================================================================================
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, 1997.
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
4607 Wedgewood Boulevard, Frederick, Maryland 21703
--------------------------------------------- -----
(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 4,270,881
-------------------------------- ---------
(Title of Each Class) (Number of Shares Outstanding
as of November 3, 1997)
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [ X ]
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<PAGE>
FREDERICK BREWING CO.
--------------------
INDEX TO FORM 10-QSB
--------------------
PART I. FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEET (UNAUDITED)
September 30, 1997 1
STATEMENTS OF OPERATIONS (UNAUDITED)
Three and Nine Months Ended September 30, 1997 and 1996 2
STATEMENTS OF CASH FLOWS (UNAUDITED)
Three and Nine Months Ended September 30, 1997 and 1996 3
NOTES TO UNAUDITED FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 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 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-QSB 15
SIGNATURES
- --------------------------------------------------------------------------------
SIGNATURE PAGE 16
<PAGE>
PART 1. - FINANCIAL INFORMATION
Item 1. Financial Statements.
Frederick Brewing Co.
Balance Sheet
<TABLE>
<CAPTION>
September 30, 1997
------------------
(Unaudited)
ASSETS
- -------------------------------------------------------------------------
<S> <C>
Current assets:
Cash and cash equivalents ............................................ $ 218,343
Restricted cash ...................................................... 27,112
Trade receivables, net ............................................... 536,441
Inventories, net ..................................................... 417,729
Prepaid expenses ..................................................... 356,727
------------
Total current assets .............................................. 1,556,352
Property and equipment, net ............................................. 8,838,728
Intangibles, net of accumulated amortization of $ 47,988 ................ 193,790
Other assets ............................................................ 747,118
------------
Total assets ...................................................... $ 11,335,988
============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt ................................. $ 314,871
Current maturities of capital lease obligations ...................... 358,520
Accounts payable ..................................................... 537,238
Accrued liabilities .................................................. 34,273
------------
Total current liabilities ......................................... 1,244,902
Long-term debt .......................................................... 2,219,388
Long-term capital lease obligations ..................................... 2,948,582
------------
Total liabilities ................................................. 6,412,872
------------
Stockholders' equity:
Preferred stock - Series A, 1,848 shares issued and outstanding ...... 786,587
Preferred stock - Series B, 1,280 shares issued and outstanding ..... 711,161
Preferred stock - Series C, 2,100 shares issued and outstanding ..... 1,837,500
Preferred Stock - Series D, 0 shares issued and outstanding ......... --
Common stock - $0.00004 par value, 9,000,000 shares authorized,
3,586,991 shares issued and outstanding ........................... 127
Additional paid-in capital ........................................... 9,723,264
Accumulated deficit .................................................. (8,135,523)
------------
Total stockholders' equity ........................................ 4,923,116
------------
Total liabilities and stockholders' equity ........................ $ 11,335,988
============
</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,
-------------------------------- -------------------------------
1997 1996 1997 1996
------------ --------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Gross sales ................................ $ 1,072,961 $ 515,376 $ 2,214,191 $ 1,390,119
Less returns and allowances ................ (3,617) (48,690) (38,805) (84,576)
Less excise taxes .......................... (51,794) (32,156) (112,022) (73,643)
------------ --------- ----------- -----------
Net sales ............................... 1,017,550 434,530 2,063,364 1,231,900
Cost of sales .............................. 949,904 475,644 2,077,723 1,353,843
------------ --------- ----------- -----------
Gross profit (loss) ..................... 67,646 (41,114) (14,359) (121,943)
Selling, general and administrative
expenses ................................ 1,183,310 439,913 2,681,205 996,472
------------ --------- ----------- -----------
Loss from operations .................... (1,115,664) (481,027) (2,695,564) (1,118,415)
Interest (income) expense, net ............. 95,927 (6,009) 204,294 (1,101)
Other income ............................... - - (135,523) -
------------ --------- ----------- -----------
Loss before income taxes ................ (1,211,591) (475,018) (2,764,335) (1,117,314)
Provision for income taxes ................. - - - -
------------ --------- ----------- -----------
Net loss ................................ $ (1,211,591) $(475,018) $(2,764,335) $(1,117,314)
------------ --------- ----------- -----------
Preferred stock dividend requirements....... (928,626) 0 (2,283,080) 0
------------ --------- ----------- -----------
Net loss attributable to common
shareholders .......................... (2,140,217) $(475,018) (5,047,415) (1,117,314)
============ ========= =========== ===========
Per common share
Net loss................................. ($0.44) ($0.24) ($1.01) ($0.64)
------------ --------- ----------- -----------
Preferred stock dividend requirements.... ($0.34) ($0.00) ($0.83) $0.00
------------ --------- ----------- -----------
Net loss attributable to common
shareholders........................... ($0.78) ($0.24) ($1.84) (0.64)
============ ========= =========== ==========
Weighted average common shares and common
share equivalents outstanding ........... 2,736,333 1,954,876 2,239,173 1,754,013
============ ========= =========== ===========
</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,
-------------------------------- -------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) ................................... $(1,211,591) $ (475,018) $(2,764,335) $(1,117,314)
Adjustments to reconcile net (loss)
to net cash used for operating activities:
Depreciation and amortization .............. 197,330 54,202 462,716 151,490
Changes in operating assets and liabilities:
Trade receivables ........................ (105,985) (81,573) (297,028) (119,015)
Inventories .............................. (110,762) 163,648 (207,166) 11,112
Prepaid expenses ......................... 82,332 (16,150) (274,315) 64,454
Other assets ............................. (41,604) - (676,118) -
Accounts payable and accrued expenses .... (61,325) (15,522) (223,243) (366,579)
----------- ----------- ----------- -----------
Net cash used for operating activities ..... (1,251,605) (370,413) (3,979,489) (1,375,852)
----------- ----------- ----------- -----------
Cash flows from investing activities
Deposits on equipment ........................ - (710,261) - (1,681,924)
Purchase of property and equipment ........... (489,165) 2,299 (1,969,064) (169,892)
Proceeds from sale of equipment .............. - - 154,600 0
Purchase of intangibles ...................... (16,002) (48,754) (142,896) (131,843)
----------- ----------- ----------- -----------
Net cash used for investing activities ..... (505,167) (756,716) (1,957,360) (1,983,659)
----------- ----------- ----------- -----------
Cash flows from financing activities
Proceeds from long-term debt ................. - 939,754 1,636,485 1,020,070
Payments on long-term debt ................... (162,353) (14,835) (1,858,589) (446,884)
Payments on capital leases ................... (62,128) (3,315) (77,828) (9,559)
Proceeds from common stock issuance,
net of issuance costs....................... - - - 3,857,679
Proceeds from preferred stock issuance,
net of issuance costs....................... 1,768,245 - 5,793,246 -
Restricted cash .............................. (4,439) - 612,888 -
----------- ----------- ----------- -----------
Net cash provided by financing activities .. 1,539,325 921,604 6,106,202 4,421,306
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents.................................... (217,447) (205,525) 169,353 1,061,795
Cash and cash equivalents, beginning of period .. 435,790 1,267,320 48,990 -
----------- ----------- ----------- -----------
Cash and cash equivalents, ending of period ..... $ 218,343 $ 1,061,795 $ 218,343 $ 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, 1997
(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 three and nine month periods ended September 30, 1997
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997, 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, 1996, refer to the financial statements included
in the Company's Annual Report on Form 10-KSB for the year ended December 31,
1996 and in its 1996 Annual Report to shareholders.
Note 2 - Cash and Cash Equivalents
- --------------------------------------------------------------------------------
The Company considers its investments with original maturities, at date of
purchase, of 90 days or less to be cash equivalents. At September 30, 1997, the
following cash and cash equivalents were held by the Company:
Cash in bank and petty cash ................. $218,343
Securities held under agreement to repurchase 27,112
--------
$245,455
========
The Company occasionally 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. At September 30, 1997, approximately $27,000 of the
securities was pledged as collateral to guarantee the Company's obligation to
Signet Bank of Maryland ("Signet") for the new brewing facility and was recorded
as restricted cash.
4
<PAGE>
Notes to Financial Statements
September 30, 1997
(Unaudited)
Note 3 - Income Taxes
- --------------------------------------------------------------------------------
The Company accounts for income taxes under the liability method. The Company
has not recorded a provision for income taxes for the three and nine month
periods ended September 30, 1997 and 1996, respectively, 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, 1997.
Note 4 - Net Loss per Common Share
- --------------------------------------------------------------------------------
Net loss per common share is based on the weighted average number of common
shares and common share equivalents outstanding during the periods. Common share
equivalents are comprised of stock options, stock warrants and convertible
securities for which the effective yield is less than two-thirds of the Aa
corporate bond rate at date of issuance. Common share equivalents have not been
included in the calculation for the three and nine months ended September 30,
1997 and 1996 because the effects of such items were anti-dilutive.
In February, 1997 the Financial Accounting Standards Board issued Statement 128,
"Earnings Per Share" (SFAS 128), which specifies the computation, presentation,
and disclosure requirements for earnings per share. SFAS 128 is effective for
periods ending after December 15, 1997. The Company does not expect the adoption
of SFAS 128 to have a material impact on the computation of earnings per share.
The net loss attributable to common shareholders has been adjusted for deemed
dividends. The deemed dividend relates to the discount feature associated with
the Company's Series A and Series B Convertible Preferred Stock, issued in March
of 1997 and the Company's Series C Convertible Preferred Stock, issued in
September of 1997. The discount has been computed in accordance with the SEC's
position on accounting for preferred stock that is convertible at a discount to
the market. The discount amount, which was approximately $114,000, $1,326,000
and $900,000 for Series A, Series B and Series C, respectively, is recognized as
a return to the shareholders over the minimum period in which the shareholders
can realize that return. The Series B and Series C shares are convertible
immediately, thus the dividends related to such shares was recognized
immediately, and the Series A shares are convertible one year from date of
issuance and the dividend related to these shares is being recognized over the
one year period from date of issuance.
Note 5 - Prepaid Expenses
- --------------------------------------------------------------------------------
During the first quarter of 1997, over a 60 month contractual period the Company
paid $800,000 for investor relations services to be rendered over a 60 month
contractual period by three affiliated companies: Corporate Relations Group,
Inc. ("CRG"), Arrow Marketing Inc. and Gulf Atlantic Publishing Inc. This
balance is being amortized on a straight-line basis over 60 months beginning in
April 1997. The non-current portion of this balance representing $560,000 is
included in other assets.
Note 6 - Property and Equipment
- --------------------------------------------------------------------------------
Property and equipment at September 30, 1997 consisted of the following:
Brewing equipment ................... $4,757,738
Capital lease - building ............ 3,088,103
Leasehold improvements .............. 1,343,741
Automobiles and trucks .............. 201,499
Furniture and fixtures .............. 192,095
----------
Total ............... ............ $9,583,176
Less accumulated depreciation
and amortization .................. (744,448)
----------
Property and equipment, net ......... $8,838,728
==========
5
<PAGE>
Notes to Financial Statements
September 30, 1997
(Unaudited)
The portion of property and equipment classified as "capital lease - building"
relates to the Company's agreement with Blue II, LLC ("Blue II") which built the
new brewery for the Company to its specifications and is leasing it back to the
Company. The lease has a twenty year term with monthly payments due to Blue II
as set forth in the agreement. The building has been reflected in property and
equipment at its estimated fair value at the inception of the lease term, which
was equal to the present value of the future minimum lease payments, and is
being amortized on a straight line basis over the lease term.
6
<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,
1997 and 1996
Overview of Significant Activities and Expenses
- --------------------------------------------------------------------------------
A net loss of ($1,211,591) or ($0.44) per share, was incurred during the third
quarter of 1997 compared to net loss of ($475,018), or ($0.24) per share, for
the corresponding quarter of 1996. Year-to-date 1997 losses increased to
($2,764,335) or ($1.01) per share, compared to losses of ($1,117,314) or ($0.64)
per share, for the similar period of 1996.
Weighted average common shares outstanding were 2,736,333 during the third
quarter of 1997 and 1,954,876 for the three months ended September 30, 1996. For
the year to date, weighted average shares outstanding were 2,239,173 for 1997,
compared to 1,754,013 in the similar period of 1996. The increase in the shares
outstanding for the three and nine months ending September 30, 1997 relates
primarily to the conversion of certain of the Company's Preferred shares into
Common Stock during the third quarter of 1997.
During the third quarter of 1997, record levels of revenues were achieved. The
Company's sales increased 108.3% to $1,072,961 during the third quarter of 1997
over the similar period of 1996. These record levels were associated with
increases in production that were made possible through the operation of the
Company's new facility coupled with a concentrated marketing and promotional
effort, including a line extension of the Hempen brand, all of which created a
strong demand for the Company's product. In 1997, July sales were 1,723 barrels
(on packaged production of 1,871 barrels). August sales increased to 2,039
barrels (on packaged production of 2,497 barrels) and September sales leveled
off at 1,975 barrels (on packaged production of 2,026 barrels).
Sales increases during the third quarter were generated largely within
territories where the Company had been distributing its products for a least one
year. Sales in these territories increased to 4,113 barrels in the third quarter
of 1997 from 2,999 barrels in the comparable period of 1996, a 37.1% increase.
During the third quarter, sales of 1,624 barrels were sold in new territories
entered within the past 12 months. Management intends to pursue new territorial
markets as production capacity permits.
In response to the increased demand for new hemp products, the Company added
Hempen Gold( to its family of beers in September, 1997. During the third
quarter, the Company sold 2,869 barrels of its Hempen products, which
represented 50% of the Company's total sales during the period. Sales in barrels
of the Company's "Blue Ridge[TM]" line remained level for the same period
although sales dollars increased slightly.
7
<PAGE>
Management's Discussion and Analysis
For the Three and Nine Months Ended September 30, 1997 and 1996
The performance of the Company's new packaging materials handling equipment
continued to improve throughout the quarter. Management believes packaging
efficiency has reached an acceptable level of production and will continue to
improve through the fourth quarter of 1997, as the equipment becomes fully
functional and the training of operating employees is completed. This should
continue to reduce production costs and improve operating margins.
Also, during the quarter, the Company continued to pursue geographical expansion
of its channels of distribution. The Company began shipping to seven (7) new
states during the third quarter of 1997. The states added were Kentucky,
Arizona, Kansas and limited portions of North Carolina, Missouri, California and
New York. In addition, the Company reentered portions of the Massachusetts and
Ohio markets during this period. During the third quarter, the Company added
twenty-nine (29) new distributors including completion of a full distribution
network throughout the state of Washington. As of September 30, 1997 the Company
has a total of 68 distributors throughout its current distribution network.
8
<PAGE>
Management's Discussion and Analysis
For the Three and Nine Months Ended September 30, 1997 and 1996
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, 1997 and 1996.
<TABLE>
<CAPTION>
Percentage of Sales for the Periods Ended Sept. 30,
---------------------------------------------------
Three Months Nine Months
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Gross sales .................................. 105.1% 107.4% 105.4% 106.0%
Less excise taxes ............................ 5.1 7.4 5.4 6.0
----- ----- ----- -----
Net sales .................................... 100.0 100.0 100.0 100.0
Cost of sales ................................ 93.4 109.5 100.7 109.9
----- ----- ----- -----
Gross profit (loss) ......................... 6.6 (9.5) (0.7) (9.9)
Selling, general, and admin. expenses ........ 101.5 101.2 122.6 80.9
----- ----- ----- -----
Loss from operations ......................... (94.9) (110.7) (123.3) (90.8)
Interest (income), net ....................... 9.4 (1.4) 9.9 (0.1)
Other (income) ............................... 0.0 0.0 (6.6) 0.0
----- ----- ----- -----
Net loss ..................................... (104.3) (109.3) (126.6) (90.7)
----- ----- ----- -----
</TABLE>
Sales
- --------------------------------------------------------------------------------
Gross sales for the 1997 and 1996 third quarters were $1,072,961 and $515,376,
respectively, an increase of $557,585 or 108.2%, in 1997 compared to 1996.
Year-to-date gross sales for 1997 and 1996 were $2,214,191 and $1,390,119,
respectively, an increase of $ 824,072 or 59.3%.
Third quarter volumes were 5,737 and 2,998 barrels for 1997 and 1996,
respectively, an increase of 2,739 barrels, or 91.4%. Year-to-date volumes in
1997 and 1996 were 12,277 and 7,975, respectively, an increase of 4,302 barrels
or 53.9%. Revenues per barrel for the third quarters of 1997 and 1996 were $187
and $172 per barrel, respectively, an increase of $15 per barrel, while such
revenues were $180 and $174 for the year-to-date periods in 1997 and 1996. The
increase in the revenues per barrel for the quarter reflects a change in the
sales mix of the Company's products from kegs to cases, which contributed a
higher revenue per barrel revenue contribution.
Excise Taxes
- --------------------------------------------------------------------------------
Federal and state excise taxes were $51,793 and $32,156, or 5.1% and 7.4% of net
sales, during the third quarters of 1997 and 1996, respectively. For the
year-to-date periods of 1997 and 1996 such taxes were $112,022 and $73,643, or
5.4% and 6.0%, of net sales, respectively. The decrease as a percentage of net
sales for the third quarter of 1997 and nine months ending September 30, 1997
reflects the reduction of the Company's sales in states where the Company is
levied state excise tax as a percentage of total sales. The Federal Government
and some 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 beer
excise tax rates and regulations, including some states which require the
distributor to pay such taxes instead of the Company.
Cost of Sales
- --------------------------------------------------------------------------------
Third quarter cost of sales for 1997 and 1996 was $949,904 and $475,644, or
93.4% and 109.5% of net sales, respectively, an increase of $474,260 or 99.7%
over 1996. Year-to-date cost of sales for 1997 and 1996 was $2,077,723 and
$1,353,843, or 100.7% and 109.9% of net sales, respectively, an increase of
$723,880 or 53.5% over 1996.
9
<PAGE>
Management's Discussion and Analysis
For the Three and Nine Months Ended September 30, 1997 and 1996
Two main factors caused the increase in the cost of sales for the third quarter
of 1997 over the same period of 1996: (1) the substantial increase in sales
volume, and (2) the increased fixed costs (rent, utilities and depreciation)
associated with operating the Company's new brewing facility.
Due to bulk purchasing, primarily of malted barley, glass bottles and paper
packaging materials and improved labor productivity made possible by larger
batch sizes and a higher degree of automation in the new brewery, direct
variable costs of production principally raw ingredients, packaging materials
and labor were $487,399 ($85 per barrel sold) for the third quarter of 1997
compared to $376,652 ($126 per barrel sold) in the similar period of 1996, when
the Company's beers were still being produced at its original facility. These
amounts represent a 29.4% increase in variable cost of sales compared to a
108.2% increase in sales.
This improvement was offset, however, by increased fixed production overhead
expenses associated with owning, maintaining and operating the larger new
brewery. Production overhead expenses principally management and supervisory
salaries, depreciation, utilities and equipment rentals were $462,505 ($81 per
barrel) for the third quarter of 1997 compared to $98,992 ($33 per barrel) for
the third quarter of 1996. This represents a 367.2% increase compared to a
108.2% increase in sales.
Management believes the current level of fixed production overhead expenses can
be maintained with only small increases even if production and sales volumes
increase by three to five times current levels. This would have the effect of
reducing the cost of sales as a percentage of total sales. However, while
management believes production and sales will continue to increase in future
periods, no assurances can be given that such increases of that magnitude will
occur.
Selling, General and Administrative Expenses
- --------------------------------------------------------------------------------
Selling, general and administrative ("SG&A") expenses were $1,183,310 and
$439,913 in the third quarters of 1997 and 1996, respectively, an increase of
$743,397, or 169.0%. SG&A expenses were $2,681,205 and $996,472 in the
year-to-date periods of 1997 and 1996, respectively, an increase of $1,684,733
or 169.1%.
The Company's SG&A expenses increased over the comparable period in 1996 due to
several factors. Payroll and payroll related costs increased during this period
as new sales and administrative staff were added to handle the increased work
load. In addition, the Company continued to use several outside professionals
which included investor relations services, outside legal and accounting
services. These services included an expense of $310,000 for investor relations
services, a $151,000 expense for Morgan-Keller, Inc., the general contractor of
the new brewery, pursuant to a contracted obligation acquiring the Company to
reimburse any loss on the sale of Series A Preferred Stock previously issued as
partial payment for construction services and $20,000 for financial consulting
services which represented 32% of the Company's quarterly SG&A expenditures.
Other Income
- --------------------------------------------------------------------------------
Other income of $135,523 for the nine months ended September 30, 1997 relates to
gains recognized on the sale of brewing equipment.
10
<PAGE>
Management's Discussion and Analysis
For the Three and Nine Months Ended September 30, 1997 and 1996
Interest (income) expense, net
- --------------------------------------------------------------------------------
Interest (income) expense, net during the third quarter in 1997 was $95,517 in
comparison to ($6,009) during the comparable period in 1996. Year-to-date
interest (income) expense was $204,294 and ($1,101) during comparable periods of
1997 and 1996, respectively. Interest expense was partially offset by interest
income from excess cash invested until required for operating and investment
purposes. A substantial portion of the interest expense incurred relates to the
debt obligations the Company has with Signet for the building, equipment and
bridge financing for the new brewery.
Income Tax Provision
- --------------------------------------------------------------------------------
The Company has incurred net operating losses during both 1997 and 1996 and,
accordingly, no provisions for income taxes have been provided on the Statements
of Operations. The Company has recorded a full valuation allowance against the
net deferred tax asset.
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Due to losses experienced during the start-up and expansion of the Company,
operations to date have been funded primarily from private and public placements
of common and preferred stock and by loans from stockholders and financial
institutions. As of September 30, 1997, the Company had working capital of
approximately $311,000. This balance is principally the result of the sale of
Series A, Series B and Series C preferred stock, during the first and third
quarters of 1997. As of September 30, 1996, the Company had working capital of
approximately $1.6 million primarily a result of the closing of the Company's
IPO in March, 1996.
Net cash used in investing activities during the three and nine months ended
September 30, 1997 were, $505,167 and $1,957,360, respectively, which amounts
primarily represent purchases of capital assets (approximately $440,000 and $1.9
million, respectively). In the three months and nine months ended September 30,
1996, net cash used in investing activities was $756,716 and $1,983,659,
respectively, which primarily represented deposits made with vendors for new
brewery equipment. The Company purchased and installed additional fermentation
vessels to increase its production capacity from approximately 3,300 barrels per
month (39,600 barrels per year) to approximately 6,700 barrels per month (80,000
barrels per year) and purchased other equipment to improve production efficiency
and reduce production costs, during the last half of the third quarter of 1997.
Net cash provided by financing activities during the three months and nine
months ended September 30, 1997 were approximately $1,539,325 and $6,106,202
million consisting of $5,793,246 in proceeds from preferred stock proceeds from
Series A, B, C, net of $1,106,754 issuance costs; $1,636,485 from secured debt;
minus payments and restricted cash totalling $1,323,529.
The Company does not currently have a working capital line of credit or any
other revolving credit.
During the third quarter, the Company authorized the issuance of Series D
Convertible Preferred Stock. See Part II, Item 2 for details.
11
<PAGE>
Management's Discussion and Analysis
For the Three and Nine Months Ended September 30, 1997 and 1996
The Company's current liquid assets are inadequate to cover the cost of the new
equipment to be purchased. In addition, the Company's current level of liquidity
may be inadequate to fund the Company's operations or to provide a prudent level
of cash reserves in the event cash flow from operations does not improve as the
result of increasing sales and reduced production costs as quickly as management
has anticipated. The Company's agreements with its senior lenders do not permit
the Company to incur additional debt obligations. Consequently, management
intends to arrange for a net capital infusion of approximately $600,000 during
the fourth quarter of 1997. This capital may be obtained in the form of equity
or as a combination of equity and long-term lease financing. Additional capital
infusions will be necessary in the future until the Company is able to generate
positive cash flow from operations.
For the fourth quarter of 1997, ending December 31, 1997, The Company's loan and
financing agreements with Signet Bank for a $1.5 million equipment loan and a
$3.0 million loan to Blue II, LLC for the brewery land and building require that
certain new financial ratios be met. In particular, a covenant requiring that
the Company's ratio of cash flow to debt service for the quarter equal 1.5:1 or
greater. There is significant likelihood that the Company will be unable to
demonstrate compliance with this and, perhaps, other financial covenants, which
creates the risk that the Company will enter into technical default of both loan
financing agreements. If this occurs, the Company will be required to
renegotiate the terms of the loan and financing agreements with Signet Bank or
its successor (Signet Bank and First Union Bank have announced that First Union
will acquire Signet on or about November 13, 1997), find alternate debt
financing, raise additional equity to repay the loans or otherwise replace the
existing plant and equipment financing. While management is confident that one
of these options will be achievable, no assurances can be given as to such a
result and a failure to renegotiate or refinance the senior debt could make the
Company unable to continue its business.
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. Because
such forward-looking statements involve risks and uncertainties, there are
important factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements. Factors, all of
which are difficult to predict and many of which are beyond the control of the
Company, that could cause actual results to differ materially include, but are
not limited to, those which are set forth in Exhibit 99, attached hereto and
made a part hereof.
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
PART II. - OTHER INFORMATION
For the Three and Nine Months Ended September 30, 1997 and 1996
FREDERICK BREWING CO.
Item 1. Legal Proceedings
- --------------------------------------------------------------------------------
On June 17, 1997, the Company, as plaintiff, filed suit in the Circuit Court for
Frederick County, Maryland, Case No. 97-1300CV, against Intertrade Package
Machinery Corporation, an Ohio corporation ("IPMC"), Salh F. Khan, the Chief
Executive Officer of IPMC ("Khan") and John B. Brannen, the President of IPMC
("Brannen"), (IPMC, Khan, and Brannen being collectively referred to herein as
the "Defendants") for breach of express and implied warranties, fraud and
negligent misrepresentation. Upon motion by the defendants, the case was removed
to the Federal District Court for District of Maryland (case #MJG-97-2388). The
Company's complaint arose out of the Defendants' failure to provide, as promised
in the contract dated May 2, 1996, a "turn-key" state-of-the-art bottling and
packaging line system consisting of manufactured and remanufactured equipment,
conveyor controls necessary for integration of the equipment, and the
installation and start-up assistance necessary to commence operating the system
at the Company's new brewery on or before March 3, 1997. The Company is seeking
compensatory damages from all Defendants of $1.0 million and $3.0 million in
punitive damages from Khan and Brannen. At the same time, the Company filed a
motion for partial summary judgment against IPMC, alleging that there is no
genuine dispute of material fact, relating to damages of $206,181 for the
equipment paid for by the Company but never delivered by IPMC. This motion was
denied on October 24, 1997. As of November 7, 1997, the parties are currently
conducting discovery and settlement negotiations have been held. If the Company
cannot obtain a fair and reasonable settlement, it intends to vigorously
prosecute this action.
Item 2. Changes in Securities
- --------------------------------------------------------------------------------
Effective as of July 24, 1997, The Company's Board of Directors authorized
raising up to $2,500,000 by the issuance and private sale of up to 2,500 shares
of its Series C Convertible Preferred Stock ("Series C Preferred Stock") to
"non-United States persons" as that term is defined by Regulation S promulgated
under the Securities Act of 1933, and "accredited investors" as that term is
defined by Regulation D, as amended. The following is a brief description of the
terms of the Series C Preferred Stock: (I) the number of shares of Series C
Preferred Stock offered was 2,500 shares;(ii) the Series C Preferred Stock will
rank senior to the Common Stock and to the Series A and Series B Preferred
Stocks with respect to liquidation rights; (iii) dividends on the Series C
Preferred Stock may be declared and paid if and when and to the extent
determined from time to time by the Company's Board of Directors, provided that
such dividends shall be declared with respect to the Series C Preferred Stock on
par with dividends declared with respect to the Company's Common Stock; (iv) a
30% discount to bid price for Common Stock average bid price over 5 days prior
to date of conversion; and (v) the Series C Preferred Stock is immediately
convertible to Common Stock. The Company does not expect to declare or pay such
dividends in the foreseeable future. The Company closed the first sale of the
Series C Preferred Stock on August 11, 1997. All offers and sales of the Series
C Preferred Stock were, in fact, made under Regulation D and gross proceeds of
the offering were $2,100,000 on the sale of 2,100 shares. The Company has filed
a registration statement on form S-3 with the Securities Exchange Commission
with respect to the Common Shares into which the Series C Convertible Preferred
Stock are Convertible.
- --------------------------------------------------------------------------------
13
<PAGE>
- --------------------------------------------------------------------------------
Other Information
For the Three and Nine Months Ended September 30, 1997 and 1996
The primary purpose of the private offering of the Series C Preferred Stock was
to provide funds for the purchase and installation of additional fermentation
vessels to increase brewing capacity, the purchase and installation of warehouse
and packaging equipment to improve operating efficiency, additional investor
relations efforts, a payment to Morgan-Keller, Inc, the general contractor in
satisfaction of a contractual obligation for brewery construction, the payment
of offering expenses, the payment of the hiring and training of administrative
and sales personnel, and the payment of certain promotional, marketing and
advertising expenses. The balance of the net proceeds were to be used for
working capital and general corporate purposes. This use of funds is summarized
in the following table:
Placement fees, other offering expenses $ 263,000
Plant and equipment additions .......... 489,000
Investor relations services ............ 310,000
Morgan-Keller payment .................. 151,000
Working capital ........................ 887,000
----------
Total .................................. $2,100,000
Effective as of October 30, 1997 The Company's Board of Directors authorized
raising up to $850,000 by the issuance and private sale of up to 850 shares of
its Series D Convertible Preferred Stock ("Series D Preferred Stock) to
"non-United States persons" as that term is defined by Regulation S promulgated
under the Securities Act of 1933 and "accredited investors" as that term is
defined by Regulation D as amended. The following is a brief description of the
terms of the Series D Preferred Stock: (I) the number of shares of Series D
Preferred Stock offered was 850 shares; (ii) The Series D Preferred will rank
senior to the Common Stock and to the Series A, Series B and Series C Preferred
Stocks with respect to liquidation rights; (iii) dividends on the Series D
Preferred Stock may be declared and paid if and when and to the extent
determined from time to time by the Company's Board of Directors, provided that
such dividends shall be declared with respect to the Series D Preferred Stock on
par with dividends declared with respect to the Company's Common Stock (iv) a
30% discount to bid price for Common Stock average bid price over 5 days prior
to date of conversion; and (v) the Series C Preferred Stock is immediately
convertible to Common Stock. The Company does not expect to declare or pay such
dividends in the foreseeable future. The Company closed on the first sale of the
Series D Preferred Stock on November 10, 1997 and all offers and sales of such
shares were, in fact, made under Regulation D. In accordance with the Security
Exchange Commission's position on accounting for Preferred Stock, a net loss
attributable to common shareholders will be adjusted for deemed dividends in the
fourth quarter of 1997.
The primary purpose of the private offering of the Series D Preferred Stock is
to provide working capital for the ongoing operations of the Company during the
fourth quarter of 1997 while efforts to establish a national sales distribution
network is continued. In addition, the funds from Series D Preferred Stock will
cover the payment of offering expenses, investor relations services and the
payment of certain seasonal promotional, marketing and advertising expenses.
- --------------------------------------------------------------------------------
14
<PAGE>
Item 3. Defaults Upon Senior Securities
- --------------------------------------------------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------------------------
Not applicable.
Item 5. Other Information
- --------------------------------------------------------------------------------
Effective September 15, 1997 Craig J. O'Connor was transferred from Vice
President - Finance and Administration to the newly-created position of Director
of Business Development. Mr. O'Connor's compensation will remain unchanged.
On November 11, 1997, the Company hired Leslie P. Harper, age 49, to serve as
Chief Financial Officer. Mr. Harper holds a Bachelor of Science degree in
Accounting from Bentley College (Waltham, Mass.) and a Masters of Business
Administration with an emphasis in Finance from Babson College (Wellesley,
Mass.). From August, 1987 through June, 1996, Mr. Harper served as Chief
Financial Officer and Controller of Racal Guardata, Inc. a $30 million
(revenues) manufacturing, product development and marketing subsidiary of Racal
Electronics, PLC. From January, 1984 through 1987, Mr. Harper served as the
controller of Alcatel, Inc., a publicly-held manufacturer of telecommunication
equipment with $20 million in revenues before its acquisition by ITT Corp. From
March, 1979 through January, 1984, he served in progressively responsible
positions in the finance department of Northern Telecom, Inc. Since June, 1996,
Mr. Harper has worked as an independent financial consultant.
Item 6. Exhibits and Reports on Form 10-QSB
- --------------------------------------------------------------------------------
(a) Exhibits Filed:
Index to Exhibits
- --------------------------------------------------------------------------------
10 Material Contracts
(I.) CRG
27 Financial Data Schedule
99.1 Safe Harbor Under the Private Securities Litigation
Reform Act of 1995 /1/
99.2 Press release, August 4, 1997
99.3 Press release, September 22, 1997
- -------------
/1/ Incorporated by reference to Form 8-K filed with the SEC on
February 27, 1997.
15
<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 14, 1997 /s/ Kevin E. Brannon
--------------------- ------------------------------------
Kevin E. Brannon
Chairman of the Board and
Chief Executive Officer
Date November 14, 1997 /s/ Marjorie A. McGinnis
--------------------- ------------------------------------
Marjorie A. McGinnis
President and Chief Operating Officer
16
Exhibit 10
AMENDMENT TO CONTRACT BETWEEN
FREDERICK BREWING COMPANY AND
THE LEAD GENERATION/CORPORATE RELATIONS AGREEMENT
DATED MARCH 13, 1997
Pursuant to paragraph 8, of the Lead Generation/Corporate Relations
Agreement dated March 13, 1997, this will serve as an Amendment to said Contract
after it has been properly executed as required in paragraph 8.
The parties hereto agree as follows:
1. Exhibit "A", item I, subparagraph A, is hereby amended to read: an
additional two (2) - four (4) page advertorials will be created
(150,000 print run, each) for which Frederick Brewing Company agrees
to pay Corporate Relations Group, Inc. the sum of $235,000.00 in
total.
This Letter of Agreement modifying the Agreement dated March 13, 1997 are the
only changes and modifications agreed to by all parties.
IN WITNESS WHEREOF, this Agreement is executed as of August 8, 1997.
CORPORATE RELATIONS GROUP, INC. FREDERICK BREWING COMPANY
By: /s/ Joseph H. Landis By: /s/ Kevin E. Brannon
--------------------------- ---------------------
Joseph H. Landis Kevin E. Brannon
President Chairman/CEO
/s/ James W. Spratt, III
---------------------------
James W. Spratt, III
Consultant
<PAGE>
MONEYWORLD MAGAZINE
ADVERTISING INSERT AGREEMENT
GULF ATLANTIC PUBLISHING INC.
THIS AGREEMENT is made this 7th day of August, 1997, between GULF ATLANTIC
PUBLISHING INC., a Florida corporation (hereinafter "GAP"), and FREDERICK
BREWING COMPANY, (hereinafter the "Client").
RECITALS
1. The Client wishes to retain GAP for an Insert (AD) in MoneyWorld Magazine.
2. GAP is willing to provide such services as are more fully described herein.
NOW THEREFORE, in consideration of the mutual promises contained herein, it is
agreed as follows:
1. Furnishing of Information by Client. The Client shall furnish to GAP
information about the Client such as copies of disclosure and filing
materials, financial statements, business plans, promotional
information and background of the Client's officers and directors
("Information Package"). The Client understands that the sole purpose
for providing GAP with the Information Package is for utilization in
the preparation of the Ad. GAP is not obligated to assess the financial
viability of the Client. GAP may rely on, and assume the accuracy of
the Information Package.
2. Representations and Warranties of Client. The Client represents that
all information included in the Information Package furnished to GAP
shall disclose all material facts and shall not omit any facts
necessary to make statements made on behalf of the Client not
misleading.
3. Covenants of the Client. The Client covenants and warrants that any
information submitted for dissemination will be truthful, accurate, in
compliance with all copyright laws and all other applicable laws and
regulations and will not be submitted in connection with any improper
or illegal act or deed.
<PAGE>
4. Based on the Information Package, GAP will perform the services more
fully described in Exhibit "A", and follow the procedures outlined
below 4(A), 4(B), and 4(C).
(a) Preparation of Proofs. GAP shall prepare proofs of the agreed upon
materials and information, as set for dissemination, for the Client's
review and approval;
(b) Correction and Changes of Proofs. GAP shall make all corrections and
changes that the Client may request.
(c) Sign Offs. All approvals, corrections and change of proofs by the Client
shall be signed by a duly authorized representative of the Client. The
Client hereby designates the individual(s) listed in Exhibit "C" hereof
as authorized representatives for purposes of this paragraph 4(a), (b)
and (c); and GAP may rely upon this designation.
5. Compensation. Refer to Exhibit "B".
6. It is understood and agreed by the Parties that the above compensation in
U.S. currency, or free trading shares of the Company, should be paid timely
upon execution of this Agreement. GAP will retain the option, but is not
compelled to begin its performance under this Agreement prior to the payment
of such compensation in U.S. currency or free trading shares.
7. Assumption of Liability and Indemnification. The Client assumes and
claims all responsibility and liability for the content of all
information disseminated on behalf of the Client which have been
approved by Client. The Client shall indemnify and hold GAP, its
subsidiaries and parent company harmless from and against all demands,
claims or liability arising for any reason due to the context of
information disseminated on behalf of the Client. This indemnity shall
include any costs incurred by GAP including, but not limited to, legal
fees and expenses incurred both in administrative proceedings, at trial
and appellate levels, in settlement of claims and payment of any
judgment against GAP.
8. Assignment and Delegation. Neither party may assign any rights or delegate
any duties hereunder without the other party's express prior written
consent.
-2-
<PAGE>
9. Entire Agreement. This writing contains the entire agreement of the
parties. No representations were made or relied upon by either party,
other than those expressly set forth. Furthermore, the Client
understands that GAP makes no guarantees, assurances or representations
in regard to the results of the running of Advertising in its
publication MoneyWorld Magazine. No agent, employee or other
representative of either party is empowered to alter any of the above
terms, unless done in writing and signed by an executive officer of the
respective parties.
10. Controlling Law and Venue. This Agreement's validity, interpretation and
performance shall be controlled by and construed under the laws of the State
of Florida. The proper venue and jurisdiction shall be the Circuit Court in
Orange County, Florida.
11. Prevailing Party. In the event of the institution of any legal proceedings
or litigation, at the trial level or appellate level, with regard to this
Agreement, the prevailing party shall be entitled to receive from the
non-prevailing party all costs, reasonable attorney's fees and expenses.
12. Failure to Object not a Waiver. The failure of either party to this
Agreement to object to, or to take affirmative action with respect to any
conduct of the other which is in violation of the terms of this Agreement
shall not be construed as a waiver of the violation or breach, or of any
future violation, breach or wrongful conduct.
13. Notices. All notices or other documents under this Agreement shall be in
writing and delivered personally or mailed by certified mail, postage
prepaid, addressed to the representative or Company as follows:
COMPANY: GULF ATLANTIC PUBLISHING INC.
1801 Lee Road, Suite 301
Winter Park, FL 32789
Attention: Joseph H. Landis, President
CLIENT: FREDERICK BREWING COMPANY
4607 Wedgewood Blvd.
Frederick, MD 21703
Attention: Kevin E. Brannon, Chairman/CEO
-3-
<PAGE>
14. Headings. Headings in this Agreement are for convenience only and shall not
be used to interpret or construe its provisions.
15. Time. For all intents and purposes, time is of the essence with this
Agreement.
16. Agreement Not To Hire. The Client understands and appreciates that GAP has
invested a tremendous amount of time, energy and expertise in the training
of its employees to be able to provide the very service that Client desires.
Client further understands that should an employee be enticed to leave, then
GAP will be damaged in an amount the parties are incapable of calculating at
this time. Therefore, the Client agrees not to offer employment to any
employee or subcontractor of GAP, nor to allow any officer or director of
Client to offer such employment with Client or any other company with whom
officers and directors of Client are employed or hold a financial stake for
a period of three (3) years.
IN WITNESS WHEREOF, this Agreement is executed as of the date first above
written.
BY: /s/ Joseph H. Landis
------------------------
Joseph H. Landis
President
BY: /s/ Kevin E. Brannon
---------------------
Kevin E. Brannon
Chairman/CEO
-4-
<PAGE>
ADVERTISING INSERT ORDER
EXHIBIT "A"
I. ADVERTISING and PRINTING SERVICES
A. MoneyWorld Magazine - Lead Generation mailing (1,000,000 - 1 Million
print Run Total).
A minimum Eighteen page, four color magazine will be created of
which:
/x/ $ 75,000 Junior Page
/ / $125,000 2 Page Spread
/ / $275,000 4 Page Spread
advertorial will be dedicated to the Client. Creative concept,
color separations, copy work and printing 1 Million Copies Mailed
(of which 30,000 copies will be mailed to brokers).
B. Growth Industry Report - Four page, follow-up mail piece designed for
additional informational purposes that is mailed to respondents. A
total of 7,500 will be printed and mailed to respondents via first
class mail.
C. Lead Tracking Summary maintained for all response leads generated and
provided.
D. Supply Companies with copies of all Inquiries in either, Diskette or
Labels.
E. Supply company in separate Diskette or Labels Broker Inquiries.
-1-
<PAGE>
EXHIBIT "B"
PAYMENT AGREEMENT
made by and between
FREDERICK BREWING COMPANY
and
GULF ATLANTIC PUBLISHING INC.
THIS AGREEMENT is made this 7th day of August, 1997, and will serve as
confirmation of payment terms for services to be provided FREDERICK BREWING
COMPANY, ("CLIENT") whereby GULF ATLANTIC PUBLISHING INC. ("GAP") has agreed to
perform said services as defined in the "Advertising Insert Only."
TERMS
A. CLIENT will pay to GAP,
/ / $ 75,000 Junior Page
/ / $125,000 2 Page Spread
/ / $275,000 4 Page Spread
B. This Agreement is subject to compliance with the rules of the Exchange
and Securities Commissions on which Client is listed and registered.
C. It is understood and agreed by the Parties that the above compensation
in U.S. currency, or free trading shares of the Company, should be paid
timely upon execution of this Agreement. GAP will retain the option,
but is not compelled to begin its performance under this Agreement
prior to the payment of such compensation in U.S. currency or free
trading shares.
D. In the event of termination of the Agreement by Client, GAP shall be
fully released and forever discharged by Client from any further
obligations or liabilities with respect to the Advertising Insert and
any results therefrom, save and except liabilities arising from GAP's
own negligence during the term of this Agreement. Concurrently, Client
shall be fully released and forever discharged by GAP from any and all
obligations of further payments or liabilities with respect to the
"Advertising Insert." This release in no way affects Point #7, Page 2
of the "Advertising Insert."
/s/
-----------------------
Initials
-1-
<PAGE>
EXHIBIT "B"
continued
E. Shares shall be made free trading through the registration that is
mutually agreed upon by the Company's attorney and GAP's attorney.
IN WITNESS WHEREOF, this Agreement is executed as of the date first above
written.
BY: /s/ Joseph H. Landis
-----------------------
Joseph H. Landis
President
BY: /s/ Kevin E. Brannon
-----------------------
Kevin E. Brannon
Chairman/CEO
-2-
<PAGE>
EXHIBIT "C"
FREDERICK BREWING COMPANY hereby designates the following person or persons to
act on its behalf for purposes of signing off on all copies pursuant to
Paragraph 4 of this Advertising Insert. GAP may rely upon the signature of any
of the following:
/s/ Not Legible /s/ Kevin E. Brannon
---------------------------------- ----------------------------
Chairman: Chief Executive Officer DIRECTOR (Please Print)
/s/ /s/
---------------------------------- ----------------------------
PRESIDENT (Please Sign) PRESIDENT (Please Print)
/s/ /s/
---------------------------------- ----------------------------
VICE-PRESIDENT (Please Sign) VICE-PRESIDENT (Please Print)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000926978
<NAME> Frederick Brewing Co.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jul-01-1997
<PERIOD-END> Sep-30-1997
<EXCHANGE-RATE> 1
<CASH> 245,455
<SECURITIES> 0
<RECEIVABLES> 536,441
<ALLOWANCES> 0
<INVENTORY> 417,729
<CURRENT-ASSETS> 1,556,352
<PP&E> 9,583,176
<DEPRECIATION> 744,448
<TOTAL-ASSETS> 11,335,988
<CURRENT-LIABILITIES> 1,244,902
<BONDS> 0
0
3,335,248
<COMMON> 127
<OTHER-SE> 1,587,741
<TOTAL-LIABILITY-AND-EQUITY> 11,335,988
<SALES> 1,072,961
<TOTAL-REVENUES> 1,072,961
<CGS> 949,904
<TOTAL-COSTS> 2,133,214
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,927
<INCOME-PRETAX> (1,211,591)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,211,591)
<EPS-PRIMARY> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
Exhibit 99.2
For Immediate Release
August 4, 1997
BREWER'S GROSS REVENUES ALMOST DOUBLE IN SECOND QUARTER
Frederick, Maryland - Frederick Brewing Co. (Nasdaq: BLUE), brewers of Blue
Ridge beers and Hempen Ales, announced today that second quarter sales almost
doubled to $875,416 compared with the same period last year. Year to date sales
are up 30 percent to $1.14 million and the turn toward profitability had begun.
Gross revenues increased from $440,066 to $875,416 as production at the
company's new $8.8 million brewery doubled each month of the quarter - up from
900 barrels in April to 3,005 barrels in June said CEO Kevin Brannon.
Demand for the company's craft brews is so strong that work is already in
progress to expand production capacity by 75 percent to nearly 70,000 barrels a
year. This work is expected to be completed by the end of the third quarter with
the full impact of the additional production being seen in the fourth quarter's
figures.
While the loss widened to $907,243 ($.045/share) up from $320,538 ($0.16/share),
the company believes this has now bottomed out with the quarter's results for
the first time reflecting the fixed cost of the new brewery, which is now
operating at near-full capacity.
"The larger loss was due to higher fixed costs associated with owning and
operating the new brewery for the first full quarter, and high packaging costs
because of delays in bringing the new automated packaging equipment on-line.
There were also higher overhead expenses as the result of increasing the
company's sales force, additional promotion and advertising and increases in net
interest payments.
"However, the turn to profitability has now begun with strong growth, an
expanding distribution network and lower operating costs," he said.
The company expects packaging costs to fall and gross margins to increase in the
third quarter with the new bottling line operating at peak efficiency and
additional efficiencies implemented. Further gross margin improvements can be
achieved through increased sales reducing per barrel cost of production, and
also by expanded distribution.
The company's strong growth is spearheaded by the phenomenal success of Hempen
Ale. First shipped in May and supported by tremendous nationwide press coverage,
it is now Frederick Brewing's best-selling product, accounting for 37 percent of
sales in the quarter. Boosted by this success and a consumer advertising
campaign targeted at six metropolitan markets, sales of Frederick Brewing's Blue
Ridge beers also rose by 22 percent during the quarter.
Sales in areas where distribution has been open for at least a year were up 74
percent over the second quarter last year, and these markets represented 90
percent of the company's shipments during the quarter.
"Strong demand in our historical core markets strained brewing capacity
throughout the quarter and slowed planned expansion into new areas although this
is now changing. New markets include Washington state which represents the
company's first West Coast distribution and Florida where statewide sales
exceeded expectations," said Marjorie McGinnis, President and CEO.
<PAGE>
Financial Recap Three months ended June 30 Year to date Year to date
- --------------- -------------------------- ------------ ------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Gross sales $ 875,416 440,066 1,141,230 874,741
Less excise taxes 43,323 23,125 60,228 41,486
Net Sales 821,341 383,501 1,045,814 797,370
Cost of sales 730,353 357,181 1,127,819 763,845
Gross profit (loss) 90,988 26,320 (82,005) 33,525
Selling, general and
administrative expenses 991,626 362,413 1,497,895 687,975
Operating loss (900,638) (336,093) (1,579,900) (654,450)
Interest expenses, net 80,792 (15,555) 108,367
Other income (expense) (74,187) -- 135,523 (12,153)
Net loss (907,243) (320,538) (1,552,744) (642,297)
Net loss per share (0.45) (0.16) (0.78) (0.39)
Weighted average common
shares and common share
equivalents outstanding 2,026,309 1,954,876 1,990,593 1,652,477
For more information contact: Kevin Branon CEO, Frederick Brewing Co.
301/694-7899 x 100 (web sites: www.fredbrew.com and www.hempenale.com, or Ron
Jones, Corporate Relations Group, Inc. 800-444-4980/407-628-5700
###
Exhibit 99.3
FREDERICK BREWING CO. EXPANDS BREWERY,
DISTRIBUTION AND PRODUCT LINE
For Immediate Release
September 22, 1997
Frederick, Maryland - Frederick Brewing Co. (Nasdaq Small Cap: BLUE), brewers of
the "Blue Ridge" and "Hempen" families of craft beers, announced today that the
company received the last of eight new 200-barrel fermenters purchased to expand
brewery capacity. This addition expands production capacity at its new brewery
to approximately 80,000 barrels per year, which represents an 80 percent
increase.
The decision to add capacity was driven primarily by the company's ongoing
expansion of marketing territory and continuing sales growth of its "Hempen
Ale," North America's first beer brewed with hemp seeds. After doubling during
the quarter ending June 30, 1997, Frederick's revenues for July and August were
more than 2 1/2 times greater than last year ($871,000 in 1997 vs. $258,000 in
1996). Bucking flat or declining sales trends reported by other craft brewers,
company president Marjorie McGinnis stated: "Our shipments to markets open for
at least one year were up 39 percent this July and August over last year (2100
barrels in 1997 vs. 1500 barrels in 1996) and the Blue Ridge brands alone were
up double digits. We have recently hired two new sales representatives to cover
the southern New England states and Georgia, bringing the total number of
representatives to eleven. Past performance indicates that sales in these
territories should increase significantly.
Since July 30, 1997, the company has established distribution in 26 new markets,
including nine additional states. According to McGinnis, "Frederick's near-term
strategy is to distribute Hempen products nationwide, while building Blue Ridge
into a leading brand in our eastern region. With these new fermenters, we will
be able to pursue our goals without concern for outgrowing our capacity for some
time." Hempen Ale is now sold in all or parts of 21 states, and Blue Ridge
brands are available in seventeen.
The new fermentation tanks will also be used to brew Frederick's newest beer,
"Hempen Gold," a cream ale brewed with hemp seeds. McGinnis stated: "Hempen Gold
is a lighter, less hoppy beer, which allows more of the hemp flavor to come
through. It will appeal to those drinkers who prefer a less aggressive flavor
profile. It should be a great complement to Hempen Ale." Hempen Gold will be
released to wholesale distributors starting September 22, 1997.
A $2.0 million private placement of convertible preferred stock issued to
accredited domestic investors financed these recent expansions. The company has
filed a registration statement to permit the public sale of approximately 1.3
million shares of common stock underlying the preferred stock. After fees and
expenses, the offering netted Frederick Brewing approximately $1.7 million. As a
condition of the offering, the company extended its agreement with the investor
relations firm Corporate Relations Group, Inc. and affiliated companies, and
prepaid $305,000 for these additional investor relations services.
According to Frederick Brewing CEO Kevin Brannon, of the remaining $1.4 million,
approximately $550,000 will be spent on the capacity expansion and other capital
improvements. Pursuant to a prior agreement, $180,000 was paid to redeem
convertible preferred stock issued to the general contractor for the building of
the brewery. The remaining proceeds will be used for working capital. The
investor relations expense will result in a one-time $305,000 charge in the
third quarter, which will have a substantial impact on the company's financial
results, and the company will continue to show substantial losses. Brannon
noted: "If revenues continue to grow as they have, and our production efficiency
continues to improve as projected, we should reverse these operating losses in
the fourth quarter of 1997."
<PAGE>
While the company does not expect to utilize all of the new brewing capacity
immediately, completing the entire project at once reduced the overall cost of
equipment and the disruption caused by expansion. In addition, he said, "We were
running close enough to capacity that we were unwilling to market our brewery to
contract brewers for fear of being unable to meet demand during our peak winter
holiday season. We now have the capacity to meet our current and anticipated
demand over the next several months, in addition to brewing other brands."
Brannon indicated that Frederick expected to begin brewing a brand owned by a
Pennsylvania company during the fourth quarter and is negotiating with other
potential contract brewers.
For more information, contact Ron Jones with Corporation Relations Group, Inc.
at 800-444-4980 or Kevin Brannon/Marjorie McGinnis with Frederick Brewing Co. at
301-694-7899.
Except for historical information, this press may contain forward-looking
statements that involve risks and uncertainties including, but not limited to,
quarterly fluctuations in results, the management of growth, competition and
other risks detailed in the company's SEC filings. Actual results may differ
materially from such information set forth herein.
