===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _______________________
Commission File Number: 0-27800
Frederick Brewing Co.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Maryland 52-1769647
-------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
4607 Wedgewood Boulevard, Frederick, Maryland 21703
- - --------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(301) 694-7899
-----------------------------------------------
(Issuer's telephone number, including area code)
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
<PAGE>
Common Stock, $0.00004 Par Value 2,768,735
- - -------------------------------- ---------
(Title of Each Class) (Number of Shares Outstanding
as of July 31, 1997)
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [ X ]
================================================================================
<PAGE>
Frederick Brewing Co.
----------------------
Index to Form 10-QSB
----------------------
Part I. Financial Information
- - ---------------------------------------------------------------------------
Item 1. Financial Statements
Balance Sheet (Unaudited)
June 30, 1997 1
Statements of Operations (Unaudited)
Three and Six Months Ended June 30, 1997 and 1996 2
Statements of Cash Flows (Unaudited)
Three and Six Months Ended June 30, 1997 and 1996 3
Notes to Unaudited Financial Statements 4
Item 2. Management's Discussion and Analysis 6
Part II. Other Information
- - -----------------------------------------------------------------------------
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
<PAGE>
Signatures
- - -----------------------------------------------------------------------------
Signature Page 15
<PAGE>
PART I. -- FINANCIAL INFORMATION
Item 1. Financial Statements.
Frederick Brewing Co.
Balance Sheet
<TABLE>
<CAPTION>
June 30, 1997
-----------------
(Unaudited)
ASSETS
- - -------------------------------------------------------------------------
<S> <C>
Current assets:
Cash and cash equivalents $ 435,790
Restricted cash 22,673
Trade receivables 430,456
Inventories, net 306,967
Prepaid expenses 439,059
---------------
Total current assets 1,634,945
Property and equipment, net 8,489,234
Intangibles, net of accumulated amortization of $39,195 235,447
Other assets 705,514
---------------
Total assets $ 11,065,140
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ---------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt $ 401,861
<PAGE>
Current maturities of capital lease obligations 273,000
Accounts payable 571,766
Accrued liabilities 61,070
---------------
Total current liabilities 1,307,697
Long-term debt 2,294,751
Long-term capital lease obligations 3,096,230
---------------
Total liabilities 6,698,678
---------------
Stockholders' equity:
Preferred stock - Series A, 1,848 shares issued and outstanding 743,648
Preferred stock - Series B, 3,450 shares issued and outstanding 1,757,339
Common stock - $0.00004 par value, 9,000,000 shares authorized,
2,139,507 shares issued and outstanding 79
Additional paid-in capital 6,523,747
Unearned compensation (17,500)
Accumulated deficit (4,640,851)
---------------
Total stockholders' equity 4,366,462
---------------
Total liabilities and stockholders' equity $ 11,065,140
===============
</TABLE>
The accompanying notes are an integral part of these financial statements
1
<PAGE>
Frederick Brewing Co.
Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- ------------------------------------
1997 1996 1997 1996
---------------- ---------------- ----------------- ----------------
(Unaudited) (Unaudited)
<PAGE>
<S> <C> <C> <C> <C>
Gross sales $ 875,416 $ 4$0,066 $ 1,141,230 $ 874,741
Less returns and allowances 10,752 33,440 35,188 35,885
Less excise taxes 43,323 23,125 60,228 41,486
---------------- -------------- --------------- --------------
Net sales 821,341 383,501 1,045,814 797,370
Cost of sales 730,353 357,181 1,127,819 763,845
---------------- -------------- --------------- --------------
Gross profit (loss) 90,988 26,320 (82,005) 33,525
Selling, general and administrative expenses 991,626 362,413 1,497,895 687,975
---------------- -------------- --------------- --------------
Loss from operations (900,638) (336,093) (1,579,900) (654,450)
Interest (income) expense, net 80,792 (15,555) 108,367 (12,153)
Other expenses (74,187) - (135,523) -
---------------- -------------- --------------- --------------
Loss before income taxes (907,243) (320,538) (1,552,744) (642,297)
Provision for income taxes - - - -
---------------- -------------- --------------- --------------
Net loss $ (907,243) $ (320,538) $ (1,552,744) $ (642,297)
================ ============== =============== ==============
Preferred Stock Dividend Requirements (28,626) - (1,354,454) -
---------------- -------------- -------------- --------------
Net loss attributable to common shareholders $ ( 935,869) $ (320,538) $ (2,907,198) $ (642,297)
================ ============== ============== ==============
Per common share
Net loss $ (0.45) $ (0.16) $ (0.78) $ (0.39)
================ =============== ============== =============
Preferred stock dividend requirements $ (0.01) $ - $ (0.68) $ -
---------------- --------------- -------------- -------------
Net loss attributable to common shareholders $ (0.46) $ (0.16) $ (1.46) $ (0.39)
================ =============== ============== =============
Weighted average common shares and common
share equivalents outstanding 2,026,309 1,954,876 1,990,593 1,652,477
================ ============== =============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE>
Frederick Brewing Co.
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- ------------------------------------
1997 1996 1997 1996
---------------- ---------------- ----------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (907,243) $ (320,538) $ (1,552,744) $ (642,297)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 220,748 48,920 265,386 97,288
Changes in operating assets and liabilities:
Receivables (310,697) (9,105) (191,043) (37,442)
Inventories (134,573) (77,633) (96,404) (152,536)
Prepaid expenses 444,313 8,718 (356,647) 114,934
Other assets (676,740) 1,685 (634,514) (34,330)
Accounts payable (169,557) (108,639) (57,450) (304,506)
Accrued expenses 16,637 7,280 (104,468) (46,550)
---------------- -------------- --------------- ------------
Net cash used for operating activities (1,517,112) (449,312) (2,727,884) (1,005,439)
---------------- -------------- --------------- ------------
Cash flows from investing activities
Deposits on equipment - (405,517) - (971,663)
Purchase of property and equipment (733,470) (160,617) (1,479,899) (172,191)
Proceeds from sale of equipment 154,600 - 154,600 -
Purchase of intangibles (59,242) (35,346) (126,894) (83,089)
---------------- --------------- --------------- ------------
Net cash used for investing activities (638,112) (601,480) (1,452,193) (1,226,943)
---------------- --------------- --------------- ------------
Cash flows from financing activities
Payments on debt (1,548,917) (10,839) (1,696,236) (432,049)
Proceeds from long-term debt 1,105,142 80,316 1,636,485 80,316
Payments on capital leases (12,388) (6,244) (15,700) (6,244)
Proceeds from preferred stock issuance, net (65,089) - 4,025,001 -
Proceeds from common stock issuance, net - - - 3,857,679
Restricted cash 13,597 - 617,327 -
---------------- --------------- --------------- ------------
Net cash provided by financing activities (507,655) 63,233 4,566,877 3,499,702
---------------- --------------- --------------- ------------
Net increase (decrease) in cash and cash equivalents (2,662,879) (987,559) 386,800 1,267,320
Cash and cash equivalents, beginning of period 3,098,669 2,254,879 48,990 -
---------------- --------------- --------------- ------------
<PAGE>
Cash and cash equivalents, ending of period $ 435,790 $ 1,267,320 $ 435,790 $ 1,267,320
================ =============== ===============
============
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
FREDERICK BREWING CO.
Notes to Financial Statements
June 30, 1997
(Unaudited)
Note 1 - Basis of Presentation
- - -----------------------------------------------------------------------------
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Regulation S-B. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. However, in
the opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation of the interim financial
position and the interim results of operations of the Company have been
included.
Operating results for the three and six month period ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997, or for any other period. For information relating to the
financial position and the results of operations of the Company as of and for
the year ended December 31, 1996, refer to the financial statements included in
the Company's Annual Report on Form 10-KSB for the year ended December 31, 1996
and in its 1996 Annual Report to shareholders.
Note 2 - Cash and Cash Equivalents
- - -----------------------------------------------------------------------------
The Company considers its investments with original maturities, at date of
purchase, of 90 days or less to be cash equivalents. At June 30, 1997, the
following cash and cash equivalents were held by the Company:
<PAGE>
Cash in bank and petty cash $435,790
Securities held under agreement to repurchase 22,673
--------
$458,463
========
The Company occasionally invests excess funds in reverse repurchase agreements
for U.S. government securities. Under these agreements, the Company purchases
securities with an agreement to resell them. Generally, such agreements mature
on the next business day following the date of investment. Due to the short-term
nature of the agreements, the Company does not take possession of the
securities, which are instead held at the Company's bank from which it purchases
the securities. The carrying value of the agreements approximates fair value
because of the short maturity of the investments and the Company believes that
it is not exposed to any significant risk on its investments in reverse
repurchase agreements. At June 30, 1997, approximately $23,000 of the securities
was pledged as collateral to guarantee the Company's obligation to Signet Bank
of Maryland ("Signet") for the new brewing facility and was recorded as
restricted cash.
4
<PAGE>
Notes to Financial Statements
June 30, 1997
(Unaudited)
Note 3 - Income Taxes
- - -----------------------------------------------------------------------------
The Company accounts for income taxes under the liability method. The Company
has not recorded a provision for income taxes for the three and six month
periods ended June 30, 1997 and 1996 based on the fact that the Company has
incurred net operating losses during those periods. The Company has provided a
full valuation allowance against its net deferred tax asset as of June 30, 1997.
Note 4 - Net Loss per Common Share
- - -----------------------------------------------------------------------------
Net loss per common share is based on the weighted average number of common
shares and common share equivalents outstanding during the periods. Common share
equivalents are comprised of stock options, stock warrants and convertible
securities for which the effective yield is less than two-thirds of the Aa
corporate bond rate at date of issuance. Common share equivalents have not been
included in the calculation for the three and six months ended June 30, 1997 and
1996 because the effects of such items were anti-dilutive.
In February, 1997 the Financial Accounting Standards Board issued Statement 128,
"Earnings Per Share" (SFAS 128), which specifies the computation, presentation,
and disclosure requirements for earnings per share. SFAS 128 is effective for
periods ending after December 15, 1997. The Company does not expect the adoption
of SFAS 128 to have a material impact on the computation of earnings per share.
The net loss attributable to common shareholders has been adjusted for deemed
dividends. The deemed dividend relates to the discount feature associated with
the Company's Series A and Series B Convertible Preferred Stock, issue din March
of 1997. The discount has been computed in accordance with the SEC's position on
accounting for preferred stock that is convertible at a discount to the market.
The discount amount, which was approximately $114,000 and $1,326,000 for the
Series A and Series B, respectively, is recognized as a return to the
shareholders over the minimum period in which the shareholders can recognize
that return. The Series B shares are immediately, and the Series A shares are
convertible one year from the date of issuance and the dividend related to these
shares is being recognized over the one year period from date of issuance.
<PAGE>
Note 5 - Prepaid Expenses
- - -----------------------------------------------------------------------------
During the first quarter of 1997, the Company paid $800,000 for investor
relations services to be rendered by three affiliated companies: Corporate
Relations Group, Inc. ("CRG"), Arrow Marketing Inc. and Gulf Atlantic Publishing
Inc. This balance is being amortized on a straight-line basis over 60 months
beginning in April 1997. The non-current portion of this balance representing
$568,000 is included in other assets.
Note 6 - Property and Equipment
- - -----------------------------------------------------------------------------
Property and equipment at June 30, 1997 consisted of the following:
Brewing equipment $4,365,749
Capital lease - building 3,000,000
Leasehold improvements 1,303,146
Automobiles and trucks 201,499
Furniture and fixtures 180,513
----------
Total 9,050,907
Less accumulated depreciation and amortization (561,673)
----------
Property and equipment, net $8,489,234
==========
5
<PAGE>
Notes to Financial Statements
June 30, 1997
(Unaudited)
The portion of property and equipment classified as "capital lease - building"
relates to the Company's agreement with Blue II, LLC ("Blue II") to build the
new brewery for the Company to its specifications and lease it back to the
Company. The lease, which became effective during the first quarter of 1997, has
a twenty year term with monthly payments due to Blue II as set forth in the
agreement. The building has been reflected in property and equipment at its
estimated fair value at the inception of the lease term, which was equal to the
present value of the future minimum lease payments, and is being amortized on a
straight line basis over the lease term.
Note 7 - Long-Term Debt
- - -----------------------------------------------------------------------------
On April 24, 1997, the Company closed a $1.0 million loan with the United States
Small Business Administration ("SBA"). The proceeds of this loan were used to
pay the principal balance of Company's bridge loan with Signet Bank which was
incurred for the purchase of brewing and packaging equipment for the Company's
new facility. The loan has a twenty year term and a fixed interest rate of
7.368%. See the Company's Pre-effective Amendment No. 5 to the Form SB-2 filed
<PAGE>
with the SEC on March 5, 1996, attached hereto by reference.
PART I. - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations For the Three and Six Months Ended June 30, 1997
and 1996
Overview of Significant Activities and Expenses
- - -----------------------------------------------------------------------------
A net loss of ($907,243), or ($0.45) per share, was incurred during the second
quarter of 1997 compared to net loss of ($320,538), or ($0.16) per share, for
the corresponding quarter of 1996. Year-to-date 1997 losses increased to
($1,552,744) or ($0.78) per share, compared to losses of ($642,297) or ($0.39)
per share, for the similar period of 1996.
Weighted average common shares outstanding were 2,026,309 during the second
quarter of 1997 and 1,954,876 for the three months ended June 30, 1996. For the
year to date, weighted average shares outstanding was 1,990,593 for 1997,
compared to 1,652,477 in the similar period of 1996. The increase in the shares
outstanding relates primarily to the conversion of some of the Company's
Preferred shares into Common Stock during the second quarter of 1997. The
increase in the shares outstanding for the year to date, relates to the
Company's successful initial public offering ("IPO") in March 1996.
6
<PAGE>
Management's Discussion and Analysis
For the Three and Six Months Ended June 30, 1997 and 1996
During the second quarter of 1997, record levels of revenues were achieved. The
Company's sales increased 98.9% to $876,416 during the second quarter of 1997
over the similar period of 1996. This was also an increase of 329.3% over the
first quarter of 1997. These record levels were associated with increases in
production that were made possible through the operation of the Company's new
facility. This, coupled with a concentrated marketing and promotional effort,
created a strong demand for the Company's product that exceeded even the
increased production levels. April sales were limited to 839 barrels (on
packaged production of 900 barrels) because, until April 27th, the Company was
forced to bottle beer on its original bottling line, which ran at a top speed of
30 bottles per minute. Thereafter, the numerous machines comprising the new
bottling equipment began to be brought into service and production capacity and
speed increased incrementally through the end of the quarter. May sales
increased to 1,321 barrels (on packaged production of 1,580 barrels) and June
sales increased to 2,704 barrels (on packaged production of 3,005 barrels)
Packaged production represents actual beer barrels packaged, at the Company's
facility, into sellable product units, either bottled cases or draft kegs.
Sales increases during the second quarter were generated largely within
territories where the Company had been distributing its products for at least
<PAGE>
one year. Sales in these territories increased to 4,382 barrels in the second
quarter of 1997 from 2,521 barrels in the comparable period of 1996, a 73.8%
increase. Total sales of 482 barrels were sold in new territories, primarily
Florida and Washington state. Management intends to pursue new territorial
markets as production capacity permits.
Supported by substantial regional, national and international media coverage, a
new home page on the World Wide Web (www.hempenale.com) and considerable
word-of-mouth communication, the Company launched a new product, Hempen Ale(TM),
in May of 1997. Hempen Ale(TM) if the first commercially produced and marketed
malt beverage in United States history to be produced with hemp seeds as a
primary ingredient. During the second quarter, the Company sold 1,781 barrels of
this new product, which represented 36.6% of the Company's total sales during
the period. Sales of the Company's "Blue Ridge(TM)" line also grew, posting a
22.3% increase (from 2,521 barrels in 1996 to 3,083 barrels in 1997) over the
similar period of 1996.
Because the Company's package handling equipment was not running at designed
efficiency during the second quarter of 1997, (see June 26, 1997 press release
attached hereto), the Company hired temporary workers to assist in the packaging
of product for sale. This additional labor expense, resulted in higher than
expected cost of sales. See Item 1 - Legal Proceedings attached hereto. The
performance of the package handling equipment improved throughout the quarter
and the need for these temporary workers declined. Management believes packaging
efficiency will continue to improve through the middle of the third quarter of
1997, as the equipment becomes fully functional and the training of operating
employees progresses. This should reduce production costs and improve operating
margins.
Also during the quarter, the Company continued to pursue geographical expansion
of its channels of distribution. The Company began shipping to Florida and
Washington state during the second quarter of 1997. In addition, the Company
began its largest advertising campaign to date in six metropolitan markets on
the east coast of the United States. This campaign consisted of a combination of
print, radio, and billboard advertising most of which were outside of the
Company's main market areas of Maryland and Washington D.C. Distributors and
retailers in these outside markets have indicated to management that these
increased advertising efforts were a major factor in the increase in demand for
the Company's products.
On April 24, 1997, the Company closed a $1.0 million loan with the United States
Small Business Administration ("SBA"). The proceeds of this loan were used to
pay the principal balance of Company's bridge loan with Signet Bank which was
incurred for the purchase of brewing and packaging equipment for the Company's
new facility. The loan has a twenty year term and fixed interest rate of 7.368%.
See the Company's Pre-effective Amendment No. 5 to the Form SB-2 filed with the
SEC on March 5, 1996, attached hereto by reference.
Preferred Stock Dividend Requirement
The deemed dividend relates to the discount feature associated with the
Company's Series A and Series B Convertible Preferred Stock, issue din March of
1997. The Series A shares are convertible one year from the date of issuance and
the dividend related to these shares is being recognized over the one year
period from the date of issuance. During the three month period ended June 30,
1997, the dividend related to these shares is approximately $29,000. The average
conversion rate for the Series A shares is $3.71955 per share based on the five
day average closing Market Price of the Common Stock, for the days preceding the
purchase date of the Series A shares. The Series B shares are convertible
immediately and the dividend related to these shares, approximately $1,326,000,
is recorded by the Company on its financial statements. The conversion rate is
equal to $1,000 divided by Seventy Percent (70%) of the average market Price of
the Common Stock for the five trading days immediately prior to the Conversion
date. The Market Price is defined as 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.
7
<PAGE>
Management's Discussion and Analysis
For the Three and Six Months Ended June 30, 1997 and 1996
On April 24, 1997, the Company closed a $1.0 million loan with the United States
Small Business Administration ("SBA"). The proceeds of this loan were used to
pay the principal balance of Company's bridge loan with Signet Bank which was
incurred for the purchase of brewing and packaging equipment for the Company's
new facility. The loan has a twenty year term and a fixed interest rate of
<PAGE>
7.368%. See the Company's Pre-effective Amendment No. 5 to the Form SB-2 filed
with the SEC on March 5, 1996, attached hereto by reference.
Review of Operations
- - -----------------------------------------------------------------------------
The following table sets forth certain items derived from the Company's
Statements of Operations, expressed as a percentage of net sales, for the three
and six month periods ended June 30, 1997 and 1996.
Percentage of Sales for the Periods
Ended June 30,
-----------------------------------
Three Months Six Months
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited) (Unaudited)
Gross sales.............................. 105.3% 106.0% 105.8% 105.2%
Less excise taxes........................ 5.3 6.0 5.8 5.2
----- ----- ----- -----
Net sales................................ 100.0 100.0 100.0 100.0
Cost of sales............................ 88.9 93.1 107.8 95.8
----- ----- ----- -----
Gross profit (loss)...................... 11.1 6.9 (7.8) 4.2
Selling, general, and admin. expenses.... 120.7 94.5 143.2 86.3
----- ----- ----- -----
Loss from operations..................... (109.7) (87.6) (151.1) (82.1)
Interest (income), net................... 9.8 (4.1) 10.4 (1.5)
Other (income)........................... (9.0) 0.0 (13.0) 0.0
----- ----- ----- -----
Net loss................................. (110.5) (83.6) (148.5) (80.6)
===== ===== ===== =====
Sales
- - -----------------------------------------------------------------------------
Gross sales for the 1997 and 1996 second quarters were $875,416, and $440,066,
respectively, an increase of $435,350, or 98.9%, in 1997 compared to 1996.
Year-to-date sales for 1997 and 1996 were $1,141,230 and $874,741, respectively,
an increase of $ 266,489 or 30.5%.
Second quarter volumes were 4,864 and 2,521 barrels for 1997 and 1996,
respectively, an increase of 2,343 barrels, or 93.0%. Year-to-date volumes in
1997 and 1996 were 6,470 and 4,977, respectively, an increase of 1,493 or 30.0%.
Revenues per barrel between the second quarters of 1997 and 1996 were $180 and
$175 per barrel, respectively, an increase of $5 per barrel, while they were
$176 for the year-to-date periods in both 1997 and 1996. The increase in the
revenues per barrel for the quarter reflects a change in the sales mix of the
Company's products between cases, which have a higher revenue per barrel
contribution, and kegs.
8
<PAGE>
<PAGE>
Management's Discussion and Analysis
For the Three and Six Months Ended June 30, 1997 and 1996
Excise Taxes
- - -----------------------------------------------------------------------------
Federal and state excise taxes were $43,323 and $23,125, or 5.3% and 6.0% of net
sales, during the second quarters of 1997 and 1996, respectively. For the
year-to-date periods of 1997 and 1996 such taxes were $60,228 and $41,486, or
5.8% and 5.2%, of net sales, respectively. The decrease as a percentage of net
sales, during the second quarter of 1997, reflects the reduction of the
Company's sales in states where the Company is levied excise tax. The increase
in excise taxes in six month period of 1997, as a percentage of net sales, is
due to changes in the mix of beer distribution between states. The Federal
government and all state governments impose excise taxes on all beer sold. These
taxes are levied on volume, regardless of the price or revenue generated from
those sales. Each state in which the Company distributes its product has
different liquor excise tax rates and regulations, including some states which
require the distributor to pay such taxes instead of the producer.
Cost of Sales
- - -----------------------------------------------------------------------------
Second quarter cost of sales for 1997 and 1996 was $730,353 and $357,181, or
88.9% and 93.1% of net sales, respectively, an increase of $373,172 or 104.4%
over 1996. Year-to-date cost of sales for 1997 and 1996 was $1,127,819 and
$763,845, or 107.8% and 95.8% of net sales, respectively, an increase of
$363,974 or 47.7% over 1996.
Two main factors caused the increase in the cost of sales for the second quarter
of 1997 over the same period of 1996: (1) the substantial increase in sales and
(2) the increased fixed costs associated with owning and operating the Company's
new brewing facility. Direct variable costs of production, principally raw
ingredients, packaging materials, and labor for the second quarters of 1997 were
$425,738, compared to $278,283 in the similar period of 1996, a 53.0% increase,
compared with a 98.9% increase in sales. This volume related increase in cost of
sales was partially offset by a 14.6% decrease in those costs per dollar of
sales and a $22.86 decrease per barrel sold. Management believes direct labor
costs of production per barrel and as a proportion of sales will decline further
in the third and fourth quarters of 1997 as packaging efficiencies gained during
the second quarter will be reflected for the entire third quarter and additional
efficiencies are gained during the third quarter and reflected for the entire
fourth quarter.
During the second quarter of 1997, the cost of sales were substantially
increased by the increased fixed cost of the Company's new brewing facility.
Fixed production overhead expenses, principally depreciation, utilities, and
rent rose $237,310, to $316,208 in the second quarter of 1997 from $78,898 in
1996, an increase of 300.7%. Depreciation as a component of the cost of sales
increased approximately $89,000 over the comparable period of 1996. The
depreciation portion of the cost accounted for approximately $104,000 of the
increase over the six months ended June 30, 1996. In addition, utilities
increased by approximately $74,000 due to the increased volumes of electricity,
natural gas, and water needed to run the much larger facility. For the six
months, utility expenses had increased by approximately $91,000 over 1996. Rent
<PAGE>
increased approximately $60,000 over the similar period of 1996, and
approximately $75,000 for the six months ended June 30. These fixed overhead
expenses represent an increase of 18.2% per dollar of sales and $33.71 per
barrel sold for the second quarter.
9
<PAGE>
Management's Discussion and Analysis
For the Three and Six Months Ended June 30, 1997 and 1996
Management expects that production costs will remain high for the balance of
1997. Labor and other variable production costs are expected to gradually
decline through the third quarter as the packaging equipment is "debugged" and
personnel gain experience. The production overhead expenses will remain high and
may increase during the remainder of 1997, as additional production equipment is
purchased and installed. If, however, as Management expects, sales continue to
increase, the negative impact of the increase in production overhead expenses
should decline, both as a percentage of sales and dollars per barrel sold.
Selling, General and Administrative Expenses
- - -----------------------------------------------------------------------------
Selling, general and administrative ("SG&A") expenses were $991,626 and $362,413
in the second quarters of 1997 and 1996, respectively, an increase of $629,213,
or 173.6%. SG&A expenses were $1,497,895 and $687,975 in the year-to-date
periods of 1997 and 1996, respectively, an increase of $809,920 or 117.7%.
The Company's SG&A expenses increased over the comparable period in 1996 due to
several factors. The most substantial increase was the increase in the Company's
sales force. During the second quarter of 1997, the Company had eight sales
people and a sales manager working to increase distribution of the Company's
products compared to four sales people in the second quarter of 1996.
Approximately $147,000 of the increase can be attributed to increased payroll
expense and travel and related promotional expenses. For the six month period,
these expenses accounted for approximately $290,000 of the increase over the
comparable period of 1996. The Company also embarked upon a substantial
advertising campaign in outside markets for the first time during the second
quarter of 1997. These markets included New Jersey, Pennsylvania, and Georgia.
This advertising campaign caused approximately $188,000 of the increase. During
the second quarter of 1997, the Company used several outside professionals which
included investor relations services, outside legal and accounting services.
These services cost the Company approximately $154,000 during the quarter, and
$164,000 for the year.
Other Income
- - -----------------------------------------------------------------------------
Other income of $74,187 during the second quarter of 1997 relates to gains
recognized due to timing differences between the cash received and full sale
value of written-down assets from year end 1996. For the year to date, other
income of $135,523 has been recognized by the Company. The Company had no other
<PAGE>
income or expenses during the comparable period of 1996.
Interest (income) expense, net
- - -----------------------------------------------------------------------------
Interest (income) expense, net during the second quarter in 1997 was $80,792 in
comparison to ($15,555) during the comparable period in 1996. Year-to-date
interest (income) expense was $108,367 and ($12,153) during comparable periods
of 1997 and 1996. Interest expense was offset by interest income from excess
cash invested until required for operating and investment purposes. A
substantial portion of the interest expense incurred relates to the debt
obligations the Company has with Signet for the building, equipment and bridge
financing for the new brewery.
10
<PAGE>
Management's Discussion and Analysis
For the Three and Six Months Ended June 30, 1997 and 1996
Income Tax Provision
- - -----------------------------------------------------------------------------
The Company has incurred net operating losses during both 1997 and 1996 and,
accordingly, no provisions for income taxes have been provided on the Statements
of Operations. The Company has recorded a full valuation allowance against the
net deferred tax asset.
Liquidity and Capital Resources
- - -----------------------------------------------------------------------------
Due to losses experienced during the start-up and expansion of the Company,
operations to date have been funded primarily from private and public placements
of common and preferred stock and by loans from stockholders and financial
institutions. As of June 30, 1997, the Company had working capital of
approximately $327,000. This balance is principally the result of the sale of
Series A and Series B preferred stock, during the first quarter of 1997. As of
June 30, 1996, the Company had working capital of approximately $1.8 million
primarily a result of the closing of the Company's IPO in March, 1996.
Net cash used in investing activities during the three and six months ended June
30, 1997 were, $638,112, and $1,452,193, respectively, which amounts primarily
represent purchases of capital assets (approximately $733,000 and $1.5 million,
respectively). In addition, various expenses incurred in arranging for the Small
Business Administration ("SBA"), the Maryland Economic Development Corporation
("MEDCO") and Signet financing, brewery construction, and trademarks were
capitalized as intangible assets. In the second quarter and six months ended
June 30, 1996, net cash used in investing activities was $601,480 and
$1,226,943, respectively, which primarily represented deposits made with vendors
for new brewery equipment.
Net cash provided by financing activities during the three and six months ended
June 30, 1997 were approximately ($508,000) and $4.6 million, consisting
<PAGE>
primarily of the first quarter 1997 preferred stock proceeds of approximately
$4.1 million net of commissions and fees and the $3.0 million building lease
with Blue II, LLC. Second quarter 1996 activities related primarily to the
proceeds of the Company's IPO and repayments of most of the Company's debt
obligations immediately upon the close of the IPO.
The Company does not currently have a working capital line of credit or any
other revolving credit. Management does not anticipate obtaining this or any
other revolving credit facility until it has achieved profitability over a three
to nine month period.
11
<PAGE>
Management's Discussion and Analysis
For the Three and Six Months Ended June 30, 1997 and 1996
The Company intends to purchase and install additional fermentation vessels to
increase its production capacity from the current level of approximately 3,300
barrels per month (39,600 barrels per year) to approximately 5,500 barrels per
month (66,000 barrels per year) and to purchase other equipment to improve
production efficiency and reduce production costs, during the last half of the
third quarter of 1997. The Company's current liquid assets are inadequate to
cover the cost of the new equipment to be purchased. In addition, the Company's
current level of liquidity may be inadequate to fund the Company's operations or
to provide a prudent level of cash reserves in the event cash flow from
operations does not improve as the result of increasing sales and reduced
production costs as quickly as management has anticipated. The Company's
agreements with its senior lenders do not permit the Company to incur additional
debt obligations. Consequently, management expects to receive a capital infusion
of $1.5 to $2.0 million during the third quarter of 1997. This capital may be
obtained in the form of equity or as a combination of equity and long-term lease
financing. Additional capital infusions may be necessary in the future until the
Company is able to operate profitably.
Impact of Inflation
- - -----------------------------------------------------------------------------
Although the Company has not attempted to calculate the effect of inflation,
management does not believe inflation has had a material effect on its results
of operations. Material increases in costs and expenses, particularly packaging,
raw material and labor costs, in the future, could have a significant impact on
the Company's operating results to the extent that the effect of such increases
cannot be transferred to its customers.
Forward-Looking Information
- - -----------------------------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements made by the Company in its disclosures to
the public. There is certain information contained herein, in the Company's
press releases and in oral statements made by authorized officers of the Company
<PAGE>
which are forward-looking statements, as defined by such Act. When used herein,
in the Company's press releases and in such oral statements, the words
"estimate," "project," "anticipate," "expect," "intend," "believe," "plans," and
similar expressions are intended to identify forward-looking statements. Because
such forward-looking statements involve risks and uncertainties, there are
important factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements. Factors, all of
which are difficult to predict and many of which are beyond the control of the
Company, that could cause actual results to differ materially include, but are
not limited to, those which are set forth in Exhibit 99, attached hereto and
made a part hereof.
12
<PAGE>
PART II. - OTHER INFORMATION
For the Three and Six Months Ended June 30, 1997 and 1996
FREDERICK BREWING CO.
Item 1. Legal Proceedings
- - -----------------------------------------------------------------------------
On June 17, 1997, the Company, as plaintiff, filed suit in the Circuit Court for
Frederick County, Maryland, Case No. 97-1300CV, against Intertrade Package
Machinery Corporation, an Ohio corporation ("IPMC"), Salh F. Khan, the Chief
Executive Officer of IPMC ("Khan") and John B. Brannen, the President of IPMC
("Brannen"), (IPMC, Khan, and Brannen being collectively referred to herein as
the "Defendants") for breach of express and implied warranties, fraud and
negligent misrepresentation. The Company's complaint arose out of the
Defendants' failure to provide, as promised in the contract dated May 2, 1996, a
"turn-key" state-of-the-art bottling and packaging line system consisting of
manufactured and remanufactured equipment, conveyor controls necessary for
integration of the equipment, and the installation and start-up assistance
necessary to commence operating the system at the Company's new brewery on or
before March 3, 1997. The Company is seeking compensatory damages from all
Defendants of $1.0 million and $3.0 million in punitive damages from Khan and
Brannen. At the same time, the Company filed a motion for partial summary
judgment against IPMC, alleging that there is no genuine dispute of material
fact, relating to damages of $206,181.00 for the equipment paid for by the
Company but never delivered by IPMC. As of July 22, 1997, all Defendants had
been served and counsel for Brannen had indicated that they would be filing for
removal of the case to U.S. District Court in Baltimore, Maryland. The Company
intends to vigorously prosecute this action.
Item 2. Changes in Securities
- - -----------------------------------------------------------------------------
None.
Item 3. Defaults Upon Senior Securities
<PAGE>
- - -----------------------------------------------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- - -----------------------------------------------------------------------------
The annual meeting of stockholders of the Company was held on June 5, 1997. Two
matters were put to a vote of the stockholders at this meeting: the election of
two directors and the ratification of Coopers & Lybrand L.L.P. as the Company's
independent accountants for the fiscal year ending December 31, 1997.
Information regarding the matters voted upon was disclosed and discussed in the
Company's Proxy Statement which, along with forms of Proxy, were distributed to
all shareholders of record of the Company on or about May 5, 1997. Readers
should refer to such Proxy Statement for additional information on the matters
voted upon.
At the meeting 1,530,040 shares (approximately 78.3%) of the Company's issued
and outstanding 1,954,876 shares of common stock were represented either in
person or by proxy.
Results of the voting for directors was as follows:
Nominee for Three-Year Term Expiring in 2000:
Carl R. Hildebrand 1,514,584 for, 0 against, 15,456 withheld.
Jerome M. Pool 1,514,584 for, 0 against, 15,456 withheld.
13
<PAGE>
Other Information
For the Three and Six Months Ended June 30, 1997 and 1996
Such nominees were declared duly elected. The directors of the Company whose
term of office continued after the meeting were Kevin E. Brannon and Marjorie A.
McGinnis whose terms expire in 1998 and Nicholas P. Foris, MD and Maribeth Visco
whose terms expire in 1999.
Results of the voting for the ratification of independent accountants was as
follows:
1,525,330 for, 3,100 against, 1,610 withheld.
The independent accountants were declared duly elected.
Item 5. Other Information
- - -----------------------------------------------------------------------------
None.
- - -----------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
- - -----------------------------------------------------------------------------
(a) Exhibits Filed:
<PAGE>
Index to Exhibits
- - -----------------------------------------------------------------------------
(I.) Press release, May 19, 1997
(II.) Press release, June 9, 1997
(III.) Press release, June 26, 1997
10 Material Contracts
(I.) Loan agreement between U.S. Small Business
Administration and the Company
27 Financial Data Schedule
99 Safe Harbor Under the Private Securities Litigation
Reform Act of 1995 /1/
- - ----------------
1 Incorporated by reference from the Form 8-K filed with the SEC on February 27,
1997.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Frederick Brewing Co.
Date July, 1997 /s/ Kevin E. Brannon
---------------- --------------------------------
Kevin E. Brannon
Chairman of the Board and
Chief Executive Officer
Date July, 1997 /s/ Craig J. O'Connor
---------------- --------------------------------
Craig J. O'Connor
Vice President - Finance &
Administration
15
<PAGE>
<PAGE>
FOR IMMEDIATE RELEASE: NEWS
May 19, 1997 Nasdaq-BLUE
FREDERICK BREWING CO. REPORTS FIRST QUARTER RESULTS
FREDERICK, Maryland -- Frederick Brewing Co. (FBC) (Nasdaq-BLUE), brewer of the
Blue Ridge family of beers, today reported results for its first quarter ended
March 31, 1997.
Gross sales for the quarter were $265,814 compared with $432,230 in the first
quarter last year. Management said sales in the quarter were hindered as the
Company transitioned its brewing operations and headquarters to a new,
57,000-square-foot brewery. Full scale operation at the new facility, which was
completed late in the first quarter, should begin in the second quarter of
fiscal 1997. The $8 million, state-of-the-art facility has increased the
Company's brewing capacity from 12,600 barrels to 50,000 barrels per year.
FBC reported a net loss for the quarter of $645,502, or 33 cents per share,
compared with a net loss of $321,759, or 24 cents per share, in the same period
a year ago. Management said the loss was attributable to reduced sales and a
significant rise in selling, general and administrative expenses, which
increased to $506,268 from $325,562 last year. Increased SG&A expenses resulted
primarily from expansion of the Company's sales force as the Company works to
increase distribution of its products.
In addition to completing the new brewery, FBC announced several other
significant accomplishments during the quarter, which management believes will
strengthen the Company's long-term sales performance. On April 1, FBC introduced
Hempen Ale, the first commercially produced and marketed malt beverage that uses
hemp seeds as a primary ingredient. Wholesale distributors throughout the United
States and Canada have contacted the Company about the new product, and
management expects the widespread media attention Hempen Ale is receiving will
increase the Company's sales and geographic distribution.
In March, FBC announced it had signed distribution agreements for the New York
City, New Jersey and Florida markets. Also in March, three FBC brews won medals
at the Cheers' Magazine's "One World" Beer Festival held in Miami, Florida. The
Company completed two private placements of preferred stock during the quarter,
which netted proceeds of more than $4 million.
"While our first quarter financial results were not satisfactory, we are pleased
with the overall level of activity that took place during the period," said
Kevin Brannon, CEO. "As the new brewery reaches full operating capacity, we
should experience a corresponding increase in our gross sales results and an
improvement in our overall financial performance. We are eager to capitalize on
the widespread national attention the Company has received in recent months."
<PAGE>
Founded in 1992, Frederick Brewing Co. participates in the growing "craft" beer
segment of the $50 billion domestic beer market. The Frederick, Maryland-based
Company produces 12 styles of distinctive, all-natural beers.
Continued on Page 2
<PAGE>
Statements made in this news release that are not historical facts may be
forward looking statements. Actual results may differ materially from those
projected in any forward looking statement. There are a number of important
factors that could cause actual results to differ materially from those
anticipated by any forward looking information. A description of risks and
uncertainties attendant to Frederick Brewing Company and its industry and other
factors which could affect the Company's financial results are included in the
Company's 10-QSB filed with the Securities and Exchange Commission.
FINANCIAL RECAP
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1997 1996
------------------ -----------------
<S> <C> <C>
Gross sales $ 265,814 $ 432,230
Less excise taxes 16,906 18,361
Net sales 248,908 413,869
Cost of sales 421,903 406,664
Gross profit (loss) (172,995) 7,205
Selling, general and
administrative expense 506,268 325,562
Operating loss (679,263) (318,357)
Interest expense, net 27,575 3,402
Other income (expense) (61,336) -
Loss before income taxes (645,502) (321,759)
Provision for income taxes - -
Net loss $ (645,502) $ (321,759)
Net loss per share $ (.33) $ (.24)
Weighted average common shares and
common share equivalents outstanding 1,954,876 1,350,079
###
CONTACTS:
Frederick Brewing Co. Pfeiffer Public Relations, Inc.
Kevin Brannon, CEO Geoff High
301/694-7899x100 303/393-7044
www.fredbrew.com
<PAGE>
</TABLE>
Page 2 of 2
<PAGE>
Press Release June 9, 1997
For Immediate Issue
Frederick Brewing Co. Management Sees Good Time Ahead
Frederick Brewing Co. (Nasdaq: BLUE) announced today that it expects second
quarter sales to reach $850,000, a 93 percent increase over the same period last
year and management expects to reach break even on a monthly-basis by the end of
the September, CEO Kevin Brannon, told Thursday's annual meeting of
shareholders.
Production at the new brewery has steadily increased since early April, said Mr.
Brannon. April sales were 85 percent of average monthly sales for 1996, although
the new bottling line, ten times faster than the old one, was initially running
at one third of maximum speed.
May gross revenues of $242,000 were the second highest of any month in the
company's history, and the 1,560 barrels packaged was 60 percent higher than
could have been achieved at the old brewery. Revenues for April and May were up
42 percent over the same period last year on an increase of 39 percent in
barrels sold. By the end of May the automatic bottling line was running at 50
percent of its rated speed - five times faster than the old equipment.
Bottling line speeds are expected to reach capacity by mid-June with production
due to reach 3,000 barrels of packaged beer by the end of the month which will
help clear backorders from current customers of more than 1,200 barrels.
"Assuming normal June orders and with the company's plans to expand distribution
of its Blue Ridge and Hempen Ales as soon as sales permit, the month's revenue
is expected to be about $500,000 on sales of 3,000 barrels. This would mean
second quarter revenues of over $850,000, a 93 percent increase over the second
quarter of 1996," he said.
The cost of the company's move to its new multi-million dollar brewery in March
and the initial disruption caused will mean another loss being posted for the
second quarter.
First quarter sales were down by 38 percent compared with the first three months
of 1996 because production in the original brewery was reduced in early February
and halted at the end of the month. Additionally, beer brewed at the new plant
could not be packaged until late March and was bottled on the company's old
bottling line until mid-April.
Labor costs are expected to remain higher than originally anticipated until all
packing line automation is fully operational, expected in mid-June. These costs,
together with the high costs already incurred in April and May and planned
advertising expenditure in June, mean that the company expects to post another
<PAGE>
large loss during the current quarter - similar to the $650,000 incurred in the
first quarter.
"Based on current trends, planned market and plant expansions, and the
expectation of lower costs as levels of automation and employee training
increase, management believes the company can reach break-even on a monthly
basis by the end of the third quarter of this year," said Mr. Brannon.
Statements made in this news release that are not historical facts may be
forward looking statements. Actual results may differ materially from those
projected in any forward looking statements. There are a number of important
factors that could cause actual results to differ materially from those
anticipated by any forward looking information. A description of risks and
uncertainties attendant to Frederick Brewing company and its industry and other
factors which could affect the company's financial results are included in the
Company's 10-QSB filed with the Securities and Exchange Commission.
###
For further information contact Kevin E. Brannon with Frederick Brewing Co.
at 301-694-7899.
<PAGE>
FOR IMMEDIATE RELEASE
June 26, 1997
BREWER SAYS SOARING DEMAND STRAINS CAPACITY
Frederick, MD -- Frederick Brewing Co., the brewer of the "Blue Ridge" and
"Hempen Ale" lines of craft beers, today said rapidly rising demand in current
markets, not problems with its packaging equipment, were slowing the company's
expansion into new markets. The company took issue with a report published in
the June 26 editions of the local Gazette weekly tabloids.
According to Marjorie McGinnis, FBC's president, the company's new
brewery on Wedgewood Boulevard has been bottling and shipping beer at levels
very near its current 3,300 barrel per month brewing capacity for about six
weeks. "The Gazette story missed the main point: sales of Blue Ridge and Hempen
Ale in our existing markets are so high that we cannot keep up with demand, even
with the new brewery running at full capacity. That is why, as the Gazette also
reported, we are ordering more tanks to increase our brewing capacity by 75%."
The new capacity should become available in September and October.
FBC previously reported that May sales were the second-highest in its
four year history and that it expects production and sales for the quarter
ending June 30 to be nearly double the same period last year. June production
was projected to reach about 3,000 barrels of packaged beer.
The brewer has filed a lawsuit, seeking $1 million in compensatory
<PAGE>
damages and $3 million in punitive damages, against Intertrade Packaging
Machinery Corp. of Cinncinatti, and two company officers, alleging breach of
contract, breach of warranty and fraud in the sale of packaging equipment. FBC
says none of the equipment was delivered on time, much of it was not delivered
at all and most of what was delivered required costly repairs to make it
function. The company was forced to use a much smaller and slower bottling line
for several weeks. McGinnis said, "In mid-May, we were able to get enough of the
equipment running to allow us to package all the beer we can make. The problem
since then has been that we have had to employ a number of temporary workers to
build and pack the six-pack cartons and case boxes. This has been expensive and
negatively effects our profitability but has not caused us to lose sales over
the past six weeks." She acknowledged that the packaging equipment problems did
cause the brewery to lose substantial sales from March through mid-May. The
company expects that all of the packaging equipment will be fully functional
within a week.
<PAGE>
Of the lawsuit, Kevin Brannon, FBC's chief executive officer, said, "I
am very confident that we will win our case. But having studied and practiced
law for ten years before starting this business, I know that it is often a long
and winding road between filing a case and collecting money from a defendant."
Brannon scoffed at the Gazette's headline, "Brewery files lawsuit for $4 million
to stay afloat." He said the company's financial prospects were "in no way tied"
to the outcome of the lawsuit.
FOR FURTHER INFORMATION CONTACT:
KEVIN BRANNON OR MARJORIE MCGINNIS, FREDERICK BREWING CO.
(301) 694-7899. E-Mail: [email protected]; [email protected]
U. S. Small Business Administration
Certified Development Company Program
"504" NOTE
Loan Number CDC-L 919-628-30-04-MD
Baltimore, Maryland
-------------------
(city and state)
<PAGE>
$ 1,000,000.00 (Date) April 15, 1997
------------------------ ---------------
For value received, the Undersigned promises to pay to the order of
Mid Atlantic Business Finance Company
-------------------------------------
Payee (development company)
at its office in (city and State) Baltimore, Maryland, or upon assignment or
transfer of this Note by the Payee, and written notice thereof to the
Undersigned, at such other place as may be designated from time to time by said
assignee or transferee, ONE
MILLION------------------------------------------dollars,
(Write out amount)
with interest on the outstanding balance at 7.368% per annum commencing on May
14, 1997 (date of Debenture).
Loan payments shall be made in equal installments, each in the amount
of $8,570.98, commencing on the first day of June, 1997, and continuing due and
payable on the first day of each month thereafter until May 1, 2017, when the
full unpaid balance of principal and interest shall become due and payable. In
addition to the aforesaid loan payments, forth in the Servicing Agent Agreement
(SBA Form 1506) attached to and incorporated into this Note.
This Promissory Note evidences and related Collateral is given, to
secure a loan made by the Payee to the Undersigned and such Note and Collateral
will be assigned by Payee to the Small business Administration (SBA) to secure
the guaranty by SBA pursuant to 503 (a) of the Small Business Investment Act [15
U.S.C. 697 (a)], of a Debenture to be issued and sold by the Payee (the
"Debenture"), which is hereby incorporated herein by reference.
All payments under this note shall be applied in this order: (1)to the
servicing fees set forth in the Servicing Agent Agreement, (2) to interest, (3)
to principal, (4) to the late fee set forth in this Note.
Late Charge
- - -----------
In the event Payee or its Agent or assignee accepts a late payment after the
fifteenth day of the month in which such payment is due, the Undersigned agrees
to pay a late payment charge equal to five percent of the late amount or
$100.00, whichever is greater, as compensation for additional collection
efforts.
Definitions
- - -----------
The term "Indebtedness" as used herein shall mean the indebtedness evidenced by
the Note, including principal, interest, service fees, late payment charges, and
expenses including but not limited to the expenses related to the care and
preservation of Collateral and interest at the note rate thereon, whether
contingent, now due or hereafter to become due, and the stated prepayment
premium, if applicable. The term "Collateral" as used in this Note shall mean
<PAGE>
any funds, guaranties, or other property, or rights therein of any nature
whatsoever, or the proceeds thereof, which are, or hereafter may be
hypothecated, directly or indirectly, by the Undersigned or others, in
connection with, or as security for, the Indebtedness or any part thereof. The
Collateral, and each part thereof, shall secure the Indebtedness and each part
thereof. The covenants and conditions set forth or referred to in any
instruments of hypothecation constituting the Collateral are hereby incorporated
in this Note as covenants and conditions of the Undersigned with the same force
and effect as though such covenants and conditions were fully set forth herein.
The term "CSA" shall mean the Central Servicing Agent appointed by the
development company (SBA Form 1506) and accepted by the Undersigned to receive
all payments by the Undersigned under this Note. The term "Undersigned" shall
mean the borrower under this Note and, if the operating small concern for the
benefit of which this loan is made is not the borrower, such operating small
concern.
<PAGE>
Prepayment
- - ----------
Payment of the entire outstanding balance of the Indebtedness may be made prior
to the maturity date hereof, timing to be arranged with Payee or SBA as assignee
but no partial prepayments may be made. The amount required to prepay this Note
shall be the aggregate of the Indebtedness including interest to the prepayment
(repurchase) date, and any prepayment premium required by the schedule to be
attached to this Note and incorporated by this reference. For purposes of
prepayment the repurchase date is the next semi-annual payment date on the
Debenture. The Undersigned must make a written request for prepayment to the
payee or SBA as assignee at least forty-five (45) days before the prepayment
date. Ten (10) business days prior to the scheduled refundable good faith
deposit of one thousand dollars ($1,000) to the CSA. Such deposit shall be
applied in full to the repurchase price of said debenture and shall be forfeited
if undersigned fails to pay the designated total prepayment amount to the CSA on
the designated prepayment date, as compensation for the cost of arranging the
failed prepayment.
Acceleration
- - ------------
The Indebtedness shall immediately become due and payable, upon the appointment
of a receiver or liquidator, whether voluntary or involuntary, for the
Undersigned or for any of its property, or upon the filing of a petition by or
against the Undersigned under provisions of any State or Federal insolvency law
or under the provisions of the Bankruptcy Code of 1978 or upon the making by the
Undersigned of an assignment for the benefit of its creditors. Payee with the
consent of SBA, or SBA as assignee is authorized to declare all or any part of
the Indebtedness immediately due and payable upon the happening of any of the
following events: (1) Failure to pay any part of the Indebtedness when due; (2)
nonperformance by the Undersigned of any agreement with, or any condition
imposed by, the development company or SBA; (3) failure of the Undersigned or
<PAGE>
any person acting on behalf of the Undersigned to disclose any material fact, in
any application, declaration or other document delivered to the development
company or SBA or any misrepresentation by or for the benefit of the Undersigned
in such document; (4) the reorganization, merger or consolidation of the
Undersigned without prior written consent of the development company and SBA, or
the making of an agreement therefor; (5) the sale of the Collateral, or any part
of it or any interest in it, or any agreement that the Collateral will be
alienated by the Undersigned, or any alienation of the Collateral by operation
of law or otherwise; (6) the Undersigned's failure duty to account, to Payee's
or SBA's (as assignee) satisfaction, at such time or times as may be required,
for any of the Collateral, or proceeds thereof, coming into the control of the
Undersigned; (7) the institution of any suit affecting the Undersigned deemed
otherwise; (8) any change, without prior written approval by SBA, affecting ten
or more percent in the legal or equitable ownership of the Undersigned; (9) any
change in the respective ownerships of the Undersigned; (10) if the Undersigned
and/or its affiliates acquire directly or indirectly an ownership interest of
ten or more percent in the development company; (11) any other event prohibited
by the related security or other instruments; or (12) any failure to exercise
its rights under this paragraph shall not constitute a waiver thereof. Upon
acceleration pursuant to this paragraph, the indebtedness shall be computed in
the same manner as is set forth for the prepayment amount in the preceding
paragraph captioned "Prepayment".
Collateral
- - ----------
Upon the nonpayment of the Indebtedness, or any part thereof, when due, whether
by acceleration or otherwise, Payee with SBA's consent or SBA as assignee is
empowered to sell, assign, and deliver the whole or any part of the Collateral
at public or private sale. After deducting all expenses incidental to such sale
or sales, Payee or SBA as assignee may apply the proceeds thereof to the payment
of the Indebtedness as it shall deem proper. The Undersigned hereby waives all
rights to redemption or appraisement whether empowered, to convert into money
all or any part of the Collateral, by suit or otherwise, and to surrender,
compromise, release, renew, extend, exchange, or substitute any item of the
collateral in transactions with the Undersigned or any third party. Whenever any
item of the collateral shall not be paid when due, or otherwise shall be in
default, whether or not the Indebtedness, or any rights and powers with respect
to such item of the Collateral as are granted in respect thereof in this
paragraph in case of nonpayment of the Indebtedness, or any part thereof, when
due. None of the rights, remedies, privileges, or powers of Payee or SBA as
assignee expressly provided for herein shall be exclusive, but each of them
shall be cumulative with and in addition to every other such power now or
hereafter existing in favor of Payee or SBA as assignee, whether at law or in
equity, by statute or otherwise.
2
<PAGE>
The Undersigned agrees to take all necessary steps to administer, supervise,
preserve, and protect the Collateral; and regardless of any action taken by
Payee or SBA as assignee, there shall be no duty upon Payee or SBA as assignee
<PAGE>
in this respect. The Undersigned shall pay all expenses of any nature, including
but no limited to reasonable attorney's fees and costs, which Payee or SBA as
assignee may deem necessary in connection with the satisfaction of the
Indebtedness or the administration, preservation (including, but not limited to,
adequate insurance of), or the realization upon the Collateral. Payee with SBA's
consent or SBA as assignee is authorized to pay at any time and from time to
time any or all of such expenses, add the amount of such payment to the amount
of the Indebtedness, and charge interest thereon at the rate specified by any
indulgence, including but not limited to (a) any renewal, extension, or
modification which Payee or SBA as assignee may grant with respect to the
Indebtedness or any part thereof, or (b) any surrender, compromise, release,
exchange, or substitution which Payee or SBA as assignee may grant in respect of
the Collateral, or (c) any indulgence granted in respect to any endorser,
guaranty, and any other document (or any of them), sold, transferred, or
pledged, shall forthwith become vested with and entitled to exercise all the
powers and rights given by this Note as if said purchaser, transferee, or pledge
were originally named as Payee in the Note.
FREDERICK BREWING CO.
Witness: /s/ Carole S. Gould By: /s/ Kevin E. Brannon
------------------- ---------------------
[Title] Chairman
[Name of Undersigned] Kevin E. Brannon
----------------
In consideration of the guarantee by Small Business Administration of a
Debenture in the amount of $1,000,000.00, issued by Mid-Atlantic Business
Finance Company hereby assigns and transfers
(Development Company)
all rights, title and interest in this Note to the Small Business
Administration.
SEAL The Mid-Atlantic Business
Finance Company
---------------
By: /s/ Paula Kligg
---------------
Attest /s/ Allison F. Crispell
-----------------------
See attached Addendum for confession of Judgment Clause
3
<PAGE>
<PAGE>
Addendum to 504 Note
SBA Form 1505
Loan # CDC-L 919-628-30-04-MD
dated this 15th day of April, 1997
CONFESSION OF JUDGMENT CLAUSE
-----------------------------
If payment of the indebtedness evidenced by this Note, or any part
thereof, shall not be made when due and at maturity, by acceleration or
otherwise, the undersigned hereby authorize(s) and empower(s) any attorney of
any Court of Record within the United States to appear for the undersigned in
any Court, or before any Clerk thereof, and confess judgment against the
undersigned either jointly or severally in favor of the Holder of this Note for
the amount then due thereon, with the interest thereon aforementioned and the
cost of suit and attorney's fees of fifteen per cent (%15), hereby waiving and
releasing all errors and all rights of exemption, appeal, stay of execution,
inquisition and extension upon any levy or real estate or personal property to
which the undersigned may otherwise by entitled under the laws of any State
hereafter be passed. If this Note is referred to any attorney for collection,
and payment is obtained without the entry of a judgment, then the undersigned
shall pay to Holder attorney's fees in the amount aforesaid. If there be more
than one undersigned, their liability shall be joint and several, any use of the
singular herein may also refer to the plural and vice versa, and the use of any
gender shall be applicable to all genders.
The undersigned acknowledge(s) that this Addendum is a continuation of
504 Note, SBA Form 1505, dated April 15, 1997 evidencing a loan in the amount of
$1,000,000.00 to Frederick Brewing Co., and that they have read all of the pages
of said Note and this Addendum is incorporated by reference therein.
IN WITNESS THE EXECUTION OF THIS NOTE UNDER SEAL, on the day and year
first above written.
FREDERICK BREWING CO.
Witness: /s/ Craig J. O'Connor /s/ Kevin E. Brannon
--------------------- --------------------
Kevin E. Brannon
Chairman
4
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