UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 31, 1996.
Commission File Number: 000-27800
Frederick Brewing Co.
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(Exact name of small business issuer as specified in its charter)
Maryland 52-1769647
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
4607 Wedgewood Boulevard Frederick, Maryland 21703
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(Address of principal executive offices) (Zip Code)
(301) 694-7899
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(Issuer's telephone number, including area code)
103 South Carroll Street, Frederick, Maryland, 21701
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(Former name, former address and former fiscal year,
if changed since last report)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
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
Check if there is no disclosure of delinquent filers in response to Item 405 of
the Regulation S-B is not contained in this Form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Pat III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for the recent fiscal year: $1,871,593
The aggregate market value of voting shares held by non-affiliates
as of March 27, 1997 : $ 6,361,127
Common Stock, $0.00004 Par Value 1,954,876
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(Title of Each Class) (Number of Shares Outstanding
as of March 27, 1997)
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [ X ]
Documents incorporated by reference: Posteffective Amendment No. 1 to the
Registration statement on Form SB-2 filed with the Securities and Exchange
Commission ("SEC") on March 11, 1996
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FREDERICK BREWING CO.
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INDEX TO FORM 10-KSB
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PART I.
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ITEM 1. DESCRIPTION OF BUSINESS 2
ITEM 2. DESCRIPTION OF PROPERTY 3
ITEM 3. LEGAL PROCEEDINGS 3
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 3
PART II.
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ITEM 5. MARKET FOR FREDERICK BREWING CO.'S COMMON STOCK
AND RELATED SHAREHOLDER MATTERS 3
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 3
ITEM 7. FINANCIAL STATEMENTS 11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 11
PART III.
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ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF FREDERICK BREWING CO.;
COMPLIENCE WITH SECTION 16(a) OF THE EXCHANGE ACT 11
ITEM 10. EXECUTIVE COMPENSATION 12
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 13
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 14
ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K 14
SIGNATURES
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FREDERICK BREWING CO.
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PART I.
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Item 1 - Description of Business
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Since its founding in 1992, Frederick Brewing Co. (the "Company"), has been one
of the fastest growing microbreweries in the United States. The Company brews,
kegs and bottles at its brewery in Frederick, Maryland, for wholesale to its 31
independent distributors, 10 styles of fresh, full flavored beers and a
non-alcoholic birch beer under the "Blue Ridge" brand name. By catering to the
segment of the beer drinking market which is seeking a new and different beer
experience, the Company has been able to capture a significant share of the
specialty beer market in Maryland.
The Company's beers have been critically acclaimed and continue to attract new
consumers. Sales have grown from 660 barrels in 1993 to 6,436 in 1994 to 10,031
barrels in 1995 to 10,910 barrels in 1996. The Company began selling Blue Ridge
Golden Ale on April 1, 1993, prior to the completion of the construction of its
first brewery. The ale was brewed to the Company's formulation under supervision
of its Brewmaster at breweries in Frankenmuth, Michigan and Linthicum, Maryland
until the Company's brewery was completed and operational in October 1993.
Demand quickly outpaced the brewery's original annual 2,070 barrel capacity and
plans to effect a wide distribution of the Company's products in Washington,
D.C., Northern Virginia, Delaware and parts of Pennsylvania and West Virginia
were then postponed. By August 1994, the Company had expanded its annual
capacity a maximum of 12,600 barrels. The Company presently sells its beers and
non-alcoholic birch beer to independent wholesale distributors in Maryland, the
District of Columbia, Virginia, Pennsylvania, West Virginia, Georgia, South
Carolina, New Jersey, Massachusetts, Connecticut, Rhode Island and Delaware.
On April 9, 1996, Frederick Brewing Co. began the construction of a 53,000
square foot, state of the art brewing facility in Frederick, Maryland. The
initial annual capacity of this new facility is 48,000 barrels. The capacity of
the new brewery can be expanded to approximately 150,000 barrels with the
addition of fermentation tanks and without further expenditure on land or
building. This facility began full production of the Company's products in March
1997. Construction on the brewery has been financed with a portion of the
proceeds from the Company's initial public offering ("IPO") completed in March
1996, together with funds loaned by the Maryland Economic Development
Corporation ("MEDCO") and Signet Bank Maryland ("Signet" or the "Bank") and
guaranteed by the Maryland Industrial Financing Authority ("MIDFA").
The Company's business strategy is to become one of the leading regional
craftbrewers in the Eastern United States. During 1997, the Company intends to
increase its production to approximately 50,000 barrels through the enlarged
capacity of its new brewery and to expand its area of distribution into selected
target markets on the East Coast and in certain areas of the Midwest. With this
expansion, the Company intends to increase its sales force, focus on building
its brand in its existing and new markets, and allocate a larger percentage of
revenues to advertising and promotion.
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Item 2 - Description of Property
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During fiscal year 1996, the Company operated in a leased facility of
approximately 7,700 square feet of office and brewery space in Frederick,
Maryland, under a lease that expires January 31, 1998. This facility will be
closed upon the completion of the relocation to the new facility. In February
1997, the production staff of Frederick Brewing Co. moved into the new 53,000
square foot facility, which the Company leases, under a lease that expires on
March 1, 2017. The new facility which was built for the Company, houses, in
addition to the production staff, the office staff, who relocated in March 1997.
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Item 3 - Legal Proceedings
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None.
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Item 4. Submission of Matters to a Vote of Security Holders
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Not applicable.
PART II.
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Item 5. Market for Frederick Brewing Co.'s Common Stock and
and Related Shareholder Matters
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The Company's common stock trades on the Nasdaq Small Cap Stock Market under the
symbol "BLUE". The number of record shareholders at December 31, 1996 was
approximately 1,500. The following table shows the range of high and low closing
prices and year end closing prices for the common stock for the most recent
fiscal year, on a quarterly basis. The Company's Series A 8% Cumulative
Convertible Preferred Stock (the "Series A Preferred Stock") is not traded
publicly.
1996
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High Low
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First Quarter $ 7 1/4 $ 5 1/4
Second Quarter 5 3/4 4 7/8
Third Quarter 5 1/4 4 23/32
Fourth Quarter 5 1/8 3 7/8
Year End Close $ 4
The Company paid no dividends in 1996.
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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The following selected financial data and Management's Discussion and Analysis
of Financial Conditions and Results of Operations should be read in conjunction
with the Company's 1996 financial statements and the notes thereto, included
elsewhere in this Form 10-KSB. (See Item 7).
2
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Selected Financial Data
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(in thousands, except share and per share data)
For the year ended December 31,
1996 1995 1994 1993
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Sales $ 1,872 $ 1,832 $ 1,186 $ 106
Less excise taxes 101 87 59 4
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Net sales 1,771 1,745 1,127 102
Cost of sales 1,743 1,253 847 89
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Gross Profit 27 492 280 13
Selling, general, and administrative expenses 2,682 831 485 259
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Loss from operations 2,655 (339) (205) (246)
Interest (income) expense, net (29) 79 52 11
Other (income) expense - (42) (5) 1
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Loss before income taxes (2,625) (376) (253) (258)
(Benefit) provision for income taxes - (17) 17 -
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Net loss $ (2,625) $ (359) $ (269) $ (258)
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Net loss per common share $ (1.45) $ (0.30) $ (0.24) $ (0.29)
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Weighted average common shares and
common share equivalents outstanding 1,804,503 1,204,719 1,122,437 886,908
========= ========= ========== =========
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Overview of Significant Activities and Expenses
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The Company was incorporated in Maryland on March 4, 1992 by Kevin Brannon and
Marjorie McGinnis, who, with Steven Nordahl and Steven Tluszcz, are the founders
of the Company. FBC sells its beers and birch beer through selected independent
wholesale beer distributors who represent the Company's brands in an exclusive
geographic territory. The distributors are an important link between the Company
and the consumers of its products. As a result, Frederick Brewing works closely
with wholesale distributors to educate, motivate and support them in their
efforts to penetrate the retail markets in their areas. The Company also works
hard to increase consumer recognition of its brands by participating in beer
festivals, beer tastings, working to obtain tap handles at up-scale restaurants
and bars, and by encouraging consumers and tourists to visit its brewery and try
its beer. The Company markets mugs, shirts and other items which display the
Blue Ridge brand name.
The Company's sales growth has, at times, been constrained by insufficient
production capacity. The Company has expanded its brewery capacity several times
since its construction in 1993. Three separate expansions undertaken between
February and August of 1994 increased the annual production capacity of the
current brewery from approximately 200 per month to approximately 1,000 barrels
per month. The Company has increased its production capacity substantially by
constructing a second, much larger brewery in Frederick County, Maryland.
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In order to build the new brewery the Company entered into agreements to have a
third party, Blue II, LLC ("Blue II") purchase the land, construct the new
brewery to the Company's specifications and lease the improved property to the
Company. Blue II is affiliated with Dr. Nicholas Foris, a director and principal
shareholder of the Company, and Edward D. Scott, who is affiliated with Maribeth
Visco, a director and the Secretary of the Company, in the real estate brokerage
firm Kline, Scott, Visco Commercial Real Estate, Inc. The Company assisted Blue
II in obtaining financing for the land purchase and building construction. On
July 19, 1996, MEDCO issued $4.5 million in taxable economic development revenue
bonds, the proceeds of which were used to purchase the land, for the
construction of the building and for the purchase of brewing and other
equipment. As a condition of this financing the Company and Blue II are required
to meet certain financial covenants. In connection with such loan, the MIDFA
partially guaranteed the repayment of these bonds. On that date, Signet
purchased the MEDCO-issued bonds and provided the Company a bridge loan of
approximately $1.0 million which will be refinanced by the Small Business
Administration ("SBA") loan described below. The Company received, on December
7, 1995, the approval of a SBA development company for a $1.0 million SBA loan
to partially finance the purchase of brewing equipment and other furnishings.
This approval is subject to, among other things, final SBA approval, which the
Company believes will be obtained in April 1997. There can be no assurance that
the SBA debt financing will close, will close pursuant to the terms of the
approval referenced above or will not be altered or revised.
On February 27, 1997, the Company executed two Forbearance Agreements with
Signet. The first Forbearance Agreement (the "Blue II Forbearance Agreement")
related to the $3.0 million MEDCO bond (the "Blue II Facility") relative to the
construction of the new brewery. The other Forbearance Agreement (the "FBC
Forbearance Agreement") related to the $1.5 million MEDCO Bond (the "FBC
Facility") and to the $969,000 bridge loan from the Bank ("Bridge Loan"), the
proceeds of which were to be loaned to the Company to purchase brewing equipment
for the new brewery. The Forbearance Agreements were executed by the Company as
a result of an approximately $340,000 difference between the amount of the Blue
II Facility and the cost to construct the new brewery as well as a decline in
the Company's cash position which resulted from significant weather-related
delays during construction, and an approximately $250,000 difference between the
FBC Facility and the Bridge Loan and the cost to acquire certain brewing
equipment. These so-called "funding deficiencies" caused Signet to claim the
Bridge Loan was in default and to temporarily cease funding the Blue II Facility
and the Bridge Loan as of January 22, 1997, subject to the execution of the
Forbearance Agreements. The Forbearance Agreements will facilitate the full
funding of the Blue II Facility and the Bridge Loan, as set forth below. During
the negotiations of the Forbearance Agreements, work on the new brewery
continued unabated.
The Blue II Forbearance Agreement recites that Blue II has defaulted under the
Blue II Facility due to its failure to cure a funding deficiency thereunder and
that an Event of Default has occurred under the Bridge Loan. However, Signet has
agreed, pursuant to the Blue II Forbearance Agreement, to forbear in the
exercise of its rights and remedies under the Blue II Facility loan documents
and to continue to make loan advances to Blue II to facilitate the completion of
the new brewery, provided: (i) no other event of default occurs under the Blue
II Facility loan documents, and (ii) Blue II and the Company perform their
obligations under the Blue II Forbearance Agreement. Signet's agreement to
forbear from exercising its rights and remedies under the Blue II Facility loan
documents and to make advances thereunder are conditioned upon, among other
things: (i) Blue II providing to the Bank the amount by which the proceeds of
the Blue II Facility will be insufficient to satisfy the unpaid Acquisition
Costs (as defined in the Blue II Facility) of the new brewery through final
completion of the new brewery (the "Final Net Funding Deficiency"); (ii) the
sale by the Company of its Series A Preferred Stock to the general contractor of
the new brewery in an amount equal to the Final Net Funding Deficiency; (iii)
the
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revision of the Projected Completion Date (as defined in the Blue II Facility)
of the new brewery to be March 14, 1997; (iv) the use of the certain funds
escrowed with Signet to pay current requisitions for funding under the Blue II
Facility; (v) the payment by the Company of all of the Signet's fees and
expenses relating to these Forbearance Agreements; and (vi) the waiver by the
Company of all causes of action against Signet, MEDCO, and MIDFA. Signet
provided a letter to the general contractor prior to its purchase of the Series
A Preferred Stock that it will complete the funding of the Blue II Facility upon
the general contractor's acquisition of such shares. The Company has agreed to
repurchase such shares from the general contractor when ----------.As of March
27, 1997, Blue II and the Company had performed their obligations under the Blue
II Forbearance Agreement and, the events of defaults recited therein were, by
operation of the Blue II Forbearance Agreement, cured and/or waived.
The FBC Forbearance Agreement recites that Signet by letter dated February 3,
1997, advised the Company that certain events of default have occurred with
respect to the FBC Facility, including (i) the occurrence of adverse changes
deemed material by Signet with respect to the business, assets, operations of
financial condition of the Company, and (ii) the failure of Blue II to cure the
funding deficiency under the Blue II Facility. However, the Bank has agreed,
pursuant to the FBC Forbearance Agreement, to forbear in the exercise of its
rights and remedies under the FBC Facility loan documents and to continue to
make loan advances (up to $250,000 immediately and the remaining loan balance
upon the satisfaction of the conditions set for below) to the Company under the
Bridge Loan to facilitate the purchase of the brewing equipment provided: (i) no
other event of default occurs under the FBC Facility Loan Documents, and (ii)
the Company performs its obligations under the FBC Forbearance Agreement.
Signet's agreement to forbear from exercising its rights and remedies under the
FBC Facility loan documents and to fund the remaining balance of the Bridge Loan
are conditioned upon, among other things: (i) the maintenance by the Company of
Eligible Accounts Receivable (as defined in the FBC Forbearance Agreement) of
not less than $100,000 until March 31, 1997 and of not less than $200,000
thereafter, tested twice monthly: (i) the payment to the Bank of a fee of
$25,000 in cash or Company Common Stock; (iii) the execution of an unconditional
personal guarantee of the Bridge Loan by the Chief Executive Officer and the
President of the Company; (iv) the payment over to Signet of any proceeds
obtained from the sale of the equipment at the old brewery to be held to further
collateralize the Bridge Loan; (v) Signet not having been advised that the SBA
has terminated its commitment to extend a $1.0 million loan to the Company; (vi)
the payment by the Company of all of Signet's fees and expenses relating to the
Forbearance Agreements; and (vii) the waiver by the Company of all causes of
action against Signet, MEDCO and MIDFA. If the Company performs its obligations
under the FBC Forbearance Agreement, the events of default recited therein will
be deemed by Signet to have been cured and/or waived.
The Blue II Facility and the FBC Facility each contain restrictive covenants,
including certain financial ratios relating to the Company's liquidity and
financial position at certain dates set forth in the loans and restrictions on
the occurrence of adverse changes deemed material by the Bank with respect to
the business, assets, operations or financial condition of the Company. The
Company has not complied with certain of the financial ratios set forth in the
agreements. During the first quarter of 1997, the Company obtained a waiver from
the Bank related to certain violations of financial covenants as of December 31,
1996 set forth in the Company's loan agreements with the bank.
The Company's capacity utilization has significant impact on gross profits. When
the facilities are operating at their maximum designed production capacity,
profitability is favorably affected by spreading depreciation and other fixed
and semivariable operating costs over a larger sales base. Conversely, when a
brewery is operating at lower production levels, as the Company expects
initially be the case at the new brewing facility, gross margins will be
negatively affected. The Company anticipates that its variable costs, such as
ingredients,
5
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packaging materials and labor will decrease in the future due to the economies
of scale anticipated with the operation of the new brewery.
The Company believes that factors other than capacity utilization are also
likely to influence gross profit margins, including the higher costs of opening
and maintaining distribution relationships in more distant new markets. The
Company also expects that net revenues per barrel may, in the future, decline
somewhat due to greater use of incentive pricing and competitive pressures.
A net loss of ($2,625,174), or ($1.45) per share, was incurred during 1996
compared to net loss of ($359,120), or ($0.30) per share, for 1995. Costs
associated with the Company's efforts to expand its business including additions
to sales, marketing and support staffs, costs associated with staff increases
and greater market coverage, the increased costs of being a publicly held and
traded and general business operations costs were the primary reasons for the
increase in the loss between the periods. In addition, the Company wrote off
approximately $641,000 of assets and leasehold improvements related to the old
brewing facility which will be closed upon the commencement of full scale
operations in the new facility in early 1997.
Due to the Company's current lack of liquidity and need for additional working
capital, the Company is currently in the process of raising additional equity
capital of up to $2.0 million pursuant to a private placement of its Series A
Preferred Stock to primarily "accredited investors" as that term is defined by
Regulation D promulgated under the Securities Act of 1933, as amended. The
following is a brief description of the terms of the Series A Preferred Stock:
(i) the number of shares of Series A Preferred Stock being offered is a minimum
of 600 shares and a maximum of 4,000 shares; (ii) the Series A Preferred Stock
will rank senior to the Common Stock with respect to dividend and liquidation
rights; (iii) dividends on the Series A Preferred Stock are payable at the
annual rate of $40.00 per share per annum, when, as and if declared by the
Company's Board of Directors. If not declared, dividends will accumulate and be
payable in the future. Full dividends must be paid or set aside on the Series A
Preferred Stock before dividends may be paid or set aside on the Company's
Common Stock. All dividend payments will be subordinated to the Company's debt
obligations, and will be subject to the prior approval of Signet and the
Company's other future lenders. Signet has stated that it will not permit
dividends to be paid on the Series A Preferred Stock in 1997.
As of March 27, 1997, the Company had consummated the private sale of 1,418
shares of the Series A Preferred Stock for $709,000 and anticipates additional
sales of approximately 200 to 400 additional Series A shares by March 31, 1997,
on which date the offering will terminate, pursuant to the Company's election to
terminate the offering. The Company also may seek to raise additional equity
capital in the private or public markets from time to time in the future on
terms and conditions to be determined by the Company at such time or times.
Effective as of March 13, 1997, the Company's Board of Directors authorized
raising up to $3.5 million by the issuance and private sale of up to 3,500
shares of its Series B Convertible Preferred Stock ("Series B Preferred Stock")
to "non-United States persons" as that term is defined by Regulation D
promulgated under the Securities Act of 1933, as amended. The following is a
brief description of the terms of the Series B Preferred Stock: (i) the number
of shares of Series B Preferred Stock being offered is 3,500 shares; (ii) the
Series B Preferred Stock will rank senior to the Common Stock and to the Series
A Preferred Stock with respect liquidation rights; (iii) dividends on the Series
B Preferred Stock may be declared and paid if, 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 B Preferred Stock on par
with dividends declared with respect to the Company's Common Stock. The Company
does not expect to declare or pay such dividends in the foreseeable future. The
Company
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anticipates that all of the authorized Series B Preferred Stock will be placed
on or about March 31, 1997 and expects to file a report on Form 8-K with respect
to that transaction within 15 days of the closing of that transaction.
The primary purpose of the private offering of the Series A and Series B
Preferred Stock is to provide funds for the completion of the new brewery,
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 will be for
working capital and general corporate purposes. The Company may also use a
portion of the net proceeds for the acquisition of stock, debt, assets or
businesses or products from other brewers or independent third parties that are
complementary to those of the Company, although no such acquisitions are planned
or being negotiated as of the date hereof, and no portion of the net proceeds
has been allocated for such expansion or for any specific acquisition. Pending
such uses, the net proceeds of the offering will be invested in short-term,
interest or dividend-bearing securities. See also Notes 6 and 11 to the Notes to
the Financial Statements.
Weighted average common shares outstanding were 1,804,503 at year end 1996, and
1,204,719 for corresponding period in 1995. The substantial increase in shares
outstanding from 1995 1996, is the result of the Company's completion of its
"IPO" of 771,154 shares of common stock in March 1996.
Sales
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Sales are affected by market distribution, seasonal product introductions,
promotions and competition. For 1996 and 1995 sales were $1,871,593 and
$1,832,136, respectively, an increase of $39,457, or 2.2%. Production volumes in
1996 and 1995 were 10,910 barrels and 10,031 barrels, respectively, an increase
of 879 barrels, or 8.8%. Revenues per barrel for the years 1996 and 1995 were
$172 and $183 per barrel, respectively, a decrease of $11 per barrel, or 6.4%
This revenue decline per barrel reflects the sales during 1996 of distressed
product at a lower overall selling price.
Excise Taxes
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Federal and state excise taxes were $100,697 and $86,763, during 1996 and 1995,
respectively, representing 5.7% and 5.0% of net sales, respectively. The
increase in excise taxes in 1996, as a percentage of net sales, is due to
changes in the proportion of beer distribution between states where the beer is
being distributed. 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.
Cost of Goods Sold
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Cost of goods sold for 1996 and 1995 was $1,743,896 and $1,253,181,
respectively. The most substantial portion of the cost increases was related to
the Company's third party contract brewing arrangement with Johnson Beer
Company, Inc. Charlotte, North Carolina. That arrangement resulted in a cost of
goods which was approximately 42% greater than that for the product produced at
the Company's facility. Approximately $105,000 of the 1996 cost increase over
1995 was due to this third party contract. In addition to the increased unit
cost of production caused by the third party contract, the Company incurred
additional freight costs to ship raw materials to the third party facility and
finished goods to the Company's distribution center. This arrangement was
terminated as of September 30, 1996. No additional freight
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charges attributable to the arrangement will be incurred in future periods and
the cost of goods sold should normalize in future periods.
Materials and packaging costs increased during 1996 compared to 1995 due to
increased costs of acquiring such packaging materials. Depreciation expense also
increased during 1996, substantially due to a reduction in the estimated useful
life of the Company's leasehold improvements to its existing facility. The
Company recorded a provision for inventory obsolescence in 1996 of $48,060
relating to packaging materials that will no longer be of use when the Company
moves its operations to the new facility. There was no such provision recorded
in 1995.
Selling, General, and Administrative Expenses
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Selling, general, andadministrative ("S,G&A") expenses were $2,040,786 and
$831,154 in 1996 and 1995, respectively. S,G&A increases from 1995 to 1996 are
consistent with the Company's expectations in the expansion of its
manufacturing, sales, and marketing capabilities and the requisite related
support functions. During 1996, the Company launched its first advertising
campaign to promote its products. This campaign along with other smaller market
support efforts were a substantial portion of the S,G&A increase over 1995. In
addition, costs associated with the Company's efforts to expand its business
(additions to sales, marketing and support staffs and greater market coverage,
etc.), the increased costs of being a publicly held and traded company (legal
and professional fees, etc.), and general business operations costs, were the
primary reasons for the increase between the comparable periods.
Other Expense
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During 1996, the Company incurred an expense of $640,815 which related to the
write-off of leasehold improvements and the write-down of machinery and
equipment to be disposed of at their fair value. The equipment being disposed of
had been used in its old facility, which is being closed following the
completion of the new brewery in early 1997.
Interest (Income) Expense, Net
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Interest (income) expense during 1996 was ($28,202) compared to $78,926 in 1995.
Interest expense decreased due to the payoff of $412,000 in debt obligations
following the IPO. Borrowings during 1996 were not made until the fourth
quarter, thus interest expense on these borrowings was only recorded during a
small portion of the year. Interest income was primarily the result of the
investment of IPO proceeds until required for operating purposes.
Income Tax Provision
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The Company has incurred net operating losses during both 1996 and 1995 and,
accordingly, no provisions for income taxes have been provided in the Statements
of Operations.
Liquidity and Capital Resources
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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 stock, and loans from stockholders and financial institutions. As of
December 31, 1996 the Company had a working capital deficit of approximately
$67,000. This balance was principally the result of current maturities of long
term debt as well as recurring operating losses. Net cash used in operating
activities was approximately $1.7 million in 1996.
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Net cash used in investing activities during 1996 was approximately $3,000,000
which primarily represented deposits placed with vendors for the fabrication of
new brewery equipment and purchases of capital assets. In addition, various
expenses incurred in arranging for MEDCO, Signet and future SBA financing,
brewery construction, and trademarks were capitalized as intangible assets.
Net cash provided by financing activities during 1996 was approximately $5.4
million, consisting primarily of net IPO proceeds of $3,848,000 and proceeds
from debt incurred to finance the equipment for the new facility (see Note 5 of
the Financial Statements), offset by repayments on short-term and long-term debt
of $447,000.
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 would be separate from the bridge financing by Signet for new brewery
equipment and furnishings currently in place.
The Company had a cash balance of approximately $49,000 at December 31, 1996. In
addition, at December 31, 1996, approximately $640,000 of cash equivalents
(short-term securities with original maturities of less than 90 days), was
pledged as collateral to guarantee the Company's obligation to Signet for
equipment purchases and/or build out for the new facility and was recorded as
restricted cash.
In February 1997, the Board of Directors authorized the issuance of up to $2.0
million the Series A Preferred Stock and in March 1997 unauthorized the sale of
up to $3.5 million of Series B Preferred Stock. In connection with the
forbearance agreements (see Note 5 of the Financial Statements) related to
certain of the Company's outstanding loans, the Company had, as of March 27,
1997, issued 1,418 shares of Series A Preferred Stock resulting in proceeds of
$709,000.
Management believes that this level of liquidity may be insufficient to fund its
operations and continues to seek capital through private placement offerings
(see "Overview of Significant Activities and Expenses") 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.
No assurance can be given that positive cash flows will occur at such time.
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. See
Exhibit 99 for a discussion of the risks and uncertainties which could cause
actual results to differ materially from the forward-looking information.
9
<PAGE>
Item 7. Financial Statements
- --------------------------------------------------------------------------------
See page F-1 for Index to Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
- --------------------------------------------------------------------------------
None.
PART III.
Item 9. Directors and Executive Officers of Frederick Brewing Co.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Name Age Position Since
- ---- --- -------- -----
<S> <C> <C> <C>
Kevin E. Brannon 42 Chairman & Chief Executive Officer 1992
Marjorie A. McGinnis 34 President & Chief Operating Officer 1992
Steven T. Nordahl 27 VP-Brewing Operations & Brewmaster 1994
Craig J. O'Connor 26 VP-Finance & Administration 1994
Dr. Nicholas P. Foris 69 Director 1994
Carl R. Hildebrand 45 Director & Treasurer 1995
Jerome M. Pool 60 Director 1993
Peter C. Spellar 51 Director 1995
Maribeth Visco 37 Director & Secretary 1993
</TABLE>
Mr. Brannon, prior to starting the Company in 1992, was an attorney with the law
firm of Preston, Gates, & Ellis, in Portland, Oregon.
Ms. McGinnis, prior to starting the Company in 1992, was a partner of B&G
Partnership and Butler Brothers Farm and Orchard in Martinsburg, West Virginia.
Mr. Nordahl, prior to joining the Company in 1993, graduated from the Master
Brewer's program at the University of California at Davis, in Davis, California.
Mr. O'Connor, prior to joining the Company in 1994, was the general accountant
for the Frick Division of York International in Waynesboro, Pennsylvania, for
two years and prior thereto was a student at and graduated from Roanoke College,
Salem Virginia.
Dr. Foris is a general and thoracic cardiovascular surgeon who practices in
Frederick, Maryland. He is a member of the Compensation Committee of the Board.
<PAGE>
Mr. Hildebrand has a certified public accounting practice, Hildebrand, Limparis,
and Hevey, in Rockville and Frederick, Maryland. Prior to August 1995, he was a
partner with the accounting firm of McLean, Koehler, Sparks and Hammond,
Frederick, Maryland. He serves as the Company's Treasurer and serves on the
Audit and Compensation Committees of the Board.
Mr. Pool is retired and has been a business consultant since December 1991.
Prior thereto, he was the Chairman of the Board and President of Jantzen, Inc.
He is also a director of Pacific Metal Company, Portland, Oregon. He is a member
of the Audit and Compensation Committees of the Board.
Mr. Spellar is the President of the Applied Systems Group of York International
Corporation, York, Pennsylvania, a NYSE traded company. He is a member of the
Audit Committee of the Board.
Ms. Visco is a partner in the commercial leasing firm of Kline, Scott, Visco,
Frederick, Maryland. She serves as the Company's Secretary and is a member of
the Compensation Committee of the Board.
Section 16(a) of the Exchange Act requires the Company's officers, directors and
persons who own more than 10% of the Company's Common Stock to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the National Association of Securities Dealers, Inc. Officers, directors and
greater than 10% stockholders are required by regulation to furnish the Company
with copies of all forms they file pursuant to Section 16(a) of the Exchange
Act. The Company knows of no person who owns 10% or more of the Company's Common
Stock.
Based solely on review of copies of such forms furnished to the Company, or
written representations from its officers and directors, the Company believes
that during, and with the respect to, fiscal 1996, the Company's officers and
directors complied in all aspects with the reporting requirements promulgated
under Section 16(a) of the 1934 Act.
11
<PAGE>
Item 10. Executive Compensation
- --------------------------------------------------------------------------------
The following table sets forth all compensation awarded to, earned by, or paid
for services rendered to the Company in all capacities during the fiscal year
ended December 31, 1996, by the Company's named executive officers.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Annual Compensation Long-Term
-------------------- Compensation
Awards
------
Name Salary Bonus Other Options All Other
- ---- ------ ----- ----- ------- ---------
<S> <C> <C> <C> <C> <C>
Kevin E. Brannon (1) $61,000 $ 0 $ 0 0 $ 0
Marjorie A. McGinnis (2) $61,000 $ 0 $ 0 0 $ 0
Steven T. Nordahl (3) $49,000 $ 0 $ 0 0 $ 0
Craig J. O'Connor (4) $40,000 $ 0 $ 0 762 $ 0
</TABLE>
(1) On February 4,5, 1994, Mr. Brannon exercised options for 27,639 shares of
Common Stock at an exercise price of $.50 per share for an aggregate realized
value of $13,819.50. He had no unexercised options as of December 31, 1996.
(2) On February 4,5, 1994, Ms. McGinnis exercised options for 27,639 shares of
Common Stock of an exercise price of $.50 per share for an aggregate realized
value of $13,819.50. She had no unexercised options as of December 31, 1996.
(3) At December 31, 1996, Mr. Nordahl had options to acquire 16,779 shares of
Common Stock at an exercise price of $.50 per share; all of such options were
immediately exerciseable and the value of such in-the-money options at December
31, 1996 was $58,726.50.
(4) Only Mr. O'Connor was granted immediately exerciseable options during the
fiscal year ended December 31, 1996 under the Company's 1995 Stock Option Plan,
which represented 7.8% of the total options granted to employees during the
fiscal year, at an exercise price of $6.00 per share, which expires in March
2016. For a description of the Company's 1995 Stock Plan, reference is made page
68 of the Company's final Prospectus dated March 5, 1996, which is incorporated
herein by reference from the Post-Effective Amendment No. 1 to the Registration
Statement on Form SB-2 filed with the SEC on March 11, 1996 ("Form SB-2).
Director Compensation
For a description of the compensation of the directors of the Company,
reference is made to page 69 of the Company's final Prospectus dated March 5,
1996, which is incorporated herein by reference from the Form SB-2.
Employment Agreements
For a description of the employment agreements for the named executive
officers of the Company, reference is made to page 67 of the Company's final
Prospectus dated March 5, 1996, which is incorporated herein by reference from
the Form SB-2.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------------------------
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 27, 1997, by (i) each person
known by the Company to be the beneficial owner of more than 5.0% of the
Company's Common Stock, (ii) each of the Company's directors, (iii) each of the
Company's executive officers named in the Summary Compensation Table (see Item
10 hereof), and (iv) all executive officers and directors as a group. Except as
otherwise noted, the named beneficial owner has sole voting and investment
power.
Shares Beneficially Owned
as of March 27, 1997
-------------------------
Directors, Named Executive Officers Number Percent
and 5% Stockholders ------ -------
- -----------------------------------
Kevin E. Brannon (2) 145,797 7.46%
Marjorie A. McGinnis (2) 145,797 7.46
Nicholas P. Foris, M.D.(2)(3) 116,194 5.93
Carl R. Hildebrand (4) 3,000 0.15
Jerome M. Pool (5) 22,344 1.14
Maribeth Visco (6) 26,680 1.36
Peter C. Spellar (7) 43,792 2.24
Steven T. Nordahl (10) 54,739 2.78
Craig J. O'Connor (8) 762 0.00
Steven Tluszcz (9) 102,029 5.18
All directors and executive officers
as a group (nine persons) 559,105 28.06
(1) Based upon information furnished by respective individuals. The information
is not necessarily indicative of beneficial ownership for any other purpose.
Under regulations promulgated pursuant to the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), shares are deemed to be beneficially owned by a
person if he or she directly or indirectly has or shares: (i) voting power,
which includes the power to vote or to direct the voting of the shares, or (ii)
investment power, which includes the power to dispose or to direct the
disposition of the shares.
(2) The number of shares shown in the table includes the exercise of options for
27,639 shares of Common Stock for each of Mr. Brannon and Ms. McGinnis on
February 15, 1996 and excludes the number of shares beneficially owned by the
other. The business address for such persons is 4607 Wedgewood Boulevard,
Frederick, Maryland 21703.
(3) Includes immediately exercisable options to purchase 4,000 shares of Common
Stock.
(4) Includes immediately exercisable options to purchase 3,000 shares of Common
Stock.
(5) Includes immediately exercisable options to purchase 5,000 shares of Common
Stock.
<PAGE>
(6) With respect to Ms. Visco's shares, see Item 12, and Certain Relationships
and Related Transactions, below includes immediately exerciseable options to
purchase 5,000 shares of Common Stock.
(7) Includes 542 shares owned by Mr. Spellar's daughter who resides with Mr.
Spellar but does not include 15,718 shares owned by Mr. Spellar's other adult
children who do not reside with him includes immediately exerciseable options to
purchase 3,000 shares of Common Stock.
(8) Consists solely of immediately exercisable options to purchase 762 shares of
Common Stock.
(9) Includes immediately exercisable options to purchase 13,412 shares of Common
Stock.
(10) Under the Exchange Act, a person is deemed to have beneficial ownership of
any shares of Common Stock which may be acquired within 60 days of March 27,
1997 pursuant to the exercise of outstanding stock options. Shares of Common
Stock which are subject to stock options are deemed to be outstanding for the
purpose of computing the percentage of outstanding Common Stock owned by such
person or group but not deemed outstanding for the purpose of computing the
percentage of Common Stock owned by any other person or group. The amounts set
forth in the table include 16,779 shares which may be received upon the exercise
of stock options by Mr. Nordahl, 762 shares which may be acquired upon
exercise of stock options by Mr. O'Connor (see footnote (6) below) and 20,000
shares which may be received upon the exercise of stock options by the
non-employee directors. For all the directors and executive officers as a group,
the number of shares includes 37,561 shares of Common Stock subject to
outstanding stock options.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------------------------------
The information provided on pages 72 and 73 of the Company's Prospectus dated
March 5, 1996 entitled "Certain Transactions" is incorporated herein by
reference from the Pre-effective Amendment No. 5 to the Form SB-2 filed with the
Securities and Exchange Commission on March 5, 1996.
Item 13. Exhibits, List and Reports on Form 8-K
- --------------------------------------------------------------------------------
(a) Documents filed as part of this Report.
(1) The following documents are filed as part of this report
and this list includes the Index to the Financial Statements:
Report of Independent Accountants
Financial Statements:
Balance Sheets as of December 31, 1996 and 1995.
Statements of Operations for the Years Ended
December 31, 1996 and 1995.
Statements of Changes in Stockholders' Equity of the
Years Ended December 31, 1996 and 1995.
Statements of Cash Flows for the Years Ended
December 31,1996 and 1995.
Notes to Financial Statements
(2) All schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
omitted because they are not applicable or the required information is included
in the Financial Statements or notes thereto.
(3)(a) The following exhibits are filed as part of this Form
10-KSB, and this list includes the Exhibit Index.
No. Description
-----------------------------------------------------------------------
3.1 Amended and Restated Articles of Incorporation1
<PAGE>
3.2 Amended and Restated Bylaws2
4 Stock Certificate2
10 Material Contracts:
(i) Stock Option Agreement dated April 15, 1993 between the
Company, Edward D. Scott, Kevin E. Brannon, and Marjorie McGinnis;2*
(ii) Form of Shareholder Agreement;2
(iii) Form of Termination of Shareholder Agreement;2
(iv) Employment Agreement dated December 9, 1995 between the
Company and Kevin E. Brannon;2*
(v) Employment Agreement dated December 9, 1995 between the
Company and Marjorie A. McGinnis;2*
(vi) Employment Agreement dated December 9, 1995 between the
Company and Steven T. Nordahl;2*
(vii) Employment Agreement dated December 9, 1995 between the
Company and Craig J. O'Connor;2*
(viii) Employment Agreement dated February 20, 1993 between
the Company and Steven Tluszcz;2
(ix) Lease Agreement dated February 15, 1994 between the
Company and Carroll Creek LLC;2
(x) Lease Agreement dated March 25, 1994 between the Company
and Carroll Creek LLC;2
(xi) Addendum to the Agreement of Lease dated March 30, 1995
between the Company and Carroll Creek LLC;2
(xii) Agreement of Lease dated January 21, 1993 between the
Company, Kevin E. Brannon, and South Carroll Street Partnership;2
(xiii) Letter lease dated January 18, 1995 between the Company
and Frederick Produce Company, Inc;2
(xiv) Form of Distribution Agreement;2
<PAGE>
(xv) Letter from the Company dated October 30, 1993 to the
Kronheim Company, Inc.;2
(xvi) Non-employee Directors Stock Option Plan;2*
(xvii) 1995 Stock Option Plan;2*
(xviii) Form of Promissory Note dated various dates from the
Company to certain stockholders;2
(xix) Promissory Note dated June 18, 1994 between the Company
and Dr. Nicholas Foris;2
(xx) Promissory Note dated March 18, 1994 between the Company
and Dr. Nicholas Foris;2
(xxi) Contract Brewing Agreement dated December 12, 1995 by
the Johnson Beer Company and the Company;2
(xxii) Promissory Note by the Company to FCNB Bank dated
November 24, 1995 with a guarantee by Dr. Nicholas Foris;2
(xxiii) Agreement of Sale by and between the Company and SOPM
Limited Partnership dated November 7, 1995;2
(xxiv) Assignment and Extension of Agreement of Sale by and
between the Company and Blue II, LLC dated December 19, 1995;2
(xxv) Letter of Intent for Build-to-Suit Light Industrial
Space by and between the Company and Blue II, LLC dated December 21, 1995;2
(xxvi) Resolutions adopted by the Maryland Industrial
Development Financing Authority;2
(xxvii) Letter dated January 30, 1996 from the Maryland
Economic Development Corp.;2
(xxviii) Letter dated January 30, 1996 from Ryan, Lee &
Company, Inc.;2
(xxix) Letter dated January 24, 1996 from the Mid-Atlantic
Business Finance Co.;2
(xxx) Letter from Signet Bank/Maryland dated January 16,
1996;2
(xxxi) Loan and financing agreement between Blue II, MEDCO,
Signet and the Company;3
<PAGE>
(xxxii) Promissory note;3
(xxxiii) $3,000,000 Economic Development Revenue Bond;3
(xxxiv) Construction contract between Blue II, Morgan Keller,
Inc, and the Company;3
(xxxv) Lease Agreement between Blue II, LLC and the Company;3
(xxxvi) Loan and financing agreement between MEDCO, Signet and
the Company;3
(xxxvii) Promissory note;3
(xxxviii) $1,500,000 Economic Development Revenue Bond;3
(xxxix) Loan and security agreement - $969,000 Bridge loan;3
(xxxx) Promissory note - bridge loan;3
(xxxxi) Filler/capper equipment;3
(xxxxii) Bottling line;3
(xxxxiii) Mechanical and electrical work;3
(xxxxiv) Phase I Industrial wastewater treatment;3
(xxxxv) Bottle supply;3
(xxxxvi) Interior fit out of new brewery office space;3
(xxxxvii) Blue II Forbearance Agreement;4
(xxxxviii) FBC Forbearance Agreement;4
21 Subsidiaries of the Registrant - None.
27 Financial Data Schedule.
99 Safe Harbor Under the Private Securities Litigation Reform Act
of 19954
(3)(b) Reports filed on Form 8-K-6. None
None.
17
<PAGE>
1 Incorporated by reference from Pre-effective Amendment No. 5 to the
Form SB-2 filed with the SEC on March 5, 1996.
2 Incorporated by reference from Form SB-2 filed with the SEC on
December 12, 1995.
3 Incorporated by reference from Form 10-QSB, Quarterly Report, filed
with the SEC on June 30, 1996.
4 Incorporated by reference from Form 8-K, Current Report, filed with
the SEC on February 27, 1997.
* Management contract or compensatory plan or agreement.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Independent Accountants ..........................................F-2
Financial Statements:
Balance Sheets ....................................................F-3
Statements of Operations ..........................................F-4
Statements of Changes in Stockholders' Equity .....................F-5
Statements of Cash Flows ..........................................F-6
Notes to Financial Statements .....................................F-7
F-1
<PAGE>
Report of Independent Accountants
---------------------------------
Board of Directors
Frederick Brewing Co.
Frederick, Maryland
We have audited the accompanying balance sheets of Frederick Brewing
Co. as of December 31, 1996 and 1995, and the related statements of operations,
changes in stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Frederick Brewing Co. as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Rockville, Maryland
February 26, 1997 except as to
Note 11 for which the date is
March 31, 1997
F-2
<PAGE>
Frederick Brewing Co.
Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
ASSETS
- -----------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 48,990 $ -
Cash - restricted 640,000 -
Trade receivables, net 239,413 253,359
Inventories, net 210,563 209,473
Prepaids and other current assets 82,412 42,633
Total current assets 1,221,378 505,465
---------- -----------
Property and equipment, net 3,287,696 1,121,569
Deposits - 1,042
Intangibles, net of accumulated amortization 186,251 31,074
Other assets 71,000 -
---------- -----------
Total assets $ 4,766,325 $ 1,659,150
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------
Current Liabilities:
Current maturities of debt and lease obligations $ 425,090 $ 235,758
Accounts payable 629,216 374,574
Accrued expenses 165,538 94,075
----------- -----------
Total current liabilities 1,219,844 704,407
Long-term debt and lease obligations 1,723,094 373,861
----------- -----------
Total liabilities 2,942,938 1,078,268
----------- -----------
Stockholders' equity:
Preferred stock - $.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 and 1,128,444
shares issued and outstanding 72 42
Additional paid-in capital 4,911,424 1,043,775
Accumulated deficit (3,088,109) (462,935)
------------ ----------
Total stockholders' equity 1,823,387 580,882
------------ ----------
Total liabilities and stockholders' equity $ 4,766,325 $ 1,659,150
============ ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements
F-3
<PAGE>
Frederick Brewing Co.
Statements of Operations
For the Years Ended December 31, 1996 and 1995
1996 1995
---- ----
Gross Sales $ 1,871,593 $ 1,832,136
Less: Excise taxes 100,697 86,763
----------- -----------
Net sales 1,770,896 1,745,373
Cost of sales 1,743,896 1,253,181
----------- -----------
Gross profit 27,000 492,192
Selling, general and administrative
expense 2,040,786 831,154
Loss on assets to be disposed of 640,815 -
----------- -----------
Operating loss (2,654,601) (338,962)
Interest (income) expense (29,427) 78,926
Other (income) expense - (41,868)
----------- -----------
Loss before income taxes (2,625,174) (376,020)
----------- -----------
Benefit for income taxes - (16,900)
Net loss $(2,625,174) $ (359,120)
=========== ===========
Net loss per common share $ (1.45) $ (0.30)
=========== ===========
Weighted average common share and
common share equivalents outstanding 1,804,503 1,204,719
=========== ===========
The accompanying notes are an integral
part of these financial statements
F-4
<PAGE>
Frederick Brewing Co.
Statements of Changes in Stockholders' Equity
For the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Unamortized
Common Stock Employee Stock Total
--------------------- Additional Stock Accumulated Stockholders'
Shares Par Value Paid-In Capital Compensation Deficit Equity
------------ --------- ------------ ------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ................... 895,926 $ 33 $ 505,990 $(7,812) $(103,815) $ 394,396
Issuance of stock for cash ................... 94,850 4 209,996 -- -- 210,000
Exercise of options .......................... 44,986 2 36,123 -- -- 36,125
Conversion of subordinated notes to stock .... 92,682 3 149,997 -- -- 150,000
Amortization of employee stock compensation .. -- -- -- 7,812 -- 7,812
Compensation related to stock options ........ -- -- 141,669 -- -- 141,669
Net loss ..................................... -- -- -- -- (359,120) (359,120)
---------- ---------- ---------- ------ ---------- ----------
Balance, December 31, 1995 ................... 1,128,444 42 1,043,775 -- (462,935) 580,882
Issuance of stock for cash, net of expenses .. 771,154 28 3,847,701 -- -- 3,847,729
Exercise of options .......................... 55,278 2 9,948 -- -- 9,950
Fair value of warrants issued to non-employees
for services ............................. -- -- 10,000 -- -- 10,000
Net loss ..................................... -- -- -- -- (2,625,174) (2,625,174)
---------- ---------- ---------- ------ ---------- ----------
Balance, December 31, 1996 ................... 1,954,876 $ 72 $4,911,424 $ -- $(3,088,109) $ 1,823,387
========== ========== ========== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
Frederick Brewing Co.
Statements of Cash Flows
for the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,625,174) $ (359,120)
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation and amortization 151,772 116,772
(Gain) loss on sale of asset - (2,527)
Loss on assets to be disposed of 640,815 -
Bad debt expense 109,484 -
Provision for inventory write-down 48,060 -
Fair value of warrants issed to non-employees for services 10,000 -
Compensation related to stock options - 141,669
Changes in operating assets and liabilities:
Trade Receivables (123,430) (151,917)
Inventories (49,150) (75,117)
Deposits 1,042 465
Other current assets (39,779) (16,900)
Other assets (71,000) -
Accounts payable 254,642 171,082
Accrued expenses 71,463 55,902
------------ ----------
Net cash used for operating activities (1,621,255) (119,691)
------------ ----------
Cash flows from investing activities
Purchase of property and equipment (2,833,176) (220,842)
Purchase of intangibles (107,093) (18,732)
Proceeds from sale of property and equipment - 9,985
------------ ----------
Net cash used for investing activities (2,940,269) (229,589)
------------ ----------
Cash flows from financing activities
Payments on short-term debt (100,000) 100,000
Proceeds from long-term debt 1,965,114 176,551
Payments on long-term debt (398,895) (172,850)
Payments on capital leases (12,874) (12,294)
Proceeds from common stock issuance 4,636,924 246,125
Costs incurred for common stock issuance (769,245) -
Restricted cash (640,000) -
Payment of loan origination fees (70,510) -
------------ ----------
Net cash provided by financing activities 4,610,514 337,532
------------ ----------
Net increase (decrease) in cash and cash equivalents 48,990 (11,748)
Cash and cash equivalents, beginning of period - 11,748
------------ ----------
Cash and cash equivalents, ending of period $ 48,990 $ -
============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE>
1. Business and Financing
Business
Frederick Brewing Co. (the "Company") engages in the manufacture, bottling,
distribution and sale of beer primarily in the Mid-Atlantic region.
2. Summary of Significant Accounting Policies
Inventories
Inventories are valued at lower of cost or market, with cost based on a moving
average method.
Property and equipment
Property and equipment are recorded at cost and are depreciated using
straight-line and accelerated methods over the estimated useful lives of the
assets as follows:
Brewing equipment 7 - 20 years
Automobiles and trucks 5 years
Furniture and fixtures 3 - 7 years
Leasehold improvements are recorded at cost and are depreciated over the terms
of the related lease or the estimated useful life of the related improvement,
whichever is shorter. Upon retirement or disposition of property and equipment,
the cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in operations. Repairs and maintenance are
charged to expense as incurred.
Intangible assets
Intangible assets consist of organization costs associated with the formation of
the Company, trademarks and copyrights, and loan origination costs. Organization
costs, trademarks and copyrights are being amortized over a five year period on
a straight-line basis. Loan origination costs are amortized over the term of the
related loan. Amortization expense was $17,453 and $10,259 for the years ended
December 1996 and 1995, respectively.
F-7
<PAGE>
Revenue recognition
Revenue is recognized upon shipment of product to distributors. The Company has
established 90 days as the acceptable inventory shelf life for its products. The
Company will reimburse distributors for 50% of all out-of-date product destroyed
in the first year of each new distribution agreement. Amounts reimbursed to date
for out-of-date products have been minimal.
The Company records bad debt expense at the time it is judged that an account
receivable is uncollectible. A $25,000 reserve for doubtful accounts is recorded
in the balance sheet at December 31, 1996. Bad debt expense for the year ended
December 31, 1995 was minimal.
Income taxes
Deferred income taxes are recognized for the tax consequences in future years
for differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
Income tax expense represents the current tax provision for the period plus the
change during the period in deferred tax assets and liabilities.
Stock-based compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation." SFAS 123 is effective for the year ended December 31, 1996. SFAS
123 permits companies to account for stock-based compensation based on the
provisions prescribed in SFAS 123 or based on the authoritative guidance in
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees." The Company has elected to continue to account for its
stock-based compensation in accordance with APB 25, however, as required by SFAS
123, the Company has disclosed the pro forma impact on the financial statements
assuming the measurement provisions of SFAS 123 had been adopted (see Note 6).
F-8
<PAGE>
Net loss per common share
Net loss per common shares 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 because the effects of such items were
anti-dilutive. For the year ended December 31, 1995, pursuant to Securities and
Exchange Commission requirements, 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 were included in the calculation
of weighted average common shares and common share equivalents outstanding as if
they were outstanding for all of 1995.
New Accounting Standard
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 financial statements issued on or after January 1, 1998. The
Company has not yet made a determination of the impact that the adoption of SFAS
128 is expected to have on the financial statements.
Use of accounting estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
amounts could differ from these estimates.
Fair value information
The carrying amounts of financial instruments, principally cash, trade
receivables, accounts payable and accrued expanses approximate fair value
because of their short term maturity. The carrying amount of the Company's debt
approximates its fair value as the debt bears interest at rates approximating
current market rates.
F-9
<PAGE>
3. Inventories
Inventories at December 31, consist of the following:
1996 1995
---- ----
Raw materials $ 35,957 $ 24,315
Work in process 17,153 23,982
Finished goods 15,749 44,714
Packaging and marketing 189,764 116,462
Inventory allowances (48,060) --
---------- -----------
Total $ 210,563 $ 209,473
========== ===========
4. Property and equipment
Property and equipment at December 31, consists of the following:
1996 1995
---- ----
Brewing equipment $ 491,660 $ 731,004
Leasehold improvements - 305,690
Automobiles and trucks 201,499 53,230
Furniture and fixtures 68,821 45,274
Construction in progress 2,830,834 163,416
--------- -------
Total 3,592,814 1,298,614
Less accumulated depreciation (305,118) (177,045)
--------- ---------
Property and equipment, net $ 3,287,696 $ 1,121,569
=========== ===========
Construction in progress represents costs incurred in connection with the
construction of a building to be used as a new brewery. Approximately $30,000 in
interest expense has been capitalized associated with the construction in
progress. As a result of the Company's move into its new brewery in early 1997,
there is a significant amount of brewing equipment housed in the old facility
which is being disposed. As of December 31, 1996, this equipment has been
reduced to $240,000, representing its estimated fair value less estimated costs
to dispose. A loss of $640,815 has been included in the statement of operations
associated with this brewing equipment and the write-off of leasehold
improvements in the old facility.
<PAGE>
5. Debt obligations
Long-term debt
The detail of long-term debt is as follows:
<TABLE>
<CAPTION>
Description Maturity December 31, December 31,
----------- -------- 1996 1995
---- ----
<S> <C> <C> <C>
Note payable to bank, interest LIBOR + 150 July 2006 $1,500,000 $ --
basis points , 108 monthly payments at
$13,889, commencing Aug. 1997, collateralized
by brewing equipment. (see below).
Note payable to bank, interest at LIBOR + July 1997 363,515 --
150 basis points, interest only payments,
collateralized by brewing equipment (see
below).
Note payable to bank, interest at prime + March 1999 -- 143,347
2%, 12 monthly payments of $1,667
followed by 48 monthly payments of $3,750;
collateralized by brewing equipment and
inventories.
Installment note payable to bank, monthly February 1997 -- 4,443
payments of $335 including interest at
8.75%; collateralized by vehicle.
Note payable to bank, interest at 10.5%, September 1997 -- 168,683
12 monthly payments of $1,667 followed by
48 monthly payments of $3,750;
collateralized by brewing equipment and
inventories.
Notes payable to bank, monthly payments May 1999 143,920 24,797
ranging from $268 to $808, including to
interest ranging from 7.9% to 9.1%, October 2000
collateralized by vehicles.
Stockholder loans payable, monthly March 1996 61,666 83,346
payments ranging from $425 to $655 to
including interest ranging from 10% to 11% July 1999
Obligations under capital leases 79,083 85,003
---------- --------
Total 2,148,184 509,619
Less current maturities 425,090 135,758
---------- --------
Total long-term debt $1,723,094 $373,861
========== ========
</TABLE>
During 1996, the Company entered into agreements to have a new brewery built by
Blue II, LLC, a limited liability company affiliated with certain directors of
the Company ("Blue II"). Blue II has constructed the new brewery to the
Company's specifications and effective in early 1997, is leasing the property to
the Company (see Note 7). On July 19, 1996, in connection with the purchase of
the equipment to be housed in the new brewery, the Company obtained a $1.5
million revenue bond from the Maryland Economic Development Corporation
("MEDCO") and a $969,000 bridge loan from a bank. The $1.5 million revenue bond
was immediately purchased by MEDCO by a bank. Each of these loans contain
restrictive covenants, including certain financial ratios relating to the
Company's liquidity and financial position at certain dates set forth in the
loans and restrictions on the occurrence of adverse changes deemed material by
the bank with respect to the business, assets, operations or financial condition
of the Company. The Company has not complied with certain of the financial
ratios set forth in the agreements. Additionally, Signet has declared that a
material adverse change, primarily caused by a
F-11
<PAGE>
$340,000 overrun in equipment purchases as compared to the original budget, has
occurred in the Company's business. The bank has agreed, under a forbearance
agreements, dated February 27, 1997, to waive its rights under these events of
default and to fund the Company with additional advances of $250,000 under the
bridge loan. In connection with this forbearance agreement, the Company has
committed to realize an aggregate of approximately $1.3 million in net proceeds
from the issuance of shares of Series A Preferred Stock (See Notes 6 and 11), to
maintain specified levels of accounts receivable at specified measurement dates,
to pay a bank fee of $25,000, and to pay to the bank any proceeds obtained from
the sale of the equipment at the old brewery. Further, in connection with the
forbearance agreement, the bridge loan has been personally guaranteed by both
the Chief Executive Officer and the President of the Company. Additionally the
bank has provided the Company with a waiver related to the financial covenant
violations (see Note 11). Any further noncompliance with the restrictive
covenants or any breach of the terms of the forbearance agreement by the Company
could result in a future event of default, which would give the bank the right
to call the loans.
During 1996, Blue II obtained a $3 million revenue bond for the construction of
the brewery which was also purchased by the same bank. Due to a funding
deficiency of approximately $340,000 between the loan amount and the cost
incurred by Blue II in construction, the bank claimed that this loan was in
default. Blue II obtained a similar forbearance agreement which ensured the
continued funding for the construction. One of the conditions related to the
Blue II forbearance agreement stipulated that the Company would sell shares of
its Series A Preferred Stock (See Note 6) to the general contractor of the
brewery in an amount equal to the final net funding deficiency, and that the
proceeds from such sale by the Company would be used to satisfy the funding
deficiency.
F-12
<PAGE>
Principal repayments required on this long-term debt are due as follows:
1997 $ 474,642
1998 242,236
1999 206,924
2000 169,577
2001 166,668
Other future years 767,192
------------------
Total $ 2,027,239
==================
Capital leases
The Company has entered into a brewing equipment lease and a computer equipment
lease which qualify as capital leases. Aggregate monthly payments total
approximately $1,600 with the leases expiring through April 1999.
The related assets, with a cost of $101,869 and accumulated depreciation of
$29,275 and $16,541, as of December 31, 1996 and 1995, respectively, are
reflected on the balance sheet in brewing equipment and furniture and fixtures.
Depreciation is being provided over the estimated useful lives of the assets (3
to 10 years) and totaled $12,734 and $9,990 for the years ended December 31,
1996 and 1995, respectively.
Future minimum payments under all capital leases are as follows as of December
31, 1996:
1997 $27,506
1998 23,400
1999 47,877
-----------
98,783
Less amount representing interest (19,700)
-----------
Present value of minimum lease payments 79,083
Less current maturities (27,506)
===========
Long-term capital lease obligations $51,577
===========
6. Stockholders' equity
Preferred stock
<PAGE>
The Company is authorized to issue up to 1,000,000 shares of $.01 par value
preferred stock. The Board of Directors has the authority to issue the preferred
stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereon. In February 1997, the Board of Directors
authorized the issuance of 8% Series A Cumulative Convertible Preferred Stock
("Series A"). The Series A shares rank senior to the common stock with respect
to dividend and liquidation rights. Dividends are payable at an annual rate of
$40 per share per annum, when and if declared by the Board of Directors. If not
declared, dividends will accumulate and be payable in the future. The
liquidation preference is $500 per share plus accrued but unpaid dividends. Each
Series A share is convertible, after one year from the closing date of such sale
of Series A shares or immediately preceding any public offering of the Company's
common stock, into shares of common stock based on conversion parameters set
forth in the agreement. The Series A shares do not have any voting rights.
In March 1997, the Board of Directors authorized the issuance of a Series B
Convertible Preferred Stock ("Series B"). The Series B shares rank senior to the
common stock and the Series A shares with respect to liquidation rights.
Dividends may be declared consistent with amounts declared with respect to the
common stock. The Company does not expect to declare or pay such dividends in
the foreseeable future. The Series B shares are convertible to shares of common
stock based on conversion parameters set forth in the agreement.
Stock options
The Company had entered into employment agreements with four key individuals for
the period January 1, 1993 through December 31, 1995. These agreements were
replaced in December 1995 by new agreements discussed in Note 7. Under the
previous agreements, options to purchase shares of the Company's common stock
were to be granted if a specified amount of taxable barrels of beer were
produced in a year. Any options granted were immediately vested and exercisable
for a period of five years from the date awarded at an exercise price of $.18
per share. These agreements limited the number of options that could be awarded
to these key employees to an aggregate of 3.75% of all outstanding common stock
and outstanding stock options on the date of award. Total option granted under
these employment agreements were 101,749, including 42,671 granted during 1995.
16,260 of the options were exercised during 1995.
Effective November 20, 1995, the Company adopted the 1995 Stock Option Plan
("the Plan") in order to attract and retain qualified personnel in key
positions. The Company has reserved approximately 152,000 shares of common stock
for issuance under the Plan. The exercise price of all options under the Plan
must be equal to at least the fair value of the related common stock on the date
of grant. Vesting provisions for the options are to be determined by the Board
of Directors. All options are exercisable for ten years after the vesting date.
The Company also grants options under its Non-employee Directors Stock Option
Plan. Under this plan, non-employee directors were granted options to purchase
2,000 shares of common stock as well as options to purchase 1,000 shares of
common stock for each year of service by each individual director prior to the
date of the first annual meeting following the closing of the Company's initial
public offering is 1996. Approximately 20,000 options were granted under this
plan during 1996. This plan provides for annual grants of options to purchase
2,000 shares of common stock to each non-employee director of the Company. There
are 40,000 shares of common stock reserved for future grants under this plan.
The Company accounts for the fair value of its stock option grants in accordance
with APB 25. Accordingly, no compensation expense has been recognized for the
Company's option plan. Had compensation expense been determined based on fair
value at the grant dates for option awards consistent with the method of SFAS
123, the Company's net loss and loss per share would have been increased to the
pro forma amounts indicated below:
<PAGE>
1996 1995
---- ----
Net loss
As reported $ (2,625,174) $ (359,120)
Pro forma (2,703,915) (359,120)
Loss per common share
As reported $ (1.45) $ (0.30)
Pro forma (1.50) (0.30)
The fair value of each option is estimated on the date of grant using a
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the year ended December 31, 1996 and 1995:
dividend yield of 0%, expected volatility of 33%, risk-free interest rate of
6.3% and expected term of 8 years.
A summary of the status of the Company's stock options is presented.
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1996 December 31, 1995
--------------------------------- ----------------------------
Weighted-average Weighted-average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of period 85,489 $ 0.18 59,078 $ 0.18
Options exercised (55,278) (0.18) (16,260) (0.18)
Options canceled (3,334) (5.00) - -
Options granted 33,110 5.45 42,671 0.18
------- -------
Options outstanding at end of period 59,987 $ 1.60 85,489 $ 0.18
======= =======
Options exercisable at end of period 59,987 $ 1.60 85,489 $ 0.18
======= =======
</TABLE>
The weighted average fair value of options granted during the year ended
December 31, 1996 was $2.38 per share.
As of December 31, 1996, the weighted average remaining contractual life of the
options such options have exercise prices ranging from $0.18 to $6.00 per share
is approximately 9 years.
As of December 31, 1996, the pro forma tax effects under SFAS 109 would include
an increase to both the deferred tax asset and the valuation allowance of
approximately $31,000, with no impact to the statement of operations.
F-15
<PAGE>
Warrants
In connection with the initial public offering, the underwriter was granted a
warrant to purchase up to 38,558 shares of common stock at an exercise price of
$ 7.20 per share. In addition, during 1996, the Company entered into an
agreement with a financial consulting firm, and granted this firm warrants to
purchase $120,000 worth of the Company's common stock at an exercise price equal
to 125% of the average closing price of the shares for the twenty days prior to
the execution of the agreement between the Company and the consulting firm. The
Company recorded an expense of $10,000 and a corresponding increase to
paid-in-capital related to this grant based on the estimated fair value of the
warrants on their date of grant, determined using a Black-Scholes pricing model.
7. Commitments and contingencies
Leases
The Company leases its premises under a five year lease agreement expiring
January 1998. Extra office and plant areas were added to the original lease in
1994. This lease contains an annual increase of 4%. The current monthly rental
is $2,926. In addition, the Company leases additional warehousing space on a
month to month basis, from a local business, at a rate of $1,500 per month.
Total rent expense was $53,112 and $45,923 in 1996 and 1995, respectively. The
minimum future rental payments under this lease are as follows:
1997 $ 28,296
1998 2,341
---------
Total future minimum rental payments $ 30,637
=========
A member of the Company's Board of Directors is a member of the limited
liability corporation from which the Company leases its premises.
In February 1997, the Company moved into its new facility which it is leasing
under a twenty year agreement expiring March 2017. The monthly rental, which
began in March 1997, is equal to $20,857. The Company will recognize these
amounts under the guidelines of Financial Accounting Standards Board Statement
No. 13 as a capital lease.
Contingencies
In the normal course of business, the Company may become 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 adverse effect
on the financial statements.
Employment agreements
In December 1995, the Company entered into employment agreements with four key
members of management. Under the terms of the agreements, aggregate base
salaries for calendar years 1997 and
F-16
<PAGE>
1998 are $295,000 and $375,000, respectively. The employment agreements also
include a provision for annual cash bonuses not to exceed 25% of base salaries.
In 1996, no such bonuses were paid or accrued.
8. Wholesale distributors
The Company distributes its products only through independent wholesale
distributors for resale to retailers such as liquor and wine and beer stores,
restaurants, taverns, pubs, bars, and sporting arenas. Accordingly, the Company
is dependent upon these wholesale distributors to sell the Company's beers and
to assist the Company in creating demand for, and promoting market acceptance
of, the Company's products and providing adequate service to all retail
customers. If a significant wholesale distributor were to discontinue selling,
or decrease the level of orders for, the Company's products, the Company's
business would be adversely affected in areas serviced by such wholesale
distributors until the Company retained replacements.
Sales to wholesale distributors representing greater than 10% of total sales
were as follows for the years ended December 31:
1996 1995
---- ----
Distributor A $ 961,000 $ 654,000
Distributor B 40,000 277,000
Distributor C 241,000 228,000
Distributor D - 196,000
============ ===========
$ 1,242,000 $ 1,355,000
============ ============
F-17
<PAGE>
9. Income taxes
The tax effects of the primary temporary differences giving rise to the
Company's deferred tax asset (liability) at December 31, 1996 and 1995 are
summarized as follows:
1996 1995
---- ----
Net operating loss carryforward $ 1,028,000 $ 68,000
Other 44,700
8,000
Depreciation (100,000) (45,500)
------------ ------------
Subtotal 936,000 67,200
Valuation allowance (936,000) (67,200)
------------ ------------
Net deferred taxes $ -- $ --
============ ============
Realization of the net deferred tax asset at the balance sheet date is dependent
on future earnings which are uncertain. Accordingly, a full valuation allowance
was recorded against the asset.
As of December 31, 1996, the Company had net operating loss carryforwards of
approximately $2.7 million expiring between 2009 and 2011 available to offset
future taxable income for federal income tax purposes, subject to Section 382
limitations.
10. Supplemental disclosure of cash flow information
1996 1995
---- ----
Cash paid for interest $ 53,088 $ 71,000
Supplemental disclosure of non cash investing
and financing activities:
Conversion of subordinated notes to stock $ - $ 150,000
Capital lease obligations $ 11,464 $ 5,076
11. Subsequent events
The Company has been reliant on financing transactions, including an initial
public offering of common stock, certain notes payable agreements and various
private placements of common stock and preferred stock, to partially fund its
operations and business expansion.
F-18
<PAGE>
During the first quarter of 1997, the Company has received approximately
$700,000 in net proceeds from the issuance of Series A Preferred Stock.
Additionally, the Company has received approximately, $750,000 in net proceeds
from the issuance of Series B Preferred Stock and has received stock
subscriptions from investors for Series B Preferred Stock issuances to result in
an additional $2.75 million in net proceeds.
Management believes that these proceeds along with the Company's cash generated
from operations will be adequate to meet the Company's working capital needs
through early 1998 while it expands the production and sales base to the
ultimately desired levels.
During the first quarter of 1997, the Company obtained a waiver from the bank
related to certain violations of financial covenants as of December 31, 1996 set
forth in the Company's loan agreements with the bank. Management believes that
the Company will be in compliance at the interim covenant measurement dates
during 1997.
<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 March, 1997 /s/Kevin E. Brannon
-------------- -------------------------------------
Kevin E. Brannon
Chairman of the Board,
Chief Executive Officer
and Principal Executive Officer
Date March, 1997 Craig J. O'Connor
-------------- -------------------------------------
Craig J. O'Connor
Vice President - Finance & Administration
and Principal Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
/s/ Kevin E. Brannon Date: March 27, 1997
- --------------------------
Kevin E. Brannon
Chairman
/s/ Majorie A. McGinnis Date: March 27, 1997
- --------------------------
Marjorie A. McGinnis
/s/ Nicholas P. Foris, M.D. Date: March 27, 1997
- --------------------------
Nicholas P. Foris, M.D.
/s/ Carl R. Hildebrand Date: March 27, 1997
- --------------------------
Carl R. Hildebrand
/s/ Jerome M. Pool Date: March 27, 1997
- --------------------------
Jerome M. Pool
/s/ Peter C. Spellar Date: March 27, 1997
- --------------------------
Peter C. Spellar
/s/ Maribeth Visco Date: March 27, 1997
- --------------------------
Maribeth Visco
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000926978
<NAME> Frederick Brewing Co.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> Dec-31-1996 Dec-31-1995
<PERIOD-START> Jan-1-1996 Jan-1-1995
<PERIOD-END> Dec-31-1996 Dec-31-1995
<EXCHANGE-RATE> 1 1
<CASH> 688,990 0
<SECURITIES> 0 0
<RECEIVABLES> 264,413 0
<ALLOWANCES> 25,000 0
<INVENTORY> 210,563 0
<CURRENT-ASSETS> 1,221,378 0
<PP&E> 3,287,696 0
<DEPRECIATION> 305,118 0
<TOTAL-ASSETS> 4,766,325 0
<CURRENT-LIABILITIES> 1,219,844 0
<BONDS> 2,148,184 0
72 0
0 0
<COMMON> 0 0
<OTHER-SE> 1,823,315 0
<TOTAL-LIABILITY-AND-EQUITY> 4,766,325 0
<SALES> 1,871,593 1,832,136
<TOTAL-REVENUES> 1,871,593 1,832,136
<CGS> 1,743,896 1,253,181
<TOTAL-COSTS> 2,040,786 831,154
<OTHER-EXPENSES> 640,815 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (29,437) 78,926
<INCOME-PRETAX> (2,625,174) (376,020)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,625,174) (359,120)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,625,174) (359,120)
<EPS-PRIMARY> (1.45) (0.30)
<EPS-DILUTED> (1.45) (0.30)
</TABLE>
