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As filed with the Securities and Exchange Commission on December 8, 2000
File No.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
General Form For Registration of Securities
of Small Business Issuers Under Section 12(b) or 12(g) of
The Securities Exchange Act of 1934
RED BELL BREWING COMPANY
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
PENNSYLVANIA 23-2729103
(State or other jurisdiction (I.R.S. Employer Identification No.)
of organization)
</TABLE>
3100 WEST JEFFERSON STREET
PHILADELPHIA, PENNSYLVANIA 19121-3508
(Address of principal executive offices and zip code)
(215) 235-2460
(Issuer's telephone number)
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE OTC ELECTRONIC BULLETIN BOARD
(Title of each Class to be registered) (name of each Exchange onto which
each class is to be registered)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Red Bell Brewing Company, a Pennsylvania corporation ("Red Bell"), was
founded on June 29, 1993 by James R. Bell, President and Chief Executive
Officer, and James T. Cancro, Director of Brewing Operations. Red Bell's
objective is to operate and continue to open in the future high profile,
strategically located brew pub locations featuring its own beer as well as to
increase awareness for case and keg beer sales to wholesale distributors and
retail locations. Red Bell produces its speciality draft products in its
technically advanced main brewery, in historic Brewerytown, in Philadelphia,
Pennsylvania, as well as in its brew pub.
Red Bell currently produces ten styles of beer year round, marketed
under distinct brand names. Our flagship brands are Philadelphia Original Lager
and Philadelphia Traditional Irish Amber. Our other principal products include
Philadelphia Black & Tan, Red Bell Cherry Stout, Philadelphia Original Light,
Lemon Hill Wheat, American Pale Ale, Red Bell Heffe-Weizen, Ahopalypse Now
(IPA), and Wee Heavy Scottish Ale. Red Bell markets its hand-crafted ales and
lagers through a third party independent distribution network. We sell beer in
cases and kegs on a wholesale basis.
In addition to our main brewery, Red Bell, since 1996 has operated
through its wholly-owned subsidiary, the Red Bell Brewery & Pub Company, a
smaller scale micro brewery (known as a brew pub) in the First Union Center in
Philadelphia, Pennsylvania. The brew pub is operated under a joint venture
arrangement with ARAMARK Leisure Services, Inc. (ARA). The First Union Center
location features high quality, moderately priced food along with 8 styles of
our distinctive micro brewed beer. The brew pub is open during all events
(professional hockey, professional basketball, indoor lacrosse, wrestling,
concerts, ice skating, conventions, etc.)at the First Union Center.
In addition, we have licensed the Red Bell name to four brew pubs
located at Veteran's Stadium in Philadelphia, Pennsylvania, which feature our
beer. Three of these brew pubs have been operating since 1996 and the other
since 1999. These locations are open during all events (professional football,
professional baseball, soccer, concerts, etc.) held at Veteran's Stadium.
On January 20, 1999, our subsidiary, Red Bell Brewery and Pub
Company-State College, Inc. ("Red Bell-State College") was
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incorporated in Pennsylvania in order to develop and operate a restaurant and
brewery in State College, Pennsylvania, in close proximity to the Pennsylvania
State University ("PSU"). The restaurant and brewery is scheduled to open in
April 2001 pending and conditioned upon our closing on financing in the amount
of approximately $1,800,000 no later than April 2001 which is required in order
to construct improvements and to purchase brewing and restaurant equipment. The
leased premises are approximately 9,000 square feet and would feature an on-site
brewery, live music and billiard tables in addition to our fine beer and food
offerings. We have already purchased and obtained the required Pennsylvania
liquor licenses required to operate the proposed location.
We currently generate substantially all of our revenues through the
sale of keg beer to our high profile brew pubs, and through sales of our keg
beers and cases to wholesalers and retail locations, and through management fees
and commissions earned at our First Union Center and Veteran's Stadium
locations. During 1999, we sold a total of 151,357 gallons of beer, and earned
the following revenues:
* $170,000 from keg beer sales and $14,291 from management
fees in connection with the First Union Center brew pub;
* $74,495 from keg beer sales and $93,947 from commissions
in connection with our Veteran's Stadium brew pub locations;
* $51,058 from keg beer sales and $28,769 from commissions
in connection with our former brew pub located at the Philadelphia International
Airport; and
* $101,745 from sales of keg beer and cases to wholesalers
and retail locations.
INDUSTRY BACKGROUND
Our brewery operations are part of the relatively small craft brewing
segment of the United States brewing industry. The industry includes regional
specialty brewers and brew pubs such as Red Bell, contract brewers, and micro
breweries. Craft beers are distinguishable from other domestically produced
beers by their fuller flavor and adherence to traditional European brewing
styles.
According to The Modern Brewery Age Handbook (March 2000 Edition), beer
sales moved up a notch in 1999, the first intimation that the beer industry is
on the cusp of a long awaited demographic
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upsurge. Domestic barrelage rose 1.24% to an estimated 179,800,000, and imports
rose 9.03% to 17,790,000. Exports dropped 9.73%, to 5,100,000, as United States
brewers shifted more volume to licensed production abroad. The overall beer
market is expected to increase 28% by 2010, but the high-priced segment is
expected to more than double which could take it to 18.9% of the overall market
from just over 11% today. With the combination of overall market growth the
volume of high-priced beers is expected to go from 21.6 million barrels in 1998
to almost 47 million barrels by 2010.
The greatest number of breweries in the craft segment is, and will be,
brew pubs. As of December 31, 1999, there were more than 900 of them producing
about 700,000 barrels of beer annually. While the craft segment volume growth
has slowed significantly, the number of craft breweries in the United States has
grown dramatically, from 627 at the end of 1994 to approximately 1,400 as of
December 31, 1999.
At the turn of this century, the United States brewing industry was
comprised of nearly 2,000 breweries, most of which were small operations that
produced distinctive beers for local markets. Fewer than 1,000 of these
breweries reopened following Prohibition. During the ensuing decades,
competition in the beer industry has narrowed product offerings. Reasons for the
reduction in the types of beer offered include:
* efforts to market to the broadest possible segment of the
population;
* economies of scale;
* mass production techniques;
* lowered costs and lightened flavor profiles which use
less barley and more corn, rice and other adjuncts;
* pasteurization processes which prolong shelf-life; and
* national marketing of a few major brand names through
mass-media advertising.
As a result of these competitive factors, extensive industry
consolidation has occurred. Currently, according to industry sources, the five
largest domestic brewers account for approximately 90% of domestic beer
shipments.
By the early 1980s, annual domestic consumption of beer produced by
United States brewers had plateaued at approximately 180 million barrels. Over
the past decade, per capita annual domestic beer consumption has declined
slightly, due to increasing health and safety consciousness and the changing
tastes, affluence and consumption attitudes of the maturing generation of beer
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drinkers born after World War II. A growing number of consumers began to migrate
away from less flavorful mass-marketed beers toward greater taste and broader
variety in their malt beverages, mirroring similar trends in other beverage and
cuisine categories.
Initially, foreign brewers were the principal beneficiaries of these
evolving consumption patterns. Even though the principal European, Canadian and
Mexican imported beers are also mass-produced, many represent a fuller-flavored
alternative to the national brands produced in the United States.
By the latter half of the 1980s, a substantial new domestic industry
segment had developed in response to the increasing consumer demand for
fuller-flavored beers. Across the country, a proliferation of regional specialty
brewers (annually selling more than 15,000 barrels of craft beer brewed at their
own facilities), contract brewers (selling craft beer brewed by a third party to
the contract brewer's specifications), micro breweries (selling less than 15,000
barrels per year), and brew pubs (combination restaurant-breweries) emerged to
form the craft beer industry. Certain national brewers of mass-produced beers
have also sought to appeal to this growing demand for craft beers by introducing
their own fuller-flavored products. Also, in recent years imported products from
foreign brewers have enjoyed a resurgence in demand and that has contributed to
the reduced volume growth in the craft beer segment.
BUSINESS STRATEGY
Red Bell's business objective is to become recognized as the premier
brew pub operator along the eastern seaboard. It is our objective to produce the
finest quality craft beers and to serve them with well prepared, moderately
priced food which complement our beer product offerings at strategic, event
driven, high volume, and high profile locations such as arenas, airports,
stadiums, ballparks, and select train stations. We intend to meet this objective
by creating a vast network of brew pubs. These smaller brewery locations are
designed to aggressively improve the overall marketing awareness of Red Bell and
our fine line of beers.
Our business strategy includes the following key objectives:
* Develop strategic distribution locations. We plan to expand
into high profile locations such as arenas, airports,
stadiums, ballparks, and select train stations. These
locations would serve high volumes of people and would
generate customer affinity for Red Bell's beers.
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Our objective is to open two properties in key strategic
locations every 11-14 months to increase revenue, name
recognition and to realize efficiencies in marketing,
management, purchasing and distribution.
* Production of High-Quality Craft Beers. Red Bell
produces of a variety of distinctive, flavorful craft
beers. We brew our craft beers according to traditional
European brewing styles and methods, using only
high-quality ingredients and technologically advanced
brewing equipment. It is our objective to never
pasteurize or homogenize our beer or use adjuncts in
substitute for all grain.
* Control of Production in Company-Owned Breweries. Red
Bell built, owns and operates its own brewing facilities
to optimize the quality and consistency of its products
and to achieve the greatest control over its production
costs. Red Bell believes its proprietary designs of its
brewery equipment and brew pub aesthetics make it truly
unique in the market place. Management believes that its
ability to engage in constant product innovation and its
control over product quality are critical competitive
advantages.
* Brewery in each brew pub. To the extent there is
adequate space at a particular location and subject to
the applicable laws of a location, we intend to install
a brewery in each of our brew pubs. By locating small
scale breweries in each brew pub and restaurant, in
direct proximity to our key customer markets, Red Bell
believes it would be able to enjoy distinct competitive
marketing and production advantages, including eliminated
or shortened delivery times which maximize product
freshness, reduced shipping costs, established consumer
identification with our brands, and direct marketing to
our customers.
* Hire dedicated, highly-motivated employees. At Red Bell, we
know that a company is only as good as the employees who
comprise it. We place a great deal of emphasis on hiring the
right people, and creating an environment which allows them to
thrive. We believe that the quality and training of our
employees are significant factors to our future success.
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PRODUCTS
Red Bell produces a variety of distinctive craft beers ranging in color
from light to dark. All of our beer is brewed in accordance with the German
purity law, Reinheitsgebot, which stipulates that all beer is made from four
traditional ingredients: water, hops, yeast and malted barley. Within this
tradition, each Red Bell beer exhibits unique properties of color, richness,
bitterness, and aroma, creating a special signature for each beer. In order to
maintain full flavor, our beer is not pasteurized or homogenized. We never use
adjuncts in substitute for all grain.
We currently produce 10 principal brands, each with its own distinctive
combination of flavor, color and clarity:
* Philadelphia Original Light. A classic American light
lager. Light bodied, clean tasting pale straw in color
with a light crisp finish.
* Lemon Hill Wheat. American style wheat brewed with 50 percent
wheat malt for a light crisp tangy finish. Low bitterness with
a refreshing citrus flavor.
* Philadelphia Original Lager. A golden colored German
style lager. A medium-bodied malt emphasized beer with
relatively low bitterness.
* Philadelphia Irish Amber. Copper colored English Ale
with strong hop aroma and flavor. This ale is full-bodied
with a residual malt sweetness.
* Red Bell Heffe-Weizen. Golden German style wheat beer brewed
with 60% malted wheat and authentic Bavarian yeast. Served
unfiltered which contributes to a spicy and fruity taste with
aromas of bananas and cloves.
* American Pale Ale. Medium-bodied pale ale with generous
additions of American hops (cascade) to produce a somewhat
fruity and floral finish.
* Black Cherry Stout. Dark, dry full-bodied stout brewed with
six different types of malts and black cherries with overtones
of bitter sweet chocolate and licorice.
* Philadelphia Black & Tan. A careful blend of our stout and
Philadelphia Original lager which results in a slightly roasty
crisp drinkable beer not to light, not too heavy.
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* Wee Heavy Scottish Style Ale. Deep brown colored ale with
intense malt flavors and a bread like aroma boasting over 100
pounds of English, Scottish and French malts in each barrel.
Full bodied with dominant sweet maltiness with big, rich,
robust flavor.
* Ahopalypse Now (IPA). A substantial malt character from the
use of five specialty grains resulting in a deep amber color
with an intense hop aroma, complex flavor and a hoppy finish.
In addition, we are constantly developing new products in order to be
responsive to changing customer tastes. We believe that our continued success
will be affected by our ability to be innovative and attentive to consumer
desires while maintaining consistently high product quality.
BREWING OPERATIONS
THE BREWING PROCESS
Beer is produced from four main ingredients: malt, hops, yeast and
water. Malt, the main ingredient of beer, is produced when barley is moistened,
allowed to germinate and then dried. The malted barley is then crushed and mixed
with hot water and strained, producing a clear amber liquid called "wort". Wort
is boiled in the brew kettle and hops are added which add bitterness and variety
to the brew. The mixture is then strained and placed in a fermentation vessel
where yeast is added and the beer is allowed to ferment. During fermentation,
yeast metabolizes the sugars in the wort and produces alcohol and carbon
dioxide.
Upon completion of fermentation, the beer is then transferred to aging
tanks where the flavor is developed and matured. The brewing process, from the
conversion of raw materials to the serving of beer, is typically completed in 14
to 28 days, depending on the type of beer being brewed. The production schedule
for all of our ale products requires a fourteen (14) day cycle. Our lager
products requires a twenty-eight (28) day cycle, from brewing through filtration
and packaging.
The production cycle includes the following steps:
* Day 1. Mashing. Weighed amounts of milled, malted
barley, a cereal grain that provides the body and color to the
beer, are mixed and steeped with hot water in a Mash Tun.
This serves to extract fermentable and non-fermentable sugars,
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thus creating a mash. At the end of the mashing process, the sweet,
fermentable liquid from the mash, called wort, is run off through
screened plates and then transferred into the brew kettle. While the
wort is running off, the grain is sprayed with hot water again, a
process called "sparing". (This is a process similar to making coffee.)
Once the wort run off is completed, the spent grains are given to local
farmers for cattle feed or to local mushroom growers.
* Day 1. Brewing. When the sweet liquid wort transfer is
completed, we start the boil, then add fresh hops that provide
bitterness and aroma, thus creating the balance and flavor of our beer.
* Day 1. Clarification. After approximately an hour and one
half of boiling, the wort and the spent hops are transferred into a
whirlpool. A centrifugal force is created inside the vessel during
whirlpooling. This force separates the malt proteins and the spent
hops from the wort.
* Day 1. Cooling. The wort is pumped from the whirlpool
through a heat exchanger which rapidly cools the wort. The cool wort is
transferred into a fermenter.
* Day 1. Inoculation. Pure culture lager yeast or ale yeast is
added to the wort in the fermenter and the tank is closed up.
* Days 2-7. Fermentation. Within three to five days, the yeast
has metabolized and utilized the sugars from the wort, creating alcohol
and carbon dioxide. Our ales are made with a top fermenting ale strain
that actually floats to the top of the fermenter. Our lagers are made
with a bottom fermenting lager strain that settles during fermentation.
When the yeast completely settles it is collected from the tank and
used in the next lager or ale brew cycle.
* Days 5-27. Cooling and Conditioning. At the end of the
fermentation cycle, our beer is cooled from its fermentation
temperature (between 65-70-F for ales and 58-55-F for lagers) to 32-
Fahrenheit. Beer flavors mature during this stage. Our beer is then
stored for seven to fourteen days. Isinglass finings are added to aid
in the clarification process.
* Day 14. Filtration for Ales. While under pressure, the
beer is transferred through cellulose sheets in a Filter Press
in order to remove protein haze and yeast while stabilizing
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and clarifying the beer. The beer is transferred from the Filter Press
into a Serving Tank which is counter pressured, for service directly to
draft taps at each bar.
* Day 28. Filtration for Lagers. Our lager beer remains
in the Cellar Tank for an additional fourteen days of
fermentation. It is then processed in the same manner as our
ale.
Each of our Red Bell beers has a brilliant look due to the polish
filtration process which is selective; removing yeast without stripping the
body, flavor or character. All of our beer is processed without preservatives.
It is fresh and unpasteurized.
RED BELL BREW PROCESS AND EQUIPMENT
Our creed is "We will use only the finest, all natural ingredients
available to brew our products. Our brewing methods will be standardized, with a
rigorous production and quality control program to insure that the product is
consistently of superior quality." Our brewing program is supervised by our
Director of Brewing Operations, James Cancro.
Brewing Equipment. Red Bell's technologically advanced main brewery
consists of a four step, four vessel, forty barrel brewing system manufactured
by Century Manufactures. We have over 1,100 barrels of monthly storage
capability (also known as fermentation tanks). An equal portion of both ales and
lagers enables us to produce a maximum of 20,000 barrels or 270,000 cases each
year. In addition to our main brewery, our First Union Center brew pub has the
capacity to produce approximately 4,000 half barrels per year. We anticipate
that our proposed PSU brew pub would produce approximately 4,000 half barrels
per year. At all of our breweries, we strive to ensure that every batch of beer
is of the highest quality and exact consistency.
Bottling and Kegging. Red Bell packages its craft beers in bottles and kegs
which are clearly marked with freshness dates. This is to ensure that our
products are consumed at the height of their flavor. Bottled products utilize
the latest technology in bottle crowns by using the Zapata Company's "pure seal"
cap. This cap prevents oxygen from causing deterioration of the beer's fresh
taste. Our beer is naturally carbonated and pasteurized to insure that customers
enjoy the full, fresh flavor.
Contract Brewing. In addition to our main brewery, we also utilize a
third party brewery to manufacture and bottle our beer.
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We believe that contract brewing gives us economic advantages through lower
capital and overhead costs per barrel. In addition, the contract brewer bottles
substantially all of our beer for us. The contract brewer manufactured
approximately fifty percent of our entire beer production during 1999.
Quality Control. Our main brewery and our brew pub at the First Union
Center has an on-site laboratory where our staff supervises on-site yeast
propagation, monitor product quality, test products, measure color and
bitterness, and test for oxidation and unwanted bacteria. We also regularly
utilize independent laboratories for additional product analysis.
Ingredients and Raw Materials. Red Bell currently obtains all of its malted
barley (grain) from two primary suppliers and its premium-quality select hops,
grown in the California region, from two competitive sources. We periodically
purchase small lots of European hops, which we use to achieve a special hop
character in certain of our beers. Red Bell believes that alternate sources of
malted barley and hops are available at competitive prices. In order to ensure
the supply of the hop varieties used in its products, we enter into supply
contracts for our hop requirements. Since inception, we have cultivated our own
yeast supply. We have multiple competitive sources for packing materials, such
as bottles, labels, six-pack carriers, crowns and shipping cases.
DISTRIBUTION
Red Bell offers the sale of beer primarily in four states and the
District of Columbia. Our products are distributed through a network of import
distributors, as well as by our own personnel in our local markets. Import
distributors are larger distributors that typically supply local distributors as
well as bars, restaurants and tavern accounts. Favorable consumer demand for
micro brewed products and higher profit margins are the two primary factors that
contribute to strong interest from import distributors in handling our regional
micro brewed products. Our success is dependent upon our ability to maintain and
develop our third party distributor, bar and restaurant accounts. In addition to
distribution, we intend to solicit our own customer base through on-site visits,
cold calling, and mailings in addition to our on premise advertising at our
strategic brew pub locations.
MARKETING
Red Bell's current marketing activity is concentrated in Pennsylvania
and New Jersey. Our efforts will be focused on bars,
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restaurants and retailers of premium beer products in order to obtain shelf and
tap space. This will be accomplished by an aggressive one-on-one campaign to
familiarize our customers thoroughly with our products and our devotion to
service. The micro brewers' market is not for the masses rather it is those
consumers searching for something different, something superior, with more
flavor and more character.
Red Bell has designed slogans, logos and trade names for use in radio,
television and print advertising. To create additional Red Bell name recognition
and customer identification, we will continue to sell t-shirts, sweatshirts and
other merchandise featuring the Red Bell name and logo. Distributors and package
store locations are provided with point of purchase cards, banners, static
stickers and shelf channels. All material will continue to help generate
interest from the consumer.
BREW PUB OPERATIONS
FIRST UNION CENTER MICRO BREWERY, PHILADELPHIA, PENNSYLVANIA
In 1996, Red Bell Brewery & Pub Company entered into a joint venture
with ARAMARK Leisure Services, Inc. (ARA) to build and operate a micro brewery
in the First Union Center, home of the Philadelphia Flyers National Hockey
League team and the Philadelphia Seventy-Sixers National Basketball Association
team. Our micro brewery, the first of its kind in a major indoor arena, opened
in August 1996.
The agreement is for an initial term of ten years and has two five year
renewal terms. ARA has the option to cancel the contract at any time after five
years upon payment of a termination fee. Under our agreement with ARA, we
generate revenues as follows:
* From sales of our keg beer to the brew pub for sale
to its customers. Our agreement provides that we
shall be the exclusive manufacturer of beer for the
First Union Center location.
* From per diem fees paid to us as a management
supervisory fee for each event during which the brew
pub is open.
We contributed $600,000 towards the development and fit out of the brew
pub. These funds were provided to us by a bank and the outstanding balance bears
interest at one percent in excess of the bank's prime rate, is payable on
demand, and at September 30, 2000
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had a balance of $550,000 (exclusive of the credit of $48,059 of restricted cash
reflected on our financial statements). Under our agreement with ARA, we are to
receive the amount of $75,000 per year during the term of the contract. This
payment has been assigned by us to the bank to repay the loan and the current
unapplied portion thereof is reflected as restricted cash on our financial
statements. Upon the termination of the contract all improvements belong to ARA.
All non-supervisory personnel at the First Union Center are employees
of Red Bell Brewery & Pub Company and ARA has agreed to pay all personnel and
payroll costs. We are responsible for maintaining all liquor licenses and
manufacturing all beer for the brew pub. ARA has agreed to make all necessary
repairs to the brew pub and to maintain the books and records. Upon the
termination of the contract all improvements belong to ARA. ARA will retain any
operating profits remaining after payment of all operating expenses of the brew
pub. Subject to our supervision, ARA operates the food and beverage business of
the brew pub. ARA has agreed to promote the Red Bell name in a professional and
first class manner.
Red Bell's First Union Center brew pub provides an on-premise brewery
experience that entertains and satisfies our guests. It also assists local bars,
restaurants and beer distributors in their efforts to sell our product line. Red
Bell's First Union Center brew pub creates consumer affinity for our beers and
capitalizes on the growing consumer interest in higher quality, more flavorful,
fresh brewed beer. Our Red Bell pub offers a selection of eight to ten
distinctive, hand crafted beers ranging in color from light to dark.
VETERAN'S STADIUM, PHILADELPHIA, PENNSYLVANIA
Beginning in 1996, we have licensed the Red Bell name to Ogden
Entertainment Services, Inc. and in 1999 to RBC Capital. Ogden operates three
Red Bell brew pub locations at Veteran's Stadium in Philadelphia, Pennsylvania,
and we sell keg beer to Ogden for sale. In addition to the revenues we earn from
the sale of our products to Ogden, we receive a commission equal to 40% of all
gross sales less expenses. Our current agreement with Ogden expires in January
2001. Since 1999, RBC Capital has operated a Red Bell brew pub at Veteran's
Stadium pursuant to a joint venture agreement with Ogden. Red Bell receives
revenues from the exclusive sales of keg beer to Ogden at this location. RBC's
contract with Ogden expires in January 2001.
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Veteran's Stadium is the home of the Philadelphia Phillies Major League
Baseball team and the Philadelphia Eagles National League Football team. The
three initial brew pubs opened for business in July of 1996, just prior to the
Major League Baseball all-star game and the fourth brew pub opened in April
1999.
COMPETITION
Brewing industry. The brewing industry in the United States is both
highly competitive and highly concentrated. Based upon industry figures of beer
sales in 1994, six industrial brewing companies generate approximately 90% of
sales. Sales of imported beer account for approximately 5.6% of sales, and the
remaining 4+% is divided among several hundred companies, including Red Bell.
Our beer is distributed and sold in competition with national, regional, foreign
and local brewers. All mass industrial breweries (Budweiser, Miller, Coors,
Samuel Adams) and many regional and local breweries have significantly greater
financial, production, distribution and marketing resources than Red Bell. The
principal methods of competition across all levels are adverting, packaging and
price. Within the craft beer segment of the industry, quality, taste and
freshness of product are the key competitive factors.
Although we are a small regional brewer of beer, we view our
competition as the larger national domestic beers such as Budweiser, Coors,
Samuel Adams, and Miller. At our First Union Center brew pub and at our
Veteran's Stadium brew pub locations we are primarily competing with these much
larger brewers for the customer's business. We believe that our future growth
will be driven by obtaining market share from customers of these larger domestic
brewers. At the wholesale and retail level, our pricing is comparable with other
high quality, premium brands such as Budweiser and Miller and more attractive
than those such as Samuel Adams.
Restaurant industry. The restaurant industry is intensely competitive.
Our brew pub located in the First Union Center competes directly with the
Victor's Club restaurant (located in First Union Center) and food vendors
primarily on the basis of quality, price, service and atmosphere. Our business
is largely dependent upon the success of ticket sales in the First Union Center.
In addition, we are affected by changes in consumer tastes, national, regional
or local economic conditions, weather conditions, demographic trends, and the
type, number and location of competing restaurants and food vendors. Our ability
to compete effectively will continue to depend upon our ability to offer high
quality, value priced menu items and superior service in
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distinctive dining environments.
REGULATION
Red Bell's business is highly regulated at federal, state and local
levels. Various permits, licenses and approvals are necessary to manufacture and
distribute beer and to operate brew pubs. We are required to comply with
licensing requirements imposed by the U.S. Treasury Department, Bureau of
Alcohol, Tobacco and Firearms (the "BATF"); the United States Department of
Agriculture; the United States Food and Drug Administration; the Pennsylvania
Liquor Control Board; state alcohol regulatory agencies in the states in which
we sell our products; and state and local health, sanitation, safety, fire and
environmental agencies.
Various federal and state labor laws govern Red Bell's relationship
with its employees, including minimum wage requirements, overtime, working
conditions and immigration requirements. Significant additional
government-imposed increases in minimum wages, paid leaves of absence and
mandated health benefits, or increased tax reporting and tax payment
requirements for employees who receive gratuities could have an adverse effect
on Red Bell's results of operations. Delays or failures in obtaining the
required construction and operating licenses, permits or approvals could delay
or prevent the opening of new restaurants.
Management believes that Red Bell currently has all licenses, permits
and approvals necessary for its current operations. However, existing permits or
licenses could be revoked if we were to fail to comply with the terms of such
permits or licenses, and additional permits or licenses could in the future be
required for the our existing or expanded operations. If licenses, permits or
approvals necessary for our brewery or pub operations were unavailable or unduly
delayed, or if any such permits or licenses were revoked, our ability to conduct
our business could be substantially and adversely affected.
ALCOHOLIC BEVERAGE REGULATION AND TAXATION
Our brewery and our brew pub are subject to licensing and regulation by
a number of governmental authorities. We operate our breweries under federal
licensing requirements imposed by the BATF. The BATF requires the filing of a
"Brewer's Notice" upon the establishment of a commercial brewery. In addition,
we are required to file an amended Brewer's Notice every time there is a
material change in the brewing process or brewing equipment, change in the
brewery's location, change in the brewery's management or a
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material change in the brewery's ownership. Our operations are subject to audit
and inspection by the BATF at any time.
In addition to the regulations imposed by the BATF, our breweries are
subject to various regulations concerning retail sales, pub operations,
deliveries and selling practices in states in which we sell our products. Our
failure to comply with applicable federal or state regulations could result in
limitations on our ability to conduct our business. The BATF's permits can be
revoked for failure to pay taxes, to keep proper accounts, to pay fees, to bond
premises, and to abide by federal alcoholic beverage production and distribution
regulations, or if holders of 10% or more of the Company's equity securities are
found to be of questionable character. Permits from state regulatory agencies
can be revoked for many of the same reasons.
The U.S. federal government currently imposes an excise tax of $18 per
barrel on beer produced for consumption in the United States. However, brewers
like Red Bell with an annual production of less than 2 million barrels per year
instead only pay a federal excise tax in the amount of $7 per barrel on the
first 60,000 barrels of production each year. While we are not aware of any
plans by the federal government to reduce or eliminate this benefit to small
brewers, any such reduction in a material amount could have an adverse effect on
Red Bell. Individual states also impose excise taxes on alcoholic beverages in
varying amounts, which have also been subject to change. It is possible that
excise taxes will be increased in the future by both the federal government and
states. In addition, increased excise taxes on alcoholic beverages have in the
past been considered in connection with various governmental budget-balancing or
funding proposals. Any such increases in excise taxes, if enacted, could
adversely affect Red Bell.
ENVIRONMENTAL REGULATION OF BREWERY OPERATIONS
Red Bell's brewery operations are subject to environmental regulations and
local permitting requirements and agreements regarding, among other things, air
emissions, water discharges and the handling and disposal of waste. While we
have no reason to believe the operations of our facilities violate any such
regulation or requirement, if such a violation were to occur, our business may
be adversely affected. In addition, if environmental regulations were to become
more stringent in the future, our operations could be adversely affected.
<PAGE> 17
DRAM SHOP LAWS
The serving of alcoholic beverages to a person known to be intoxicated may,
under certain circumstances, result in the server being held liable to third
parties for injuries caused by the intoxicated customer. We have established an
employee training program to teach our employees how to identify and reduce this
risk. Large uninsured damage awards against Red Bell could adversely affect our
financial condition.
EMPLOYEES
As of September 30, 2000, Red Bell had 11 employees, 6 of whom were
full time and 5 part time. Of these employees, 4 work in management and 7 work
in our main brewery. Pursuant to our contract with ARA, the non-supervisory
personnel working at our First Union Center brew pub are treated as employees of
our Red Bell Brewery & Pub Co. subsidiary and ARA pays all personnel and payroll
costs. As of September 30, 2000, there were 39 non-supervisory personnel
employed at the First Union Center brew pub.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward Looking Statements
Certain statements contained in this Form 10-SB, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward- looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of Red Bell or industry results to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
* the ability of Red Bell to maintain and/or renew its
existing contracts and licensing agreements;
* the ability of Red Bell to open additional brew pubs
including its proposed PSU location;
* the ability of Red Bell to obtain financing for the
development and acquisition of any its future brew pubs;
* existing governmental regulations;
<PAGE> 18
* legislative proposals for reform of the regulation and
taxation of the manufacture and sale of alcohol;
* competition;
* the loss of any significant ability to attract and
retain qualified personnel;
* the availability and terms of capital to fund
acquisitions or the development of new business;
* the ability of Red Bell to refinance its existing long- term
debt which is currently not being paid when due;
* the ability of Red Bell to satisfy the existing judgments
against it as well as the outstanding executions on its properties by these
judgment holders;
* the ability of Red Bell to restructure its debt and/or
satisfy its creditors in the event it is not successful in its refinancing
efforts.
OVERVIEW
In 1996, Red Bell entered into a joint venture agreement with ARA to
build and operate a Red Bell brew pub located in the First Union Center. The
brew pub opened in 1996. In 1996, Red Bell licensed its name to Ogden pursuant
to which Ogden is operating three brew pubs in Veteran's Stadium. In 1999, we
licensed our name to RBC Capital. Pursuant to a joint venture agreement,
commencing April 1999, RBC and Ogden have operated another brew pub in Veteran's
Stadium. In 1998, we licensed our name to the tenant who operated a Red Bell
brew pub at the Philadelphia International Airport. In 1999, all of our interest
in the brew pub was terminated. In 1999, we formed Red Bell Brewery & Pub
Co. - State College to develop and operate a proposed restaurant and brew pub in
State College, Pennsylvania.
During the 1998 and 1999 calendar years, substantially all of our
revenues were attributable to the following:
* sales of keg beer to our First Union Center brew pub.
* sales of keg beer to our licensed brew pubs at Veteran's
Stadium.
* sales of keg beer to our former licensed brew pub at the
<PAGE> 19
Philadelphia International Airport.
* sales of keg beer and cases to wholesalers and retail
locations.
* Commissions and management fees earned at our Veteran's
Stadium, First Union Center, and former Philadelphia
International Airport locations.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net sales decreased 31% to $495,425 in 1999, compared to $717,594 in
1998, primarily as a result of the reduction of keg beer sales to a former Red
Bell pub located in the Philadelphia International Airport.
Excise taxes increased from $23,912 in 1998 to $34,174 in 1999 as a
result of increases in our beer production from 3,420 barrels in 1998 to 4,882
barrels in 1999.
Cost of sales decreased as a percentage of net sales from 99% in 1998
to 91% in 1999. This is a result of cost cutting measures taken by management.
Advertising and marketing expenses decreased to $14,212 in 1999,
compared to $53,815 in 1998, primarily as a result of our reducing the supply of
our product and personnel at no charge to various charity events.
General and administrative expense increased 21% to $1,152,363 in 1999
as compared to $955,346 in 1998, primarily attributable to the increase in
accounting, consulting, and legal expenses.
Interest income remained relatively the same at $33,666 in 1999 as
compared to $27,687 in 1998 reflecting the accounting treatment of the advance
to customer. Interest expense was $394,799 in 1999 as compared to $333,747 in
1998 reflecting the accrual of interest on our debt obligations. Other income
decreased 65% in 1999 to $55,775 compared to $161,311 in 1998, reflecting the
receipt of $115,000 payment in settlement of a lawsuit.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
<PAGE> 20
Net sales increased 22% to $717,594 in 1998, compared to $585,800 in
1997, primarily as a result of keg beer sales and in 1998 to a former Red Bell
brew pub located in the Philadelphia International Airport.
Cost of sales expressed as a percentage of net sales was 99% in 1998
compared to 121% in 1997. This is a result of efficiency in purchasing our
materials and supplies as sell as decreases in payroll.
Advertising and marketing expenses decreased 56% to $53,815 in 1998,
compared to $122,800 in 1997, primarily as a result of significant reduction in
our advertising to promote our beer and brew pubs.
General and administrative expense increased 9% to $955,346 in 1998 as
compared to $870,800 in 1997. This is primarily as a result of additional part
time employees and increased management expenses.
Interest income remained relatively the same at $27,687 in 1998 as
compared to $36,800 in 1997. Interest expense was $333,747 in 1998 as compared
to $312,500 in 1997 reflecting the accrual of interest on our debt obligations.
Other income in 1998 was $161,311 compared to $0 in 1997, reflecting the receipt
of the settlement referred to above.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Net sales of $374,385 during the nine month period ended September 30,
2000, were similar to those of $351,596 during the nine month corresponding
period of 1999.
Cost of sales expressed as a percentage of net sales decreased from 96%
in 1999 to 94% in 2000. This is a result of continued efficiencies in our
purchasing procedures and efficiencies in our workforce.
Advertising and marketing expenses decreased 45% to $7,057 in 2000,
compared to $12,922 in 1999, primarily as a result of reduction in providing
free products and personnel at charity events.
<PAGE> 21
General and administrative expenses declined 26% to $597,153 in 2000 as
compared to $802,064 in 1999 attributable to reducing our employee payroll
through utilizing part time employees.
Interest income remained relatively the same at $19,650 in 2000 as
compared to $25,271 in 1999. Interest expense was $396,096 in 2000 as compared
to $300,580 in 1999 reflecting our increased debt obligations. Other income
decreased 16% in 2000 to $43,174 compared to $51,141 in 1999, reflecting the
reduction of equipment sales revenues received.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash of $86,049 and $450 at December 31, 1999 and 1998,
respectively, and cash of $10,913 at September 30, 2000. Red Bell had a working
capital deficit of $5,002,937 at December 31, 1999, $4,404,164 at December 31,
1998, and $6,050,754 at September 30, 2000. Due to our failure to make payments
on our long-term debt, all of our long-term debt was reflected as a current
liability on our balance sheet. Our accounts payable increased from $325,899 as
of December 31, 1998 to $919,370 as of December 31, 1999 and to $1,149,120 on
September 30, 2000, and our accrued liabilities increased from $770,615 on
December 31, 1999 to $1,215,573 on September 30, 2000 which includes an increase
of $380,577 of accrued interest.
During 1999 net cash of $448,071 was used by operating activities
primarily due to the net loss of $1,671,045 offset by the non-cash impairment
loss of $242,754 attributable to our bottling line held for sale and non-cash
increase in accounts payable and overdrafts of $590,229. The net cash provided
by financing activities of $484,760 was attributable primarily to proceeds from
term loans of $1,370,632 and $188,630 for preferred stock and $30,623 for sales
of common stock offset by the repayment of notes payable of $1,045,459.
During the first nine months of 2000, net cash of $75,536 was used by
operating activities primarily due to the net loss of $915,126 offset by the
non-cash increase in accounts payable and overdrafts of $227,339 and accrued
liabilities of $444,958. The net cash used by financing activities of $11,681
was attributable primarily to payment of preferred dividends.
Red Bell has not been able to pay its long-term debt obligations as
they become due, and has not made any significant payment thereon during 1998
and 1999 and during the nine months ended September 30, 2000. In addition, our
accrued liabilities have
<PAGE> 22
increased from $770,615 to $1,215,573 during the first nine months of 2000.
Management is currently attempting to refinance our long-term debt and our
accrued liabilities. Management also believes that our debt obligations could be
satisfied through funds generated by the sales of our equity securities. There
can be no assurance that we will be able to obtain any funds from sales of
equity securities or debt refinancing from any source. If we are unsuccessful in
our efforts, our ability to continue in business will be in large part dependent
on the willingness of our creditors to restructure their debt and our repayment
obligations.
In order to partially finance our operations and to pay certain current
liabilities, we obtained a loan on October 23, 2000 from CDB Finance Corporation
in the amount of $194,000. The loan is payable in five monthly installments of
$4,000 with the final payment of $197,766 due on April 23, 2001. The loan bears
interest at the rate of 2% per month and has been personally guaranteed by James
R. Bell and Robert T. Huttick.
We anticipate that the PSU restaurant and brewery would open in April
2001 pending and conditioned upon our closing on financing no later than April
2001 in the amount of approximately $1,800,000. Red Bell-State College borrowed
$260,000 from a Red Bell shareholder in March 2000 in order to fund its purchase
of the required liquor licenses for the proposed brew pub. The loan bears
interest at 10% per annum and is payable on demand. In addition, the note
provides that at the time of repayment Red Bell- State College shall pay an
additional $100,000 or a total principal amount of $360,000.
Red Bell has incurred losses of $1,671,045 and $1,144,951 during the
years ended December 31, 1999 and 1998, respectively, and cumulative losses
since inception through September 30, 2000 amount to $7,236,301. Further, the
Company has a stockholders' deficit of $2,248,705 at September 30, 2000.
As a result of all these factors, Red Bell's independent auditors have
included an explanatory paragraph in their report on our December 31, 1999
consolidated financial statements raising doubt about our ability to continue as
a going concern. Red Bell believes that funds from additional sales of
securities, refinancing of its existing debt, as well as the ability to defer
payments of existing obligations, debts, and expenditures, if required, will
allow Red Bell to continue as a going concern.
<PAGE> 23
ITEM 3. DESCRIPTION OF PROPERTY.
Red Bell's executive offices and main brewery are located at 3100
Jefferson Street, Philadelphia, Pennsylvania 19121. The entire building consists
of approximately 280,000 square feet, of which 1,250 square feet is used for
executive offices, 45,000 square feet for our brewery, 35,000 square feet is
rented to third parties, and 198,750 square feet is unoccupied or used for
storage. The property is an industrial building, was renovated when it was
acquired by Red Bell in 1996, and management believes it is in good condition.
The Company is purchasing the building pursuant to an installment sales
agreement with the Pennsylvania Industrial Development Authority.
The brewery premises are subject to six mortgages:
* A first mortgage in favor of PIDA. The mortgage secures the
installment sales agreement. As of September 30, 2000 the principal amount due
was $379,201 which bears interest at 3.75% per annum. The loan has been
guaranteed by James R. Bell. The loan is payable in equal monthly installments
of $2853 with the final payment due on February 1, 2013.
* A second mortgage in favor of the United States Small
Business Administration. The mortgage secures a note with a principal balance on
September 30, 2000 of $398,000 and bears interest at 6.85% per annum. The loan
is payable in equal monthly installments of $3,070 with the final payment due in
January 2019. The loan has been personally guaranteed by James R. Bell.
* A third mortgage in favor of the United States Small
Business Administration. The mortgage secures a note with a principal balance as
of September 30, 2000 of $522,000 and bears interest at 5.4% per annum. The loan
is payable in equal monthly installments of $6,005 with the final payment due in
January 2009. The loan has been personally guaranteed by James R. Bell.
* A fourth mortgage in favor of Machinery and Equipment Loan
Fund of the Pennsylvania Department of Community and Economic Development. The
mortgage secures a note with a principal balance as of September 30, 2000 of
$456,770 and bears interest at 3.0% per annum. The loan is payable in equal
monthly installments of $6,607 with the final payment due in February 2005. The
loan has been personally guaranteed by James R. Bell and Mr. Bell has granted to
the lender a second mortgage on his residence.
* A fifth mortgage in favor of First Union National Bank in
the amount of $393,000. The mortgage secures the installment note to the bank
with a principal balance as of September 30, 2000
<PAGE> 24
of $448,024. The note bears interest at 9.5% per annum and is payable in monthly
installments of $7,593.62 with the final payment due on February 1, 2004. The
loan has been personally guaranteed by James R. Bell.
* A sixth mortgage in favor of First Union in the amount of
$500,000 which also secures the above installment note.
We have entered into a lease agreement for our proposed PSU brewery and
brew pub. The lease covers 9,309 square feet at 116 South Allen Street, State
College, Pennsylvania, located in the first floor of the building in the heart
of the town. The lease has a five year term with four five-year renewal terms.
The initial term commenced on June 1, 1999 and expires on May 31, 2004. The
monthly rental is $10,412 during the initial five year term plus our share of
operating expenses and taxes.
We own a bottling line which is presently located at our brewery. This
bottling line has never been used by us. Our bottling line is subject to a
security interest in favor of Foothill Capital Corporation in order to secure
our note in favor of Foothill. Foothill has declared Red Bell in default of the
loan and has commenced legal action. We anticipate that we will sell the
bottling line to repay the debt.
Our main brewery houses our beer manufacturing equipment. This
equipment is subject to four security interests:
* A first security interest in favor of the MELF in
order to secure its loan to Red Bell.
* A second security interest in favor of the SBA in
order to secure the $522,000 loan to Red Bell.
* A third security interest in favor of the SBA in
order to secure the $398,000 loan to Red Bell.
* A fourth security interest in favor of First Union in
order to secure its installment loan to Red Bell in
the principal amount of $448,024.
In the opinion of management all of the above properties are adequately
covered by insurance.
<PAGE> 25
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information concerning the beneficial
ownership of our Common Stock as of September 30, 2000, by each person known by
us to be the beneficial owner of five percent or more of our outstanding common
stock, by each director and executive officer of Red Bell, and all directors and
executive officers as a group.
<TABLE>
<CAPTION>
Name and Address of Amount Beneficially
Beneficial Owner Beneficially Owned Percentage(1)
Owned
<S> <C> <C>
James R. Bell
6490 Woodbine Avenue
Philadelphia, PA 19151 1,590,833(2) 29.4%
Robert T. Huttick
760 Longstreth Road
Warminster, PA 18974 219,950(3) 4.06%
James T. Cancro
927B North Hancock Street
Philadelphia, PA 19123 148,003(4) 2.7%
All Directors and Officers
As a Group (5 persons) 1,958,786 36.2%
</TABLE>
(1) Includes all shares beneficially owned as of September 30, 2000, as
defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934,
including: (i) shares owned by a spouse, minor child or by relatives sharing the
same home; (ii) shares
<PAGE> 26
owned by entities owned or controlled by the named person; and (ii) shares the
named person has the right to acquire within 60 days by the exercise of any
right or option. Unless otherwise noted, shares are owned of record and
beneficially by the same person. In accordance with the foregoing, for purposes
of this table, Red Bell had 5,406,213 shares issued and outstanding as of
September 30, 2000.
(2) Includes 51,000 shares underlying warrants and 583,000 shares
underlying options.
(3) Includes 100,000 shares issuable upon exercise of stock options, 94,000
shares held with his spouse, 300 shares held as custodian for his minor
children, and 25,000 shares held by Chrisley Investments of which his spouse is
general partner.
(4) Includes 6,000 shares issuable upon exercise of stock options.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The executive officers and Directors of the Company, as of September
30, 2000, together with their ages and business backgrounds are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
James R. Bell 35 Chairman of the Board of
Directors, Chief Executive
Officer, President
Robert T. Huttick 34 Executive Vice President, Chief
Operating Officer
James Cancro 39 Director, Executive Vice
President, Director of Brewing
Operations
Stephen J. Bell 27 Vice President, Manager of
Brewing Operations-Head Brewer
Robert White 46 Executive Vice President,
Director of Food and Beverage
Operations
</TABLE>
<PAGE> 27
Each Director holds office until the expiration of the term for which
he was elected and until his successor has been elected and qualified. The
following is a summary of the business experience of each executive officer and
Director.
James R. Bell is one of Red Bell's founders and has served as Chief
Executive Officer, President, and Chairman of the Board since its inception in
June 1993. Prior to co-founding Red Bell, Mr. Bell was a First Vice President of
Investments with the firm of Janney Montgomery Scott Inc., a Philadelphia,
Pennsylvania investment banking and brokerage company from April 1994 to
September 1996. From February 1991 to April 1994, Mr. Bell served as Senior
Executive Vice President of First Interregional Equity Corporation, a New Jersey
based investment banking firm. From 1988 to 1991, Mr. Bell was an Associate Vice
President with Dean Witter Reynolds, Inc. in Philadelphia, Pennsylvania. Mr.
Bell received a Bachelor's Degree in Business Administration from Frostburg
State University, Maryland.
Robert T. Huttick joined Red Bell in 1996 and serves as the Executive
Vice President and Chief Operating Officer. Mr. Huttick is responsible for
overseeing all aspects of operations and management of the main brewery and the
First Union Center Red Bell Brewery and Pub. Mr. Huttick supervises and manages
the design and construction teams on all Red Bell properties. Prior to joining
Red Bell, Mr. Huttick was director of customer service with Lincoln Mercury,
from 1986 through 1996. From 1995 to 1996, Mr. Huttick served as President of
Ford Motor Company's Parts and Service Directors Association.
James T. Cancro is one of Red Bell's founders and has served as a
Director and as Director of Brewing Operations for our main brewery and our
brewpubs since our inception June 1993. Mr. Cancro is responsible for all
aspects of our brewing operations including brewing equipments designs,
specifications, installation, recipe formulation, and brewing operations. Mr.
Cancro has been brewing and formulating recipes for over 12 years and has
completed a brewing apprenticeship under Mr. Will Kemper of Dock Street Brewing
Company, Philadelphia, Pennsylvania. Mr. Cancro is a certified beer judge with
the American Brewers Association. Prior to joining Red Bell, Mr. Cancro served
as project manager for Cornell Construction Company, a Delaware Valley based
construction firm. Mr. Cancro received a degree in Structural Engineering from
Villanova University.
Stephen J. Bell is the brother of founder James R. Bell. Mr. Bell
joined the Company in May 1998, to serve as Vice President and
<PAGE> 28
Manager of Brewing Operations- Head Brewer for both the Red Bell Brewing Company
(main brewery) and the Red Bell Brewery and Pub Company (brew pubs). Mr. Bell is
chiefly responsible for the day today brewing operations of our owned and/or
managed brewery and brew pubs. Prior to joining us in his current capacity, Mr.
Bell held various part time positions with Red Bell for over two years. Mr. Bell
holds a Bachelors degree in Political Science and minor in History and
Administration of Justice from the University of Pittsburgh.
Robert White joined Red Bell in December 1998 to serve as Executive
Vice President and Director of Food and Beverage Operations for our subsidiary
Red Bell Brewery and Pub Company. Mr. White is responsible for the day to day
operations of Red Bell owned and/or managed restaurants and brew pubs. Prior to
joining us, Mr. White served as the Director of Food and Beverage for Sentry
Hospitality III, Ltd. a New York based hotel and restaurant management
partnership, from 1996 to 1998. From 1994 to 1996, Mr. White served as Director
of Dining Services for Columbia University in New York, where he was responsible
for the supervising of all day to day operations of the University Dining Halls,
Fast Food concepts, and banquet and catering business. From 1990 to 1995, Mr.
White was the owner and operator of the Promenade Restaurant, a high volume
restaurant located in Cape May, New Jersey. Mr. White holds a Bachelors degree
in Educational Studies from West Chester University.
DIRECTORS' COMPENSATION
Members of the Board of Directors of Red Bell do not currently receive
any cash compensation for serving as a Director.
ITEM 6. EXECUTIVE COMPENSATION.
The following table sets forth the amount of all compensation paid or
accrued by the Company during the calendar years ended December 31, 1997, 1998
and 1999 to the individual acting in the capacity of Chief Executive Officer. No
other individual who was serving as an executive officer at the end of these
calendar years received salary and bonus in excess of $100,000 in such year.
<TABLE>
<CAPTION>
Name and Position Year Salary Other Total Compensation
----------------- ---- ------ ----- ------------------
<S> <C> <C> <C>
James R. Bell
Chief Executive
Officer and President 1997 $89,999 $0 $89,999
1998 $89,999 $0 $89,999
1999 $89,999 $0 $89,999
</TABLE>
<PAGE> 29
EMPLOYMENT AGREEMENTS
In August 1996, Red Bell and James R. Bell, our Chief Executive
Officer, entered into an employment agreement. The agreement has a term
commencing September 1, 1996 and extends through December 31, 2001. The
agreement is automatically renewed from year to year thereafter unless canceled
by Mr. Bell or Red Bell. The agreement provided for an annual base salary of
$140,000 per annum. In 1997, Mr. Bell voluntarily agreed to reduce the annual
base salary to $89,999. The agreement requires Mr. Bell to devote his full time
and attention to the business and affairs of Red Bell and obligates him not to
engage in any investments or activities which would compete with Red Bell during
the term of the agreement and for two years thereafter.
The Company does not have employment agreements with any of its other
executive officers.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1998, James Bell sold to us 75,000 shares of Common Stock at $4.50
per share for $337,500. Red Bell reflected the amount due as a related party
payable on its financial statements and no monies were ever paid to Mr. Bell on
the obligation. In 1999, the shares were returned to Mr. Bell and the
corresponding obligation canceled.
As a condition of the $194,000 loan to Red Bell by CDB Finance made in
October 2000, Mr. Bell has pledged 500,000 shares of his Common Stock and Mr.
Huttick has pledged 122,777 shares of his Common Stock as security for the loan.
In addition, each of Mr. Bell and Mr. Huttick has agreed to personally guaranty
the loan, provided that Mr. Huttick's liability is limited to $90,000.
In March 1999, RBC Capital Investments, a partnership of which Mr.
Huttick is a general partner, entered into a License Agreement with Red Bell.
Pursuant to the agreement, RBC will pursuant to a joint venture agreement with
Ogden operate the former Veteran's Stadium Winners Park as a Red Bell brew pub.
In exchange for a license to use the Red Bell name, RBC agreed to serve only Red
Bell beer and Red Bell agreed to sell keg beer to RBC at a fixed price equal to
that of our other Veteran's Stadium locations. The agreement has term of three
years.
As of September 30, 2000, the Company owed Mr. Bell $87,069
<PAGE> 30
and Mr. Huttick $63,397 on account of accrued and unpaid salary. These amounts
are reflected as related party payable on the financial statements of Red Bell
and do not accrue interest.
ITEM 8. DESCRIPTION OF SECURITIES.
Red Bell is authorized to issue up to 25,000,000 shares of Common
Stock, without par value. As of September 30, 2000, there were the following
issued and outstanding securities of Red Bell:
* 3,400,243 shares of Common Stock.
* Options to acquire up to 999,750 shares of Common
Stock at an exercise price of $.30 per share which expire May 2005, options to
acquire up to 300,000 shares of Common Stock at an exercise price of $2.75 per
share (250,000 of which expire in July 2007 and 50,000 of which expire in
November 2009), and options to acquire up to 10,000 shares of Common Stock at
$4.50 per share which expire in June 2008.
* Warrants to purchase up to 89,500 shares of Common
Stock at $.30 per share which expire August 2003.
* Convertible Subordinated Debentures which are
convertible at the option of the holder into 276,000 shares of Common Stock as
well as accrued interest thereon which entitles the holders to receive 54,720
shares.
* Warrants issuable to the holders of the above
Debentures upon conversion thereof to purchase up to 276,000 shares, 230,000 of
which are exercisable at $2.00 per share and expire August 2006, and 46,000 of
which are exercisable at $2.50 per share and expire September 2006.
Subsequent to September 30, 2000, Red Bell has issued the following
securities:
* 22,000 shares to CDB Finance in connection with the
loan to Red Bell of $194,000.
COMMON STOCK
The holder of each share of Common Stock is entitled to one vote on all
matters submitted to a vote of the shareholders of Red Bell, including the
election of directors. The holders of Common Stock are entitled to receive such
dividends as the Board of Directors may from time to time declare out of funds
legally
<PAGE> 31
available for payment of dividends. Upon any liquidation, dissolution or winding
up of the Company, holders of shares of Common Stock are entitled to receive pro
rata all of the assets of the Company available for distribution. The holders of
Common Stock do not have any preemptive rights to subscribe for or purchase
shares, obligations, or other securities of Red Bell. In addition, the Common
Stock is not redeemable, does not have any conversion rights, and the holders
thereof are not liable for assessments or further calls.
SUBORDINATED DEBENTURES
In August 1996, we issued a 5% Convertible Subordinated Debenture in
the principal amount of $460,000 to Villars I, L.P. (formerly Red Bell Partners,
L.P.). Interest on the Debenture which is payable quarterly, is payable in
shares of Common Stock through August 1, 2000 and all payments thereafter are in
cash. All principal is due August 1, 2006. The Debenture is convertible into
shares of Common Stock at any time prior to maturity at the rate of $2.00 per
share. Red Bell has granted to the holder certain registration rights in the
event of a public offering of the Common Stock. Upon conversion, the holder
shall receive warrants to purchase at any time prior to August 1, 2006, the same
number of shares received upon conversion at the conversion price. Any payment
of the Debenture is subordinated to prior payment of all indebtedness of the
Company to any bank or other institutional lender.
In September 1996, we issued a 5% Convertible Subordinated Debenture in
the principal amount of $115,000 to Villars II, L.P. Interest on the Debenture
which is payable quarterly, is payable in shares of Common Stock through
September 1, 2000 and all payments thereafter are in cash. All principal is due
September 1, 2006. The Debenture is convertible into shares of Common Stock at
any time prior to maturity at the rate of $2.50 per share. Red Bell has granted
to the holder certain registration rights in the event of a public offering of
the Common Stock. Upon conversion, the holder shall receive warrants to purchase
at any time prior to September 1, 2006, the same number of shares received upon
conversion at the conversion price. Any payment of the Debenture is subordinated
to prior payment of all indebtedness of the Company to any bank or other
institutional lender.
PART II
ITEM 1. MARKET FOR COMMON EQUITY AND OTHER STOCKHOLDER MATTERS.
<PAGE> 32
There is presently no public trading market for our Common Stock. Red
Bell intends to have the Common Stock listed for trading on the NASD's OTC
Electronic Bulletin Board under the symbol RBEL as soon as practicable.
As of September 30, 2000, there are the following options, warrants or
convertible securities outstanding:
* Options to acquire up to 999,750 shares of Common Stock at
an exercise price of $.30 per share which expire May 2005, options to acquire up
to 300,000 shares of Common Stock at an exercise price of $2.75 per share
(250,000 of which expire in July 2007 and 50,000 of which expire in November
2009), and options to acquire up to 10,000 shares of Common Stock at $4.50 per
share which expire in June 2008.
* Warrants to purchase up to 89,500 shares of Common Stock at
$.30 per share which expire August 2003.
* Convertible Subordinated Debentures which are convertible at
the option of the holder into 276,000 shares of Common Stock as well as accrued
interest thereon which entitles the holders to receive 54,720 shares.
* Warrants issuable to the holders of the above Debentures
upon conversion thereof to purchase up to 276,000 shares, 230,000 of which are
exercisable at $2.00 per share and expire August 2006, and 46,000 of which are
exercisable at $2.50 per share and expire September 2006.
These shares when and if issued would constitute restricted securities
as such term is defined in Rule 144 under the Securities Act of 1933. We have
not agreed to register any of these shares for resale by the holders thereof
under the 1933 Act. The shares underlying the Convertible Subordinated Debenture
and the related warrants are subject to certain registration rights but only
following the occurrence of an underwritten public offering of Red Bell's stock.
We have agreed to register for resale the following shares promptly
following the effective date of this Form 10-SB:
* The 22,000 shares issued to CDB Finance in October 2000.
All of our issued and outstanding Common Stock as of September 30, 2000
constituted restricted securities within the meaning of
<PAGE> 33
Rule 144 under the 1933 Act. Assuming compliance with the requirements of Rule
144, 3,399,443 shares are presently eligible for sale thereunder and the
remaining 800 shares will be eligible to be resold under Rule 144 in July 2001.
On September 30, 2000 there were 429 record holders of our Common
Stock.
The holders of our Common Stock are entitled to receive such dividends
as the Board of Directors of Red Bell may from time to time declare out of funds
legally available for payment of dividends. Through the date hereof, no cash
dividends have been paid on our Common Stock.
ITEM 2. LEGAL PROCEEDINGS.
In September 2000, Foothill Capital Corporation commenced a legal
action against us and our Chairman, James R. Bell, in the United States District
Court for the Eastern District of Pennsylvania. The complaint alleges that we
have defaulted under a Promissory Note we made in favor of Foothill and that as
of the date of the filing of the complaint, we owe $721,360 to Foothill.
Foothill seeks to recover the amount due from Mr. Bell pursuant to a guaranty
and surety agreement signed by Mr. Bell. In December 2000, we entered into a
stipulation for entry of a judgment in the above amount against us. We are
currently engaged in settlement negotiations with Foothill. The debt of Foothill
is secured by our bottling line and we anticipate that the judgment would be
satisfied through the sale of the bottling line.
In May 1999, we commenced an action in the Court of Common Pleas of
Philadelphia County, Pennsylvania, against RBGSC Investment Corp., GS Capital,
L.P., Bella's Place, Inc. and an individual for breaches of various agreements
between us regarding a former Red Bell brew pub located at the Philadelphia
International Airport and a then unopened facility at the Reading Terminal
Headhouse. In September 1999, RBGSC filed for voluntary bankruptcy pursuant to
Chapter 11 and our action was removed to the United States Bankruptcy Court for
the Eastern District of Pennsylvania. The bankruptcy court has entered various
orders including the following: affirming RBGSC's rejection of our management
contract for the Headhouse location; holding that our licensing and management
agreement for the Airport brew pub expired in May 1999 and awarding us $20,269
in back licensing fees; denying our claims to seek to have GS Capital held
liable under the contracts pursuant to a piercing the corporate veil theory; and
denying our claim for restitution from the defendants. We have appealed these
orders to
<PAGE> 34
the United States District Court for the Eastern District of Pennsylvania. To
date, the District Court has affirmed all of the bankruptcy court orders except
for the orders relating to our restitution claim and piercing the corporate veil
claim which are still pending.
In September 2000, we filed an action against the law firm of Buchanan
Ingersoll Professional Corporation and one of its partners in the Court of
Common Pleas of Philadelphia County, Pennsylvania. The complaint alleges that
the law firm and its partner wrongfully represented both RBGSC, GS Capital and
their affiliates, and us regarding the various agreements entered into among us
referred to above, and subsequently withdrew from representing us and wrongfully
continued to represent RBGSC, GS Capital and their affiliates. Our complaint
alleges breach of contract, breach of fiduciary duties, negligence, and fraud,
and seeks recovery of various damages including punitive damages and damages for
the value of the lost leasehold interests in the two brew pubs referred to
above. In November 2000, the defendants filed preliminary objections to our
complaint which are currently pending.
In October 2000, our landlord under the lease for our proposed PSU brew
pub commenced an action against us in the Court of Common Pleas of Philadelphia
County, Pennsylvania. The complaint seeks to recover past due rents under the
lease for the premises in the amount of $117,703. To date, we have not responded
to the complaint and are attempting to settle this action.
In September 2000, the law firm of White And Williams, LLP entered
judgment by confession against us in the Court of Common Pleas of Philadelphia
County, Pennsylvania, for $59,179.96 representing legal fees owed by us. On
November 28, 2000, the law firm executed on its judgment by among other things,
levying on our furniture, fixtures, equipment, machinery and inventory located
at our 3100 Jefferson Street premises. We are attempting to work out appropriate
payment arrangements with the plaintiff.
In September 2000, the law firm of Fox Rothschild O'Brien and Frankel,
LLP commenced a legal action against us in the Court of Common Pleas of
Philadelphia County, Pennsylvania, for legal fees owed by us. In October 2000, a
default judgment was entered against us for $49,601. We are attempting to
negotiate acceptable payment arrangements with plaintiff.
In November 2000, pursuant to our agreement, the law firm of Cohen
Seglias Pallas & Greenhall entered a judgment against us for $55,227.43 in the
Court of Common Pleas of Philadelphia County,
<PAGE> 35
Pennsylvania, representing legal fees due by us. Pursuant to the agreement,
plaintiff will not execute on the judgment for 100 days.
From time to time, Red Bell is a party to other routine litigation
which arises in the normal course of business. In the opinion of management, the
resolution of these lawsuits would not have a material adverse effect on our
consolidated financial position or consolidated results of operations.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
None.
ITEM 4. RECENT SALE OF UNREGISTERED SECURITIES.
Between November 1997 and November 1999, Red Bell sold 217,507 shares
of Common Stock to fifty investors at $4.50 per share. The shares were offered
and sold pursuant to the exemption from registration set forth in Section 4(2)
of the Act.
In June 1998, Red Bell granted to the Agostinelli Family Partnership
fully vested options to purchase up to 10,000 shares of Common Stock at $4.50
per share at any time for a period of ten years. The options were issued in
connection with the lease agreement for the proposed PSU location. The options
were sold pursuant to the exemption from registration set forth in Section 4(2)
of the Act.
From March 1999 through December 1999, Red Bell- Penn State sold
112,670 shares of Class A Preferred Stock to 23 investors at $1.72 per share for
a total of $193,779.08. The shares were offered and sold pursuant to the
exemption from registration set forth in Section 4(2) of the Act. The shares
earn a cumulative dividend of 10.5% per annum, are entitled to one vote per
share, and are to be redeemed no later than four years after issuance at $2.15
per share.
During November 1999, Red Bell issued fully vested options to purchase
up to 25,000 shares of Common Stock to each of two consultants. The options are
exercisable at any time for a ten year period at $2.75 per share. The options
were issued pursuant to the exemption from registration set forth in Rule 701
promulgated under the Act.
In June 2000, Red Bell sold 800 shares of Common Stock to one investor
at $4.50 per share. The shares were offered and sold by the Company pursuant to
the exemption from registration set forth
<PAGE> 36
in Section 4(2) of the Act.
In October 2000, Red Bell issued 22,000 shares of Common Stock to CDB
Finance Company in connection with the loan made by CDB to Red Bell. The shares
were issued pursuant to the exemption from registration set forth in Section
4(2) of the Act. Red Bell has granted to CDB certain registration rights in
connection with these shares.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 1746 of the Pennsylvania Business Corporation Law of 1988, as
amended ("BCL"), authorizes a Pennsylvania corporation to indemnify its
officers, directors, employees and agents under certain circumstances against
expenses and liabilities incurred in legal proceedings involving such persons
because of their holding or having held such positions with the corporation and
to purchase and maintain insurance of such indemnification. Our By-laws
substantively provide that we will indemnify our officers, directors, employees
and agents to the fullest extent provided by Section 1746 of the BCL.
Section 1713 of the BCL permits a Pennsylvania corporation, by so
providing in its By-laws, to eliminate the personal liability of a director for
monetary damages for any action taken unless the director has breached or failed
to perform the duties of his office and the breach or failure constitutes
self-dealing, willful misconduct or recklessness. In addition, no such
limitation of liability is available with respect to the responsibility or
liability of a director pursuant to any criminal statute or for the payment of
taxes pursuant to Federal, State or local law. Our By-laws eliminate the
personal liability of the directors to the fullest extent permitted by Section
1713 of the BCL.
PART F/S FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Index to Financial Statements
<S> <C>
Audited:
Independent Auditors' Report F - 1
Consolidated Balance Sheets as of
December 31, 1998 and December 31, 1999 F - 2
Consolidated Statement of Operations for
the years ended December 31, 1998 and
December 31, 1999 F - 3
</TABLE>
<PAGE> 37
<TABLE>
<S> <C>
Consolidated Statement of Stockholders'
Equity for the years ended December 31,
1998 and December 31, 1999 F - 4
Consolidated Statement of Cash Flows for
the years ended December 31, 1998 and
December 31, 1999 F - 5
Notes to the Consolidated Financial
Statements F - 6
Unaudited:
Consolidated Balance Sheet as of September
30, 2000 F - 2
Consolidated Statement of Operations
for the nine months ended September 30, 2000
and September 30, 1999 F - 3
Consolidated Statement of Cash Flows for
the nine months ended September 30, 2000 and
September 30, 1999 F - 5
</TABLE>
PART III
INDEX TO EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
Number Description
-------------------------------------------------------------------
<S> <C>
2.1 Articles of Incorporation of Red Bell Brewing Co., filed
in the Commonwealth of Pennsylvania on June 29, 1993.
2.1.1 First Amendment of Articles of Incorporation of Red Bell
Brewing Co., filed in the Commonwealth of Pennsylvania on
August 16, 1993.
2.1.2 Second Amendment of Articles of Incorporation of Red Bell
Brewing Co., filed in the Commonwealth of Pennsylvania on
June 12, 1995.
2.1.3 Third Amendment of Articles of Incorporation of Red Bell
Brewing Co., filed in the Commonwealth of Pennsylvania on
April 27, 1998.
</TABLE>
<PAGE> 38
<TABLE>
<S> <C>
2.1.4 Fourth Amendment of Articles of Incorporation of Red Bell
Brewing Co., filed in the Commonwealth of Pennsylvania on
March 3, 2000.
2.2 Bylaws of Red Bell Brewing Co.
*4.1 Specimen Common Stock Certificate.
4.2 $455,617.58 Amended, Restated and Consolidated Note of
the Company in favor of First Union National Bank dated
January 21, 1999.
4.3 $600,000.00 Master Demand Note from Red Bell Brewery Pub
Company in favor of Corestates Bank, N.A. dated August
20, 1996.
4.4 Assignment and Security Agreement between Red Bell
Brewery Pub and Corestates Bank, N.A. dated August 20,
1996.
4.5 Guaranty of Red Bell in favor of Corestates Bank, N.A.
dated August 20, 1996.
4.6 $398,000.00 Note dated October 12, 1998 of the Company in
favor of PIDC Local Development Corporation.
4.7 Mortgage Subordination and Lien Priority Agreement dated
October 12, 1998.
4.8 $522,000 Note of the Company in favor of PIDC Local
Development Corporation October 12, 1998.
4.9 $500,000 Note from the Company to the Commonwealth of
Pennsylvania dated January 29, 1998.
4.10 Loan Agreement dated January 29, 1998 between the Company
and Commonwealth of Pennsylvania.
4.11 Installment Sale Agreement dated January 29, 1998 between
PIDC Financing Corporation and the Company.
4.12 Assignment of Installment Sale Agreement dated January
26, 1998 between PIDC Financing Corporation, the Company
and the Pennsylvania Industrial Development Authority.
4.13 Registration Rights Agreement between Red Bell and CDB
Finance Corporation dated October 23, 2000.
</TABLE>
<PAGE> 39
<TABLE>
<S> <C>
4.14 Subscription Agreement between CDB Finance Corporation
and Red Bell dated October 23, 2000.
10.1 Debenture Purchase Agreement dated August 12, 1996 by and
between Red Bell and Red Bell Partners, L.P.
10.2 5% Convertible Subordinated Debenture dated August 12,
1996.
10.3 Employment Agreement dated August 12, 1996 between James
R. Bell and Red Bell.
10.4 Debenture Purchase Agreement dated September 27, 1996 by
and between Red Bell and Villars II, L.P.
10.5 5% Convertible Subordinated Debenture dated September
27, 1996.
10.6 Agreement dated August 1, 1996 by and between ARAMARK
Leisure Services, Inc. and Red Bell Brewery & Pub Company.
10.7 Agreement of Lease dated November 20, 1998 by and between
Red Bell and Agostinelli Family Partnership.
10.7.1 First Amendment to Lease Agreement dated December 20,
1998 between Red Bell and Agostinelli Family Partnership.
10.8 Non-Qualified Stock Option Agreement dated May 16, 1995
between Red Bell and James R. Bell.
10.9 Incentive Stock Option Agreement dated May 16, 1995
between Red Bell and Francis J. Ciabattoni.
21 Subsidiaries.
27 Financial Data Schedule.
</TABLE>
--------------
* to be filed by amendment.
<PAGE> 40
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Red Bell Brewing Company and Subsidiaries
We have audited the accompanying consolidated balance sheets of Red Bell Brewing
Company and Subsidiaries (the "Company") as of December 31, 1999 and 1998, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1999 and 1998, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2, the
Company has incurred recurring operating losses, has not complied with certain
covenants of loan agreements with banks, and has been unable to satisfy its
obligations to certain creditors. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans
relating to these matters are also described in Note 2. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
October 26, 0000 /s/ HJ Jump, Scutellaro and Company, LLP
F-1
<PAGE> 41
RED BELL BREWING COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31 September 30
1999 1998 2000
----------- ---------- ------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current Assets:
Cash $ 86,049 450 10,913
Cash-restricted 48,059 893 48,059
Trade receivables 664 3,012 75,745
Inventories 41,467 47,775 35,202
Advance to customer-net 51,200 45,848 37,500
Prepaid expenses 73,161 47,531 51,031
----------- ---------- ----------
Total current assets 300,600 145,509 258,450
----------- ---------- ----------
Property, Plant and Equipment-net 3,308,668 3,503,301 3,175,746
Assets held for sale 600,000 842,754 600,000
Advance to customer, long-term-net 222,649 281,921 216,699
Other assets 111,489 107,672 389,431
----------- ---------- ----------
Total Assets $ 4,543,406 4,881,157 4,640,326
=========== ========== ==========
Liabilities and Stockholders Equity (deficit)
Current liabilities:
Notes payable $ 710,000 1,737,227 970,000
Current portion of long-term debt 2,719,545 1,367,145 2,719,545
Current portion of capital leases 1,540 6,068 --
Accounts payable 919,370 325,899 1,149,120
Accrued liabilities 770,615 695,834 1,215,573
Related party payable 182,467 417,500 254,966
----------- ---------- ----------
Total current liabilities 5,303,537 4,549,673 6,309,204
Subordinated convertible notes 554,307 523,658 569,827
Capital lease, less current portion -- 7,972 --
Other liabilities 10,000 10,000 10,000
----------- ---------- ----------
Total Liabilities 5,867,844 5,091,303 6,889,031
Stockholders' Equity (deficit)
Common stock, no par value:
Authorized shares - 5,000,000 in 1999
and 1998 and 25,000,000 (unaudited)in 2000
Issued and outstanding shares
3,374,941 in 1999 3,293,136 in 1998
and 3,375,741 (unaudited)in 2000 4,790,206 4,759,583 4,793,806
Preferred stock $1.72 stated value
Authorized shares 1,000,000 in 1999 and
2000 Issued and outstanding shares
109,670 in 1999 and 112,670
(unaudited) in 2000 188,630 -- 193,790
Accumulated deficit (6,303,274) (4,632,229) (7,236,301)
Treasury stock, 75,000 shares
at cost -- (337,500) --
----------- ---------- ----------
Total Stockholders'
Equity (Deficit) (1,324,438) (210,146) (2,248,705)
----------- ---------- ----------
Total Liabilities and Equity (deficit) $ 4,543,406 4,881,157 4,640,326
=========== ========== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
F-2
<PAGE> 42
RED BELL BREWING COMPANY AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31 September 30
1999 1998 2000 1999
------------------------- ------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Gross sales $ 538,851 745,229 396,724 408,749
Less: returns and allowances 9,252 3,723 2,246 8,561
Less: excise taxes 34,174 23,912 20,093 26,656
----------- ---------- ---------- ----------
Net sales 495,425 717,594 374,385 373,532
Cost of sales 451,783 708,635 352,029 358,446
----------- ---------- ---------- ----------
Gross profit 43,642 8,959 22,356 15,086
----------- ---------- ---------- ----------
Advertising and marketing expenses 14,212 53,815 7,057 12,922
General and administrative expenses 1,152,363 955,346 597,153 802,064
Impairment loss 242,754 -- -- 242,754
----------- ---------- ---------- ----------
Operating loss (1,365,687) (1,000,202) (581,854) (1,042,654)
Interest income 33,666 27,687 19,650 25,271
Interest expense (394,799) (333,747) (396,096) (300,580)
Other income 55,775 161,311 43,174 51,141
----------- ---------- ---------- ----------
Net loss $(1,671,045) (1,144,951) (915,126) (1,266,822)
----------- ---------- ---------- ----------
Net loss per common shares -
basic and diluted $ (.49) (.35) (.27) (.37)
=========== ========== ========== ==========
Weighted average common shares -
basic and diluted 3,383,513 3,292,601 3,399,799 3,378,647
=========== ========== ========== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
F-3
<PAGE> 43
RED BELL BREWING COMPANY AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
For the years ended December 31, 1999 and 1998
and the nine months ended September 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Preferred Total
Common Stock Stock Accumulated Treasury Stockholders'
Shares Amount Amount Deficit Stock Equity (deficit)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 3,283,702 $4,269,368 -- (3,487,278) -- 782,090
Issuance of common stock-net
of issuance costs 108,936 490,215 -- -- -- 490,215
Purchase of Treasury stock (75,000) -- -- -- (337,500) (337,500)
Net loss -- -- -- (1,144,951) -- (1,144,951)
---------- ---------- ------- ---------- -------- ----------
Balance, December 31, 1998 3,317,638 4,759,583 -- (4,632,229) (337,500) (210,146)
Issuance of common stock-net
of issuance costs 6,805 30,623 -- -- -- 30,623
Issuance of Treasury stock 75,000 -- -- -- 337,500 337,500
Issuance of 109,670 shares
of preferred stock of
Red Bell State College -- -- 188,630 -- -- 188,630
Net loss -- -- -- (1,671,045) -- (1,671,045)
---------- ---------- ------- ---------- -------- ----------
Balance, December 31, 1999 3,399,443 4,790,206 188,630 (6,303,274) -- (1,324,438)
Issuance of common stock
net of issuance cost
(unaudited) 800 3,600 -- -- -- 3,600
Issuance of 3,000 shares
of preferred stock of
Red Bell State College -- -- 5,160 -- -- 5,160
Preferred stock dividends -- -- -- (17,901) -- (17,901)
Net loss (unaudited) -- -- -- (915,126) -- (915,126)
---------- ---------- ------- ---------- -------- ----------
Balance September 30, 2000
(unaudited) 3,400,243 $4,793,806 193,790 (7,236,301) -- (2,248,705)
========== ========== ======= ========== ======== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
F-4
<PAGE> 44
RED BELL BREWING COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31 September 30
1999 1998 2000 1999
------------------------- ----------------------
(Unaudited)
<S> <C> <C> <C> <C>
Cash Flows from operating activities
Net loss $(1,671,045) (1,144,951) (915,126) (1,266,822)
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation 202,815 193,396 152,549 152,111
Accretion of convertible
debt discount 30,649 28,558 25,520 22,986
Impairment loss 242,754 -- -- 242,754
Changes in operating assets and liabilities:
(Increase) Decrease in trade receivables 2,348 2,888 (75,081) (6,141)
Decrease in inventories 6,308 32,225 6,265 4,730
(Increase) decrease in prepaid
expenses and other current
assets (25,630) (36,831) (303) (214)
(Increase) decrease in other assets (3,817) (77,372) 3,884 (5,000)
Increase in accounts payable
and cash overdrafts 590,299 105,199 219,299 494,402
Increase (decrease) in accrued liabilities 74,781 (247,966) 444,958 258,550
Increase (decrease) in related
party payable 102,467 -- 72,499 75,350
----------- ---------- -------- ----------
Net cash used for operating activities (448,071) (1,144,854) (75,536) (27,294)
----------- ---------- -------- ----------
Cash Flows from Investing Activities:
Capital expenditures (5,000) (23,260) (7,569) (5,000)
Proceeds from sale of assets -- 40,688 -- --
Repayment of advance to customer 87,500 62,500 37,500 --
Amortization of discount on
advance to customer (33,590) (27,309) (17,850) (25,184)
----------- ---------- -------- ----------
Net Cash provided (used) for Investing Activities 48,910 52,619 12,081 (30,184)
----------- ---------- -------- ----------
Cash Flows from Financing Activities:
Proceeds from borrowings 1,370,632 575,963 -- --
Payments of debt obligations (1,045,459) -- -- --
Payments of capital lease (12,500) -- (2,540) (9,960)
Preferred dividends paid to stockholders -- -- (17,901) --
Increase (decrease) in restricted cash (47,166) 26,507 -- --
Proceeds from issuance of preferred stock 188,630 -- 5,160 128,630
Proceeds from issuance of common stock 30,623 490,215 3,600 30,623
----------- ---------- -------- ----------
Net cash provided (used) by financing activities 484,760 1,093,685 (11,691) 149,293
----------- ---------- -------- ----------
Net (decrease) increase in cash
and cash equivalents 85,599 450 (75,136) 91,815
Cash beginning of year 450 -- 86,049 450
----------- ---------- -------- ----------
Cash end of year $ 86,049 450 10,913 91,369
=========== ========== ======== ==========
Supplemental disclosure of cash flow information:
Interest payments (net of amounts
capitalized) 311,238 214,328 15,519 224,091
=========== ========== ======== ==========
Treasury stock purchased $ -- 337,500 -- --
=========== ========== ======== ==========
Debt repaid with Treasury stock $ 337,500 -- -- 337,500
=========== ========== ======== ==========
License paid with short term note $ -- -- 260,000 --
=========== ========== ======== ==========
</TABLE>
See Accompanying Notes to Financial Statements.
F-5
<PAGE> 45
RED BELL BREWING COMPANY AND SUBSIDIARIES
Consolidated Notes to Financial Statements
December 31, 1999 and 1998
Information with respect to the period ended September 30, 2000 is (Unaudited)
1. Business
Red Bell Brewing Company and Subsidiaries consist of the parent, Red Bell
Brewing Company and its wholly owned subsidiaries, Red Bell Brewing and Pub
Company and Red Bell Brewing and Pub Company - State college (Red Bell -
State College).
Red Bell Brewing Company, a Pennsylvania corporation ("the Company") was
incorporated in July, 1993, The Company engages in the manufacture,
bottling, distribution and sale of beer, primarily in the Mid-Atlantic
region. The Company generates its revenues by the sale of its beer to
wholesalers, retailers, beer distributors and through royalty and
management agreements with brew pubs.
Red Bell Brewing and Pub Company operates a brewing and brew pub in the
First Union Center under an arrangement with Aramark Leisure Services (see
note 3). Red Bell - State College was incorporated on January 20, 1999 in
Pennsylvania in order to develop and operate a restaurant and brewing in
State College, Pennsylvania. All intercompany transactions have been
eliminated in consolidations.
The manufacturing and sale of alcoholic beverages is a business that is
regulated and taxed at the federal, state and local levels. The operations
may be subject to more restrictive regulations and taxation by federal,
state and local governmental agencies than are other non-alcohol related
businesses.
2. Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
The financial statements of the Company have been prepared assuming that
the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. Accordingly, the financial statements do not include
any adjustments that might be necessary should the Company be unable to
continue in existence.
The Company had been in the development stage since its inception in 1993
to 1996 and has incurred substantial cumulative losses from its inception
through December 31, 1999 amounting to $6,303,274. Losses have continued
through September, 2000. The Company's ability to meet its future
obligations is dependent upon the success of its products in the
marketplace and its ability to raise capital until the Company's products
can generate sufficient operating revenues. These factors raise doubt about
the Company's ability to continue as a going concern. Management believes
that actions presently taken and currently being contemplated will provide
for the Company to continue as a going concern. Such actions include the
generation of revenues from operations, raising capital through debt
issuance and additional sales of Company common stock.
Interim Financial Information
The financial statements and disclosures included herein for the nine
months ended September 30, 2000 and 1999 are unaudited. These financial
statements and disclosures have been prepared by the Company in accordance
with generally accepted accounting principles and include all adjustments,
consisting of adjustments of a normal and recurring nature, which in the
opinion of management, are necessary for a fair presentation of the
Company's financial position and the results of its operations and cash
flows for these periods.
F-6
<PAGE> 46
RED BELL BREWING COMPANY AND SUBSIDIARIES
Consolidated Notes to Financial Statements
December 31, 1999 and 1998
Information with respect to the period ended September 30, 2000 is (Unaudited)
2. Summary of Significant Accounting Policies (continued)
Cash
Restricted cash represents collections of an advance to a customer that is
restricted to repayment of a bank loan.
Concentration of Credit Risk
The Company's unsecured advance to a customer ($273,849 at December 31,
1999) represents a significant concentration of credit risk.
Inventory
Inventory is valued at the lower of cost or market, with cost being based
on a moving average method.
Property, Plant and Equipment
Property, Plant and Equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives if the
assets. All significant additions and improvements are capitalized and
repairs and maintenance charges are expensed as incurred.
Estimated useful lives for the assets are as follows:
<TABLE>
<S> <C>
Building and improvements 30 years
Brewing equipment 13 years
Automobiles and trucks 5 years
Furniture and fixtures 3-7 years
</TABLE>
Deferred Funding Costs
Deferred costs consist primarily of financing costs associated with debt
financing which are stated at cost. Amortization is provided on a
straight-line basis over the life of the associated debt agreement.
F-7
<PAGE> 47
RED BELL BREWING COMPANY AND SUBSIDIARIES
Consolidated Notes to Financial Statements
December 31, 1999 and 1998
Information with respect to the period ended September 30, 2000 is (Unaudited)
2. Summary of Significant Accounting Policies (continued)
Excise Taxes
The U.S. federal government currently imposes an excise tax of $18 per
barrel of beer produced for consumption in the United States. However, any
brewer with production under 2 million barrels per year, which includes the
Company, pays a federal excise tax of $7 per barrel on the first 60,000
barrels it produces annually. Individual states also impose excise taxes on
alcoholic beverages in varying amounts. The Company records the excise tax
as a reduction of gross sales in the accompanying financial statements.
Net loss Per Common Share
Basic earnings per share is based on the net loss adjusted for the
preferred stock dividends divided by the weighted average number of
outstanding common shares for the period. Diluted earnings per share
adjusts the weighted average for the potential dilution that could occur if
stock options, warrants, or subordinated convertible notes were exercised
or converted into common stock. Diluted earnings per share equals basic
earnings per share because the effects of such items were anti-dilutive.
Long-Lived Assets
The Company evaluates the carrying value of long-lived assets in accordance
with the provisions of Statement of Financial Accounting Standards No.121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of." Historical performance and anticipated future results
are considered in assessing potential impairment. When indicators of
impairment are present, the recoverability of the carrying value of the
assets in question is assessed based on the future undiscounted cash flows
expected to result from their use. If the carrying value cannot be
recovered, impairment losses would be recognized to the extent the carrying
value exceeds fair value. There was an impairment loss in 1999 of $242,754.
Revenue Recognition
Revenue from beer sales is recognized upon shipment of product to
customers. Sales returns are recorded as a reduction of gross sales.
Revenue from royalty and management agreements is recognized in accordance
with contract terms.
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 amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
F-8
<PAGE> 48
RED BELL BREWING COMPANY AND SUBSIDIARIES
Consolidated Notes to Financial Statements
December 31, 1999 and 1998
Information with respect to the period ended September 30, 2000 is (Unaudited)
2. Summary of Significant Accounting Policies (continued)
Stock-Based Compensation
The Company has elected to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
No.25, "Accounting for Stock Issued to Employees", and related
Interpretations for issuance of stock options to employees. Accordingly,
compensation costs for stock options is measured as the excess, if any, of
the fair market value of the stock at the date of the grant over the amount
an employee must pay to acquire the stock. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
No.123, "Accounting for Stock-Based Compensation".
Advertising Costs
The Company expenses advertising costs as they are incurred.
Impact of Recent Pronouncements
In fiscal 1999, the Statement of Financial Accounting Standards (SFAS)
Board issued Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 is effective beginning July 1, 2000 for
the Company. The Company does not currently utilize any derivative
instruments covered by SFAS No. 133 nor does it hedge any transaction,
therefore, no material financial statement impact is expected from the
adoption of SFAS No. 133.
In December 1999, the Securities and Exchanges Commission (SEC) released
Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial
Statements. SAB 101 establishes guidelines in applying generally accepted
accounting principles to the recognition of revenue in financial statements
based on the following four criteria; persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the seller's
price to the buyer is fixed or determinable, and collectibility is
reasonably assured. SAB 101, as amended by SAB 101B, is effective no later
than the fourth fiscal quarter of the Company's fiscal year ending year
2001. The Company does not believe that the adoption of SAB 101 will have a
material effect on its financial position or result of operations.
F-9
<PAGE> 49
RED BELL BREWING COMPANY AND SUBSIDIARIES
Consolidated Notes to Financial Statements
December 31, 1999 and 1998
Information with respect to the period ended September 30, 2000 is (Unaudited)
3. Brew Pubs
During 1996, the Company entered into an agreement with Aramark Leisure
services, Inc. ("Aramark") to open and operate a brewery and brew pub in
facilities leased by Aramark at the First Union Center entertainment
complex in Philadelphia, Pennsylvania. Under the agreement, the Company
contributed $600,000 to Aramark to fund construction of the brew pub and
receives $75,000 per year from the brew pub's revenues. The agreement
provides that Aramark has title to the leasehold improvements. Amounts
received by the Company under the agreement are restricted to the payment
of principal and interest of a related note payable to First Union National
Bank. Under the agreement, the Company is required, among other things, to
maintain the brew pub's license and supplemental liability insurance and to
manufacture and supply beer to the brew pub.
The agreement has an initial term of ten years and provides the Company
with two successive five-year renewal options. However, the agreements
would automatically terminate upon termination of Aramark's lease of the
facilities or upon other events of default by Aramark. Also, Aramark may
terminate the agreement at any time after five years without cause. Upon
any of these events, Aramark would be required to pay the Company a
termination fee equal to any unamortized balance of the $600,000
contribution (amortized on a straight-line basis over eight years). In the
event of default by the Company under the agreement, the Company would
receive from Aramark only an amount equal to the fair market value of the
brewing equipment located at the brew pub.
The Company recorded the contribution to Aramark as an advance to customer
in the amount of $422,500, based on the brew pub distributions over the
eight year contractual amortization period of the contribution discounted
at 9.5%. The discount of $177,500 was recognized as a marketing expense in
1996. The unamortized amount of the discount at December 31, 1999 and 1998
was $63,651 and $97,231, respectively ($29,887 unaudited at September 30,
2000). Interest income of $33,580 and $27,687 related to the advance was
recognized during the year ended December 31, 1999 and 1998, inclusive of
amortization of the discount. ($33,764 unaudited for the nine months ended
September 30, 2000).
The Company also has mobile brew pubs at the Veterans' Stadium
entertainment complex in Philadelphia, Pennsylvania. The Company owns the
fixed assets, however, the pubs are operated by the vendor who has the
concession contract at the stadium. The Company sells beer to the vendor
and receives a commission on the retail beer sales from the vendor. There
is no contractual commitment by either party.
4. Inventories
Inventories consists of the following:
<TABLE>
<CAPTION>
December 31 September
1999 1998 2000
------- ------ -----------
(Unaudited)
<S> <C> <C> <C>
Raw Materials and supplies $30,179 34,153 28,013
Work in Process 2,772 7,362 2,079
Finished Goods 8,516 6,260 5,110
------- ------ ------
Total $41,467 47,775 35,202
======= ====== ======
</TABLE>
F-10
<PAGE> 50
RED BELL BREWING COMPANY AND SUBSIDIARIES
Consolidated Notes to Financial Statements
December 31, 1999 and 1998
Information with respect to the period ended September 30, 2000 is (Unaudited)
5. Property, Plant and Equipment
Property, Plant and Equipment consists of the following:
<TABLE>
<CAPTION>
December 31 September
1999 1998 2000
--------- --------- ---------
(Unaudited)
<S> <C> <C> <C>
Land $ 100,328 100,328 100,328
Building 401,312 401,312 401,312
Building improvements 2,446,646 2,446,646 2,446,646
Brewing equipment 893,683 909,023 896,252
Automobiles and trucks 25,896 25,896 25,896
Furniture and fixtures 71,046 71,046 71,046
---------- --------- ---------
Total 3,938,911 3,954,251 3,941,480
Less Accumulated Depreciation 630,243 450,950 765,734
---------- --------- ---------
Property, Plant and
Equipment, net $3,308,668 3,503,301 3,175,746
========== ========= =========
</TABLE>
Included in property, plant, and equipment as of both December 31, 1999 and
1998 was $23,000 in assets held under capital lease. Accumulated
amortization as of December 31, 1999 and 1998 related to these assets was
$4,100 and $820, respectively.
Assets Held for Sale
Assets held for sale consists of bottling equipment purchased in 1998 and
1997, which was previously recorded as construction in progress. The
equipment was never placed in service as the Company determined that
bottling could be performed more efficiently by a third party. The Company
has a plan to sell this equipment. The net realizable value after
consideration of the cost associated with the sale is $600,000. Therefore,
an impairment loss of $242,754 was recorded in 1999.
6. Other assets
Other assets consist of the following:
<TABLE>
<CAPTION>
December 31 September
1999 1998 2000
--------- -------- -----------
(Unaudited)
<S> <C> <C> <C>
Deferred funding cost $ 142,819 82,311 142,819
Less accumulated amortization (36,330) (13,586) (53,388)
--------- -------- --------
Net deferred funding costs 106,489 68,725 89,431
License 5,000 -- 300,000
Security deposits -- 38,947 --
--------- -------- --------
$ 111,489 107,672 389,431
========= ======== ========
</TABLE>
F-11
<PAGE> 51
RED BELL BREWING COMPANY AND SUBSIDIARIES
Consolidated Notes to Financial Statements
December 31, 1999 and 1998
Information with respect to the period ended September 30, 2000 is (Unaudited)
7. Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31 September
1999 1998 2000
-------- ------- ---------
(Unaudited)
<S> <C> <C> <C>
Independent contractor $217,500 130,000 217,500
Interest 372,980 289,419 753,557
Taxes other than income taxes 131,887 212,238 177,617
Other 48,248 64,177 66,899
-------- ------- ---------
Total $770,615 695,834 1,215,573
======== ======= =========
</TABLE>
8. Related Party Payable
<TABLE>
<CAPTION>
December 31 September
1999 1998 2000
-------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
Loan to officer for treasury stock $ -- 337,500 --
Officer loans and deferred salaries 108,467 -- 180,966
Stockholder loans 74,000 80,000 74,000
-------- ------- -------
Total $182,467 417,500 254,966
======== ======= =======
</TABLE>
The above payables to related parties bear no interest and have no specific
repayment terms.
9. Subordinated Convertible Notes
<TABLE>
<CAPTION>
December 31 September
1999 1998 2000
-------- ------- -----------
(Unaudited)
<S> <C> <C> <C>
5% convertible subordinated note due
August 2006, net of discount of $20,693,
$51,342 and in 1999 and 1998,
respectively $439,307 408,658 454,827
5% convertible subordinated note due
September 2006 115,000 115,000 115,000
-------- ------- -------
$554,307 523,658 569,827
======== ======= =======
</TABLE>
F-12
<PAGE> 52
RED BELL BREWING COMPANY AND SUBSIDIARIES
Consolidated Notes to Financial Statements
December 31, 1999 and 1998
Information with respect to the period ended September 30, 2000 is (Unaudited)
9. Subordinated Convertible Notes (continued)
5% convertible subordinated notes of $460,000 and $115,000 were borrowed
from a partnership group during 1996. These obligations are subordinate to
the Company's notes payable. The notes, or a portion of the notes not less
than 25% of the outstanding balance, are convertible after the first
anniversary of the notes, at the discretion of the note holders, into units
at $2.00 and $2.50 per unit, respectively. Each unit consists of a share of
common stock and a warrant to purchase one share of common stock at $2.00
and $2.50 per share, respectively. The warrants expire August 1, 2006 and
September 1, 2006, respectively. Interest is to be paid with shares of
common stock at the conversion price until August 1, 2006 and September 1,
2006, respectively, after which interest is payable in cash. Accrued
interest, payable in common stock, at December 31, 1999 and 1998 was
$96,711 and $67,961, respectively.
The Company can repay any portion of the notes after the fourth anniversary
of the notes. These two obligations also contain certain "piggyback" and
other registration rights related to the stock underlying the convertible
notes under certain terms and conditions in their respective agreements.
The $460,000 subordinated convertible note has been discounted to reflect
the beneficial conversion feature of the debt and the related warrants. The
discount is being amortized over the anticipated life of the debt of four
years. The carrying value of this debt approximates its fair value.
10. Notes Payable
Notes Payable consist of the following:
<TABLE>
<CAPTION>
December 31 September
1999 1998 2000
-------- --------- -----------
(Unaudited)
<S> <C> <C> <C>
First Union National Bank credit line $555,000 1,577,227 555,000
Villars Partnership Demand Note 155,000 160,000 155,000
Shareholder note payable -- -- 260,000
-------- --------- -------
Total $710,000 1,737,227 970,000
======== ========= =======
</TABLE>
All of the notes are payable on demand. The First Union note is senior to
the Company's subordinated notes and bears interest at 1% above the bank's
prime rate (9.5% at December 31, 1999). The Villars note is senior to the
Company's subordinated notes and bears interest of 10%. The weighted
average interest rate on notes payable outstanding as of December 31, 1999
and 1998 was 9% and 8.5%, respectively (20% for 2000). The Company is in
violation of covenants related to these notes, and the Villars note has
been called.
The shareholder note was loaned directly to the subsidiary Red Bell - State
College to fund the purchase of a liquor license for the proposed brew pub.
The loan bears interest at 10% per annum, plus $100,000 on demand. The
$100,000 has been included in accrued expenses at September 30, 2000.
F-13
<PAGE> 53
RED BELL BREWING COMPANY AND SUBSIDIARIES
Consolidated Notes to Financial Statements
December 31, 1999 and 1998
Information with respect to the period ended September 30, 2000 is (Unaudited)
11. Long-term debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31 September
1999 1998 2000
-------------------- -----------
(Unaudited)
<S> <C> <C> <C>
Mortgage payable in monthly
installments of $2,853, including
principal and interest 3.75% per
annum through February, 2013. Secured
by a first lien on the brewery
premises and a personal guarantee by
an officer of the Company. $379,201 379,201 379,201
Mortgage payable in monthly
installments of $6,607, including
principal and interest at 3% per
annum through February, 2005.
Secured by a junior lien on the
brewery premises, a personal
guarantee by an officer of the
Company, and a $254,000 lien on
the personal residence of the officer. 456,770 456,770 456,770
Installment note in monthly
installments of $14,286 plus interest
at 2% above the reference rate, as
defined (18.7% at December 31, 2000
through August 2001. Secured by
bottling equipment. 488,323 485,714 488,323
9% installment note payable in
monthly installments of $491 including
principal and interest through December, 2000.
Secured by transportation equipment. 13,158 13,158 13,158
9.30% installment note payable in monthly
installments of $5,538.55 including principal
and interest through April 1999 secured by
equipment. 14,069 32,302 14,069
Installment note payable in monthly
installments of $7,594 plus interest at
1% above prime rate (9.5% at December 31, 1999),
through December, 2003. This note is senior
to the Company's subordinated notes. 448,020 -- 448,024
</TABLE>
F-14
<PAGE> 54
RED BELL BREWING COMPANY AND SUBSIDIARIES
Consolidated Notes to Financial Statements
December 31, 1999 and 1998
Information with respect to the period ended September 30, 2000 is (Unaudited)
11. Long-term debt (continued)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31 September
1999 1998 2000
--------- --------- -----------
(Unaudited)
<S> <C> <C> <C>
5.4% SBA Note payable in monthly
installments of $6,005, including
principal and interest through
January, 2009. 522,000 -- 522,000
6.85% SBA Note payable in monthly
installments of $3,070 including
principal and interest through
January, 2019. 398,000 -- 398,000
--------- --------- ---------
2,719,545 1,367,145 2,719,545
========= ========= =========
</TABLE>
The Company is in default on all of the above long-term debt, therefore, it
has been classified as current liabilities in its entirety.
Future annual maturities under these obligations pursuant to the loan
agreements for the next five years are:
<TABLE>
<S> <C> <C>
Year ending December 31, 2000 881,081
2001 360,011
2002 247,178
2003 253,780
2004 184,733
</TABLE>
12. Stockholders' Equity
The Company's Articles of Incorporation authorize the issuance of 5,000,000
shares of capital stock without par value.
Each Common share is entitled to one vote except in elections of directors,
when cumulative voting applies. Cumulative voting entitles each stockholder
to a number of votes equal to the shares owned multiplied by the number of
directors to be elected. The common shares do not have preemptive rights,
are redeemable, do not have any conversion rights, and are not liable for
assessments or further calls.
The holders of common shares are entitled to dividends when and as declared
by the Board of Directors from funds legally available. There are certain
restrictions on the transfer of shares.
F-15
<PAGE> 55
RED BELL BREWING COMPANY AND SUBSIDIARIES
Consolidated Notes to Financial Statements
December 31, 1999 and 1998
Information with respect to the period ended September 30, 2000 is (Unaudited)
12. Stockholders' Equity (continued)
Warrants
In addition to warrants issuable upon conversion of the subordinated
convertible notes, the Company has 89,500 Common Stock purchase warrants
outstanding. Each warrant entitles its holder to purchase one common share
on or prior to August 11, 2003, at a purchase of $.30 per share. Warrant
holders do not have the rights and privileges of stockholders. Warrants are
not transferable separately from the common stock to which they relate.
The following summarizes the capital shares reserved for future issuance by
the Company:
<TABLE>
<CAPTION>
Year Ended December 31 Nine Months Ended
1999 1998 September 30, 2000
----------------------------- ------------------
(Unaudited)
<S> <C> <C> <C>
Stock Options 999,750 999,750 1,309,750
Warrants issued with initial
stock sales 89,500 89,500 89,500
Shares reserved for conversion
of subordinated convertible
debentures principal and
interest 322,479 308,679 330,720
Shares reserved for non-detachable
warrants related to convertible
debentures 276,000 276,000 276,000
--------- --------- ---------
1,687,729 1,673,929 2,005,970
========= ========= =========
</TABLE>
As of December 31, 1999 the Company had issued or reserved for issuance
87,972 shares of common stock in excess of the amount authorized for
issuance by its Articles of Incorporation. In addition, the Company agreed
to grant one employee, two independent contractors and the landlord of a
future brew pub an aggregate of 310,000 stock option shares. However, the
Company could not grant the options until it receives stockholder approval
for an increase in the authorized number of shares of common stock.
13. Stock-Based Compensation
The Company's 1995 Employee Stock Option Plan ("the Plan") permits the
granting of options to purchase one million shares to directors and
employees of the Company. The plan is administered by the Board of
directors, which generally has the authority to select individuals who are
to receive options and to specify the terms and conditions of each option
granted, including the number of shares covered by the option, the type of
options (incentive stock option or non-qualified stock option) and the
exercise price (which must be equal to at least the fair market value of
the related common stock on the date of grant). All options vest over a
period of 5 years and have an overall option term of 10 years from the date
of grant.
F-16
<PAGE> 56
RED BELL BREWING COMPANY AND SUBSIDIARIES
Consolidated Notes to Financial Statements
December 31, 1999 and 1998
Information with respect to the period ended September 30, 2000 is (Unaudited)
13. Stock-Based Compensation (continued)
On May 16, 1995 the Company's Board of Directors granted options to
purchase an aggregate of 583,000 and 416,750 shares of common stock of the
Company to the President and CFO, respectively at $.30 per share (the
estimated fair market value on the date of grant).
On May 21, 1999 the Board of Directors approved an incentive stock option
plan to issue stock of the Company to key employees and managers, who had
payroll reductions, at the opening of a registration of the Company's
common stock.
The Long-Term Debt Incentive Plan permits grants of options or equity
awards of 250,000 shares. In 1996, the Company agreed to grant one current
employee and an independent contractor, who is a stockholder, 100,000 and
150,000 stock options, respectively, at $2.75 per share. In 1999, the
Company agreed to grant two independent contractors, who are stockholders,
25,000 stock options each at $2.75 per share, and the landlord of a future
brew pub 10,000 stock options at $4.50 per share. However, the Company
cannot issue the options until it receives stockholder approval for an
increase in the number of authorized shares of common stock. The Company's
management and Board of Directors control enough shares to ensure the
approval of an increase in the number of authorized shares. The Company
approved the increase in the authorized shares to 25,000,000 in February of
2000 (see note 15). Compensation expense of $130,000 and $87,500 was
recorded in 1996 and 1999, respectively for the independent contractors and
is included in accrued liabilities as of December 31, 1999 based on the
fair value of the services rendered to the Company.
A summary of the status of the Company's employees stock options is as
follows:
<TABLE>
<CAPTION>
December 31 September 30
1999 1998 2000 (unaudited)
---------------------- --------------------- ---------------------
Weighted-average Weighted-average Weighted-average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Options outstanding
at beginning of period 1,099,750 $.52 1,099,750 $.52 1,099,750 $.52
Options granted -- -- -- -- -- $
--------- --------- ---------
Options outstanding
at end of period 1,099,750 $.52 1,099,750 $.52 1,099,750 $.52
========= ========= =========
Options exercisable at
end of period 899,800 $.52 699,850 $.52 1,099,750 $.52
========= ========= =========
</TABLE>
As of December 31, 1999, the weighted average remaining contractual life of
the options is approximately 6 years. The options outstanding consists of
$999,750 at an exercise price of $.30 and 100,000 at an exercise price of
$2.75.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that Statement. The fair value for these options was established at the
date of grant using the minimum value option pricing model with the
following weighted average assumptions for 1999 and 1998 (and 2000
unaudited), respectively: risk-free interest rates of 6%, a weighted
average expected life of the options of 8, 7 and 6 years, respectively, and
no dividends.
F-17
<PAGE> 57
RED BELL BREWING COMPANY AND SUBSIDIARIES
Consolidated Notes to Financial Statements
December 31, 1999 and 1998
Information with respect to the period ended September 30, 2000 is (Unaudited)
13. Stock-Based Compensation (continued)
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The
Company's pro forma net loss and net loss per share were as follows:
Net loss attributable to common shareholders:
<TABLE>
<CAPTION>
1999 1998 2000
------------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
As reported $ (1,671,045) (1,144,951) (915,126)
Pro forma (1,713,035) (1,184,901) (959,115)
Net loss per common share (basic and diluted)
As reported $ (.49) (.35) (.27)
Pro forma (.51) (.36) (.28)
</TABLE>
As of December 31, 1999 and 1998 (September 30, 2000, unaudited), the pro
forma tax effects under SFAS 109 would not have had a material impact.
14. Commitments And Contingencies
The brewery purchased by the Company in November 1995 may be subjected to
liens related to obligations of the seller in the amount of $360,000. In
connection with a refinancing, the title insurance company obtained an
indemnification from the Company, but not a release from civil liability,
with regard to such liens. No action has been asserted with respect to the
possible liens, and the Company believes that its interest in the property
is superior to any such liens.
The Company is engaged in certain legal and administrative proceedings
related primarily to unpaid liabilities. These liabilities are recorded in
the financial statements. The ability of the Company to pay these
liabilities is dependent upon its ability to continue as a going concern
as described in note 2.
The Company leases certain office equipment under an operating lease with
monthly payments of $154 through September, 2003. The Company subsidiary,
Red Bell-State College leases space for a future brew pub. The lease is for
a five-year term beginning June 1, 1999, with renewal options for four
additional five-year periods. In addition to the base lease payments, the
Company has to pay a proportionate share of common area maintenance
charges. Rent expense was $72,884 in 1999 and $93,708 in 2000 (unaudited).
The following represents the minimum lease payments over the remaining life
of the lease.
<TABLE>
<S> <C> <C>
For the year ending December 31, 2000 $110,544
2001 114,000
2002 121,772
2003 132,998
2004 69,954
</TABLE>
15. Significant Customers
The Company distributes its products through a distribution network to
retailers and wholesalers such as liquor, wine and beer stores,
restaurants, taverns, pubs, bars and sports arenas/complexes. The Company
is dependant upon the brew pubs at the sports arenas to sell the Company's
beers and to assist the Company in creating demand for, and promoting
market acceptance of the Company's products. If a significant contract or
arrangement were to be terminated or discounted, or decrease the level of
orders for the Company's products, the Company's business would be
adversely affected until the Company retained replacements.
F-18
<PAGE> 58
RED BELL BREWING COMPANY AND SUBSIDIARIES
Consolidated Notes to Financial Statements
December 31, 1999 and 1998
Information with respect to the period ended September 30, 2000 is (Unaudited)
16. Income Taxes
At December 31,1999, the Company has net operating loss carryforwards (NOL)
of approximately $5,950,000 for federal and state income tax purposes that
begin to expire in 2010 for federal tax purposes and 2000 for state tax
purposes.
Realization of the net deferred tax asset at the balance sheet date is
dependent on future earnings, which are uncertain. Accordingly, a valuation
allowance of $2,205,000 has been established to offset the net deferred tax
assets related to the NOL carryforward and other items as realization of
such amounts is not reasonably assured. During the year ended December 31,
1999, the valuation allowance increase was primarily related to the
increase in the net operating loss carryforwards.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of the assets and liabilities for financial
reporting purposes and the basis used for income tax reporting purposes.
Significant components of the Company's tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
December 31 September
1999 1998 2000
----------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,300,000 1,690,000 2,746,000
Accruals 82,000 52,000 127,000
----------- ---------- ----------
Total deferred assets 2,382,000 1,742,000 2,873,000
Less valuation allowance (2,205,000) (1,587,000) (2,726,000)
----------- ---------- ----------
Net deferred tax assets 177,000 155,000 147,000
Deferred tax liability
tax in excess of book depreciation (177,000) (155,000) (147,000)
----------- ---------- ----------
$ -- -- --
=========== ========== ==========
</TABLE>
17. Subsequent Event
On February 24, 2000 the Company amended its Articles of Incorporation to
increase the authorized shares of common stock to 25,000,000.
In October of 2000, CDB Finance loaned the Company $194,000. The loan is
repayable in five monthly installments of $4,000 with the final payment of
$197,776, which includes interest due on April 23, 2000. The interest rate
is 2% per month and the loan has been personally guaranteed by two officers
of the Company, and is secured by 622,777 shares of Company stock owned by
the two officers. Additionally, as part of the loan the Company will issue
22,000 shares to CDB Finance.
F-19
<PAGE> 59
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
RED BELL BREWING COMPANY
Date: December 8, 2000 By: /s/ James R. Bell
----------------------
James R. Bell,
Chairman
