<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
Frederick Brewing Co.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE> 2
[FREDERICK BREWING CO LOGO]
FREDERICK BREWING CO.
4607 WEDGEWOOD BOULEVARD
FREDERICK, MARYLAND 21703
(301) 694-7899
April 13, 1998
Dear Stockholder:
On behalf of the Board of Directors and management, I cordially invite
you to attend the Annual Meeting of Stockholders to be held on Thursday, May 14,
1998 at 11:00 a.m. Eastern Time, at the offices of the Company at 4607 Wedgewood
Boulevard, Frederick, Maryland.
The formal Notice of the Annual Meeting and Proxy Statement accompanying
this letter describe the specific business to be acted upon at the Annual
Meeting. In addition to the specific matters to be acted upon, there will be an
opportunity for Stockholders to tour the brewery and to ask questions of
management and our independent auditors.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. WHETHER
OR NOT YOU PLAN TO ATTEND IN PERSON, YOU ARE REQUESTED TO VOTE, SIGN, DATE, AND
PROMPTLY RETURN THE ENCLOSED FORM OF PROXY IN THE ENVELOPE PROVIDED. YOUR RETURN
OF THE FORM OF PROXY WILL NOT PREVENT YOU FROM VOTING IN PERSON, BUT WILL ENSURE
THAT YOUR VOTE IS COUNTED IF YOU ARE UNABLE TO ATTEND.
Your support, investment and interest in the Company is greatly
appreciated.
Very truly yours,
/s/ KEVIN E. BRANNON
KEVIN E. BRANNON
Chairman of the Board and
Chief Executive Officer
<PAGE> 3
FREDERICK BREWING CO.
---------------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 14, 1998
---------------------------------------------------------
To the Holders of Common Stock
of Frederick Brewing Co.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the
"Annual Meeting") of Frederick Brewing Co., a Maryland corporation (the
"Company"), will be held on Thursday, May 14, 1998 at 11:00 a.m. Eastern Time,
at the offices of the Company at 4607 Wedgewood Boulevard, Frederick, Maryland,
for the following purposes, all of which are more completely set forth in the
accompanying Proxy Statement:
(1) To elect one director, whose name is set forth in the accompanying
proxy statement to hold office until the Annual Meeting of
Stockholders in the year 1999, and until his successor is elected and
qualified and to elect two directors, the names of whom are set forth
in the accompanying proxy statement, to hold office until the Annual
Meeting of Stockholders in the year 2001, and until their successors
are elected and qualified; and
(2) To amend the Articles of Amendment and Restatement of the Articles of
Incorporation by increasing the total number of shares of capital
stock, which the Company has the authority to issue from 10,000,000
to 20,000,000; and
(3) To ratify the appointment of Coopers & Lybrand LLP as independent
auditors of the Company for the year ending December 31, 1998; and
(4) To vote on a proposal to approve an adjournment of the Annual Meeting
to another date or place for the purpose of soliciting additional
proxies if there are not sufficient votes at the time of the Annual
Meeting to approve the foregoing proposals; and
(5) To transact such other business as may properly come before the
Annual Meeting, or any such adjournment thereof. Except with respect
to the foregoing proposals and procedural matters incident to the
conduct of the Annual Meeting, management is not aware of any other
matters which could come before the Annual Meeting.
As determined by the Board of Directors, only stockholders of record at
the close of business on March 12, 1998 are entitled to notice of, and to vote
at, the Annual Meeting of Stockholders or any postponement or adjournment
thereof.
By Order of the Board of Directors,
/s/ KEVIN E. BRANNON
KEVIN E. BRANNON
Chairman of the Board
April 13, 1998
Frederick, Maryland
PLEASE NOTE
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED REGARDLESS OF THE NUMBER YOU
OWN.
EVEN IF YOU PLAN TO BE PRESENT, YOU ARE URGED TO COMPLETE, SIGN, DATE AND
RETURN THE ENCLOSED PROXY PROMPTLY IN THE ENVELOPE PROVIDED. IF YOU ATTEND THE
MEETING, YOU MAY VOTE EITHER IN PERSON OR BY PROXY. ANY PROXY GIVEN MAY BE
REVOKED BY YOU IN WRITING OR IN PERSON AT ANY TIME PRIOR TO THE EXERCISE
THEREOF.
<PAGE> 4
FREDERICK BREWING CO.
4607 WEDGEWOOD BOULEVARD
FREDERICK, MARYLAND 21703
-------------------------------
PROXY STATEMENT
-------------------------------
This proxy statement is furnished in connection with the solicitation by
the Board of Directors of Frederick Brewing Co., a Maryland corporation (the
"Company"), of proxies for the Annual Meeting of Stockholders (the "Annual
Meeting") to be held on Thursday, May 14, 1998, at 11:00 a.m. Eastern Time, at
the offices of the Company located at 4607 Wedgewood Boulevard, Frederick,
Maryland, and at any adjournments or postponements thereof, for the purposes set
forth in the accompanying Notice of Annual Meeting. Shares of common stock,
$.00004 par value per share (the "Common Stock"), of the Company may be
represented at the Annual Meeting by stockholders in person or by the return of
the enclosed, properly executed, proxy card.
The Notice of Annual Meeting, this proxy statement and the enclosed proxy
card are first being mailed to stockholders commencing on or about April 13,
1998.
The Company may solicit proxies by mail, advertisement, telephone,
facsimile, telegraph and personal solicitation. Directors and executive officers
of the Company may solicit proxies personally or by telephone without additional
compensation. The Company will reimburse banks, brokerage firms and other
custodians, nominees and fiduciaries for reasonable expenses incurred by them in
sending proxy solicitation materials to the beneficial owners of the Company's
Common Stock.
The Company has retained D.F. King & Co., Inc., 77 Water Street, New
York, New York 10005, a professional proxy solicitation firm, to assist in the
solicitation of proxies and for related services. The Company will pay D.F. King
& Co., Inc. a fee of $5,000 and has agreed to reimburse it for its reasonable
out-of-pocket expenses.
VOTING RIGHTS AND PROCEDURES
QUORUM
The presence, either in person or by proxy, of the holders of a majority
of the shares of Common Stock outstanding on March 12, 1998 is necessary to
constitute a quorum at the Annual Meeting.
ELECTION OF DIRECTORS
The election of directors requires a plurality of the votes cast by the
shares entitled to vote at the election, either in person or represented by
proxy, with a quorum present. Each share of Common Stock may be voted for as
many individuals as there are directors to be elected and for whose election the
share is entitled to be voted.
AMENDMENT TO THE ARTICLES OF AMENDMENT AND RESTATEMENT OF THE ARTICLES OF
INCORPORATION
The amendment to the Articles of Amendment and Restatement of the
Articles of Incorporation of the Company (the "Articles") requires an
affirmative vote of more than two-thirds of all votes entitled to be cast, with
a quorum, at this Annual Meeting.
1
<PAGE> 5
RATIFICATION OF INDEPENDENT AUDITORS
The affirmative vote of the holders of a majority of the total votes cast
at the Annual Meeting is required for approval of the proposal to ratify the
appointment of the independent auditors.
APPROVAL OF ADJOURNMENT
The affirmative vote of the holders of a majority of the total votes cast
at the Annual Meeting is required for approval of the proposal to approve any
adjournment of the Annual Meeting.
OTHER MATTERS
Abstentions will be counted for purposes of determining the presence of a
quorum at the Annual Meeting. Because of the required votes, abstentions will
have the same effect as a vote against the proposals to amend the Articles,
ratify the appointment of the Company's independent auditors and approve any
adjournment, but will not be counted as votes cast for the election of directors
and, thus, will have no effect on the voting for the election of directors.
Under the applicable rules, all of the proposals for consideration at the Annual
Meeting are considered "discretionary" items upon which brokerage firms may vote
in their discretion on behalf of their clients if such clients have not
furnished voting instructions. Thus, there are no proposals to be considered at
the Annual Meeting which are considered "non-discretionary" and for which there
will be "broker non-votes."
At March 12, 1998, directors and executive officers and their affiliates
of the Company beneficially owned 629,859 shares of Common Stock, or 9.39% of
the total shares of Common Stock outstanding on such date. It is anticipated
that all of such shares will be voted for the election of the nominees of the
Company's Board of Directors and in favor of all of the proposals of the Board
described herein.
PROXIES
Shares of Common Stock represented by properly executed proxies, if such
proxies are received in time and not revoked, will be voted in accordance with
the instructions indicated on the proxies. If no instructions are indicated,
such proxies will be voted (i) FOR the nominees for director described herein;
(ii) FOR the amendment of the Articles; (iii) FOR the ratification of Coopers &
Lybrand LLP as the Company's independent public accountants for the year ending
December 31, 1998; (iv) FOR the approval of any adjournment and (v) in the
discretion of the proxy holder as to any other matter which may properly come
before the Annual Meeting. Any holder of Common Stock who returns a signed proxy
but fails to provide instructions as to the manner in which such shares are to
be voted will be deemed to have voted in favor of the matters set forth in the
preceding sentence.
A stockholder who has given a proxy may revoke it at any time prior to
its exercise at the Annual Meeting by (i) giving written notice of revocation to
the Secretary of the Company, (ii) properly submitting to the Company a
duly-executed proxy bearing a later date, or (iii) attending the Annual Meeting
and voting in person. All written notices of revocation and other communications
with respect to revocation of proxies should be addressed as follows: Frederick
Brewing Co., 4607 Wedgewood Boulevard, Frederick, Maryland 21703, Attention:
Secretary.
SHARES OUTSTANDING
Only Common Stockholders of record at the close of business on March 12,
1998 (the "Record Date") are entitled to notice of the Annual Meeting and to
vote the shares of Common Stock held by them on that date at the Annual Meeting
or any adjournment or postponement thereof. Only holders of
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<PAGE> 6
Company Common Stock will be entitled to vote at the Annual Meeting and each
outstanding share of Common Stock entitles its holder to cast one vote on each
matter to be voted on at the Annual Meeting, and for the election of directors,
each share of Common Stock may be voted for as many individuals as there are
directors to be elected and for those whose election the share is entitled to be
voted. There were outstanding on March 12, 1998, the record date for
stockholders entitled to notice of and to vote at the 1998 Annual Meeting,
6,706,602 shares of Common Stock. At March 12, 1998, the Company had 1,828
shares of 8% Cumulative Convertible Preferred Stock, Series A ("Series A
Preferred Stock"), no shares of Convertible Preferred Stock, Series B ("Series B
Preferred Stock"), 1,005 shares of Convertible Preferred Stock, Series C
("Series C Preferred Stock"), 455 shares of Convertible Preferred Stock, Series
D ("Series D Preferred Stock") and 3,000 shares of Convertible Preferred Stock,
Series E ("Series E Preferred Stock") outstanding, none of which have the right
to vote at the Annual Meeting.
BENEFICIAL OWNERSHIP
Set forth below is information with respect to shares of Common Stock
beneficially owned, as of March 12, 1998 by: each beneficial owner of 5% or more
of the Common Stock; each nominee for director; each director of the Company;
each executive officer named in the Summary Compensation Table; and by all
directors and officers of the Company as a group. In addition, as of March 12,
1998, no persons were known by the Company to beneficially own 5% or more of the
issued and outstanding Common Stock. The address for all directors and executive
officers of the Company, is 4607 Wedgewood Boulevard, Frederick, Maryland 21703.
<TABLE>
<CAPTION>
AMOUNT
AND NATURE
NAME OF BENEFICIAL PERCENT
OF BENEFICIAL OWNER POSITION OWNERSHIP(1) OF CLASS(2)
- --------------------------- ----------------------------------- ------------- -----------
<S> <C> <C> <C>
Kevin E. Brannon(3)(12) Chairman of the Board & Chief
Executive Officer 147,131 2.19%
Marjorie A. McGinnis(3)(12) President 147,131 2.19%
Nicholas P. Foris, MD(4) Director 118,194 1.76%
Carl R. Hildebrand(5) Director 5,000 0.07%
Jerome M. Pool(6) Director 24,344 0.36%
Maribeth Visco(7) Director 28,680 0.43%
James W. Lutz(8) Director 99,450 1.48%
Steven T. Nordahl(9)(12) Vice President - Brewing Operations 56,073 0.84%
Leslie P. Harper(10) Chief Financial Officer 3,334 0.05%
Patrick L. Helsel(11) Vice President - Sales 522 0.01%
All directors and executive officers as a group (11 persons)(13) 629,859 9.39%
</TABLE>
- -------------------------------
(1) Beneficial ownership of the Common Stock has been determined for this
purpose in accordance with Rule 13d-3 of the Securities and Exchange
Commission ("SEC"), under which a person is deemed to be the beneficial
owner of securities if he or she has or shares voting power or investment
power in respect to such securities, or has the right to acquire beneficial
ownership within 60 days.
(2) Percentage of Class does not take into account the 4,518,509 shares of
Common Stock into which the Series A, C, D and E Preferred Stock are
immediately convertible.
(3) The number of shares shown in the table for each of Mr. Brannon and Ms.
McGinnis excludes the number of shares beneficially owned by the other.
3
<PAGE> 7
(4) Includes 6,000 shares which may be received upon the exercise of
immediately exercisable stock options. Does not include 210 shares of
Convertible Preferred Stock, Series A, which are immediately convertible
into Common Stock at the price of $3.8388 per share.
(5) Includes 5,000 shares which may be received upon the exercise of
immediately exercisable stock options.
(6) Includes 7,000 shares which may be received upon the exercise of
immediately exercisable stock options.
(7) Includes 7,000 shares which may be received upon the exercise of
immediately exercisable stock options.
(8) The number of shares reflected in the table for Mr. Lutz have been reserved
for issuance upon completion of the reconciliation of the shares of Common
Stock to be distributed to the prior stockholders of Wild Goose Brewery,
Inc.
(9) Includes 16,779 shares which may be received upon the exercise of
immediately exercisable stock options.
(10) Includes 3,334 shares which may be received upon the exercise of
immediately exercisable stock options.
(11) Includes 522 shares which may be received upon the exercise of immediately
exercisable stock options.
(12) Includes 1,334 shares of Common Stock granted in lieu of a $10,000
reduction in salary.
(13) Includes 52,635 shares which may be acquired by all directors and officers
of the Company as a group upon the exercise of immediately exercisable
stock options.
ELECTION OF DIRECTORS
GENERAL INFORMATION
The Articles and the Amended and Restated Bylaws ("Bylaws") of the
Company provide that the Board of Directors shall be divided into three classes
as nearly equal in number as possible, and that the members of each class shall
be elected for terms of three years and until their successors are elected and
qualified, with one of the three classes of directors to be elected each year.
The Company's Articles of Incorporation stipulate a minimum of five and a
maximum of twenty-one directors. The Bylaws provide that the number of directors
may be increased or decreased by a vote of a majority of the Whole Board of
Directors and a majority of the Continuing Directors, as such terms are defined
in the Articles of Incorporation.
At the Annual Meeting, stockholders of the Company will be asked to elect
one director of the Company for a one year term and until his successor is
elected and qualified as well as two directors of the Company for a three year
term and until their successors are elected and qualified. The nominee for
election as a director for the one year term was recently appointed to the Board
and was selected by the Nominating Committee of the Board of Directors to
complete the vacancy left by Mr. Peter Spellar's departure from the Board in
1997 due to the demands of his occupation. The remaining two nominees for
election as directors were selected by the Nominating Committee of the Board of
Directors and each nominee currently serves as a director of the Company. There
are no arrangements or understandings between the persons nominated and any
other person pursuant to which such person was selected as a nominee for
election as a director at the Annual Meeting, and no director or nominee, other
than Mr. Brannon and Ms. McGinnis who are married to each other, is related to
any other director or executive officer of the Company by blood, marriage or
adoption.
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<PAGE> 8
If any person named as a nominee should be unable or unwilling to stand
for election at the time of the Annual Meeting, the proxies will nominate and
vote for any replacement nominee or nominees recommended by the Board of
Directors of the Company. At this time the Board of Directors knows of no reason
why any of the nominees may not be able to serve as a director if elected.
Article VII.D. of the Company's Articles governs nominations for election
to the Board of Directors and requires all nominations for election to the Board
of Directors, other than those made by or at the direction of the Board, to be
made pursuant to timely notice in writing to the Secretary of the Company, as
set forth in the Articles. To be timely, with respect to an election to be held
at an Annual Meeting of the Stockholders, a stockholder's notice must be
delivered to, or mailed and received at, the principal executive offices of the
Company, not later than sixty days prior to the anniversary date of the mailing
of proxy materials by the Company in connection with the immediately preceding
Annual Meeting of Stockholders of the Company. Each written notice of a
stockholder nomination must set forth certain information specified in the
Articles. The presiding officer of the Annual Meeting may refuse to acknowledge
the nomination of any person not made in accordance with the procedures set
forth in the Articles.
INFORMATION REGARDING NOMINEES AND OTHER CONTINUING DIRECTORS
There is shown below for each nominee for election as a director, and for
each continuing director the individual's name, age, his or her period of
service as a director of the Company and his or her principal occupation and
business experience for the past five years as of March 12, 1998.
Nominee for Director For a One Year Term Expiring at the 1999 Annual Meeting.
- --------------------------------------------------------------------------------
JAMES W. LUTZ, 40 Director Since 1998
Mr. Lutz joined the Company as Director and President of its newly
acquired subsidiary, Wild Goose Brewing, Inc. in January 1998. Prior
thereto from January 1992 until the consummation of the acquisition he
served as President and Chief Executive Officer of Wild Goose Brewery,
Inc., Cambridge, Maryland.
Nominees for Director For a Three Year Term Expiring at the 2001 Annual Meeting.
- --------------------------------------------------------------------------------
KEVIN E. BRANNON, 43 Director Since 1992
Chairman of the Board and Chief Executive Officer of the Company since
co-founding it in March 1992. Served as President of the Company from
March 1992 until July 1994. From November 1987 to November 1991, he was a
senior associate with the law firm of Preston, Gates & Ellis in Portland,
Oregon.
MARJORIE A. McGINNIS, 36 Director Since 1992
President of the Company since July 1994. Co-founded the Company in March
1992 and served as Executive Vice President until July 1994. From
November 1985 to August 1991, she was a partner and the administrator of
B&G Partnership and Butler Brothers Farm and Orchard in Martinsburg, West
Virginia.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF THE ABOVE
NOMINEES
AS DIRECTORS.
Continuing Directors Whose Terms Expire at the 1999 Annual Meeting.
- --------------------------------------------------------------------------------
NICHOLAS P. FORIS, MD, 72 Director Since 1994
Dr. Foris is a general thoracic cardiovascular surgeon practicing in
Frederick, Maryland.
5
<PAGE> 9
MARIBETH VISCO, 40 Director Since 1993
Ms. Visco has been a Principal in the commercial leasing firm of Kline,
Scott, Visco in Frederick, Maryland since July 1985. She serves as
Corporate Secretary of the Company.
Continuing Directors Whose Terms Expire at the 2000 Annual Meeting.
- --------------------------------------------------------------------------------
CARL R. HILDEBRAND, 46 Director Since 1995
Mr. Hildebrand is a Certified Public Accountant engaged in private
practice since August 1995 with Hildebrand, Limparis & Hevey in Rockville
and Frederick, Maryland, and from December 1990 to July 1995 as a partner
with McLean, Koehler, Sparks and Hammond, the Company's prior independent
auditors. He also serves as the Company's Treasurer.
JEROME M. POOL, 62 Director Since 1993
Mr. Pool is retired and since his retirement in December 1991, he has
been consulting with private businesses. Prior thereto, he was the
Chairman of the Board and President of Jantzen, Inc., a division of VF
Corporation, a manufacturer of sports and swim wear.
EXECUTIVE OFFICERS
Information regarding the current executive officers of the Company who
are not directors, including their names, ages, positions with the Company, and
a brief description of their business experience during the past five years, is
presented below. All executive officers of the Company are elected annually by
the Board of Directors and serve at the discretion of the Board of Directors
until their successors are elected and qualified. No such executive officer who
is not a director is related to any director or other executive officer of the
Company by blood, marriage or adoption, and there are no arrangements or
understandings between a director and any other person pursuant to which such
person was elected an executive officer.
Steven T. Nordahl, 28, Vice President - Brewing Operations and Brewmaster
since October 1992. From August 1991 to June 1992, Mr. Nordahl attended and
graduated from the University of California at Davis Master Brewers' program.
From May 1990 to August 1991, he acted as Program Director of Amerivision
Communications, Inc., Oklahoma City, Oklahoma. From January 1987 to May 1990, he
attended the University of Washington at Seattle.
Leslie P. Harper, 49, Chief Financial Officer since November 1997. Mr.
Harper served as a financial consultant from 1995 to 1997. Prior thereto, from
August 1987 to May 1996, Mr. Harper served as Chief Financial Officer/Controller
of Racal-Guardata, Inc., Herndon, Virginia. Mr. Harper holds a B.S. in
Accounting from Bentley College, Waltham, Massachusetts and an M.B.A. in Finance
from Babson College, Wellesley, Massachusetts.
Patrick L. Helsel, 34, Vice President - Sales, since November 1997. Prior
to his joining the Company in 1996, Mr. Helsel served as a sales presentative to
Mass Bay Brewing Co. of Boston, Massachusetts from 1994 to 1996. During 1992
through 1994, he served as regional sales manager of Warsteiner Imports Agency,
Denver Colorado. He received his B.A. in Communications from the University of
Denver, also located in Denver, Colorado.
Cameron E. Barry, 41, worked as an independent contractor for the Company
from August 1997 until she was named an officer in January 1998. From 1996 to
1997, she served as senior vice president and director of public relations for
Gray Kirk Van Sant of Baltimore, Maryland. From 1990 to 1996, she was the
President of Cameron E. Barry Marketing Communications, also in Baltimore.
6
<PAGE> 10
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Effective with the date of registration of the Company's Common Stock
(March 5, 1996), Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") required the Company's officers and directors, and
persons who owned more than 10% of the Company's Common Stock, to file reports
of ownership and changes in ownership with the SEC and the National Association
of Securities Dealers, Inc. In addition, officers, directors and greater than
10% Stockholders are required by regulation to furnish the Company with copies
of all Section 16(a) forms they file. The Company knows of no person who owns
10% or more of the Company's Common Stock.
Based solely on review of the copies of such forms furnished to the
Company, the Company believes that except for the failure of Messrs. Hildebrand,
Pool, and Foris and Ms. Visco to report the granting of options under the
Company's Non-employee Directors Stock Option Plan on Form 5, all Section 16(a)
filing requirements applicable to its officers and directors were complied with.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
Regular Meetings of the Board of Directors of the Company are held
quarterly and special meetings of the Board of Directors of the Company are held
from time-to-time as needed. There were five meetings of the Board of Directors
of the Company held during the twelve months ended December 31, 1997. No
director attended fewer than 75% of both the total number of meetings of the
Board of Directors held during the twelve months ended December 31, 1997 and the
total number of meetings held by all committees of the Board on which the
director served during such year.
The Board of Directors of the Company has established various standing
committees of the Board, including the Compensation and Audit Committees. The
entire Board of Directors of the Company acts as the Nominating Committee.
The Compensation Committee reviews and approves the design of employee
compensation programs and assesses the effectiveness of such programs in
attaining the goals set forth in the Company's short and long-term business
plans. The committee annually reviews and approves all salary arrangements and
other remuneration for the Company's Chief Executive Officer and other
executives, evaluates executive performance against set criteria, and considers
other matters related to the employment and compensation of executive officers
and senior managers of the Company. Messrs. Foris, Hildebrand, and Pool and Ms.
Visco serve as members of this Committee. During the twelve months ended
December 31, 1997, the Compensation Committee met two times.
The Audit Committee of the Company reviews the Company's audit reports,
consults with the independent auditors on internal accounting controls, consults
with and reviews the services provided by the Company's independent auditors,
and monitors the Company's adherence in accounting and financial reporting to
Generally Accepted Accounting Principles. Messrs. Hildebrand and Pool serve as
members of this Committee. During the twelve months ended December 31, 1997, the
Audit Committee met two times.
The Board of Directors of the Company has authority under the Company's
Bylaws to establish such other committees from time-to-time as may be deemed
necessary.
DIRECTORS' COMPENSATION
During 1997, members of the Company's Board of Directors received
compensation for their services as directors. Directors received a fee of $250
for each Board and Committee Meeting attended in
7
<PAGE> 11
person. The Company reimburses directors for their travel and lodging expenses
if they have to travel more than 300 miles to attend a Board or Committee
Meeting.
Non-employee directors participate in the Non-employee Directors Stock
Option Plan ("Directors Plan"). The Directors Plan provides for annual grants of
2,000 shares of non-qualified stock options for each non-employee director. Each
grant is automatic as of the date of the Annual Meeting so long as shares of
Common Stock remain available under the Directors Plan. As of this Annual
Meeting, 2,000 options will be granted automatically to all non-employee
directors. The exercise price of each option is the fair market value of the
Common Stock on the date of grant. Each option expires upon the earlier of ten
years after grant or one year after the cessation of service of the recipient
director. A total of 40,000 shares of Common Stock was reserved at the time of
the Company's initial public offering for future grants of options under the
Directors Plan; 7,000 shares will remain ungranted as of the day after the
Annual Meeting.
EXECUTIVE COMPENSATION
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is comprised of
three non-employee directors. The committee approves the design of employee
compensation programs and assesses the effectiveness of such programs in
attaining the goals set forth in the Company's short and long-term business
plans. The committee annually reviews and approves all salary arrangements and
other remuneration for the Company's Chief Executive Officer and other
executives, evaluates executive performance against set criteria, and considers
other matters related to the employment and compensation of executive officers
and senior managers of the Company.
EXECUTIVE OFFICER COMPENSATION
Compensation for the executive officers consists primarily of annual
compensation (comprised of base salary and an incentive compensation ("cash
bonus") award) and long-term compensation. Base salaries for each executive are
determined according to competitive pay practices, his or her level of
responsibility, prior experience, and breadth of knowledge, as well as internal
equity issues and the Company's financial condition and performance. During
1995, the Company entered into employment agreements with Mr. Brannon, Ms.
McGinnis and Mr. Nordahl, the material terms of which are described below. In
June, 1997, Messrs. Brannon and Nordahl and Ms. McGinnis agreed to a reduction
in their annual compensation for fiscal 1997 with such compensation to equal
$80,000, $55,000 and $80,000, respectively. In exchange for such reduction,
1,334 stock grants were received by each. No cash bonuses were paid in 1997.
LONG-TERM INCENTIVES
To provide long-term incentive to key employees the Company has adopted a
1995 Stock Option Plan (the "Stock Option Plan"). This Stock Option Plan is
designed to attract and retain qualified personnel, provide officers and key
employees with a proprietary interest in the Company as an incentive to
contribute to the success of the Company and to reward key employees for
outstanding performance and the attainment of targeted goals. The Stock Option
Plan provides value to its participants only if the stock price appreciates from
the date options are granted, thus focusing executives on the creation of
stockholder value. Key provisions of this Stock Option Plan are described below.
Other than the stock options granted to Mr. Harper upon his employment with the
Company, no stock options were granted to executive officers in 1997.
8
<PAGE> 12
CONCLUSION
The Compensation Committee believes that the Company's compensation
practices and structures serve to effectively align the interest of its
executives with the interests of stockholders, to motivate and reward key
executives to achieve a high level of personal and Company performance, and to
compete for and retain executives who are critical to the future success of the
Company.
Members of the Committee:
Nicholas P. Foris, MD
Carl R. Hildebrand
Jerome M. Pool
EMPLOYMENT AGREEMENTS
In December 1995, the Company entered into employment agreements with Mr.
Brannon, Ms. McGinnis, and Mr. Nordahl, (the "Executives"). Except for base
salary amounts (none of which exceed $100,000 for any Executive through 1997),
the terms of the employment agreements are substantially similar. Each of the
Executives were engaged for a three year term; which term will be automatically
extended for an additional year upon the third anniversary of the date of the
employment agreement. According to the Agreements, the aggregate base salaries
for the Executives in the years 1996, 1997, and 1998 were to be $180,000,
$245,000 and $320,000, respectively, with base salaries to be supplemented by a
cash bonus of up to 25% of each of the Executive's base salary assuming the
Executive and/or Company meets certain performance objectives agreed to by the
Board of Directors and the Executives for that year. The Executives are entitled
to participate in all employee benefit plans of the Company and will be
reimbursed for expenses relating to Company business. Ms. McGinnis drives a
Company automobile, the operating expenses of which are paid by the Company. The
employment agreements are terminable by the Company with or without "cause" and
upon the Executive's death, disability or retirement, or by the Executives for
"good reason," or any or no reason. "Good Reason" is defined by the employment
agreement to mean termination of the Executive's employment following a change
of control of the Company (defined by the employment agreements to be an event
that would be required to be reported under the SEC's Proxy Rules or the
acquisition by any person of 25% or more of the voting power of the Company or a
change in the individuals constituting the Board of Directors during any two
consecutive years) based on: (i) a reduction in the Executive's base salary;
(ii) the relocation of the Company's executive offices; (iii) any purported
termination of the Executive without proper notice; or (iv) the failure by any
successor to the Company to assume the employment agreements. If the Company
terminates the employment agreement for cause or the Executive's disability,
retirement or death, or if the Executive terminates his or her employment for
other than good reason, the Executive will have no right to further compensation
or benefits under the employment agreement. If, however, the employment
agreement is terminated for "good reason," the Executive will be entitled to
severance pay equal to the greater of two times his or her current base salary
plus two times the cash bonus paid in the prior year or the remainder of that
year's base salary plus the base salaries due to be paid for the remaining term
of the employment agreement plus the product of the prior year's cash bonus
times the number of years (and any fractional year) remaining until the end of
the term of the employment agreement had the agreement not been so terminated.
The Executive would also be entitled to maintain, at no cost to him or her, the
Company benefits he or she was then receiving (other than participation in stock
option or restricted stock plans) until he or she obtains full-time employment
with another employer or the expiration or the remaining term of the employment
agreement, whichever is earlier. The Company has agreed to pay any excise tax,
if necessary, pursuant to Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code"). If the Executive's employment is terminated by the Company
for other than cause, disability, retirement or death or if the employment is
terminated by the Executive because the Company has
9
<PAGE> 13
breached the employment agreement, the Executive will be entitled to receive
severance pay equal to the full base salary for the year in which the Executive
was terminated plus an amount equal to the cash bonus paid in the prior year.
The Executives have agreed not to disclose any proprietary information of
the Company and not to compete with the Company for twelve months after the
termination or expiration of their respective employment agreement.
SUMMARY COMPENSATION TABLE
The following table sets forth a summary of certain information
concerning the compensation awarded, or paid by the Company for services
rendered in all capacities during the last two fiscal years, to the Chief
Executive Officer and the four other executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Long Term
Annual Compensation Compensation
--------------------------------------------------------
Awards Payouts
----------------------
Other Securities All
Name and Annual Underlying LTIP Other
Principal Position Year Salary Bonus Compensation Options Payouts Compensation
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kevin E. Brannon 1997 $80,000 $ -- $10,000(1) -- $ -- $ --
Chief Executive Officer 1996 $61,000 $ -- $ -- -- $ -- $ --
Marjorie A. McGinnis 1997 $80,000 $ -- $10,000(1) -- $ -- $ --
President 1996 $61,000 $ -- $ -- -- $ -- $ --
Steven T. Nordahl 1997 $55,000 $ -- $10,000(1) -- $ -- $ --
VP-Brewing Operations 1996 $49,000 $ -- $ -- -- $ -- $ --
Leslie P. Harper(2) 1997 $6,462 $ -- $ -- -- $ -- $ --
Chief Financial Officer
Patrick L. Helsel 1997 $46,963 $ -- $ -- -- $ -- $ --
VP-Sales
</TABLE>
- -------------------------------
(1) In lieu of a $10,000 reduction in salary, a stock grant of 1,334 shares was
awarded, the fair market value of which is reflected.
(2) Employment was commenced in November 1997.
STOCK OPTION PLAN
Effective November 20, 1995, the Board of Directors of the Company
adopted the Stock Option Plan which was approved by the stockholders of the
Company at a special Meeting of Stockholders held on December 9, 1995. Options
covering 30,468 shares of Common Stock have been awarded to key employees of the
Company and to 24 other Company employees under the Stock Option Plan.
The Stock Option Plan provides for the grant of incentive stock options
("Options") intended to comply with the requirements of Section 422 of the Code.
The Company has reserved a number of shares of Common Stock for issuance
pursuant to the exercise of Options granted under this plan, subject to
adjustment under the Stock Option Plan, equal to 156,390 shares. In the event of
a stock split, reverse stock split or stock dividend, the number of shares of
Common Stock under the Stock Option Plan, the number of shares to which any
Option relates and the exercise price per share under any Option will be
adjusted to reflect such increase or decrease in the total number of shares of
the Common Stock outstanding.
10
<PAGE> 14
The Stock Option Plan is administered and interpreted by the Compensation
Committee of the Board of Directors which is "disinterested" pursuant to
applicable regulations under the federal securities laws. Unless sooner
terminated, the Stock Option Plan will be in effect until November 20, 2005, ten
years from the date of the adoption of the Stock Option Plan by the Board of
Directors.
Under the Stock Option Plan, the Compensation Committee will determine,
among other things, which officers and key employees will be granted Options,
the performance goals which must be met to receive Options, the number of shares
subject to each Option, the exercise price of the Option, whether such Options
may be exercised by delivering other shares of Common Stock or other
consideration and when such Options become exercisable. The per share exercise
price of all Options is required by the Code to be at least equal to the fair
market value of a share of Common Stock on the date the Option is granted. The
Code also requires that the aggregate fair market value of the Common Stock with
respect to which the Options are exercisable for the first time by the Optionee
during any calendar year cannot exceed $100,000. Moreover, any person who owns
10% or more of the voting power of the Common Stock may not receive Options
whose exercise price is less than 110% of the fair market value of a share of
Common Stock of the Company on the date of grant.
Options will become vested and exercisable in the manner specified by the
Committee and all Options will be become fully vested and exercisable in the
event of a change in control of the Company, as defined in the Stock Option
Plan. Each Option or portion thereof shall be exercisable at any time on or
after it vests and is exercisable until ten years after its date of grant or
three months after the date on which the optionee's employment terminates,
unless extended by the Committee to a period not to exceed five years from such
termination. However, failure to exercise Options within three months after the
date on which the optionee's employment terminates may result in adverse tax
consequences to the optionee. Options are non-transferable except by will or the
laws of descent and distribution.
Under current provisions of the Code, the federal income tax treatment of
stock options is as follows: An optionee who meets certain holding period
requirements will not recognize income at the time the option is granted or at
the time the option is exercised, and a federal income tax deduction generally
will not be available to the Company at any time as a result of such grant or
exercise.
SUMMARY OF STOCK OPTIONS GRANTED
The following table sets forth certain information concerning individual
grants of stock options made during the year ended December 31, 1997.
STOCK OPTIONS GRANTED IN YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Individual Grants
- ---------------------------------------------------------------------------------------------------------------
% of Total
Options Options Granted Exercise Expiration
Name Granted to Employees Price per Share Date
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nicholas P. Foris, MD, 2000 15.25% $3.69 6/05/07
Director
Carl R. Hildebrand, 2000 15.25% $3.69 6/05/07
Director
Jerome M. Pool, 2000 15.25% $3.69 6/05/07
Director
Maribeth Visco, 2000 15.25% $3.69 6/05/07
Director
</TABLE>
11
<PAGE> 15
SUMMARY OF STOCK OPTIONS EXERCISED
The following table sets forth certain information regarding stock
options held by the executive officers named in the Summary Compensation Table
as of December 31, 1997.
AGGREGATE OPTIONS EXERCISED IN THE YEAR ENDED DECEMBER 31, 1997
AND YEAR END OPTION VALUES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Number of Value of
Shares Securities Underlying Unexercised
Acquired Unexercised Options Options at
on Value at Year End Year End(1)
Exercise Realized --------------------------------------------------------
Name (No.) ($) Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Kevin E. Brannon -- -- -- -- $ -- $ --
Marjorie A. McGinnis -- -- -- -- $ -- $ --
Steven T. Nordahl -- -- 16,779 -- $28,440.41 $ --
</TABLE>
- -------------------------------
(1) Based on the closing market price for the Company's Common Stock as of
December 31, 1997.
EMPLOYEE RETIREMENT PLAN
The Company has a 401(k) plan for all employees ("401(k) Plan"), age 18
or older, with one year of service. The 401(k) plan is a contributory defined
contribution plan which is intended to qualify under Section 401(k) of the Code.
Participants may contribute to the 401(k) Plan by salary reductions up to 15% of
Annual compensation for the year. Such contribution defers the employee's
earnings up to a maximum of $9,500 in each plan year, indexed annually. The
Company may in its discretion, determine each year to make a matching
contribution out of current or accumulated net profit equal to a percentage of
the amount deferred by the employee. While an employee's contributions to the
401(k) Plan are immediately vested, the matching contributions made by the
Company become vested upon the completion of seven years of credited service.
All funds contributed to the 401(k) Plan are held in a trust fund, which are
invested at the direction of the employee in up to any one or more of seven
separate funds. The 401(k) Plan became functional in the second quarter of 1996.
Company contributions to the 401(k) Plan in 1997 totaled $12,459.70.
CERTAIN TRANSACTIONS
RELATED PARTY TRANSACTIONS
The Company has borrowed money from its directors and stockholders from
time to time to provide cash for operations and for other purposes. At December
31, 1997, the Company had: (i) a five-year loan due July 1999 in the original
principal amount of $50,000, with interest payable at the rate of 10%, from Dr.
Foris secured by Company vehicles; and (ii) three loans from stockholders due
March 1999, in the aggregate original principal amount of $62,000 with interest
payable at the rate of 10%. All of these loans are current and are evidenced by
unsecured promissory notes.
On December 19, 1995, the Company assigned all of its rights and
obligations under a real estate purchase agreement to acquire the land for the
Company's new brewery to Blue II LLC ("Blue II") and on July 17, 1996 the
Company entered into a lease of the brewery with Blue II. The lease is a triple
net lease with a monthly rental payment of $3,000 plus an amount equal to Blue
II's interest and principal payments due under its economic development revenue
bond obligation and expires on December 31,
12
<PAGE> 16
2017. Blue II is a recently formed Maryland limited liability company whose
managing member is Mr. Edward D. Scott, a partner of Ms. Visco, a director of
the Company, in the commercial real estate firm of Kline, Scott, Visco. Mr.
Scott has a 25% interest in Blue II. The other members of Blue II who are
affiliated with the Company are Dr. Foris, a director of the Company, Dr. Radha
Nathan and Mr. Schuerholz, both of whom are stockholders of the Company and a
business associate of Mr. Scott, each of whom hold a 25% interest. The lease
arrangements were negotiated by the Company and Blue II at arm's length.
Management of the Company believes that the terms of the lease are at market
rates and at least as favorable to the Company as could have been obtained from
a non-affiliated lessor.
No loans will be made by the Company to officers, directors or
stockholders who own more than 5% of the outstanding shares of Common Stock or
the affiliates of any of them, except for a bona fide business purpose.
AMENDMENT OF THE ARTICLES
GENERAL
The Board of Directors has unanimously adopted a resolution to submit to
the stockholders a proposal to amend the second sentence of Article V of the
Company's Articles to increase the number of shares of capital stock which the
Company is authorized to issue from 10,000,000 to 20,000,000. The Board has
determined that such an amendment is necessary (the "Amendment Proposal").
The full text of the second sentence of Article V of the Company's
Articles, if amended as proposed, would read as follows:
Pursuant to these Articles of Amendment, the total number of
shares of capital stock which the Corporation has authority to
issue is 20,000,000, of which 19,000,000 shall be common stock,
$0.00004 par value per share (hereinafter the "Common Stock") and
of which 1,000,000 shall be preferred stock, $0.01 par value per
share (hereinafter the "Preferred Stock").
The terms of the additional shares of Common Stock will be identical to
those of the currently outstanding Common Stock. However, because shareholders
have no preemptive rights to purchase any additional shares of Common Stock,
which may be issued, the issuance of additional shares will likely reduce the
percentage interest of current shareholders in the total outstanding shares. The
Amendment Proposal will not increase the number of shares of Preferred Stock
authorized. The relative rights and limitations of the Common Stock and
Preferred Stock would remain unchanged under the Amendment Proposal.
PURPOSES AND EFFECTS OF INCREASING THE NUMBER OF AUTHORIZED SHARES OF COMMON
STOCK
If approved by the Company's Stockholders, the Amendment Proposal would
increase the number of shares of Common Stock which the Company is authorized to
issue from 10,000,000 to 19,000,000. The additional 1000,000 shares, if and when
issued, would have the same rights and privileges as the outstanding shares of
Common Stock. See "Description of Securities -- Common Stock."
The Board of Directors recommends the proposed increase in the authorized
number of shares of Common Stock to enable the Company to satisfy its
obligations under the terms of the Series A, Series C, Series D and Series E
Preferred Stock, warrants and options associated with the issuance of the Series
A and Series B Preferred Stock, and outstanding stock option grants as well as
the Agreement and Plan of Merger entered into with Wild Goose Brewery, Inc. See
"Consequences if Stockholder Approval Is not Obtained." In addition, the
approval of the Amendment Proposal would help ensure an adequate supply of
authorized and unissued shares for (i) the financing of the acquisition of other
businesses, (ii) the
13
<PAGE> 17
satisfaction of the Company's contingent obligations to issue Common Stock,
(iii) the raising of additional capital for the operations of the Company, and
(iv) additional issuances under the Company's Stock Option Plan and other
employee benefit plans. Except as described herein, there are currently no plans
or arrangements relating to the issuance of any of the additional shares of
Common Stock proposed to be authorized and such shares would be available for
issuance without further action by stockholders, unless required by the
Company's Articles, its Bylaws or applicable law.
The increase in the number of authorized shares of Common Stock has not
been proposed for any anti-takeover purpose and the Board of Directors and
members of management of the Company have no knowledge of any current effort to
obtain control of the Company or to accumulate large amounts of its Common
Stock. However, the availability of additional shares of Common Stock could make
any attempt to gain control of the Company or of the Board more difficult.
Shares of authorized but unissued Common Stock could be issued in an effort to
dilute the stock ownership and voting power of any person or entity desiring to
acquire control of the Company, which might have the effect of discouraging or
making less likely such a change of control. Such shares could also be issued to
other persons or entities who support the Board in opposing a takeover attempt
that the Board considers not to be in the best interests of the Company and its
stockholders.
If all such options and warrants were exercised and all shares of the
Series A, Series C, Series D and Series E Preferred Stock outstanding on
December 31, 1997 were converted, approximately 13,239,665 shares of Common
Stock would be outstanding. These share amounts are based upon the following
formulas for each series of Preferred Stock.
Each share of Series A Preferred Stock is convertible, at the
option of the holder thereof, at any time after the 365th day following
the date of issuance of such shares (March 31, 1997) or immediately
preceding any public sale of the Company's Common Stock pursuant to the
registration of such Common Stock with the SEC, whichever is first to
occur, but prior to the mailing of any notice of redemption by the
Company (the "Series A Conversion Date"). The conversion formula is
determined by dividing $500 by the product of .83 times the average
closing price of the Common Stock as reported by the Wall Street Journal
over the 30 days immediately preceding the Closing Date (the "ACP"), in
the event the Series A Conversion Date is within two years of the date of
issuance of the Series A Preferred Stock. Thereafter, the number of
shares of Common Stock into which each share of the Series A Preferred
Stock may be converted will be equal to $500.00 divided by 100% of the
ACP.
Each share of the Series C Preferred Stock is convertible, at the
option of its holder, at any time, into a number of shares of Common
Stock equal to $1,000 divided by the lower of (i) Seventy Percent (70%)
of the average Market Price of the Common Stock for the five trading days
immediately prior to the conversion date or (ii) $1.62, increased
proportionally for any reverse stock split and decreased proportionally
for any forward stock split or stock divided.
Each share of the Series D Preferred Stock (the "Preferred
Shares") shall be convertible, at the option of its holder, at any time,
into a number of shares of Common Stock equal to $1,000 divided by the
lower of (i) Seventy Percent (70%) of the average Market Price of the
Common Stock for the five trading days immediately prior to the
conversion date or (ii) 75% on day of issuance increased proportionally
for any reverse stock split and decreased proportionally for any forward
stock split or stock divided.
Each share of Series E Preferred Stock is convertible, at the
option of its holder, at any time after 90 days or April 1, 1998 from its
issuance into a number of shares of Common Stock equal to $1,000 divided
by Seventy Five Percent (75%) of the average Market Price of the Common
Stock for the five trading days immediately prior to the conversion date.
14
<PAGE> 18
For purposes of the Series C, Series D and Series E Preferred
Stock, market price for any date shall be the closing bid price of the
Common Stock, on such date, as reported by the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"), or the closing
bid price in the over-the-counter market if other than NASDAQ.
The following table summarizes this analysis:
<TABLE>
<S> <C>
Shares Outstanding -- March 12, 1998........................ 6,706,602
Options Outstanding -- December 31, 1996.................... 59,987
Options Granted from January 1, 1997........................ 19,581
Warrants Outstanding -- December 31 1996.................... 38,558
Warrants issued in 1997..................................... 769,306
Series A Convertible into Common Stock...................... 245,461
Series C Convertible into Common Stock...................... 1,082,235(1)
Series C Convertible into Common Stock...................... 289,524
Series D Convertible into Common Stock...................... 760,336(1)
Series D Convertible into Common Stock...................... 7,619
Series E Convertible into Common Stock...................... 2,133,334
Common Stock reserved for issuance to owners of Wild
Goose..................................................... 1,127,122
----------
Total issued or necessary for issuance...................... 13,239,665
Total shares of Common Stock Available (Shortfall).......... (4,239,665)
</TABLE>
- ---------------
(1) These shares were sent in for conversion, but were not processed as of March
12, 1998. Series C, D, and E are calculated based on the December 31, 1997
market price of $1.875 with applicable conversion discounts.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company's Articles authorizes the issuance of 9,000,000 shares of
Common Stock, $.00004 par value per share, of which 6,706,602 shares were
outstanding as of March 12, 1998. Holders of shares of Common Stock are entitled
to one vote for each share on all matters to be voted on by the shareholders.
Holders of Common Stock have no cumulative voting rights. Holders of shares of
Common Stock are entitled to share ratably in dividends, if any, as may be
declared, from time to time by the Board of Directors in its discretion, from
funds legally available therefor. In the event of a liquidation, dissolution or
winding up of the Company, the holders of share of Common Stock are entitled to
share pro rata all assets remaining after payment in full of all liabilities.
Holders of Common Stock have no preemptive rights to purchase the Company's
Common Stock. There are no conversion rights or redemption or sinking fund
provisions with respect to the Common Stock. All of the outstanding shares of
Common Stock are validly issued, fully paid and non-assessable.
The transfer agent for the Common Stock is Registrar & Transfer Company,
10 Commerce Drive, Cranford, New Jersey 07016.
PREFERRED STOCK
The Company's Articles also authorize the issuance of 1,000,000 shares of
preferred stock, $.01 par value, of which 1,828 shares of Series A Preferred, 0
shares of Series B Preferred, 1,005 shares of Series C Preferred, 455 shares of
Series D and 3,000 shares of Series E Preferred are outstanding. The Preferred
Stock is convertible into shares of common stock (see "Selling Stockholders").
The holders of Series A Preferred are senior to the Common Stock with respect to
dividend rights and are entitled to a liquidation preference of $500 per share.
The annual dividend rate for the Series A Preferred is $40.00 per share per
annum, and the annual dividend rate for the Series C, Series D and Series E
Preferred Stock before dividends may be paid or set aside on the Company's
Common Stock. All dividend payments are
15
<PAGE> 19
subordinated to the Company's debt obligations, and are 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. The Company has the option to pay dividends on the Series C, Series D and
Series E Preferred by the issuance of Common Stock valued at the then effective
conversion rate of the Series C, Series D and Series E Preferred Stock. The
holders of Series B, Series C, Series D and Series E Preferred have a
liquidation preference of $1,000 per share over the Common Stock and the Series
A Preferred. Dividends on the Series B Preferred 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 may issue additional preferred
stock in the future. The Company's Board of Directors has authority, without
action by the shareholders, to issue all or any portion of the authorized but
unissued preferred stock in one or more series and to determine the voting
rights, preferences as to dividends and liquidation, conversion rights, and
other rights of such series.
The Company considers it desirable to have preferred stock available to
provide increased flexibility in structuring possible future acquisitions and
financings and in meeting corporate needs which may arise. If opportunities
arise that would make desirable the issuance of preferred stock through either
public offering or public placements, the provisions for preferred stock in the
Company's Articles of Incorporation would avoid the possible delay and expense
of a shareholder's meeting, except as may be required by law or regulatory
authorities. Issuance of the preferred stock could result, however, in a series
of securities outstanding that will have certain preferences with respect to
dividends and liquidation over the Common Stock which would result in dilution
of the income per share and net book value of the Common Stock. Issuance of
additional Common Stock pursuant to any conversion right which may be attached
to the terms of any series of preferred stock may also result in dilution of the
net income per share and the net book value of the Common Stock.
In evaluating the Amendment Proposal, stockholders should consider the
effect of certain other provisions of the Company's Articles and Bylaws that may
have anti-takeover consequences. These provisions include (i) the authorization
of Preferred Stock, the terms of which may be fixed by the Board of Directors
without further action of the Stockholders, (ii) a provision that standing
Directors may be removed only by a two-thirds vote of stockholders entitled to
vote; (iii) a limitation of the ability of the Company's stockholders to call
special stockholder meetings; and (iv) limitations on certain business
combinations and acquisitions involving the Company.
VOTE REQUIRED; EFFECTIVE DATE OF PROPOSED AMENDMENT
If the Amendment Proposal is approved by an affirmative vote of more than
two-thirds of all votes entitled to be cast at this Annual Meeting, it will
become effective upon the filing by the Company of Articles of Amendment to the
Company's Articles with the State Department of Assessments and Taxation of
Maryland, which is expected to be done as soon as practicable after stockholder
approval is obtained.
CONSEQUENCES IF STOCKHOLDER APPROVAL IS NOT OBTAINED
In the event the Amendment Proposal is not approved, the inability to
convert the outstanding shares of Series A, C, D and E Preferred Stock to Common
Stock or to exercise any of the outstanding warrants to purchase Common Stock or
Common Stock Options may be viewed as a breach of contract between the holders
thereof and the Company, the likely outcome of which would be litigation.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE
AMENDMENT PROPOSAL.
16
<PAGE> 20
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of the Company has appointed Coopers & Lybrand
LLP, as independent auditors for the Company for the year ending December 31,
1998, and further directed that the selection of auditors be submitted for
ratification by the Stockholders at the Annual Meeting. The Company has been
advised by Coopers & Lybrand LLP that neither the firm nor any of its associates
has any relationship with the Company other than the usual relationship that
exists between independent public accountants and clients. Coopers & Lybrand LLP
will have representatives at the Annual Meeting who will have an opportunity to
make a statement, if they so desire, and will be available to respond to
appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE RATIFICATION OF THE
APPOINTMENT OF COOPERS & LYBRAND LLP AS INDEPENDENT AUDITORS FOR THE YEAR ENDING
DECEMBER 31, 1998.
APPROVAL OF ADJOURNMENT
If a quorum is not obtained or if fewer shares are likely to be voted to
approve the Amendment Proposal than the number required for approval, the Annual
Meeting may be adjourned for the purpose of obtaining additional proxies or
votes or for any other purposes, and, at any subsequent reconvening of the
Annual Meeting, all proxies will be voted in the same manner as such proxies
would have been voted at the original convening of the meeting (except for any
proxies which have theretofore effectively been revoked or withdrawn),
notwithstanding that they may have been effectively voted on the same or any
other matter prior to the adjournment.
If it is necessary to adjourn the Annual Meeting, no notice of the time
and place of the adjourned meeting is required to be given to the Company's
stockholders other than the announcement of such time and place at the Annual
Meeting. The affirmative vote of the holders of at least a majority of all votes
cast at the Annual Meeting is required to approve such adjournment. An
adjournment of the Annual Meeting may be necessary because the limited time
between the mailing of the Proxy Statement and the Annual Meeting may result in
the lack of quorum at the Annual Meeting.
If the Annual Meeting is postponed or adjourned, at any subsequent
reconvening of the Annual Meeting, all proxies will be voted in the same manner
as such proxies would have been voted at the original convening of the Annual
Meeting (except for any proxies that have theretofore effectively been revoked
or withdrawn.)
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE ADJOURNMENT
PROPOSAL.
STOCKHOLDER PROPOSALS
Proposals of stockholders intended to be included in the proxy materials
and presented at the Annual Meeting of Stockholders to be held in 1999 must be
received by the Secretary of the Company, at 4607 Wedgewood Blvd., Frederick,
Maryland 21703, no later than November 26, 1998. If such proposal is in
compliance with all of the requirements of Rule 14a-8 promulgated under the
Exchange Act, it will be included in the proxy statement and set forth on the
form of proxy .
Proposals not submitted for inclusion in the proxy statement, and
therefore not included in such, may be properly brought before an Annual Meeting
by a stockholder who has submitted such proposals on a timely basis and in a
form and manner consistent with that specified under the Company's Articles of
Incorporation. For such notice to be timely for the 1999 Annual Meeting, it must
be received by the Secretary of the Company, at 4607 Wedgewood Blvd., Frederick,
Maryland 21703, no later than January 25, 1999. For the 1998 Annual Meeting, no
Stockholder proposals were received.
17
<PAGE> 21
OTHER MATTERS
Management is not aware of any business to come before the 1998 Annual
Meeting other than those matters described in this Proxy Statement. However, if
any other matters should properly come before the 1998 Annual Meeting, it is
intended that the proxies solicited hereby will be voted with respect to those
other matters in accordance with the judgment of the persons voting the proxies.
ANNUAL REPORTS AND FINANCIAL STATEMENTS
Stockholders of the Company as of the Record Date for the 1998 Annual
Meeting are being forwarded a copy of the Company's Annual Report to
Stockholders for the year ended December 31, 1997 ("Annual Report"). Included in
the Annual Report are the statements of financial position of the Company as of
December 31, 1997 and 1996 and the statements of operations and cash flows for
each of the years in the two-year period ended December 31, 1997, prepared in
accordance with Generally Accepted Accounting Principles, and the related
reports of the Company's independent public accountants, which is incorporated
herein by reference. In addition, Audited Financial Statements of Wild Goose
Brewery, Inc. and the Pro Forma Consolidated Balance Sheet and Pro Forma
Consolidated Statement of Operations of Frederick Brewing Co. and Wild Goose
Brewery, Inc. are attached to this Proxy Statement as Appendix A. The Financial
Statements of the Company included in the Annual Report as well as the Financial
Statements and Pro Forma Statements contained in Appendix A are part of the
soliciting materials.
UPON RECEIPT OF A WRITTEN REQUEST, THE COMPANY WILL FURNISH TO ANY
STOCKHOLDER, WITHOUT CHARGE, A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM
10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997, AND ANY EXHIBITS THERETO REQUIRED
TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE EXCHANGE ACT.
SUCH WRITTEN REQUEST SHOULD BE DIRECTED TO LESLIE P. HARPER, CHIEF FINANCIAL
OFFICER, FREDERICK BREWING CO., 4607 WEDGEWOOD BOULEVARD, FREDERICK, MARYLAND
21703. THE FORM 10-KSB IS NOT A PART OF THE COMPANY'S PROXY SOLICITATION
MATERIALS.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ KEVIN E. BRANNON
KEVIN E. BRANNON
Chairman of the Board
April 13, 1998
Frederick, Maryland
18
<PAGE> 22
APPENDIX A
AUDITED FINANCIAL STATEMENTS
OF
WILD GOOSE BREWERY, INC.
AND
UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION
OF
FREDERICK BREWING CO.
AND
WILD GOOSE BREWERY, INC.
<PAGE> 23
IRELAND & EVERNGAM, LLC LETTERHEAD
CERTIFIED PUBLIC ACCOUNTANTS
MEMBERS: MEMBERS OF:
John D. Ireland, CPA American Institute of
K. Thomas Everngam, Jr., CPA Certified Public Accountants
Maryland Association of
Certified Public Accountants
Board of Directors
Wild Goose Brewery, Inc.
Cambridge, Maryland
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying balance sheet of Wild Goose Brewery, Inc. as
of December 31, 1997 and the related statement of operations, stockholders'
equity, and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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 Wild Goose Brewery, Inc. as of
December 31, 1997 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ IRELAND & EVERNGAM, LLC
Ireland & Everngam, LLC, CPA's
February 19, 1998
<PAGE> 24
WILD GOOSE BREWERY, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
- --------------
Cash and Cash Equivalents $ 29,652
Accounts Receivable, Net 245,618
Other Receivables 478
Inventory 328,099
Prepaid Expenses 9,199
-----------
TOTAL CURRENT ASSETS 613,046
-----------
PROPERTY AND EQUIPMENT, AT LOWER OF
- -----------------------------------
CARRYING AMOUNT OR NET REALIZABLE VALUE
---------------------------------------
Office Equipment 13,714
Leasehold Improvements 51,447
Machinery and Equipment 1,133,148
-----------
TOTAL PROPERTY AND EQUIPMENT, AT COST 1,198,309
LESS: ACCUMULATED DEPRECIATION 561,951
LESS: ADJUSTMENT TO NET REALIZABLE VALUE
OF ASSETS TO BE SOLD 382,985
-----------
TOTAL PROPERTY AND EQUIPMENT, AT LOWER OF
CARRYING AMOUNT OR NET REALIZABLE VALUE
LESS ACCUMULATED DEPRECIATION 253,373
-----------
OTHER ASSETS
- ------------
Loan Origination Costs 4,867
Organization Costs 5,100
-----------
TOTAL OTHER ASSETS 9,967
-----------
TOTAL ASSETS $ 876,386
===========
</TABLE>
2
<PAGE> 25
WILD GOOSE BREWERY, INC.
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C>
CURRENT LIABILITIES
- -------------------
Note Payable $ 93,610
Current Maturities of Long Term Debt 448,500
Accounts Payable and Accrued Expenses 595,260
Accrued Payroll and Payroll Taxes Withheld 10,654
Keg and Slip Board Deposits 28,066
-----------
TOTAL CURRENT LIABILITIES 1,176,090
-----------
STOCKHOLDERS' DEFICIT
- --------------------
Preferred Stock, $0.01 Par Value; 50,000
Shares Authorized, Issued and Outstanding 500
Common Stock, $0.01 Par Value; 50,000
Shares Authorized, 10,000 Shares
Issued and Outstanding 100
Additional Paid in Capital 221,952
Retained Earnings (Deficit) (522,256)
-----------
TOTAL STOCKHOLDERS' DEFICIT (299,704)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 876,386
===========
</TABLE>
See Independent Auditors' Report
See Notes to Financial Statements
3
<PAGE> 26
WILD GOOSE BREWERY, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, l997
<TABLE>
<S> <C>
GROSS SALES $ 2,515,535
- ------------
EXCISE TAXES, RETURNS, ALLOWANCES
AND DISCOUNTS 268,030
-----------
NET SALES 2,247,505
- ---------
COST OF GOODS SOLD 1,636,773
- ------------------ -----------
GROSS PROFIT 610,732
SELLING EXPENSES 268,263
- ----------------
LOSS ON ADJUSTMENT TO NET REALIZABLE
VALUE OF ASSETS TO BE SOLD 382,195
GENERAL AND ADMINISTRATIVE EXPENSES 332,431
- ----------------------------------- -----------
OPERATING LOSS (372,947)
LOSS ON DISPOSAL ON EQUIPMENT
- -----------------------------
LOSS ON SALE OF EQUIPMENT (6,248)
-----------
LOSS BEFORE FINANCIAL EXPENSE
AND TAXES ON INCOME (379,195)
FINANCIAL EXPENSE, NET 66,947
- ---------------------- -----------
LOSS BEFORE TAXES ON INCOME (446,142)
INCOME TAX EXPENSE (BENEFIT) -
- ---------------------------- -----------
NET LOSS $ (446,142)
===========
</TABLE>
See Independent Auditors' Report
See Notes to Financial Statements
4
<PAGE> 27
WILD GOOSE BREWERY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
------------------ --------------- ADDITIONAL RETAINED
Shares Amount Shares Amount PAID IN CAPITAL EARNINGS (DEFICIT)
------ ------ ------ ------ --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 9,776 $ 98 48,395 $ 484 $192,340 $ (76,114)
STOCK SALE 224 2 1,605 16 29,612 -
NET LOSS - - - - - (446,142)
------ ----- ------ ----- ----- ---------
BALANCE, DECEMBER 31, 1997 10,000 $ 100 50,000 $500 $221,952 $ (522,256)
======= ====== ======= ===== ======== ===========
</TABLE>
See Independent Auditors' Report
See Notes to Financial Statements
5
<PAGE> 28
WILD GOOSE BREWERY, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING activities
- ------------------------------------
Net Loss $ (446,142)
Adjustments to Reconcile Net Loss to Net
Cash Provided By Operating Activities:
Depreciation and Amortization 126,531
Loss on Sale of Assets 6,248
Loss on Adjustment to Net Realizable Value
of Assets to be Sold 382,985
Decrease (Increase) in Assets:
Trade Receivables (88,781)
Inventories (49,269)
Other Receivables 825
Prepaid Expenses (2,172)
Income Tax Refund Receivable 40,703
Increase (Decrease) in Liabilities:
Accounts Payable and Accrued Expenses 146,477
Accrued Payroll and Payroll 6
Taxes Withheld (4,170)
Keg Deposits (4,302)
----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 108,933
----------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Purchase of Fixed Assets (48,850)
Proceeds from Sale of Assets 1,907
----------
NET CASH PROVIDED FROM INVESTING ACTIVITIES (46,943)
----------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Increase in Notes Payable 11,000
Payment of Long-Term Debt (117,000)
Sale of Stock 29,630
----------
NET CASH PROVIDED FROM FINANCING
ACTIVITIES (76,370)
----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (14,380)
CASH AND CASH EQUIVALENTS, BEGINNING 44,032
- ------------------------------------ ----------
CASH AND CASH EQUIVALENTS, ENDING $ 29,652
- --------------------------------- ==========
SUPPLEMENTAL CASH FLOW INFORMATION
- ----------------------------------
Cash Paid for Interest $ 67,170
==========
Income Taxes Paid (Refunds Received) $ (40,703)
==========
</TABLE>
See Independent Auditors' Report
See Notes to Financial Statements
6
<PAGE> 29
WILD GOOSE BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE A. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company started business in 1989, brewing beer for wholesale
distribution. All manufacturing operations took place at the
Company's Cambridge, Maryland location. The Company sold its
products to customers throughout the Eastern and Midwestern United
States.
The Company entered into an agreement and plan of reorganization
with Frederick Brewing Co. on December 15, 1997. The plan was
approved by the Company's stockholders on January 7, 1998 and
settlement occurred on January 29, 1998.
As part of the reorganization, all of the preferred and common stock
shares of Wild Goose Brewery, Inc. were exchanged for shares of
Frederick Brewing Co. The Frederick Brewing Co. paid the notes due
to Signet Bank on January 29,1998. Significantly all of the
operations at the Cambridge location ceased on that date as well.
BASIS OF PRESENTATION
The financial statements of Wild Goose Brewery, Inc. have been
prepared on the accrual basis of accounting.
CASH AND CASH EQUIVALENTS
The Company considers all investments with a maturity of three
months or less when purchased to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company uses the allowance method in accounting for bad debts.
The amount of the allowance is determined by an analysis of the
accounts at year-end. At December 31, 1997, the Company provided
for an allowance in the amount of $12,500.
INVENTORY
Inventory is accounted for at lower cost or market on a first-in,
first-out method.
PROPERTY AND EQUIPMENT
The Company's policy was to charge all additions to the asset
account but to charge the cost of repairs, maintenance and minor
betterments to operations in the year in which the cost was
incurred. Asset and accumulated depreciation accounts were relieved
when properties were retired or otherwise disposed.
Substantially all of the property and equipment at the Company's
Cambridge location will be sold at auction or abandoned by May 15,
1998. Based on an appraisal and the costs of selling those assets,
property and equipment has been adjusted to its net realizable value
of $253,373.
See Independent Auditors' Report
7
<PAGE> 30
WILD GOOSE BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997
NOTE A.BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - CONTINUED
USE OF ESTIMATES
Due to the Company's inability to confirm the number of kegs and
slipboards possessed by customers, the liability for deposits has been
estimated. 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.
NOTE B. INVENTORY
The following is a summary of inventory at December 31, 1997:
Raw Materials $218,003
Beer 81,970
Other 28,126
------
TOTAL $ 328,099
=========
NOTE C. DEPRECIATION
The following are the estimated useful lives of each class of
depreciable property.
Furniture and Fixtures 5 to 10 Years
Equipment 5 to 10 Years
Leasehold Improvements 40 Years
Depreciation is calculated using the straight-line method over the
estimated useful lives of the related assets.
Depreciation expense of all property for the year ended December 31,
1997 was $121,224.
NOTE D. INTANGIBLE ASSETS
Costs incurred in organizing the Company were capitalized and are
being amortized over a period of five (5) years. Amortization expense
charged to operations was $3,600 for the year ended December 31, 1997.
Loan origination costs are being amortized over a period of five (5)
years. Amortization of costs were charged to interest expense in the
amount of $1,708 for the year ended December 31, 1997.
See Independent Auditors' Report
8
<PAGE> 31
WILD GOOSE BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1997
NOTE E. NOTE PAYABLE
Note payable consists of the following at December 31:
Signet Bank; Revolving Line of Credit;
Interest at Prime, 8.25% at
December 31, 1996;
Interest Payable Monthly $ 93,610
========
The line of credit provides for a maximum loan amount of the lesser of
$100,000 or 80% of accounts receivable as are acceptable to the bank.
The note is subject to the same covenants referred to in Note F.
NOTE F. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
Signet Bank; Interest at Prime
Plus 4.0%, 8.75% at December 31,
1996; Interest Plus Principal of
$9,750 Payable Monthly;
Secured by Accounts Receivable,
Property and Equipment $ 448,500
LESS: CURRENT MATURITIES 448,500
---------
TOTAL LONG TERM DEBT LESS
CURRENT MATURITIES $ -
=========
Total interest expense for the year ending December 31, 1997 was
$67,170.
Loan agreements with Signet Bank include certain financial covenants
which the Company was not in compliance with at December 31, 1997.
Signet bank entered into a forbearance agreement with the Company,
effective April 15, 1997, in response to events of default, including
non-compliance with ratio covenants in the original debt agreement.
Under the agreement, the interest rate on both notes increased by
2.0%. The tenure of the forbearance agreement was through December 31,
1997. However, the bank agreed to take no action pending the plan of
reorganization with Frederick Brewing Co., as described in Note A.
See Independent Auditors' Report
9
<PAGE> 32
WILD GOOSE BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE G. LEASES
The Company leases its facility under an operating lease for a five
year period at an annual rental of $62,400. The lease was to expire
in July of 1999, but was renegotiated to end on June 30, 1998, with a
contingency that all property and equipment be removed from the
premises by May 15, 1998.
The Company leases a forklift under an operating lease. The lease is
for a five year period at an annual rental in the amount of $3,900.
The lease expires in July of 2000.
The following is a schedule of estimated future minimum lease payments
for the next five years:
1998 35,100
1999 3,900
2000 2,275
2001 -
2002 -
Total rent expense incurred in 1997 was $66,487.
NOTE H. INCOME TAXES
The Company has a net operating loss carryforward of approximately
$420,000 at December 31, 1997, giving rise to a deferred tax asset of
approximately $160,000. 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. During the year ended December 31, 1997 the
valuation allowance was increased primarily related to the increase in
the net operating loss carryforwards.
SEE INDEPENDENT AUDITORS' REPORT
10
<PAGE> 33
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Consolidated Financial Statements give effect
to the acquisition by Frederick Brewing Company (the Company) of the net assets
of Wild Goose Brewery, Inc. (Wild Goose) on January 29, 1998 and are based on
the historical financial statements of the Company and Wild Goose. These
historical financial statements were prepared in accordance with generally
accepted accounting principles. The unaudited pro forma adjustments are based
upon available information and certain assumptions that management of the
Company believes are reasonable. The Pro Forma Financial Information and
accompanying notes should be read in conjunction with the historical financial
statements of Wild Goose and the historical financial statements of the
Company, which are included in the Company's Annual Report on Form 10-KSB.
The Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 1997 has
been prepared as if the acquisition had occurred on that date. The Unaudited
Consolidated Pro Forma Statement of Operations for the year ended December 31,
1997 gives effect to the acquisition as if it had occurred at the beginning of
the year.
The Unaudited Pro Forma Consolidated Financial Statements are presented for
informational purposes only and do not purport to be indicative of what the
Company's consolidated financial position or consolidated results of operations
would actually have been had the acquisition been completed on such date or at
the beginning of the year indicated, or to project the Company's consolidated
financial position for any future date or the Company's consolidated results of
operations for any future period.
The acquisition has been accounted for as a purchase. After the acquisition,
the purchase price was allocated to the assets acquired and liabilities assumed
based on their respective fair values. The final allocation of the purchase
price may differ from the allocation set forth in the attached Unaudited Pro
Forma Consolidated Balance Sheet, since the allocation was based on the net
assets acquired on January 29, 1998. The final allocation is not expected to
differ materially from the allocation set forth herein.
The Company has preliminarily analyzed the savings that it expects to realize
from the reductions in salaries of certain Wild Goose production personnel and
from production efficiencies to be realized from the consolidation of the
production at one brewing facility. The Company has not quantified these
savings and has not included such savings in the Unaudited Pro Forma
Consolidated Results of Operations.
11
<PAGE> 34
Frederick Brewing Co. and Wild Goose Brewery Inc.
Pro Forma Consolidated Balance Sheet
December 31, 1997
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Historical Pro-forma
- ------------------------------------------------------------------------------------------------------------------------------------
Frederick Brewing Wild Goose
Company Brewery Adjustments As Adjusted
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current assets
Cash and cash equilavents $ 2,625 $ 30 $ (532) c $ 2,123
Trade receivables, net 333 246 --- 579
Inventories, Net 354 328 --- 682
Prepaid expenses and other current assets 104 9 --- 113
----------------------------------------------------------------------------
Total current assets 3,416 613 (532) 3,497
Property and equipment, net 8,376 253 --- 8,629
Intangibles, net 258 10 --- 268
Deferred public relation costs 1,131 --- --- 1,131
Other assets 220 --- --- 220
Goodwill --- --- 2,595 e 2,595
----------------------------------------------------------------------------
Total assets $13,401 $ 876 $2,063 $16,340
============================================================================
Current liabilities
Current maturities of long-term debt $ 273 $ 542 $ (532) c $ 283
Capital lease obligations, current portion 89 --- --- 89
Accounts payable 275 549 --- 824
Accrued liabilities 407 85 120 d 612
----------------------------------------------------------------------------
Total current liabilities 1,044 1,176 (412) 1,808
Long-term debt 2,209 --- --- 2,209
Capital lease obligations 2,880 --- --- 2,880
----------------------------------------------------------------------------
Total liabilities 6,133 1,176 (412) 6,897
============================================================================
Stockholders' equity (deficit):
Preferred Stock 5,552 --- --- 5,552
Common Stock --- --- --- ---
Additional paid-in capital 12,779 222 2,175 a 14,954
--- --- (222) b
Accumulated deficit (11,063) (522) 522 b (11,063)
----------------------------------------------------------------------------
Total stockholders' equity (deficit) 7,268 (300) 2,475 9,443
----------------------------------------------------------------------------
Total liabilities and stockholders' equity
(deficit) $13,401 $876 $2,063 $16,340
============================================================================
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
12
<PAGE> 35
Frederick Brewing Co. and Wild Goose Brewery Inc.
Pro Forma Consolidated Statement of Operations
Year ended December 31, 1997 (Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Historical Pro-forma
- --------------------------------------------------------------------------------------------------------------------------------
Frederick Wild Goose Adjustments As Adjusted
Brewing Company Brewery
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 3,077 $ 2,247 $ - $ 5,324
Cost of sales 2,837 1,637 (64) f 4,410
------------------------------------------------------------------------
Gross Profit 240 610 64 914
Loss on assets to be disposed - 383 - 383
Selling, general, and administrative expenses 4,622 601 260 g 5,444
(35) h
(4) i
------------------------------------------------------------------------
Operating loss (4,382) (374) (157) (4,913)
(Gain)/loss on sale of equipment (159) 6 (153)
Loss on assets to be disposed - 383 383
Interest expense, net 140 67 (67) j 140
------------------------------------------------------------------------
Loss before taxes (4,363) (447) (90) (4,900)
Provision for income taxes - - -
------------------------------------------------------------------------
Net loss (4,363) (447) (90) (4,900)
Preferred stock dividends requirements (3,612) - (3,612)
------------------------------------------------------------------------
Net loss attributable to common shareholders $ (7,975) $ (447) $ (90) $ (8,512)
========================================================================
Basic and diluted loss per common share:
Net loss before preferred stock dividend
requirements $ (1.59) $ - $ (1.27)
Preferred stock dividend requirements (1.32) - (0.93)
------------------------------------------------------------------------
Net loss per common share $ (2.91) $ - $ (2.20)
========================================================================
Weighted average common shares and common share
equivalents outstanding 2,742 - 1,127 3,869
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
13
<PAGE> 36
Frederick Brewing Company and Wild Goose Brewery, Inc.
Notes to Pro Forma Consolidated Financial Statements
Year ended December 31, 1997 (Unaudited)
(Dollars in Thousands, except per share data)
(a) Adjustment reflects the issuance of 1,127,122 shares of the Company's
common stock based on the $1.93 average price of such common stock during the
period from March 30, 1998 to April 8, 1998. The final purchase price was
determined on April 3, 1998.
(b) Adjustment removes the stockholders' deficit balance of Wild Goose.
(c) Adjustment reflects the repayment of the outstanding principal balance
on the Wild Goose debt instruments with a bank as of the January 29, 1998 date
of acquisition, pursuant to the Agreement and Plan of Reorganization by and
among the Company and Wild Goose (the Acquisition Agreement)
(d) Adjustment reflects the accrual of estimated transaction costs related
to the acquisition. Such costs are included as part of the purchase price
allocation in the determination of goodwill.
(e) Adjustment reflects the excess of the cost to the Company over the
assigned value of the net assets of Wild Goose computed as follows:
<TABLE>
<S> <C>
1,127,122 shares of common stock at $1.93 per share $2,175
Acquisition costs 120
Repayment of outstanding principal 532
----
Purchase price 2,827
Net assets acquired, excluding outstanding Wild Goose debt
instruments repaid by the Company
(232)
-----
Excess purchase price allocated to goodwill $2,595
========
</TABLE>
(f) Adjustment reflects reduction of depreciation expense recorded during
1997 corresponding to certain machinery and equipment of Wild Goose being held
for sale that were reduced to their estimated net realizable value prior to the
acquisition of Wild Goose by the Company.
(g) Adjustment reflects one years' amortization of the goodwill arising
from the acquisition. The goodwill is being amortized over an estimated useful
life of ten years.
14
<PAGE> 37
(h) Adjustment reflects a reduction in rent expense based on agreements
entered into with the landlord of the Wild Goose brewing facility in Cambridge,
Maryland to terminate the existing lease at such facility. Annual rental
payments at this facility were approximately $62 and management negotiated an
early termination of the lease for $27.
(i) Adjustment reflects reduction of depreciation expense recorded during
1997 on leasehold improvements at the Wild Goose brewing facility in Cambridge,
Maryland. All leasehold improvements were written off as management determined
that the improvements did not have any future economic benefit to the Company
or to Wild Goose.
(j) Adjustment reflects the elimination of interest expense associated
with the outstanding principal balances on the Wild Goose debt instruments.
These principal balances were repaid with the Company's existing cash balances,
which were generated primarily through several issuances of preferred stock
during 1997.
15
<PAGE> 38
FREDERICK BREWING CO.
4607 Wedgewood Boulevard, Frederick, Maryland 21703
----------------------------
Revocable Proxy
------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
FREDERICK BREWING CO. FOR USE ONLY AT THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 14, 1998 AND AT ANY ADJOURNMENT OR POSTPONEMENT THEREOF.
The Undersigned hereby appoints Kevin E. Brannon or Marjorie A. McGinnis as
Proxies, each with the power to appoint his or her substitute, and hereby
authorizes them to represent and to vote as designated below, all the shares of
Common Stock of Frederick Brewing Co. held of record by the undersigned on March
12, 1998, at the Annual Meeting of Stockholders to be held on May 14, 1998, or
any adjournment or postponement thereof, with all the powers that the
undersigned would possess if personally present as indicated below.
1. ELECTION OF DIRECTORS for a term expiring at the 1999 Annual Meeting:
<TABLE>
<S> <C>
FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary below) [ ] to vote for all nominees listed below [ ]
James W. Lutz
----------------------------------------------------------------------------------------------
</TABLE>
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL WRITE THE
NOMINEE'S NAME ON THE LINE BELOW)
ELECTION OF DIRECTORS for a term expiring at the 2001 Annual Meeting:
<TABLE>
<S> <C>
FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary below) [ ] to vote for all nominees listed below [ ]
Kevin E. Brannon Marjorie A. McGinnis
----------------------------------------------------------------------------------------------
</TABLE>
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL WRITE THE
NOMINEE'S NAME ON THE LINE BELOW)
2. PROPOSAL TO AMEND THE ARTICLES OF AMENDMENT AND RESTATEMENT of the
Articles of Incorporation of the Company.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. PROPOSAL TO RATIFY THE APPOINTMENT OF COOPERS & LYBRAND LLP as the
independent auditors of Frederick Brewing Co. for the year ending
December 31, 1998.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. PROPOSAL TO ADJOURN THE ANNUAL MEETING TO ANOTHER DATE OR PLACE for the
purpose of soliciting additional proxies.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before this Meeting including, but not
limited to, the election of any person as a director if the nominee is
unable to serve or for good cause will not serve, matters incident to the
conduct of the Meeting, and upon such other matters as may properly come
before the Meeting.
<PAGE> 39
Frederick Brewing Co.
Proxy Card
Page 2 of 2
THIS PROXY HAS BEEN MADE AVAILABLE TO
========================================================================
The Board of Directors recommends that you vote FOR the nominees listed
on the reverse side hereof and FOR Proposals 2, 3 and 4. You are encouraged to
specify your choices by marking the appropriate boxes; however, you need not
mark any boxes if you wish to vote in accordance with the Board of Directors'
recommendations. This proxy may not be voted for any person who is not a nominee
of the Board of Directors of the Company.
THIS PROXY MAY BE REVOKED AT ANY TIME BEFORE IT IS EXERCISED.
SHARES OF COMMON STOCK OF THE COMPANY WILL BE VOTED AS SPECIFIED. IF NO
SPECIFICATION IS MADE, SHARES WILL BE VOTED FOR THE ELECTION OF THE BOARD OF
DIRECTORS' NOMINEES TO THE BOARD OF DIRECTORS, FOR PROPOSALS 2, 3 AND 4 AND
OTHERWISE AT THE DISCRETION OF THE PROXIES.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting of
Stockholders of the Company called for May 14, 1998, a Proxy Statement for the
Annual Meeting and the 1998 Annual Report to Stockholders.
PLEASE MARK, SIGN, DATE, AND PROMPTLY RETURN THIS PROXY CARD
USING THE ENCLOSED ENVELOPE.
<TABLE>
<C> <S> <C>
------------------------------------------------ Date: ------------------, 1998
Signature
Date:
------------------------------------------------ ------------------, 1998
Signature
</TABLE>
PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR(S) ON THIS
PROXY. ONLY ONE SIGNATURE IS REQUIRED IN CASE OF A JOINT
ACCOUNT. WHEN SIGNING IN A REPRESENTATIVE CAPACITY, PLEASE
GIVE TITLE.
