SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT ON FORM 10-KSB
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended March 31, 1999.
[ ] Transition Report pursuant to Section 13 or 15(d) of The Exchange Act of
1934
For the period from April 1,1998 to March 31, 1999.
Commission File No. 0-21079
PHLO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3314168
(State of or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
475 Park Avenue South
7th Floor
New York, New York 10016
(Address of Principal (Zip Code)
Executive Officers)
Registrant's telephone number, including area code: (212) 447-1322
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
----------------------------------------
(Title of Class)
<PAGE>
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or15(d) of the Securities Exchange Act of 1934 during
the preceding 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of the Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year were $1,176,208.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of such stock as of March
31, 1999, was approximately $1,250,000.
Number of shares outstanding of the issuer's common stock as of March 31, 1999
was 11,333,335.
<PAGE>
TABLE OF CONTENTS
Item Number Page
PART I
1. Business
2. Properties
3. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
PART II
5. Market for the Registrant's Common Equity and Related
Shareholder Matters
6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
7. Financial Statements and Footnotes
8. Changes in and Disagreement with Accountants on
Accounting and Financial Disclosure
PART III
9. Directors and Executive Officers
10. Executive Compensation
11. Security Ownership of Certain Beneficial Owners and Management
12. Certain Relationships and Related Transactions
PART IV
13. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
<PAGE>
PART I
Item 1. BUSINESS
General
Phlo Corporation (formerly named Perry's Majestic Beer, Inc.) a Delaware
corporation incorporated in December, 1995 (the "Company") has been actively
developing a proprietary product base the result of which could dramatically
increase the intrinsic value of the Company and its valuation within the
financial community and financial markets. Central to the Company's strategic
development plan is the development, acquisition and/or exclusive licensing of
proprietary technology, nutraceutical, biotechnological, and/or pharmaceutical
in nature, which the Company initially plans to convey to consumers through the
use of beverage systems.
The Company is positioned as a technology company which is using the high
volume chain-store segment of the beverage industry to commercialize a portion
of its technology. The Company is focusing its technology acquisition efforts on
those technologies related to preventing or ameliorating cancer, reducing the
effects of aging, assisting in weight loss, and enhancing sexual performance.
The Company has exclusively licensed a proprietary (patent pending) "advanced
delivery system" technology for use in its beverages and certain foods, which
has already been tested in certain of its beverages and which will be
incorporated in all of its beverages. Through the use of this technology, the
Company will be able to deliver to the consumer in the most effective and
consumer-friendly manner nutritional and/or pharmaceutically active agents
through its beverage products. The Company believes that its controlled-release
technology is superior to other such technologies because it is ideal for use in
beverage systems and liquid formulations, as there is no creation of particulate
matter and the technology is colorless and tasteless. Additionally, the
encapsulation materials provide mechanical, chemical and thermal stability
superior to any currently available coatings, and this controlled-release
technology can employ a number of different specific trigger mechanisms which
induce release of the active ingredients. Such trigger mechanisms can be
pre-selected from a myriad of conditions which include pH change, dilution,
change in ionic strength, surfactancy, temperature, enzyme activity, and
chemical reaction of complexation with a targeted trigger component.
Although controlled-release technology is now being used by the
manufacturers of vitamin pills, this technology does not appear in the beverage
industry. The Company should be able to use the patent-pending
controlled-release technology to release during an extended period compounds
through its beverage systems which the Company believes would assist in
materially lowering the risks of certain types of cancer and cardiovascular
disease, enhancing physical and mental performance, and increasing immunity to
infectious diseases.
The Company's exclusively licensed proprietary technology and its inclusion
of truly functional (not trace) amounts of nutritional ingredients in its
beverages create a great distinction between the Company and every other
beverage company in the
1
<PAGE>
market today. The Company believes that it would be the first beverage company
to introduce controlled-release technology in its beverages and that such
introduction would provide a tremendous boost for the Company's ability to get
into the largest distribution networks. The Company's proprietary technology and
its ability to incorporate such technology in good-tasting beverages allows the
Company to offer to its distributors a product which no other beverage company
can offer in the market-place today. This development should have an excellent
effect on the Company's margins as well as on its distributors' margins, and the
Company's intrinsic value and valuation in the financial markets should be
relatively higher than that of other beverage companies. The Company is
committed to establishing a strong proprietary position in its markets with
beverage products which will support claims for important health benefits.
The "advanced delivery system" technology (the "Technology") allows the
Company to be the first to incorporate functional amounts of nutritional
ingredients, selectively directed to different locations in the body on a
sustained-released basis for maximum effect, in clear beverages without
compromising the taste, color, appearance, mouth-feel, stability, or cost of the
product. While the Technology has several attributes which collectively make
this possible, of paramount importance is the ability to make microcapsules that
are uniformly small enough to be virtually invisible when suspended in clear
beverages, that carry high payloads, and that utilize inexpensive materials.
Stock Exchange Transaction
On October 22, 1998, the Company entered into a letter of intent to acquire
a minimum of 80% of the capital stock of a beverage company, X-Treem Products
Corporation ("X-Treem"), through an exchange with the shareholders of X-Treem of
up to 93% of the issued and outstanding shares of the Company's capital stock as
of December 7, 1998, whereby X-Treem would become a subsidiary of the Company
(the "Stock Exchange Transaction"). Pursuant to the Stock Exchange Transaction,
on December 7, 1998, the Company acquired approximately 68% of the capital stock
of X-Treem from the principal shareholders of X-Treem in exchange for
approximately 67% of the issued and outstanding shares of the Company's capital
stock. This was achieved through the issuance by the Company of an aggregate of
8,000,000 shares of its common stock to the principal stockholders of X-Treem in
exchange for shares of their stock of X-Treem. Pursuant to the Stock Exchange
Transaction, each share of the capital stock of X-Treem is exchangeable for
4,490.30 shares of common stock (or common stock equivalents) of the Company.
Additionally, each holder of a warrant to purchase the common stock of X-Treem
(an "X-Treem Warrant") is entitled to exchange the X-Treem Warrant for a
comparable warrant to purchase 4,490.30 shares of the common stock of the
Company for each share of common stock of X-Treem purchasable pursuant to the
X-Treem Warrant. The Company will complete the Stock Exchange Transaction with
the holders of the capital stock of X-Treem through the issuance of additional
shares of its capital stock to X-Treem shareholders in exchange for additional
shares of their capital stock and through the issuance to holders of X-Treem
Warrants of warrants to purchase the capital stock of the Company in exchange
for their X-Treem Warrants.
2
<PAGE>
Change in Management
In conjunction with the Stock Exchange Transaction, there has been a
substantial change in the management of the Company. James B. Hovis was elected
as the Company's President and Chief Executive Officer. Anne P. Hovis was
elected as the Company's Executive Vice President, Secretary and General
Counsel. Robert J. Corsaro, Jr. became the Company's Senior Vice President,
Sales and Marketing. Allen G. (Skip) Hoube, Jr. became the Company's Vice
President of Production Operations. Robert J. Sipper, formerly the Company's
President and CEO, was elected as the Company's Chief Operating Officer. Mark
Butler, formerly the Company's Vice President, Sales, was elected as the
Company's Vice President, Food Sales. Mr. Butler resigned his employment with
the Company and his position as an officer and director of the Company in March
1999.
Change in Business Activities
The Company has completed its transformation from a microbrew beer company
to a technology company which is initially using the high-volume chain-store
segment of the beverage industry to commercialize its technology. The Company
sold its Post Road line of ales on May 18, 1998. During the second quarter, it
ceased brewing the Perry's Majestic line of organic beers. In the months
subsequent to March, 1999, the Company also ceased operations related to the
production and sale of two lines of applesauce which it acquired in 1997 and
1998.
On December 1, 1998, the Company entered into an exclusive license
agreement with X-Treem whereby the Company acquired the exclusive right to sell
and distribute the McCoy's line of all natural beverages and an option to
purchase the McCoy's beverage brand and the intellectual property associated
therewith (the "Option"). On December 23, 1998, the Company exercised the Option
by fulfilling the payment and other terms of the option agreement, including
executing a promissory note in the amount of $300,000 made payable to X-Treem in
2001.
The Company is in the process of redesigning the label and improving the
flavor of the pre-existing ten flavors of McCoy's iced teas, fruit drinks and
ready-to-drink iced teas and is creating an additional line of seven flavors of
McCoy's green teas which will contain functional levels of the powerful
anti-oxidant, EGCg. The Company intends to begin offering the McCoy's line for
sale in the first fiscal quarter of 2000.
Also in December, 1998, the Company entered into an exclusive license
agreement whereby the Company licensed for liquids and apple-based products a
proprietary (patent pending) advanced delivery technology. The technology allows
the Company to incorporate functional amounts of nutritional ingredients,
selectively directed to different locations in the body on a sustained-release
basis for maximum effect, in clear beverages without compromising the taste,
color, mouth-feel, stability or cost of the products.
3
<PAGE>
Financing Activities
The Company raised approximately $440,000 in the third and fourth quarter
of fiscal 1999 pursuant to an offering of units at a purchase price of $0.46 per
unit. Each unit consists of two shares of the common stock of the Company and
0.216 of a share of Series C Convertible Preferred Stock, and the right to
purchase, on or before July 15, 1999, at an aggregate purchase price of $0.46,
one additional share of common stock and 0.108 of an additional share of Series
C Convertible Preferred Stock. Pursuant to the terms of the Series C Convertible
Preferred Stock, (1) each share of Series C Convertible Preferred Stock is
convertible into 100 shares of common stock (as adjusted for stock splits,
mergers, consolidations, and other extraordinary corporate events) and (2) the
Series C Convertible Preferred Stock may not be converted until the earlier to
occur of (a) June 30, 2000, and (b) the closing of a secondary public offering
of the common stock resulting in gross proceeds to the Company of not less than
$10,000,000.
Recent Developments
In November, 1999, the Company's wholly-owned subsidiary, Phlo System,
Inc., executed a consulting agreement with William Regelson, M.D., a widely
published specialist in medical oncology, with joint appointments in
microbiology and biomedical engineering (Medical College of Virginia, Virginia
Commonwealth University, Richmond) who has been a leading researcher in the
field of aging for over twenty years and has over 200 publications to his
credit. Dr. Regelson will be working with Phlo System, Inc. on
biotechnology-related product development activities as well as applications of
its advanced delivery technology.
In March, 2000, Phlo System, Inc. exclusively licensed for all uses,
worldwide, a proprietary (patent pending) composition consisting of an ester
(derivative) of Vitamin E combined with a delivery system (with
sustained-release capability). This technology has been shown through in vitro
and in vivo tests to be effective in protecting cells from oxidative stress
associated with aging and exposure to toxic agents. Further, these tests have
shown this composition to be effective in stimulating the membrane repair
function of cells, particularly of the liver, heart and brain. The uses covered
by the Phlo System Inc.'s exclusive, worldwide license of this technology
include, among other things, pharmaceuticals, biotechnologicals, nutraceuticals,
dietary supplements, food and beverage products and topical preparations (for
therapeutic or cosmetic use).
As a result of this acquisition, the Company plans to introduce, during the
second calendar quarter of 2000, its new Vital Cell Defense line of beverages
which features this patent-pending technology.
Product Overview
In December, 1998, the Company purchased the McCoy's beverage line, which
features the unique concept of "microbrewed" fruit drinks, lemonades, and iced
teas and is offered in 20 ounce proprietary glass bottles in 12-pack cases. The
McCoy's line of
4
<PAGE>
all natural beverages contains no preservatives, artificial colors or flavors
and is made from the highest quality natural ingredients.
Additionally, the Company is creating a line of seven flavors of green teas
which will contain functional levels of the powerful anti-oxidant, EGCg. The
Company will manufacture, market and sell the McCoy's beverage line, and intends
to begin offering the McCoy's line for sale in the first quarter of fiscal 2000.
The McCoy's line initially will be offered in 17 flavors, as follows:
Iced Teas Green Teas Lemonades Fruit Drinks
- --------- ---------- --------- ------------
Lemon Lemon Pink Blackberry Cherry
Diet Lemon Diet Lemon Old Fashioned Kiwi Strawberry
Peach Peach Raspberry Vanilla
Raspberry Raspberry Tropical Punch
Ginger Vanilla
Ginger Mandarin Orange
Ginger Plum
McCoy's Diet Lemon Iced Tea and Diet Lemon Green Tea contain Aspartame
(NutraSweet), a low calorie sweetener. The lemonades and fruit drinks contain 5%
juice while the iced teas and green teas contain no fruit juice.
New Product Development
The Company will be introducing diet versions of the McCoy's iced teas,
green teas, and certain of the fruit drinks. The Company will also add new
flavors to those currently offered.
The Company has been actively developing a proprietary product base the
result of which could dramatically increase the intrinsic value of the Company
and its valuation within the financial community and financial markets. Central
to the Company's strategic development plan is the development, acquisition
and/or exclusive licensing of proprietary technology, nutraceutical,
biotechnological, and/or pharmaceutical in nature, which the Company initially
plans to convey to consumers through the use of beverage systems. The Company is
focusing its technology acquisition and development efforts on those
technologies related to preventing or ameliorating cancer, reducing the effects
of aging, assisting in weight loss, and enhancing sexual performance.
The Company has exclusively licensed a proprietary (patent pending)
advanced delivery technology for use in liquids and apple-based products
throughout the United States and Canada. Through the use of this technology, the
Company will be able to deliver to the consumer in the most effective and
consumer-friendly manner nutritional and/or pharmaceutically active agents
through its beverage products. The Company is currently developing the delivery
system for use in all of its beverages.
5
<PAGE>
Marketing and Distribution
The Company intends to add a new level of distribution to the traditional
"up and down the street" network (e.g. neighborhood grocery stores,
delicatessens, and convenience stores) through which McCoy's beverages were
distributed in the past by X-Treem. The Company is focusing its sales efforts on
well-known, national and regional distributors which distribute products
throughout the entire systems of large supermarket chains. Sales presentations
have been made to several of such distributors.
The Company's initial focus for the distribution of McCoy's to independent
and convenience store-type accounts is the New York metropolitan area, including
upstate New York, New Jersey, and Pennsylvania. In this distribution segment,
the Company sells its beverages to local distributors for resale to the retail
accounts.
The Company will price its McCoy's beverages to compete favorably with
other cold drinks offered for sale at the same supermarket accounts and retail
outlets where McCoy's is sold. McCoy's beverages are being priced to enable the
"up and down the street" retailer to offer a 20-ounce bottle of McCoy's to the
consumer at a cost of $1.19-$1.39 and grocery stores to offer 20 ounce bottles
at a cost of $.99-$1.19.
Industry Overview/Competition
The Company's McCoy's line of beverages competes in the "New Age" or
"Alternative" beverage category. The Company's line of ready to drink beverages
competes directly with such brands as Arizona, Sobe, Snapple and others. This
category is the fastest growing category in the beverage industry today.
The Company operates in a highly competitive segment of the beverage
industry. The segment is dominated by competitors with greater resources than
the Company's. In addition the Company competes for limited retail shelf space
for its products. The Company cannot be certain that it can successfully compete
for sales to distributors or stores that purchase from larger, more established
companies, that have greater financial, sales and technical resources. However,
the Company believes that its proprietary technology and its ability to
incorporate such technology in good-tasting beverages allows the Company to
offer to its distributors a product which no other beverage company can offer in
the market-place today.
Manufacturing
All of the Company's products are manufactured at an independent co-packer.
The Company believes that alternative sources of manufacturing exist in the
event that the production capabilities of the facility currently used by the
Company become insufficient or unavailable. However, there can be no assurances
that alternative sources would be able to meet the requirements of the Company,
and if the Company was unable to arrange for alternative co-packing in a timely
manner, such failure could
6
<PAGE>
have a material adverse effect on the Company's business, operating results and
financial condition.
The Company purchases juices, concentrates, flavors, nutrients, labels,
caps, glass bottles, boxes and other ingredients for its product line from
independent manufacturers. The products are delivered to an independent
co-packer where the Company's products are manufactured. Management believes
that there are alternatives to all of its suppliers in the event the Company is
compelled to purchase raw materials from other sources.
Trademarks
The Company's trademarks and brand name for its product line are registered
in the United States. The Company owns the trademark "McCoy's". The Company
believes that its trademarks and trade names are significant to the marketing
and sale of its products and that the inability to utilize the same could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Management and Employees
As of March 31, 1999, the Company employed a total of 7 employees on a full
time basis.
The Company has experienced no work stoppages and considers its employee
relations to be satisfactory. The Company's employees are not represented by a
labor union.
Product Liability Insurance
The Company, like other manufacturers of products that are ingested, faces
inherent risk of exposure to product liability claims if, among other things,
the use of its products results in injury. The Company currently has product
liability insurance. There can be no assurances that the amount and scope of any
coverage will be adequate to protect the Company in the event that a product
liability claim is successfully asserted against the Company.
Government Regulation
The production, distribution and sale of the Company's products in the
United States are subject to the Federal Food, Drug and Cosmetic Act, the
Occupational Safety and Health Act, the Lanham Act, various environmental
statutes, and various other federal, state and local statutes regulating the
production, transportation, sale, safety, advertising, labeling and ingredients
of such products. Certain states and localities prohibit, or may in the future
enact legislation to prohibit, the sale of certain beverages unless a deposit or
tax is charged for containers.
7
<PAGE>
Note Regarding Forward Looking Information
Certain statements contained in this Annual Report constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Sections 21E of the Exchange Act. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, levels of activity, performance or achievements of the
Company, or industry results, to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions; the ability of the Company
to implement its business strategy; the ability of the Company to obtain
financing for general corporate purposes; competition; availability of key
personnel; and changes in, or the failure to comply with, governmental
regulations. As a result of the foregoing and other factors, no assurance can be
given as to the future results, levels of activity and achievements, and neither
the Company nor any person assumes responsibility for the accuracy and
completeness of these statements.
Item 2. PROPERTIES.
The Company operates its executive offices at 475 Park Avenue South, 7th
Floor, New York, New York 10016 pursuant to a five (5) year lease dated as of
March 15, 1999 providing for a monthly rent of $10,021.
Item 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are involved in a number of lawsuits
related to claims arising through the normal course of business. There are
several claims which have been reduced to judgements against X-Treem, including
a judgment entered on February 12, 1999 in the amount of $1,064,616. This
judgment and others have been provided for and are reflected within the
accompanying financial statements as accrued expenses at March 31, 1999.
In addition to the claims, there are other lawsuits in which the Company is
involved, but is unable to predict the outcome. In the opinion of management,
based on currently available facts, and the aggregate liability currently
provided for within the accompanying financial statements, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's consolidated results of operations or financial position.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the holders of the Company's common
stock during the last quarter of its fiscal year ended March 31, 1999 other than
a change in the Company's name from Perry's Majestic Beer, Inc. to Phlo
Corporation, which was approved by written consent executed by the holders of
8,000,000 shares of the Company's common stock, which shares represented a
majority of the shares of stock of the Company outstanding and eligible to vote.
8
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The common stock of the Company was first traded on the OTC Bulletin Board
on the effectiveness of the Company's Initial Public Offering on July 31, 1996,
under the symbol "PYMB". On April 20, 1999, the Company changed its trading
symbol to "PHLC" to reflect the change in the Company's name to Phlo
Corporation. The common stock of the company is regularly quoted and traded on
the OTC Bulletin Board.
The following table indicates the high and low bid prices for the common
stock of the Company for the period April 1, 1997 to March 31, 1999, based upon
information supplied by the NASDAQ system. Prices represent quotations between
dealers without adjustments for retail markups, markdowns or commissions, and
may not represent actual transactions.
- --------------------------------------------------------------------------------
Common Stock
- --------------------------------------------------------------------------------
Year Ended 3/31/98 Year Ended 3/31/99
- --------------------------------------------------------------------------------
Quarter High Low High Low
- --------------------------------------------------------------------------------
First Quarter $5.00 $0.875 $0.25 $0.12
- --------------------------------------------------------------------------------
Second Quarter $1.00 $0.50 $0.16 $0.01
- --------------------------------------------------------------------------------
Third Quarter $0.81 $0.10 $0.29 $0.01
- --------------------------------------------------------------------------------
Fourth Quarter $0.49 $0.16 $0.85 $0.11
- --------------------------------------------------------------------------------
On March 31, 1999, the closing price of the Common Stock as reported on the
OTC Bulletin Board was $0.375. As of March 31, 1999, the Company had
approximately 150 holders of record of its shares of Common Stock.
9
<PAGE>
Item 6.
PHLO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ----------------------------------------------------------------------
For the fiscal year ended March 31, 1999, compared with the fiscal year ended
March 31, 1998.
The following discussion of the Company's financial condition as of March
31, 1999, and results of operations for the twelve month periods ended March 31,
1999 and 1998, includes information related to the stock exchange transaction
conducted by the Company and the shareholders of X-Treem Products Corporation
("X-Treem") (the "Stock Exchange Transaction"). For accounting purposes only,
the Stock Exchange Transaction was treated as a reverse acquisition whereby
X-Treem was the acquirer. The historical financial statements for the period
ended March 31, 1998, are those of X-Treem. The statement of operations for the
twelve months ended March 31, 1999, include the activities of X-Treem for the
entire period and the activities of the Company from December 7, 1998 through
March 31, 1999.
OVERVIEW
X-Treem is a beverage company incorporated in 1997 which manufactured and
sold beverages lines including the McCoy's line of iced teas, fruit drinks, and
lemonades, and the X-treem Caffeine line of caffeine-enhanced beverages. Phlo
Corporation (formerly Perry's Majestic Beer, Inc.) was formed in December 1995,
and during the period of December 7, 1998 through March 31, 1999, distributed
the Leroux Creek and Quigley's brands of applesauces.
In December 1998, subsequent to the change in management resulting from the
Stock Exchange Transaction, the Company's management refocused the Company's
core business in order to use the high volume segment of the beverage industry
to commercialize technology, nutraceutical, biotechnological and/or
pharmaceutical in nature, developed, acquired and/or licensed by the Company.
The Company acquired from X-Treem the McCoy's beverage brand. Additionally, the
Company exclusively licensed from a third party a proprietary (patent pending)
"advanced delivery" technology for use in beverages and certain foods. This
technology allows the Company to be the first to incorporate truly functional
amounts of nutritional and/or biotechnological ingredients, specifically
directed to locations in the body on a sustained-release basis for maximum
effect, in clear beverages without compromising the taste, color, appearance,
mouth-feel, stability or cost of the product.
During the fourth quarter of its fiscal year, the Company redesigned the
labels and improved the flavors of the newly acquired McCoy's beverage line.
Additionally, the Company developed a line of seven flavors of McCoy's Green
Teas. The Company's line of McCoy's Green Teas are the only new age beverages
with a truly functional level
10
<PAGE>
(the level which medical studies currently indicate is the ideal daily amount of
a particular nutritional ingredient) of powerful green tea catechins, including
the super-antioxidant EGCg. Studies show that a high daily intake of EGCg aids
in the prevention of cancer and cardiovascular disease. McCoy's green teas also
contain Vitamin C (which is known to enhance EGCg's effects) and Siberian
ginseng for sustained energy and power of concentration. The Company prepared
the expanded McCoy's beverage line for launch in May 1999. Additionally, the
Company began development work on its advanced delivery system for use in
beverages.
Results of Operations
Sales for the fiscal years ended March 31, 1999 and March 31, 1998 were
$1,176,208 and $760,183, respectively. This increase of $416,025 was principally
due to higher sales of McCoy beverages equal to approximately $177,000 and sales
of applesauce products equal to approximately $176,000.
With respect to the fiscal year ending March 31, 2000, the Company has
discontinued its applesauce product lines to concentrate selling efforts on its
McCoy's line of beverages and the incorporation therein of its proprietary
technology related to nutraceuticals, biotechnologicals and/or pharmaceuticals.
In addition, the Company will emphasize supermarket chain distribution to
achieve significant growth and to secure market entry for a wider array of
future products. Overall sales for the fiscal year ending March 31, 2000 are
expected to be higher than the fiscal year ended March 31, 1999. This shift in
focus to the chain supermarket trade will also have the effect of increasing the
Company's working capital needs as supermarket chain accounts, and as up-front
merchandising fees, frequently referred to as "slotting fees", are paid.
Selling, general and administrative expenses for the fiscal year ended March 31,
1999 and March 31, 1998 were $2,359,407 and $1,377,791, respectively. The
increase in fiscal 1999 of approximately $981,616 was due in part to the
increase in salary expense, which rose as the total number of personnel
increased as a result of the Stock Exchange Transaction. Advertising costs
increased as a result of the increase in sales to chain supermarket accounts.
Finally, legal costs, primarily related to X-Treem litigation and interest and
penalties related to past due payroll obligations, were incurred.
With respect to the upcoming fiscal year ending March 31, 2000, management
projects that selling, general and administrative costs will not show the same
rate of increase as that which occurred during the fiscal year ended March 31,
1999. Management believes that there will be no additional losses associated
with X-Treem.
Other expense for the fiscal years ended March 31, 1999 and 1998 were $613,467
and $2,828,711, respectively, representing a decrease of approximately
$2,215,244. Included within 1998 are write-downs of impaired assets of
approximately $932,000 associated with prior acquisitions of the Company,
including Riverosa Company, Inc.,
11
<PAGE>
and the Post Road brand of ales, and a charge equal to $1,064,616 associated
with a February 12, 1999 judgment entered against X-Treem. In addition to this
judgment there have been other judgments entered against X-Treem. As of March
31, 1999, X-Treem's Statement of Financial Condition reflects an excess of
liabilities over assets equal to approximately $2,532,000. Management believes
that any current or future claim that may be assessed against X-Treem is
adequately provided for within the financial statement. Furthermore, it is
likely that the ultimate disposition of the current excess of liabilities over
assets will result in the future recognition of accounting income associated
with the forgiveness of debt.
Liquidity and Capital Resources
As of March 31, 1999, the Company had a working capital deficit of approximately
$3,870,000. Additionally, for the fiscal year ended March 31, 1999, the Company
incurred a loss from operations of $2,604,001.
With respect to the working capital deficit of approximately $3,870,000,
approximately $2,593,000 is attributable to X-Treem. Management anticipates that
this portion of the deficit will ultimately be reduced or eliminated, and future
accounting income recognized in connection with forgiveness of debt. In
addition, management plans to raise additional capital totaling approximately
$3,600,000, of which $1,600,000 has been raised during the period from April 1,
1999 to February 29, 2000. The Company intends to raise the balance,
approximately $2,000,000, during the fiscal year ending March 31, 2001.
In addition to raising capital, management is instituting plans for reducing and
eliminating losses from operations by increasing sales. Through December 1999,
the number of supermarket units that have authorized the sale of McCoy's
beverage products grew from approximately 630 stores, as of March 31, 1999, to
2,057 stores. Based on this trend, management projects profitable operations by
the end of the fiscal year, March 31, 2001.
The Company believes that the closing of the additional funding of approximately
$2,000,000 coupled with achieving profitable operations by fiscal year ending
March 31, 2001 are reasonably achievable and will enable the Company to continue
operating in the normal course of business. However, there can be no assurance
that such additional funding will be successfully completed or that profitable
operations will be achieved or achieved within the necessary time period. These
conditions raise doubt about the Company's ability to continue as a going
concern.
12
<PAGE>
Impact of Inflation
The Company does not believe that inflation has had a material adverse
effect on sales or income during the past periods. Increases in supplies or
other operating costs could adversely affect the Company's operations; however,
the Company believes it could increase prices to offset increases in costs of
goods sold or other operating costs.
13
<PAGE>
Item 7. FINANCIALS & FOOTNOTES
PHLO CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
For the Years Ended March 31, 1999 and 1998
14
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
CONTENTS
- --------------------------------------------------------------------------------
Page
-------
INDEPENDENT AUDITORS' REPORT F- 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheet F- 2-3
Statements of Operations F- 4
Statements of Changes in Stockholders' Deficiency F- 5
Statements of Cash Flows F- 6-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F- 8-25
15
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Phlo Corporation and subsidiaries
We have audited the accompanying consolidated balance sheet of Phlo Corporation
(formerly Perry's Majestic Beer, Inc.) ("Phlo") and subsidiaries as of March 31,
1999, and the related consolidated statements of operations, changes in
stockholders' deficiency and cash flows for the years ended March 31, 1999 and
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. Except as explained in the following paragraph,
our examination was made in accordance with generally accepted auditing
standards and, accordingly, included such tests of the accounting records and
such other auditing procedures as we considered necessary in the circumstances.
During the year ended March 31, 1999, Phlo issued 8,000,000 shares of its
capital stock to the shareholders of a beverage company, X-Treem Products
Corporation ("X-Treem"), as part of an agreement that, as of our report date,
has yet to be completed, to acquire a minimum of 80% of the capital stock of a
X-Treem through the exchange with such shareholders of up to 93% of the issued
and outstanding shares of Phlo's capital stock. In addition, there were
subsequent events after balance sheet date, but prior to our report date
relating to various debt and equity issuances. We have not been able to examine
certain records as they relate to certain of these transactions in order for us
to be able to form an opinion regarding the balances of the accounts directly
affected by these transactions, including goodwill, the stockholders' deficiency
section of the balance sheet and net income and earnings per share calculations
on the statement of operations.
Since we have not been able to examine certain documentation regarding these
transactions as described in the preceding paragraph, the scope of our work was
not sufficient to enable us to express an opinion, and we do not express an
opinion on the financial statements referred to above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 4 to the
financial statements, the Company incurred a net loss of $2,604,001 during the
year ended March 31,1999, and, as of that date, the Company's current
liabilities exceeded its current assets by $3,870,464 and its total liabilities
exceeded its total assets by $2,532,310 and uncertain conditions that the
Company faces in its day-to-day operations. These conditions raise substantial
doubt about its ability to continue as a going concern. Management's plans
regarding those matters also are described in Note 4. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Marcum & Kliegman LLP
March 10, 2000
New York, New York
F-1
16
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
CONSOLIDATED BALANCE SHEET
March 31, 1999
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 12,790
Subscription receivable 22,137
Note receivable 58,332
----------
Total Current Assets $ 93,259
PROPERTY AND EQUIPMENT, Net 25,714
OTHER ASSETS
Goodwill - net of accumulated amortization of $31,190 1,432,377
Security deposits 30,063
----------
Total Other Assets 1,462,440
----------
TOTAL ASSETS $1,581,413
==========
The accompanying notes are an integral part of these financial statements.
F-2
17
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
CONSOLIDATED BALANCE SHEET
March 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 1,292,169
Accrued expenses and taxes 1,881,554
Current portion of long-term debt 790,000
-----------
Total Current Liabilities $ 3,963,723
OTHER LIABILITIES
Long-term debt, less current portion 150,000
-----------
TOTAL LIABILITIES 4,113,723
COMMITMENTS AND CONTINGENCIES
PREFERRED STOCK OF SUBSIDIARY
No par value, 20,000 shares Series A convertible preferred
stock authorized, 2,247 shares issued and outstanding 700,000
STOCKHOLDERS' DEFICIENCY
Preferred stock, 15,000,000 authorized:
Series A convertible stock, $0.0001 par value, 500,000 shares
authorized, issued and outstanding (liquidation preferences $100,000) 50
Series B non-convertible stock, none issued and outstanding --
Series C convertible stock, $0.0001 par value, 212,623 shares
subscribed 21
Common stock, $0.0001 par value, 25,000,000 shares
authorized, 11,333,335 shares issued and outstanding 1,133
Common stock, $0.0001 par value, 1,968,728 shares subscribed 197
Additional paid in capital 3,454,154
Accumulated deficit (6,687,865)
-----------
TOTAL STOCKHOLDERS' DEFICIENCY (3,232,310)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIENCY $ 1,581,413
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
18
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended March 31, 1999, and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
SALES $ 1,176,208 $ 760,183
COST OF SALES 864,682 637,545
----------- -----------
GROSS PROFIT 311,526 122,638
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 2,359,407 1,377,791
----------- -----------
OPERATING LOSS (2,047,881) (1,255,153)
----------- -----------
OTHER INCOME (EXPENSES)
Interest expense (363,124) (175,055)
Bad debt expense (169,843) (260,000)
Loss on abandoned assets (80,500) --
Impairment of goodwill -- (1,332,183)
Other income -- 3,143
Legal settlement -- (1,064,616)
----------- -----------
TOTAL OTHER EXPENSES (613,467) (2,828,711)
----------- -----------
NET LOSS BEFORE MINORITY INTEREST (2,661,348) (4,083,864)
MINORITY INTEREST 57,347 --
----------- -----------
NET LOSS $(2,604,001) $(4,083,864)
=========== ===========
</TABLE>
Weighted Average Common Shares Outstanding 6,300,002 8,000,000
=========== ===========
Net Loss Per Share (Basic and Diluted) $ (0.41) $ (0.51)
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
19
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Series C
Preferred Stock Series A Preferred Stock
of Subsidiary Preferred Stock Subscribed
---------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - April 7, 1997 (Inception) 0 $ 0 0 $ 0 0 $ 0
Issuance of common stock
Issuance of preferred stock 2,247 700,000
Net loss
---------------------------------------------------------------------------------
Balance - March 31, 1998 2,247 700,000 0 0 0 0
Recapitalization - reverse
acquisition 500,000 50
Proceeds from private placement
offering 212,623 21
Conversion of debt to warrant
Minority interest
Net loss
---------------------------------------------------------------------------------
2,247 $700,000 500,000 $50 212,623 $21
=================================================================================
<CAPTION>
Common Stock
Subscribed Common Stock Additional
------------------------------------------------ Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - April 7, 1997 (Inception) 0 $ 0 0 $ 0 $ 0 $ 0 $ 0
Issuance of common stock 764 5,000 5,000
Issuance of preferred stock 700,000
Net loss (4,083,864) (4,083,864)
-----------------------------------------------------------------------------------------
Balance - March 31, 1998 0 0 764 5,000 0 (4,083,864) (3,378,864)
Recapitalization - reverse
acquisition 11,332,571 (3,867) 1,523,817 1,520,000
Proceeds from private placement
offering 1,968,728 197 452,813 453,031
Conversion of debt to warrant 1,477,524 1,477,524
Minority interest 57,347 57,347
Net loss (2,661,348) (2,661,348)
-----------------------------------------------------------------------------------------
1,968,728 $ 197 11,333,335 $ 1,133 3,454,154 $(6,687,865) $(2,532,310)
=========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
20
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss before minority interest $(2,661,348) $(4,083,864)
----------- -----------
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest 57,347 --
Depreciation and amortization 35,476 19,500
Loss on disposal of equipment 80,500 --
Write-off of goodwill -- 1,332,183
Bad debt expense -- 260,000
Decrease (increase) in accounts receivable 186,028 (246,028)
Decrease (increase) in inventory 271,031 (271,031)
Decrease (increase) in other current assets 105,000 (105,000)
Increase in security deposits (29,688) (375)
Increase in accounts payable 817,997 474,172
Increase in accrued expenses and taxes 494,150 1,387,626
----------- -----------
TOTAL ADJUSTMENTS 2,017,841 2,851,047
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (643,507) (1,232,817)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of goodwill 60,000 (1,332,183)
Issuance of notes receivable (58,332) (200,000)
Purchase of furniture and equipment -- (130,000)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,668 (1,662,183)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 223,735 2,190,000
Proceeds from issuance of capital stock 430,894 705,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 654,629 $ 2,895,000
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
21
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For the Years Ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
1999 1998
------- -------
NET INCREASE IN CASH $12,790 $ --
CASH - Beginning -- --
------- -------
CASH - Ending $12,790 $ --
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Non-cash investing and financing activities:
During the fiscal year ended March 31,1998 the Company assumed a
$600,000 debt from a non related entity in exchange for inventory,
fixed assets and intangible assets. In addition, a note payable in the
amount of $700,000 was converted to preferred stock.
During the fiscal year ended March 31,1998 the Company has recorded a
$200,000 allowance against its note receivable.
On December 7, 1998, the Company issued 8,000,000 shares of its common
stock at $0.19 per share in exchange for 67% of the equity interest in
X-Treem.
The accompanying notes are an integral part of these financial statements.
F-7
22
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - Basis of Presentation
On October 22, 1998, Phlo Corporation (formerly known as Perry's Majestic
Beer, Inc.), a Delaware corporation, ("Phlo") entered into a letter of
intent to acquire a minimum of 80% of the capital stock of a beverage
company, X-Treem Products Corporation (X-Treem") through the exchange of up
to 93% of the issued and outstanding shares of Phlo's common stock. On
December 7, 1998, Phlo acquired approximately 67% interest in X-Treem's
common stock in exchange for 8,000,000 shares of Phlo's common stock (the
"Acquisition"). For accounting purposes only, the transaction was treated
as a reverse acquisition whereby X-Treem was deemed the accounting
acquirer. The historical financial statements prior to December 7, 1998
were those of X-Treem. On June 10, 1999, Perry's Majestic Beer, Inc.
changed its name to Phlo Corporation.
On June 1, 1999, Phlo issued an aggregate of 9,379,151 shares of its common
stock in exchange for additional 14% of the equity interest of X-Treem. In
addition, Phlo also issued 1,013,549 shares of its Series C Convertible
Preferred Stock to the shareholders of X-Treem as additional consideration.
Phlo has the intention to complete the transaction with the shareholders of
X-Treem by issuance of additional shares of its stock to X-Treem
shareholders in exchange for additional equity interest of X-Treem. The
completion of this stock exchange transaction is subject to a number of
conditions, including Phlo's ability to increase its authorized common
shares. No assurance can be given that these conditions will be met and
that the transaction will be completed.
NOTE 2 - Organization and Nature of Business
Phlo was formed in December 1995 and is located in New York, New York. Phlo
has completed its transformation from a microbrew beer company to a
technology company, which is using the high-volume chain-store segment of
the beverage industry to commercialize its technology.
X-Treem, a Delaware corporation, formed on April 11, 1997, was formerly
engaged in producing and marketing new beverage lines, including primarily
the McCoy's line of fruit drinks, lemonades and ready-to-drink iced teas.
X-Treem acquired raw materials, intellectual property, distribution
contracts and assumed certain liabilities of a beverage company as part of
its formation.
Quigley's Orchard, Inc. ("Quigley"), a wholly owned subsidiary of Phlo,
formed on March 15, 1997, is engaged manufacturing and distributing
applesauce products.
F-8
23
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
After the Acquisition as discussed in Note 1, Phlo commenced the process of
redesigning the label and improving the flavor of the products under the
McCoy's line.
NOTE 3 - Summary of Significant Accounting Policies
Basis of Reporting
The accompanying audited financial statements have been prepared in
accordance with generally accepted accounting principles.
Principles of Consolidation
The consolidated financial statements include the accounts of Phlo and its
subsidiaries, Quigley and X-Treem, collectively referred to as the
"Company". All significant inter-company transactions and balances have
been eliminated in consolidation.
Minority Interest
The minority interest is held by certain investors who own approximately
33% of X-Treem. Since the minority interest on the consolidated balance
sheet has been reduced to zero, the minority's interest in current or
future losses are not being recorded until the aggregate of such prior
losses and accumulated deficit equals the aggregate of any future profits.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Goodwill
Goodwill in connection with acquisitions is being amortized on a
straight-line basis over a fifteen-year period. Amortization of goodwill
charged to operations for the years ended March 31, 1999 and March 31, 1998
amounted to $20,000 and $0 respectively. In addition, $1,332,183 of
unamortized goodwill has been written off during the last quarter ended
March 31, 1998 as management determined such goodwill was impaired in
accordance with Statement of Financial Standards No. 121, "Accounting for
the Impairment of Long Lived Assets and for Long Lived Assets to be
Disposed of." The amount of goodwill impairment was measured based on the
projected discounted future operating cash flows compared to the carrying
value of goodwill.
F-9
24
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - Summary of Significant Accounting Policies, continued
Inventories
Inventories are stated at the lower of cost or market. Costs, which include
purchases, freight and packaging, raw materials, packing fees and finished
products, are determined on the first-in, first-out basis. There was no
inventory at March 31, 1999.
Advertising Expense
Advertising costs of $146,633 and $100,712 are expensed as incurred during
the years ended March 31, 1999 and 1998, respectively.
Furniture and Equipment
Furniture and equipment is stated at cost. Maintenance and repair costs are
charged to expense as incurred, costs of major additions and betterments
are capitalized. When furniture and equipment is sold or otherwise disposed
of, the cost and related accumulated depreciation are eliminated from the
accounts and any resulting gain or loss is reflected in income.
Depreciation and Amortization
The cost of furniture and equipment is depreciated under the straight-line
and accelerated methods over the estimated useful lives of the related
assets.
Revenue Recognition
Revenue is recognized at the time products are shipped and title passes.
Income Taxes
Deferred income tax assets and liabilities are computed annually for
differences between the consolidated financial statement and tax basis of
assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowance is established when necessary to reduce deferred tax assets to
the amount expected to be realized.
Reclassifications
Certain accounts in the prior year consolidated financial statements have
been reclassified for comparative purposes to conform with the presentation
in the current year consolidated financial statements. These
reclassifications have no effect on the previously reported income.
F-10
25
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - Summary of Significant Accounting Policies, continued
Fair Value of Financial Instruments
The financial instruments of the Company are reported in the statement of
financial condition at market or fair values, or at carrying amounts that
approximate fair values because of the short maturity of the instruments.
Impairment of Long-Lived Assets
Certain long-term assets of the Company are reviewed at least annually as
to whether their carrying value has become impaired, pursuant to guidance
established in Statement of Financial Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." Management considers assets to be impaired if
the carrying value exceeds the future projected cash flows from related
operations (undiscounted and without interest charges). If impairment is
deemed to exist, the assets will be written down to fair value or projected
discounted cash flows from related operations. Management also re-evaluates
the periods of amortization to determine whether subsequent events and
circumstances warrant revised estimates of useful lives.
Stock Issued to Employees
The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation"
on April 1, 1996 for financial note disclosure purposes and will continue
to apply the intrinsic value method of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" for financial
reporting purposes.
Net (Loss) Per Share
The Company adopted the provision of SFAS No. 128, "Earnings per Share".
SFAS No. 128 eliminates the presentation of primary and fully dilutive
earnings per share ("EPS") and requires presentation of basic and diluted
EPS. Basic EPS is computed by dividing income (losses) available to common
stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS is based on the weighted-average number of
shares of common stock and common stock equivalents outstanding at
year-end. Common stock equivalents have been excluded from the calculation
of diluted EPS for 1999 and 1998, as such inclusion is anti-dilutive.
Comprehensive Income
In 1997, the FASB issued the Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which
establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity, except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under current
accounting
F-11
26
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - Summary of Significant Accounting Policies, continued
Comprehensive Income, continued
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same preeminence as other financial
statements. The Company adopted this standard in fiscal 1999 and the
implementation of this standard did not have any impact on its financial
statements.
Reporting of Segments
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," effective for fiscal years
beginning after December 15, 1997, with reclassification of earlier periods
required for comparative purposes. SFAS No. 131 establishes the criteria
for determining an operating segment and establishes the disclosure
requirements for reporting information about operating segments. The
Company adopted this standard in fiscal 1999 and the adoption of this
standard had no impact on the Company's results of operations or financial
condition. In addition, the Company has determined that under SFAS No. 131,
it operates in one segment of business and its customer and operations are
within the United States.
Accounting Developments
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("ASEC of AICPA") issued
Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". Effective for
fiscal years beginning after December 15, 1998, SOP No. 98-1 requires that
certain costs of computer software developed or obtained for internal use
continuously be capitalized and amortized over the useful life of the
related software. The Company does not expect that the adoption of this
standard will have a material impact on its financial statements.
In April 1998, the ASEC of AICPA issued SOP No. 98-5, "Reporting on the
Costs of Start-up Activities", and effective for fiscal years beginning
after December 15, 1998. SOP 98-5 requires the costs of start-up activities
and organization costs to be expensed as incurred. The Company does not
expect that the adoption of this standard will have a material impact on
its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for fiscal years beginning
after June 15, 1999, which has been deferred to June 30, 2000 by publishing
of SFAS No. 137. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. This Statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at
F-12
27
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 - Summary of Significant Accounting Policies, continued
Accounting Developments, continued
fair value. The accounting for changes in the fair value of a derivative
instrument depends on its intended use and the resulting designation. The
Company does not expect that the adoption of this standard will have a
material impact on its financial statements.
NOTE 4 - Going Concern
As shown in the accompanying financial statements, the Company incurred a
net loss of $2,604,001 during the year ended March 31, 1999. As of March
31, 1999, the Company's current liabilities exceeded its current assets by
$3,870,464, and its total liabilities exceeds its total assets by
$2,532,310. These factors, as well as the uncertain conditions that the
Company faces in its day-to-day operations, create an uncertainty as to the
Company's ability to continue as a going concern. The financial statements
do not include any adjustments that might be necessary if the Company is
unable to continue as a going concern. The continuation of the Company as a
going concern is dependent upon the success of future financing.
Management has taken action and is formulating additional plans to
strengthen the Company's working capital position and generate sufficient
cash to meet its operating needs through March 31, 2000 and beyond. Among
the actions taken, the Company anticipates generating more revenue through
the expansion of its McCoy beverage line and the raising of additional
funds through private placement offerings of its securities. No assurance
can be made that the management will be successful in achieving its plan.
NOTE 5 - Property and Equipment
Property and equipment consists of the following at March 31, 1999:
Furniture and fixtures $30,000
Less: Accumulated depreciation 4,286
--------
Net $25,714
=======
Depreciation expense for the years ended March 31, 1999 and 1998 was $4,286
and $19,500, respectively.
F-13
28
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6 - Income Taxes
No provision has been made in the accompanying consolidated financial
statements for income tax expense as a result of the current operating loss
and net operating loss ("NOL") carryforwards.
Differences between income tax benefits computed at the Federal statutory
rate (34%) and reported income taxes for 1999 and 1998 are primarily
attributable to the valuation allowance for the NOL and other permanent
differences.
As of March 31, 1999, the Company's total deferred tax assets amounted to
approximately $2,200,000, which relate primarily to NOL carryforwards, and
the tax effect of differences in financial and income tax reporting for
amortization methods, and the related valuation allowance. Management
concluded a full valuation allowance on the deferred tax assets was
appropriate due to the Company's failure to file its federal and state tax
returns.
As of March 31, 1999, the Company estimated the available NOL carryforwards
to be approximately $5,500,000, subject to certain limitations, which will
expire on various dates through 2020. The amount and utilization of the NOL
carryforwards cannot be determined at March 31, 1999 based upon the
information available.
NOTE 7 - Stock Options
1996 Stock Option Plan
In March 1996, the Board of Directors of the Company adopted, and the
stockholders of the Company approved the adoption of, the 1996 Stock Option
Plan. The maximum number of shares of common stock with respect to which
awards may be granted pursuant to the 1996 Plan is initially 2,000,000
shares. No options are outstanding under this plan.
Options Granted Separate from the Stock Option Plan
In connection with the initial public offering, the Company granted to its
underwriter in July 1996 an option to purchase 58,333 shares of common
stock at a purchase price of $7.20 per share exercisable commencing July
1997 and expiring July 2001.
During the year ended March 31, 1998, the Company granted a total of
1,350,000 options to purchase common stock with an exercise price equal to
fair market value at time of issuance to certain officers, directors and
employees. In addition, the Company issued options to two consultants to
purchase 100,000 shares of its common stock each for services rendered
during the year ended March 31, 1998. Accordingly, the Company recorded
compensation expense of $46,000 for options issued.
F-14
29
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - Stock Options
Options Granted Separate from the Stock Option Plan, continued
In July 1998, in connection with the acquisition of Leroux Creek applesauce
brand, the Company granted options to purchase of 750,000 shares of its
common stock to Leroux Creek and a former stockholder of Leroux Creek with
an exercise price of $0.10 per share. None of these options were issued and
the Company has been relieved from such issuance by agreement of all
parties in June 1999 (see note 11F).
In December 1998, the Company issued a combined total of options to
purchase 850,000 shares of its common stock to two officers in exchange for
the return of 450,000 shares of common stock from these officers. These
options have an exercise price of $0.05 per share and expire in December
2003.
A summary of stock option activity is as follows:
Weighted Average
Number Exercise Price
of Options Common Stock
---------- -----------------
Balance - April 1, 1997 58,333 $7.20
Options granted 1,550,000 0.46
Options exercised --
Options cancelled --
---------
Balance - March 31, 1998 1,608,333 0.48
Option granted 1,600,000 0.75
Option cancelled --
Option exercised --
---------
Balance - March 31, 1999 3,208,333 $0.26
---------
Exercisable at March 31, 1999 2,908,333 $0.28
=========
The options issued to officers, directors and employees expire in five (5)
to ten (10) years and may be exercised at anytime. The options issued to
consultants to purchase 200,000 shares of its common stock, at an exercise
price of $0.875, have a weighted average remaining contractual life of 7.25
years.
F-15
30
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 - Stock Options
Options Granted Separate from the Stock Option Plan, continued
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of SFAS 123.
The weighted-average fair value of options granted was $0.05 per share. The
fair market value for these options was estimated at the date of grant
using a Black-Scholes option-pricing model with the following
weighted-average assumptions for the year ended March 31, 1999:
ASSUMPTIONS
---------------------------------------------------------------------------
Risk-free rate 4.43%
Dividend yield --
Volatility factor of the expected market price 1.517
Average life 5 Years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require that input of highly subjective assumptions including the
expected stock price volatility. Because of the Company's stock options
have characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially
affect the fair value estimated, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. The
Company's pro forma information for the year ended March 31, 1999 is as
follows:
Net Loss - As reported $(2,604,001)
Net Loss - Pro forma $(2,646,501)
Pro forma net loss per share:
- Basic $(0.42)
- Diluted $(0.42)
NOTE 8 - Stockholders' Equity
Common Stock
Phlo has 25,000,000 authorized common shares, $0.0001 par value, of which
3,783,335 shares were issued and outstanding at March 31, 1998.
F-16
31
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 - Stockholders' Equity, continued
Common Stock, continued
On December 1, 1998, two officers of the Company returned 450,000 shares of
the common stock in exchange for options to purchase 850,000 shares of
common stock (see Note 7). These returned shares were treated as having
been retired.
On December 7, 1998, Phlo issued 8,000,000 shares of its common stock to
three shareholders of X-Treem in exchange for 67% equity interest of
X-Treem (see Note 1).
Conversion of Debt to Warrant
On June 30, 1998, a note payable along with related interest in the total
amount of $1,477,524 was converted to a warrant. The holder of the warrant
is entitled to purchase of 893 shares of the common stock of X-Treem at an
exercise price of $0.50 per share. In connection with the Acquisition, this
warrant can be converted into warrant to purchase of Phlo's common stock.
Preferred Stock
The Company has 15,000,000 shares of "blank check" preferred stock, $0.0001
par value, authorized.
Series A Convertible Preferred Stock
At March 31, 1999, the Company has 500,000 shares of Series A Convertible
Preferred Stock ("Series A Preferred") issued and outstanding. The Series A
Preferred holders are entitled to one vote per share on all matters
presented to the stockholders with certain exceptions as defined in the
Certificate of Designation. In addition, the Series A Preferred is subject
to certain conversion, redemption and liquidation provisions, as defined.
Series B Non-Convertible Preferred Stock
At March 31, 1999, none of Series B Non-Convertible Preferred Stock
("Series B Preferred") issued and outstanding. The Series B Preferred
holders are entitled to one vote per share on all matters presented to the
stockholders with certain exceptions as defined in the Certificate of
Designation. In addition, the Series B Preferred is subject to certain
redemption and liquidation provisions, as defined.
Series C Convertible Preferred Stock
At March 31, 1999, none of Series C Convertible Preferred Stock ("Series C
Preferred") was issued and outstanding. The Series C Preferred is subject
to certain conversion, redemption and liquidation provisions, as defined.
Private Placement Offering
On March 30, 1999, the Company completed the sale, as part of a private
placement offering, of 984,364 units of securities for an aggregate
purchase price of $0.46 per unit. Each unit consists of two shares of the
common stock, par value $0.0001, 0.216 of a share of the Series C Preferred
and a warrant to purchase additional one (1) share of the common stock and
0.108 of additional share of Series C Preferred. Total proceeds from the
sale of these units amounted to $453,031. Of the total proceeds, $430,894
was received prior to March 31, 1999 and the remaining balance of $22,137
was received shortly subsequent to March 31, 1999. As of March 31, 1999,
such common stock and Series C Preferred have not been issued. Accordingly,
these common stock and Series C Preferred are presented as share subscribed
but not yet issued on the accompanying balance sheet.
F-17
32
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Preferred Stock of Subsidiary
X-Treem has 20,000 shares of Series A Convertible Preferred Stock
authorized, no par value, of which 2,247 shares were issued and outstanding
at March 31, 1999. The Series A Convertible Preferred Stock holders are
entitled to receive cumulative preferential dividends at 10%. In addition,
the Series A Convertible Preferred Stock is subject to certain conversion,
redemption and liquidation provisions, as defined.
F-18
33
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 - Long-Term Debt
Long-term debt as of March 31, 1999 consists of the
following:
Term note payable with interest due monthly at a rate
of 12% per annum. The note matured on March 31, 1998
when principal and unpaid interest was due. The note is
currently in default. No action has been taken or
threatened against the Company to enforce the note. The
Company continues to accrue interest on this note. $600,000
Term note payable with interest at a rate of 12% per
annum. Principal and accrued interest are payable at
the note's maturity date on February 12, 2001. The
Company continues to accrue interest on this note. 50,000
Note payable with principal plus an interest payment of
$10,000 are payable at the note's maturity on June 27,
1997. The note provides for a penalty interest at a
rate of $1,250 per week after maturity. The holder of
the note has initiated an action to enforce the note.
The Company continues to accrue interest on this note. 100,000
Note payable with interest at a rate of 12% per annum.
Principal and interest are payable at the note's
maturity date on November 24, 2000. The Company
continues to accrue interest on this note. 100,000
Note payable with principal plus an interest payment of
$5,000 were payable at the loan's maturity date on
March 31, 1998. The parties agreed to convert this debt
into equity, however, this conversion has not taken
place to date, and therefore, the note is in default.
The Company continues to accrue interest on this note.
The holder has agreed informally to extend the date of
maturity in order to consummate the conversion. 45,000
Note payable with principal plus an interest payment of
$5,000 was payable on the note's maturity date on March
30, 1998. The parties agreed to revise the terms of the
note to provide for an increase in interest payable
from $5,000 to $10,000 and a maturity date of December
31, 1998. The note is currently in default. No action
has been taken or threatened against the Company to
enforce the note. The Company continues to accrue
interest on this note. 45,000
-------
Total Long-Term Debt 940,000
Less: Current Portion 790,000
-------
Long-Term Debt, net of current portion $150,000
========
F-19
34
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - Commitments and Contingencies
Employment Agreement
The Company has one employment agreement with an executive of the Company
is that expires in the year 2001. The annual commitment for compensation is
approximately $150,000 each year.
Loan Guarantee
The Company is a guarantor of loan obtained by an unrelated party in
connection with a purchase agreement. In addition, payments of the loan are
secured by the Company's assets. Total outstanding balance of the loan at
March 31, 1999 was approximately $65,000.
Licensing Agreement
On December 5, 1998, the Company entered into an agreement, to exclusively
license an advanced technology and the related trademarks for use in the
development, manufacture, marketing, distribution and sale of products
incorporating the delivery system in the United States and Canada for
$70,000. The Company paid $60,000 during the year ended March 31, 1999 and
additional $10,000 was paid subsequent to the year-end. In addition, the
Company is required to pay royalty fee of 2.5% of Net Sales of the
Products, as defined.
Litigation
The Company is involved in litigation through the normal course of
business. The Company believes that the resolution of these matters will
not have a material adverse effect on the financial position of the
Company.
On February 12, 1999, a judgment in the amount of $1,064,616 was entered
against X-Treem. Such amount has been accrued and included in accrued
expenses at March 31, 1999.
Related Party Transaction
On December 1, 1998, Phlo entered into an license agreement with X-Treem,
whereby X-Treem granted to Phlo the exclusive right and license to use the
names and marks of the "McCoy" products, including but not limited to the
right and license to manufacture and sell of such products (the "Name and
Marks") for $100,000. In addition, X-Treem also granted to Phlo an option
to purchase the Name and Marks for $300,000. The option will expire on
December 31, 2001. On December 23, 1998, after the Acquisition as discussed
in Note 1, Phlo exercised the option and issued to X-Treem a promissory
note of $300,000 with interest at 10% per annum. This exercise of option
was treated as a related party transaction and has been eliminated in the
consolidation.
F-20
35
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 - Commitments and Contingencies, continued
Late Filings
The Company was required to file certain quarterly and annual reports with
the Securities Exchange Commission. However, the Company has failed to file
these reports timely. The Company intends to file these reports
contemporaneously with this filing. Management believes that the late
filings will not have a material adverse effect on the financial position
of the company.
Lease
The Company occupies its premises subject to a noncancelable lease
agreement expiring in March 2004. The Company will pay a fixed monthly rent
plus real estate taxes.
Future minimum payments under an operating lease are as follows at March
31, 1999.
For the Year Ending
March 31, Amount
-------------------------------------------------------------
2000 $ 120,250
2001 120,250
2002 120,250
2003 120,250
2004 30,062
---------
Total minimum lease payments $ 511,062
=========
Rent expense for the years ended March 31, 1999 and 1998 was $70,410 and
$33,833, respectively. In connection with the above lease, a refundable
security deposit in the amount of $30,063 is being held by the landlord.
NOTE 11 - Subsequent Event
A) Creation of Subsidiaries and Assignment of Assets
1) The Company incorporated Phlo Beverage Products Company, a wholly-owned
subsidiary of the Company on July 16, 1999. On July 19, 1999, the Company
assigned to Phlo Beverage Products Company all of its right, title and
interest in and to finished goods and raw materials inventory, and all
intellectual property, related to the McCoy's beverage line. Thereafter,
the production and sale of McCoy's beverages was conducted by Phlo Beverage
Products Company.
F-21
36
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - Subsequent Event, continued
2) The Company incorporated Phlo System, Inc., a wholly-owned subsidiary of
the Company, on August 2, 1999. On August 4, 1999, the Company assigned to
Phlo System, Inc. all of its right, title and interest in and to the
exclusive license of the advanced delivery technology for use in all
liquids and certain foods. Phlo System, Inc. will conduct the Company's
biotechnology-related activities.
B) Notes Payable
The following notes were issued by the Company subsequent to March 31,
1999, in conjunction with financing activities:
1) In May, 1999 a $250,000 term note payable was obtained with simple interest
accrues at an annual rate of 14% and is payable at the note's maturity date
of August 30, 1999. The Company exercised its option to extend the maturity
date of the note to December 31, 1999, in exchange for the issuance to
holder of warrants to purchase 200,000 shares of common stock at an
exercise price of $0.20 per share. Payment was not made on the date of
maturity. The Company believes that the holder engaged in intentional
conduct which resulted in damage to the Company. The holder filed a motion
for summary judgment against the Company, and the Company answered and
asserted its counterclaims. On March 7, 2000, the summary judgment motion
was granted, and the Company's claims were severed. The Company is
preparing to bring an action against the holder to assert its claims.
F-22
37
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11 - Subsequent Event, continued
2) In June 1999, a bridge loan payable in the principal amount of $104,000
with simple interest accruing at an annual rate of 10% and is payable at
the note's maturity date of June 29, 2000. In consideration of this loan
and two prior bridge loans, the Company has agreed to issue shares of the
Company's common and convertible preferred stock to the holder representing
approximately 200,000 shares of common stock on a fully converted basis.
3) In November and December 1999, convertible notes payable in the aggregate
amount of $400,000 were entered into with simple interest accruing at an
annual rate of one percentage point (1%) above the prime rate and is
payable at the notes maturity dates which begin in May, 2001. After
December 31, 1999, the principal under the notes is convertible, at the
option of the holder, into shares of the Company's common stock at a
conversion price of $0.22 per share.
4) In December 1999 two bridge loans in the aggregate amount of $100,000 were
entered into with simple interest accruing at an annual rate of one
percentage point (1%) above the prime rate and is payable at the notes'
maturity date of March 31, 2000. A payment default occurs under the note
only in the event that the Company fails to pay an amount due as and when
payable, with such failure continuing for a period of thirty days.
C) Equity
1) In April and May, 1999, in consideration for $80,000, the Company sold to
three investors units representing an aggregate of 173,913 shares of Common
Stock and 18,782 shares of Series C Convertible Preferred Stock. All of the
shares of Common Stock and 2,348 shares of the Series C Convertible
Preferred Stock issuable in connection with this transaction have been
issued as of March 15, 2000.
F-23
38
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16 - Subsequent Event, continued
2) In June 1999, in consideration for $500,000, the Company sold to an
institutional investor 2,312,872 shares of Common Stock and 238,051.5
shares of Series C Convertible Preferred Stock. All of the Common Stock and
no shares of the Series C Convertible Preferred Stock have been issued as
of March 15, 2000.
3) In October and November, 1999, in consideration of $121,500, the Company
sold to seven investors units aggregating 303,750 shares of Common Stock,
of which 253,750 shares have been issued as of March 15, 2000.
4) In March, 2000, in consideration of $165,000, the Company sold to five
investors an aggregate of 165,000 shares of Common Stock, none of which
have been issued as of March 15, 2000.
5) In connection with the Unit Offering commenced in the fourth fiscal quarter
of 1999, the Company has agreed to issue a cashless warrant providing for
the purchase of 9,606,682 shares of Common Stock at an exercise price of
$0.01 per share in consideration for providing bridge financing related to
such offering and to issue a cashless warrant providing for the purchase of
2,401,670 shares of Common Stock at an exercise price of $0.01 per share
for investment banking services related to such offering. Such warrants
have not been issued as of March 15, 2000.
6) In August and November 1999, the Company issued 511,435 and 30,000 shares
of Common Stock to a company in consideration of financial services
rendered.
7) In September, 1999, the Company issued 26,374 shares of Common Stock to a
company in connection with advertising services rendered to the Company and
36,550 shares of Common Stock to a law firm in connection with legal
services rendered to the Company.
F-24
39
<PAGE>
PHLO CORPORATION AND SUBSIDIARIES
(FORMERLY PERRY'S MAJESTIC BEER, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16 - Subsequent Event, continued
Equity, continued
8) Between August and October, 1999, the Company issued an aggregate of
125,000 shares of Common Stock to two of its distributors pursuant to sales
incentive programs offered to such distributors by the Company.
9) In December, 1999, the Company entered into an agreement with the providers
of advertising and marketing services pursuant to which such service
providers would earn warrants to purchase an aggregate of 50,000 shares of
Common Stock at an exercise price of $0.10 per share in consideration for
services rendered. Pursuant to such agreement, warrants providing for the
purchase of such shares vest and become issuable as the performance of
certain tasks is accomplished. In connection therewith, the Company issued
two cashless warrants in January, 2000, each providing for the purchase
thereunder of 8,333 shares of the Common Stock at an exercise price of
$0.10 per share.
10) In October, 1999, the Company issued 20,000 shares of Common Stock to an
individual in connection with an agreement providing for the rendering of
investment banking services. Terms of this agreement were breached, and the
Company has filed suit seeking damages and the return of the shares of
Common Stock to the Company.
11) In March, 2000, Phlo System, Inc entered into an exclusive license
agreement for all uses, worldwide, of a proprietary composition consisting
of an ester (derivative) of Vitamin E combined with a delivery system. In
connection with the execution of this license agreement, the Company issued
the licensor of the technology, a warrant to purchase 200,000 shares of the
common stock of the Company at an exercise price of $0.05 per share.
D) In June, 1999, the Company entered into a settlement agreement with Leroux
Creek Food Corporation and its President, Edward Tuft, which resulted in
the Company being relieved of its prior agreement to issue to Leroux Creek
and Mr. Tuft options to purchase an aggregate of 750,000 shares of Common
Stock at an aggregate purchase price of $75,000.
F-25
40
<PAGE>
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers
The names and ages of the directors, executive officers, significant
employees, and promoters of the Company are set forth below.
Name Age Position Held
James B. Hovis 49 President & CEO, Director
Robert Sipper 45 Chief Operating Officer,
Director
Anne P. Hovis 39 Executive Vice President, General
Counsel, Secretary & Director
Robert J. Corsaro, Jr. 43 Senior Vice President Sales
And Marketing
Allen Hoube 38 Vice President, Production Operations
Background of Executive Officers and Directors
James B. Hovis, President, Chief Executive Officer and a Director. Mr.
Hovis is responsible for the overall management of the Company, including the
product development, sales, marketing, distribution, production and financial
functions. Additionally, Mr. Hovis directs the Company's acquisition and
financing activities. Previously, Mr. Hovis was the partner in charge of the
corporate practice at White, Blackburn & Conte, P.C., a Richmond, Virginia-based
law firm. Mr. Hovis has over 20 years of experience involving a wide range of
corporate activity, both as a principal and as a professional representative or
advisor, including all types of financings and refinancings (including debt and
equity private placements), mergers, acquisitions (including product
acquisitions and leveraged and management buyouts), divestitures, sales of
assets or stock, restructurings and reorganizations. Additionally, his
professional background has included a strong emphasis on developing business
entities in a number of different industries, and he has been published in his
areas of expertise. During the period from 1983 to the present, he has served on
a number of boards of developing companies. Mr. Hovis is a graduate of Davidson
College and received his J.D. degree from the T.C. Williams School of Law at the
University of Richmond. He is a member of the Virginia State Bar.
41
<PAGE>
Robert J. Sipper, Chief Operating Officer and a Director. Mr. Sipper is
responsible for the overall management and operations of the Company under the
direction of Mr. Hovis, including sales, marketing, distribution, production and
administration. Previously, Mr. Sipper founded H&H Day, Inc. a beverage
brokerage company. Prior to that, Mr. Sipper served as the Executive Vice
President and Chief Operating Officer of Mootch & Muck, Inc., a beverage
distributor in New York City, and was the President of Bev-Tyme, Inc., the
corporate parent of Mootch & Muck, Inc. Mr. Sipper also practiced law for ten
years, including as a partner of Leopold, David & Sipper. Mr. Sipper has a B.A.
from Fordham University and his J.D. degree from Vermont Law School. He is a
member of the New York State Bar.
Anne P. Hovis, Executive Vice President, General Counsel, Secretary and a
Director. Mrs. Hovis is responsible for managing the day-to-day administration
of the Company and assists Messrs. Hovis and Sipper in the overall management of
the Company. She is also responsible for the legal affairs of the Company,
including intellectual property protection, compliance with FDA regulations,
securities filings, compliance with applicable laws, negotiation of agreements
with distributors and co-packers, and collection of overdue accounts receivable.
Mrs. Hovis also assists Mr. Hovis in the Company's transactional activities,
including financings and acquisitions. Previously, Mrs. Hovis was an attorney
with Anderson, Hibey & Blair, a Washington, D.C. based firm, where she
specialized in corporate legal and international trade policy matters. Prior to
this, Mrs. Hovis was an attorney with Lane & Mittendorf, where she participated
in the firm's corporate transactional (including stock and asset acquisitions
and commercial lending facilities) and international trade practices. Mrs. Hovis
has a B.A. from New York University and a J.D. degree from the Georgetown
University Law Center. She is a member of the District of Columbia Bar.
Robert J. Corsaro, Jr., Senior Vice President, Sales and Marketing. Mr.
Corsaro is responsible for the Company's activities related to sales and
distribution. He is responsible for managing the Company's sales force and
developing and implementing the Company's sales and distribution strategies.
Previously, Mr. Corsaro was Vice President of Sales for Carvel Ice-Cream
Company, where he supervised sales directors and key account mangers and managed
the company's retail sales and distribution efforts. Prior to joining Carvel,
Mr. Corsaro was the Director of Sales for TriArc Beverages and, prior to that,
Director of Field Sales for Snapple Beverage Corporation, where he was
responsible for managing a sales organization responsible for 27 states. Mr.
Corsaro also acted as a District Sales Manager with Pepsi-Cola and an Assistant
Operations Manager with Nabisco. Mr. Corsaro has a B.S. in Business Management
from Farleigh Dickinson University.
Allen G. (Skip) Hoube, Jr., Vice President of Production Operations. Mr.
Hoube is responsible for coordinating the production of the Company's beverage
products, including inventory and quality control, raw material and production
scheduling, and identification of new production facilities to accommodate
nationwide distribution. Previously, Mr. Hoube served as Director of Quality
Assurance for Premium Beverage Packers, Inc. Formerly, he was the Contract
Manufacturing Manager for Royal Crown
42
<PAGE>
Company, Inc. and the Director of Operation for Tribev Corp. (a division of
Royal Crown). He also served as President and General Manger of RC Cola Canada
Ltd. Mr. Hoube has a B.S. in Biochemistry from Auburn University.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent
(10%) of a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of common stock and other equity securities of the Company.
Officers, directors and greater than ten percent shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based solely on its review of the copies of
such reports furnished to the Company during the year ended March 31, 1999, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were satisfied.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the compensation paid to the executive
officers for the fiscal year ending March 31, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compenation
Annual Compensation Awards Awards Payouts
--------------------------
(a) (b) (c) (d) (e) (f) (g) (h)
Other Securities
Annual Restricted Under- All Other
Compen- Stock lying L/TIP Compen-
Name and sation Awards Options/ Payouts sation
Principal Position Year Salary Bonus ($) ($) SARa (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James B. Hovis
President and CEO 1999 $165,000 -0- -0- -0- -0- -0- -0-
Robert J. Sipper
COO 1999 $150,000 -0- -0- -0- 425,000 -0- -0-
Anne P. Hovis 1999 $135,000 -0- -0- -0- -0- -0- -0-
Exec. Vice President
General Counsel &
Secretary
Robert J. Corsaro, Jr
Sr. VP Sales and
Marketing 1999 $132,000 -0- -0- -0- -0- -0- -0-
Allen Hoube, VP
Production 1999 $125,000 -0- -0- -0- -0- -0- -0-
Operations
Mark Butler, VP 1999 $120,000 -0- -0- -0- 425,000 -0- -0-
Food Products
</TABLE>
43
<PAGE>
The following table sets forth certain information with respect to options
granted during the last fiscal year to the executive officers named in the above
Summary Compensation Table.
Option/SAR Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable Value at
Assumed Annual Alternative
Rates of stock Price to (f) and (g):
Appreciation Grant Date
Individual Grants for Option Term Value
- ----------------------------------------------------------------------------- -------------------- ---------------
(a) (b) (c) (d) (e) (f) (g) (h)
% of
Total
Options
Number of SARs
Securities Granted to Exercise Grant
Underlying Employees or Base Expira- Date
Options/SARS in Fiscal Price tion Present
Name Granted (#) Year ($/Share) Date 5%($) 10%($) Value($)
- ---- ----------- --------- --------- ---- ----- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert Sipper 425,000(1) 50% $.05 12/1/08 14,175 30,600 NA
Mark Butler 425,000(1) 50% $.05 12/1/08 14,175 30,600 NA
</TABLE>
- ----------
(1) Options are exercisable for shares of Common Stock
Compensation of Directors
The names of the directors of the Company as of March 31, 1999, are James
B. Hovis, Robert J. Sipper, and Anne P. Hovis. Each director of the Company is
entitled to receive reasonable out-of-pocket expenses incurred in attending
meetings of the Board of Directors of the Company. No payments were made to
directors during the year ended March 31, 1999, for services provided as a
director.
44
<PAGE>
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
As of April 4, 1996, the Company entered into a five (5) year employment
agreement with Mark Butler pursuant to which Mr. Butler served as the Company's
Vice President of Sales and Chief Operating Officer and was elected to the
Company's Board of Directors. The employment agreement was amended in November
1996, February 1997, and March 1997. In March, 1999, Mr. Butler resigned as an
officer and director of the Company, thereby terminating his employment
agreement.
As of April 4, 1996, the Company entered into a five (5) year employment
agreement with Robert Sipper pursuant to which Mr. Sipper serves as the
Company's President and Chief Executive Officer. The agreement, which was
amended in February, 1997, provides for Mr. Sipper to receive a salary of
$150,000 per annum. Pursuant to the Stock Exchange Transaction, which involved a
change in control of the Company, Mr. Sipper relinquished his positions as
President and CEO of the Company in December, 1998, and became the Company's
Chief Operating Officer.
Stock Option Plans and Agreements
In March 1996, the Board of Directors of the Company adopted, and the
stockholders of the Company approved the adoption of, the 1996 Stock Plan
(hereinafter called the "1996 Plan"). The purpose of the 1996 Plan is to provide
an incentive and reward for those executive officers and other key employees in
a position to contribute substantially to the progress and success of the
Company, to closely align the interests of such employees with the interests of
stockholders of the Company by linking benefits to stock performance and to
retain the services of such employees, as well as to attract new key employees.
In furtherance of that purpose, the 1996 Plan authorizes the grant to executives
and other key employees of the Company and its subsidiaries of stock options,
restricted stock, deferred stock, bonus shares, performance awards, dividend
equivalent rights, limited stock appreciation rights and other stock-based
awards, or any combination thereof. The 1996 Plan is expected to provide
flexibility to the Company's compensation methods, after giving due
consideration to competitive conditions and the impact of federal tax laws.
The maximum number of shares of Common Stock with respect to which awards
may be granted pursuant to the 1996 Plan is initially 2,000,000 shares. To date,
no options have been granted under the 1996 Plan. Shares issuable under the 1996
Plan may be either treasury shares or authorized but unissued shares. The number
of shares available for issuance will be subject to adjustment to prevent
dilution in the event of stock splits, stock dividends or other changes in the
capitalization of the Company.
The 1996 Plan will be administered by a committee consisting of not less
than two (2) members of the Board of Directors who are "disinterested" within
the meaning of Rule 16b-3 promulgated under the Exchange Act and "outside
directors" within the
45
<PAGE>
meaning of Section 162(m) of the Internal Revenue Code (including persons who
may be deemed outside directors by virtue of any transitional rule which may be
adopted by the Internal Revenue Service implementing such Section) (the
"Committee"). The Board will determine the persons to whom awards will be
granted, the type of award and, if applicable, the number of shares to be
covered by the award. During any calendar year, no person may be granted under
the 1996 Plan awards aggregating more than 100,000 shares (which number shall be
subject to adjustment to prevent dilution in the event of stock splits, stock
dividends or other changes in capitalization of the Company).
Types of Awards
Stock Options. Options granted under the 1996 Plan may be "incentive stock
options" ("Incentive Options") within the meaning of Section 422 of the Internal
Revenue Code or stock options which are not incentive stock options
("Non-Incentive Options" and, collectively with Incentive Options, hereinafter
referred to as "Options"). The persons to whom Options will be granted, the
number of shares subject to each Option granted, the prices at which Options may
be exercised (which shall not be less than the fair market value of shares of
common stock on the date of grant), whether an Option will be an Incentive
Option or a Non-Incentive Option, the time or times and the extent to which
Options may be exercised and all other terms and conditions of Options will be
determined by the Committee.
Each Incentive Option shall terminate no later than ten (10) years from the
date of grant, except as provided below with respect to Incentive Options
granted to 10% Stockholders (as hereinafter defined). No Incentive Option may be
granted at any time after October 2006. Each Non-Incentive Option shall
terminate not later than fifteen (15) years from the date of grant. The exercise
price at which the shares may be purchased may not be less than the fair market
value of shares of common stock at the time the Option is granted, except as
provided below with respect to Incentive Options granted to 10% stockholders.
Options granted to executive officers may not be exercised at any time prior to
six (6) months after the date of grant.
The exercise price of an Incentive Option granted to a person possessing
more than 10% of the total combined voting power of all shares of stock of the
Company or a parent or subsidiary of the Company (a "10% Stockholder") shall in
no event be less than 110% of the fair market value of the shares of the common
stock at the time the Incentive Option is granted. The term of an incentive
Option granted to a 10% Stockholder shall not exceed five (5) years from the
date of grant.
The exercise price of the shares to be purchased pursuant to each Option
shall be paid (i) in full in cash, (ii) by delivery (i.e., surrender) of shares
of the Company's common stock owned by the optionee at the time of the exercise
of the Option, (iii) in installments, payable in cash, if permitted by the
Committee or (iv) any combination of the foregoing. The stock-for-stock payment
method permits an optionee to deliver one (1) or more shares of previously-owned
common stock of the Company in satisfaction of
46
<PAGE>
the exercise price of subsequent Options. The optionee may use the shares
obtained on each exercise to purchase a larger number of shares on the next
exercise. (The foregoing assumes an appreciation in value of previously acquired
shares). The result of the stock-for-stock payment method is that the optionee
can generally avoid immediate tax liability with respect to any appreciation in
the value of the stock utilized to exercise the Option.
Shares received by an optionee upon exercise of a Non-Incentive Option may
not be sold or otherwise disposed of for a period determined by the Board of
Directors of the Company upon grant of the Option, which period shall be not
less than six (6) months nor more than three (3) years from the date of
acquisition of the shares (the "Restricted Period"), except that, during the
Restricted Period (i) the optionee may offer the shares to the Company and the
Company may, in its discretion, purchase up to all the shares offered at the
exercise price and (ii) if the optionee's employment terminates during the
Restricted Period (except in limited instances), the optionee, upon written
request of the Company, must offer to sell the shares to the Company at the
exercise price within seven (7) business days. The Restricted Period shall
terminate in the event of a Change in Control of the Company (as defined in the
1996 Plan), or at the discretion of the Board of Directors of the Company. After
the Restricted Period, an optionee wishing to sell must first offer such shares
to the Company at the fair market value.
Limited Stock Appreciation Rights. The Committee is authorized, in
connection with any Option granted under the 1996 Plan, to grant to the holder
of such Option a limited stock appreciation right ("LSAR"), entitling the holder
to receive, within sixty (60) days following a Change in Control, an amount in
cash equal to the difference between the exercise price of the Option and the
market value of the common stock of the Company on the effective date of the
Change in Control. The LSAR may be granted in tandem with an Option or
subsequent to grant of the Option. The LSAR will only be exercisable to the
extent that the related Option is exercisable and will terminate if and when the
Option is exercised.
Restricted and Deferred Stock. An award of restricted stock or deferred
stock may be granted under the 1996 Plan. Restricted stock is subject to
restrictions on transferability and other restrictions as may be imposed by the
Committee at the time of grant. In the event that the holder of restricted stock
ceases to be employed by the Company during the applicable restrictive period,
restricted stock that is at the time of cessation of employment subject to
restrictions shall be forfeited and reacquired by the Company. Except as
otherwise provided by the Committee at the time of grant, a holder of restricted
stock shall have all of the rights of a stockholder including, without
limitation, the right to vote restricted stock and the right to recover
dividends thereon. An award of deferred stock is an award that provides for the
issuance of stock upon expiration of a deferral period established by the
Committee. Except as otherwise determined by the Committee, upon termination of
employment of the recipient of the award during the applicable deferral period,
all stock that is at the time of the termination of employment subject to
deferral shall be forfeited. Until such time as the
47
<PAGE>
stock which is the subject of the award is issued, the recipient of the award
has no rights as a stockholder.
Dividend Equivalent Awards. A dividend equivalent gives the recipient the
right to receive cash or other property equal in value to the dividends that
would be paid if the recipient held a specified number of shares of common stock
of the Company. A dividend equivalent right may be granted as a component of
another award or as separate award.
Bonus Shares and other Share Based Awards. The 1996 Plan authorizes the
Committee to grant shares as a bonus, or to grant shares or other awards in lieu
of obligations of the Company to pay cash under other plans or compensatory
arrangements, upon such terms as shall be determined by the Committee. The 1996
Plan also authorizes the Committee to grant other forms of awards based upon,
payable in, or otherwise related, in whole or in part, to, common stock,
including, without limitation, convertible or exchangeable debentures or other
debt securities, other rights convertible or exchangeable into shares, purchase
rights for shares, awards contingent upon performance of the Company, and awards
valued by reference to the book value of shares of common stock or awards
determined by reference to the value of securities of, or the performance of,
specified subsidiaries.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 31, 1999, certain information
with respect to the beneficial ownership of common stock and preferred stock by
each person or entity known by the Company to be the beneficial owner of 5% or
more of such shares, each officer and director of the Company, and all officers
and directors of the Company as a group:
- --------------------------------------------------------------------------------
Name and Address of
Beneficial Owner (1)
Percentage
Shares of (%) of Percentage(%)
Common Stock Common Shares of of Total
Owned Stock(2) Preferred Combined
Stock Vote(3)
- --------------------------------------------------------------------------------
James B. Hovis 4,772,800(4) 39.26% 37.70%
- --------------------------------------------------------------------------------
Anne P. Hovis 4,772,800(5) 39.26% 37.70%
- --------------------------------------------------------------------------------
Edward J. Mathias 3,227,200(6) 26.54% 25.49%
- --------------------------------------------------------------------------------
Robert J. Sipper 825,000(7) 6.79% 6.52%
- --------------------------------------------------------------------------------
All officers and
directors as a
group (three persons)
5,597,800 46.04% 44.22%
- --------------------------------------------------------------------------------
(1) The address of each Stockholder shown above except as otherwise indicated
is c/o Phlo Corporation, 475 Park Avenue South, 7th Floor, New York, New
York 10016.
48
<PAGE>
(2) Based upon 11,333,335 shares of common stock outstanding as of March 31,
1999, and options to purchase shares of Common Stock exercisable by the
listed individuals which are outstanding as of March 31, 1999.
(3) Based upon 11,333,335 shares of common stock and 500,000 shares of
preferred stock outstanding as of March 31, 1999, and options to purchase
shares of common stock exercisable by the listed individuals which are
outstanding as of March 31, 1999.
(4) Includes 3,139,200 shares as to which Mr. Hovis has sole voting power and
1,633,600 shares as to which he shares the power to dispose with his wife,
Anne P. Hovis.
(5) Includes 1,633,600 shares as to which Mrs. Hovis has sole voting power and
3,139,200 shares as to which she shares the power to dispose with her
husband, James B. Hovis.
(6) Mr. Mathias' address is c/o The Carlyle Group, 1001 Pennsylvania Avenue,
N.W., Washington, D.C. 20004-2505
(7) Includes options issued in December 1998 to purchase 425,000 shares of
common stock, exercisable at $.05 per share, options issued in January 1998
to purchase 200,000 shares of common stock, exercisable at $0.16 per share,
options issued in September 1997 to purchase 100,000 shares of common
stock, exercisable at $.05 per share, and options issued in June 1997 to
purchase 100,000 shares of common stock, exercisable at $0.875 per share.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
James B. Hovis and Anne P. Hovis are husband and wife.
ITEM 13. EXHIBITS AND REPORTS ON FORM 10-K.
Item 1. EXHIBITS AND REPORTS ON FORM 10-K
(a)(1) Financial Statements.
The following financial statements are included in Part II, Item 7:
Index to Consolidated Financial Statements
Report of Independent Auditors F-1
49
<PAGE>
Consolidated Balance Sheet as of March 31, 1999 F-2
Consolidated Statements of Operations for the years ended
March 31, 1999 and 1998 F-3
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1999 and 1998 F- 4 F-5
Consolidated Statements of Cash Flows for the years
ended March 31, 1999 and 1998 F-6 F-7
Notes to Consolidated Financial Statements F-8 - F-18
(a) (2) Exhibits
A list and description of exhibits filed as part of this Form 10-KSB is
provided in the attached Exhibit Index.
Item 27. Exhibits.
1.01* Form of Underwriting Agreement.
1.02* Form of Selected Dealers Agreement.
3.01* Certificate of Incorporation of the Company.
3.02* Amendment of Certificate of Incorporation.
3.03 Certificate of Amendment of Certificate of Incorporation.
3.04* By-Laws of the Company.
3.05* Form of Certificate of Designation of Series A Preferred Stock.
3.06* Form of Certificate of Designation of Series B Preferred Stock.
4.01* Specimen Certificate for shares of Common Stock.
4.02* Specimen Certificate for Class A Redeemable Common Stock Purchase
Warrant.
4.03* Form of Warrant Agreement by and among the Company and American
Stock Transfer & Trust Company.
4.04* Form of Underwriter's Unit Purchase Option.
10.01* Bridge Loan Agreements and Related Promissory Notes.
50
<PAGE>
10.02* 1996 Stock Plan.
10.03* Agreement by and between the Company and Riverosa dated March 31,
1996.
10.04* Form of Financial Consulting Agreement by and between the Company
and VTR Capital, Inc.
10.05* Agreement by and between the Company and Frankenmuth Brewery.
10.06* Agreement by and between the Company and Hoboken Brewing Company
dated July 15, 1996.
10.07* Employment Agreement by and between the Company and Robert J. Sipper
dated April 4, 1996.
10.08* Employment Agreement by and between the Company and Mark Butler
dated April 4, 1996.
10.09** Asset Purchase Agreement by and between the Company and Old
Marlborough Brewing Company, Inc. dated September 20, 1996.
10.10** Consulting Agreement by and between the Company and Hartley T.
Bernstein dated January 1, 1997.
10.11** Stock Purchase Agreement by and between the Company and Mark Butler
dated March , 1997.
10.12** Amendment No. 1 to Employment Agreement by and between the Company
and Robert J. Sipper dated February 3, 1997.
10.13** Amendment No. 1 to Employment Agreement by and between the Company
and Mark Butler dated November 1, 1997.
10.14** Amendment No. 2 to the Employment Agreement by and between the
Company and Mark Butler dated February 3, 1997.
10.15** Amendment No.3 to the Employment Agreement by and between the
Company and Mark Butler dated March 10, 1997.
10.16** Employment Agreement by and between the Company and A.J. Moran dated
September 17, 1996.
10.17** Promissory Note made by Bev-Tyme, Inc. dated April 17, 1997.
51
<PAGE>
10.18** Consulting Agreement by and between the Company and The Falcon
Management Company, Inc. dated May 23, 1997.
10.19** Amendment to Consulting Agreement by and between the Company and
Hartley T. Bernstein dated June 4, 1997.
10.20*** Letter of Intent with Village Cannery of Vermont dated May 4, 1998
10.21*** Asset Purchase Agreement by and between Company and The Brooklyn
Brewery Corporation dated May 18, 1998.
10.22*** Agreement to Purchase and Market Brand Name and Recipes by and
between Leroux Creek Food Corporation and the Company dated June 30,
1998.
10.23 License Agreement between X-Treem Products Corporation and the
Company dated December 1, 1998.
10.24 Security Agreement between X-Treem Products Corporation and the
Company dated December 1, 1998.
10.25 Promissory Note, dated December 1, 1998, made by the Company in the
amount of $100,000.
10.26 Letter by Company, dated December 23, 1998, exercising Option.
10.27 Promissory Note, dated December 23, 1999, made by the Company in the
amount of $300,000.
10.28 Bill of Sale dated December 1, 1998.
* Incorporated by reference to Registrant's Registration Statement on Form
SB-2, and amendments thereto, Registration No. 333-3458 declared effective
on July 30, 1996.
** Incorporated by reference to the Company's Annual Report on Form 10KSB for
the fiscal year ended March 31, 1997 (File No. 0-21079).
*** Incorporated by reference to the Company's Annual Report on Form 10KSB for
the fiscal year ended March 31, 1998 (File No. 0-21079).
(b) Reports on Form 8-K.
(i) Form 8-K dated May 22, 1998 wherein the Company reported information
under Item 2 - Acquisition or Disposition of Assets and Item 7 -
Financial Statements and Exhibits.
52
<PAGE>
(ii) Form 8-K dated July 2, 1998 wherein the Company reported information
under Item 2 - Acquisition or Disposition of Assets and Item 7 -
Financial Statements and Exhibits.
(iii) Form
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
executed on this day of March, 2000.
Phlo Corporation
By: /s/ James B. Hovis
------------------------------------
James B. Hovis
President & Chief Executive Officer,
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant in the capacities and on the dates
indicated
Signature Title Date
/s/ James B. Hovis President & CEO March 21, 2000
- ----------------------
James B. Hovis
/s/ Robert J. Sipper Chief Operating Officer March 21, 2000
- ----------------------
Robert J. Sipper
/s/ Anne P. Hovis Exec. Vice President, General March 21, 2000
- --------------------- Counsel & Secretary
Anne P. Hovis
53
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PHLO CORPORATION
It is hereby certified that:
1. The name of the corporation (hereinafter called the "corporation") is
Phlo Corporation.
2. The certificate of incorporation is hereby amended by adding a new
Article TWELFTH thereof as follows:
"TWELFTH: The Board of Directors of the Corporation shall have the
authority to fix by resolution the voting rights and the designations,
preferences, and relative, participating, optional or other special rights,
and the qualifications or restrictions, of one or more classes or series of
stock, to create one or more series within a class, and to specify the
number of shares of any such series. The Board of Directors of the
Corporation shall have the authority to create additional classes and
series of the Common Stock and the Preferred Stock without the approval of
the shareholders of the Corporation with the limitation that such creation
or designation shall not materially adversely affect the rights,
preferences, privileges or restrictions pertaining to the Common Stock
and/or the Preferred Stock, as the case may be."
3. The amendment of the certificate of incorporation of the corporation
herein certified has been duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
4. In accordance with Section 103(d) of the General Corporation Law of the
State of Delaware, the effective date of this Certificate of Amendment shall be
August 9, 1999.
Dated: June 8, 1999
/s/ James B. Hovis
-------------------------
James B. Hovis, President
LICENSE AGREEMENT
THIS LICENSE AGREEMENT made and entered this 1st day of December, 1998, by
and between X-TREEM PRODUCTS CORPORATION, a Delaware corporation whose address
is 100 Plaza Drive, Second Floor, Secaucus, New Jersey 07094 (hereinafter, the
"Company") and PERRY'S MAJESTIC BEER, INC., a Delaware corporation whose address
is 38 West 32nd Street, Suite 801, New York, New York 10001 (hereinafter, the
"Licensee").
R E C I T A L S
A. The Company desires to grant to the Licensee the exclusive right and
license to use the Names and Marks (as defined below), including but not limited
to the right and license to manufacture and sell those beverages described on
Schedule "A" attached hereto (the "Products"), and to grant an option to
purchase the Names and Marks; and
B. The Company has the right to grant to the Licensee the right and license
to use the Names and Marks, including but not limited to the right and license
to manufacture and sell the Products, and to grant to the Licensee an option to
purchase the Names and Marks.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by each of the parties, the parties
covenant and agree as follows:
1. Definitions.
1.1 Where used herein or in any schedule or amendments hereto, the
term "Names and Marks" shall mean the Company's general intangibles of any
kind or nature whatsoever related to the mark "McCoy's" and the formulae,
label and bottle designs and other packaging, and research and development
related thereto, including but not limited to any and all names, insignias,
labels, logos, commercial symbols, slogans and other identification
schemes, patents, patent applications, copyrights, trademarks, service
marks, trade names, trade secrets, customer or supplier lists, manuals,
operating instructions, permits and franchises and/or applications that may
be controlled from time to time by the Company for use in association with
mark "McCoy's" and/or the Products, including but not limited to those
listed on Schedule "B" attached hereto.
<PAGE>
2. Grant of License and Option.
2.1 Subject to the terms and conditions set forth in this Agreement,
the Company hereby grants to the Licensee and the Licensee hereby accepts
from the Company, the right and license (the "License") to use the Names
and Marks, including but not limited to the right to manufacture and sell
the Products (the "Rights"). The Licensee agrees to diligently exercise the
License granted hereunder subject to the terms and conditions of this
Agreement.
2.2 The Licensee shall not, without the Company's written consent, use
or otherwise employ the Names and Marks except in accordance with the terms
and conditions of this Agreement, nor use, otherwise employ or permit the
use or employment of any other trade mark, trade name, service mark or
commercial symbol in connection with the Products.
2.3 Subject to the terms and conditions of this Agreement, the Company
hereby grants to the Licensee the option to purchase the Rights (the
"Option"). This Option may be exercised at any time or times during normal
business hours prior to the close of business on December 31, 2001, unless
the term is extended in writing by mutual agreement of the parties hereto.
The Option may be exercised by the Licensee by (a) delivery of a written
notice to the Company of the Licensee's election to exercise the Option and
(b) (i) payment of the Licensee to the Company of the sum of $300,000 (the
"Option Price") in cash or by certified or official bank check or wire
transfer of funds or (ii) delivery of a promissory note in the original
principal amount of the Option Price and payable in full on or before
December 31, 2001. This Agreement shall terminate upon exercise by the
Licensee of the Option and satisfaction of the payment terms set forth
hereunder in 2.3(i) or 2.3(ii).
2.4 In consideration for the License and Option being granted to the
Licensee herein, the Licensee shall, simultaneously with the execution
hereof, deliver to the Company a promissory note in the form of Schedule
"C" attached hereto (the "Promissory Note").
2.5 During the term of this Agreement, the Licensee shall pay to the
Company royalties of five percent (5%) of Net Sales (hereinafter defined)
of McCoy's beverages, which royalties shall be payable on the last day of
the month following the month in which such sales occurred. For purposes
hereof, "Net Sales" shall mean the gross invoice price of the McCoy's
beverages, less the total of (a) trade discounts, (b) sales, excise, use
and other similar taxes actually paid or deducted and related to the sale,
(c) credits given to customers for rejects or returns of the product or the
value of any returns, and (d) freight costs.
2.6 The Company shall not grant a license to any other person or
entity to use the Names and Marks during the term of this Agreement.
<PAGE>
2.7 The Company shall make its best efforts to ensure that the
distributors which are distributing the Products on behalf of the Company
as of the date of this Agreement shall continue to distribute the Products
after the grant of the License by the Company to the Licensee herein.
2.8 In order to secure the Rights with respect to which the License
and Option are granted herein, the Company shall deliver to the Licensee
simultaneously with the execution hereof a Security Agreement in the form
of Schedule "D" attached hereto granting to the Licensee, subject to the
terms and conditions thereof, a security interest in the Names and Marks.
3. Term.
3.1 This Agreement shall commence on the date first above written and
shall remain in effect, subject to termination as provided herein, for an
initial term beginning on the date first above written and continuing until
December 31, 2001 (herein the "Term").
3.2 This Agreement may be terminated in accordance with the provisions
of Section 9 hereof or by the exercise by the Licensee of the Option.
4. Representations, Warranties and Covenants of the Company.
4.1 The Company represents and warrants to the Licensee that the
Company has the full power and authority to enter into this Agreement and
to grant to the Licensee the License and the Option and has no agreements
or contractual obligations with any other party which would conflict with
this Agreement.
5. Representations, Warranties, Duties and Obligations of the Licensee.
5.1 The Licensee represents and warrants to the Company that the
Licensee has the full power and authority to enter into this Agreement and
to fulfill the duties and obligations it has undertaken pursuant to this
Agreement and that it has no agreements or contractual obligations with any
other party which would conflict with this Agreement.
5.2 The Licensee agrees to manufacture the Products in accordance with
the standards provided by the Company. The Licensee agrees to conduct its
business in compliance with all material applicable laws and regulations,
including but not limited to complying with regulatory standards for the
manufacture, storage and handling of the Products and other products
bearing the Names and Marks.
5.3 The Licensee shall not make or permit any representation
concerning the Company, the Products, or the Names and Marks other than the
representations, if any, which are contained in approved documentation
supplied by the
<PAGE>
Company to the Licensee for such purpose. All marketing, advertising and
sales promotional material are subject to the approval of the Company, such
approval to be provided by the Company within a reasonable time after
submission of marketing, advertising and sales promotional materials to the
Company by the Licensee for approval.
5.4 The Licensee acknowledges the Company's exclusive ownership of the
Names and Marks used in connection with the Products and agrees to take no
action that would prejudice or interfere with such validity or ownership
and further agrees not to apply for and/or assist any other person or
entity applying for copyright and trademark rights relating to the Names
and Marks or designs, unless and until the Licensee exercises its right to
purchase the Rights pursuant to the Option.
5.5 The Licensee shall refrain from committing any act or pursuing any
course of conduct which tends to bring the Company, the Names and Marks or
the Products into disrepute.
6. Indemnification Obligations of Parties.
6.1 The Company agrees and shall defend, indemnify and hold harmless
the Licensee, its affiliates, partners, officers, directors, shareholders,
employees, agents and assigns from and against any and all damages, claims,
losses, liabilities, costs and expenses, including without limitation,
reasonable attorneys' fees (herein "Losses") (except to the extent any such
Losses are caused by or arise from the Licensee's gross negligence or
willful misconduct) resulting from, arising out of, or by reason of (a) the
Company's breach of any of its representations or warranties hereunder or
the default or breach of any of its material obligations hereunder or (b)
the Licensee's use of the Names and Marks provided such use is in
compliance with the provisions of this Agreement.
6.2 The Licensee agrees and shall defend, indemnify and hold harmless
the Company, its affiliates, partners, officers, directors, shareholders,
employees, agents and assigns from and against any and all Losses (except
to the extent any such Losses are caused by or arise from the Company's
gross negligence or willful misconduct) resulting from, arising out of, or
by reason of (a) the Licensee's breach of any of its representations or
warranties hereunder or the default or breach of any of its material
obligations hereunder, (b) any act, omission or negligence of the Licensee
or its employees, agents or contractors in connection with its or their
performance hereunder, or (c) the manufacture, distribution and sale by the
Licensee of the Products.
<PAGE>
7. Names and Marks.
7.1 The Licensee acknowledges that the Company has control of the
Names and Marks and that, furthermore, neither this Agreement nor the
operation of the Licensee's business shall in any way give or be deemed to
give the Licensee any interest in the Names and Marks except for the right
to use the Names and Marks in accordance with the terms and conditions of
this Agreement, unless and until the Licensee shall exercise the Option
provided for hereunder (including making all payments due in connection
therewith). The Licensee shall not use the Names and Marks or any
contraction, variation or abbreviation thereof in any manner calculated to
represent that it is the owner of the Names and Marks. Unless and until the
Licensee exercises its right to purchase the Rights pursuant to the Option,
neither during the Term of this Agreement nor at any time after termination
hereof shall the Licensee, whether directly or indirectly, dispute or
contest the validity or enforceability of the Names and Marks, attempt any
registration thereof anywhere in the world, or attempt to dilute the value
of any goodwill attaching to the Names and Marks. Any goodwill associated
with the Names and Marks shall inure exclusively to the benefit of the
Company.
7.2 Without limiting the generality of the foregoing provisions, the
Licensee agrees that the Licensee will not use the Names and Marks or any
variation thereof as part of its corporate, firm or business name or for
any other purpose save and except in accordance with the terms and
condition of this Agreement or as may otherwise be specifically authorized
by the Company in writing.
7.3 No right, title or interest in the Names and Marks is transferred
to the Licensee except the right to use them in the manner and subject to
the terms and conditions set forth in this Agreement, unless and until the
Licensee exercises its right to purchase the Rights pursuant to the Option.
7.4 The Licensee will not take any action which might invalidate the
Names and Marks or impair any rights of the Company. Moreover, the Licensee
will not use the Names and Marks in any manner which might endanger the
validity of the Names and Marks or of the registration thereof. The
Licensee shall use the Names and Marks only in style as registered or, if
not registered, as prescribed by the Company.
7.5 In the event that the Licensee learns of any infringement or
threatened infringement or piracy of any of the Names and Marks or any
actual or intended passing-off by a third party, or that any third party
alleges or claims or intends to allege or claim that any of the Names and
Marks are liable to cause deception or confusion to the public or that any
third party alleges or claims or intends to allege or claim that any of the
Names and Marks infringe on its names and marks in any manner, the Licensee
shall forthwith give notice thereof to the Company together with all such
information with respect thereof as it may from time to time obtain. The
parties undertake and agree to consult with each other with respect to how
to respond to each infringement or violation. However, only the Company
shall, in its absolute discretion, institute proceedings or defend
proceedings as it shall deem advisable and the Licensee shall not, under
any circumstances whatsoever, institute any legal proceedings relating to
the Names and Marks without first obtaining the prior written consent of
the Company. In the event the Company undertakes the defense or prosecution
of any such legal proceedings, the Licensee agrees to execute any and all
documents and do such acts and things as may, in the opinion of counsel for
the Company, be necessary to carry out such defense or prosecution,
provided the Company shall reimburse the Licensee for all of its costs and
expenses related to such defense or prosecution.
<PAGE>
8. Non-Disclosure of Confidential Information.
8.1 The Licensee hereby acknowledges that any confidential information
contained herein and any other confidential information, whether oral or
written, which is disclosed to the Licensee by the Company pursuant to this
Agreement or otherwise has been disclosed to the Licensee in the strictest
confidence and, accordingly, the Licensee hereby covenants and agrees that
the Licensee will not, except in accordance with and as contemplated by
this Agreement, either during the Term of this Agreement or at any time
thereafter, make use of or disclose any information with respect to the
Products, the Names and Marks or the business of the Company that it may
obtain from the Company pursuant to this Agreement, nor will the Licensee,
for its own purpose, or any other purpose whatsoever, disclose to anyone
any information or knowledge the Licensee may acquire with respect to the
Company's affairs.
8.2 The Company hereby acknowledges that any confidential information
disclosed to the Company by the Licensee in connection with this Agreement
or otherwise, has been disclosed to the Company in the strictest confidence
and, accordingly, the Company hereby covenants and agrees that the Company
will not unless otherwise permitted in accordance with the provisions of
this Agreement, either during the Term of this Agreement or at any time
thereafter, make use of or disclose any information with respect to the
business of the Licensee or otherwise that it may obtain from the Licensee
pursuant to this Agreement, nor will the Company, for its own purpose or
any other purpose whatsoever, disclose to anyone any information or
knowledge the Company may acquire with respect to the Licensee's affairs.
8.3 The foregoing provisions of this Section 8 shall not apply to any
information which is in the public domain, or which is acquired by a party
from any third party who is not under a confidentiality agreement with a
party hereto, or except as may be required to be disclosed under applicable
law or pursuant to court order, or unless otherwise permitted in writing by
the other party.
<PAGE>
9. Termination.
9.1 Notwithstanding anything contained in this Agreement to the
contrary, the Company shall have the right to terminate this Agreement and
License granted to the Licensee hereunder upon the happening of any one or
more of the following events:
(a) if the Licensee exercises its Put/Call rights provided for in the
letter agreement between the Company and the Licensee dated
October 22, 1998 (the "Letter Agreement"), pursuant to which the
Licensee has the right to purchase from the Shareholders, as
defined in the Letter Agreement, shares of the common stock of
the Licensee previously purchased by the Shareholders from the
Licensee pursuant to the Letter Agreement.
(b) if the Licensee fails or refuses to pay promptly any amount
payable under the Promissory Note when and as the same shall
become due and payable; or
(c) if the Licensee becomes insolvent or ceases to carry on business,
or takes any action to liquidate its assets, or stops making
payments in the usual course of business, provided that the
foregoing shall not be construed so as to prohibit a bona fide
reorganization of the Licensee; or
(d) if the Licensee makes an assignment for the benefit of creditors,
or a petition for bankruptcy is filed against and consented to by
the Licensee, and such petition is not dismissed within ninety
(90) days, or the Licensee is adjudicated bankrupt; or
(e) if a receiver or any other person with like powers shall be
appointed to take charge of and liquidate the Licensee's
business, property or assets; or
(f) if the Licensee should fail to comply with any other material
requirement or obligation imposed upon the Licensee by this
Agreement and such default shall not be cured within thirty (30)
days after receipt of written notice to cure from the Company, or
if the Licensee does not take and diligently pursue reasonable
steps to cure such default if such default is of such a nature
that a period of more than thirty (30) days is required for cure.
<PAGE>
9.2 Notwithstanding anything contained in this Agreement to the
contrary, the Licensee shall have the right to terminate this Agreement
upon the happening of any one or more of the following events:
(a) if the Company becomes insolvent or ceases to carry on business,
or takes any action to liquidate its assets, or stops making
payments in the usual course of business, provided that the
foregoing shall not be construed so as to prohibit a bona fide
reorganization of the Company; or
(b) if the Company makes an assignment for the benefit of creditors,
or a petition for bankruptcy is filed against and consented to by
the Company, and such petition is not dismissed within ninety
(90) days, or the Company is adjudicated bankrupt; or
(c) if a receiver or any other person with like powers shall be
appointed to take charge of and liquidate the Company's business,
property or assets; or
(d) if the Company should fail to comply with any other material
requirement or obligation imposed upon the Company by this
Agreement and such default shall not be cured within thirty (30)
days after receipt of written notice to cure from the Licensee,
or if the Company does not take and diligently pursue reasonable
steps to cure such default if such default is of such a nature
that a period of more than thirty (30) days is required for cure.
10. Effect of Termination.
10.1 Upon the termination of this Agreement by the Company in
accordance with the provisions of Section 9 or at the end of the Term:
(a) all rights of the Licensee under this Agreement shall cease
forthwith and thereafter the Licensee shall cease conducting the
manufacture and selling of the Products and shall cease using the
Names and Marks for any purposes whatsoever; and
(b) the Licensee shall forthwith deliver up to the Company all forms,
procedures, documents and information provided to the Licensee
pursuant to this Agreement.
10.2 In addition to the provisions of subparagraph 10.1(b) hereof,
upon termination by the
<PAGE>
Company of this Agreement other than by the exercise by the Licensee of the
Option, the Licensee shall forthwith furnish the Company with an itemized
list of all quantities of unsold and unused Products, copyright design,
marketing, advertising, and sales promotion materials designed to promote
the sale of the Products and other property and material bearing the Names
and Marks located on the Licensee's premises or under the Licensee's
control. The Company shall be permitted by the Licensee to make an
inspection of these materials. The Company shall have the option to
purchase all of the said materials which are in a usable condition at the
Licensee's laid in cost for such materials (the Licensee's actual cost paid
for such materials, including without limitation applicable taxes, freight
costs and storage charges), and the Licensee shall be obligated to deliver
to the Company at the Licensee's premises all such materials purchased by
the Company.
10.3 Notwithstanding the termination of this Agreement for any reason
whatsoever, all covenants and agreements to be performed and/or observed by
the Licensee or the Company after termination of this Agreement including,
without limitation, those set out in Sections 6, 7 and 8 hereof shall
survive any such termination.
10.4 The right of the Company or the Licensee to terminate this
Agreement in accordance with the provisions hereof shall not be an
exclusive remedy and the terminating party shall be entitled, alternatively
or cumulatively, to damages arising out of any breach of this Agreement or
to any other remedy (including any equitable remedy) available under
applicable law.
11. Sale, Assignment and Transfer.
11.1 This Agreement shall inure to the benefit of the successors and
assigns of the Company. The Company shall have the right to assign its
rights under this Agreement to any person, firm, association or
corporation, provided that such transferee shall agree in writing to assume
all obligations undertaken by the Company herein and upon such assignment
and assumption, the Company shall be under no further obligation hereunder.
11.2 The Licensee understands and acknowledges that the rights and
obligations created by this Agreement are personal to the Licensee, and
that the Company has granted such rights to the Licensee in reliance on the
character, skill, aptitude, as well as the business, legal and financial
capacity of the Licensee and its management. Except as is hereinafter set
forth in this paragraph, the Licensee shall not, without the Company's
prior written consent, directly or indirectly, sell, assign, transfer,
convey, pledge, mortgage, charge, grant any security interest or otherwise
encumber any interest in this Agreement or in the right and license to use
the Products or the Names and Marks. Notwithstanding anything to the
contrary in this paragraph 11.2, the foregoing provisions shall not apply
to a transfer of stock between the owners of the Licensee as of the date of
this Agreement.
<PAGE>
12. General Provisions.
12.1 Except for the obligations of the Licensee to make payments due
to the Company, neither the Company nor the Licensee shall be held liable
for the failure of either to comply with the terms of this Agreement if
such failure is caused by fire, strike, labor boycotts, war, riots,
insurrections, government restrictions, acts of God, shortages or
unavailability of materials or other causes beyond such party's reasonable
control and without its fault and not related to the economic or financial
condition of such party.
12.2 If for any reason whatsoever, any term or condition of this
Agreement or the application thereof to any party or circumstance shall to
any extent be invalid or unenforceable, all other terms and conditions of
this Agreement and/or the application of such terms and conditions to
parties or circumstances other than those as to which it is held invalid or
unenforceable shall not be affected thereby, and each term and condition of
this Agreement shall be separately valid and enforceable to the fullest
extent permitted by law.
12.3 All notices, consents, approvals, statements, authorizations,
documents or other communications required or permitted to be given
hereunder shall be in writing, and shall be delivered personally or mailed
certified mail, return receipt requested, postage prepaid, to the said
parties at their respective addresses set forth on the first page hereof,
or at such other address or addresses as the party may designate by notice
in writing to the other party hereto as provided herein. Any notices,
consents, approvals, statements, authorizations, documents or other
communications, if delivered personally or by certified mail, shall be
deemed to have been given on the day of delivery, if a business day, or, if
not a business day, on the business day next following the day of delivery.
12.4 The headings and numbers of Sections and Paragraphs appearing in
this Agreement or any schedules annexed hereto are inserted for convenience
of reference only and shall not in any way affect the construction or
intent of this Agreement.
12.5 This Agreement shall be governed and construed in accordance with
the laws of the State of Delaware.
12.6 The waiver by the Company or the Licensee, as the case may be, of
a breach of any term or condition contained in this Agreement shall not be
deemed to be a waiver of any subsequent breach of the same or of any other
term or condition herein contained. The subsequent acceptance by the
Company of any amount payable hereunder by the Licensee shall not be deemed
to be a waiver of any preceding breach of any term or condition of this
Agreement, other than the failure to pay the particular amount so accepted,
regardless of the Company's knowledge of such preceding breach at the time
of acceptance of such amount. No term or condition of this Agreement shall
be deemed to have been waived by the Company or the Licensee unless such
waiver shall be in writing.
<PAGE>
12.7 Each of the parties hereto hereby covenants and agrees to execute
and deliver such further and other agreements or documents and to cause to
be done and performed any further and other acts and things as may be
necessary or desirable in order to give full effect to this Agreement.
12.8 This Agreement and the schedules attached hereto constitute the
entire, full and complete agreement between the Company and the Licensee
concerning the subject matter hereof and supersede all prior agreements. No
amendment, change or variance from this Agreement shall be binding on
either party unless executed in writing.
12.9 The recitals shall form an integral part of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written but on the dates shown below.
The Company:
X-TREEM PRODUCTS CORPORATION,
a Delaware Corporation
By: /s/ James B. Hovis
---------------------
Its President
Dated: December 1, 1998
The Licensee:
PERRY'S MAJESTIC BEER, INC.
a Delaware Corporation
By: /s/ Robert J. Sipper
----------------------
Its President
Dated: December 1, 1998
<PAGE>
SCHEDULE "A"
PRODUCTS
All beverages bearing the trade name "McCoy's," including but not limited
to lemonades, fruit drinks, and ready-to-drink iced teas.
/s/ James B. Hovis /s/ Robert J. Sipper
- ------------------ --------------------
Company Licensee
<PAGE>
SCHEDULE "B"
NAMES AND MARKS
1) McCoy's (ser. no. 75/316,497)
/s/ James B. Hovis /s/ Robert J. Sipper
- ------------------ --------------------
Company Licensee
<PAGE>
SCHEDULE "C"
PROMISSORY NOTE
/s/ James B. Hovis /s/ Robert J. Sipper
- ------------------ --------------------
Company Licensee
<PAGE>
SCHEDULE "D"
SECURITY AGREEMENT
/s/ James B. Hovis /s/ Robert J. Sipper
- ------------------ --------------------
Company Licensee
SECURITY AGREEMENT
THIS SECURITY AGREEMENT is made this 1st day of December, 1998, by and
between X-TREEM PRODUCTS CORPORATION, a Delaware corporation, whose principal
offices are located at 100 Plaza Drive, Second Floor, Secaucus, New Jersey 07094
("X-Treem"), and PERRY'S MAJESTIC BEER, INC. a Delaware corporation whose
principal offices are located at 38 West 32nd Street, Suite 801, New York, New
York 10001 (the "Secured Party").
I. Grant of Security Interest by X-Treem. X-Treem, for value received,
hereby grants to the Secured Party a continuing security interest, which is
subordinate only to the security interest in all of the assets of X-Treem held
by Quantum Corporate Funding, Ltd., in and to the following described property
and any and all accessions and substitutions thereto and therefor:
(a) X-Treem's general intangibles of any kind or nature whatsoever
related to the mark "McCoy's" and the formulae, label and bottle designs
and other packaging, and research and development related thereto,
including but not limited to any and all names, insignias, labels, logos,
commercial symbols, slogans and other identification schemes, patents,
patent applications, copyrights, trademarks, service marks, trade names,
trade secrets, customer or supplier lists, manuals, operating instructions,
permits and franchises and/or applications that may be controlled from time
to time by the Company for use in association with mark "McCoy's" and/or
the Products, including but not limited to the following marks:
McCoy's Serial #75/316,497
(hereinafter being collectively referred to as the "Collateral");
to secure the performance of the obligations of X-Treem pursuant to that certain
License Agreement dated the date hereof between X-Treem and the Secured Party,
pursuant to which X-Treem has granted to the Secured Party a license to use the
Collateral and an option to purchase the Collateral (the "License Agreement")
(hereinafter, the "Obligations").
II. Additional Agreements of X-Treem. X-Treem agrees that:
(a) It will upon request of Secured Party, execute such financing
statements and other documents (and pay the cost of filing or recording the
same in all public offices deemed necessary by Secured Party) and do such
other acts and things as Secured Party may from time to time reasonably
request or deem necessary to establish and maintain the security interests
in the Collateral granted hereunder;
<PAGE>
(b) Except with Secured Party's prior written consent, it will not
sell, lease, assign, create or permit to exist any lien or encumbrance upon
or security interest in any Collateral to or in favor of anyone other than
Secured Party and Quantum Corporate Funding, Inc.;
(c) It will reimburse Secured Party for all expenses, including
without limitation reasonable attorneys' fees and expenses, incurred by
Secured Party in seeking to collect or enforce any rights under this
Agreement or incurred by Secured Party in seeking to enforce the material
obligations of X-Treem pursuant to the License Agreement;
(d) It will not use the Collateral in violation of any applicable law,
regulation or insurance policy; and
(e) Secured Party may from time to time at its option take any action
reasonably necessary for the maintenance or preservation of any of the
Collateral or the interest of Secured Party therein (including without
limitation, the discharge of liens of any kind against the Collateral
unless such liens are being diligently contested in good faith by X-Treem),
and X-Treem agrees to forthwith reimburse Secured Party, on demand, for all
reasonable expenses of Secured Party in connection with the foregoing.
III. Defaults. Each of the following shall constitute an Event of Default,
whatever the reason for such event and whether it shall be voluntary or
involuntary, or within or without the control of X-Treem, or be effected by
operation of law or pursuant to any judgment or order of any court or any order,
rule or regulation of any governmental or nongovernmental body:
(a) The Company shall default in the performance or observance of any
material covenant or condition under the License Agreement, which default
is not cured or waived within a period of thirty (30) days;
(b) (i) X-Treem shall (A) commence a voluntary case under the federal
bankruptcy laws (as now or hereafter in effect), (B) file a petition
seeking to take advantage of any other laws, domestic or foreign, relating
to bankruptcy, insolvency, reorganization, winding up or composition or
adjustment of debts, (C) consent to or fail to contest in a timely and
appropriate manner any petition filed against it in an involuntary case
under such bankruptcy laws or other laws, (D) apply for, or consent to, or
fail to contest in a timely and appropriate manner, the appointment of, or
the taking of possession by, a receiver, custodian, trustee or liquidator
of itself or of a substantial part of its assets, domestic or foreign or
(E) make a general assignment for the benefit of creditors; or
(ii) A case or other proceeding shall be commenced against
X-Treem in any court of competent jurisdiction seeking (A) relief
under the federal bankruptcy laws (as now or hereafter in effect) or
under any other laws, domestic or
<PAGE>
foreign, relating to bankruptcy, insolvency, reorganization, winding
up or adjustment of debts, or (B) the appointment of a trustee,
receiver, custodian, liquidator or the like of X-Treem, or of all or
any substantial part of the assets, domestic or foreign, of X-Treem
and such case or proceeding shall continue undismissed or unstayed for
a period of 60 calendar days, or an order granting the relief
requested in such case or proceeding against X-Treem (including, but
not limited to, an order for relief under such federal bankruptcy
laws) shall be entered.
IV. Remedies. Upon the occurrence of an Event of Default:
(a) Secured Party shall have the right to take immediate possession of
the Collateral covered hereby, and, for that purpose may pursue the same
wherever said Collateral may be found, and may legally enter upon any of
the premises of X-Treem, wherever said Collateral may be or may be supposed
to be, and search for the same, and, if found, take possession of and
remove said Collateral, or any part thereof;
(b) Secured Party may legally enter any premises where the books and
records of X-Treem pertaining to Collateral are or may be located and seize
and remove said books and records from said premises or remain upon said
premises and use the same for the purpose of identifying, location, and
collecting any of the Collateral. X-Treem shall, upon Secured Party's
request, assemble the Collateral and make the Collateral available to
Secured Party at any place designated by Secured Party which is reasonably
convenient to X-Treem; and
(c) Secured Party may use the Collateral for the unexpired term of the
License Agreement and may exercise the option to purchase the Collateral
pursuant to the License Agreement (including the payment of the Option
Price, as defined in the License Agreement) at any time prior to the
expiration of such option. Upon the expiration of the term of the License
Agreement, if Secured Party has not timely exercised the option to purchase
the Collateral pursuant to the License Agreement, Secured Party shall
return the Collateral to X-Treem.
V. Amendment or Waiver. Secured Party shall not by any delay or omission be
deemed to have waived any of its rights or remedies hereunder, and no waiver
whatsoever shall be valid unless in writing signed by Secured Party, and then
only to the extent therein set forth. A waiver by Secured Party of any right or
remedy hereunder on any one occasion shall not be construed as a bar to any
right or remedy which Secured Party would otherwise have had on any future
occasion. This Agreement may not be amended except by a writing duly executed by
X-Treem and the Secured Party.
VI. Notices. All notices provided for herein shall be in writing and shall
be deemed to have been given when delivered in accordance with the notice
provisions contained in the License Agreement.
<PAGE>
VII. Remedies Cumulative. All rights, remedies and powers granted to the
Secured Party herein or in any other agreement given to the Secured Party
pertaining to the Collateral shall be cumulative and may be exercised singly or
concurrently.
VIII. Applicable Law and Severability. This Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the State of
Delaware. To the extent any provision of this Agreement is not enforceable under
applicable law, such provision shall be deemed null and void and shall have no
effect on the remaining portions of this Agreement. The headings of the
paragraphs hereof shall not be considered in the construction or interpretation
of this Agreement.
IX. Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of X-Treem and the Secured Party and their respective heirs,
executors, administrators, personal representatives, successors and assigns,
except that X-Treem may not assign any of its rights or delegate any of its
obligations under this Agreement without the prior written consent of the
Secured Party.
X. Other Obligations. Nothing contained in this Agreement shall be deemed
or held to impair or limit in any way the enforcement of the terms of any
instrument evidencing any obligation of X-Treem to Secured Party.
XI. Duration of Security Interest. This Agreement shall continue in full
force and effect and the security interest granted hereby and all of the
representations, warranties, covenants and agreements of X-Treem hereunder and
all of the terms, conditions and provisions hereof relating thereto shall
continue to be fully operative until such time as X-Treem shall have discharged
all of its obligations to the Secured Party pursuant to the License Agreement.
XII. Miscellaneous. The neuter pronoun, when used herein, shall include the
masculine and feminine and also the plural.
IN WITNESS WHEREOF, X-Treem has executed this Security Agreement as of the
1st day of December, 1998.
X-TREEM PRODUCTS CORPORATION
By: /s/ James B. Hovis
---------------------------------
James B. Hovis, President
PROMISSORY NOTE
$100,000 December 1, 1998
FOR VALUE RECEIVED, Perry's Majestic Beer, Inc., a Delaware corporation
having an address at 38 West 32nd Street, Suite 801, New York, New York 10001
(the "Maker"), promises to pay to the order of X-Treem Products Corporation, a
Delaware corporation having an address of 100 Plaza Drive, Second Floor,
Secaucus, New Jersey 07094 (the "Holder"), in lawful money of the United States
of America, the principal sum of ONE HUNDRED THOUSAND DOLLARS ($100,000)
together with simple interest thereon at the rate of ten percent (10%) per
annum, to be applied first against accrued interest at the aforesaid rate on the
outstanding principal balance due and then in reduction of principal, with such
principal and interest to be payable in full on December 31, 1999, unless the
maturity date is extended by the written agreement of the Maker and the Holder.
This Note may be prepaid at any time and from time to time, in whole or in
part, without premium or penalty.
The Maker shall pay any collection expenses, court costs and reasonable
attorney's fees and costs that may be sustained by the Holder in the collection
or enforcement of this Note or any part hereof.
The Maker, to the extent permitted by law, hereby waives presentation,
demand, protest and notices of dishonor and protest.
The rights and remedies of the Holder with respect to this Note (whether
arising at law or in equity) are cumulative, and may be pursued separately or
conjunctively in the sole discretion of the Holder. The Holder shall not, by act
or omission, be deemed to have waived any such rights or remedies unless, and
then only to the extent that, such waiver is set forth in a written instrument
signed by the Holder and delivered to the Maker. Waivers of rights or remedies
with respect to previous events of default, violation or breach under this Note
shall not preclude the exercise of such rights or remedies upon the occurrence
of subsequent events of default, violation or breach.
This Note shall be interpreted and enforced in accordance with the laws of
the State of Delaware. Each provision of this Note is severable and each valid
and enforceable provision of this Note shall remain in full force and effect,
regardless of any determination that is binding upon, or enforceable against,
the Maker or the Holder and that renders certain provisions of this Note invalid
or unenforceable.
<PAGE>
PERRY'S MAJESTIC BEER, INC.
By: /s/ Robert J. Sipper
------------------------
Its: President
[This note was canceled after having been paid in full]
PERRY'S MAJESTIC BEER, INC.
100 PLAZA DRIVE
SECOND FLOOR
SECAUCUS, NEW JERSEY 07094
(201) 866-1300 (telephone)
(201) 866-5750 (telecopier)
December 23, 1998
James B. Hovis, President
X-Treem Products Corporation
100 Plaza Drive
Second Floor
Secaucus, New Jersey 07094
Dear Jim:
This letter serves as written notice to X-Treem Products Corporation (the
"Company") of the election by Perry's Majestic Beer, Inc. (the "Licensee") to
exercise the Option, as defined in the License Agreement between the Company and
the Licensee dated December 1, 1998 (the "License Agreement"), pursuant to
Section 2.3 of the License Agreement.
The Company hereby acknowledges that this letter was accompanied by a
promissory note by the Licensee in favor of the Company in the original
principal amount of the Option Price, as defined in the License Agreement, and
that, therefore, the Licensee has exercised the Option and the License Agreement
is hereby terminated.
Very truly yours,
PERRY'S MAJESTIC BEER, INC.
By: /s/ Robert J. Sipper
----------------------
Robert J. Sipper, COO
ACCEPTED AND AGREED TO this 23rd day of December, 1998.
X-TREEM PRODUCTS CORPORATION
By: /s/ James B. Hovis
----------------------
James B. Hovis, President
PROMISSORY NOTE
$300,000 December 23, 1998
FOR VALUE RECEIVED, Perry's Majestic Beer, Inc., a Delaware corporation
having an address of 100 Plaza Drive, Second Floor, Secaucus, New Jersey 07094
(the "Maker"), promises to pay to the order of X-Treem Products Corporation, a
Delaware corporation having an address of 100 Plaza Drive, Second Floor,
Secaucus, New Jersey 07094 (the "Holder"), in lawful money of the United States
of America, the principal sum of THREE HUNDRED THOUSAND DOLLARS ($300,000)
together with simple interest thereon at the rate of ten percent (10%) per
annum, to be applied first against accrued interest at the aforesaid rate on the
outstanding principal balance due and then in reduction of principal, with such
principal and interest to be payable as follows: beginning on January 1, 2001,
quarterly installments of principal and interest, each in the amount of $25,000,
shall be payable on the last day of each of the first three calendar quarters
(March 31, June 30, September 30), and the outstanding balance of principal and
interest shall be payable in full on December 31, 2001.
This Note may be prepaid at any time and from time to time, in whole or in
part, without premium or penalty.
The Maker shall pay any collection expenses, court costs and reasonable
attorney's fees and costs that may be sustained by the Holder in the collection
or enforcement of this Note or any part hereof.
The Maker, to the extent permitted by law, hereby waives presentation,
demand, protest and notices of dishonor and protest.
The rights and remedies of the Holder with respect to this Note (whether
arising at law or in equity) are cumulative, and may be pursued separately or
conjunctively in the sole discretion of the Holder. The Holder shall not, by act
or omission, be deemed to have waived any such rights or remedies unless, and
then only to the extent that, such waiver is set forth in a written instrument
signed by the Holder and delivered to the Maker. Waivers of rights or remedies
with respect to previous events of default, violation or breach under this Note
shall not preclude the exercise of such rights or remedies upon the occurrence
of subsequent events of default, violation or breach.
This Note shall be interpreted and enforced in accordance with the laws of
the State of Delaware. Each provision of this Note is severable and each valid
and enforceable provision of this Note shall remain in full force and effect,
regardless of any determination that is binding upon, or enforceable against,
the Maker or the Holder and that renders certain provisions of this Note invalid
or unenforceable.
<PAGE>
PERRY'S MAJESTIC BEER, INC.
By: /s/ Robert J. Sipper
--------------------------------
Its: Chief Operating Officer
BILL OF SALE
Know all men by these presents that X-TREEM PRODUCTS CORPORATION, a
Delaware corporation ("Seller"), for and in consideration of the Option Price,
as defined in the License Agreement dated December 1, 1998, by and between
Seller and PERRY'S MAJESTIC BEER, INC., a Delaware corporation having its
primary place of business at 100 Plaza Drive, Second Floor, Secaucus, New Jersey
07094 ("Purchaser"), the receipt and sufficiency of which is hereby
acknowledged, does hereby grant, bargain, sell, transfer, assign and deliver
unto Purchaser, its successors and assigns, all right, title and interest of
Seller in and to certain general intangibles, as follows:
Seller's general intangibles of any kind or nature whatsoever related to
the mark "McCoy's", and the formulae, label and bottle designs and other
packaging, and research and development related thereto, including but not
limited to all names, insignias, labels, logos, commercial symbols, slogans and
other identification schemes, patents, patent applications, copyrights,
trademarks, service marks, trade names, trade secrets, customer or supplier
lists, manuals, operating instructions, permits and franchises, and/or
applications that may be controlled from time to time by the Seller for use in
association with the mark "McCoy's", including but not limited to the following
marks:
McCOY'S, serial number 75/316,497
<PAGE>
IN WITNESS HEREOF, Seller has executed this Bill of Sale this 23rd day of
December, 1998.
X-TREEM PRODUCTS CORPORATION
By: /s/ Anne P. Hovis
----------------------------------
Title: Executive Vice President and
Assistant General Counsel
ATTEST:
/s/ James B. Hovis, President
- -----------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENTS OF OPERATIONS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 12790
<SECURITIES> 0
<RECEIVABLES> 80469
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 93259
<PP&E> 30000
<DEPRECIATION> 4286
<TOTAL-ASSETS> 1581413
<CURRENT-LIABILITIES> 3963723
<BONDS> 0
0
700071
<COMMON> 1330
<OTHER-SE> 3233711
<TOTAL-LIABILITY-AND-EQUITY> 1581413
<SALES> 1176208
<TOTAL-REVENUES> 1176208
<CGS> 864682
<TOTAL-COSTS> 864682
<OTHER-EXPENSES> 250343
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 363124
<INCOME-PRETAX> (2661348)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2661348)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (2661348)
<NET-INCOME> 0
<EPS-BASIC> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
