consent of Company. Nothing in this Agreement restricts Executive from
engaging in reasonable consumer education (such as teaching the art of brewing)
and trade association or professional activities, provided such activities do
not materially interfere with the performance of Executive's duties hereunder.
The Company shall be entitled to any honoraria, stipend or other income
Executive may receive from such activities provided that the Company pays all of
Executive's reasonable expenses in connection with such activities.

3
<PAGE>

4. Termination of Employment by Company.

(r) Without Cause. Company may terminate this Agreement and
Executive's employment hereunder at any time, with or without notice, without
cause. Upon any such termination without cause, Executive shall be paid the
remaining amount owed under this Agreement in one lump sum at an 8% discount.

(s) Alternative Termination Benefit. If the Company terminates
Executive's employment at any time after eight (8) months from the date of this
Agreement without following the Grievance Process (as defined below) or, if the
Executive has taken the Specific Actions (as defined below) but still has been
terminated and not for cause (as defined in Section 4(a) above), then Company
shall pay Executive a severance benefit equal to up to six (6) months of
Executive's base salary. The amount of such payment shall be reduced by any
payments for services Executive receives from other employers during such
six-month period. In addition, no such benefit will be payable for any months
with respect to which Executive is paid pursuant to Section 4(b) above. For
example, if Executive's employment was terminated without following the
Grievance Process and without cause ten (10) months after the date of this
Agreement, Executive would receive a lump sum payment pursuant to Section 4(b)
for the four months remaining under the term of this Agreement and after the
term of this Agreement has expired, Executive would be entitled to two (2)
months of base salary as provided in this subsection (c). For purposes of this
subsection (c), the "Grievance Process" shall mean the Company (i) advises
Executive in writing of the nature of the Company's dissatisfaction with
Executive's performance and the consequences thereof, (ii) meets with the
Executive to discuss such matters, (iii) prepares a written summary of the
meeting with specific actions Executive is to take to remedy the Company's
dissatisfaction (the "Specific Actions"), and (iv) terminates Executive's
employment or takes other disciplinary action if Executive fails to take the
Specific Actions within the time specified and to the Company's satisfaction.
Nothing in this subsection (c) relating to the Grievance Process or the Specific
Actions shall in any way limit the ability of the

4
<PAGE>

Company to terminate Executive's employment hereunder, with or without notice,
without cause as set forth in Section 4(b) above.

5. Termination of Employment by Executive. After three months from the
date hereof, Executive may terminate this Agreement and Executive's employment
hereunder, with or without notice. Upon any such termination, Executive shall be
paid the remaining amount owed under this Agreement in one lump sum at an 8%
discount.

6. Beer Allowance. Upon Executive's termination other than for cause,
Executive will be entitled to a post-termination beer allowance of one case per
week for five years from the date of termination.

7. Disability. In the event Executive shall become unable to perform
his duties in substantially the manner, and to the extent required hereunder,
due to physical or mental illness or disability, from any cause, and such
failure to perform said duties shall continue for the period of time required
for Executive to be entitled to benefits for total disability available under
any long term disability plan that the Company provides to its employees and all
applicable federal and state disability benefit programs, then Company may give
Executive notice of termination of this Agreement. The termination of this
Agreement will become effective upon receipt by Executive of the notice of
termination. Executive's salary payable hereunder shall be paid up through the
date on which the termination of this Agreement pursuant to this Section 7
becomes effective.

8. Death of Executive. In the event of the death of Executive during
the period of his employment hereunder, Executive's salary payable hereunder
shall be paid up through the end of the month in which the date of death occurs,
and thereafter Company's obligations hereunder shall cease and this Agreement
shall terminate.

9. Assignment and Transfer.

(t) Executive's rights and obligations under this Agreement
shall not be transferable by assignment or otherwise, and any purported
assignment, transfer, or delegation thereof shall be void.

(u) This Agreement shall inure to the benefit of, and be
enforceable by, any purchaser of substantially all of Company's assets, any
corporate successor to Company or any assignee thereof.

10. Obligations Surviving Expiration or Termination. Executive's
obligations under Section 12, Section 13, Section 14 and Section 15(k) of this
Agreement shall survive expiration or termination of this Agreement and
termination of employment hereunder for any reason to the extent therein
provided. All such obligations shall be binding upon Executive's heirs and
personal representatives and shall inure to the benefit of Company's successors
and assigns.

11. No Inconsistent Obligations. Executive represents and warrants that
there exist no obligations, legal or otherwise, inconsistent with the terms of
this Agreement or with his

5
<PAGE>

undertaking employment with Company. Executive will not disclose to Company, or
use, or induce Company to use, any proprietary information or trade secrets of
others.

12. Obligations of or to Other Entities. Executive represents and
warrants that there exist no obligations or liabilities of or claims against,
and that Executive has no obligation of any kind to, any corporation,
partnership or other business entity, of which Executive is or was a principal
shareholder, partner or principal owner, other than those that have been
disclosed in writing to Company.

13. Non-Solicitation. For a period of one year from and after the
termination of his employment hereunder for any reason, Executive shall not,
without the prior written consent of Company, directly or indirectly employ,
solicit for employment, or advise or recommend to any other person that such
other person employ or solicit for employment, any full-time employee of the
Company or any of its affiliates during the period of such employment. Neither
shall Executive, during the same period, induce or attempt to induce any
officer, consultant, full-time or part-time employee, agent or independent
contractor to leave the employ of the Company or any of its affiliates or to
cease to provide the services then provided to Company or any of its affiliates.
Additionally, Executive shall not employ any full-time employee of the Company
or any of its affiliates until at least three months after such employee's
voluntary, or involuntary but without cause, termination from Company or any of
its affiliates.

14. Existence of Confidential Information. The Company owns and has
developed and compiled, and will develop and compile, certain proprietary
techniques and confidential information which have great value to its business
(referred to in this Agreement collectively as "Confidential Information").
Confidential Information includes not only information disclosed by the Company
to Executive, but also information developed or learned by Executive as a direct
result of his engagement by the Company under this Agreement. Confidential
Information is to be broadly defined, and includes all information which is in
fact confidential that has or could have commercial value or other utility in
the business in which the Company is engaged or contemplates engaging, and all
information of which the unauthorized disclosure could be detrimental to the
interests of the Company, whether or not such information is identified as
Confidential Information by the Company. By example and without limitation,
Confidential Information includes any and all confidential information
concerning trade secrets, techniques, processes, formulas, marketing plans,
business plans, strategies, forecasts, unpublished financial information,
budgets, projections, customer and supplier identities, characteristics, and
agreements. Executive shall keep the Company's Confidential Information
confidential.

15. Miscellaneous.

(v) Attorneys' Fees. Should either party hereto, or any heir,
personal representative, successor or assign of either party hereto, resort to
litigation or arbitration to enforce this Agreement, the party or parties
prevailing in such litigation shall be entitled, in addition to such other
relief as may be granted, to recover its or their reasonable attorneys fees and
costs in such litigation from the party or parties against whom enforcement was
sought.

6
<PAGE>

(w) Governing Law. This Agreement shall be governed by and
construed according to the laws of the State of California without regard to the
principles thereof regarding conflict of laws.

(x) Entire Agreement. This Agreement contains the entire
agreement and understanding between the parties hereto and supersedes any prior
or contemporaneous written or oral agreements between them respecting the
subject matter hereof.

(y) Amendment. This Agreement may be amended only by a writing
signed by Executive and by Company's Chairman.

(z) Severability. If any term, provision, covenant, or
condition of this Agreement, or the application thereof to any person, place or
circumstance, shall be held to be invalid, unenforceable, or void, the remainder
of this Agreement and such term, provision, covenant, or condition as applied to
other persons, places and circumstances shall remain in full force and effect.

(aa) Construction. The headings and captions of this Agreement
are provided for convenience only and are intended to have no effect in
construing or interpreting this Agreement. The language in all parts of this
Agreement shall be in all cases construed according to its fair meaning and not
strictly for or against Company or Executive.

(bb) Rights Cumulative. The rights and remedies provided by
this Agreement are cumulative, and the exercise of any right or remedy by either
party hereto (or by its successor), whether pursuant to this Agreement, to any
other agreement, or to law, shall not preclude or waive its right to exercise
any or all other rights and remedies.

(cc) Nonwaiver. No failure or neglect of either party hereto
to any instance to exercise any right, power or privilege hereunder or under law
shall constitute a waiver of any other right, power or privilege or of the same
right, power or privilege in any other instance. All waivers by either party
hereto must be contained in a written instrument signed by the party to be
charged and, in the case of Company, by Company's Chairman.

(dd) Remedy for Breach. The parties hereto agree that, in the
event of breach or threatened breach of any covenants of Executive, the damage
or imminent damage to the value and the goodwill of Company's business are not
capable of quantification, and that therefore any remedy at law or in damages
shall be inadequate. Accordingly, the parties hereto agree that Company shall be
entitled to injunctive relief against Executive in the event of any breach or
threatened breach of any of such provisions by Executive, in addition to any
other relief available to Company under this Agreement or under law.

(ee) Notices. Any notice, request, consent or approval
required or permitted to be given under this Agreement or pursuant to law shall
be sufficient if in writing, and if and when delivered personally, by facsimile
or sent by certified or registered mail, with postage prepaid, to Executive's
residence (as noted in Company's records), or to Company's principal executive
office, as the case may be.

7
<PAGE>

(ff) Assistance in Litigation. Executive shall, during and
after termination of employment, upon reasonable notice, furnish such
information and proper assistance to Company as may reasonably be required by
Company in connection with any litigation in which it or any of its subsidiaries
or affiliates is, or may become, a party.

(gg) Arbitration. Any controversy, claim or dispute arising
out of or relating to this Agreement or to Executive's employment with the
Company, including claims for discrimination, unpaid wages, claims based on
common law or statute, either during the existence of the employment
relationship or afterwards, between the parties hereto, their assignees, their
affiliates, their attorneys, or agents, shall be settled by arbitration.
Arbitration shall be conducted in accordance with the then prevailing labor
arbitration rules of the American Arbitration Association (the "AAA"), with the
following exceptions if in conflict: (a) one neutral arbitrator shall be
selected in accordance with the AAA rules; (b) each party to the arbitration
will pay 50% of the expenses and fees of the arbitrator; and (c) arbitration may
proceed in the absence of any party if written notice (pursuant to the American
Arbitration Association's rules and regulations) of the proceedings has been
given to such party. The location of the arbitration shall be in San Francisco,
California. The parties agree to abide by all decisions and awards rendered in
such proceedings. Such decisions and awards rendered by the arbitrator shall be
final and conclusive and may be entered in any court having jurisdiction thereof
as a basis of judgment and of the issuance of execution for its collection. All
such controversies, claims or disputes shall be settled in this manner in lieu
of any action at law or equity; provided however, that nothing in this
subsection shall be construed as precluding the Company or Executive from
bringing an action for injunctive relief or other equitable relief. The parties
shall keep confidential the existence of the claim, controversy or disputes from
third parties (other than arbitrator), and the determination thereof, unless
otherwise required by law.

(hh) Action by the Company. Whenever this Agreement refers to
a decision or action to be taken by the Company, such action shall be taken on
behalf of the Company by the Board of Directors, or by a duly authorized person.

(ii) Role of Enterprise Law Group. Executive acknowledges that
Enterprise Law Group, Inc., counsel to the Company, has not represented
Executive in connection with any aspect of this Agreement, and has not
undertaken to perform any services on behalf of Executive. Executive has
obtained any desire to legal advice from separate counsel of Executive's own
choosing or has freely chosen not to do so.

IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date set forth above.

EXECUTIVE

/s/ Norman Franks
- -------------------------------
Norman Franks

8
<PAGE>

MENDOCINO BREWING COMPANY, INC.

By: /s/ H. Michael Laybourn
---------------------------------------------
Name: H. Michael Laybourn
Title: Chairman and Chief Executive Officer

AGREEMENT

THIS AGREEMENT is made as of October 24, 1997, between United
Breweries of America, Inc. ("UBA") and Releta Brewing Company LLC ("Releta").

WHEREAS, Releta has entered into a lease (the "Lease") dated
October __, 1997 with Stewart's Ice Cream Company, Inc. (the `Landlord") for the
brewing facility located in Saratoga Springs, New York;

WHEREAS, as consideration for the Landlord entering into the
Lease, Releta has agreed to assume the right and obligation to release the liens
listed on Exhibit B to the Lease from the property that is the subject of the
Lease;

WHEREAS, UBA has entered into an Investment Agreement (the
"Investment Agreement") with Mendocino Brewing Company, Inc. ("Mendocino"),
dated as of October 24, 1997;

WHEREAS, as a further inducement to Mendocino entering into
the Investment Agreement, UBA desires to enter into this Agreement; and

WHEREAS, the execution and delivery of this Agreement is a
condition precedent to the closing of the transactions contemplated by the
Investment Agreement.

NOW, THEREFORE, in consideration of the foregoing and the
promises and covenants hereinafter contained, the parties hereto hereby agree as
follows:

1. UBA agrees to assume from Releta the right and obligation
to release the liens listed on Exhibit B to the Lease from the property that is
the subject of the Lease as set forth in Section 2.4 of the Lease.

2. Each of the parties to this Agreement agrees that at any
time and from time to time, upon the request of any other party, it will execute
and deliver such further acts and things as any such party may reasonably
request in order to effectuate the purposes of this Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date and year first written above.

UNITED BREWERIES OF AMERICA, INC.

By: /s/ Vijay Mallya
---------------------------------------
Name: Vijay Mallya
Title: Chairman and Chief Executive Officer

RELETA BREWING COMPANY LLC

By: /s/ Vijay Mallya
---------------------------------------
Name: Vijay Mallya
Title: Chairman and Chief Executive Officer

Exhibit 10.30

[GRAPHIC OMITTED]
WESTAMERICA BANK

SONOMA REGION CREDIT ADMINISTRATION

October 21, 1997

Michael Laybourn, President
Mendocino Brewing Company, Inc.
P.O. Box 400
Hopland, CA 95449

Dear Michael,

Westamerica Bank is pleased to commit to the restructure of the existing
non-revolving line of credit into a revolving line of credit prior to the
expiration date of November 30, 1997. This commitment is subject to the Bank's
review of the executed Investment Agreement between Mendocino Brewing Company,
Inc. and United Brewers of America, Inc. and the completion of a collateral
field audit satisfactory to Bank. The basic terms of the credit are outlined
below:

1. Type of Facility:

Revolving line of credit.

2. Maximum Principal Amount:

$600,000 or the maximum applicable Borrowing Base as may change from
time to time, as will be defined in the Credit Documentation.
Increases to the line can be considered as revenues grow and profits
return.

3. Forms of Utilization:

Cash advances, including direct deposits to your checking account.

4. Interest Rate:

Westamerica Bank index plus 1.50% floating.

Interest will accrue daily on the basis of a (365/360-day) year and
actual days elapsed.

31 D STREET . SANTA ROSA CA 95404
(707) 576-3625

<PAGE>
Michael Laybourn, President
October 21, 1997
Page 2

5. Expiration and/or Maturity Date:
-------------------------------

May 31, 1998. Prior to maturity, the December 31, 1997 Financial
statement will be reviewed by Bank. Subsequent line renewals will be
for one year.

6. Borrowing Base:
--------------

80% of eligible accounts receivable (as will be defined in the credit
documents).

25% of eligible inventory to a maximum of $200,000 (as will be defined
in the credit documents).

7. Collateral:
----------

Perfected security interest of first priority in the following
personal property: Accounts Receivable and inventory.

8. Purpose of Line of Credit:
-------------------------

Finance trading assets.

9. Fees Payable On or Before Closing:
---------------------------------

Loan Fee: .25% per annum anticipated.

10. Repayment:
---------

Interest payable (monthly) with all accrued interest and unpaid
principal to be due at maturity.

11. Loan Documentation:
------------------

In addition to the documentation that will be required in connection
with the security interest to be given to Bank in the property which
will serve as collateral for this loan, the following documentation,
in form and substance satisfactory to Bank will be required:

<PAGE>
Michael Laybourn, President
October 21, 1997
Page 3

Business Loan Agreement. Among other terms, this agreement will contain
various financial and other covenants, agreements and conditions to be
mutually agreed upon.

12. Banking Relationship:

Primary banking relationship must be maintained with Westamerica Bank.

This commitment is also subject to such additional terms, conditions and
requirements as may be provided in Bank's credit documents of otherwise required
by Bank or its counsel.

Sincerely,

/s/ Dwight Davenport
Dwight Davenport
Vice President and Manager

DD/ju

Savings Bank
OF MENDOCINO COUNTY
A Full Service Commercial Bank
<TABLE>
CHANGE IN TERMS AGREEMENT
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
$2,700,000.00 01-01-1998 962256R MJL
- ------------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan
or item.
- ------------------------------------------------------------------------------------------------------------------------------------

Borrower: Mendocino Brewing Company, a California Lender: SAVINGS BANK OF MENDOCINO COUNTY
Corporation MAIN OFFICE
P.O. Box 400 P.O. Box 3600
Hopland, CA 95449 200 N. School Street
Ukiah, CA 95482
====================================================================================================================================
</TABLE>

Principal Amount: $2,700,000.00 Date of Agreement: November 1, 1997

DESCRIPTION OF EXISTING INDEBTEDNESS. EXISTING LOAN NUMBER 8010962256R IN THE
ORIGINAL AMOUNT OF $2,700,000.00, DATED 9/25/96 WITH AN OUTSTANDING BALANCE ON
11/1/97 IN THE AMOUNT OF $2,404,313.57, WITH INTEREST PAID TO 11/1/97.

DESCRIPTION OF COLLATERAL. 1. The existing obligation continues to be secured by
a security interest in the property described in a Deed of Trust dated 9/25/96,
recorded 10/7/96 in Book 2366, Page 544 of Official Records, Mendocino County.

DESCRIPTION OF CHANGE IN TERMS. 1. Final maturity of the loan is hereby extended
to 1/1/98. 2. Interest continues to be payable monthly commencing 12/1/97 and
monthly thereafter.

CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of
the original obligation or obligations, including all agreements evidenced or
securing the obligation(s), remain unchanged and in full force and effect.
Consent by Lender to this Agreement does not waive Lender's right to strict
performance of the obligation(s) as changed, nor obligate Lender to make any
future change in terms. Nothing in this Agreement will constitute a satisfaction
of the obligation(s). It is the intention of Lender to retain as liable parties
all makers and endorsers of the original obligation(s), including accommodation
parties, unless a party is expressly released by Lender in writing. Any maker or
endorser, including accommodation makers, will not be released by virtue of this
Agreement. If any person who signed the original obligation does not sign this
Agreement below, then all persons signing below acknowledge that this Agreement
is given conditionally, based on the representation to Lender that the
non-signing party consents to the changes and provisions of this Agreement or
otherwise will not be released by it. This waiver applies not only to any
initial extension, modification or release, but also to all such subsequent
actions.

PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND
ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT.

BORROWER:

Mendocino Brewing Company, a California Corporation

By:/s/ Michael Laybourn By:/s/ Norman Franks
----------------------- -----------------------
Michael Laybourn, Norman Franks,
Chief Executive Officer Chief Executive Officer

Savings Bank
OF MENDOCINO COUNTY
================================================================================
P.O. BOX 3600 . UKIAH, CALIFORNIA 95462
TELEPHONE (707) 462-6613

Exhibit 10.3

October 15, 1997

Mr. Michael Laybourn
Mendocino Brewing Company Inc.
Post Office Box 400
Hopland, CA 95449

Dear Michael:

Following up our earlier telephone conversation, the Savings Bank of Mendocino
County is prepared to convert our $2,700,000.00 construction loan to a permanent
financing loan package on substantially the same terms and conditions specified
in the now-lapsed take-out commitment issued September 13, 1996. With the
exception of the substitution of the expiration date specified below, the only
loan terms which are modified are as follows:

1) Origination Fee--in lieu of the one-half percent origination fee
originally negotiated, you will be required to pay to the Bank a one
and one-half (1-1/2) percent origination fee. As previously expressed,
we have unexpectedly expended considerably more time and expense over
the past year for which we would like to obtain reimbursement.

2) Interest Rate--the original commitment provided for an interest rate
floor of eight and one-half (8-1/2) percent. In lieu of the foregoing,
the interest rate floor will be lowered to seven and one-half (7-1/2)
percent.

Michael, we recognize that the investment agreement reached with United
Breweries of America, Inc. substantially strengthens Mendocino Brewing Company
and understand that it is in everyone's best interest to work together to
facilitate consummation of the contemplated transaction. In spite of the
foregoing, we believe it is premature to lower the interest rate from the level
originally committed until such time as we are satisfied that our risk has been
mitigated by demonstrations of sustained profitability, stable sales growth and
confirmation of ongoing production efficiency. It is my additional understanding
that Mendocino Brewing Company is or will in the near future be negotiating
alliances that could significantly enhance the company's profitability and/or
capital structure. The relationship with Mendocino Brewery is very important to
our

<PAGE>

Bank and we want you to know that we are very willing to consider any future
requests to lower the interest rate pricing.

In addition to the conditions specified previously, our commitment is further
conditioned upon:

1) Our being satisfied that there are no outstanding payables owed to the
prime contractor, BDM Construction, or any subcontractor that provided
goods and/or services in association with your construction project.

2) Receipt of a signed copy of the investment agreement between Mendocino
Brewing and United Breweries of America. The agreement must be in form
and substance satisfactory to Bank and its council.

3) Written confirmation that Westamerica Bank has agreed to renew its loan
commitment to Mendocino Brewing and our determination that the
negotiated terms are acceptable to us.

4) Confirmation that your promissory note obligations to BDM Construction
and Cordes Langley et al have been fully satisfied.

5) Confirmation that in addition to the four million dollars in cash
contributions, United Breweries of America has contributed all of their
Sarasota Springs Brewery Inc. assets into Mendocino Brewing Company
Inc. It is my understanding that the value of these assets approximate
seven and one-half (7-1/2) million dollars.

It goes without mention that the requirement stipulated in our original
commitment letter relating to your public offering and the related deposit of
proceeds into a bank account are no longer relevant.

The take-out loan must be completely negotiated, documented and closed by
December 1, 1997 or our commitment will expire. Should any of the foregoing
require any clarification, don't hesitate contacting me at your earliest
convenience.

Sincerely,

/s/ Martin J. Lombardi
Martin J. Lombardi
Vice President

Exhibit 10.38

United Breweries of America, Inc.

October 23, 1997

Martin J. Lombardi
Vice President
Savings Bank of Mendocino County
P.O. Box 3600
Ukiah, Ca. 95449

Dear Marty,

It was very nice speaking with you yesterday. As I shared with you, we certainly
appreciate your cooperation and the support of the Savings Bank of Mendocino
with regard to United Breweries of America's proposed investment in the
Mendocino Brewing Company ("MBC").

Pursuant to your request, I am writing you this note in order to formalize our
understanding with respect to your Commitment Letter dated October 15, 1997,
which references the terms and conditions of your Commitment Letter dated
September 13, 1997, to Michael Laybourn and Norman Franks of Mendocino Brewing
Company.

1. The proposed Interest Rate for the permanent financing is one and one half
(1-1/2) percent over the Prime Rate.

2. Paragraph 5 b. Referencing collateral. You agree to omit the "as well as
inventory, chattel paper, accounts, equipment, general intangibles etc.".

3. Section 5. Referencing collateral. As you reference in your Commitment
Letter dated, October 15, 1997; you will omit all language with reference to
the Public Offering.

4. Paragraph 7f. Referencing lease financing. You agree to omit complete
paragraph, as it is no longer applicable.

5. Paragraph 7G. Regarding Dean Strupp & Associates Appraisals, you agree to
waive this requirement.

6. It is agreed that the bank terms, covenants and/or requirements with respect
to this permanent financing loan facility, will allow MBC the ability to do
the following without triggering any default provisions;

<PAGE>
Martin J. Lombardi
Vice President
Savings Bank of Mendocino County
Page 2.

a. Should we choose to, buy back the preferred shareholders in an
amount of $180,000.

b. In light of the transaction proposed between UBA and MBC, to write
off certain items, if we feel it is in the best interest of the
company. Such items are accounting related items in the amount of
$200,000 and a potential distributor claim in the amount of
$400,000.

UBA obviously is not assuming any of MBC's liabilities to the Savings Bank of
Mendocino. Our interest in discussing these matters with you is to confirm our
understanding of the financial terms and conditions of MBC's banking facilities
and our understanding of the status of MBC's relationship with the Savings Bank
of Mendocino.

If the above represents your understanding of our conversation, please sign
below.

Kindest Regards,

/s/ Jerome G. Merchant
- ----------------------------------
Jerome G. Merchant
Director
Strategic Planning

/s/ Martin J. Lombardi
- ----------------------------------
Martin J. Lombardi
Vice President
Savings Bank of Mendocino County

WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> 5
<LEGEND>
The unaudited financial statements of Mendocino Brewing Company, Inc.
as of September 30, 1997
</LEGEND>
[TYPE] FDS

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 152,400
<SECURITIES> 0
<RECEIVABLES> 505,800
<ALLOWANCES> 0
<INVENTORY> 429,300
<CURRENT-ASSETS> 1,294,200
<PP&E> 11,888,900
<DEPRECIATION> 760,300
<TOTAL-ASSETS> 13,059,500
<CURRENT-LIABILITIES> 7,470,700
<BONDS> 0
<COMMON> 3,869,600
0
227,600
<OTHER-SE> (149,100)
<TOTAL-LIABILITY-AND-EQUITY> 13,059,500
<SALES> 3,593,500
<TOTAL-REVENUES> 3,792,200
<CGS> 2,240,600
<TOTAL-COSTS> 2,439,300
<OTHER-EXPENSES> (197,500)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (73,600)
<INCOME-PRETAX> (596,800)
<INCOME-TAX> (244,600)
<INCOME-CONTINUING> (352,200)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (352,200)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> 0

</TABLE>