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 March 31, 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 Exhcange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ]Yes [ ]No
Common Stock, $0.00004 Par Value 1,954,876
-------------------------------- ---------
(Title of Each Class) (Number of Shares Outstanding
as of May 13, 1997)
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [ X ]
0
<PAGE>
FREDERICK BREWING CO.
-------------------------
INDEX TO FORM 10-QSB
-------------------------
PART I. FINANCIAL INFORMATION
- - - ----------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEET (UNAUDITED)
March 31, 1997 1
STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31, 1997 and 1996 2
STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, 1997 and 1996 3
NOTES TO UNAUDITED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 8
PART II. OTHER INFORMATION
- - - ----------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 2. CHANGES IN SECURITIES 13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES
- - - ----------------------------------------------------------------------------
SIGNATURE PAGE 17
1
<PAGE>
Item 1. Financial Statements.
Frederick Brewing Co.
Balance Sheet
March 31, 1997
--------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,098,669
Cash - restricted 36,270
Trade receivables 119,759
Inventories, net 172,394
Prepaids and other current assets 883,372
-----------
Total current assets 4,310,464
Property and equipment, net 7,750,853
Intangibles, net of accumulated amoritization of $25,914 232,098
Other assets 28,774
-----------
Total assets $12,322,189
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and lease obligations $ 674,861
Accounts payable 741,323
Accrued liabilities 44,433
-----------
Total current liabilities 1,460,617
Long-term debt and lease obligations 5,593,594
-----------
Total liabilities 7,054,211
-----------
Commitments and contingencies
Stockholders' equity:
Preferred stock - Series A, 1,848 shares issued
and outstanding 729,335
Preferred stock - Series B, 3,750 shares and
outstanding 1,920,422
Common stock - $0.00004 par value, 9,000,000 shares
authorized, 1,954,876 shares issued and outstanding 72
Additional paid-in capital 6,351,757
Accumulated deficit (3,733,608)
-----------
Total stockholders' equity 5,267,978
----------
Total liabilities and stockholders' equity $12,322,189
===========
The accompanying notes are an integral part of these financial statements.
<PAGE>
Frederick Brewing Co.
Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1997 1996
------------------ --------------
(Unaudited)
<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 expenses 506,268 325,562
----------- -----------
Loss from operations (679,263) (318,357)
Interest expense, net 27,575 3,402
Other income (61,336) -
----------- -----------
Loss before income taxes (645,502) (321,759)
Provision for income taxes - -
----------- -----------
Net loss $ (645,502) $ (321,759)
=========== ===========
Preferred Stock Dividend Requirements (1,325,828) -
------------ ------------
Net loss attributable to common shareholders $(1,971,330) $ (321,759)
=========== ============
Per common share
Net loss $ (0.33) (0.24)
=========== ===========
Preferred stock dividend requirements $ (0.68) $ -
----------- -----------
Net loss attributable to common shareholders $ (1.01) $ (0.24)
=========== ===========
Weighted average common shares and common
share equivalents outstanding 1,954,876 1,350,079
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Frederick Brewing Co.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1997 1996
------------------ --------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (645,502) $ (321,759)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 44,638 48,368
Changes in operating assets and liabilities:
Receivables 119,654 (28,337)
Inventories 38,169 (74,902)
Prepaid expenses (800,960) 107,708
Other assets 42,226 -
Accounts payable & accrued expenses (8,998) (249,697)
----------- -----------
Net cash used for operating activities (1,210,773) (518,619)
----------- -----------
Cash flows from investing activities
Deposits on equipment - (566,146)
Purchase of other assets - (36,015)
Purchase of property and equipment (746,428) (13,067)
Increase in intangibles (67,652) (47,743)
----------- -----------
Net cash used for investing activities (814,080) (662,971)
----------- -----------
Cash flows from financing activities
Payments on short-term debt - (100,000)
Proceeds from long-term debt 531,343 -
Payments on long-term debt (147,319) (321,210)
Payments on capital leases (3,312) -
Proceeds from preferred stock issuance, net 4,090,090 -
Proceeds from common stock issuance, net - 3,857,679
Restricted cash 603,730 -
----------- -----------
Net cash provided by financing activities 5,074,532 3,436,469
----------- -----------
Net increase in cash and cash equivalents 3,049,679 2,254,879
Cash and cash equivalents, beginning of period 48,990 -
----------- -----------
Cash and cash equivalents, end of period $ 3,098,669 $ 2,254,879
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
FREDERICK BREWING CO.
Notes to Financial Statements
March 31, 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 month period ended March 31, 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 March 31, 1997, the
following cash and cash equivalents are held by the Company:
Cash in bank and petty cash $ 3,098,669
Securities held under agreement to repurchase 36,270
------------
$ 3,134,939
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 March 31, 1997, approximately $36,000 of the
securities was pledged as collateral to guarantee the Company's obligation to
Signet for the new facility and was recorded as restricted cash.
5
<PAGE>
Notes to Financial Statements
March 31, 1997
(Unaudited)
Note 3 - Income Taxes
- - - ----------------------------------------------------------------------------
The Company accounts for income taxes under the asset and liability method. The
Company has not recorded a provision for income taxes for the three month
periods ended March 31, 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 March 31,
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 months ended March 31, 1997 and 1996
because the effects of such items were anti-dilutive.
In February, 1997 the Financial Accounting Standards Board issued Statement 128,
"Earnings Per Share" (SFAS 128), which specifies the computation, presentation,
and disclosure requirements for earnings per share. SFAS 128 is effective for
periods ending after December 15, 1997. The Company does not expect the adoption
of SFAS 128 to have a material impact on the computation of earnings per share.
The net loss attributable to common shareholders has been adjusted for deemed
dividends. The deemed dividend relates to the discount feature associated with
the Company's Series A and Series B Convertible Preferred Stock, issued in March
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 Series
A and Series B, respectively, is recognized as a return to the shareholders over
the minimum period in which the shareholders can realize that return. The Series
B shares are convertible immediately, thus the dividends related to such shares
was recognized 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 the date of issuance.
Note 5 - Preferred Stock
- - - ----------------------------------------------------------------------------
The Company is authorized to issue up to 1,000,000 shares of $.01 par value
preferred stock. The Board of Directors has the authority to issue the preferred
stock in one or more series and to fix the price, rights, preferences,
privileges and restrictions thereon. In January 1996, the Board of Directors
authorized the issuance of 8% Series A Cumulative Convertible Preferred Stock
("Series A"). The Series A shares rank senior to the common stock with respect
to dividend and liquidation rights. Dividends are payable at an annual rate of
$40 per share per annum, when and if declared by the Board of Directors. If not
declared, dividends will accumulate and be payable in the future. The
liquidation preference is $500 per share plus accrued but unpaid dividends. Each
Series A share is convertible, after one year from the closing date of such sale
of Series A shares or immediately preceding any public offering of the Company's
common stock, into shares of common stock based on conversion parameters set
forth in the agreement. The Series A shares do not have any voting rights.
In March 1997, the Board of Directors authorized the issuance of a Series B
Convertible Preferred Stock ("Series B"). The Series B shares rank senior to the
common stock and the Series A shares with respect to liquidation rights.
Dividends may be declared consistent with amounts declared with respect to the
common stock. The Company does not expect to declare or pay such dividends on
the Series B in the foreseeable future. The Series B shares are immediately
convertible to shares of common stock based on conversion parameters set forth
in the agreement. Both the Series A and Series B would be convertible into
1,323,036 shares of Common Stock as of the date of the Company's Registration
Statement on Form S-3 filed with the SEC.
7
<PAGE>
Notes to Financial Statements
March 31, 1997
(Unaudited)
In connection with the sale of approximately $4.7 million of the Preferred Stock
in the first quarter of 1997, the Company paid cash commissions in the amount of
$553,080 to certain of the brokers who assisted in the private placements and
issued to certain of such brokers and to the Company's two public relations firm
immediately exercisable warrants to purchase up to 782,145 shares of the
Company's Common Stock at prices ranging from $4.38 to $7.20 per share. These
warrants are subject to adjustment for stock splits, stock dividends,
combinations, recapitalizations or reclassifications undertaken by the Company.
See the Company's Registration Statement on Form S-3 filed with the SEC on April
24, 1997.
Note 6 - Prepaid Expenses
- - - ----------------------------------------------------------------------------
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. according to the agreements
attached as exhibits hereto. The entire $800,000 is reflected in prepaid
expenses in the Company's Financial Statements. Of this amount $150,000
represents payments to Gulf Atlantic and Arrow Marketing to be amortized during
the second quarter of 1997, while the remaining balance represents payments to
CRG which will be amortized on a straight-line basis over 60 months beginning in
April 1997. See exhibits attached hereto.
Note 7 - Property and Equipment
- - - ----------------------------------------------------------------------------
Property and equipment at March 31, 1997 consists of the following:
Brewing equipment $ 3,788,208
Capital lease - building 3,739,568
Leasehold improvements 274,170
Automobiles and trucks 201,499
Furniture and fixtures 72,808
------------
Total 8,076,253
Less accumulated depreciation and amortization (325,400)
------------
Property and equipment, net $ 7,750,853
============
The portion 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, which was equal
to the present value of the future minimum lease payments at the inception of
the lease term.
8
<PAGE>
PART I. - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations For the Three Months Ended March 31, 1997 and 1996
Overview of Significant Activities and Expenses
- - - ----------------------------------------------------------------------------
A net loss of ($645,502), or ($0.33) per share, was incurred during the first
quarter of 1997 compared to net loss of ($321,759), or ($0.24) per share, for
the corresponding quarter of 1996.
Weighted average common shares outstanding were 1,954,876 during the first
quarter of 1997, compared to 1,350,079 for the corresponding period in 1996.
Construction of the Company's new brewery was completed during the first quarter
of 1997. This facility increases the Company's ability to produce approximately
400% more product per year than the Company's former brewery. This production
capacity can grow even more with the installation of additional fermentation
vessels and minimal capital construction. The Company began producing its
products in this facility at limited levels in the latter part of the quarter.
The Company's production levels were hindered by delays in the full operation of
the packaging facilities of the new brewery. These delays have been addressed
and are being corrected as of the date of this filing. Full production in the
new facility should begin in the second quarter of 1997.
Management took several steps during the first quarter to prepare the Company's
distribution network to generate anticipated higher levels of sales during the
remainder of 1997. The Company continues to expand its geographic distribution
across the eastern half of the United States.
During the first quarter of 1997 the Company also announced the introduction of
Hempen Ale(TM), the first commercially produced and marketed malt beverage in
United States history to be produced with hemp seeds as a primary ingredient.
Since this announcement, the Company has been contacted by wholesale
distributors, throughout the U.S. and Canada, about the sale of this product.
The Company intends to use this product to assist in broadening the geographic
expansion of its other ales and lagers.
The Company also completed two separate private placements of preferred stock
during the first quarter of 1997. The first placement, the 8% Cumulative
Preferred Stock, Series A, (the "Series A"), was completed on March 31, 1997,
resulting in net proceeds of approximately $848,000 into the Company for
completion of the new brewing facility and working capital purposes. A second
placement, the Preferred Stock, Series B, (the "Series B"), resulted in net
proceeds of $3.2 million into the Company for working capital purposes. For more
information about the terms of these placements, see the Company's Form 10-KSB
filed with the Securities and Exchange Commission ("SEC") on March 31, 1997 and
the Company's Registration Statement on Form S-3 filed with the SEC on April 24,
1997 to permit certain shares of common stock into which the Series B is
convertible to be sold without restrictions by the private investors.
8
<PAGE>
Management's Discussion and Analysis
For the Three Months Ended March 31, 1997 and 1996
Review of Operations
- - - ----------------------------------------------------------------------------
The following table sets forth certain items derived from the Company's
Statements of Operations, expressed as a percentage of net sales, for the three
month periods ended March 31, 1997 and 1996.
Percentage of Sales
Three Months
Ended March 31,
---------------
1997 1996
---- ----
(Unaudited)
Gross sales . . . . . . . . . . . . . . . . 106.8% 104.4%
Less excise taxes . . . . . . . . . . . . . 6.8 4.4
--- ---
Net sales . . . . . . . . . . . . . . . . . 100.0 100.0
Cost of sales . . . . . . . . . . . . . . . 169.5 98.3
----- ----
Gross profit (loss). . . . . . . . . . . . . (69.5) 1.7
Selling, general, and admin. expenses . . . 203.4 78.7
----- ----
Loss from operations . . . . . . . . . . . . (272.9) (77.0)
Interest expense, net. . . . . . . . . . . 11.1 0.8
Other income . . . . . . . . . . . . . . . (24.7) 0.0
----- ---
Net loss . . . . . . . . . . . . . . . . . . (259.3)% (77.8)%
======== =======
Sales
- - - ----------------------------------------------------------------------------
Gross sales for the 1997 and 1996 first quarters were $265,814, and $432,230,
respectively, a decrease of $166,416, or 38.5%, from 1997 to 1996.
First quarter volumes were 1,606 and 2,456 barrels for 1997 and 1996,
respectively, a decrease of 850 barrels, or 34.6%. Revenues per barrel between
the first quarters of 1997 and 1996 were $166 and $168 per barrel, respectively,
a decrease of $2 per barrel. The decline in the revenues per barrel reflects a
change in the sales mix of the Company's products between kegs, which have a
lower revenue per barrel contribution, and cases.
Sales of the Company's products were hindered in the first quarter of 1997
because the Company ceased operations in the Company's old facility prior to the
full scale operation of its new brewery. This limited the amount of the
Company's products available for sale. The delay in bringing the new brewery up
to full operation was primarily due to delays on the part of the supplier of the
materials handling portion of the packaging equipment. The Company believes this
supplier has caused material financial burden on the Company through a breach of
the contract between the companies. The Company is in discussions with the
supplier to resolve the situation. However, there can be no assurance that an
acceptable and timely settlement can or will be reached.
<PAGE>
Management's Discussion and Analysis
For the Three Months Ended March 31, 1997 and 1996
Excise Taxes
- - - ----------------------------------------------------------------------------
Federal and state excise taxes were $16,906 and $18,361, or 6.8% and 4.4% of net
sales, during the first quarters of 1997 and 1996, respectively. The increase in
excise taxes in 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 an 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
- - - ----------------------------------------------------------------------------
First quarter cost of sales for 1997 and 1996 was $421,903 and $406,664, or
169.5% and 98.3% of net sales, respectively, an increase of $15,239 over 1996.
During the first quarter of 1997, the cost of sales increases were primarily due
to the Company's increased fixed costs of operating two facilities for a
substantial portion of the quarter. The Company's original facility ceased
operation early in the second quarter of 1997. Rent increased by approximately
$15,000 over the same period in 1996 due to operating in multiple locations. In
addition, utilities costs increased by approximately $17,000 due to the
increased volumes needed to run the much larger new facility. Labor costs
variances also increased as a portion of the cost of sales because of the number
of hours worked per employee increased, while the number of barrels of product
sold decreased as production employees spent much of their time commissioning
and training to use the new brewing and packaging equipment. These labor
variances were also caused by delays in the packaging facilities in the new
brewery.
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 production equipment is "de-bugged" and
personnel gain experience. However, fixed depreciation expenses associated with
the brewery building and equipment and leased equipment expenses will increase
in the near term because future quarters will have a full three months
amortization incorporated in the expense. Fixed production costs, as a
percentage of revenues, will decline if and when sales volumes increase,
allowing these expenses to be spread over a larger number of units sold.
<PAGE>
Management's Discussion and Analysis
For the Three Months Ended March 31, 1997 and 1996
Selling, General and Administrative Expenses
- - - ----------------------------------------------------------------------------
Selling, general and administrative ("SG&A") expenses were $506,268 and $325,562
in the first quarters of 1997 and 1996, respectively, an increase of $180,706,
or 55.5%.
The Company's SG&A expenses increased over the comparable period in 1996 due to
several factors. The most substantial increase was the addition of the Company's
sales force. During the first quarter of 1997, the Company had eight sales
people and a sales manager working to increase distribution of the Company's
products compared to two sales people and no sales manager in the first quarter
of 1996. Approximately $143,000 of the increase can be attributed to increased
payroll expense and travel and related promotional expenses. The number of
Company employees has increased over the comparable period of 1996, resulting in
increased health insurance costs and payroll taxes of approximately $18,000.
Salary increases also were a factor in the increases over the comparable period
of 1996. These increases accounted for approximately $5,000. Outside
professionals expenses increased by approximately $10,000 over the first quarter
of 1996, most of which related to the cost of being a publicly held company
during the entire first quarter of 1997.
Other Income
- - - ----------------------------------------------------------------------------
Other income of $61,336 during the first quarter of 1997 relates to gains
recognized due to timing differences between the cash received and full sale
values of written-down assets from year end 1996. In future periods of 1997,
this gain will be offset by losses incurred on the remaining assets. Management
believes that the net gain on the sale of used brewing equipment on the Company
for the year will be zero. The Company had no other income or expenses during
the comparable period of 1996.
Interest Expense, Net
- - - ----------------------------------------------------------------------------
Interest expense, net during the first quarter in 1997 was $27,575 in comparison
to $3,402 during the comparable period in 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.
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.
Preferred Stock Dividend Requirement
The deemed dividend relates to the discount feature associated with the
Company's Series B Convertible Preferred Stock, issued in March of 1997. 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 dividend 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.
Liquidity and Capital Resources
- - - ----------------------------------------------------------------------------
Due to losses experienced during the start-up and expansion of the Company,
operations to date have been funded from private and public placements of common
and preferred stock, primarily, and loans from stockholders and financial
institutions. As of March 31, 1997, the Company had working capital of
approximately $2.8 million. This balance is principally the result of the sale
of preferred stock which raised approximately $ 4.7 million in gross proceeds
for the Company. In the comparable period of 1996, the Company had working
capital of approximately $2.6 million primarily a result of the closing of the
Company's IPO.
<PAGE>
Management's Discussion and Analysis
For the Three Months Ended March 31, 1997 and 1996
Net cash used in investing activities during the three months ended March 31,
1997 was, $814,080, which amounts primarily represent purchases of capital
assets (approximately $746,000). In addition, various expenses incurred in
arranging for the Small Business Administration ("SBA"), MEDCO and Signet
financing, brewery construction, and trademarks were capitalized as intangible
assets. In the first quarter of 1996, net cash used in investing activities was
$662,971, which primarily represented deposits made with vendors for new brewery
equipment.
Net cash provided by financing activities during the three months ended March
31, 1997 was approximately $4.3 million, consisting primarily of the first
quarter 1997 preferred stock proceeds of approximately $4.1 million net of
commissions and fees. First quarter 1996 activities related primarily to the
proceeds of the Company's IPO and repayments of some 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 facility but is negotiating to obtain a line of credit
from Signet. Management does not anticipate obtaining this or any other
revolving credit facility until after the new brewery is fully operational. This
line of credit will be separate from the bridge financing provided by Signet for
new brewery equipment and furnishings.
The Company had cash balances of approximately $3.1 million at March 31, 1997.
Management believes that this level of liquidity is sufficient to fund its
operations until such time as the Company can generate positive cash flows from
operations, which is expected to occur within twelve months after the new
brewery begins full scale production.
Impact of Inflation-------------
Although the Company has not attempted to calculate the effect of inflation,
management does not believe inflation has had a material effect on its results
of operations. Material increases in costs and expenses, particularly packaging,
raw material and labor costs, in the future, could have a significant impact on
the Company's operating results to the extent that the effect of such increases
cannot be transferred to its customers.
Forward-Looking Information
- - - ----------------------------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements made by the Company in its disclosures to
the public. There is certain information contained herein, in the Company's
press releases and in oral statements made by authorized officers of the Company
which are forward-looking statements, as defined by such Act. When used herein,
in the Company's press releases and in such oral statements, the words
"estimate," "project," "anticipate," "expect," "intend," "believe," "plans," and
similar expressions are intended to identify forward-looking statements. 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.
<PAGE>
PART II. - OTHER INFORMATION
For the Three Ended March 31, 1997 and 1996
FREDERICK BREWING CO.
Item 1. Legal Proceedings
- - - ----------------------------------------------------------------------------
None.
Item 2. Changes in Securities
- - - ----------------------------------------------------------------------------
In January 1996, the Company's Board of Directors authorized the raising of
additional equity capital of up to $2.0 million pursuant to a private placement
of its Series A Preferred Stock to primarily "accredited investors" as that term
is defined by Regulation D promulgated under the Securities Act of 1933, as
amended. The following is a brief description of the terms of the Series A
Preferred Stock: (i) the number of shares of Series A Preferred Stock offered
was a minimum of 600 shares and a maximum of 4,000 shares; (ii) the Series A
Preferred Stock will rank senior to the Common Stock with respect to dividend
and liquidation rights; (iii) dividends on the Series A Preferred Stock are
payable at the annual rate of $40.00 per share per annum, when, as and if
declared by the Company's Board of Directors. If not declared, dividends will
accumulate and be payable in the future. Full dividends must be paid or set
aside on the Series A Preferred Stock before dividends may be paid or set aside
on the Company's Common Stock. All dividend payments will be subordinated to the
Company's debt obligations, and will be subject to the prior approval of Signet
and the Company's other future lenders. Signet has stated that it will not
permit dividends to be paid on the Series A Preferred Stock in 1997. As of March
31, 1997, the Company had sold 1,848 shares of the Series A Preferred Stock for
$924,000, which sale terminated on March 31, 1997.
Effective as of March 13, 1997, the Company's Board of Directors authorized
raising up to $3.75 million by the issuance and private sale of up to 3,750
shares of its Series B Convertible Preferred Stock ("Series B Preferred Stock")
to "non-United States persons" as that term is defined by Regulation S
promulgated under the Securities Act of 1933, as amended. The following is a
brief description of the terms of the Series B Preferred Stock: (i) the number
of shares of Series B Preferred Stock offered was 3,750 shares; (ii) the Series
B Preferred Stock will rank senior to the Common Stock and to the Series A
Preferred Stock with respect liquidation rights; (iii) dividends on the Series B
Preferred Stock may be declared and paid if, when and to the extent determined
from time to time by the Company's Board of Directors, provided that such
dividends shall be declared with respect to the Series B Preferred Stock on par
with dividends declared with respect to the Company's Common Stock. The Company
does not expect to declare or pay such dividends in the foreseeable future. The
Company closed on the sale of the Series B Preferred Stock on March 31, 1997 and
filed a report on Form 8-K with respect to that transaction with the Securities
and Exchange Commission on April 10, 1997.
The primary purpose of the private offering of the Series A and Series B
Preferred Stock was to provide funds for the completion of the new brewery, the
payment of offering expenses, the payment of the hiring and training of
administrative and sales personnel, and the payment of certain promotional,
marketing and advertising expenses. The balance of the net proceeds will be for
working capital and general corporate purposes. The Company may also use a
portion of the net proceeds for the acquisition of stock, debt, assets or
businesses or products from other brewers or independent third parties that are
complementary to those of the Company, although no such acquisitions are being
negotiated as of the date hereof, and no portion of the net proceeds has
13
<PAGE>
been allocated for such expansion or for any specific acquisition. Pending such
uses, the net proceeds of the offering will be invested in short-term, interest
or dividend-bearing accounts or securities.
Item 3. Defaults Upon Senior Securities
- - - ----------------------------------------------------------------------------
In connection with financing for the new brewery and related equipment, all of
the principal lenders of such financing (SBA, the Maryland Economic Development
Corporation ("MEDCO"), and Signet) have placed restrictions upon the Company's
ability to pay dividends, enter into new debt financing agreements, guarantee
debts of another person or party, make loans to other persons or parties, or
make substantial investments in non-current assets other than the new brewery.
In addition, debt covenants exist which stipulate various financial ratios which
must be maintained by the Company to avoid technical default on the equipment
financing.
On February 27, 1997, the Company executed two Forbearance Agreements with
Signet. The first Forbearance Agreement (the "Blue II Forbearance Agreement")
related to the $3.0 million MEDCO bond (the "Blue II Facility") relative to the
construction of the new brewery. The other Forbearance Agreement (the "FBC
Forbearance Agreement") related to the $1.5 million MEDCO Bond (the "FBC
Facility") and to the $969,000 bridge loan from the Signet ("Bridge Loan"), the
proceeds of which were to be loaned to the Company to purchase brewing equipment
for the new brewery. The Forbearance Agreements were executed by the Company as
a result of an approximately $340,000 difference between the amount of the Blue
II Facility and the cost to construct the new brewery as well as a decline in
the Company's cash position which resulted from significant weather-related
delays during construction, and an approximately $250,000 difference between the
FBC Facility and the Bridge Loan and the cost to acquire certain brewing
equipment. These so-called "funding deficiencies" caused Signet to claim the
Bridge Loan was in default and to temporarily cease funding the Blue II Facility
and the Bridge Loan as of January 22, 1997, subject to the execution of the
Forbearance Agreements. The Forbearance Agreements will facilitate the full
funding of the Blue II Facility and the Bridge Loan, as set forth below. During
the negotiations of the Forbearance Agreements, work on the new brewery
continued unabated.
The Blue II Forbearance Agreement recites that Blue II has defaulted under the
Blue II Facility due to its failure to cure a funding deficiency thereunder and
that an Event of Default has occurred under the Bridge Loan. However, Signet
agreed, pursuant to the Blue II Forbearance Agreement, to forbear in the
exercise of its rights and remedies under the Blue II Facility loan documents
and to continue to make loan advances to Blue II to facilitate the completion of
the new brewery, provided: (i) no other event of default occurs under the Blue
II Facility loan documents, and (ii) Blue II and the Company perform their
obligations under the Blue II Forbearance Agreement. Signet's agreement to
forbear from exercising its rights and remedies under the Blue II Facility loan
documents and to make advances thereunder were conditioned upon, among other
things: (i) Blue II providing to the Bank the amount by which the proceeds of
the Blue II Facility will be insufficient to satisfy the unpaid Acquisition
Costs (as defined in the Blue II Facility) of the new brewery through final
completion of the new brewery (the "Final Net Funding Deficiency"); (ii) the
sale by the Company of its Series A Preferred Stock to the general contractor of
the new brewery in an amount equal to the Final Net Funding Deficiency; (iii)
the revision of the Projected Completion Date (as defined in the Blue II
Facility) of the new brewery to be March 14, 1997; (iv) the use of the certain
funds escrowed Signet to pay current requisitions for funding under the Blue II
Facility; (v) the payment by the Company of all of the Signet's fees and
expenses relating to these Forbearance Agreements; and (vi) the waiver by the
Company of all causes of action against Signet, MEDCO, and the Maryland
Industrial Development Finance Authority ("MIDFA"). Signet provided a letter to
the general contractor prior to its purchase of the Series A Preferred Stock
that it would complete the funding of the Blue II Facility upon the general
contractor's acquisition of such shares. As of March 31, 1997, Blue II and the
Company had performed their obligations under the Blue II Forbearance Agreement
and, the events of defaults recited therein were, by operation of the Blue II
Forbearance Agreement, cured and/or waived.
14
<PAGE>
The FBC Forbearance Agreement recites that Signet by letter dated February 3,
1997, advised the Company that certain events of default have occurred with
respect to the FBC Facility, including: (i) the occurrence of adverse changes
deemed material by Signet with respect to the business, assets, operations of
financial condition of the Company, and (ii) the failure of Blue II to cure the
funding deficiency under the Blue II Facility. However, Signet agreed, pursuant
to the FBC Forbearance Agreement, to forbear in the exercise of its rights and
remedies under the FBC Facility loan documents and to continue to make loan
advances (up to $250,000 immediately and the remaining loan balance upon the
satisfaction of the conditions set forth below) to the Company under the Bridge
Loan to facilitate the purchase of the brewing equipment provided: (i) no other
event of default occurs under the FBC Facility Loan Documents, and (ii) the
Company performs its obligations under the FBC Forbearance Agreement. Signet's
agreement to forbear from exercising its rights and remedies under the FBC
Facility loan documents and to fund the remaining balance of the Bridge Loan
were conditioned upon, among other things: (i) the maintenance by the Company of
Eligible Accounts Receivable (as defined in the FBC Forbearance Agreement) of
not less than $100,000 until March 31, 1997 and of not less than $200,000
thereafter, tested twice monthly; (i) the payment to the Bank of a fee of
$25,000 in cash or Company Common Stock; (iii) the execution of an unconditional
personal guarantee of the Bridge Loan by the Chief Executive Officer and the
President of the Company; (iv) the payment over to Signet of any proceeds
obtained from the sale of the equipment at the old brewery to be held to further
collateralize the Bridge Loan; (v) Signet not having been advised that the SBA
has terminated its commitment to extend a $1.0 million loan to the Company; (vi)
the payment by the Company of all of Signet's fees and expenses relating to the
Forbearance Agreements; and (vii) the waiver by the Company of all causes of
action against Signet, MEDCO and MIDFA. The Company has performed its
obligations under the FBC Forbearance Agreement, and the alleged events of
default recited therein are deemed by Signet to have been cured and/or waived.
Each of these loans contain restrictive covenants, including certain financial
ratios relating to the Company's liquidity and financial position at certain
dates set forth in the loans and restrictions on the occurrence of adverse
changes deemed material by Signet with respect to the business, assets,
operations or financial condition of the Company. The Company has not complied
with certain of the financial ratios set forth in the agreements. During the
first quarter of 1997, the Company obtained a waiver from Signet related to
certain violations of financial covenants as of December 31, 1996 set forth in
the Company's loan agreements with the Bank. As March 31, 1997, the Company was
in full compliance with all loan covenants.
15
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
- - - ----------------------------------------------------------------------------
Not applicable.
Item 5. Other Information
- - - ----------------------------------------------------------------------------
See Item 6. Exhibits and Reports on 8-K, attached hereto.
Item 6. Exhibits and Reports on 8-K
- - - ----------------------------------------------------------------------------
(a) Exhibits Filed:
Index to Exhibits
- - - ----------------------------------------------------------------------------
(I.) Report filed on Form 8-K, March 31, 1997 /1/
(II.) Registration Statement filed on Form S-3, April 24, 1997 /2/
(III.) Press release, May 12, 1997 /4/
10 Material Contracts
(I.) Corporate Relations Group, Inc. /4/
(II.) Arrow Marketing Inc. /4/
(III.) Gulf Atlantic Publishing Inc. /4/
27 Financial Data Schedule
99 Safe Harbor Under the Private Securities Litigation
Reform Act of 19953
1 Incorporated by reference from Form 8-K filed with the SEC on March 31, 1997.
2 Incorporated by reference from Form S-3 filed with the SEC on April 24, 1997.
3 Incorporated by reference from Form 8-K filed with the SEC on February 27,
1997.
4 To be filed by Amendment
16
<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.
-------------------------------------
Kevin E. Brannon
Chairman of the Board and
Chief Executive Officer
-------------------------------------
Craig J. O'Connor
Vice President - Finance & Administration
Date: May ___, 1997
17
<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 May, 1997 /s/ Kevin E. Brannon
------------ ------------------------------------------
Kevin E. Brannon
Chairman of the Board and
Chief Executive Officer
Date May, 1997 /s/ Craig J. O'Connor
------------ ------------------------------------------
Craig J. O'Connor
Vice President - Finance & Administration
18
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