LETTER OF INTENT
This Letter of Intent dated May 2, 1997 sets forth the terms and conditions of
the proposed series of two linked transactions. The first transaction (the
"Stock Purchase") is the purchase by The UB Group, Xxx Xxxxxx Xxxxx, Xxxxx 000,
Xxxxxxxxx, XX 00000 of an equity interest in Mendocino Brewing Company, Inc.
("Mendocino") located at 00000 Xxxxx Xxxxxxx 000, Xxxxxxx, XX 00000-0400. The
purchaser may be The UB Group or a corporation controlled by Mr. Xxxxx Xxxxxx,
Chairman of The UB Group (the "Purchaser"). The second transaction (the
"Merger") is the proposed merger of Mendocino into a publicly traded affiliate
of Purchaser in a related transaction.
A. THE INVESTMENT - SECURITIES TO BE PURCHASED AND PURCHASE PRICE
1. At the closing of the Stock Purchase (the "Closing"), which will be
simultaneous with the execution of definitive documents, Purchaser will
purchase preferred and/or common equity securities in Mendocino (the
"Securities") and the purchase price for the Securities will consist of
between $3,000,000 to $4,000,000, payable in cash upon Closing and as
adjusted for the creditable refundable deposit described in Section F.7.
The exact amount of the investment within the prescribed range will be
determined during Purchaser's due diligence through an assessment of
Mendocino's cash flow needs through December 31, 1997 as mutually agreed to
between Purchaser and Mendocino. The cash price per share for the
purchased Securities is set to $4.50 as warranted by performance versus
1996, but not less than $4.00.
B. THE PROPOSED MERGER - MENDOCINO AND UCB
1. It is the intention of the Parties that at a later stage, but no later than
September 30, 1997, Mendocino should merge into United Craft Brewers, Inc.
("UCB"), a corporation to be formed by The UB Group and listed on NASDAQ.
UCB will be a holding company for various constituent corporations
("Subsidiaries") involved in the business of brewing and selling craft
beers. The merger will take place on the basis of a conversion factor
based upon the relative valuations, relating to then prevailing market
prices of their respective listed shares, or such other basis to be agreed
upon, together with other reasonable mutually agreed terms. There will be
appropriate non-manipulation covenants. The Purchaser and the Original
Partners agree to exercise their voting power to approve the merger.
C. EXECUTION OF INVESTMENT AGREEMENT AND CLOSING
1. The parties shall use reasonable diligence to commence due diligence and
negotiations with the objective of entering into a definitive Stock
Purchase and Merger Agreement detailing the terms of the Stock Purchase and
the Merger no later than 45 days from execution of this Letter of Intent.
The date on which the Stock Purchase and Merger Agreement is executed is
hereinafter referred to as the "Execution Date".
2. Promptly after the Closing, Mendocino shall terminate its current direct
public offering and shall take such steps as are necessary to make a
rescission offer to persons who have subscribed to purchase shares in the
offering.
D. CONDITIONS
The parties' obligations to consummate the Stock Purchase are subject to
the following conditions.
1. The negotiation, preparation and execution of (a) a definitive Stock
Purchase and Merger Agreement consistent with the provisions of this
Letter, together with all other documents, schedules and instruments
necessary to fully issue the Securities to Purchaser, (b) a voting
agreement consistent with the terms set forth in Section G.1 and 2 below.
2. The obtaining of all required consents and approvals, if any, from all
third parties, including without limitation the approval of the respective
boards of directors of Mendocino and Purchaser.
3a. The completion of a due diligence review and investigation by Xxxxxxxxx,
its counsel, accountants and other advisers, of the assets, liabilities,
business and financial condition of Mendocino, all of which must be
satisfactory to Purchaser in its sole and unfettered discretion.
3b. The completion of a due diligence review and investigation by Mendocino,
its counsel, accountants and other advisers, of the business plan, assets,
liabilities, business and financial condition of UCB, all of which must be
satisfactory to Mendocino in its sole and unfettered discretion.
4. The receipt of such reasonable and customary opinions of counsel as
Mendocino and Purchaser may each require concerning such matters as may be
of concern to them.
5. Mendocino's performance of its obligations described in Sections F.1, H, I
and J below.
2
E. STOCK PURCHASE AND MERGER AGREEMENT
The Stock Purchase and Merger Agreement will, among other things, include:
1. Provisions reflecting the sale and purchase of the Securities, purchase
price, payment, indemnification, closing requirements and covenants
pursuant to Sections A though J of this Letter of Intent.
2. Terms and basis of the Merger of Mendocino with UCB.
3. Reasonable and customary representations and warranties as to such matters
as the parties may require, subject only to those exceptions that may be
disclosed in written schedules acceptable to parties and attached to the
Stock Purchase and Merger Agreement.
a. By way of illustration and not limitation, the Stock Purchase and
Merger Agreement shall include representations and warranties by the
Parties as to:
i) the legal status and authority of UCB and Mendocino;
ii) the authorization and validity of the Stock Purchase and Merger
Agreement as to UCB and Mendocino;
iii) the ownership structure of UCB and Mendocino and the existence
and structure of any subsidiaries or affiliates of UCB and
Mendocino;
iv) the status of all consents and approvals required to be obtained
by UCB and Mendocino to consummate the Stock Purchase;
v) UCB's and Mendocino's substantial compliance with all material
laws, and the status of all licenses and permits applied for or
obtained for the operation or contemplated operation of their
respective businesses;
vi) information relating to UCB's and Mendocino's material
contracts;
vii) the status of any pending or threatened litigation or other
proceeding involving UCB and Mendocino or its assets;
viii) the accuracy of UCB's and Mendocino's financial statements, and
information relating to its taxes, debts, and other liabilities;
ix) UCB's and Mendocino's title to all material assets used in the
operation of its businesses;
x) information relating to UCB's and Mendocino's employees,
compensation and benefit policies and programs;
3
xi) information relating to UCB's and Mendocino's distributors and
suppliers;
xii) the accuracy and completeness of all disclosures made to
Purchaser; and
xiii) the accuracy of all statements made in UCB's pending S-4
Registration Statement.
b. By way of illustration and not limitation, the Stock Purchase and
Merger Agreement shall include representations and warranties by
Purchaser as to:
i) Purchasers legal status and authority;
ii) the authorization and validity of the Stock Purchase and Merger
Agreement and related documents as to Purchaser;
iii) the status of any pending or threatened litigation or other
proceeding involving Purchaser.
F. COVENANTS
1. From the date on which the parties execute this Letter of Intent through
the date of Closing, Mendocino will not issue any shares of their capital
stock or securities convertible into share of its capital stock without the
prior written consent of Purchaser except (i) pursuant to presently
outstanding options, (ii) approximately 20,000 shares accepted in the
current public offering (which will be subject to the rescission offer
described elsewhere herein), (iii) 2,000 shares to be issued to Xxxxxxx
Xxxxxxxx and Xxxxxx Xxxxxx for providing collateral with respect to the
refundable deposit described in Section F.6, (iv) 2,000 shares to be issued
to Purchaser at Closing for making the refundable deposit described in
Section F.6, and (v) 200 shares to be issued as a stock bonus to an
employee.
2. Following the Closing and so long as Purchaser continues to hold securities
representing at least 10% of the outstanding voting securities of Mendocino
the Purchaser shall have a contractual right to participation in any
further financing by Mendocino in an amount or amounts necessary to enable
Purchaser to maintain its percentage of ownership in Mendocino.
3. Following the Closing, Mendocino may not, without the prior written consent
of Purchaser, issue any securities having rights, privileges or preferences
which equal or are senior to the securities issued to Purchaser.
4. At Closing, Purchaser shall be granted customary demand and piggyback
registration rights with respect to the Securities issued to it by
Mendocino and the Original
4
Partners shall be granted co-equal piggyback registration rights with
respect to the shares of Mendocino equity securities owned by them. The
registration rights shall be assumed by UCB in the Merger.
5. At Closing each Original Partner and Purchaser shall enter into an
agreement granting the other a right of first refusal (the "ROFR") to
purchase the securities which they own in Mendocino which the Original
Partners and Purchaser propose to sell. Purchaser shall provide a de
minimis exception or a mechanism in the ROFR so the Original Partners will
not be delayed in selling into the market in a Rule 144 transaction should
Purchaser decide not to exercise the ROFR.
6. Upon execution of this Letter, Purchaser will pay $250,000 to Mendocino as
a refundable deposit which Mendocino shall use first to fund its due
diligence costs and second for other working capital uses. Xxxxxxx
Xxxxxxxx and Xxxxxx Xxxxxx shall pledge an aggregate of 71,500 of their
common shares as collateral for the repayment of the deposit. The entire
deposit shall be credited against the purchase price of the Securities.
Mendocino shall return the deposit within 60 days after termination of
negotiations between the parties. Purchaser shall release the pledged
shares promptly upon execution of the definitive agreement or repayment of
the deposit.
G. GOVERNANCE OF MENDOCINO FOLLOWING THE DATE CLOSING
1. At the Closing, the board of directors of Mendocino shall each be composed
of seven persons, consisting of Xxxxxxx Xxxxxxxx and one other existing
employee of Mendocino selected by the current Mendocino Board of Directors,
three persons selected by Purchaser (one of whom shall be Xxxxx Xxxxxx who
shall be Chairman of the Board), and two outside directors each of whom
shall be mutually satisfactory to the current Mendocino Board of Directors
and Purchaser. To the extent possible, Purchaser shall also have
representation of any committees of the board. At the Closing, the
Original Partners and Purchaser shall enter into a voting agreement to
reflect the parties' continuing obligation to vote their shares at the 1997
annual meeting for the election of directors of Mendocino consistent with
the above-described board composition.
2. Until the Merger, Xxxxxxx Xxxxxxxx will remain the Chief Executive Officer
of Mendocino.
H. ACCESS, INFORMATION, CONFIDENTIALITY, ANNOUNCEMENTS.
1. Mendocino will provide Purchaser, including Purchaser's counsel,
accountants and other advisers, with access to Mendocino's employees and
agents and other persons with whom Mendocino has a business relationship,
and will provide Purchaser on a timely basis with all documents and other
information Purchaser may request, to enable Purchaser to perform the due
diligence review and investigation described in
5
Section D.3 of this Letter of Intent. Mendocino understands that Purchaser
may provide such information on a confidential basis to such of Purchaser's
attorneys, accountants, financing sources and other advisors as have a need
to know such information.
2. Purchaser agrees that if a definitive Stock Purchase and Merger Agreement
is not entered into, Purchaser will hold in confidence all documents,
material and other information which Purchaser shall have obtained
regarding Mendocino and their respective businesses in accordance with the
terms of the Confidentiality Agreement previously executed by Purchaser.
3. Except as required by law, no public announcement, discussion, press
release or other publication of this Letter of Intent, the possibility of
the purchase or the negotiations and discussions between Xxxxxxxxx and
Mendocino may be made or issued by one party without the written
authorization of the other party, except that each party may seek the
advice of its counsel, accountants and other advisers with respect thereto.
I. CONDUCT OF BUSINESS
Until the Closing, except with the prior written consent of Purchaser,
which shall not be unreasonably withheld:
1. Mendocino will:
a. conduct its business in the ordinary course, with no dividend or stock
distributions;
b. maintain its books, accounts and records in the usual, regular and
ordinary manner;
c. pay and discharge when due all taxes, assessments, and governmental
charges imposed upon them or any of their properties, or upon the
income or profit therefrom;
d. fully and timely perform its obligations under all contracts,
agreements, instruments, and arrangements;
e. operate in such a manner as to assure that the representations and
warranties of Mendocino set forth in the Stock Purchase and Merger
Agreement will be true and correct as of the Closing; and
f. promptly reject in writing any offer from BDM Construction Company to
retain the 300,000 shares of common stock issued to it in satisfaction
of any portion of the Company's indebtedness to BDM (BDM does not have
any conversion rights).
6
2. Mendocino will not:
a. incur any additional indebtedness for borrowed money, make any loans
or advances (other than in the normal course of business consistent
with prior practice) to any individual, firms or unaffiliated
corporation or assume, guarantee or endorse or otherwise become
responsible for the obligation of any other individual, firms or
unaffiliated corporation; or
b. knowingly take any other action which would adversely affect or
detract from the net value of its assets or its business.
J. "NO SHOP" CLAUSE
For a period of 45 days from the execution of this Letter of Intent, none
of the Original Partners, Mendocino, its employees, or its agents will
directly or indirectly contact, solicit from, negotiate with or provide
information to anyone other than the Purchaser regarding the sale or
potential sale of the assets, the business or any ownership interest in
Mendocino.
K. MISCELLANEOUS PROVISIONS
1. If suit or action is instituted to interpret or enforce any binding
provision of this Letter of Intent, the prevailing party shall be entitled
to recover reasonable attorneys' fees from the losing party in the trial
and all appellate courts, in addition to any other recovery and costs. The
attorneys' fee award shall include a reasonable amount in connection with
enforcement of the judgment. All such disputes shall be settled through
Arbitration in accordance with the commercial rules of the American
Arbitration Association. No Original Partner shall be personally liable
for any breach of this Agreement by Mendocino.
2. The validity, construction, enforceability and effect of this Letter of
Intent, and the rights and obligations of the parties, shall be determined
in accordance with the laws of the State of California other than
California's laws concerning conflicts of laws.
3. All disputes relating to this Letter of Intent shall be arbitrated in San
Francisco County, California.
4. This Letter of Intent may be executed in any number of counterparts, and by
different parties hereto on separate counterparts, and all counterparts
shall constitute a single document. The execution and delivery of any
counterpart by any person shall have the same force and effect as if that
person had executed and delivered all other counterparts. The electronic
facsimile transmission of a copy of this Letter of Intent by any party
shall have the same force and effect as the physical delivery to the other
party of any original counterpart bearing the first party's signature.
7
5. "Original Partners" means Xxxxxxx Xxxxxxxx, Xxxxxx Xxxxxx, Xxxxxxx Xxxxxx,
Xxxx Xxxxxxx, and Xxxxxx Xxxxxxx and who jointly control approximately 41%
of the common stock of Mendocino.
L. EMPLOYMENT AGREEMENTS; NON-COMPETE AGREEMENTS
1. Each of the Original Partners will agree to cancel his existing employment
agreement with Mendocino and enter into a new employment agreement to be
mutually agreed to by the parties and that would provide for the continued
employment of the Original Partners for a period of fourteen months from
the date of the Closing at his existing rate of base salary or more.
Either Mendocino (at any time after the Closing) or any Original Partner
other than Xxxxxxx Xxxxxxxx or Xxxxxx Xxxxxxx (beginning three months after
the Closing) or Xxxxxxx Xxxxxxxx or Xxxxxx Xxxxxxx (beginning six months
after the Closing) may elect to terminate the applicable employment
agreement and upon any such termination the Original Partner shall be paid
the remaining amount owed under the employment agreement in one lump sum at
an 8% discount; provided, however, Xxxxxxx Xxxxxxxx'x salary will be paid
on the ordinary payroll schedule to ensure compliance with his non-compete
obligations set out in Section L.3. below. The Original Partners will
continue to be entitled to their post-termination beer allowance of one
case per week for five years.
2. Each of the Original Partners will have registration rights as outlined
above. These rights will survive any termination of employment.
3. Xxxxxxx Xxxxxxxx will enter into an agreement not to compete with UCB for
the duration of his new employment agreement (fourteen months from the
Closing); provided, however, that such non-compete agreement may be
extended for two years from the Merger if either (i) UCB at its election
extends his employment agreement and pays Xxxxxxxx his base salary through
such date, or (ii) Xxxxxxxx sells his UCB shares. There shall be no
material restrictions on the Original Partners not set forth in this Letter
of Intent.
M. EFFECT OF THIS LETTER OF INTENT
The parties shall be bound by Sections F.1, H, I, J, and K above.
Otherwise, this Letter of Intent is an expression of intent only, and
neither party shall be legally bound to the other in any respect unless and
until a definitive Stock Purchase and Merger Agreement has been signed by
all parties. Furthermore, this Letter of Intent shall not give rise to an
agreement by estoppel, or be the basis for a claim based on detrimental
reliance or any other theory, it being understood that the parties have
expressed an intent to proceed but do not intend to be legally bound to one
another to proceed with the proposed stock purchase and merger or to become
legally bound to one another in any respect, unless and until due diligence
has been satisfactorily completed and a definitive Stock Purchase and
Merger Agreement is signed.
8
Purchaser and Mendocino agree to proceed promptly in conducting due
diligence and the preparation and negotiation of the definitive Stock
Purchase and Merger Agreement. Each party shall pay its own expenses
associated with the transactions contemplated by this Letter of Intent.
ACCEPTED AND AGREED TO
AS OF MAY 2, 1997
Purchaser
___________________________________
Xxxxx Xxxxxx
Chairman of the Board of Directors
Mendocino Brewing Company, Inc.
___________________________________
Xxxxxxx Xxxxxxxx
Chairman of the Board of Directors
1) Xxxxxxx Xxxxxxxx
2) Xxxxxx Xxxxxx
3) Xxxxxxx Xxxxxx
4) Xxxx Xxxxxxx
5) Xxxxxx Xxxxxxx
(Original Partners of Mendocino)
9
