UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________________ to ______________________
Commission File Number: 0-27800
Frederick Brewing Co.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Maryland 52-1769647
-------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
103 South Carroll Street, Frederick, Maryland 21701
- --------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(301) 694-7899
- --------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Common Stock, $0.00004 Par Value 1,954,876
-------------------------------- ---------
(Title of Each Class) (Number of Shares Outstanding
as of November 2, 1996)
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
<PAGE>
FREDERICK BREWING CO.
--------------------
INDEX TO FORM 10-QSB
--------------------
PART I. FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEET (UNAUDITED)
September 30, 1996 1
STATEMENTS OF OPERATIONS (UNAUDITED)
Three and Nine Months Ended September 30, 1996 and 1995 2
STATEMENTS OF CASH FLOWS (UNAUDITED)
Three and Nine Months Ended September 30, 1996 and 1995 3
NOTES TO UNAUDITED FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 6
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 2. CHANGES IN SECURITIES 13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 5. OTHER INFORMATION 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-QSB 13
SIGNATURES
- --------------------------------------------------------------------------------
SIGNATURE PAGE 21
<PAGE>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements.
FREDERICK BREWING CO.
Balance Sheet
<TABLE>
<CAPTION>
September 30, 1996
------------------
(Unaudited)
ASSETS
- --------------------------------------------------------------------
<S> <C>
Current assets:
Cash and cash equivalents $ 1,061,795
Trade receivables 410,298
Inventories, net 198,361
Prepaids and other current assets 71,441
-----------
Total current assets 1,741,895
Property and equipment, net 1,042,779
Deposits 1,682,966
Intangibles, net of accumulated amortization of $30,951 145,858
-----------
Total assets $ 4,613,498
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt $ 52,976
Current maturities of capital leases 13,385
Accounts payable and accrued liabilities 102,071
-----------
Total current liabilities 168,432
Long-term debt 1,054,888
Obligations under capital leases 68,932
-----------
Total liabilities 1,292,252
-----------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $0.01 par value, 1,000,000 shares authorized,
none issued or outstanding --
Common stock - $0.00004 par value, 9,000,000 shares authorized,
1,954,876 shares issued and outstanding 72
Additional paid-in capital 4,901,424
Accumulated deficit (1,580,250)
-----------
Total stockholders' equity 3,321,246
-----------
Total liabilities and stockholders' equity $ 4,613,498
===========
</TABLE>
The accompanying notes are an integral part of these financial statements
1
<PAGE>
Frederick Brewing Co.
Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Gross sales $ 515,376 $ 502,225 $ 1,390,119 $ 1,364,923
Less returns and allowances 48,690 (4,583) 84,576 15,365
Less excise taxes 32,156 19,246 73,643 60,194
----------- ----------- ----------- -----------
Net sales 434,530 487,562 1,231,900 1,289,364
Cost of sales 475,644 319,973 1,353,843 906,963
----------- ----------- ----------- -----------
Gross profit (loss) (41,114) 167,589 (121,943) 382,401
Selling, general and administrative expenses 439,913 126,958 996,472 415,297
----------- ----------- ----------- -----------
(Loss) income from operations (481,027) 40,631 (1,118,415) (32,896)
Interest (income) expense, net (6,009) 14,445 (1,101) 43,016
Other expenses -- -- -- 12,391
----------- ----------- ----------- -----------
(Loss) income before income taxes (475,018) 26,186 (1,117,314) (88,303)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net (loss) income $ (475,018) $ 26,186 $(1,117,314) $ (88,303)
=========== =========== =========== ===========
Net (loss) income per common share $ (0.24) $ 0.02 $ (0.64) $ (0.07)
=========== =========== =========== ===========
Weighted average common shares and common
share equivalents outstanding 1,954,876 1,204,719 1,754,013 1,204,719
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE>
Frederick Brewing Co.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (475,018) $ 26,186 $(1,117,314) $ (88,303)
Adjustments to reconcile net (loss) income
to net cash used for operating activities:
Depreciation and amortization 54,202 26,442 151,490 80,287
Changes in operating assets and liabilities:
Trade Receivables (81,573) (56,140) (119,015) (48,885)
Inventories 163,648 (2,313) 11,112 (55,019)
Prepaids and other current assets (16,150) 597 64,454 (62,941)
Accounts payable and accrued liabilities (15,522) 1,182 (366,579) 57,717
----------- ----------- ----------- -----------
Net cash used for operating activities (370,413) (4,046) (1,375,852) (117,144)
----------- ----------- ----------- -----------
Cash flows from investing activities
Deposits on equipment (710,261) -- (1,681,924) --
Purchase of property and equipment 2,299 (36,705) (169,892) (65,116)
Purchase of intangibles (48,754) (23,790) (131,843) (27,367)
----------- ----------- ----------- -----------
Net cash used for investing activities (756,716) (60,495) (1,983,659) (92,483)
----------- ----------- ----------- -----------
Cash flows from financing activities
Payments on short-term debt -- -- (100,000) --
Proceeds from long-term debt 939,754 -- 1,020,070 232,164
Payments on long-term debt (14,835) (27,895) (346,884) (307,656)
Payments on capital leases (3,315) (4,675) (9,559) (3,229)
Proceeds from common stock issuance -- 73,200 3,857,679 276,600
----------- ----------- ----------- -----------
Net cash provided by financing activities 921,604 40,630 4,421,306 197,879
----------- ----------- ----------- -----------
Net increase (decrease) in cash (205,525) (23,911) 1,061,795 (11,748)
Cash and cash equivalents, beginning of period 1,267,320 23,911 -- 11,748
----------- ----------- ----------- -----------
Cash and cash equivalents, ending of period $ 1,061,795 $ -- $ 1,061,795 $ --
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
FREDERICK BREWING CO.
Notes to Financial Statements
September 30, 1996
(Unaudited)
Note 1 - Basis of Presentation
- --------------------------------------------------------------------------------
The accompanying unaudited financial statements have been prepared in accordance
with Generally Accepted Accounting Principles for interim financial information
and with the instructions to Form 10-QSB and Regulation S-B. Accordingly, they
do not include all of the information and footnotes required by Generally
Accepted Accounting Principles for complete financial statements. However, in
the opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation of the interim financial
position and the interim results of operations of the Company have been
included.
Operating results for the nine month period ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996, or for any other period. For information relating to the
financial position and the results of operations of the Company as of and for
the year ended December 31, 1995, refer to the financial statements included in
the Company's 1995 Annual Report to shareholders and to the Company's final
Prospectus dated March 5, 1996.
Note 2 - Cash and Cash Equivalents
- --------------------------------------------------------------------------------
The Company considers its investments with original maturates, at date of
purchase, of 90 days or less to be cash equivalents. At September 30, 1996, the
following cash and cash equivalents are held by the Company:
Cash in bank and petty cash $ 17,703
Securities held under agreement to repurchase 1,044,092
----------
$1,061,795
==========
The Company invests excess funds in reverse repurchase agreements for U.S.
government securities. Under these agreements, the Company purchases securities
with an agreement to resell them. Generally, such agreements mature on the next
business day following the date of investment. Due to the short-term nature of
the agreements, the Company does not take possession of the securities, which
are instead held at the Company's bank from which it purchases the securities.
The carrying value of the agreements approximates fair value because of the
short maturity of the investments and the Company believes that it is not
exposed to any significant risk on its investments in reverse repurchase
agreements.
Approximately $540,000 of the total amount held under agreements to repurchase
has been pledged as collateral that guarantees the Company's obligation to fund
purchases of equipment for the new facility in excess of $3.0 million.
4
<PAGE>
Notes to Financial Statements
September 30, 1996
(Unaudited)
Note 3 - Deposits
- --------------------------------------------------------------------------------
As of September 30, 1996, the Company had advanced approximately $1,683,000 to
vendors supplying major equipment components for a new brewery being built for
the Company. Such advances are a normal requirement of the acquisition process
for customized brewing equipment, and as fabrication of such equipment
continues, additional deposits will be required by some vendors.
Note 4 - Commitments and Contingencies
- --------------------------------------------------------------------------------
In the normal course of business, the Company is involved in various claims and
litigation. Management is of the opinion that any liability or loss resulting
from such claims or litigation will not have a material effect on the financial
statements.
Note 5 - Income Taxes
- --------------------------------------------------------------------------------
The Company accounts for income taxes under the asset and liability method. The
Company has not recorded a provision for income taxes for the three and nine
month periods ended September 30, 1996 and 1995 based on the fact that the
Company has incurred net operating losses during those periods. The Company has
provided a full valuation allowance against its net deferred tax asset as of
September 30, 1996.
Note 6 - Earnings per share
- --------------------------------------------------------------------------------
Net (loss) income per common share is based on the weighted average number of
common shares and common share equivalents outstanding during the period. For
the three and nine month periods ended September 30, 1995, the weighted average
number of common shares outstanding included common stock issued and stock
options granted by the Company during the twelve months preceding the filing
date of the Company's Registration Statement on form SB-2.
5
<PAGE>
PART I. - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations For the Three and Nine Months Ended September 30, 1996
and 1995
Overview of Significant Activities and Expenses
- --------------------------------------------------------------------------------
A net loss of ($475,018), or ($0.24) per share, was incurred during the third
quarter of 1996 compared to net income of $26,186, or $0.02 per share, for the
corresponding quarter of 1995. Year-to-date 1996 losses increased to
($1,117,314), or ($0.64) per share, compared with losses of ($88,303), or
($0.07) per share, for the similar period in 1995.
Weighted average common shares outstanding were 1,954,876 during the third
quarter of 1996, 1,754,013 year-to-date in 1996 and 1,204,719 for corresponding
periods in 1995. The substantial increase in shares outstanding from 1995 to the
third quarter of 1996, is the result of the Company's completion of its initial
public offering ("IPO") of 771,154 shares of common stock in March 1996.
Construction of the Company's new brewery was hindered during the second and
third quarters by extremely wet weather and site conditions. However, the
building was put under roof during October and interior finish work began.
Brewing and packaging equipment manufacturing proceeded on schedule and the
equipment began arriving on site in September. The remaining equipment is
expected to arrive during the fourth quarter and installation should be
accomplished during the month of December. Brewing and packaging operations are
expected to begin in January of 1997. The Company anticipates moving its office
operations to the new brewery in February, 1997, when the brewery should be
substantially complete.
Late in the second quarter of 1996, the Company took actions to slow production
of its product at an off-site, third party facility. When full production was
expected to begin again in July, the third party brewery's refrigeration and
product cooling systems proved inadequate to properly cool the beer during
fermentation and prior to filtration and packaging. Production of the Company's
product at the third party brewery was therefore suspended for several weeks
and, to ensure continuing high product quality, was reduced to one-half its
prior rate until September 30, when the brewing arrangement terminated by its
terms. The slower rate of production at the third party brewery increased the
costs of production at that brewery and reduced the Company's potential for
short term market expansion. The termination of production should, however, have
positive effects on production costs during the fourth quarter and management
believes production at the Company's current brewery will permit it to fill
orders in its current markets until shipments from the new brewery begin.
Management took several steps during the third quarter to prepare the Company's
distribution network to generate anticipated higher levels of sales in 1997,
after the new brewery's increased capacity comes on-line. Shipments to
distributors in New Jersey and Chicago were suspended in order to permit the
Company to meet demand in its core markets and in preparation to align its
wholesale distribution with stronger wholesalers in those markets in the first
quarter of 1997. The Company also hosted hospitality events at the National Beer
Wholesaler's Association Annual Convention in September. There, senior managers
met with 20 wholesale distributors from 13 states where the Company intends to
establish new distribution channels during 1997.
6
<PAGE>
Management's Discussion and Analysis
For the Three and Nine Months Ended September 30, 1996 and 1995
The Company also retained Baltimore advertising agency, Gray Kirk VanSant, to
design the Company's first direct-to-consumer advertising campaign. A test of
this campaign, which utilizes radio, billboards, metro train car cards and
limited print media, will be conducted during the holiday season in the fourth
quarter. The effectiveness of the campaign will be measured following the
holiday season to determine whether the campaign will be extended to additional
metropolitan markets.
During the third quarter of 1996 the Company continued to expand its staffing
and support services to position itself for rapid growth in current and future
markets following the completion of the new brewery. Four new Brewery
Representatives were added to staff. These additions doubled the size of the
sales staff to eight full-time representatives. Management also began
interviewing candidates for an additional seven sales positions which it intends
to fill by the end of the first quarter of 1997.
Late in the third quarter of 1996, Chief Financial Officer, Dennis Olson and
Marketing Director, Jim Gordon, left the Company. Mr. Olson left his employment
for personal reasons and will continue to serve as a consultant to the Company
with respect to implementing accounting and internal control systems.
Mr. Gordon's employment was terminated by the Company. Neither position will be
filled immediately, as the Company's remaining officers and managers will handle
those duties.
Review of Operations
- --------------------------------------------------------------------------------
The following table sets forth certain items derived from the Company's
Statements of Operations, expressed as a percentage of net sales, for the three
and nine month periods ended September 30, 1996 and 1995.
<TABLE>
<CAPTION>
Percentage of Sales for the Period Ended Sept. 30,
----------------------------------------------------------
Three Months Ended Nine Months Ended
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross sales ............................................ 107.4% 103.9% 106.0% 104.7%
Less excise taxes ...................................... 7.4 3.9 6.0 4.7
Net sales .............................................. 100.0 100.0 100.0 100.0
Cost of goods sold ..................................... 109.5 65.6 109.9 70.3
Gross margin ........................................... (9.5) 34.4 (9.9) 29.7
Selling, general, and admin. expenses .................. 101.2 26.0 80.9 32.2
----- ---- ---- ----
(Loss) income from operations .......................... (110.7) 8.3 (90.8) (2.5)
Interest (income) expense .............................. (1.4) 3.0 (0.1) 3.3
Other expenses ......................................... 0.0 0.0 0.0 1.0
--- --- --- ---
Net (loss) income ...................................... (109.3)% 5.4% (90.7)% (6.8)%
====== === ===== ====
</TABLE>
Sales
- --------------------------------------------------------------------------------
Gross sales for the 1996 and 1995 third quarters were $515,376, and $502,225,
respectively, an increase of $13,151, or 2.6%, from 1995 to 1996. Year-to-date
sales for 1996 and 1995 were $1,390,119 and $1,364,923, respectively, an
increase of $25,196, or 1.8%.
7
<PAGE>
Management's Discussion and Analysis
For the Three and Nine Months Ended September 30, 1996 and 1995
Third quarter volumes were 2,998 and 2,713 barrels for 1996 and 1995,
respectively, an increase of 285 barrels, or 10.5%. Year-to-date volumes in 1996
and 1995 were 7,975 and 7,603, respectively, an increase of 372 barrels, or
4.9%.
Revenues per barrel between the third quarters of 1996 and 1995 were $172
and $185 per barrel, respectfully, a decrease of $13 per barrel, while revenues
per barrel for the year-to-date periods in 1996 and 1995 were $174 and $180,
respectively, a decrease over 1995 of $6 per barrel, or 3.3%. The quarter as
well as the year-to-date revenue decline per barrel reflects the sales during
the 1996 third quarter of distressed product at a lower overall selling price.
Returns and Allowances
- --------------------------------------------------------------------------------
Returns for the third quarters of 1996 and 1995 were ($48,690) and $4,583,
respectively, an increase of ($53,273). For the year-to-date periods of 1996 and
1995 returns were ($84,576) and ($15,366), respectively, an increase of
($69,210), or 550.0%.
During the third quarter of 1996, the Company paid approximately $38,000 to
distributors for promotional and quantity discount allowances, compared to
approximately $7,000 in 1995. On a year-to-date basis, the Company has recorded
over $60,000 for these allowances in 1996 compared to approximately $10,000 in
1995. These discount allowances represent partial reimbursements made by the
Company to distributors for discounts made by the distributors to their retail
customers for purchasing larger quantities of the Company's products.
Excise Taxes
- --------------------------------------------------------------------------------
Federal and state excise taxes were $32,156 and $19,246, or 7.4% and 3.9% of net
sales, during the third quarters of 1996 and 1995, respectively. For the
year-to-date periods of 1996 and 1995 such taxes were $73,643 and $60,195, or
6.0% and 4.7%, respectively. The increase in excise taxes in 1996, as a
percentage of net sales, is due to changes in the mix of beer distribution
between states. The Federal government and all state governments impose excise
taxes on all beer sold. These taxes are levied on volume, regardless of the
price or revenue generated from those sales. Each state in which the Company
distributes its product has different liquor excise tax rates and regulations,
including some states which require the distributor to pay such taxes instead of
the producer. In addition, the sale of the distressed product at a lower selling
price had a negative impact on excise tax expense as a percentage of sales.
Cost of Goods Sold
- --------------------------------------------------------------------------------
Third quarter cost of goods for 1996 and 1995 was $475,644 and $319,973, or
109.5% and 65.6% of net sales, respectively, an increase of $155,671 over 1995.
Year-to-date cost of goods sold for 1996 and 1995 was $1,353,843 and $906,963,
or 109.9% and 70.3% of net sales, respectively, an increase of $446,880 over
1995.
8
<PAGE>
Management's Discussion and Analysis
For the Three and Nine Months Ended September 30, 1996 and 1995
Had third quarter and year-to-date 1996 costs, as a percentage of net sales,
been consistent with those of 1995, cost of goods sold would have been
approximately $191,000 and $488,000 lower in the third quarter and year-to-date
periods in 1996, respectively. A recap of the most substantial changes in cost
of goods sold is presented below.
<TABLE>
<CAPTION>
Cost of Goods Sold,
1996 Increase Over 1995
-----------------------
Description of Item Third Quarter Year-to-Date
------------------- ------------- ------------
<S> <C> <C>
Third party brewing facility increased costs $ 40,000 $ 105,000
Physical inventory variances 40,000 40,000
Depreciation expense 20,000 55,000
Materials and packaging variances 39,000 82,000
Distressed product sales 25,000 25,000
Labor variances 15,000 35,000
Freight costs 6,000 21,000
Other fixed costs and expenses 6,000 23,000
Reserve for inventory obsolescence 0 14,000
--------- ----------
Total change from 1995 $ 191,000 $ 400,000
========= ==========
</TABLE>
The most substantial portion of the cost increases is related to the third party
contract brewing arrangement. That arrangement resulted in a standard cost of
goods which was approximately 42% above that for product produced at the
Company's facility. In excess of $40,000 of the 1996 third quarter cost increase
over 1995 is due to the third party contract. On a year-to-date basis, in excess
of $105,000 of the 1996 over 1995 cost is due to the contract. In addition to
increased unit cost of production at the third party facility, the Company
incurs additional freight costs to ship raw materials to the third party
facility and finished goods to the Company's distribution center. In total, 1996
freight costs increased approximately $21,000, or 183.8%, over last year,
primarily due to the third party arrangement. That arrangement was terminated as
of September 30, 1996. No additional freight charges attributable to the
arrangement will be incurred in future periods and the cost of goods sold should
diminish in future periods.
Another factor in the increased cost of goods sold for the three and nine months
ended September 30, 1996, as compared to the same periods in 1995 can be
attributed to certain favorable inventory variances reflected in the third
quarter of 1995. The Company performs a physical inventory at the conclusion of
each month and compares the actual inventory on hand to the amounts recorded in
the financial statements. Any differences resulting from this comparison are
recorded in cost of goods sold. Cost of goods sold increased during 1996 by
approximately $40,000 as a result of physical inventory variances recorded in
1995. The effects of these variances are expected to add $60,000 to cost of
goods sold during the fourth quarter, after which all such variances will be
fully accounted for. Physical inventory variances have been reduced
significantly in 1996 as a result of improved internal controls and tracking of
inventory on a perpetual basis.
9
<PAGE>
Management's Discussion and Analysis
For the Three and Nine Months Ended September 30, 1996 and 1995
Materials and packaging costs increased approximately $39,000 in the third
quarter 1996 compared to the comparable period of 1995. On a year-to-date basis,
such costs increased $82,000 over the third quarter of 1995. A substantial
portion of the increase was due to higher wage rates of production workers and
increased costs of packaging materials. Increases in direct labor wages and
benefits expense for brewing and packaging personnel have accounted for
approximately $10,000 of increased costs in the third quarter of 1996 and
$30,000 year-to-date in 1996 in comparison to the comparable periods in 1995.
Depreciation expense increased approximately $20,000 and $55,000 in the third
quarter and year-to-date periods of 1996, respectively, than in the comparable
periods of 1995. A substantial portion of such depreciation expense increase is
due to a reduction in the estimated useful life of the Company's leasehold
improvements to its existing facility resulting in the depreciation of such
leasehold improvements over a shorter period of time (approximately $10,000 in
the third quarter and approximately $30,000 year-to-date in 1996).
Sales of distressed product accounted for $25,000 of the change in cost of goods
sold in the third quarter of 1996 compared to the similar period of 1995. The
beer was sold at a reduced sales price thus increasing the cost of goods as a
percentage of net sales.
Labor variances of production during the third quarter of 1996, caused by base
wage increases and overtime wages, accounted for in excess of $15,000 of cost
increases over those in the 1995 third quarter, and in excess of $35,000
year-to-date over those in 1995.
Other fixed costs and expenses increased $6,000 in the third quarter of 1996 and
$23,000 for the year, over the same periods of 1995. These increases are
primarily associated with increases in utilities and lease expenses of forklifts
and the Company's delivery truck.
The Company has recorded a $14,000 expense in 1996 for inventory obsolescence.
The expense relates to packaging materials that will be obsolete when the
Company moves its operations to the new facility. Management believes that this
amount accurately estimates the inventory that will be obsolete following the
move.
Selling, General and Administrative Expenses
- --------------------------------------------------------------------------------
Selling, general and administrative ("S,G&A") expenses were $439,913 and
$126,958 in the third quarters of 1996 and 1995, respectively, an increase of
$312,955, or 246.5%. S,G&A expenses were $996,472 and $415,297 in the
year-to-date periods of 1996 and 1995, respectively, an increase of $581,175, or
140.0%.
10
<PAGE>
Management's Discussion and Analysis
For the Three and Nine Months Ended September 30, 1996 and 1995
S,G&A increases between 1995 and 1996 are in line with the Company's
expectations and its plans to expand its manufacturing, sales and marketing
capabilities and requisite related support functions. The most significant
increases in 1996 costs over related periods in 1995 are presented in the table
below. In general, such increases can be attributed to three areas: Those costs
associated with the Company's efforts to expand the business (building of the
new brewery, additions to sales, marketing and support staffs, costs associated
with staff increases and greater market coverage, etc.), the increased costs of
being a publicly held and traded company (legal and professional fees, exchange
registration fees, etc.), and general business operations costs.
<TABLE>
<CAPTION>
1996 Increase Over 1995
-----------------------
Description of Item Third Quarter Year-to-Date
------------------- ------------- ------------
<S> <C> <C>
Increased Costs Associated With Expansion of the Business:
Salaries and wages $ 85,567 $ 157,040
Promotion and advertising 100,290 135,118
Travel related 4,099 43,336
Increased Costs Predominately Related to Being a Public Company:
Professional fees 15,731 86,695
Insurance 17,532 45,232
Licenses, fees and permits 3,266 18,421
Increased General Operations Costs:
Bad debt expense 0 50,000
</TABLE>
Other Expense
- --------------------------------------------------------------------------------
No "other expense" has been recorded by the Company in 1996 compared to
approximately $12,000 in 1995 when the Company incurred such expenses in the
defense of its trademark.
Interest (Income) Expense, Net
- --------------------------------------------------------------------------------
Interest (income) expense during the third quarter, and year-to-date periods in
1996 was ($6,009) and ($1,101), respectively in comparison to $14,445 and
$55,407 during comparable periods in 1995. Interest expense decreased due to the
payoff of $412,000 in debt following the IPO coupled with only minimal amounts
of borrowing since the IPO. Interest income is primarily the result of the
investment of IPO proceeds until required for operating and investment purposes.
Income Tax Provision
- --------------------------------------------------------------------------------
The Company has incurred net operating losses during both 1996 and 1995 and,
accordingly, no provisions for income taxes have been provided on the Statements
of Operations.
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Due to losses experienced during the start-up and expansion of the Company,
operations to date have been funded from private and public placements of common
stock, primarily, and loans from stockholders and financial institutions. As of
September 30, 1996 the Company had working capital of approximately $1.6
million. This balance is principally the result of the IPO which raised
approximately $3.8 million (net of selling commissions and offering expenses)
for the Company.
11
<PAGE>
Management's Discussion and Analysis
For the Three and Nine Months Ended September 30, 1996 and 1995
Net cash used in investing activities during the three and nine months ended
September 30, 1996 was $756,716 and $1,983,659, respectively, which amounts
primarily represent deposits placed with vendors for the fabrication of new
brewery equipment (approximately $710,000 and $1,682,000, respectively) and
purchases of capital assets (approximately ($2,300) and $170,000). In addition,
various expenses incurred in arranging for future SBA, MEDCO and Signet
financing, brewery construction, and trademarks were capitalized as intangible
assets.
Net cash provided by financing activities during the three and nine months ended
September 30, 1996 was $921,604 and $4,421,306, respectively, consisting
primarily of the first quarter 1996 IPO proceeds of $3,848,000, offset by
repayments on short-term and long-term debt of $447,000. Third quarter 1996
activities related primarily to draws against the Signet financing for deposits
on equipment as well as routine monthly payments on existing debt and additional
financing on new vehicles purchased by the Company for use by its Sales
Representatives.
The Company does not currently have a working capital line of credit or any
other revolving credit facility but is negotiating to obtain a line of credit
from Signet. Management does not anticipate obtaining this or any other
revolving credit facility until after the new brewery is operational. This line
of credit will be separate from bridge financing proposed by Signet for new
brewery equipment and furnishings.
The Company had cash balances of approximately $18,000 at September 30, 1996. In
addition, approximately $1,044,000 of cash equivalents (short-term securities
with maturates of less than 90 days), approximately $540,000 of which is
currently pledged as collateral that guarantees the Company's obligation to
Signet for equipment purchases or build out for the new facility.
Management believes that this level of liquidity is sufficient to fund its
operations until such time as the Company can generate positive cash flows from
operations, which is expected to occur within twelve months after the new
brewery begins full scale production.
Impact of Inflation
- --------------------------------------------------------------------------------
Although the Company has not attempted to calculate the effect of inflation,
management does not believe inflation has had a material effect on its results
of operations. Material increases in costs and expenses, particularly packaging,
raw material and labor costs, in the future, could have a significant impact on
the Company's operating results to the extent that the effect of such increases
cannot be transferred to its customers.
Forward-Looking Information
- --------------------------------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements made by the Company in its disclosures to
the public. There is certain information contained herein, in the Company's
press releases and in oral statements made by authorized officers of the Company
which are forward-looking statements, as defined by such Act. When used herein,
in the Company's press releases and in such oral statements, the words
"estimate," "project," "anticipate," "expect," "intend," "believe," "plans," and
similar expressions are intended to identify forward-looking statements.
12
<PAGE>
PART II. - OTHER INFORMATION
For the Three and Nine Months Ended September 30, 1996
FREDERICK BREWING CO.
Item 1. Legal Proceedings
- --------------------------------------------------------------------------------
See Note 4 - Commitments and Contingencies, to the Condensed Financial
Statements attached hereto.
Item 2. Changes in Securities
- --------------------------------------------------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
- --------------------------------------------------------------------------------
In connection with financing for the new brewery and related equipment, all of
the principal lenders of such financing (SBA, MEDCO, and Signet) have placed
restrictions upon the Company's ability to pay dividends, enter into new debt
financing agreements, guarantee debts of another person or party, make loans to
other persons or parties, or make substantial investments in non-current assets
other than the new brewery. In addition, debt covenants exist which stipulate
various financial ratios which must be maintained by the Company to avoid
technical default on the equipment financing.
Item 4. Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------------------------
Not applicable.
Item 5. Other Information
- --------------------------------------------------------------------------------
See Item 6. Exhibits and Reports on 10-QSB, attached hereto.
Item 6. Exhibits and Reports on 10-QSB
- --------------------------------------------------------------------------------
(a) Exhibits Filed:
Index to Exhibits
- --------------------------------------------------------------------------------
Ex. 27. "Financial Data Schedule"
Ex. 99.1 "Fellow Shareholder" letter
Ex. 99.2 "Report to Shareholders - 11/96"
Ex. 99.3 "Press Release - 11/7/96"
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Frederick Brewing Co.
Date November 11, 1996 /s/ Kevin E. Brannon
----------------- -----------------------------------------
Kevin E. Brannon
Chairman of the Board and
Chief Executive Officer
Date November 11, 1996 /s/ Craig J. O'Connor
----------------- ------------------------------------------
Craig J. O'Connor
Vice President - Finance & Administration
14
EXHIBIT 99.1
[BLUERIDGE LOGO]
Frederick Brewing Co.
4607 Wedgewood Blvd., Frederick, MD 21703
Dear Fellow Shareholders;
Greetings from the brewery! This is the first of our quarterly reports to
shareholders. We hope you find it useful. We apologize that we have not been
communicating with you in a systematic way and pledge to do better from now on.
If you ever need more information, please do not hesitate to contact Kevin
Brannon at (301) 694-7899. We are also building a site on the World Wide Web
where you can also communicate with us electronically. Look for us at
www.fredbrew.com.
In the past several months, the market environment in the craftbrew
segment has begun to change dramatically. As expected in a market segment
growing at 40-50% per year, competition is increasing. This competition is
coming from the larger craftbrewers who recently went public, dozens of new
start-ups and the mega-brewers whose market share is being taken by the
craftbrewers. We are seeing signs that competitors with inefficient breweries,
inconsistent product and inadequate marketing support are losing wholesale
distribution and retail shelf space. We believe, with our efficient new brewery,
experienced and well-trained brewers and aggressive market support, that
Frederick Brewing Co. and our Blue Ridge brand are well-positioned to capitalize
on these trends and grow at a rapid rate.
ADVERTISING, MARKETING AND SALES CAMPAIGNS MOVING INTO HIGH GEAR
CEO Kevin Brannon, President Marjorie McGinnis and Sales Manager Patrick
Helsel hosted a Blue Ridge hospitality suite for wholesale beer distributors on
two nights at the National Beer Wholesalers' Association convention in San
Francisco in September. They met with 20 distributors from 13 states where the
Company intends to establish new distribution during 1997. We are now following
up to establish formal relationships with new wholesalers in the states of New
York, New Jersey, Pennsylvania, Virginia, North Carolina, Florida, Ohio, Maine,
New Hampshire, Vermont and West Virginia with the goal to have state-wide
distribution in those markets by mid-January. We intend to establish new
distribution in 29 additional states by the beginning of the fourth quarter of
1997. We are interviewing candidates to fill seven new outside sales positions
by January and six more positions, for a total of 21, by the fourth quarter of
1997 in order to provide sales support in the new markets.
We have also retained a Baltimore advertising agency, Gray Kirk Van Sant,
to develop the first direct-to-consumer advertising campaign for "Blue Ridge."
Gray Kirk has designed and implemented successful campaigns for numerous other
consumer products and services companies. A test of the campaign, whose theme is
"Beer With A Conscience" will begin with radio (WJFK, WHFS and WIYY),
billboards, Metro car cards and print in November and December in both the
Baltimore and Washington, DC markets.
We have retained a market research firm to conduct brand awareness surveys
before and after the initial flight of ads to measure their impact on target
consumers. If the campaign succeeds, it will be expanded into 11-13 other metro
markets during 1997, with the next flight of ads beginning late in the first
quarter of 1997. Together with our increased sales force, imaginative new
merchandising display items and wholesaler and retailer incentive programs,
these efforts will give Blue Ridge a level of sales support matched by few
craftbrews in our markets.
<PAGE>
MEDIA FOCUS ON CRAFTBREWS HIGHLIGHTS THE COMPANY'S STRENGTHS
A batch of media reports and a marketing offensive by Anheuser-Busch have
recently put craftbrews in the spotlight. At first blush, this focus seems to be
negative but is, in fact, good news for the Company. In October, NBC's
"Dateline" aired a segment critical of contract brewers in general and
devastating to Boston Beer Co. ("Samuel Adams") in particular. A-B has recently
begun broadcasting ads directly confronting Boston Beer and its CEO, Jim Koch.
In both cases, the criticism is that the contract brewers (which include "Pete's
Wicked") are deceiving consumers by pretending to be genuine craftbrewers while,
in fact, they are marketers of brands produced by second and third tier
breweries like Stroh's, Genessee and Pittsburgh Brewing. This is obviously good
for Blue Ridge, in that we do operate our own brewery and make our own beer.
As Barron's reported in its October 28 issue, A-B is pressuring its
distributors to drop all brands not supported by A-B. Most A-B distributors say
they will not go along with A-B's program because A-B lacks new products to
replace the high-margin craftbrews and imports A-B wants the distributors to
give up. Under most states' beer franchise law the independent wholesalers have
strong legal protection against A-B's position. In any event, only five of our
distributors sell A-B products and they account for a small part of our sales.
In some markets it could be good news for Blue Ridge if A-B distributors, who
usually control 50% of the market, were limited to offering only "Red Hook" in
the craftbrew segment.
A-B is also heavily marketing the fact that it now freshness dates its
beer. As our consumers know, we have been freshness dating since our inception
three years ago.
Finally, several of the larger public craftbrewers have been reporting
slower than expected sales growth. For example Boston Beer reported that
October/November orders were up only 5.5% over last year. Red Hook, Pyramid and
Pete's also reported slower growth. Nevertheless, Barron's reported, overall
craftbrew sales should increase 40% in 1996 and more than double again over the
next few years. This indicates that the larger companies do not have a lock on
the market, leaving plenty of room for aggressive smaller brewers, like
ourselves, to grow.
WINTER SEASONAL PRODUCTS A HIT WITH THE TRADE
We have successfully pre-sold two seasonal products and will begin
shipping them in the first week of November. The first, "Snowball's Chance
Winter Ale," debuted in the brewery tasting room in late October. It is a dark
brown, strong (appx. 6% alcohol by volume) ale with a malty, nutty flavor. The
second seasonal product is our "Blue Ridge Mug Box" featuring five different
beers, including Snowball's Chance, a Blue Ridge pint glass and a company
brochure in our patented mug-shaped box, decorated with pictures of our brewers
at work. A great gift idea, the Mug Box has a suggested retail price of $9.99.
After a sales presentation showing the promotional four-foot snowman, unique
snowman tap handle and "screaming snowball" displays, our Maryland/DC
distributor pre-sold its entire allotment of both products in one week. Early
pre-sales in Virginia have also been promising. Experience indicates that
displays and sales of these high-margin products should also stimulate sales of
our regular product line.
Again, we welcome your feedback on the format of this report and any
questions or comments you may have. Thank you for your support of Frederick
Brewing Co.
Sincerely,
/s/ KEVIN BRANNON /s/ MARJORIE MCGINNIS
----------------- ---------------------
Kevin Brannon Marjorie McGinnis
Chairman and CEO President and COO
Exhibit 99.2
[Blueridge LOGO]
[Stationery of Frederick Brewing Company]
THIRD QUARTER RESULTS
--------
The Company will report a third quarter 1996 loss of $475,018 ($0.24 per
share) compared to net income of $26,186 ($0.02 per share) for the corresponding
quarter of 1995. The year-to-date 1996 loss increased to $1,117,314 ($0.68 per
share) compared to a loss of $88,303 ($0.07) for the first nine months of 1995.
The per share calculations were affected by an increase in the number of shares
outstanding as the result of the Company's initial public offering in March of
1996. The loss reflects planned increases in overhead expenses associated with
expanding sales and management staffing, production of new marketing materials,
the increased professional fees, insurance and other costs associated with being
a public company and higher production costs associated with a contract brewing
arrangement with a non-owned brewery (which was terminated as of September 30);
as well as an expense associated with adjusting certain accounts payable
cut-offs and a below-cost sale of dated and returned beer to a liquidator in
Nevada.
Gross revenues for the quarter were $506,450, an increase of 3.8% over the
$492,445 recorded in the third quarter of 1995 on shipments of 2998 barrels, a
10.5% increase over 1995 shipments of 2713 barrels. Gross revenues for the first
nine months of 1996 were $1,375,302, an increase of 2.1% over the $1,346,644 in
the same period in 1995, on shipments of 7,975 barrels, an increase of 4.9% over
1995 sales of 7,603 barrels. Shipments continue to be constrained by the lack of
production capacity--finished goods inventories at September 30 were 461
barrels, about 14 days' shipments, down from 1085 barrels at June 30, 1996,
indicating that the Company was selling all the beer it was capable of producing
in its current facilities. Depletions (sales by the Company's wholesale
distributors) in the core markets of Maryland and Washington, DC increased by
nearly 15% over the same period in 1995, reflecting the Company's success in
increasing market share in its core market, while sales to several markets,
including Chicago and New Jersey, were suspended to allow the Company to meet
increased demand in its core markets and in preparation for alligning its
distribution with stronger wholesalers when the Company's new brewery comes on
line.
NEW BREWERY EQUIPMENT
BEGINS TO ARRIVE,
CONSTRUCTION PROCEEDS
--------
The first of about 25 truckloads of new brewery equipment began to arrive
at the Company's new brewery in September. The remaining new equipment is
scheduled to arrive by December 10th. Installation of the equipment should be
complete by December 31st. Barring unforeseen problems, management anticipates
shipping up to 1,000 barrels of beer from the new brewery by the end of January.
The Company's offices will move to the new facility during February. Extremely
wet spring and summer weather delayed building construction by six to eight
weeks. The building is now under roof, however, and further weather-related
delays should not be significant. The new brewery expands the Company's
production capacity by 500%, provides efficient office and meeting space and
features an attractive tap room where wholesalers, retailers and consumers can
meet and sample Blue Ridge beers.
In a related development, the Board of Directors has decided to close the
existing brewery in downtown Frederick as soon as practicable after the new
brewery is operational, in order to permit the Company's employees to focus on
the start-up of the new brewery and because production costs at the new brewery
are expected to be much lower than at the current brewery. The existing
equipment will be sold for cash, but the Company will take a significant fourth
quarter charge, reflecting the write-off of undepreciated leasehold improvements
and equipment.
<PAGE>
FREDERICK BREWING CO.
Balance Sheet
September 30, 1996
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $1,061,795
Trade receivables 410,298
Inventories, net 198,361
Prepaids and other current assets 71,441
---------
Total current assets 1,741,895
Property and equipment, net 1,042,779
Deposits 1,682,966
Intangibles, net 145,858
Other assets --
Total assets $4,613,498
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 52,976
Current maturities of capital leases 13,385
Accounts payable and accrued liabilities 102,071
----------
Total current liabilities 168,432
Long-term debt 1,054,888
Obligations under capital leases 68,932
----------
Total liabilities 1,292,252
Stockholders' equity:
Common stock 72
Additional paid-in capital 4,901,424
Accumulated deficit (1,580,250)
----------
Total stockholders' equity 3,321,246
----------
Total liabilities and stockholders' equity $4,613,498
----------
<PAGE>
FREDERICK BREWING CO.
Statement of Operations
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross sales 515,376 502,225 1,390,119 1,364,923
Less returns and allowances 48,690 (4,583) 84,576 15,365
Less excise taxes 32,156 19,246 73,643 60,194
------ ------ ------ ------
Net sales 434,530 487,562 1,231,900 1,289,364
Cost of sales 475,644 319,973 1,353,843 906,963
------- ------- --------- -------
Gross profit (41,114) 167,589 (121,943) 382,401
Selling, general and administrative expenses 439,913 126,958 996,472 415,297
------- ------- ------- -------
(Loss) income from operations (481,027) 40,631 (1,118,415) (32,896)
Interest (income) expense, net (6,009) 14,445 (1,101) 43,016
Other expenses -- -- -- 12,391
(Loss) income before income taxes (475,018) 26,186 (1,117,314) (88,303)
Provision for income taxes -- -- -- --
Net (loss) income (475,018) 26,186 (1,117,314) (88,303)
--------- ------ ----------- --------
Net loss per common share (0.24) 0.02 (.064) (0.07)
------ ---- ------ ------
Weighted average common shares
and common share equivalents outstanding 1,954,876 1,204,719 1,754,013 1,204,719
--------- --------- --------- ---------
</TABLE>
FOR IMMEDIATE RELEASE **FOR IMMEDIATE RELEASE**
November 7, 1996
Frederick, Maryland
BREWER ANNOUNCES THIRD QUARTER RESULTS; NEW BREWERY PROGRESS AND MARKETING
CAMPAIGN
Frederick Brewing Co., the brewer of Blue Ridge beer, will report a
third quarter 1996 loss of $475,018 ($0.24 per share) compared to net income of
$26,186 (0.02 per share) for the corresponding quarter of 1995. The year-to-date
1996 loss increased to $1,117,314 ($0.68 per share) compared to a loss of
$88,303 ($0.07) for the first nine months of 1995. The per share calculations
were affected by an increase in the number of shares outstanding as the result
of the Company's initial public offering in March of 1996. The loss reflects
planned increases in overhead expenses associated with expanding sales and
management staffing, production of new marketing materials, the increased
professional fees, insurance and other costs associated with being a public
company and higher production costs associated with a contract brewing
arrangement with a non-owned brewery (which was terminated as of September 30);
as well as an expense associated with adjusting certain accounts payable
cut-offs and a below-cost sale of dated and returned beer to a liquidator in
Nevada.
Gross revenues for the quarter were $506,450, an increase of 3.8% over
the $492,445 recorded in the third quarter of 1995 on shipments of 2998 barrels,
a 10.5% increase over 1995 shipments of 2713 barrels. Gross revenues for the
first nine months of 1996 were $1,375,302, an increase of 2.1% over the
$1,346,644 in the same period in 1995, on shipments of 7,975 barrels, an
increase of 4.9% over 1995 sales of 7,603 barrels. Shipments continue to be
constrained by the lack of production capacity -- finished goods inventories at
September 30 were 461 barrels, about 14 days' shipments, down from 1085 barrels
at June 30, 1996, indicating that the Company was selling all the beer it was
capable of producing in its current facilities. Depletions (sales by the
Company's wholesale distributors) in the core markets of Maryland and
Washington, DC increased by nearly 15% over the same period in 1995, reflecting
the Company's success in increasing market share in its core market, while sales
to several markets, including Chicago and New Jersey, were suspended to allow
the Company to meet increased demand in its core markets
<PAGE>
and in preparation for aligning its distribution with stronger wholesalers when
the Company's new brewery comes on line.
NEW BREWERY NEARS COMPLETION
CEO Kevin Brannon also announced that the first of about 25 truckloads
of new brewery equipment began to arrive at the Company's new brewery in
September. According to Brannon, the remaining new equipment is scheduled to
arrive by December 10th. Installation of the equipment should be complete by
December 31st. Barring unforeseen problems, management anticipates shipping up
to 1,000 barrels of beer from the new brewery by the end of January. The
Company's offices will move the new facility during the month of February.
Extremely wet spring and summer weather delayed building construction by six to
eight weeks. The building is now under roof, however, and further
weather-related delays should not be significant. The new brewery immediately
expands the Company's production capacity by 500% to nearly 50,000 barrels per
year and can be further expanded to nearly 170,000 barrels.
In a related development, the company has decided to close its existing
brewery in downtown Frederick as soon as practicable after the new brewery
is operational, in order to permit management and employees to focus on the
start-up of the new brewery and because production costs at the new brewery are
expected to be much lower than at the current brewery. The existing equipment
will be sold for cash, but the company will take a significant fourth quarter
charge, reflecting the write-off of undepreciated leasehold improvements and
equipment.
ADVERTISING, MARKETING AND SALES CAMPAIGNS MOVING INTO HIGH GEAR
Company president Marjorie McGinnis also announced that the company has
been meeting with numerous new wholesale distributors and intends to establish
statewide distribution in the states of New York, New Jersey, Pennsylvania,
Virginia, North Carolina, Florida, Ohio and West Virginia in those markets by
mid-January. She stated that she expects to establish new distribution in 29
additional states by the beginning of the fourth quarter of 1997. The company
plans to fill seven new outside sales positions by January and nine more
positions, for a total of 21, by the fourth quarter of 1997 in order to provide
sales support in the new markets.
<PAGE>
McGinnis also said the company has retained a Baltimore advertising
agency, Gray Kirk Van Sant to develop the first direct-to-consumer advertising
campaign for "Blue Ridge." A test of the humorous campaign, whose theme is "Beer
With A Conscience" will begin with radio, billboards, Metro car cards and print
advertising in November and December in both the Baltimore and Washington, DC
markets. If successful, the company plans to expand the campaign to 11-13
additional metropolitan markets during the first quarter of 1997. McGinnis said
the company's strategy is to provide Blue Ridge wholesalers and retailers with
high levels of marketing, sales and advertising support to differentiate the
brand in an increasingly crowded marketplace, where most competitors continue to
rely largely on word of mouth to promote sales.
For More Information, Contact:
Kevin Brannon or Marjorie McGinnis
Frederick Brewing Co.
(301)694-7899 or fax (301)694-2971
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,061,795
<SECURITIES> 0
<RECEIVABLES> 410,298
<ALLOWANCES> 0
<INVENTORY> 198,361
<CURRENT-ASSETS> 1,741,895
<PP&E> 1,353,962
<DEPRECIATION> 311,183
<TOTAL-ASSETS> 4,613,498
<CURRENT-LIABILITIES> 168,432
<BONDS> 1,123,820
0
0
<COMMON> 72
<OTHER-SE> 3,321,174
<TOTAL-LIABILITY-AND-EQUITY> 4,613,498
<SALES> 515,376
<TOTAL-REVENUES> 515,376
<CGS> 475,644
<TOTAL-COSTS> 915,557
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (8,009)
<INCOME-PRETAX> (475,018)
<INCOME-TAX> 0
<INCOME-CONTINUING> (475,018)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (475,018)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
