================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998.
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
Common Stock, $0.00004 Par Value 11,594,634
- -------------------------------- ------------------------------
(Title of Each Class) (Number of Shares Outstanding
as of June 30, 1998)
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
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, 1998 3
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three and Six Months Ended June 30, 1998 and 1997 4
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three and Six Months Ended June 30, 1998 and 1997 5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 9
PART II. OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2. CHANGES IN SECURITIES 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES
- --------------------------------------------------------------------------------
SIGNATURE PAGE 16
2
<PAGE>
Frederick Brewing Company
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 1998
-----------------
(Unaudited)
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $195,817
Cash-Restricted 12,475
Trade receivables, net of allowance for doubtful accounts of $35,076 742,261
Inventories, net 840,836
Prepaid expenses, and other current assets 225,146
-----------------
Total current assets 2,016,535
Property and equipment, net 8,245,231
Intangibles, net 457,436
Goodwill, net 2,620,192
Deferred cost & other assets 258,133
=================
TOTAL ASSETS $13,597,527
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $272,742
Capital lease obligations, current portion 85,504
Accounts payable 960,044
Accrued liabilities 506,857
-----------------
Total current liabilities 1,825,147
Long-term debt 2,068,199
Capital lease obligations 2,838,112
-----------------
Total liabilities 6,731,458
-----------------
Stockholders' Equity:
Preferred stock - $.01 par value, 1,000,000 shares authorized:
Cumulative, convertible Series A, 1,643 shares and outstanding, 614,633
Convertible Series B, 0 shares issued and outstanding --
Convertible Series C, 100 shares issued and outstanding 83,929
Convertible Series D, 0 shares issued and outstanding --
Convertible Series E, 1,765 shares issued and outstanding 1,367,875
1,367,875 Common stock - $0.00004 par value, 19,000,000 shares
authorized, 11,594,634 shares issued and outstanding 464
Additional paid-in capital 18,562,992
Accumulated deficit (13,763,824)
-----------------
Total stockholders' equity 6,866,069
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,597,527
=================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
Frederick Brewing Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------------------------
1998 1997 1998 1997
-------------------- --------------------------------- -----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(1,936,003) $(907,243) $(2,672,007) $(1,552,744)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 199,884 220,748 504,223 265,386
Write-off of net deferred public relations costs 1,089,000 -- 1,089,000 --
(Gain) Loss on sale of equipment 102,205 -- 99,545 --
Changes in operating assets and liabilities:
Trade receivables (160,319) (310,697) (337,131) (191,043)
Inventories (162,557) (134,573) (362,827) (96,404)
Prepaid expenses and other current assets 49,491 444,313 (136,016) (356,647)
Other assets 8,582 (676,740) (23,096) (634,514)
Accounts payable 228,300 (169,557) 572,332 (57,450)
Accrued liabilities 124,590 16,637 99,914 (104,468)
-------------------- --------------------------------- -----------------
Net cash used for operating activities (456,827) (1,517,112) (1,166,063) (2,727,884)
-------------------- --------------------------------- -----------------
Cash Flows from Investing Activities:
Purchase of property and equipment (47,744) (733,470) (233,233) (1,479,899)
Purchase of intangibles (90,711) (59,242) (90,711) (126,894)
Purchase of business, net of cash acquired -- -- (834,611) --
Proceeds from sale of equipment 77,260 154,600 94,060 154,600
-------------------- --------------------------------- ---------------
Net cash used for investing activities (61,195) (638,112) (1,064,495) (1,452,193)
-------------------- --------------------------------- ---------------
Cash Flows from Financing Activities:
Proceeds from long-term debt -- 1,105,142 -- 1,636,485
Payments on debt obligations (67,515) (1,548,917) (140,609) (1,696,236)
Payments on capital leases (31,704) (12,388) (45,896) (15,700)
Proceeds from issuance of preferred stock, net -- (65,089) -- 4,025,001
Restricted cash 12,475 13,597 (12,475) 617,327
-------------------- --------------------------------- ---------------
Net cash provided by financing activities (86,744) (507,655) (198,980) 4,566,877
-------------------- --------------------------------- ---------------
Net Increase/(Decrease) in Cash and Cash Equivalents (604,766) (2,662,879) (2,417,063) 386,800
Cash and Cash Equivalents, Beginning of Period 800,583 3,098,669 2,612,880 48,990
==================== ================================= ===============
Cash and Cash Equivalents, End of Period $195,817 $435,790 $195,817 $435,790
==================== ================================= ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
Frederick Brewing Company
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
----------------- -------------- --------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Gross Sales $1,595,010 $875,416 $2,609,847 $1,141,230
Less: Depletions, allowances, and excise taxes 205,624 106,223 300,745 157,764
----------------- ------------------------------- ----------------
Net sales 1,389,386 769,193 2,309,102 983,466
Cost of sales 974,916 730,353 1,779,718 1,127,819
----------------- ------------------------------- ----------------
Gross profit (loss) 414,470 38,840 529,384 (144,353)
Selling, general and administrative expenses 1,055,071 939,478 1,802,411 1,435,547
Write-off of net deferred public relations costs 1,089,000 - 1,089,000 -
----------------- ------------------------------- ----------------
Operating loss (1,729,601) (900,638) (2,362,027) (1,579,900)
(Gain)/loss on sale of equipment 102,205 (74,187) 99,545 (135,523)
Interest expense, net 104,197 80,792 210,435 108,367
----------------- ------------------------------- ----------------
Net loss (1,936,003) (907,243) (2,672,007) (1,552,744)
Preferred stock deemed dividend requirements -- (28,626) (28,627) (1,354,454)
================= =============================== ================
Net loss attributable to common shareholders $(1,936,003) $(935,869) $(2,700,634) $(2,907,198)
================= =============================== ================
Basic and Diluted Loss per Common Share:
Net loss before preferred stock dividend (0.20) (0.45) (0.34) (0.78)
requirements
Preferred stock dividend requirements -- (0.01) (0.00) (0.68)
================= =============================== ================
Net loss per common share (0.20) (0.46) (0.34) (1.46)
================= =============================== ================
Average common shares 9,502,833 2,026,309 7,848,674 1,990,593
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
FREDERICK BREWING CO.
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated 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 Consolidated financial position and the interim Consolidated results
of operations of the Company have been included.
Operating results for the three and six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998, 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, 1997, refer to the financial statements included in
the Company's Annual Report on Form 10-KSB, as amended on April 24, 1998, for
the year ended December 31, 1997 and in its 1997 Annual Report to shareholders.
Note 2 - Principles of Consolidation
The consolidated financial statements as of and for the three and six months
ended June 30, 1998 include the accounts of the Company and its wholly-owned
subsidiaries, Wild Goose Brewery, Inc. (Wild Goose) and Brimstone Brewing
Company, Inc. (Brimstone), from their dates of acquisition during the first
quarter of 1998 (see Note 3). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Note 3 - Acquisitions
In January 1998, the Company acquired 100% of the outstanding equity securities
(comprised of 50,000 shares of preferred stock and 10,000 shares of common
stock) of Wild Goose and all of the brands, formulas, copyrights, trademarks and
related intangible assets of Brimstone.
6
<PAGE>
Notes to Financial Statements
June 30, 1998
(Unaudited)
Note 3 - Acquisitions (cont.)
The consideration paid for Wild Goose consisted of the issuance of 1,192,086
shares of the Company's common stock with an aggregate value of $2,419,935 plus
the repayment of approximately $532,000 in notes payable and the assumption of
other liabilities. 123,153 shares of the common stock are being withheld by the
Company to account for any undisclosed liabilities or uncollectible accounts
which may be discovered.
The consideration paid for Brimstone consisted of 80,000 shares of the Company's
common stock with a value of $162,000. Both the Wild Goose and Brimstone
acquisitions were accounted for under the purchase method of accounting.
The purchase price for each acquisition has been allocated to the assets
acquired and liabilities assumed, based on their estimated fair values. The
excess of the purchase price over the net assets acquired has been recorded as
goodwill and is being amortized over 10 years. Results of operations for Wild
Goose and Brimstone are included with those of the Company subsequent to the
date of acquisition.
Results for the three and six months ended June 30, 1998 reflect production of
Brimstone and Wild Goose products being transferred to the Company's facility in
January and February, respectively, that operations at the Wild Goose brewery
ceased as of the effective date of the acquisition (January 29, 1998) and that
the Company's gross sales from the dates of acquisition to June 30, 1998
included $84,400 of Brimstone products and $799,000 of Wild Goose products.
The following unaudited pro forma summary presents the consolidated results of
operations as if the acquisitions had been completed at the beginning of the
periods presented and does not purport to be indicative of what would have
occurred had the acquisitions actually been made as of such date or of results
which may occur in the future.
Six months ended Six months ended
June 30, 1998 June 30, 1997
------------- -------------
Net sales $2,309,000 $2,052,000
Net loss ($2,672,000) ($1,739,000)
Basic and diluted loss
per common share $(0.34) $(0.89)
Note 4 - Deferred public relations costs
During 1997, the Company recorded $1,270,000 in deferred public relations costs
associated with an agreement with a third party for public and investor
relations services to be rendered over a five-year service period. The amount
originally recorded included $650,000 in cash paid in advance and $670,000,
representing the estimated fair value of 500,000 warrants issued to the third
party. During the three months ended June 30, 1998, the Company had written off
the unamortized balance of the deferred public relations costs since the
services are no longer being provided by the investor relations firm. There are
still 400,000 warrants outstanding in connection with this agreement.
During the three months ended June 30, 1998, the Company has entered into a new
agreement for public and investor relations services to be provided over a
one-year service period. The terms of the new agreement include the issuance of
shares of common stock and warrants to purchase shares of the Company's common
stock in exchange for the services. The impact of this new agreement on the
consolidated financial statements as of and for the periods ended June 30, 1998
are immaterial.
Note 5 - Long-term Debt
During 1996, the Company entered into agreements to have a new brewery built by
Blue II, LLC, a limited liability company affiliated with certain directors of
the company ("Blue II"). Blue II constructed the new brewery building to the
Company's specifications and is leasing the building to the Company. On July 19,
1996, in connection with the purchase of the equipment to be housed in the new
brewery, the Company obtained a $1,500,00 revenue bond from the Maryland
Economic Development Corporation ("MEDCO") and a $969,000 bridge loan from a
bank which has been repaid. The $1,500,000 revenue bond was immediately assigned
by MEDCO to a bank. In connection with the $1,500,000 revenue bond, the bank
issued a note to the Company from the proceeds of the revenue bond. There are
certain restrictive covenants existing on the $1,500,000 note payable to the
bank. Among those covenants is a cash flow to debt service ratio for March 31,
1998. This covenant violation represents an event of default on the note and
also a cross default on a $3,000,000 loan obtained by Blue II for the
construction of the brewery for which the Company is a guarantor. During the
first quarter of 1998, for both the $1,500,000 loan and $3,000,000 Blue II loan
the bank has waived compliance with the cash flow to debt service covenant for
the calendar quarters ending March 31, 1998, June 30, 1998 and September 30,
1998. The bank has also modified this covenant for the calendar quarter ending
December 31, 1998 and for each quarter thereafter whereby the Company must
maintain a cash flow to debt service ratio of 1.0 to 1. In addition, the bank
modified the current ratio covenant whereby the Company must maintain a ratio of
current assets to current liabilities of 1.0 to 1 as of calendar quarter March
31, 1998 and each calendar quarter thereafter. The Company anticipates it will
be able to comply with these modified covenants. In exchange for these covenant
modifications, the maturity date on the loans and the related capital lease
obligation to Blue II was revised to May 1, 1999, the interest rate increased to
the prime rate plus 1.25% for the Company's loan and the prime rate plus 1.5%
for the Blue II loan, the Company is required to pay a loan modification fee of
$25,000 payable in two installments of $10,000 and $15,000 on June 30, 1998 and
September 30, 1998, respectively, and be responsible for all fees and expenses
incurred by the bank in connection with preparation of the modification and use
its best efforts to obtain replacement financing.
The Company and Blue II are currently negotiating with a local financial
institution to refinance the Company's long-term debt. If such a refinancing
occurs, it is likely that the interest rates will rise, the Company's rent
payment to Blue II will rise and the Company's Chief Executive Officer and
President will be required to provide personal guarantees of the $1,500,000 bond
and the Blue II building lease. While management believes this debt refinancing
will be completed during the third quarter of 1998, no assurances can be given
that this will occur.
Based on the negotiations in process to refinance the notes payable, the Company
has classified the majority of its loan and capital lease obligation as
non-current. Should the refinancing not be completed, the note payable to the
bank and the capital lease obligation would represent current liabilities.
Note 6 - 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 six month periods
ended June 30, 1998 and 1997 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, 1998.
Note 7 - Basic and Diluted Loss per Common Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," which requires the
presentation of basic earnings per share and diluted earnings per share for all
periods presented. Basic earnings per share is based on the weighted average
number of outstanding common shares for the period. Diluted earnings per share
adjusts the weighted average for the potential dilution that could occur if
stock options, warrants, or other convertible securities were exercised or
converted into common stock. Diluted earnings per share equals basic earnings
per share for all periods presented because the effects of such items were
anti-dilutive.
7
<PAGE>
Notes to Financial Statements
June 30, 1998
(Unaudited)
Note 8 - New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," and
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related information," in June 1997, which are both
effective for the year ending December 31, 1998. SFAS No. 130 establishes
standards for reporting comprehensive income in a full set of general purpose
financial statements either in the income statement or in a separate statement.
SFAS No. 131 establishes standards for reporting information about operating
segments, including related disclosures about products and services, geographic
areas and major customers. The Company has adopted SFAS No. 130 during the first
quarter of 1998 and has no items of comprehensive income to report.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and hedging Activities." This Statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company will be
required to adopt this new accounting standard by January 1, 2000. Management
does not anticipate early adoption. The Company believes that the effect of
adoption of SFAS No. 133 will not be material.
Note 9 - Issuance of Common Stock upon Conversion of Preferred Stock
During the three months ended June 30, 1998, the Company issued 3,114,670 shares
of common stock upon the conversion of 185 shares of Series A Preferred Stock,
729 shares of Series C Preferred Stock, 219 shares of Series D and 1,235 shares
of Series E Preferred Stock.
8
<PAGE>
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, 1998
and 1997
Overview of Significant Activities and Expenses
A net loss of ($1,936,003) or ($0.20) per common share was incurred during the
second quarter of 1998. This compares to a net loss of ($907,243) or ($0.47) per
common share during the second quarter of 1997. The year-to-date 1998 net loss
is ($2,672,007) or ($0.34) per common share, versus a 1997 year-to-date net loss
of ($1,552,744) or ($1.47) per common share.
Of the net loss for the second quarter of 1998, two items, both of which were
non-cash charges, accounted for $1,191,200: $1,089,000 was charged as the result
of the Company's decision to terminate its pre-paid, long-term contract with an
investor relations firm; and $102,200 was charged as a result of the loss on the
sale of surplus brewing equipment from the Wild Goose Brewery. Without these
one-time charges, the net loss for the current quarter would have been $744,803
($0.08 per share), a reduction of $205,381 as compared to the same period in
1997.
There were 9,502,833 weighted average common shares outstanding during the three
months ended June 30, 1998, and 7,848,674 weighted shares outstanding during the
six months ended June 30, 1998. During 1997 there were 2,026,309 weighted common
shares outstanding in the second quarter, and 1,990,593 weighted shares
year-to-date. The increase in shares between the second quarters of 1997 and
1998 relates primarily to the conversion of certain of the Company's Preferred
shares into common stock, and by issuance of common stock due to the acquisition
of Wild Goose Brewery and Brimstone Brewing Company.
The second quarter saw significant improvements in several key measures of the
Company's operations. Cost of sales, a measure of production costs, fell to
70.2% of net sales ($110 per barrel) compared to 95% of net sales ($150 per
barrel) in the same period in 1997. This improvement was due largely to
increased utilization of plant capacity which reduced fixed plant overhead
expenses per barrel and as a percentage of sales and a reduction of direct labor
expense in packaging operations. Excluding the write-off of the terminated
investor relations services contract, the Company's operating loss was reduced
by 28.9% to $640,601 in the second quarter of 1998, compared to $900,638 during
the same period of 1997. Despite a gross sales increase of 82%, SG&A expenses
(again, excluding the termination of the investor relations services contract)
increased by only 12% over the previous year. Gross revenues per barrel and
wholesaler depletion allowances and incentive discounts were held steady,
despite widely-reported discounting by competitive importers and craft brewers.
Equally important, the Company's negative operating cash flow for the second
quarter was reduced by more than $1 million (from $1,517,112 in 1997 to $456,827
in 1998), a decrease of nearly 70%, compared to the same period a year ago.
During the second quarter of 1998 record quarterly sales levels were achieved.
The Company's gross sales increased 82.2% to $1,595,010 from $875,416 in the
second quarter of 1997; this on top of a 281.8% increase in gross sales during
the first quarter of 1998 versus the first quarter of 1997. Year-to-date 1998
gross sales of $2,609,847 were 128.7% greater than the $1,141,230 recorded in
the first six months of 1997. The quarterly and year-to-date sales growth is
attributable to: (1) sales of the Wild Goose and Brimstone brands which were
acquired in the first quarter of 1998; (2) concentrated local marketing,
promotional and sales efforts in all product lines; (3) sales of Hempen Ale and
Hempen Gold which were introduced during the second and third quarters of 1997
respectively and the geographic distribution of which has increased steadily;
and (4) the Company's new and upgraded brewing and packaging facilities and
equipment, which reached full capacity in June of 1997.
Management believes that caution should be exercised when comparing 1997 and
1998 quarterly and year-to-date sales results. Because production at the new
brewery did not reach full capacity until June of 1997, the Company was unable
to produce sufficient quantities of all products, which artificially depressed
sales. Direct production labor costs were higher during the prior year because
the automated packaging equipment did not become fully operational until the
third quarter of 1997. These factors are partially off-set by the fact that the
Company had not drawn down all of the loans or received all of the leased
equipment used to construct and outfit the new brewery until late in the second
quarter and, consequently, interest, depreciation and equipment lease expenses
were lower during the first half of 1997 than in subsequent periods. Therefore
comparisons of revenues, production costs, interest and other expenses between
1997 and 1998 are not fully indicative of the Company's business trend or
prospects.
9
<PAGE>
Management's Discussion and Analysis
For the Three and Six Months Ended June 30, 1998 and 1997
However, management does believe that initiatives begun in the first quarter of
1998, and continued into the second quarter, will positively effect gross sales,
production costs, and general and administrative costs in future periods. The
Wild Goose and Brimstone brands were brought under the Company's product
portfolio via acquisition and the ongoing expansion of Hempen product
distribution into new markets and new promotional programs for the Blue Ridge
brand should contribute to future sales growth, as should recently formed
strategic alliances in which the Company will produce beer under brands owned,
in whole or in part, by others. Improved plant capacity utilization with
increased sales, somewhat lower per unit direct production costs, and lowered
production overhead costs should continue to increase the gross profit line. A
restructuring of the sales department, elimination of certain production,
management, marketing, accounting and administrative positions, and an executive
management salary decrease should continue to decrease SG&A costs. The Company
will continue to seek viable additional brand licenses and acquisitions, and is
currently in discussions with several companies with the goal of increasing its
market share in areas outside its core marketing area, increasing sales
revenues, and further increasing plant production to achieve economies of scale.
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, 1998 and 1997.
<TABLE>
<CAPTION>
Percentage of Net Sales for the Periods ended June 30
------------------------------------- ------------------------------------
Three Months Six Months
------------------------------------- ------------------------------------
1998 1997 1998 1997
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Gross Sales 114.8% 113.8% 113.0% 116.0%
Less Depletions, allowances and excise taxes 14.8 13.8 13.0 16.0
------ ------ ------ ------
Net Sales 100.0 100.0 100.0 100.0
Cost of Sales 70.2 95.0 77.1 114.7
------ ------ ------ ------
Gross Profit/(Loss) 29.8 5.0 22.9 (14.7)
Selling, General and Administrative Expenses 75.9 122.1 77.9 145.9
Write-off of Net Deferred Public Relations Costs 78.4 -0- 47.2 -0-
------ ------ ------ ------
Operating Loss (124.5) (117.1) (102.2) (160.6)
(Gain)/Loss on Sale of Equipment 7.4 (9.7) 4.3 (13.8)
Interest Expense, net 7.4 10.5 9.2 11.1
------ ------ ------ ------
Net Loss (139.3) (117.9) (115.7) (157.9)
------ ------ ------- -------
</TABLE>
Sales
Gross sales in the second quarters of 1998 and 1997 were $1,595,010 and $875,416
respectively, an increase of $719,594 or 82.2%. Year-to-date sales were
$2,609,847 in 1998, and $1,141,230 in 1997, a year to year increase of
$1,468,617 or 128.7%. Sales of Wild Goose and Brimstone products began late in
the first quarter of 1998, and contributed $527,000 and $41,000 respectively to
second quarter gross sales, and $799,000 and $84,000 respectively to
year-to-date gross sales.
Second quarter volumes shipped were 8,861 barrels in 1998 and 4,864 barrels in
1997, an increase of 3,997 barrels or 82.2%. Year-to-date volumes shipped were
14,567 barrels in 1998, and 6,470 barrels in 1997, a year to year increase of
8,097 barrels or 125.1%.
Revenues per barrel were $180 in both the second quarters of 1998 and 1997.
Year-to-date per barrel revenues were $179 in 1998 and $176 in 1997, an increase
of $3 per barrel. This small increase is largely due to increased sales of
higher-priced seasonal beers in 1998 during the first quarter.
10
<PAGE>
Management's Discussion and Analysis
For the Three and Six Months Ended June 30, 1998 and 1997
Returns, Depletions and Excise Taxes
Returns, depletion allowances (the Company's contribution to volume discounts
offered by wholesalers to retailers) and excise taxes were $40,100 (2.9% of net
revenues); $75,500 (5.4%) and $90,024 (6.5%); respectively during the second
quarter of 1998, for a total of $205,624 (14.8% of net revenues) compared to
$13,800 (1.8%); $49, 800 (6.5%); and $42,623(4.9%), respectively, for a total of
$106,233 (13.8% of net revenues). The higher rate of returns reflects the fact
that, due to the Company's inability to produce all of the products ordered by
its customers in 1997, inventory levels were very low and little product was
unsold by its expiration date, relative to the same period in 1998. For the six
months ending June 30, 1998, returns, depletion allowances and excise taxes were
$47,200 (2% of net revenues); $122,400 (5.3%); and $131,145 (5.7%),
respectively; for a total of $300,745 (13% of net revenues) compared to $37,500
(3.8%); $60,100 (6.1%); and $60,164 (6.1%), respectively; for a total of
$157,764 (16% of net revenues) for the first half of 1997. The higher rate of
returns and discounts in 1997 resulted from the Company's effort to reduce
wholesaler inventory levels in the first quarter, in anticipation of new
packaging and higher quality product from the new brewery. State excise taxes
vary, depending on where the beer is to be sold. In some jurisdictions,
including Maryland and Pennsylvania, the brewer is required to pay the tax while
in others, such as the District of Columbia and Virginia, the tax is paid by the
wholesale distributor to whom the beer is shipped. State excise tax rates vary
from state to state, as well. The Company currently also pays a $7 per barrel
federal excise tax on all beer sold in the United States.
Cost of Sales
Second quarter cost of sales for 1998 and 1997 were $974,916 and $730,353
respectively, (or 70.2% and 95.0% of net sales), an increase of $244,563 or
33.4% over 1997 on a gross sales increase of 82.2%. Year-to-date costs of sales
were $1,779,718 in 1998 and $1,127,819 in 1997 (or 77.1% and 114.7% of net sales
respectively) on a gross sales increase of 128.7%. Production costs as a
percentage of revenues declined primarily because of the large increase in plant
capacity utilization brought about by the increase in sales. Production overhead
expenses (management and supervisory salaries, quality assurance and brewery
repairs and maintenance expenses, depreciation charges, utilities, equipment
rentals and lease payments) declined from $74.16 per barrel ($360,734 on 4864
barrels) in the second quarter of 1997 to $42.25 per barrel ($374,363 on 8861
barrels) in the second quarter of 1998. Production overhead expenses for the
first half of 1998 were $741,518 ($51 per barrel), and $485,919 ($75 per barrel)
in 1997. The increase in production overhead was primarily the result of owning,
maintaining and operating the new brewery for all the 1998 period compared to
only a portion of the same period in 1997
Direct variable product costs (ingredients, packaging materials and direct
production labor) were $600,553 ($68 per barrel) during the second quarter of
1998 compared to $369,619 ($76 per barrel) in 1997. For the first half of 1998,
direct variable costs were $1,038,200 ($71 per barrel), compared to $641,900
($99 per barrel) in 1997. Bulk purchasing of raw ingredients, primarily malted
barley, glass bottles, and paper packaging materials, which began during the
second quarter of 1997 accounted for the much of the reduction in year-to-year
per unit direct costs. Improved labor productivity made possible by larger batch
sizes and a higher degree of automation also contributed to the direct cost
reduction.
11
<PAGE>
Management's Discussion and Analysis
For the Three and Six Months Ended June 30, 1998 and 1997
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") were $1,055,071 and
$939,478, an increase of 12.3%, in the second quarters of 1998 and 1997,
respectively, or 75.9% and 122.1% of net sales in the two periods. While
marketing, advertising, finance and accounting declined during the quarter
compared to the same period in 1997; increases in legal and accounting fees,
costs associated with the Company's annual report and meeting of shareholders,
sales personnel costs, and other salary and benefit expenses caused total SG&A
to increase for the period. For the six months ended June 30, SG&A increased by
25.6% to $1,802,411 (78% of net sales) in 1998 compared to $1,435,547 (146% of
net sales) in 1997. The Company's SG&A spending for the first half of 1998
increased over 1997 levels primarily due to increased costs described above and
due to payroll related costs in the marketing department and increased travel
and other expenses associated with an larger sales staff and a broader
geographic distribution of the Company's products compared to the year-earlier
period.
The Company instituted an SG&A expense reduction program during the second
quarter of 1998. The goal of the program is to reduce annual personnel-related
expenditures by approximately $375,000 below first quarter 1998 levels. Six
salaried staff positions have been eliminated, and senior management have
accepted salary reductions in exchange for restricted stock to be issued as of
year-end 1998. These cost savings will be fully realized beginning in the third
quarter of 1998.
Write-off of Net Deferred Public Relations Costs
A non-cash expense of $1,089,000 was incurred in the second quarter of 1998 to
reflect the write-off of a terminated contract for investor relations services.
This action will eliminate approximately $68,000 in quarterly expenses and will
help to improve future operating results. This cost reduction will be partially
offset by the lower expense of the Company's new investor relations services
firm.
(Gain)/Loss on Sales of Equipment
Second quarter loss on sale of equipment was ($102,205) reflecting the below
cost auction sale of equipment which became obsolete when the Company closed the
former Wild Goose brewery and moved all production to the Company's brewery in
Frederick. The Company had realized a gain of $74,187 in 1997 from the sale of
brewing equipment from its old brewery which was closed in March of 1997.
Year-to-date net losses on the disposition of obsolete equipment were ($99,545)
in 1998 versus a gain of $135,523 for the first six months of 1997.
Interest Expense (Net)
Net interest expense was $104,197 in the second quarter of 1998 compared with
$80,792 in 1997. Year-to-date 1998 net interest expense was $210,435 reflecting
interest income of $50,613 and interest expense of $261,048, versus a 1997 net
expense of $108,367.
Income Tax Provision
The Company has incurred net operating losses during both 1998 and 1997 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, rapid expansion of Company
operations and brand acquisitions, 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, 1998, the Company
had working capital of approximately $191,388. As of June 30, 1997, the Company
had working capital of $327,248.
On August 3, 1998 the Company closed a private placement of 573,476 shares of
restricted common stock for gross proceeds of $500,000 with two foreign
investors. Management expects to close a similar private placement for an
additional $500,000 before August 31, 1998. The proceeds of these offerings will
be used for working capital, the purchase and installation of brewery
12
<PAGE>
Management's Discussion and Analysis
For the Three and Six Months Ended June 30, 1998 and 1997
equipment to improve wastewater treatment systems and reduce labor costs and for
the design and production of new packaging and marketing materials to be used in
the production and sale of new brands acquired via strategic alliances.
The commercial mortgage on the land and building comprising the Company's
brewery and the term loan secured by the Company's brewing equipment, current
assets, trademarks and goodwill are due to be paid in full to First Union
National Bank on May 1, 1999. Management has worked with the owner of the real
estate assets, Blue II LLC, to refinance the mortgage loan and expects that this
loan will be re-financed on a long-term basis during the third quarter of 1998
by a local commercial bank. Management is applying, both independently and
through a consultant to similarly refinance the equipment loan. Management is
confident that both loans will be re-financed on a long-term basis before the
end of 1998.
Net cash used for operations in the second quarter of 1998 was $456,827, versus
$1,517,112 in the second quarter of 1997. Year-to-date net cash used for
operations was $1,166,063 in 1998 and $2,727,884 in 1997.
Net cash used for investing was $61,195 in the second quarter of 1998 versus
$638,112 in the second quarter of 1997. Investment funds used year-to-date was
$638,112 in 1998, and $1,452,193 in 1997.
Net cash used for financing in the second quarter of 1998 was $74,269 versus
$507,655 in 1997. Financing usage called for $186,505 year-to-date 1998 versus
an inflow of funds of $4,566,877 in 1997.
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.
Impact of Year 2000 Issue
The Company is in the process of assessing its computer applications to insure
their functionality with respect to the "Year 2000" millenium change. At
present, the Company does not anticipate that material incremental costs will be
incurred in any single future year.
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.
13
<PAGE>
PART II. - OTHER INFORMATION
For the Three and Six Months Ended June 30, 1998 and 1997
FREDERICK BREWING CO.
Item 1. Legal Proceedings
- --------------------------
In June of 1998, the Architectural firm which designed and supervised the
construction of the new brewery made formal demand for the payment of
approximately $51,000 in disputed invoices for services rendered during 1997.
After negotiations, a settlement was reached whereby the Company paid $25,000
and both parties mutually released each other from all other claims.
Item 2. Changes in Securities ------------------------------ During the three
months ended June 30, 1998, the Company issued 3,114,670 shares of common stock
upon the conversion of 185 shares of Series A, 729 shares of Series C, 219
shares of Series D and 1235 shares of Series E Preferred Stock. The Company also
issued 1,068,933 shares of common stock to former equity holders of Wild Goose
(see Note 3). As a result, 11,594,634 of the Company's 19,000,000 authorized
shares of common stock had been issued, as of June 30, 1998. As of July 31,
1998, an additional 2,151,819 shares had been issued upon the conversion of 100
shares of Series C Preferred Stock, 1305 shares of Series E Preferred Stock and
the exercise of 370 employee stock options, for a total of 13,746,453 common
shares, 1643 Series A Preferred Shares and 460 shares of Series E Preferred
Stock outstanding.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
Item 5. Other Information
- --------------------------
None.
14
<PAGE>
Other Information
For the Three and Six Months Ended June 30, 1998 and 1997
- --------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
- --------------------------------------------------------------------------------
(a) Exhibits Filed:
Index to Exhibits
- --------------------------------------------------------------------------------
10.1 Financial Public Relations Agreement by and between I. W.
Miller Group, Inc. and Frederick Brewing Co. dated effective
June 12, 1998.
10.2 Contract Brewing Agreement by and between MOJO Highway
Brewing Company, LLC and Frederick Brewing Co. dated June
19, 1998.
10.3 Operating Agreement by and between MOJO Highway Brewing
Company and Frederick Brewing Co. dated June 19, 1998.
27.1 Financial Data Schedule
27.2 Financial Data Schedule
99.1 Safe Harbor Under the Private Securities Litigation Reform
Act of 1995
99.2 Press Release, April 1, 1998
99.3 Press Release, April 14, 1998
99.4 Press Release, May 12, 1998
99.5 Press Release, May 15, 1998
99.6 Press Release, May 19, 1998
99.7 Press Release, May 22, 1998
99.8 Press Release, June 8, 1998
99.9 Press Release, June 8, 1998
99.10 Press Release, June 17, 1998
(b) Reports on Form 8-K
As filed on April 10, 1998.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Frederick Brewing Co.
Date August 5, 1998 /s/ Kevin E. Brannon
-------------- --------------------------
Kevin E. Brannon
Chairman of the Board and
Chief Executive Officer
Date August 5, 1998 /s/ Leslie P. Harper
-------------- --------------------------
Leslie P. Harper
Chief Financial Officer
16
EXHIBIT 10.1
FINANCIAL PUBLIC RELATIONS AGREEMENT
This Financial Public Relations Agreement (this "Agreement") is made and
entered into effective the 12th day of June, 1998 between Frederick Brewing, Co.
Inc., a Maryland corporation (the "Company"), having offices at 4607 Wedgewood
Blvd., Frederick, MD, 21703 and I. W. Miller Group, Inc., a Califorina
corporation (the "Consultant"), having offices at 4 Andisen, Irvine, California,
92614, based on the following:
Premise
A. The Company is a publicly held corporation whose securities are lsited
on the NASDAQ Small Cap market. The Company is seeking to expand its investor
base and the number of market professionals who are aware of the Company's
activities.
B. Consultant is established in the securities industry and has experience
in providing advice and support for publicly-held companies.
C. The Company desires to retain the services of Consultant, and Consultant
desires to offer services on the terms and conditions set forth in this
Agreement.
NOW, THEREFORE, based on the forgoing premises and in consideration of the
mutual covenants of the parties and the benefits to be derived therefrom, it is
hereby agreed as follows:
Agreement
1. Engagement of Consultant. The Comapany hereby engages Conultant to
provide services to the Company under the terms of this agreement, including,
but not limited to, the analysis of business and proposed business of the
Company by the Consultant as it pertains to the desirability and suitability of
an investment in the Company by equity participants; the presentation of the
Company to market professionals, including broker-dealers, mutual funds, and
other institutional investors; providing the Company advice concering
shareholder relations and the preparation of information for the Company's
shareholders; assisting in long-term financial planning, including borrowings,
equity financiang and other opportunities; providing advice concerning the
existing and future capital structure of the Company. Notwithstanding the
foregoing, Consultant shall not act as an agent of the Company and shall not
contact the holders of the securities of the Company in connection with the
exercise or conversion of currently issued and outstanding warrants, options, or
convertible securities.
KEB
IWM
<PAGE>
2. Marketing. Company shall furnish to Consultant disclosure and filing
materials, financial statements, business plans, promotional materials, annual
reports and press releases. In addition, Company agrees to distribute due
diligence packages in ample quantities to potential investors as well as to the
brokerage community. Consultant may rely on, and assume the accuracy of the due
diligence package and/or research reports. Consultant may disseminate through
the use of the media and advertisement the contents of the due diligence package
and any research reports in order to attract potential investors as well as the
brokerage community. Company acknowledges that Consultant is engaged in other
business activities and will continue such activities during the term of this
Agreement. Consultant shall not be restricted from engaging in other business
activities during the term of this Agreement.
3. Advertising. Advertising is defined as the cost associated with lead
generation programs arranged by the Consultant for the Company. These programs
are designed to create investor awareness for the Company. All advertising/legal
generation programs are to be presented by the Consultant to the Company
and approved by the Company in advance. SEE SCHEDULE "B"
4. Compensation to Consultant. For the services provided to the Company the
Consultant is to receive compensation as set forth in the attached SCHEDULE "A",
incorporated herein by this reference.
5. Reimbursement of Costs. Consultant shall be reimbursed by the Company for
all reasonable and necessary out-of-pocket third party expenses incurred by
Consultant in connection with the performance of its obligations under the terms
of this Agreement. All third party expenses are to be mutually agreed upon in
advance. Furthermore, both parties agree that all out-of-pocket third party
expenses contemplated in SCHEDULE "B" will be paid by Consultant unless Company
agrees by written approval to pay said expense.
6. Term. This Agreement shall commence on the date hereof and will terminate
on earliest of the following:
a. The term of this Agreement is one year from date of execution.
b. Consultant can be terminated for cause by Company upon 30 days written
notice. Cause shall be determined solely as the following; violation of any rule
or regulation of any regulatory agency; any other neglect, act or omission
detrimental to the conduct of Company business; material breach of the Agreement
or any unauthorized disclosure of any of the secrets or confidential information
of the Company; dishonesty related to independent contractor status; a change
in personnel, or management control of the Consultant which materially effects
the Consultant's work on behalf of the Company.
c. The Consultant is to furnish to the Company activity reports on a
quarterly basis.
d. Company can be terminated for cause by Consultant upon 30 days written
notice. Cause shall be determined solely as to the following; violation of any
rule or regulation of any regulatory agency; material breach of the Agreement.
/s/ KEB
/s/ IWM
<PAGE>
e. In the event the Consultant is found in violation of article "d" of
this agreement there will be prepaid compensation refunded to the Company on a
pro-rata basis.
7. Marketing Plan. During the first 180 days of the term of this Agreement,
Consultant shall, at a minimum, perform and/or purchase the services and
provide the opportunities for exposure on the schedule described the six month
action plan, attached hereto as Schedule B and incorporated herein by this
reference. Changes in the scope of work or the schedule may be made only with
written consent of the Company. Not later than the 150th day after execution of
this Agreement, Consultant shall propose to Company a scope of work and schedule
describing its marketing plan for the next six months of the term of this
Agreement. The parties shall work in good faith to reach an agreement as to a
marketing plan reasonably acceptable to both the Company and the Consultant,
taking into account past performance, general market conditions and reasonable
expectations of the parties. The marketing plan so formulated shall then become
an amendment to this Agreement. In the event the parties are unable to reach an
agreement as to a marketing plan for the second six months, this Agreement shall
terminate, without further obligation by the Company to compensate the
Consultant or for Consultant to provide additional services.
8. Confidentiality. Consultant acknowledges that it may receive confidential
and proprietary information of the Company in connection with the services
provided under the terms of the Agreement. The Consultant agrees to keep all
such information confidential and to take prudent steps to assure that its
officers, directors, and employees maintain the confidentiality of such
information, including obtaining agreements similar to the provisions of this
paragraph from such officers, directors, and employees, and to not use such
confidential information, except for the direct benefit of the Company.
Consultant shall not disclose such confidential information and shall take
reasonable steps to prevent the disclosure by its officers, directors, and
employees, without the prior written consent of the Company.
9. Independent Consultant. The Company and Consultant hereby acknowledge that
Consultant is an independent contractor. Consultant shall not hold itself out
as, nor shall it take any action from which others might infer that it is a
partner or agent of or a joint venturer with the Company. Consultant shall have
no authority to act on behalf of or bind the Company and shall take no action
which purports to bind the Company. The Company shall have no authority to act
on behalf of or bind the Consultant and shall take no action which purports to
bind the Consultant.
10. Entire Agreement. This Agreement is and shall be considered to be the only
agreement or understanding between the parties hereto with respect to the
engagement of Consultant by the Company. All negotiations, commitments, and
understandings acceptable to both parties have been incorporated herein. No
letter, telegram, or communication passing between the parties hereto covering
any matter during this contract period, or any plans or periods thereafter,
shall be deemed as part of this Agreement; and shall not have the effect of
modifying or adding to this Agreement unless it is distinctly stated is such
letter, telegram, or communication that is to constitute a part of the Agreement
and is to be attached as an amendment to this Agreement and is signed by the
parties to this Agreement.
/s/ KEB
/s/ IWM
<PAGE>
11. Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the state of California.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
/s/ Kevin E. Brannon /s/ Ira W. Miller
- --------------------------- -------------------------------
Kevin E. Brannon Ira W. Miller
Chairman/CEO President
Frederick Brewing Company I.W. Miller Group, Inc.
<PAGE>
SCHEDULE A
Compensation Structure
1ST Q
- -----
50,000 shares (free trading) reduced by any cash paid (based on closing
offer price at date payment is received)
50,000 warrants @ $2 or closing offer price at date of S-3 registration
(whichever is greater)
2ND Q
- -----
30,000 shares (free trading)
25,000 warrants @ a price 50% greater than 1ST Q warrants
3RD Q
- -----
20,000 shares (free trading)
25,000 warrants @ same price 2ND Q
4TH Q
- -----
20,000 shares (free trading)
25,000 warrants @ 100% 1ST Q price
It is understood that I.W. Miller Group, Inc., is to receive a draw in the
months of June, July, and August as follows:
June: $10,000
July: $15,000
Aug: $15,000
For your records, our wiring instructions are as follows:
Union Bank of California
17605 Harvard Ave.
Irvine, CA 92714
949-261-9924
Account name: I.W. Miller
Routing number: 122080496 Account number: 6110006916
<PAGE>
SCHEDULE B
I.W. Miller Group, Inc.
Six Month Action Plan
MONTH ONE:
----------
Work with company to create a corporate profile (IM into sheet).
Account teams would begin syndication efforts in telemarketing and
one-on-one presentations with key brokers.
Begin a fax marketing campaign to the IWMG Database. Utilizing
company profile information, the campaign would cover 2,000 brokerage firms per
month via fax cast.
An investor/broker teleconference call would be scheduled in week
three of the syndication effort.
Utilize an advertising placement in Investor's Business Daily.
MONTH TWO:
----------
(Ira Miller) Travel to New York for pre-planned Institutional
presentation.
Syndication and telemarketing efforts are concentrated to attract new
market makers and broker-dealer support.
Continuation of fax marketing campaign to cover 2000 additional
brokers with follow-up telemarketing.
Utilize Business Channel 22-Los Angeles; 15 minute interview with
Ira Miller and Kevin Brennon. This format reaches 2 million viewers.
MONTH THREE:
------------
(Larry Fortune) Travel to San Francisco for pre-planned Institutional
presentations.
Syndication efforts continue to attract individual investors, market
makers and institutional support.
Fax marketing campaign continues; 2000 additional brokers.
(Larry Fortune) Travel to Frederick Brewing with selected investment
representatives to tour the brewery and one-on-one presentation with Kevin
Brennon.
<PAGE>
o Advertising placement in Barrons.
o Open Invitation Conference Call with stockholders and open invitation to
broker-dealers, institutions and key media personnel.
o Submit activity reports for performance evaluations.
MONTH FOUR
----------
o For marketing campaign contracts; 2,000 additional brokers.
o Begin an Internet Advertising campaign utilizing 100,000 e-mail addresses to
qualified investors.
o Utilize a brewery trade publication for media placement highlighting
investment opportunity.
o (Ira Miller & Kevin Drannon) Travel to New York for one-on-one presentations
with key institutional firms.
MONTH FIVE
----------
o Utilize Business Channel 32-Los Angeles; 15 minute interview with Ira Miller
regarding company profile and investment opportunity.
o (Account Executive; Michael Lafferman) Travel to Chicago, IL, for
pre-planned presentations to small cap institutional firms.
o Fax marketing/syndication/telemarketing efforts continue; 2,000 new brokers.
o Account Executives will perform mini road shows within their designated
regions. These presentations will be performed at broker-dealer sales
meetings, etc.
o Advertising placement in Barrons.
o (Larry Foppone) Travel to New Orleans for regional pre-planned
presentations.
o Internet Advertising Campaign continues: 100,000 e-mail's to new qualified
investors.
MONTH SIX
---------
o Open Invitation Conference Call.
o (Ira Miller) Travel to New York for pre-planned presentations.
<PAGE>
o Advertising placement in Smart Money.
o Fax marketing/syndication/telemarketing efforts continue; 2,000 new Brokers
o One week telemarketing campaign will concentrate in institutional support
o Account Team Review Meeting - Performance reviews and evaluation of success
ratios with preceding marketing campaign. This meeting will dictate new
strategies and continuation of successful programs.
EXHIBIT 10.2
CONTRACT BREWING AGREEMENT
BY AND BETWEEN
MOJO HIGHWAY BREWING
COMPANY, LLC
AND
FREDERICK BREWING CO.
DATED: June 19, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
Section Page
- ------- ----
PREAMBLE ............................................................ 1
1. SCOPE OF AGREEMENT. ............................................. 1
2. PRICE AND MANNER OF PAYMENT. .................................... 4
3. BREWING INGREDIENTS, PACKAGING MATERIALS AND BREWING SUPPLIES. .. 6
4. TERM. ........................................................... 7
5. MINIMUM ORDERS. ................................................. 8
6. RISK OF LOSS. ................................................... 9
7. BREWERY OF RECORD. .............................................. 9
8. FORCE MAJEURE. .................................................. 9
9. CHANGE PARTS AND BREWERY MODIFICATIONS. ......................... 10
10. TERMINATION. .................................................... 11
11. AGENCY AND INDEMNIFICATION. ..................................... 12
12. PRODUCT LIABILITY. .............................................. 12
13. RECIPE AND QUALITY. ............................................. 13
14. TRADEMARKS. ..................................................... 14
15. TEST BREWING. ................................................... 14
16. COMPETING PRODUCTS. ............................................. 14
17. RIGHTS OF OFFSET. ............................................... 15
18. NOTICES. ........................................................ 15
19. SUCCESSORS AND ASSIGNS. ......................................... 16
<PAGE>
20. GOVERNING LAW. .................................................. 16
21. DISPUTE RESOLUTION. ............................................. 16
22. EXECUTION IN COUNTERPARTS. ...................................... 17
23. AMENDMENTS. ..................................................... 17
24. NO THIRD PARTY BENEFICIARIES. ................................... 17
25. MERGER; SEPARABILITY. ........................................... 17
SIGNATURES .......................................................... 18
(iii)
<PAGE>
CONTRACT BREWING AGREEMENT
BETWEEN
FREDERICK BREWING CO.
AND
MOJO HIGHWAY BREWING COMPANY, LLC
THIS CONTRACT BREWING AGREEMENT is dated as of the day of ,
1988 (the "Effective Date") by and between FREDERICK BREWING CO., a Maryland
corporation ("FBC") and MOJO HIGHWAY BREWING COMPANY, LLC, a Maryland limited
liability company ("MOJO"). FBC and MOJO are sometimes referred to herein
individually as a "Party" and collectively as the "Parties."
WHEREAS, MOJO is a recently formed Maryland limited liability company
having as its members FBC and C&L Brewing Company, Inc., a Maryland corporation;
WHEREAS, FBC and MOJO desire to enter into this Contract Brewing Agreement
to set forth the terms and conditions pursuant to which FBC will brew all MOJO
products produced for distribution in the North American Continent;
WHEREAS, the Parties believe that this Contract Brewing Agreement is in
their best interests;
ACCORDINGLY, for and in consideration of the mutual agreements contained
herein, the Parties, intending to be legally bound, hereby agree as follows:
1. SCOPE OF AGREEMENT.
(a) During the term of this Contract Brewing Agreement and any
extension thereof (even if there is no written contract in existence during any
such extension), MOJO hereby grants to FBC, and FBC hereby accepts from MOJO,
the exclusive right to brew, produce, package and supply to MOJO all Products
(as defined in Section 1(c), below) of MOJO produced for distribution in the
North American Continent (which shall include, but not be limited to, the United
States, Mexico, the islands in the Atlantic and Caribbean oceans and all of
Canada).
(b) During the term of this Contract Brewing Agreement as set
forth in Paragraph 4 hereof and in accordance with the terms set forth herein,
FBC agrees to brew, package and sell the Products (defined in Section 1(c)
below) to MOJO, and MOJO agrees to purchase the Products from FBC. MOJO and FBC
acknowledge that they both wish to develop a mutually beneficial, long term
relationship under this Contract Brewing Agreement. In order to facilitate a
long term relationship, the Parties acknowledge that modifications, changes and
other capital improvements to FBC's plant and equipment may be required to allow
FBC to efficiently produce Products for MOJO while also producing its own
products. However, the exact nature of any such modifications, changes or
capital improvements will depend on the competitive conditions, product mix and
volume, brewing and packaging capacity, and other circumstances that develop or
exist at various times
<PAGE>
Contract Brewing Agreement
Page 3
during the term of this Contract Brewing Agreement which cannot be completely
determined at this time. In light of such uncertainty, and to allow FBC to
adequately meet the production requirements of MOJO for the Products and for
FBC's own products, the Parties agree that they shall: (i) meet on a regular
basis during the term of this Contract Brewing Agreement to discuss anticipated
needs; and (ii) establish for each year during the term of this Contract Brewing
Agreement a mutually agreeable capital investment plan. The Parties agree to act
in good faith and to use their best efforts to resolve differences arising
during the course of such discussions in a mutually agreeable manner. The
Parties acknowledge that future needs may require one or both of the Parties to
make capital investments in FBC's plant and equipment and that in the event of
any such investment is contemplated by MOJO, the Parties will negotiate in good
faith and use their best efforts to agree upon any amendments to this Contract
Brewing Agreement that may be required to facilitate the long term relationship
contemplated by the Parties.
(c) For purposes of this Contract Brewing Agreement, "Product"
shall mean: (i) alcoholic malt beverages, including but not limited to, beers,
ales, malt liquor, barley wine, cider or any other alcoholic product produced
from grain, fruit or vegetable matter, with or without the introduction of yeast
and/or hops, packaged in cases of 4 by 6 or 24 loose twelve ounce bottles, in
half barrel or quarter barrel kegs, and any other package types or
configurations that the Parties mutually agree to use for packaging Product,
or (ii) any other beverage product which the Parties mutually agree in writing
shall be included in the definition of Product.
(d) It is the intention of the Parties that FBC shall brew,
package and sell to MOJO other MOJO products upon terms mutually agreed to in
writing by FBC and MOJO. For purposes of this Contract Brewing Agreement,
"Other Products" shall mean any MOJO product other than the Product, whether
currently offered or developed in the future, (including, but not limited to,
soft drinks) which the Parties mutually agree to add to this Contract Brewing
Agreement during any calendar year in accordance with the following procedure.
By November 15 in each calendar year, MOJO shall provide FBC with an annual
forecast for the following calendar year, showing MOJO's monthly projections by
package for the Product and any Other Products. At least 90% of the projected
volume in each calendar year shall be the Product. In the event that the annual
forecast includes any proposed Other Products, MOJO will furnish FBC with the
brewing formula or recipe and procedures and product specifications for the
proposed Other Products. FBC shall: (i) review the specifications and brewing
formula or recipe for any proposed Other Products; (ii) propose a Unit Price for
each of the proposed Other Products; and (iii) propose to MOJO the minimum order
size, tank usage and other production and capacity parameters. MOJO may accept
or reject FBC's proposal with respect to each of the proposed Other Products. If
MOJO accepts the FBC proposal for a proposed Other Product, such Other Product
shall be deemed to be added to this Contract Brewing Agreement only for the
<PAGE>
Contract Brewing Agreement
Page 4
calendar year covered by the annual forecast. If in any annual forecast, MOJO
proposes an Other Product that was produced by FBC in a prior year, and: (x) the
specifications, brewing formula and procedures, Brewing Ingredients, Packaging
Materials and the timing and volume of production for such Other Product have
not changed, and (y) the capacity utilization required for FBC's own products is
substantially the same; then FBC shall not unreasonably refuse to produce such
Other Product and the Unit Price proposed by FBC for such Other Product shall
be the Unit Price paid by MOJO for such Other Product in the most recent prior
year, increased by the annual adjustment factor for the Product set forth in
Subparagraph 2(b) hereof.
(e) The Unit Price proposed by FBC for any Other Products, and for
the Product in any package size or type other than those identified in Section
1(c) hereof, shall be based on the expected incremental cost differences, when
compared with FBC's Amber Lager, associated with the brewing and/or packaging
formulations and processes required in the production of such Other Products or
package. If FBC determines during the trial brews or initial production of any
Other Product that the brewing formula, procedures or product specifications
furnished by MOJO are materially inaccurate, then FBC shall notify MOJO in
writing and FBC may cease production of such Other Product (after completion of
any production in progress) until the Parties mutually agree on adjustment of
the brewing formula, procedures or product specifications and/or the Unit
Price for such Other Product.
(f) For purposes of this Contract Brewing Agreement, the term
"barrel" shall mean 31 U.S. gallons (3,748 ounces). The following calculation
shall be used to measure barrels of the Product and other Products packaged in
containers other than Kegs:
Container Volume in Ounces X Containers Per Case Unit X No. of Case Units
-------------------------------------------------
Barrel Volume in Ounces
2. PRICE AND MANNER OF PAYMENT.
(a) Except as otherwise provided in the following subsections of this
Section 2, MOJO shall pay FBC for the Product and/or Other Products an amount
(the "Unit Price") equal to: (i) based on MOJO's individual purchase orders, for
Product and the volume ordered as follows:
Price Per Price Per
Volume Ordered Case Unit Keg
-------------- ----------- ----------
100 Barrels $10.00 $40.00
200 Barrels 9.00 35.00
400 Barrels 8.50 30.00
<PAGE>
Contract Brewing Agreement
Page 5
plus (ii) all state and local excise taxes attributable to the Product
and/or Other Products that are paid by FBC; plus (iii) the then-applicable
per-use fee charged by Micro-Star Keg Management, Inc., a deposit of $7.50 per
pallet, or such other amounts as the Parties mutually agree.
(b) The Unit Price quoted in Section 2(a) above for any Product and/or
Other Products packaged in a "Case" represents the price for a boxed unit of
twenty-four loose 12-ounce bottles or 4-6 packs of 12-ounce bottles (in each
instance, a "Case Unit"). The Unit Price for any Product and/or Other Product
packaged in a "Keg" shall represent the price for a one-half barrel (15.5 U.S.
gallons) keg (individually referred to as a "Keg" and collectively referred to
as "Kegs"). FBC may charge to MOJO, as an adjustment to the Unit Price, an
amount equal to 110% of any price increases in the net cost to FBC for Brewing
Ingredients, Brewing Supplies or Packaging Materials for any month (the "Base
Month") in which the net cost of such item to FBC exceeds the cost paid by FBC
for such item in the immediately prior month (the "Prior Month"), and FBC may
continue to charge such adjustment in each succeeding month (and may make
similar adjustments) until the net cost to FBC for such item in any month is
equal to or is lower than the net cost to FBC for such item was in the Prior
Month. For this purpose, "net cost to FBC" shall include purchase discounts, but
not discounts resulting from credit terms.
(c) Notwithstanding the above, the Unit Price that MOJO shall pay to FBC
shall, in no event, exceed the highest Unit Price paid by any other third party
brand owner whose products are produced by FBC for orders of similar volume. In
addition, Unit Price plus the costs of warehousing and shipping of the first two
100 barrel batches of MOJO Product shall be paid by FBC.
(d) Unit Prices are F.O.B. the carrier's trucks at FBC's docks (i.e., the
Unit Price includes the cost and risk of loading trucks at FBC's dock) and
include FBC's labor costs, overhead, profit and other costs incurred in the
brewing and packaging of the Product.
(e) On the date the Product and/or Other Products is shipped, FBC will
invoice MOJO for the Unit Price. The portion of the Unit Price attributed to
Brewing Ingredients purchased by FBC will be billed at FBC's standard cost when
the Product and/or Other Products is shipped (with monthly reconciliation to
reflect FBC's actual cost). FBC may periodically adjust its standard cost for
Brewing Ingredients to more accurately reflect its actual costs. FBC shall
notify MOJO in writing of any adjustment in its standard cost at least ten (10)
days prior to the date such adjustment will take effect. All invoices will be
sent to MOJO by telecopier and MOJO will pay each Friday by electronic funds
transfer all invoices that relate to shipments of the Product and/or Other
Products made by FBC during the previous week.
<PAGE>
Contract Brewing Agreement
Page 6
3. BREWING INGREDIENTS, PACKAGING MATERIALS AND BREWING
SUPPLIES.
(a) For purposes of this Contract Brewing Agreement, "Brewing Ingredients"
shall be defined as all grain, malt, yeast and hops used to produce the Product.
Brewing Ingredients shall be purchased and supplied as follows:
(i) All grain and/or malt used in the brewing of the Product shall be
purchased by FBC directly from commercial grain and/or malt suppliers. FBC and
MOJO will use their best efforts to agree upon specifications for grain and/or
malt that will allow FBC to commingle storage of grain and/or malt used to
produce the Product with grain and/or malt used to produce FBC's own products.
If FBC and MOJO cannot agree upon standard grain and/or malt specifications, the
Unit Price shall be increased to reflect any additional cost incurred by FBC for
separate handling and storage of grain and/or malt used in the Product.
(ii) All hops used in the brewing of the Product shall be purchased by
FBC from usual and customary sources.
(b) For purposes of this Contract Brewing Agreement, "Packaging Materials"
shall be defined as all bottles, crowns, labels, cases, cartons, Kegs, tap
covers, pallets and dust covers and the like used in the packaging and shipment
of the Product. Packaging Materials shall be purchased and supplied as follows:
(i) Except for the first production runs of Packaging Materials
adequate for the production of up to the first 200 barrels (which shall be paid
by FBC as set forth in Section 2(c), above), bottles, crowns, labels, cases,
cartons, tap covers and the like shall be purchased by FBC from usual and
customary sources as needed to meet the Packaging Schedule for the Product.
(ii) Unless otherwise mutually agreed, Kegs and pallets in quantities
adequate for the volume of the Product and/or Other Products to be packaged
under this Contract Brewing Agreement shall be purchased by FBC from usual and
customary sources from time to time. All such Kegs and pallets shall be
returned and reused in accordance with FBC's standard policies for Keg and
pallet return and reuse. From time to time during the term of this Contract
Brewing Agreement, FBC shall purchase additional Kegs and pallets in numbers
adequate to replace Kegs and pallets lost or otherwise rendered unusable. All
Kegs and pallets shall conform to the specifications of Kegs and pallets used by
FBC in packaging and shipping its own products.
<PAGE>
Contract Brewing Agreement
Page 7
(c) MOJO has the right, subject to the approval of FBC, which
approval will not be unreasonably withheld, to make changes in the Packaging
Materials. If the proposed new Packaging Materials can be produced without
modification or addition to FBC's existing equipment, FBC shall produce the
Product using the new Packaging Materials upon mutual agreement by FBC and MOJO
to any adjustment to the Unit Price required to compensate FBC for any
difference in production cost compared to the cost to produce the Product in the
comparable bottle package. If the proposed new Packaging Material requires any
modifications or additions to FBC's existing equipment, then the obligations of
the parties with respect to such modifications or additions shall be governed by
Sections 1(b) and 9 of this Contract Brewing Agreement.
(d) For purpose of this Contract Brewing Agreement, "Brewing Supplies"
shall be defined as all Kettle additives, brewing liquor treatments and
chill-proofing and fining agents used to produce the Product. FBC shall purchase
all Brewing Supplies from usual and customary sources.
(e) MOJO shall have sole responsibility for the selection and approval
of all Brewing Ingredients, Packaging Materials and Brewing Supplies used to
produce the Products. MOJO shall have sole responsibility for the content and
design of all labels, tap covers, crowns, cartons, cases and other Packaging
Materials.
(f) Upon the termination of this Contract Brewing Agreement for any
reason: (i) MOJO will purchase from FBC (w) all Kegs and pallets purchased by
FBC on behalf of MOJO pursuant to this Contract Brewing Agreement at their
documented cost to FBC, (x) all finished Product and/or Other Products at the
Unit Price, (y) all inventory of work in process of the Product and/or Other
Products at FBC's cost, and (z) all inventory of Brewing Ingredients, Packaging
Materials and Brewing Supplies purchased by FBC that are not reasonably useable
by FBC in its own products at FBC's cost; and (ii) FBC will make available for
pick up by MOJO at FBC's dock all finished Product and/or Other Products, all
Brewing Ingredients, Packaging Materials and Brewing Supplies referred to in
Section 3(e) hereof, and all Kegs, pallets and dust covers on hand at FBC that
were purchased by FBC on behalf of MOJO pursuant to this Contract Brewing
Agreement. In the event that sales of the Product are greater than 2,500 barrels
within 12 months after the shipment to MOJO's distributors, but such sales are
substantially less than forecasted by MOJO, resulting in abnormally excess
inventories of Packaging Materials purchased by FBC, MOJO will purchase such
excess from FBC at FBC's cost.
4. TERM.
The term of this Contract Brewing Agreement shall commence on the
Effective Date and, unless sooner terminated pursuant to Section 10 hereof, this
Contract Brewing
<PAGE>
Contrct Brewing Agreement
Page 8
Agreement shall expire on December 31, 2008. However, this Agreement shall be
automatically renewed on January 1, 2009 and each subsequent January 1 (the
"Annual Renewal Date") thereafter for one (1) additional year unless a party
hereto shall, within sixty (60) days prior to such Annual Renewal Date, provide
notice to the other party that the other party is in breach of this Agreement
and that the notifying party will not renew the Agreement as a consequence
thereof on the Annual Renewal Date. The parties acknowledge that MOJO's
obligations pursuant to this Contract Brewing Agreement to make payments to FBC
and the Parties' respective rights and obligations under Sections 3(e), 9,
10(a), 11, 12, 14, 16(a), 16(c) and 17 shall survive the expiration or
termination of this Contract Brewing Agreement.
5. MINIMUM ORDERS.
(a) On a weekly basis, MOJO shall provide FBC with a twelve (12) week
Production Plan for the Product (the "Production Plan"). The Production Plan
shall be a rolling twelve week schedule setting forth brewing and packaging
requirement for the Product for each week during the twelve weeks covered
by the Production Plan. All brewing requirements for the Products during the
first two weeks of the Production Plan shall constitute firm orders by MOJO. All
brewing requirements for the Product during the twelve (12) weeks of the
Production Plan and all packaging requirements set forth in the Production Plan
shall be a forecast of MOJO's best estimate of brewing and packaging
requirements for the Product and shall be used by FBC for capacity planning
purposes. MOJO shall update the Production Plan each week by providing its best
estimate of brewing and packaging requirements for the next week and by revising
the schedule for brewing and packaging requirements in the remaining weeks of
the Production Plan. The minimum brew size that MOJO shall utilize in the
Production Plan shall be FBC's maximum brew based on FBC's current brewing
vessels, currently estimated to yield approximately 100 barrels of the Product
(a "Brew"). The minimum brewing requirement that MOJO may specify during any six
month period shall be two Brews. The maximum brewing requirement that MOJO may
specify shall not exceed 400 Barrels in any consecutive four (4) week period.
FBC shall have the right, in its sole discretion, to set the actual time and
date on which each Brew shall be brewed, provided that FBC shall use its best
efforts to (i) minimize the length of time that the Product remains in storage
prior to packaging, and (ii) meet the shipment dates specified on the Packaging
Schedule.
(b) MOJO shall place all orders for packaging and shipment of the
Product not less than 28 days in advance of the proposed shipping date (the
"Packaging Schedule"). The Packaging Schedule shall set forth the quantity of
the Product by package type and the week in which each order shall be shipped in
the following month. Packaging shall be scheduled in increments of 100, 200 and
400 barrels and shall specify the number of Kegs and Case limits.
<PAGE>
Contract Brewing Agreement
Page 9
6. RISK OF LOSS.
MOJO shall have sole responsibility for selecting carriers and making
all arrangements for shipment of the Product to its customers. MOJO shall pay
for all costs associated with shipment of the Product from FBC's facility. FBC
and MOJO acknowledge and agree that, consistent with the F.O.B. pricing terms,
the risk of loss in loading the carrier's trucks shall be borne by FBC. However,
the carrier's driver shall have the right to inspect each shipment for damage
prior to leaving the loading dock and, accordingly, MOJO shall bear the risk of
loss on any shipment of Product, once the carrier's truck leaves FBC's loading
dock.
7. BREWERY OF RECORD.
(a) FBC shall provide all Product brewed hereunder under the name
of "The MOJO Highway Company, LLC" as the Brewery of Record. FBC shall secure
and maintain any permits, licenses, approvals and the like required by any
federal, state or local governmental agency on behalf of MOJO, and FBC shall pay
for any out-of-pocket costs, including, without limitation, legal expenses,
incurred in connection therewith.
(b) FBC and MOJO shall maintain an alternating proprietorship whereby
the Product is produced at FBC's facility under a Brewer's Notice for such
premises issued to MOJO. FBC shall maintain separate records for the Product
produced under the MOJO alternating proprietorship and shall file monthly
reports and federal excise tax returns in a timely manner on behalf of the MOJO
alternating proprietorship. FBC shall, to the extent reasonably possible, but
subject to and in compliance with all applicable federal, state or local laws,
rules and regulations, identify Frederick, Maryland, as the sole label source
for the Product. FBC shall pay for its out-of-pocket costs, including, without
limitation, legal expenses, incurred in connection with maintaining the MOJO
alternating proprietorship.
8. FORCE MAJEURE.
(a) FBC shall not be liable to MOJO in the event that FBC shall delay
in or fail to deliver Product and/or Other Products to MOJO hereunder for any
reason or cause beyond its control, including but not limited to a slowdown,
stoppage or reduction of FBC's production or delivery due to strikes, fire,
flood, labor stoppage or slowdown, inability to obtain materials or packages,
shortage of energy or water, acts of God, a limitation or restriction of its
production by action of any military or governmental authority, or any other
causes, outside of its control.
(b) In the event of any such slowdown, stoppage or reduction of FBC's
production or deliveries, FBC will allocate its remaining capacity pro-rata
between FBC's
<PAGE>
Contract Brewing Agreement
Page 10
own products, other products being brewed and produced under contract by FBC,
and the Product, provided that MOJO, upon the request of FBC, shall use
reasonable efforts to move production of the Product to other suppliers for the
duration of any such slowdown, stoppage or reduction so as to minimize the
amount of the Product that FBC is required to produce for MOJO during such a
slowdown, stoppage or reduction. The pro rata allocation of FBC's remaining
production capacity shall be based on the proportionate volume of FBC's own
products, products being brewed and produced for other third party brand owners
under contract with FBC, and the Product produced by FBC during the three month
period immediately preceding the month in which occurred the event which gave
rise to the slowdown, stoppage or reduction of FBC's production or delivery. In
allocating the proportionate share of its remaining capacity to be devoted to
the Product, FBC shall use its best efforts to accommodate the mix of Product
and Other Products specified by MOJO.
9. CHANGE PARTS AND BREWERY MODIFICATIONS.
(a) The Parties anticipate that production of Other Products or the use
of new Packaging Materials may require changes or modifications to FBC's brewing
equipment and facilities, or the installation of new equipment by FBC to
accommodate Other Products or new Packaging Materials. Subject to the
obligations of MOJO and FBC under Section 1(b) of this Contract Brewing
Agreement, FBC shall have no obligation to make any modifications to its
equipment or facilities to accommodate the production of the Product unless
agreed to by FBC in writing. If the change parts, modifications or new equipment
required to produce any Other Products or use any new Packaging Materials would,
in FBC's reasonable judgment, have a material adverse impact on FBC's
operations, including without limitation, space availability, plant capacity, or
cost of production, then FBC shall not be required to produce any such Other
Products or use any such new Packaging Materials. If FBC determines that the
required changes, modifications or new equipment would not have a material
adverse impact, then the allocation of cost, ownership and the other terms and
conditions relating to such change parts, modifications or new equipment shall
be determined as provided herein.
(b) MOJO will pay for all change parts, brewery modifications or new
equipment that are unique to producing the Product and/or Other Products at
FBC's facility, provided that FBC notifies MOJO in advance of making any such
expenditures. FBC shall own all change parts and brewery modifications paid for
by MOJO and MOJO shall not be entitled to such change parts or to remove any
such change parts and brewery modifications at the termination or expiration of
this Contract Brewing Agreement. The payment by MOJO for all change parts,
brewery modifications or new equipment shall be on an amortization schedule
mutually agreed upon by the Parties. If such agreed upon changes and
modifications are used in the production or packaging of FBC's products or other
products manufactured by FBC under contract at the termination or expiration of
this
<PAGE>
Contract Brewing Agreement
Page 11
Agreement, FBC shall compensate MOJO for the fair market value of the changes
and modifications, taking into account depreciation and wear and tear.
10. TERMINATION.
(a) Unless the reason for termination is governed by Sections 10(c) or
10(d) of this Contract Brewing Agreement, either Party may terminate this
Agreement for any other reason in accordance with the terms set forth in this
Section 10(a). If either Party wishes to terminate this Contract Brewing
Agreement, the Party wishing to terminate shall first notify the other Party in
writing explaining all of the reasons causing it to seek termination. The other
Party shall have ten (10) business days after receipt of the notice explaining
reasons to present to the Party that gave notice a written proposal setting
forth all of the proposed measures, concessions, amendments or other actions
which the Parties would undertake to alleviate the reasons cited in the
notice. The Parties shall then negotiate in good faith to reach mutual agreement
on the proposal. The Parties will not disclose to any third party that notice
has been given, that discussions are taking place or the content of any such
notice or discussions, except that either Party may issue any press release or
make any public disclosure which such Party determines to be required by law,
regulation or by the rules or regulations of any self-regulating securities
exchange. If, within twenty (20) business days after receipt of the notice
explaining reasons, the Parties have not mutually agreed in writing on all of
the measures, concessions, amendments and other actions to be undertaken to
alleviate the reasons cited by the Party that gave notice, then the Party that
gave notice may notify the other Party in writing that it is terminating this
Contract Brewing Agreement. A Party wishing to terminate this Contract Brewing
Agareement shall use good faith and exercise reasonable judgment in concluding
that it has reasons for terminating this Contract Brewing Agreement. Reasons
that may cause a party to terminate this Contract Brewing Agreement shall
include without limitation: a material default by any Party of any of its
obligations under this Contract Brewing Agreement; a material violation of the
laws and regulations governing the production, marketing or sale of alcoholic
beverages; the material violation by either Party of the terms of the MOJO
Operating Agreement of the limited liability company.
(b) Either Party may terminate this Contract Brewing Agreement
effective immediately upon written notice to the other Party in the event
that: (i) the other Party makes an assignment for the benefit of creditors or
files a voluntary bankruptcy, insolvency, reorganization or similar petition
seeking protection from creditors; (ii) the other Party fails to vacate any
involuntary bankruptcy, insolvency or reorganization petition filed against such
Party within ten (10) business days after the filing of such petition; or (iii)
the other Party liquidates, dissolves or ceases to do business as a going
concern.
<PAGE>
Contract Brewing Agreement
Page 12
(c) Upon termination pursuant to this Section 10, MOJO shall promptly
pay to FBC all unpaid invoices in full and all unpaid costs incurred by FBC
pursuant to this Contract Brewing Agreement in the brewing, packaging, shipping
and storage for the Product and/or Other Products. FBC will use all reasonable
efforts to minimize such costs upon termination and MOJO will have the right to
review documentation evidencing such costs. FBC also agrees, upon reasonable
assurance of payment, to complete the production of all work-in-process and,
upon payment of all sums due, to make all finished product, packaging materials
and unused ingredients available for shipping to MOJO.
11. AGENCY AND INDEMNIFICATION.
FBC and MOJO understand and agree that neither Party is, by virtue of
this Contract Brewing Agreement or anything contained herein, including FBC
affixing to any Product and/or registering the name of "The MOJO Highway Brewing
Company, LLC" or "MOJO Highway," constituted or appointed the agent of the other
Party for any purpose whatsoever, nor shall anything herein contained be deemed
or constructed as granting MOJO or FBC any right or authority to assume or to
create any obligation or responsibility, express or implied, for or on behalf of
or in the name of the other, or to bind the other in any manner or way
whatsoever. MOJO shall indemnify and hold harmless FBC from and against any and
all claims, expenses, causes of action or liabilities of any nature whatsoever
(collectively, "Damages"), to the extent that Damages arise solely from the
independent conduct of MOJO; provided that Damages shall not include any loss,
liability, cost or expense incurred by FBC as a consequence of the exercise by
MOJO of any of its rights under this Contract Brewing Agreement.
12. PRODUCT LIABILITY.
(a) FBC and MOJO shall each maintain product liability insurance
coverage in the respective amount of not less than $1,000,000 per occurence and
$1,000,000 combined single limit, and in the amount of not less than $1,000,000
combined single limit in the aggregate relating to the Product produced by FBC
for MOJO hereunder.
(b) FBC shall indemnify and hold harmless MOJO and all of its
affiliates from and against any and all loss, liability, cost or expense of any
nature whatsoever, including reasonable attorney's fees (collectively, "Product
Liability Damages"), arising out of or associated with the manufacture and/or
packaging of the Product and/or Other Products by FBC, regardless of when
manufactured or packaged, except to the extent that (i) Product Liability
Damages were caused solely by improper storage, handling or alteration of the
Product and/or Other Products after delivery to MOJO, (ii) Product Liability
Damages are based on or result from a claim that the Product and/or Other
Product is inherently defective, (iii) Product Liability Damages were caused by
Brewing Ingredients, Packaging
<PAGE>
Contract Brewing Agreement
Page 13
Materials (other than bottles) or Brewing Supplies specified or otherwise
approved by MOJO which have not been altered by FBC without MOJO's consent, or
(iv) Product Liability Damages relating to the health aspects of the consumption
of alcoholic beverages or to damage, injury or death as a result of the
ingestion of any Product and/or Other Products.
(c) MOJO shall indemnify and hold harmless FBC and all of its affiliates
from and against any and all Product Liability Damages to the extent arising out
of the causes excepted from FBC's duty to indemnify MOJO under clauses (i), (ii)
and (iii) of Section 12(b).
13. RECIPE AND QUALITY.
(a) FBC shall produce the Product and/or Other Products using the
ingredients and brewing formula and procedures specified in the Brewing Package
provided by MOJO to FBC within thirty (30) days after the execution of this
Contract Brewing Agreement. FBC shall produce any new Product or any Other
Products using the brewing formula and procedures specified in the Brewing
Package provided by MOJO to FBC for such Product and/or Other Products. MOJO
shall have the right to change ingredients and/or brewing formula and procedures
upon reasonable prior written notice to FBC, provided that the cost of any such
change shall be borne by MOJO and, provided further, that the specified
ingredients are readily available to FBC in the necessary time frame.
(b) FBC shall use its best efforts to meet the specifications for the
Product to be provided by MOJO in the Brewing Package. FBC shall use its best
efforts to meet the specifications for any new Product and/or any Other Products
which are furnished in writing by MOJO at the time the Parties agree to add a
new Product and/or Other Products to this Contract Brewing Agreement. MOJO has
the right to reject batches of the Product which it determines to taste
materially different from representative sample of the Product, such rejection
not to be arbitrary or unreasonable. Any rejected batches shall not be charged
to MOJO by FBC.
(c) The Product shall be brewed and packaged according to MOJO's
specifications, including the maintenance of standards and quality control
programs furnished to FBC in writing by MOJO. MOJO shall have ultimate
responsibility and authority over every detail of the production process for the
Product, with such responsibility and authority as to those parameters affecting
beer taste and quality to be the same as if MOJO were the owner of FBC's brewing
facility. MOJO shall have the right, at any time, to monitor and review the
practices and procedures of FBC in the production and packaging of the Product
and inspect FBC's brewing facility. If a decision made by MOJO in the exercise
of its authority under this Section 13(c) results in a rejection of two or more
<PAGE>
Contract Brewing Agreement
Page 14
consecutive batches by MOJO, the Parties shall work together in good faith to
resolve all such problems. In addition, in the exercise of its authority under
this Section 13(c), MOJO shall not interfere with FBC's production process for
its own proprietary brands.
(d) Consistent with the provisions of Section 13(c), FBC and MOJO
will, in any and all public statements or comments, recognize that MOJO controls
the ingredients, recipe, brewing processes and procedures and quality parameters
for all Product and/or Other Products produced for MOJO by FBC, and that MOJO is
the brewer of all such Product. Neither Party will make any public statement
inconsistent with the foregoing.
14. TRADEMARKS.
(a) FBC acknowledges that no trademark or trade name rights in
"MOJO", "MOJO Highway", "MOJO Highway Brewing Company" and any other trademarks,
trade names, service marks or logos owned or held under license by MOJO
(collectively, the "Trademarks") are granted by this Contract Brewing Agreement.
(b) MOJO hereby represents, warrants and covenants to FBC that it
has and will maintain its right to use the Trademarks and will indemnify and
hold harmless FBC from any alleged infringement by any Party against FBC
including, but not limited to, FBC's reasonable costs of legal expenses.
15. TEST BREWING.
Nothwithstanding anything to the contrary in this Contract Brewing
Agreement, MOJO may, at any time after notice to FBC, engage any other brewer
for the purpose of conducting test production and distribution of the Product in
order to ensure the delivery of the Product following termination of this
Contract Brewing Agreement.
16. COMPETING PRODUCTS.
(a) FBC will not at any time use the brewing formula for the
Product and/or Other Products which MOJO has supplied to FBC to produce a malt
beverage product for itself (or any of its affiliates) or on behalf of any
unaffiliated person.
(b) For so long as this Contract Brewing Agreement remains in
effect, FBC shall not, without the prior written consent of MOJO, produce for or
on behalf of any person unaffiliated with FBC or MOJO a malt beverage product
for sale in the United States which is targeted to be marketed and sold
primarily to the African-American demographic segment of the population, nor
will FBC produce, market or sell brands to such segment in conjunction with any
other entity owned or controlled by African-Americans
<PAGE>
Contract Brewing Agreement
Page 15
without the prior written consent of C&L Brewing Company, Inc., the controlling
member of MOJO. The foregoing restrictions shall not apply in any calendar year
after 2000 unless MOJO has purchased at least the volume of the Products set
forth in Section 10(a) hereof.
(c) MOJO acknowledges that FBC is currently in the business of
brewing craft and specialty malt beverage products for sale by FBC and by other
third party brand owners that are similar to and compete with the Product, and
MOJO agrees that nothing in this Contract Brewing Agreement shall prevent FBC
from continuing or expanding its craft and specialty brewing or contract brewing
business, provided that FBC shall not intentionally copy the brewing formula for
the Product and/or Other Products or use any yeast supplied to FBC by MOJO to
produce craft and specialty products for itself or any of its affiliates or any
other third party brand owners. All of the Product and/or Other Products
produced by FBC for purposes of this Contract Brewing Agreement, including all
work in process, shall be produced solely for the benefit of MOJO and used for
no other purpose.
17. RIGHTS OF OFFSET.
The Parties acknowledge and agree that, to the extent a Party is at any
time owed money by the other Party, such Party may set off such amount against
any monies owed by such Party from time to time to such other party, said
set-off to be accomplished by written notice to such other Party effective upon
being sent.
18. NOTICES.
All notices required herein shall be given by registered or certified
mail, return receipt requested, or by overnight courier service, in both cases
with a copy also sent by telecopier, to the following addresses (unless change
thereof has previously been given to the Party giving the notice) and shall be
deemed effective when received:
If to MOJO: Lee M. Chapman
Manager-Chief Executive Officer
MOJO Highway Brewing Company, LLC
33 Gold Street, No. 119
New York, New York 10038
Telephone: (212)
Telecopier: (212) 714-9856
<PAGE>
Contract Brewing Agreement
Page 16
If to FBC: Kevin E. Brannon
Chief Executive Officer
Frederick Brewing Co.
4607 Wedgewood Blvd.
Frederick, Maryland 21703
Telephone: (301) 694-7899
Telecopier: (301) 694-2971
With a copy to: Jeffrey A. Koeppel
Elias, Marz, Tiernan & Herrick L.L.P.
734 15th Street, N.W.
12th Floor
Washington, D.C. 20005
Telephone: (202) 347-0300
Telecopier: (202) 347-2172
19. SUCCESSORS AND ASSIGNS.
This Contract Brewing Agreement shall be binding upon and inure to the
benefit of the successors and assigns of the Parties, but shall not be assigned
by any Party, whether by merger, consolidation, reorganization, operation of law
or otherwise, without the prior written consent of the other Party, which
consent will not be unreasonably withheld. No failure of a Party to consent to a
proposed assignment of this Contract Brewing Agreement by the other Party shall
be deemed unreasonable if such Party believes in good faith that the proposed
assignee is not capable of performing the financial or production obligations of
the Party proposing to assign this Contract Brewing Agreement. Assignment of
this Contract Brewing Agreement shall not relieve the assigning Party of its
financial obligations hereunder, including its indemnification obligations
hereunder.
20. GOVERNING LAW.
This Contract Brewing Agreement shall be interpreted and construed in
accordance with the laws of the State of Maryland.
21. DISPUTE RESOLUTION.
Any disagreement, dispute, controversy or claim with respect to the
validity of this Contract Brewing Agreement or arising out of or in relation to
the Contract Brewing Agreement, or breach hereof, shall be submitted to
arbitration in Baltimore, Maryland, in accordance with the articles of the
American Arbitration Association for Commercial Arbitration. The arbitrator(s)
shall have the right to assess costs including legal expenses,
<PAGE>
CONTRACT BREWING AGREEMENT
PAGE 17
in favor of the prevailing Party. The decision of the arbitrator(s) shall be
final and binding on both Parties. Notwithstanding the foregoing, the Parties
may, prior to submitting a dispute to arbitration, have recourse to the courts
of the United States of America or the State of Maryland for the purpose of
obtaining a temporary restraining order or other preliminary injunctive relief.
22. EXECUTION IN COUNTERPARTS.
This Contract Brewing Agreement may be executed in one or more
counterparts each of which shall be deemed to be an original but all of which
together shall constitute one and the same document.
23. AMENDMENTS.
No amendment, change or modification of any of the terms, provisions
or conditions of this Contract Brewing Agreement shall be effective unless made
in writing and signed or initialed on behalf of the Parties hereto by their duly
authorized representatives.
24. NO THIRD PARTY BENEFICIARIES.
FBC and MOJO agree that this Contract Brewing Agreement is solely for
their benefit and it does not nor is it intended to create any rights in favor
of, or obligations owing to, any person not a Party to this Contract Brewing
Agreement.
25. MERGER; SEPARABILITY.
This Contract Brewing Agreement terminates and supersedes all prior
formal or informal understandings between the Parties with respect to the
subject matter contained herein, including that letter of intent dated April 3,
1998. Should any provision or provisions of this Contract Brewing Agreement be
deemed ineffective or void for any reasons whatsoever, such provision or
provisions shall be deemed separable and shall not effect the validity of any
other provision.
<PAGE>
Contract Brewing Agreement
Page 18
IN WITNESS WHEREOF, the Parties hereto enter into this Contract Brewing
Agreement as of the date first above written.
Witness: /s/ Illegible MOJO HIGHWAY BREWING COMPANY, LLC
-------------
By: /s/ Lee M. Chapman
-----------------------------
Lee M. Chapman
Manager-Chief Executive Officer
By: /s/ Curtis J. Lewis
-----------------------------
Curtis J. Lewis, II
Manager-Chief Operating Officer
Witness: /s/ Illegible FREDERICK BREWING CO.
-------------
By: /s/ Kevin E. Brannon
-----------------------------
Kevin E. Brannon, Chairman
and Chief Executive Officer
EXHIBIT 10.3
MOJO HIGHWAY BREWING COMPANY, LLC
-----------------------
OPERATING AGREEMENT
-----------------------
JUNE 19, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
RECITALS...................................................................
Section I - Defined Terms..................................................
Section II - Formation and Name; Office; Purpose; Term.....................
2.1 Organization...........................................
2.2 Name of the Company....................................
2.3 Purpose/Business.......................................
2.3.1 Purpose..........................................
2.3.2 Permitted Business...............................
2.4 Term...................................................
2.5 Principal Office.......................................
2.6 Resident Agent.........................................
Section III - Members; Capital Contribution; Capital Accounts..............
3.1 Members................................................
3.2 Additional Members.....................................
3.3 Initial Capital Contributions..........................
3.4 Additional Capital Contributions.......................
3.4.1 Limited Liability...............................
3.4.2 Unpaid Capital Contributions....................
3.5 No Interest on Capital Contributions...................
3.6 Return of Capital Contributions........................
3.7 Form of Return of Capital..............................
3.8 Capital Accounts.......................................
3.9 Loans..................................................
Section IV - Members and Interest Holders - Voting, Profit,
Loss, and Distributions.......................................
4.1 Percentages of Membership Interests....................
4.2 Meetings...............................................
4.2.1 Annual and Special Meetings.....................
4.2.2 Notice..........................................
4.2.3 Quorum..........................................
4.2.4 Record Date.....................................
4.2.5 Voting By Certain Members.......................
4.2.6 Conduct of Meetings.............................
4.2.7 Presumption of Asset............................
4.2.8 Telephone Meetings..............................
4.3 Voting.................................................
i
<PAGE>
4.4 Distributions of Cash Flow.............................
4.5 Required Distributions to Interest Holders.............
4.6 Allocation of Profits or Loss..........................
4.7 Liquidation and Dissolution............................
4.8 Timing of Distributions................................
Section V - Rights and Duties of, Designation and Election of, Conduct of
Business by, and Meetings of Managers..........................
5.1 Management.............................................
5.1.1 Tax Matters Partners.............................
5.2 Member, Tenure and Qualification.......................
5.2.1 Managers........................................
5.2.2 Term............................................
5.3.3 Qualification...................................
5.3 Selection and Replacement of Managers..................
5.3.1 Selection of Managers; Vacancies................
5.3.2 Removal.........................................
5.3.3 Resignation.....................................
5.4 General Powers of Managers.............................
5.4.1 General Powers..................................
5.4.2 Member Authority................................
5.5 Duties of the Managers.................................
5.6 Third Party Reliance...................................
5.7 No Duty to Consult.....................................
5.8 Director...............................................
5.9 Rights of Members......................................
5.10 Reimbursement..........................................
5.11 Regular Meetings.......................................
5.12 Special Meetings.......................................
5.13 Telephonic Meetings Permitted..........................
5.14 Manager Voting.........................................
5.15 Actions of Managers and Committees Meetings............
5.16 Managers' Liability....................................
5.17 Member Indemnification.................................
Section VI - Transfer of Interests and Withdrawals of Members..............
6.1 Transfers..............................................
6.2 Involuntary Withdrawal.................................
6.3 Voluntary Withdrawal...................................
ii
<PAGE>
Section VII - Dissolution, Liquidation and Termination of the Company......
7.1 Events of Dissolution..................................
7.2 Procedure for Winding Up and Dissolution...............
7.3 Filing of Articles of Cancellation.....................
Section VIII - Fiscal Matters..............................................
8.1 Fiscal Year............................................
8.2 Deposits...............................................
8.3 Checks, Drafts, etc....................................
8.4 Books and Records......................................
Section IX - General Provisions............................................
9.1 General................................................
9.1.1 Funding Indemnification.........................
9.2 Limited Power of Attorney..............................
9.3 Assurances.............................................
9.4 Notification...........................................
9.5 Anticipated Transactions...............................
9.6 Specific Performance...................................
9.7 Complete Agreement; Amendment..........................
9.8 Applicable Law.........................................
9.9 Section Titles.........................................
9.10 Binding Provisions.....................................
9.11 Jurisdiction and Venue.................................
9.12 Terms..................................................
9.13 Separability of Provisions.............................
9.14 Counterparts...........................................
SIGNATURES.................................................................
EXHIBIT A - Articles of Organization
EXHIBIT B - Percentage Interest in Mojo Highway Brewing Company, LLC
EXHIBIT C - Member Contributions
iii
<PAGE>
MOJO HIGHWAY BREWING COMPANY, LLC
OPERATING AGREEMENT
The undersigned, as owners of Mojo Highway Brewing Company, LLC (the
"Company") do hereby enter into this Operating Agreement effective the ___ day
of _______, 1998.
RECITALS
WHEREAS, the parties hereto desire to establish Mojo Highway Brewing
Company, LLC as a Maryland limited liability company; and
WHEREAS, the parties desire to enter into a limited liability company
operating agreement pursuant to the terms of the Maryland Limited Liability
Company Act.
NOW, THEREFORE, for good and valuable consideration, the parties, intending
to be legally bound, agree as follows:
Section I
Defined Terms
The following capitalized terms shall have the meanings specified in this
Section I. Other terms are defined in the text of this Agreement, and,
throughout this Agreement, those terms shall have the meanings respectively
ascribed to them.
"Act" means the Maryland Limited Liability Company Act, as amended from
time to time.
"Agreement" means this Operating Agreement, as amended from time to time.
"Articles of Organization" means the Articles of Organization for Mojo
Highway Brewing Company, LLC, a copy of which is attached hereto as Exhibit A.
"C&L" means C&L Brewing Company, Inc., a Maryland corporation and a founder
of the Company.
"Capital Account" means the account maintained by the Company for each
Interest Holder. Such Capital Account shall be maintained throughout the full
term of the Company in accordance with applicable Treasury Regulations that must
be complied with in order for the allocations of taxable profits and losses
provided in this Agreement to have "economic effect" under applicable Treasury
regulations.
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 2
"Capital Contribution" means the total amount of cash and the fair market
value of any other assets contributed (or deemed contributed under Regulation
Section 1.704-1(b)(2)(iv)(d)) to the Company by a Member, net of liabilities
assumed or to which the assets are subject.
"Cash Flow" means all cash funds derived from operations of the Company
(including interest received on reserves), without reduction for any non-cash
charges, but less cash funds used to pay current operating expenses and to pay
or establish reasonable reserves for future expenses, debt payments, capital
improvements, and replacements, as determined by the Managers. Cash flow shall
be increased by the reduction of any reserve previously established.
"Certificate of Ownership" means the document delivered to an Interest
Holder which set forth the Interest held, subject to the terms of this Operating
Agreement.
"Code" means the Internal Revenue Code of 1986, as amended, or any
corresponding provision of any succeeding law.
"Company" means the limited liability company organized in accordance with
this Agreement.
"Contribution Agreement" means the agreement between an Investor and the
Company that sets out an Investor's Capital Contribution.
"FBC" means Frederick Brewing Co., a Maryland corporation and a founder of
the Company.
"Interest" means a Person's share of the Profits and Losses of, and the
right to receive distributions from, the Company.
"Interest Holder" means any Person who holds an Interest, whether as a
Member or as a permitted unadmitted assignee of a Member.
"Investor(s)" means those Persons who become Members of the Company by
virtue of their contribution to the venture.
"Involuntary Withdrawal" means, with respect to any Member, the occurrence
of any events set forth in the Act as set forth in Section 4A-606(3) through
(9).
"Manager(s)" means those persons designated in Section V of this Agreement.
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 3
"Member(s)" means each Person signing this Agreement and any Person who is
subsequently admitted as a member of the Company.
"Membership Rights" means all the rights of a Member in the Company,
including a Member's: (i) Interest; (ii) right to inspect the Company's books
and records; (iii) right to elect the Company's Managers as provided in this
Agreement; and (iv) to the extent authorized by this Agreement, right to vote on
matters coming before the Members;
"Percentage" or Percentage Interest" means, as to a Member, the percentage
set forth after the Member's name in Section 4.1 as to the initial Members and
Exhibit B, as amended from time to time as to subsequent Members, and as to an
Interest Holder who is not a Member, the Percentage of the Member whose Interest
has been acquired by such Interest Holder, to the extent the Interest Holder has
succeeded to that Member's Interest.
"Person" means and includes an individual, corporation, partnership,
association, limited liability company, trust, estate, or other entity.
"Profit" and "Loss" means, for each taxable year of the Company (or other
period for which Profit or Loss must be computed) the Company's taxable income
or loss determined in accordance with Code Section 703(a) and the following:
(i) all items of income, gain, loss, deduction, or credit required to be
stated separately pursuant to Code Section 703(a)(1) shall be included in
computing taxable income or loss;
(ii) any tax-exempt income of the Company, not otherwise taken into account
in computing Profit or Loss, shall be included in computing taxable income or
loss;
(iii) any expenditures of the Company described in Code Section
705(a)(2)(B) (or treated as such pursuant to Regulation Section
1.704-1(b)(2)(iv)(i)) and not otherwise taken into account in computing Profit
or Loss, shall be subtracted from taxable income or loss;
(iv) gain or loss resulting from any taxable disposition of Company
property shall be computed by reference to the adjusted book value of the
property disposed of, notwithstanding the fact that the adjusted book value
differs from the adjusted basis of the property for federal income tax purposes;
and
(v) in lieu of the depreciation, amortization or cost recovery deductions
allowable in computing taxable income or loss, there shall be taken into account
the depreciation computed based upon the adjusted book value of the asset.
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 4
"Regulation" means the regulations, including any temporary regulations,
from time to time promulgated under the Code.
"SDAT" means the State Department of Assessments and Taxation of Maryland.
"Transfer" means, when used as a noun, any voluntary sale, hypothecation,
pledge, assignment, attachment, gift or any other transfer, and, when used as a
verb, means voluntarily to sell, hypothecate, pledge, assign, gift or otherwise
transfer.
"Treasury" means the U.S. Department of the Treasury.
"Voluntary Withdrawal" means a Member's disassociation with the Company by
means other than a Transfer or an Involuntary Withdrawal.
Section II
Formation and Name; Office; Purpose; Term
2.1 Organization. The parties hereby organize a limited liability company
pursuant to the Act and the provisions of this Agreement and, for that purpose,
have caused the Articles of Organization to be prepared, executed and filed with
SDAT on the ___ day of ______________, 1998.
2.2 Name of the Company. The name of the Company is Mojo Highway Brewing
Company, LLC. The Company may do business under that name and under any other
name or names upon which the Members lawfully may agree. If the Company does
business under a name other than set forth in the Articles of Organization, then
the Company shall file a trade name certificate as may be required by applicable
law.
2.3 Purpose/Business. The purposes for which the Company is formed are:
2.3.1 Purpose. To create, produce, market and sell alcoholic and
non-alcoholic beverages and to conduct business in the State of Maryland for any
lawful purpose and at such other places as may be determined by the Managers of
this limited liability company, pursuant to the powers granted to limited
liability companies pursuant to Section 4A-203 of the Act or any successor
provision.
2.3.2 Permitted Businesses. The business of the Company shall be to
exercise all powers necessary to or reasonably connected with the Company's
business that may be legally exercised by limited liability companies under the
Act and to engage in all activities necessary, customary, convenient, incidental
or related to any of the foregoing.
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 5
2.4 Term. The term of the Company began upon the acceptance of the Articles
of Organization by the SDAT and shall continue in existence until December 31,
2023, unless its existence is sooner terminated pursuant to Section VII of this
Agreement.
2.5 Principal Office. The principal office of the Company in the State of
Maryland shall be located at 4607 Wedgewood Blvd., Frederick, Maryland 21703.
The Company may have such other offices, either within or without the State of
Maryland, as the Managers may designate or as the business of the Company may
require. The registered office of the Company required by the Act to be
maintained in the State of Maryland may be, but need not be, identical with the
principal office, and may be changed from time to time by the Managers.
2.6 Resident Agent. The name and address of the Company's resident agent
shall be Frederick Brewing Co., at 4607 Wedgewood Boulevard, Frederick, Mayland
21703, or any successor resident agent and address to which the Managers may
agree and notice of which is filed with the SDAT.
Section III
Members; Capital Contributions; Capital Accounts
3.1 Members. The initial Members of the Company and their respective
business addresses are set forth on Exhibit C hereto.
3.2 Additional Members. Additional Members of the Company may be admitted
from time to time upon such terms and conditions as approved by the Members. No
additional Member may be admitted without the prior written consent of FBC and
C&L. The business address of each such Additional Member shall be set forth on
Exhibit C. The Percentages of Membership Interest of Additional Members shall be
as approved by the Members and shall dilute the Percentages of Membership
Interests of the other existing Members, pro rata in proportion to their
Percentages, except that the Percentage of Membership Interest of FBC shall not
be diluted without its prior written consent. Notwithstanding the foregoing, any
Investor who purchases an interest in the Company by virtue of his Capital
Contribution shall automatically be admitted to the Company upon the delivery of
a fully-executed Agreement and payment of the full purchase price therefor and
the Company's acceptance of any such Investor's subscription. All Interest
Holders shall be entitled to receive a Certificate of Ownership which must be
signed by all Managers of the
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 6
Company and consecutively numbered and recorded in the Certificate Register
maintained by the Manager who is the Secretary of the Company.
3.3 Initial Capital Contributions. Upon the execution of this
Agreement, the Members shall contribute to the Company capital in the amounts
respectively set forth on Exhibit C.
3.4 Additional Capital Contributions.
3.4.1 Limited Liability. Upon the delivery and complete payment of the
initial capital contribution by any Member, no Member shall be required to
contribute any additional capital to the Company, and no Member shall have any
personal liability for any obligation of the Company, and Member's Interests
shall be fully paid and non-assessable.
3.4.2 Unpaid Capital Contribution. If a Member fails to pay when due
all or any portion of any Capital Contribution, the Managers shall request the
nondefaulting Members to pay the unpaid amount of the defaulting Member's
Capital Contribution (the "Unpaid Contribution"). To the extent the Unpaid
Contribution is contributed by any other Member, the defaulting Member's
Percentage shall be reduced and the Percentage of each Member who makes up the
Unpaid Contribution shall be increased, so that each Member's Percentage is
equal to a fraction, the numerator of which is that Member's total Capital
Contribution and the denominator of which is the total Capital Contributions of
all Interest Holders. The Managers shall amend Exhibit B accordingly. This
remedy is in addition to any other remedies allowed by law or by this Agreement.
3.5 No Interest on Capital Contributions. Except as otherwise provided
in this Agreement, no Interest Holders shall not be paid interest on their
Capital Contributions.
3.6 Return of Capital Contributions. Except as otherwise provided in
this Agreement, no Interest Holder shall have the right to receive the return of
any Capital Contributions.
3.7 Form of Return of Capital. If an Interest Holder is entitled to
receive a return of a Capital Contribution, the Company may distribute cash,
notes, property, or a combination thereof to the Interest Holder in return of
the Capital Contribution at the discretion of the Managers of the Company.
3.8 Capital Accounts. A separate Capital Account shall be maintained
for each Interest Holder. No Member shall make any withdrawals from his Capital
Account without prior approval of all of the Managers. If the Capital Account of
any Member becomes
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 7
impaired, his share of subsequent Company Profits shall be first credited to his
Capital Account until that account has been restored.
3.9 Loans. Any Member may, at any time, make or cause a loan or advance to
be made to the Company in any amount and on those terms upon which the Company
and the Member agree. Loans or advances by any Member to the Company shall not
be considered Capital Contributions and shall not increase the Capital Account
balance of the lending or advancing Member.
Section IV
Members and Interest Holders -- Voting, Profit, Loss, and Distributions
4.1 Percentages of Membership Interests. The initial Membership Interests
of the Company's founders shall be as follows:
Federick Brewing Co. 25%
C & L Brewing Company, Inc. 75%
4.2 Meetings.
4.2.1 Annual and Special Meetings. There shall be an annual meeting of
the Members which shall be held at such time and such place as determined by the
Managers, commencing with the year 1999 to elect Managers and to transact such
business as may come before the meeting. Special meetings of Members, for any
purpose or purposes, may be called by the Manager who is the chief executive
officer of the Company or by any Member or Members having 20% or greater
Membership Interest.
4.2.2 Notice. Written or telephonic notice stating the place, day and
hour of the meeting and, in case of a special meeting, the purposes for which
the meeting is called, must be delivered not less than three (3) ddays before
the date of the meeting, pursuant to Section 9.4 hereof, by or at the direction
of the Manager who is the chief executive officer of the Company are present at
any meeting, or if those not present sign in writing a waiver of notice of the
meeting are as valid as if a meeting were formally called and notice had been
given.
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 8
4.2.3 Quorum. At any meeting of the Members, eighty percent (80%) of
the Membership Percentage Interests represented in person or by proxy, will
constitute a quorum at a meeting of Members. If less than eighty percent (80%)
of the Membership Percentage Interests are represented at a meeting, a majority
of the Interests so represented may adjourn the meeting from time to time
without further notice. At an adjourned meeting at which a quorum is present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified. The Members present at a duly organized
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough Members to leave less than a quorum.
4.2.4 Record Date. For the purpose of determining Members entitled to
notice of or to vote at any meeting of Members, or any adjournment thereof, or
entitled to receive payment of any distribution by the Company or in order to
make a determination of Members for any other proper purpose, the Manager who is
the chief executive officer of the Company shall fix in advance a record date
for any determination of Members, such date to be not more than forty-five (45)
days, and in case of a meeting of members, not less than ten (10) days, prior to
the date which the particular action requiring such determination of Members is
to be taken.
4.2.5 Voting by Certain Members. Certificates of Ownership standing in
the name of a Member that is a corporation, partnership or company may be voted
by the officer, partner, agent or proxy as the bylaws, partnership agreement or
operating agreement of the entity may prescribe or, in the absence of such
provision, as the board of directors, general partners or managers of the entity
may determine. Certificates held by a trustee, personal representative,
administrator, executor, guardian or conservator may be voted by him, either in
person or by proxy, without a transfer of the certificates into his name.
4.2.6 Conduct of Meetings. The Manager who is the chief executive
officer of the Company will preside at meetings of the Members, may move or
second any item of business, but may not vote on any matter unless he is also a
Member. A written record must be maintained of the meetings of the Members.
4.2.7 Presumption of Assent. A Member of the Company who is present at
a meeting of the Members at which action on any matter is taken will be presumed
to have assented to the action taken, unless his dissent is entered in the
minutes of the meeting or unless he files his written dissent to the action with
the Manager who is the Secretary of the Company before the adjournment of the
meeting or forwards his dissent by certified mail to the Secretary of the
Company immediately after the adjournment of the meeting. The right to dissent
will not apply to a Member who voted in favor of the action.
<PAGE>
Mojo Highway Brewing Company LLC
Operating Agreement
Page 9
4.2.8 Telephone Meetings. Members of the Company may participate in
any meeting of the Members by means of conference telephone or similar
communication if all persons participating in the meeting can hear one another
for the entire discussion of the matter(s) to be voted on. Participating in a
meeting pursuant to this Section 4.2.8 will constitute presence in person at the
meeting.
4.3 Voting. Members shall vote on any matter that may come before the
Members, in person or proxy, in proportion to their respective Membership
Percentage Interests as set forth in Exhibit B. Decisions concerning the
affairs of the Company shall be determined by the affirmative vote of Members
holding at least a majority of the Membership Percentage Interests as set forth
in Exhibit B, unless otherwise set forth in this Agreement. At all meetings of
Members, a Member may vote by proxy executed in writing by the Member or by his
duly authorized attorney-in-fact. The proxy must be filed with the Manager who
is the Secretary of the Company before or at the time of the meeting. No proxy
may be valid after three (3) months from date of execution, unless otherwise
provided in the proxy. Actions of Members may be taken without a meeting if
100% of the Membership Percentage Interests consent in writing to such action
and such consent is filed with the minutes of the proceeding of the Members.
4.4 Distributions of Cash Flow. At the end of each taxable year of the
Company, the Managers shall determine whether any Cash Flow of the Company will
be available for distribution to Members. In such event, the amount of such
distribution shall be determined by the Managers, in their discretion, and shall
be distributed to all Interest Holders in proportion to their Percentages no
later than ninety (90) days after the end of the taxable year.
4.5 Required Distributions to Interest Holders. To the extent that Cash
Flow is available to cover such distributions, there shall be a required
distribution to be made by the Company to each of the Interest Holders in an
amount equal to the tax liability associated with such Interest Holder's
respective shares of income of the Company. For purposes of calculating this
distribution an assumed tax rate of forty percent (40%) shall be used in
determining the amount of such distribution. Any additional distributions shall
be in the sole discretion of the Managers.
4.6 Allocation of Profits or Loss. All Profits or Loss of the Company
shall be shared by each of the Interest Holders according to their respective
Percentages of Interest owned.
4.7 Liquidation and Dissolution. If the Company is dissolved and
liquidated for Cause by FBC pursuant to Section 7.1, the assets of the Company
shall be distributed to the
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 10
Interest Holders in accordance with their respective Percentages of Interest
owned, after taking into account the allocations of Profit or Loss pursuant to
Section 4.6, if any, and distributions, if any of cash or property, pursuant to
Section 4.4, but only after FBC first receives, in cash or property at the
option of FBC, an amount equal to $40,000 with simple interest at the rate of 8%
per annum from the date hereof. "Cause" shall be defined, for purposes of this
Section 4.7, as: (i) a change in control of C&L Brewing Company, Inc. ("C&L") as
determined by FBC, in good faith; (ii) any material breach of this Operating
Agreement by C&L or of any other agreement between C&L and FBC, including, but
not limited to, the Contract Brewing Agreement; (iii) any material violation of
the law or regulations governing the marketing and sale of alcoholic beverages
by C&L in the judgment of FBC; (iv) upon the insolvency of C&L or the assignment
by C&L for the benefit of creditors of if C&L files a voluntary bankruptcy
petition, or if an involuntary petition in bankruptcy or reorganization is filed
against C&L: or (v) if C&L liquidates, dissolves or ceases to do business as a
going concern. If the Company is dissolved and liquidated other than for Cause,
the assets of the Company shall be distributed to the Interest Holders in
accordance with their respective Percentages of Interest owned, after taking
into account the allocations of Profit or Loss pursuant to Section 4.6, if any,
and distributions, if any, of cash or property, pursuant to Section 4.4. No
Interest Holder shall be obligated to restore a negative Capital Account upon
liquidation or dissolution.
4.8 Timing of Distributions. Except as otherwise provided in this
Agreement, the timing and amount of all distributions shall be determined by the
Managers.
Section V
Rights and Duties of, Designation and Election of,
Conduct of Business by, and Meetings of Managers
5.1 Management. The business and affairs of the Company shall be managed
by its Managers. The Managers shall in all cases act collectively as provided
in Section 5.14, and not individually. Without limiting the generality of the
foregoing, no Manager acting individually shall be the agent of the Company or
shall have authority to bind the Company, and no debt shall be contracted or
liability incurred by or on behalf of the Company except by the Managers acting
pursuant to a majority vote of the Managers or by one of the Managers of the
Company acting pursuant to the express authority granted to him by a majority of
the Managers. The Managers shall direct, manage, and control the business of
the Company to the best of their ability and in accordance with the provisions
of this Agreement. Except as otherwise provided in this Agreement or by
nonwaivable provisions of applicable law, the Managers acting collectively shall
have full and complete authority, power, and discretion to manage and control
the business, affairs, and properties of the
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 11
Company, to make all decisions regarding those matters and to perform any and
all other acts or activities customary or incident to the management of the
Company's business.
5.1.1 Tax Matters Partner. The Managers will designate a Member to
act on behalf of the Company as the "tax matters partner" within the meaning of
Section 6231(a)(7) of the Code. The initial tax matters partner shall be FBC.
5.2 Number, Tenure and Qualification.
5.2.1 Managers. The Company shall have two (2) Managers. A Member
may be a Manager. The initial Managers and their initial terms are:
Manager Term
------- ----
Curtis J. Lewis, II One (1) year or until his successor is elected
and qualified pursuant to Section 5.3 hereof.
Lee M. Chapman, III One (1) year or until his successor is elected
and qualified pursuant to Section 5.3 hereof.
Managers shall be selected as provided in Section 5.3. The Members may increase
or decrease the number of Managers by vote at any annual meeting or by unanimous
written consent. No decrease in the number of Managers shall prejudice the
contractual rights of such Manager, if any. Managers may be paid a salary,
fringe benefits and expenses as approved by the Members.
5.2.2 Term. The initial Managers shall serve for terms set forth
opposite their names in Section 5.2.1. At each annual meeting of Members,
successors to the Manager whose term expires at that meeting shall be selected
or elected, as the case may be, as set forth in Section 5.3 to hold office for a
term expiring at the annual meeting of Members held in the next year following
the year of their election, subject, however, to their prior death, resignation
or removal as provided by Section 5.3.
5.2.3 Qualification. Managers need not be Interest Holders or
residents of the State of Maryland.
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 12
5.3 Selection and Replacement of Managers.
5.3.1 Selection of Managers: Vacancies. At each annual meeting, the
Members shall elect a Manager to fill the seat of any Manager whose term has
expired. An affirmative vote of eighty percent (80%) of the Percentage Interests
then held by Members shall be required to elect any Manager. In the event of any
vacancies resulting from the increase, removal, resignation or death of a
Manager, the remaining Managers shall elect a Manager to replace the Manager who
has been removed, resigned or died until the next annual meeting of Members.
5.3.2 Removal. A Manager may be removed at any time, with or without
cause, by an affirmative vote of Members holding eighty percent (80%) or more
of the Percentage Interest then held by Members, by means of a writing delivered
by the Members to the Managers of the Company and to the other Members in
accordance with this Agreement stating, if applicable, the cause for such
removal. The removal of any Manager shall take effect upon the receipt of that
notice by the Managers of the Company, or at such later time as may be specified
in the notice. Except as provided in this Section 5.3.2, the Managers may not
be removed, either with or without cause, by the Members or the Managers.
5.3.3 Resignation. Any Manager of the Company may resign at any time
by giving written notice to the other Managers of the Company and to the Members
of the Company in accordance with this Agreement. The resignation of any Manager
shall take effect upon receipt of that notice by the other Managers of the
Company or at such later time as shall be specified in the notice, with the
consent of the other Managers of the Company. Unless otherwise specified in the
notice, acceptance of the resignation shall not be necessary to make it
effective.
5.4 General Powers of Managers.
5.4.1 General Powers. Without limiting the generality of Section 5.1
and except for admitting new Members to the Company, entering into contracts
(for employment, professional services or other purposes), purchases or
expenditures or commitments to purchase goods or services with a total value in
excess of $5,000 for each transaction or contract, entering into wholesale
distribution arrangements, and the sale, licensing or other transfer of any of
the intellectual property or other property, tangible or intangible, used by the
Company for any purpose whatsoever, the Managers shall have complete and
exclusive control of the management of the Company's business and affairs, and
the Members shall have no right to participate in the management or the conduct
of the Company's business and affairs, nor any power or authority to act for or
on behalf of
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 13
the Company in any respect whatsoever, except as expressly provided in Sections
5.2 and 5.3. Except as otherwise specifically provided in this Agreement, the
Managers shall have the right, power and authority on behalf of the Company, and
in its name, to exercise all of the rights, powers and authority of the Company
under the Act; ans shall have the full and entire right, power, and authority in
the management and control of the Company's business to do any and all acts and
things necessary, proper, convenient or advisable to effectuate the purposes of
the Company, including, but not limited to the following:
(i) to acquire property from any Person as the Managers may determine. The
fact that any Manager, or Member is directly or indirectly affiliated or
connected with any such Person shall not prohibit the Managers from dealing with
that Person;
(ii) to borrow money for the Company (in amounts not to exceed $5,000 in
the aggregate) from banks, other lending institutions, the Members, or
Affiliates of the Members, on such terms as the Managers deem appropriate, and,
in connection therewith, to hypothecate, encumber, and grant security interests
in the assets of the Company to secure repayment of the borrowed sums. No debt
shall be contracted or liability incurred by or on behalf of the Company except
by the Managers, or, to the extent permitted under the Act, by agents or
employees of the Company expressly authorized by the Managers to contract such
debt or incur such liability;
(iii) to purchase liability and other insurance to protect the Company's
property and business;
(iv) to hold, and own, and Company real and/or personal properties in the
name of the Company;
(v) to invest any Company funds temporarily (by way of example, but not
limitation) in time deposits, short term governmental obligations, commercial
paper, or other investments;
(vi) to recommend approval by the Members of any matters that may come
before the Company; to name individuals, who may or may not be Members of the
Company to serve on advisory Committees with respect to the Company's affairs;
(vii) to execute on behalf of the Company all instruments and documents,
including, without limitation: checks; drafts; notes and other negotiable
instruments; mortgages or deeds of trust; security agreements; financing
statements; documents providing for the acquisition, mortgage or disposition of
the Company's property; assignments; bills of sale; leases; partnership
agreements; operating agreements of other limited liability companies;
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 14
and any other instruments or documents necessary, in the opinion of the
Managers, to the business the Company;
(viii) to designate from time to time the Company's independent
accountants, and the location of the Company's principal executive office;
(ix) to employ legal counsel, agents, consultants or other experts to
perform services for the Company or to employ any individual to provide services
in connection with the Company's affairs including any current Manager or Member
and to compensate them from Company funds; and
(x) to do and perform all other acts as may be necessary or appropriate to
the conduct of the Company's business.
5.4.2 Member Authority. Unless authorized to do so by this Agreement
or by the Managers of the Company, no attorney-in-fact, officer, employee, or
other agent of the Company shall have any power or authority to bind the Company
in any way, to pledge its assets, request credit or to render it liable
pecuniarily for any purpose. No Member shall be an agent of or shall have any
power or authority to bind the Company unless the Member has been authorized by
the Managers to act as an agent of the Company in accordance with the previous
sentence.
5.5 Duties of the Managers. The Managers shall devote such time,
effort, and skill to the Company's business affairs as they deem necessary and
proper for the Company's welfare and success. The Members expressly recognize
that the Managers have other business activities and agree that the Managers and
their affiliates, employees, and agents, as the case may be, shall not be bound
to devote all of their business time to the affairs of the Company, and the
Managers or their affiliates may engage for their own account and for the
accounts of others in other businesses or activities.
5.6 Third Party Reliance. Third parties dealing with the Company shall
be entitled to rely conclusively upon the power and authority of the Managers as
set forth herein.
5.7 No Duty to Consult. Except as otherwise provided herein, the
Managers shall have no duty or obligation to consult with or seek the advice of
the Members. A duty to consult with FBC exists for admitting new Members to the
Company, entering into contracts (for employment, professional services or other
purposes), borrowing in excess of $5,000, purchases or expenditures or
commitments to purchase goods or services with a total value in excess of $5,000
for each transaction or contract, entering into wholesale distribution
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 15
arrangements, and the sale, licensing or other transfer of any of the
intellectual property or other property, tangible or intangible, used by the
Company for any purpose whatsoever.
5.8 Director. The Managers shall, in their discretion, have the right
and authority to employ on behalf of the Company a full time Director to manage
the affairs and day-to-day operations of the Company. In such event, the
Director shall accede to such rights, duties and obligations of the Managers
under this Agreement to the extent designated by the Managers.
5.9 Rights of Members. The Members shall not take part in the
management of the business nor transact any business for the company in their
capacity as Members, nor shall they have power to sign for or to bind the
Company. This Section 5.9. supersedes any authority granted to the Members
pursuant to Section 4A-401 of the Act. Any Member who takes any action or binds
the Company in violation of this Section 5.9 shall be solely responsible for any
loss and expense incurred by the Company as a result of the unauthorized action
and shall indemnify and hold the Company harmless with respect the loss or
expense.
5.10 Reimbursement. All expenses incurred with respect to the
organization, operation, and management of the Company shall be borne by the
Company. The Managers shall be entitled to reimbursement from the Company for
direct reasonable business expenses incurred in the regular course of business
and allocable to the organization, operation, and/or management of the Company.
5.11 Regular Meetings. Regular meetings of the Managers for the
transaction of any business may be held without notice of the time, place or
purposes thereof and shall be held at such times and places as may be determined
in advance by the Managers.
5.12 Special Meetings. Special meetings of the Managers may be held at
any time and place agreed upon by any two Managers. Reasonable oral (including
by telephone) or written notice (including by facsimile transmission) thereof
shall be given by the individual or individuals calling the meetings, not later
than 24 hours before the special meeting.
5.13 Telephonic Meetings Permitted. The Managers, or any committee
designated by the Managers, may participate in a meeting of the Managers or such
committee by means of conference telephone or similar communications equipment
by means of which all individuals participating in the meeting can hear each
other, and such participation shall constitute presence in person at such
meeting.
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 16
5.14 Manager Voting. Except as otherwise set forth herein, all
decisions of the Managers shall be made either at a meeting or by a written
consent and a majority vote of all the Managers shall constitute and be the act
of the Managers.
5.15. Action of Managers and Committees Meeting. Unless otherwise
restricted by this Agreement, any action required or permitted to be taken at
any meeting of the Managers or of any committee thereof may be taken without a
meeting if the vote of the Managers as provided in Section 5.14, or the members
of the committee, as the case may be, consent thereto in writing and the writing
or writings are filed with the minutes of proceedings of the Managers or the
committee.
5.16 Managers' Liability. The Managers shall not be liable,
responsible, or accountable, in damages or otherwise, to any Member or to the
Company for any act performed, or failure to act, by the Managers within the
scope of the authority conferred on the Managers by this Agreement, except for
acts which constitute fraud, gross negligence, breach of a fiduciary duty to the
Company or an intentional breach of this Agreement.
5.17 Member Indemnification. Any Member who shall violate any of the
terms, conditions, and provisions of this Agreement shall keep and save harmless
the Company and shall also indemnify the other Members from any and all claims,
demands and actions of every kind and nature whatsoever which may arise out of
or by reason of such violation of any terms and conditions of this Agreement.
The Members shall not be liable, responsible, or accountable, in damages or
otherwise, to any other Member or to the Company for any authorized act
performed by a Member with respect to Company matters.
Section VI
Transfer of Interests and Withdrawals of Members
6.1 Transfers. No Member may Transfer all, or any portion of, or any
interest or rights in, the Membership Rights owned by the Member, and no
Interest Holder may transfer all, or any portion of, or any interest or rights
in any Interest, except by will and the laws of descent and distribution, in
which case the recipient thereof shall succeed to the Interest and not to the
Membership unless such Person is admitted as a Member pursuant to Section 3.2
hereof. Each Member hereby acknowledges the reasonableness of this prohibition
in view of the purposes of the Company and the relationship of the Members. The
Transfer of any Membership Rights or Interests in violation of the prohibition
contained in this Section 6.1 shall be deemed invalid, null and void, and of no
force or effect unless, on the approval of the Managers, the Company agrees to
recognize such a Transfer and admit the transferee to become a Member.
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 17
6.2 Involuntary Withdrawal. Immediately upon the occurrence of an
Involuntary Withdrawal pursuant to the Act, if the Company is continued as
provided in this Agreement, the Person ceasing to be the Member and his
successor to the interest shall not be entitled to receive in liquidation of the
Interest, pursuant to Section 4A-905(l)(ii) of the Act, the fair market value of
the Member's Interest as of the date the Member involuntarily withdrew from the
Company.
6.3 Voluntary Withdrawal. Any Member may withdraw from the Company at
any time upon thirty (30) days' prior written notice to the Manager who serves
as the Secretary of the Company at the principal executive office of the
Company. No voluntary withdrawal shall operate to cause the dissolution of the
Company. Members who voluntarily withdraw shall be entitled to receive a return
of their Capital Contribution which shall be returned only at the time
determined in writing by the Managers of the Company that such return of the
Capital Contribution would be in the best interests of the Company. The Capital
Contribution of a Member who voluntarily withdraws shall continue to be
considered as an equity interest in the Company until such time as the Managers
make such determination. No interest shall be paid to a Member who voluntarily
withdraws on his Capital Contribution.
Section VII
Dissolution, Liquidation and Termination of the Company
7.1 Events of Dissolution. The Company shall be dissolved upon the
happening of the following events:
(i) when the period fixed for its duration as set forth in
Section 2.4 has expired; or
(ii) upon the written consent of the Members holding eighty
(80%) or more of the Percentages of Membership Interests then held by Members;
or
(iii) upon a dissolution by FBC for Cause (as defined in
Section 4.7 hereof); or
(iv) upon a dissolution by C&L, at the option of C&L, if: (a)
there shall be a change in control of FBC as determined by C&L in good faith;
(b) there shall be a material breach of this Operating Agreement by FBC or of
any other agreement between C&L and FBC, including, but not limited to, the
Contract Brewing Agreement; (c) FBC, for any reason, fails to obtain, fails to
retain or loses any license or permit necessary to the performance of its duties
under the Contract Brewing Agreement; (d) upon the insolvency
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 18
of FBC or the assignment by FBC for the benefit of creditors or if FBC files a
voluntary petition in bankruptcy of if an involuntary petition in bankruptcy or
reorganization is filed against FBC; or (e) if FBC liquidates, dissolves or
ceases to do business as a going concern.
(v) upon the occurrence of an Involuntary Withdrawal, unless
twenty five (25%) or more of the Percentages of Membership Interests, within
ninety (90) days after the occurrence of the Involuntary Withdrawal, elect to
continue the business of the Company pursuant to the terms of this Agreement;
(vi) upon the termination of the Contract Brewing Agreement by
and between FBC and the Comapny; or
(vii) upon the entry of a decree of judicial dissolution under
Section 4A-903 of the Act.
7.2 Procedure for Winding Up and Dissolution. If the Company is
dissolved, the Managers and remaining Members shall wind up its affairs. On
winding up of the Company, the assets of the Company shall be distributed in the
following order:
(i) to pay or provide for the payment of all Company
liabilities to creditors, including Members who are creditors; and liquidating
expenses and obligations in satisfaction of the liabilities of the Company; and
(ii) if the Company is dissolved for Cause by FBC, as set
forth in Section 4.7, to make the payment therein specified to FBC; and
(iii) if the Company is dissolved for other than Cause, to
repay capital owing to Members in proportion to their respective Percentage
Interests, after the Percentage Interests are adjusted by adding to the Members'
Interests their respective share of the Company's Profits and deducting from the
Members' Interests their respective share of the Company's Losses and all
distributions previously received by the Members.
7.3 Filing of Articles of Cancellation. If the Company is dissolved,
the Members through the Managers shall promptly file Articles of Cancellation
with SDAT. If there are no remaining Members, the Articles shall be filed by the
last Person to be a Member; if there are no remaining members, or a Person who
last was a Member, the Articles shall be filed by the legal or personal
representatives of the Person who last was a Member.
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 19
Section VIII
Fiscal Matters
8.1 Fiscal Year. The fiscal year of the Company will begin on the first
day of January and the end on the last day of December each year unless
otherwise determined by resolution of the Members.
8.2 Deposits. All funds of the Company will be deposited from time to
time to the credit of the Company in the banks, trust companies or other
depositories as the Managers may select.
8.3 Checks, Drafts, Etc. All checks, drafts or other orders for the
payment of money, and all notes or other evidences of indebtedness issued in the
name of the company will be signed by the Manager who is the chief executive
officer of the Company or by the Manager who is the chief financial officer of
the Company.
8.4 Books and Records. The books and records of the Company must be
kept at the principal executive office of the Company or at other places, within
or without the State of Maryland, as the Managers from time to time determine
and each Member shall have access thereto upon reasonable notice to the
Managers. The books shall be kept on a calendar year basis and shall be closed
and balanced at the end of each fiscal year. Each of the parties to this
Agreement hereby covenants and agrees to cause all known business transactions
pertaining to the purpose of the Company to be entered properly and completely
into said books. The Company will furnish annual statements prepared on the
basis of generally accepted accounting principles to the Members, and prepare
tax returns in a timely manner, furnishing copies to all Members at least ten
(10) days before they are filed by the Company.
Section IX
General Provisions
9.1 General Indemnification By Company. The Company may indemnify any
person who was or is a party defendant or is threatened to be made a party
defendant to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative, or investigative (other than an action
by or in the right of the Company) by reason of the fact that he is or was an
Interest Holder of the Company, Manager, employee or agent of the Company, or is
or was otherwise serving at the request of the Company, against expenses
(including attorney's fees), (which expenses may be advanced to him upon receipt
by the Company of a written promise to repay such expenses if it is ultimately
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 20
determined that he is not entitled thereto hereunder), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with the action, suit or proceeding if the Members determine at a meeting of
Members called for such purpose or by unanimous written consent, that he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interest of the Company, and with respect to any criminal action or
proceeding, has no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order, settlement,
conviction, or on a plea of nolo contendere or its equivalent, will not in
itself create a presumption that the person did or did not act in good faith and
in a manner which he reasonably believed to be in the best interest of the
Company, and, with respect to any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful.
9.1.1 Funding Indemnification. The Company will fund the
indemnification obligations provided by Section 9.1 in the manner and to the
extent the Members may from time to time deem proper and may purchase insurance
therefor.
9.2 Limited Power of Attorney. Each Member constitutes and appoints the
Managers, acting under this Agreement, as the Member's true and lawful
attorney-in-fact ("Attorney-in-Fact"), and in the Member's name, place and
stead, to make, execute, sign, acknowledge, and file:
(i) one or more Articles of Organization;
(ii) any and all other certificates or other instruments
required to be filed by the Company under the laws of the State of Maryland or
of any other state or jurisdiction, including, without limitation, any
certificate or other instruments necessary in order for the Company to continue
to qualify as a limited liability company under the laws of the State of
Maryland or any other state;
(iii) one or more fictitious or trade name certificates; and
(iv) all documents which may be required to dissolve and
terminate the Company and to cancel its Articles of Organization.
9.3 Assurances. Each Member shall execute all such certificates and
other docuements and shall do all such filing, recording, publishing, and other
acts as the Managers and Members deem appropriate to comply with the
requirements of laws, rules, and regulations relating to the acquisition,
operation, or holding of the property of the Company.
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 21
9.4 Notifications. Any notice, demand, consent, election, offer,
approval, request, or other communication (collectively, a "notice") required or
permitted under this Agreement must be in writing and either delivered
personally or sent by recognized overnight courier (such as Federal Express) or
by certified or registered mail, postage prepaid, return receipt requested. A
notice must be addressed to an Interest Holder at the Interest Holder's last
known address on the records of the Company. A notice to the Managers or to the
Company must be addressed to the Managers at the Company's principal executive
office. A notice that is sent by mail or overnight courier is deemed to be given
three (3) business days after it is mailed. Any party may designate, by notice
to the Company his new address for notices and, thereafter notices are to be
directed to that substitute address.
9.5 Anticipated Transactions. Notwithstanding the duties of undivided
loyalty of the Members and Managers to the Company, it is anticipated that the
Members and Managers will have other legal and financial relationships. Members
and Managers of this Company, along with representatives of other entities, from
time to time may participate in the joint development of contracts and
transactions designed to be fair and reasonable to each participant and to
afford an aggregate benefit to all participants. Therefore, it is anticipated
that this Company will desire to participate in these contracts and tranactions
and, after ordinary review for reasonableness, that the participation of the
Company in these contracts and transactions may be authorized by the Members.
9.6 Specific Performance. The parties recognize that irreparable injury
will result from a breach of any provision of this Agreement and that money
damages will be inadequate to fully rememdy the injury. Accordingly, in the
event of a breach or threatened breach of one or more of the provisions of this
Agreement, any party who may be injured (in addition to any other remedies which
may be available to that party) shall be entitled to one or more preliminary or
permanent orders (i) restraining and enjoining any act which would constitute a
breach or (ii) compelling the performance of any obligation which, if not
performed, would constitute a breach.
9.7 Complete Agreement; Amendment. This Agreement constitutes the
complete and exclusive agreement among the Interest Holders with respect to the
subject matter herein. It supersedes all prior written and oral statements,
including any prior representation, statement, condition, or warranty. Except as
expressly provided otherwise herein, this Agreement may not be amended without
the written consent of the Managers and by the Members holding eighty percent
(80%) or more of the Percentages of Membership Interests.
9.8 Applicable Law. All questions concerning the construction,
validity, and interpretation of this Agreement and the performance of the
obligations imposed
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 22
by this Agreement shall be governed by the internal law, not the law of
conflicts, of the State of Maryland.
9.9 Section Titles. The headings herein are inserted as a matter of
convenience only, and do not define, limit, or describe the scope of this
Agreement or the intent of the provisions hereof.
9.10 Binding Provisions. This Ageement is binding upon, and inures to
the benefit of, the parties hereto and their respective heirs, executors,
administrators, personal and legal representatives, successors, and permitted
assigns pursuant to the terms hereof.
9.11 Jurisdiction and Venue. Any suit involving and dispute or other
matter arising under this Agreement may only be brought in the United States
District Court for the District of Maryland state court having jurisdiction over
the subject matter of the dispute or matter. All Members hereby consent to the
exercise of personal jurisdiction by any such court with respect to any such
proceeding.
9.12 Terms. Common nouns and pronouns shall be deemed to refer to the
masculine, feminine, neuter, singular and plural, as the identity of the Person
may in the context require.
9.13 Separability of Provisions. Each provision of this Agreement shall
be considered separable; and if, for any reason, any provision or provisions
herein are determined to be invalid and contrary to any existing or future law,
such invalidity shall not impair the operation of or affect those portions of
this Agreement which are valid.
9.14 Counterparts. This Agreement may be executed simultaneously in two
or more counterparts each of which shall be deemed an original and all of which,
when taken together, constitute one and the same document. The signature of any
party to any counterpart shall be deemed a signature to, and may be appended to,
any other counterpart.
<PAGE>
Mojo Highway Brewing Company, LLC
Operating Agreement
Page 23
IN WITNESS WHEREOF, the Members have hereunto set their hands effective
the day and first above written.
FREDERICK BREWING CO.
Witness: /s/ Kimberley D. Chester By: /s/ Kevin E. Brannon
------------------------ ----------------------
Kevin E. Brannon
Chairman
Address: 4607 Wedgewood Blvd.
Frederick, Maryland 21703
Date: June 16, 1998
C & L BREWING COMPANY, INC.
Witness: /s/ Sue [Illegible] By: /s/ Lee M. Chapman
------------------------ ----------------------
Lee M. Chapman, III
Chairman
Address: 33 Gold Street, #119
New York, New York, 10038
Date: June 18, 1998
Witness: /s/ [Illegible] By: /s/ Curtis J. Lewis
------------------------ ----------------------
Curtis J. Lewis, II
President
Address: 33 Gold Street, #119
New York, New York 10038
Date: June 17, 1998
<PAGE>
EXHIBIT A
ARTICLES OF ORGANIZATION
<PAGE>
ARTICLES OF ORGANIZATION
OF
MOJO HIGHWAY BREWING COMPANY, LLC
Pursuant to Section 4A-204 of the Limited Liability Company Act of
Maryland, the Member set forth below does hereby file with the Maryland State
Department of Assessments and Taxation the following Articles of Organization:
I.
The name of the limited liability company is "Mojo Highway Brewing Company,
LLC."
II.
The purpose of the limited liability company is to engage in any lawful act or
activity for which a limited liability company may be organized under the
Limited Liability Company Act of Maryland other than the business of acting as
an insurer.
III.
The principal office of the limited liability company in the State of Maryland
is 4607 Wedgewood Blvd., Frederick, Maryland 21703. The name of the
corporation's initial registered agent is Frederick Brewing Co., at 4607
Wedgewood Boulevard, Frederick, Maryland 21703.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Organization this 30 day of June, 1998.
By: /s/ Kevin E. Brannon
---------------------------
Frederick Brewing Co.
Member
By Kevin E. Brannon
Chief Executive Officer
Frederick Brewing Co.
<PAGE>
EXHIBIT B
PERCENTAGE INTEREST IN MOJO HIGHWAY
BREWING COMPANY, LLC
<PAGE>
EXHIBIT B
PERCENTAGE
INTEREST
IN
MOJO HIGHWAY BREWING COMPANY, LLC
Member Non-Member Interest Holder
------ -------------------------- Percentage of
Name Yes No Yes No Interest
---- ------ --- -- --------
C&L Brewing Company, Inc. X X 75%
Frederick Brewing Co. X X 25%
<PAGE>
EXHIBIT C
MEMBER CONTRIBUTIONS
<PAGE>
EXHIBIT C
MEMBER CONTRIBUTIONS
Member Member
Name Business Address
---- ----------------
Frederick Brewing Co. 4607 Wedgewood Blvd.
Frederick, Maryland 21703
Contributions
-------------
1. Formulations and specifications for the first
Mojo Highway Brewing Company, LLC product;
2. Adaptations of the Company logos and designs
for use in packaging materials including
labels, six-pack carriers, case cartons
and, when volume warrants, crown closures;
3. Purchase of first production runs of
packaging materials adequate for the
production of up to 2700 cases (200 barrels)
of Company product;
4. Brewing, packaging, warehousing and shipping
of first two 100-barrel batches of Company
product;
5. All necessary licenses, permits, approvals
and security bonds required by the Bureau of
Alcohol, Tobacco and Firearms and the state
and local governments of Maryland and the
District of Columbia; and
6. FBC's best efforts to obtain wholesale
distribution of the Company's products
through National Distributing Company, Mid-
Atlantic (the Kronheim Companies). If and
when the Company's products attain adequate
customer acceptance and sales in this initial
market territory, FBC will use its best
efforts to obtain additional wholesale
distribution through FBC's existing
wholesaler network.
FBC's contribution would be valued, for
liquidation purposes, at $40,000.
<PAGE>
Exhibit C
Page 2
C&L Brewing Company, Inc. 33 Gold Street, #119
New York, New York 10038
Contributions
-------------
1. $35,000 in cash for the use of the venture
to purchase mutually agreed-upon goods and
services necessary for the marketing and
sale of the Company's products;
2. All trademarks, copyrights, designs, logo-
types, business plans, marketing plans,
projections, market research and other
intellectual property pertaining to the
Company's brand and to malt beverage
marketing now in the possession of or later
developed by C&L, its officers, principals,
agents, employees or contractors. C&L shall
take all reasonable steps to register and
other- wise obtain legal protection of its
exclusive rights to use its intellectual
property and will grant to the Comapany, on
terms acceptable to FBC, an exlcusive license
to exercise those rights; and
3. A minimum of 30 hours per week of direct
sales activity in the Washington/Baltimore
market area, to be performed by one or more
of C&L's current officers or such other
persons as may later be proposed by C&L and
approved by FBC. FBC would require that C&L
enter into employment contracts with Curtis
J. Lewis, II, Celeste _____________ and Lee
M. Chapman, III which ensures that such
persons would devote all of their work
efforts, outside of specified current
employment, to the management of C&L and the
Company and the promotion of the Company and
its products and would include a
non-competition agreement with respect to the
alcoholic beverage industry. The
non-competition agreement will be of a form
acceptable to the parties and will have a
term equal to the life of the Company plus
two years.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000926978
<NAME> Frederick Brewing Co.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 208,292
<SECURITIES> 0
<RECEIVABLES> 777,337
<ALLOWANCES> 35,076
<INVENTORY> 840,836
<CURRENT-ASSETS> 2,032,015
<PP&E> 12,261,202
<DEPRECIATION> 938,343
<TOTAL-ASSETS> 13,597,527
<CURRENT-LIABILITIES> 1,825,147
<BONDS> 0
0
2,041,796
<COMMON> 464
<OTHER-SE> 4,823,809
<TOTAL-LIABILITY-AND-EQUITY> 13,597,527
<SALES> 1,389,386
<TOTAL-REVENUES> 1,389,386
<CGS> 974,916
<TOTAL-COSTS> 974,916
<OTHER-EXPENSES> 2,246,276
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104,197
<INCOME-PRETAX> (1,936,003)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,936,003)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000926978
<NAME> Frederick Brewing Co.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 208,292
<SECURITIES> 0
<RECEIVABLES> 777,337
<ALLOWANCES> 35,076
<INVENTORY> 840,836
<CURRENT-ASSETS> 2,032,015
<PP&E> 12,261,202
<DEPRECIATION> 938,343
<TOTAL-ASSETS> 13,597,527
<CURRENT-LIABILITIES> 1,825,147
<BONDS> 0
0
2,041,796
<COMMON> 464
<OTHER-SE> 4,823,809
<TOTAL-LIABILITY-AND-EQUITY> 13,597,527
<SALES> 2,309,102
<TOTAL-REVENUES> 2,309,102
<CGS> 1,779,718
<TOTAL-COSTS> 1,779,718
<OTHER-EXPENSES> 2,990,956
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 210,435
<INCOME-PRETAX> (2,672,007)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,672,007)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
EXHIBIT 99.1
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. The Company desires to
take advantage of the "safe harbor" provisions of the Act. Certain information,
particularly information regarding future economic performance and finances and
plans and objectives of management, contained, or incorporated by reference, in
the Company's Current Report on Form 8-K dated as of February 12, 1998 ("Form
8-K") is forward-looking. The following factors, in addition to other possible
factors not listed, could affect the Company's actual results and cause such
results to differ materially from those expressed in forward-looking statements.
Limited Operating History; Past and Possible Future Operating Losses. The
Company was founded in 1992 and has operated at a loss for each year since such
date. The Company's limited operating history makes the prediction of future
sales and operating results difficult. Accordingly, although the Company has
experienced sales growth, such growth should not be considered indicative of
future sales growth, if any, or of future operating results. There can be no
assurance that the Company's sales will grow or be sustained in future periods
or that the Company will become or remain profitable in any future period.
Liquidity and Working Capital. The Company has, in the last twenty months,
spent a significant amount of working capital on machinery and equipment and on
salaries and benefits and advertising, all in connection with the completion of
the Company's new brewery, the expansion of its brewing capacity and its
attempts to increase demand for its products. Growth in sales has not been
sufficient to fund such expenditures. To address the lack of working capital,
the Company recently completed a private placement of 3,000 shares of its Series
E Preferred Stock at $1,000 per share less finders, legal and investor relations
services fees. While the Company believes that it has adequate working capital
for fiscal 1998, it does not have and does not anticipate obtaining in the
foreseeable future a working line of credit. As a consequence, there can be no
assurance that the Company will not experience a lack of liquidity or working
capital during fiscal 1998 and beyond.
For the fourth quarter of 1997 ended December 31, 1997, the Company's loan
and financing agreements with First Union National Bank (the "Bank"), as
successor to Signet Bank, for a $1.5 million equipment loan and a $3.0 million
loan to Blue II, LLC for the brewery land and building required that the
Company's ratio of cash flow to debt service for the quarter equal 1.5:1 or
greater. The Company was unable to meet this ratio requirement and as a result
was required to obtain a one-time waiver thereof from the Bank. There is a
significant likelihood that the Company will be unable to demonstrate compliance
with the cash flow to debt ratio requirement and, perhaps, other financial
covenants, during fiscal 1998, which creates the risk that the Company will
enter into technical default of both loan financing arrangements. As a result,
the Company is attempting to renegotiate or refinance the loans. While
management is confident that one of these options will be achievable no
assurances can be made as to such result and a failure to renegotiate or
refinance the senior debt could make the Company unable to continue its
business.
<PAGE>
Ability to Successfully Integrate Operations of WGB, Assets of BBC and
Other Acquisition Candidates. The integration of WGB and BBC involve a number of
risks, including, but not limited to, diversion of management's attention,
assimilation of the operations and personnel of WGB and BBC. The successful
operation of an acquired business will require communication and cooperation in
product development and marketing among management and other key personnel.
Given the inherent difficulties involved in completing a major business
combination, there can be no assurance that such cooperation will occur or that
integration of the respective businesses will be successful and will not result
in disruption of the Company's business. In addition, there can be no assurance
that the Company will realize any of the anticipated benefits of the acquisition
and asset purchase. To the extent the Company is unsuccessful in integrating WGB
and BBC, or the operations or assets of any future acquisition candidate, the
Company would be materially adversely affected. There are, as of the date of
this Form 8-K, no agreements, arrangements or understandings between the Company
and any party relating to any potential acquisition.
Possible Need for Additional Financing. The Company's planned expansion of
its operations with respect to its current and planned products and those of WGB
and BBC (including increased overhead, depreciation, marketing and salaries)
combined with the Company's lack of liquidity may require that the Company
obtain additional debt or equity financing for these or other general corporate
purposes. There can be no assurance that the Company will be able to obtain
additional debt or equity financing on terms favorable to the Company, or at
all, or if obtained, there can be no assurance that such debt or equity
financing will be sufficient for the financing needs of the Company.
Heavy Dependence on Wholesale Distributors. The Company distributes its
products only through independent wholesale distributors for resale to retailers
such as liquor and wine and beer stores, restaurants, taverns, pubs, bars and
sporting arenas. Accordingly, the Company is dependent upon these wholesale
distributors to sell the Company's beers and to assist the Company in creating
demand for, and promoting market acceptance of, the Company's products and
providing adequate service to its retail customers. There can be no assurance
that the Company's wholesale distributors will devote the resources necessary to
provide effective sales and promotion support to the Company.
Dependence on Major Customer. Sales to The Kronheim Co., Inc., Baltimore,
Maryland ("Kronheim"), the Company's largest wholesale distributor, represented
50.6%, 35.7% and 56.5% of the Company's beer revenues in 1996, 1995 and 1994,
respectively. Sales to all other wholesale distributors represented 49.4%, 64.3%
and 43.5% of the Company's beer revenues in 1996, 1995 and 1994, respectively.
(The 1994 percentages for sales to other wholesale distributors include beer
sold directly to retailers by the Company.) The Company expects sales to its
largest wholesale distributor to continue to represent a significant portion of
its sales in the near term. The Company believes that its future growth and
success will continue to depend in large part upon this significant wholesale
distributor, but such dependence should decrease as the Company expands its
market area.
2
<PAGE>
No Assurance of Continued Wholesale Distributor Support. If Kronheim or any
other significant wholesale distributor were to discontinue selling, or decrease
the level of orders for, the Company's products, the Company's business would be
adversely affected in the areas serviced by such wholesale distributors until
the Company retained replacements. There can be no assurance however that the
Company would be able to replace a significant wholesale distributor in a timely
manner or at all in the event it were to discontinue selling the Company's
products. In addition, there is always a risk that the Company's wholesale
distributors will give higher priority to the products of other beverage
companies, including products directly competitive to the Company's beers, thus
reducing their efforts to sell the Company's products. This risk is exacerbated
by the fact that many of the Company's wholesale distributors are reliant on the
beers of one of the major domestic beer producers for a large percentage of
their revenues and, therefore, may be influenced by such producer. The Company's
distributors are not contractually committed to make future purchases and
therefore could discontinue carrying the Company's products in favor of a
competitor's product or another beverage at any time or for any reason.
If any of the Company's significant wholesale distributors were to
experience financial difficulties, or otherwise become unable or unwilling to
promote or sell the Company's products, the Company's results of operations
would be adversely affected. Many of the Company's distribution agreements
(other than its agreement with Kronheim which does not specify such a date)
permit their termination upon 90 days' prior notice. The Company's ability to
terminate poorly performing distributors may be hindered by laws that restrict
the Company's right to terminate the services of its wholesale distributors.
There can be no assurance that the Company will be able to attract reliable,
effective new distributors in markets it will enter as a result of its planned
geographic expansion or that the Company's business will not be adversely
affected by the loss or declining performance of any of its current or future
wholesale distributors.
Intense and Increasing Competition. The Company competes in the specialty
or craft beer segment of the domestic beer market. The principal competitive
factors affecting the market for the Company's beers include product quality and
taste, advertising, distribution capabilities, brand recognition, packaging and
price. There can be no assurance that the Company will be able to compete
successfully against current and future competitors based on these and other
factors. The Company competes with a variety of domestic and international
brewers, many of whom have substantially greater financial, production,
distribution and marketing resources and have achieved a higher level of brand
recognition than the Company.
3
<PAGE>
The Company anticipates increased competition in the specialty beer segment
from the major domestic brewers such as Anheuser-Busch Companies, Inc.
("Anheuser-Busch"), Miller Brewing Co. ("Miller") and Adolph Coors Co.
("Coors"), each of whom has introduced and is marketing fuller flavored beers
designed to compete directly in the specialty beer segment. These large domestic
brewers dominate the overall domestic beer market and the Company expects that
certain of these companies, with their superior financial resources and
established distribution networks, will continue to seek further participation
in the specialty beer segment through the acquisition of equity positions in, or
the formation of distribution alliances with, smaller craft brewers (such as
Anheuser-Busch's equity position in, and distribution agreement with, Redhook
Ale Brewery, Incorporated).
The Company also faces and will face increasing competition from import
specialty beer companies such as Heineken N.V., Bass PLC and Guinness PLC and
existing domestic specialty and contract brewers such as The Boston Beer
Company, Inc., Pete's Brewing Co., Redhook Ale Brewery, Incorporated, Sierra
Nevada Brewing Co. and Anchor Brewing Co., as well as the regional specialty
brewers and local microbreweries in the markets where the Company distributes
its beers. Recent growth in the sales of specialty beers is expected to result
in increased competition in the segment, including a continuing proliferation of
microbrewers and efforts by micro and regional brewers to expand their
production capacity, marketing expenditures and geographical distribution areas.
Increased competition could result in price reductions, reduced profit margins
and loss of market share, all of which would have a material adverse effect on
the Company's financial condition and results of operations.
The Company's products also compete generally with other alcoholic
beverages, including products offered in other segments of the beer industry and
low- or no-alcohol products. The Company competes with other beer and beverage
companies not only for consumer acceptance and loyalty but also for shelf and
tap space in retail establishments and for marketing focus by the Company's
wholesale distributors and their customers, all of which also distribute and
sell other beers and alcoholic beverage products. Finally, there can be no
assurance that the recent growth in consumer demand for craft beers will
continue, or even if such growth continues, that consumers will choose the
Company's beers.
Potential Fluctuations in Quarterly Results. The Company's quarterly
operating results have in the past and may in the future vary significantly
depending on factors such as sales for the quarter, fixed and semi-variable
operating costs during periods when the Company's brewery is producing below
maximum designed production capacity, professional fees and expenses relating to
the Company's planned expansion, increased competition, fluctuations in the
price of ingredients or packaging materials, seasonality of sales of the
Company's beers, general economic factors, trends in consumer preferences,
regulatory developments, including changes in excise and other tax rates,
changes in the sales mix between kegs and bottles, changes in average selling
prices or market acceptance of the Company's beers, increases in packaging and
marketing costs associated with initial production of new products and
variations in shipping and transportation costs.
4
<PAGE>
The Company's operating results may be significantly impacted in the future
by, among other things, the timing of new product announcements by the Company
or its competitors, the impact of increasing average federal and state excise
tax as sales volume increases, the timing of new advertising and promotional
campaigns by the Company and other expansion activities engaged in by the
Company. The Company's expense levels are based, in part, on its expectations of
future sales levels. If sales levels are below expectations, operating results
are likely to be materially adversely affected. In particular, because the
Company operates its own production facility, a significant portion of its
overhead is fixed and cannot be reduced for short-term adjustments such as sales
below management's expectations, and an excess of production capacity could
therefore have a significant negative impact on the Company's operating results.
However, the Company has historically operated with little or no backlog. The
absence of backlog increases the difficulty of predicting sales and operating
results. In addition, the Company's decision to undertake a significant media
advertising campaign after the commencement of construction of the new brewery
could substantially increase the Company's expenses in a particular quarter,
while any increase in sales from such advertising may be realized in subsequent
periods.
Based upon the risks of potential fluctuations in quarterly results
discussed above and seasonality and the unpredictability of demand, discussed
below, the Company believes that quarterly sales and operating results are
likely to vary significantly in the future and that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Further, it is possible that
in some future quarter the Company's revenue or operating results will be below
the expectations of public market analysts and investors. In such event, the
price of the Company's Common Stock could be materially adversely affected.
Sales Fluctuations Due to Seasonality. The Company's wholesale distributors
have historically experienced higher sales in the second and fourth quarters of
the calendar year due to increased consumption of the Company's beers during
periods of warmer weather and from Halloween through New Year's Day. Although
the Company has not yet experienced sale fluctuations due to seasonality because
the Company has continued to expand its wholesale distribution network over the
past three years, fluctuations in the Company's sales due to seasonality may
become evident in the future as the Company's sales increase.
No Assurance of Geographic Expansion. While the Company has recently
expanded its distribution network and now sells in approximately 27 states,
sales in Maryland accounted for over 62.8% of the Company's sales in 1996. The
Company's continued growth depends upon its ability to expand sales in these and
other new regions. There can be no assurance that the Company's efforts to
expand sales in new regions will be successful or that such expansion can be
accomplished on a profitable basis. The Company's timely and successful
expansion of sales will depend on a number of factors, including competition,
the continued promotion and sale of the Company's products by suitable local
wholesale distributors, the retention of skilled sales and other personnel, the
ability to adapt management and other operational systems to accommodate
increased volume, the success of advertising and promotion campaigns, and other
factors, some of which are beyond the control of the Company. Furthermore,
consumer tastes vary by region and there can be no assurance that consumers
located in new geographic regions will be receptive to the Company's beers. The
Company believes that consumer demand for its products is greater in certain
areas than others due to demographic, economic and other factors. The Company's
efforts to increase sales by further penetrating market areas may be limited by
such factors. The inability of the Company to expand sales in a timely manner
would have a material adverse effect on the Company's operating results and
financial condition.
5
<PAGE>
Dependence on Recently Introduced Beers. A substantial portion of the
Company's revenues for the 12 months ended December 31, 1997, as well as those
of WGB and BBC, were generated by sales of beer styles marketed for one year or
less. There can be no assurance that such styles of beer will continue to
achieve market acceptance. A decline in the demand for such beer styles as a
result of competition, changes in consumer tastes and preferences, government
regulation or other factors could have a material adverse effect on the
Company's operating results and financial condition. In addition, there can be
no assurance that the Company will be successful in developing, introducing and
marketing additional new beers that will sustain sales growth in the future.
No Assurance of Future Ability to Satisfy Changing Consumer Preferences.
The craft beer market is highly competitive and characterized by changing
consumer preferences and continuous introduction of new products. The Company
intends to introduce new products from time to time to maintain wholesale
distributor and retailer interest and appeal to varying consumer preferences and
to create consumer demand. The Company believes that its future growth will
depend, in part, on its ability to anticipate changes in consumer preferences or
to create consumer demand and develop and introduce, in a timely manner, new
beers that adequately address such changes. There can be no assurance that the
Company will be successful in developing, introducing and marketing new products
on a timely basis. If the Company is unable to introduce new products or if the
Company's new products are not successful, the Company's sales may be adversely
affected as customers seek competitive products. In addition, the introduction
of new products by the Company could result in reduction of sales of the
Company's existing beers, requiring the Company to manage carefully product
introductions in order to minimize disruption in sales of existing products.
There can be no assurance that the introduction of new product offerings by the
Company will not cause wholesale distributors, retailers and consumers to reduce
purchases or consumption of existing Company products. Such reduction of
purchases or consumption could have a material adverse effect on the Company's
operating results and financial condition.
6
<PAGE>
No Assurance of Future Consumer Demand for Craft Beer. The craft beer
segment of the domestic beer market has grown dramatically over the past decade.
The Company believes that one factor in such growth has been consumer demand for
more flavorful beers offered in a wider variety of styles. No assurance can be
given, however, that consumer demand for craft beers will continue in the
future. The Company's success also depends upon a number of factors related to
the level of discretionary consumer spending, including the general state of the
economy, federal and state tax laws and consumer confidence in future economic
conditions. Changes in consumer spending can affect both the quantity and the
price of the Company's products and may therefore affect the Company's operating
results. For example, reduced consumer confidence and spending may result in
reduced demand for the Company's products, limitations on its ability to
increase or maintain prices and increases in required levels of selling,
advertising and promotional expenses.
No Assurance of Future Satisfaction of Demand. The production schedule for
the Company's beers is based on forecasts of the Company's sales in general and
the rate of sales of each of the Company's styles of beer. The Company currently
has the flexibility to modify short-term production schedules and is currently
able, on a short-term basis, to satisfy fully most changes in demand for its
product. The ability of the Company to estimate demand may be less precise
during periods of rapid growth or with respect to new products. The failure of
the Company to accurately forecast its sales could lead to inventory shortages
or surpluses that could adversely affect results of operations and lead to
further fluctuations in quarterly operating results.
Dependence on Certain Suppliers. The Company purchases from, and is
dependent upon, its suppliers for certain agricultural ingredients and packaging
materials used in the Company's products. Although to date the Company has been
able to obtain adequate supplies of these ingredients and materials in a timely
manner from existing sources and has changed suppliers from time to time with
minimal disruption, if the Company were unable to obtain sufficient quantities
of ingredients and materials, delays or reductions in product shipments could
occur which would have a material adverse effect on the Company's financial
condition and results of operations. To date, the Company has not experienced
material difficulties in obtaining timely delivery from its suppliers. Although
the Company believes that there are alternative sources available for its raw
materials, there can be no assurance that the Company will be able to acquire
these products from other sources on a timely or cost-effective basis if current
suppliers are unable to supply them. In 1996, the Company experienced a
significant increase in the price of its ingredients and packaging materials.
Except for suppliers who provide glass bottles and corrugated cardboard cartons,
the Company does not have long-term purchase contracts with its suppliers. The
loss of a material supplier could materially adversely affect the Company's
results of operations and financial condition if there were a delay in shipments
from the alternative suppliers.
The Company also is dependent upon an adequate supply of hemp seeds, which
is a key ingredient in the Company's "Hempen Ale" brand. The hemp seeds are
obtained from a supplier located in China and accordingly, the Company's supply
of such seeds also is subject to disruption by economic, international trade and
government instability, as well as civic unrest, in the region. Further,
world-wide demand for hemp seeds is growing. The Company's inability to qualify
an alternative source of hemp seeds may in the future have a significant adverse
impact on the Company if a material disruption of the Company's hemp seed supply
occurs.
7
<PAGE>
As with most agricultural products, the supply and price of raw materials
used to produce the Company's beers can be affected by a number of factors
beyond the control of the Company such as floods, frosts, droughts, other
weather conditions, economic factors affecting growing decisions, various plant
diseases and pests. To the extent that any of the foregoing affects the
ingredients used to produce the Company's beers, the Company's results of
operations would be materially and adversely affected. In addition, the Company
keeps only approximately a 30 day supply of hops and a seven day supply of malt
on its premises. Moreover, its purchases are limited to pre-packaged quantities,
rather than in bulk. Therefore, the Company is highly dependent upon the ability
of its suppliers to deliver its ingredients in a timely fashion. Such delivery,
which is by truck, is dependent upon certain factors beyond the control of the
Company, including but not limited to weather and labor relations. The Company's
operations are dependent upon its ability to accurately forecast its need for
ingredients. Any failure by the Company to accurately forecast its requirements
of raw materials could result in the Company either being unable to meet higher
than anticipated demand for its products or producing excess inventory, either
of which may adversely affect the Company's results of operations.
Ability to Manage Growth. The Company has experienced rapid growth that has
resulted in new and increased responsibilities for management personnel which
has challenged and continues to challenge the Company's management, operating
and financial systems and resources. To compete effectively and manage future
growth, if any, the Company will be required to continue to implement and
improve its operational, financial and management information systems,
procedures and controls on a timely basis and to expand, train, motivate and
manage its work force. There can be no assurance that the Company's personnel,
systems, procedures and controls will be adequate to support the Company's
existing and future operations. Any failure to implement and improve the
Company's operational, financial and management systems or to expand, train,
motivate or manage employees could have a material adverse effect on the
Company's operating results and financial condition.
No Assurance of Ability to Protect Intellectual Property Rights. The
Company considers its trademarks and pending trademarks, particularly the "Blue
Ridge" brand names, proprietary beer recipes and the design of product
packaging, advertising and promotional design and art work (the "Intellectual
Property"), as well as the recently acquired Intellectual Property of WGB and
BBC, to be of considerable value and critical to its business. The Company
relies on a combination of trade secret, copyright and trademark laws,
non-disclosure, non-competition and other arrangements to protect its
proprietary rights. In this regard, the Company has obtained trademark
protection for its "Blue Ridge" brands in 1997 from the U.S. Patent and
Trademark Office.
8
<PAGE>
Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy or obtain and use information that the
Company regards as proprietary. There can be no assurance that the steps taken
by the Company to protect its proprietary information will be adequate to obtain
the legal protection sought or will prevent misappropriation of such information
and such protection may not preclude competitors from developing confusingly
similar brand names or promotional materials or developing products with taste
and other qualities similar to the Company's products.
Risk of Third Party Claims of Patent Infringement. While the Company
believes that its Intellectual Property does not infringe upon the proprietary
rights of third parties, there can be no assurance that the Company will not
receive future communications from third parties asserting that the Company's
Intellectual Property infringes, or may infringe, upon the proprietary rights of
third parties. The potential for such claims will increase as the Company
increases distribution in recently entered and new geographic areas. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation and diversion of management's attention, cause product distribution
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
economical or acceptable to the Company or at all. In the event of a successful
claim of infringement against the Company and failure or inability of the
Company to license the infringed or similar proprietary information, the
Company's operating results and financial condition could be materially
adversely affected.
Dependence on Key Personnel. The Company's success depends to a significant
degree upon the continuing contributions of, and on its ability to attract and
retain, qualified management, sales, production and marketing personnel,
particularly Kevin E. Brannon, Chairman of the Board and Chief Executive
Officer, Marjorie A. McGinnis, President, Les Harper, Chief Financial Officer,
Steven T. Nordahl, Vice President - Brewing Operations and Patrick N. Helsel,
Vice President - Sales, (collectively, the "FBC officers") as well as, James
Lutz, President of WGB and Marc Tewey, President of BBC. The Company entered
into employment agreements with each of the FBC officers in 1996, except with
respect to Mr. Harper, and with Messrs. Lutz and Tewey in 1998, and, with the
exception of the employment agreement of Mr. O'Connor, all such agreements
continue to be current and in effect. Prior to their employment by the Company,
none of FBC officers had prior experience in the beer industry or significant
business experience. The competition for qualified personnel is intense and the
loss of any of such persons as well as the failure to recruit additional key
personnel in a timely manner, could adversely affect the Company. There can be
no assurance that the Company will be able to continue to attract and retain
qualified management and sales personnel for the development of its business.
Failure to attract and retain key personnel could have a material adverse effect
on the Company's operating results and financial condition.
9
<PAGE>
Operating Hazards; No Assurance of Adequate Insurance. The Company's
operations are subject to certain hazards and liability risks faced by all
brewers, such as bottle flaws or potential contamination of ingredients or
products by bacteria or other external agents that may be accidentally or
wrongfully introduced into products or packaging. The Company's products are not
pasteurized and require careful product rotation to prevent spoilage. However,
neither spoiled beer nor the bacteria introduced in the brewing process is known
to be harmful to human health. The Company runs periodic diagnostic tests on all
of its products to assure that they meet Company quality control guidelines and
comply with federal and state regulatory requirements. While the Company has not
experienced a serious contamination problem in its products, the occurrence of
such a problem could result in a costly product recall and serious damage to the
Company's reputation for product quality. The Company's operations are also
subject to certain injury and liability risks normally associated with the
operation and possible malfunction of brewing and packaging equipment. Although
the Company maintains insurance against certain risks under various general
liability and product liability insurance policies, there can be no assurance
that the Company's insurance will be adequate.
Government Regulation. The Company's business is highly regulated by
federal, state and local laws and regulations. The Company must comply with
extensive laws and regulations regarding such matters as state and regulatory
approval and licensing requirements, trade and pricing practices, permitted and
required labeling, advertising, promotion and marketing practices, relationships
with distributors and related matters. For example, federal and state regulators
require warning labels and signage on the Company's products. The Company
believes that it has obtained all regulatory permits and licenses necessary to
operate its business in the states where the Company's products are currently
being distributed. Failure on the part of the Company to comply with federal,
state or local regulations could result in the loss or revocation or suspension
of the Company's licenses, permits or approvals and accordingly could have a
material adverse effect on the Company's business. In addition, changes to
federal and state excise taxes on beer production, federal, state and local
environmental regulations, including laws relating to packaging and waste
discharge, or any other laws or regulations which affect the Company's products
could have a material adverse effect on the Company's results of operations. The
federal government and each of the states levy excise taxes on alcoholic
beverages, including beers. The federal government currently imposes an excise
tax of $18.00 per barrel on every barrel of beer produced for consumption in the
United States by each brewing company with annual production of over 2,000,000
barrels. The federal excise tax for brewing companies with annual production
under 2,000,000 barrels is $7.00 per barrel on all barrels up to the first
60,000 barrels produced and $18.00 per barrel for each barrel produced in excess
of 60,000. Any increase in the excise tax for small brewers could have a
material adverse effect on the Company's operating results and financial
condition.
10
<PAGE>
Public Attitudes Toward Alcohol Consumption. In recent years, there has
been an increase in the level of health-consciousness in the United States and
considerable debate has occurred concerning alcohol-related social problems,
such as alcoholism and drunk driving. In addition, a number of anti-alcohol
groups are advocating increased governmental action on a variety of fronts
unfavorable to the beer industry, including the legislation of new labeling or
packaging requirements and restrictions on advertising and promotion that could
adversely affect the sale of the Company's products. Restrictions on the sale
and consumption of beer or increases in the retail cost of beer due to increased
governmental regulations, taxes or otherwise, could materially and adversely
affect the Company's financial condition and results of operations.
Concentration of Ownership of Management. As of December 31, 1997, the
executive officers and directors of the Company on that date beneficially owned
approximately 13.07% of the Common Stock. Although the percentage of such
beneficial ownership will decrease as a result of the BBC asset purchase and the
acquisition of WGB, these stockholders will be able to significantly influence
all matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions. Such concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company.
Antitakeover Provisions in the Company's Corporate Documents. The Company's
Board of Directors has the authority to issue up to 1,000,000 shares of
preferred stock, $.01 par value per share, of the Company and to determine the
price, rights, preferences, privileges and restrictions thereof, including
voting rights, without any further vote or action by the Company's stockholders.
The voting and other rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The Company's Board may similarly issue
additional shares of Common Stock without any further vote or action by
stockholders. Such an issuance could occur in the context of another public or
private offering of shares of Common Stock or preferred stock or in a situation
where the Common or preferred stock is used to acquire the assets or stock of
another company. The issuance of Common or preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no current plans to issue any
shares of Common or preferred stock other than as described herein.
Moreover, the Restated and Amended Articles of Incorporation ("Articles")
and Restated and Amended Bylaws ("Bylaws") of the Company contain certain
provisions which, among other things, maintain a "staggered" Board of Directors,
limit the personal liability of, and provide indemnification for, the directors
of the Company, require that stockholders comply with certain requirements
before they can nominate someone for director or submit a proposal before a
meeting of stockholders, prohibit the ability of stockholders to call special
meetings of stockholders, limit the ability of stockholders to act by written
consent and require a supermajority vote of stockholders in the event that a
"related person" (as defined) attempts to engage in a business combination with
the Company.
11
<PAGE>
Potential Volatility of Stock Price. Stock prices of many growing
consumer-product companies fluctuate widely, often for reasons that are
unrelated to their actual operating performance. Announcement of new facilities
or products by the Company or its competitors, regulatory developments, and
economic or other external factors, as well as period-to-period fluctuations in
financial results, may have a significant impact on the market price and
marketability of the Common Stock. In the past, following periods of volatility
in the market price of a company's securities, securities class action
litigation has often been initiated against such company. Such litigation could
result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect upon the Company's
operating results and financial condition.
Common Stock Equivalents. The Company has outstanding a number of shares of
Preferred Stock which may be converted into approximately 4,165,060 shares
of Common Stock (assuming that the average closing price of the Company's Common
Stock for the prior thirty trading days is $2.00 per share). An increase in
the number of shares of Common Stock (or Common Stock equivalents) outstanding
will have a negative effect on the Company's per share ratios, including
earnings per share, which could negatively impact the market for the Company's
Common Stock and the price of the Common Stock in the market.
Dividends. The Company has never paid a dividend on its Common Stock and
currently expects to retain its future earnings, if any, for use in the
operation and expansion of its business and does not anticipate paying any such
cash dividends on its Common Stock in the foreseeable future. In addition,
certain of the Company's outstanding Preferred Stock has priority on funds
available for dividends and dividends on such Preferred Stock must be paid in
full before dividends may be paid on the Common Stock. Dividends to be paid on
the Preferred Stock must be approved by the Bank prior to payment and in
management's opinion, it is doubtful that the Bank will approve such dividends
in the foreseeable future. Any dividend not approved shall accumulate but will
not be paid by the Company until approval of such dividend is obtained from the
Bank. Future loan agreements may similarly restrict or limit the payment of
dividends on the Preferred Stock.
Certain Related-Party Transactions. The Company has borrowed money from
time to time to provide cash for operations and for other corporate purposes
from its directors, stockholders and persons having business relationships with
its directors. In addition, the Company has agreed to lease the new brewery
premises from a company which is owned, in part, by one of the Company's
directors and by other affiliated persons.
12
<PAGE>
Limitations on Liability of Management. The Company has adopted provisions
in its Articles that eliminate to the fullest extent permissible under Maryland
law the liability of its directors for monetary damages except to the extent
that it is proved that the director actually received an improper benefit or
profit in money, property or services or the director's action or failure to act
was the result of active and deliberate dishonesty and was material to the cause
of action adjudicated in the proceeding. While it may limit stockholder actions
against the directors of the Company for various acts of misfeasance, the
provision is designed to ensure that the ability of the Company's directors to
exercise their best business judgment in managing the Company's affairs, subject
to their continuing fiduciary duties to the Company and its stockholders, is not
unreasonably impeded by exposure to potentially high personal costs or other
uncertainties of litigation.
Indemnification of Management. The Company's Articles consistent with
Maryland law, provide that the Company will indemnify and advance expenses to
any director, officer, employee or agent of the Company who is, or is threatened
to be made, a party to any action, suit or proceeding. Such indemnification
would cover the cost of attorneys' fees as well as any judgment, fine or amounts
paid in settlement of such action provided that the indemnified party meets
certain standards of conduct necessary for indemnification under applicable law.
Such indemnity may or may not be covered by officer and director liability
insurance and could result in an expense to the Company even if such person is
not successful in the action. This provision is designed to protect such persons
against the costs of litigation which may result from his or her actions on
behalf of the Company. In addition, the Company has purchased insurance to cover
its directors and officers under certain circumstances.
13
EXHIBIT 99.2
FOR IMMEDIATE RELEASE CONTACT: Cameron Barry
Frederick Brewing Co.
(301) 694-7899 ext. 108
FREDERICK BREWING REPORTS 4TH QUARTER, ANNUAL RESULTS FOR 1997
Craft Brewer Announces 123% Increase in Revenues
FREDERICK, MD -- Frederick Brewing Co. (NASDAQ: BLUE) (FBC), brewers of Blue
Ridge, Hempen, Wild Goose and Brimstone Beers, today reported results for the
fourth quarter and fiscal year, both of which ended December 31, 1997.
Gross revenues for the fourth quarter were $1,072,585, an increase of 123% over
the same period the previous year. For the full year, 1997 gross revenues
increased 76% to approximately $3.3 million from approximately $1.8 million in
1996. FBC attributed the revenue gains to the increased capacity of its new
brewery which became fully operational in May of 1997, the introduction of its
popular "Hempen" beers in may of 1997 and higher per barrel revenues in 1997 due
to increased sales of higher priced seasonal brews and "Hempen" beers. Beer
shipments rose 72% for the quarter to 5,023 barrels from 2,925 barrels in the
previous year. For the full year, volume rose 59% to 17,300 in 1997 from 10,900
in 1996.
These results do not include sales of the Wild Goose or Brimstone brands, which
were acquired in agreements made in December, 1997. On a pro forma basis, these
sales would have boosted FBC's revenues to $6 million on shipments of 35,000
barrels.
FBC also reported a net loss of $1,599,105 ($0.37 per basic and diluted share)
for the fourth quarter of 1997, a slight increase over the $1,507,860 ($0.85 per
basic and diluted share) loss in the corresponding period in 1996. For the full
year, the net loss widened to $4,363,440 ($1.59 per basic and diluted share) in
1997 from $2,625,174 ($1.45 per basic and diluted share) in 1996. For both
periods, the company attributes the increasing loss to large increases in
production overhead associated with owing and operating its new brewery, which
remains underutilized; extraordinary investor relations, public future periods;
costs associated with the expansion of the company's sales and marketing force
and distribution network and a large increase in net interest expense resulting
from new debt taken on to build and outfit the new brewery; all as compared to
the corresponding periods of 1996.
FBC also reported non-operating charges, for "embedded dividends" accruing to
certain preferred shares which can be converted to common stock. For the fourth
quarter of 1997, these charges totaled $1,328,561 and for the full year
$3,611,641. No corresponding charges were recorded in 1996. The amount of this
charge is set to equal the discount from market price at which certain preferred
shares can be converted to common stock. Including these charges, the total loss
attributable to common shares in the fourth quarter of 1997 was $2,927,666
($0.67 per share) and for the full year was $7,975,081 ($2.91 per share).
Company president Marjorie McGinnis said she sees signs of "solid progress" in
the report. "Ever since we decided to build this new brewery, we have known that
the key to profitability was to increase sales volume and capacity utilization.
We have invested heavily and successfully in market building over the past year
and our revenue growth indicates that. The fourth quarter was the third straight
in which we have shown triple-digit growth over the previous year and we've done
it in a domestic specialty beer market which grew at only 5-7% over that period.
Our distribution network has grown to include 145 distributors in 31 states at a
time when many craft brewers are finding it difficult to maintain existing
distribution networks, much less enlarge them," McGinnis said.
Chief Executive Officer, Kevin Brannon said that more rapid sales growth,
improved capacity utilization and lower per barrel sales and marketing costs
should result from FBC's recent mergers with Wild Goose Brewery, Inc. and
Brimstone Brewing Company, as their production has been moved into FBC's brewery
and the sales and marketing of those brands has been centralized, with little
increase in personnel or expense. Financing and investor relations expenses
should also drop substantially in 1998, Brannon said, because the company's cash
position ($2.6 million as of December 31, 1997) is relatively strong and the
company's cash flows should improve substantially, beginning in March, the first
full month of production and sales of the new Wild Goose and Brimstone brands.
<PAGE>
FBC also released its sales estimate for the first quarter of 1998. The company
says it will report gross revenues of approximately $902,000 on sales of more
than 5,000 barrels, representing a 239% increase in revenues over the $266,000
recorded during the first quarter of 1997 and a 211% increase over the 1996
sales volume of 1,606 barrels.
Founded in 1993, Frederick Brewing Co. has consistently been one of the fastest
growing craft brewers in U.S. Today, the company is the Mid-Atlantic's largest
craft brewer. Its 22 award-winning beers are distributed in selected areas
throughout the United States.
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 Co. and its industry and other
uncertainties attendant to Frederick Brewing Co. and its industry and other
factors that could affect the company's financial results are included in the
company's Annual Report on Form 10 KSB filed with the Securities and Exchange
Commission on March 31, 1998.
FREDERICK BREWING COMPANY
FINANCIAL RECAP
For the years ended December 31, 1997 and 1996
1997 1996
---- ----
Gross Sales $3,286,776 $1,871,593
Less: Returns and Allowances 39,859 50,463
Less: Excise taxes 169,236 100,697
Net sales 3,077,681 1,720,433
Cost of sales 2,837,229 1,743,896
Gross profit (loss) 240,452 (23,463)
Selling, general and administrative expenses 4,622,029 1,990,323
Loss on assets to be disposed --- 640,815
Operating Loss (4,381,577) (2,654,601)
Gain on sale of equipment (158,167) ---
Interest (income) expense 140,030 (29,427)
Loss before income taxes (4,363,440) (2,625,174)
Provision for income taxes --- ---
Net Loss (4,363,440) (2,625,174)
Preferred stock dividend requirements (3,611,641) 0
Net loss attributable to common shareholders $(7,975,081) $(2,625,174)
Basic earnings per common shares:
Net loss before preferred stock
dividend requirements (1.59) (1.45)
Preferred stock dividend requirements (1.32) ---
Net loss per common share (2.91) (1.45)
Weighted average common share and
common share equivalents outstanding 2,741,583 1,804,503
EXHIBIT 99.3
FOR IMMEDIATE RELEASE CONTACT: Jonathan Gambill
April 14, 1998 (888) 258-7434, ext. 122
[email protected]
FREDERICK BREWING CO. RELEASES SUMMER BEER
Blue Ridge(R) SunRage(TM) Summer Ale Available May 11
FREDERICK, MD -- Frederick Brewing Co. announced today the return of its summer
ale, Blue Ridge(R) SunRage(TM). It is one of the few American beers brewed using
a special sour mash technique. This process, sometimes used in the production of
whiskey and bourbon, imparts a slight, natural tartness to the beer, which is
balanced with gentle hopping and orange blossom honey. The result is a crisp,
uniquely refreshing summer-time beer.
The first step in brewing is to mix crushed barley malt with hot water. In this
porridge-like mixture, known as the "mash," starches are converted into sugars
by enzymes naturally present in the malt. (Later, this sugar solution is boiled
with hops -- for bitterness -- cooled, and fermented by yeast to produce
unfiltered beer.) In sour mashing, the mash temperature is substantially lower,
favoring a different set of enzymes. The mash rests overnight and a natural
"souring" occurs, imparting a subtle tartness to the brew.
Blue Ridge SunRage Summer Ale was first released last May. It will be available,
in bottles and on draft, throughout the Mid-Atlantic and in parts of the
Mid-West.
- more -
<PAGE>
Page 2 of 2
Blue Ridge SunRage Summer Ale specifications:
Malts: 2-row, Caramel 20, and Orange Blossom Honey
Hops: Cascade, Centennial
Bitterness: Low, 24 IBU
Color: Light Orange
Gravity: 10.5 Plato, (1.042 OG)
Alcohol: 4.0 % by volume
In January 1998, Frederick Brewing Co. merged with Wild Goose Brewery, of
Cambridge, MD, and Brimstone Brewing Co., of Baltimore, MD, creating the
Mid-Atlantic's largest craft brewery. Frederick Brewing Co. now brews the Blue
Ridge, Hempen, Wild Goose and Brimstone brands at its 57,000 square foot,
purpose-built facility. Company shares are traded under the NASDAQ symbol: BLUE.
Downloadable artwork is available at http://www.fredbrew.com/prphotos.
Free tours and tasting are held every Saturday and Sunday at 1:30 p.m.
Visit Frederick Brewing Co. on-line at http://www.fredbrew.com.
Contact Jonathan Gambill, (888) 258-7434, ext. 122 for additional information.
# # #
EXHIBIT 99.4
FOR IMMEDIATE RELEASE CONTACT: Cameron Barry
May 12, 1998 Frederick Brewing Co.
(301) 694-7899 x .108
BREWERY'S FIRST QUARTER 1998 REVENUES UP 282% OVER FIRST QUARTER '97
Frederick Brewing Co.'s Earnings, Distribution at Record High
FREDERICK, MD -- Frederick Brewing Co. (FBC) (NASDAQ: BLUE), brewers of Blue
Ridge(R), Hempen(TM), Wild Goose(R) and Brimstone(TM) beers, today announced
that first quarter 1998 sales nearly quadrupled to $1,015,000, compared to the
same period last year. The Company said the sales increase resulted largely from
sales of its two Hempen beers, which were introduced in the second and third
quarters of 1997 and from March sales of the recently acquired Wild Goose and
Brimstone brands.
"Barrelage is up 255 percent over first quarter 1997," said FBC's President,
Marjorie A. McGinnis, "from 1,606 to 5,706." She noted that the January to March
period has historically been the slowest quarter of the year for all beer sales.
Revenues per barrel for the first quarters of 1998 and 1997 were $178 and $165
per barrel, respectively - an increase of $13 per barrel. She added, "We are
seeing an immediate increase in sales from our acquisition of the Wild Goose and
Brimstone brands, while sales of Hempen and Blue Ridge continue to grow. Our
distribution network also continues to expand. During the quarter we added 3
wholesalers in two new markets to distribute the Hempen line and we integrated
46 Wild Goose distributors into our system."
FBC's CEO, Kevin Brannon, notes that investors should exercise caution in
comparing first quarter results for 1997 and 1998, because sales for the first
quarter of 1997 were artificially depressed by delays in production and shipment
caused by the Company's move to its new facility. "Nonetheless," he adds, "we
expect strong revenue growth to continue as we see the full effects of the
acquisitions, and as new sales and marketing campaigns begin for the Hempen and
Blue Ridge brands."
<PAGE>
FBC reported a net loss of $736,004, or 12 cents per share, compared with a net
loss of $645,502, or 33 cents per share, in the same period a year ago.
Management said the loss was primarily attributable to an increase in overhead
expenses. These include the higher fixed production costs such as depreciation,
building and equipment leasing costs, supervisory salaries, and interest
expenses associated with owning and operating the new brewery for the entire
quarter of 1998, compared to 1997, when those costs were not fully accounted for
until the second quarter. The addition of sales, marketing and accounting staff
also raised the Company's expenses during the quarter compared to a year
earlier.
According to Brannon, "This is the smallest loss we have experienced since the
new brewery costs were fully absorbed. These results show marked improvement in
several of our key measures of performance: sales; revenue per barrel; revenue
per employee; discounts, returns and allowances; direct production costs and
gross margin and cash flow, when compared to the past three quarters. The
improvement can be traced directly to the increased sales volume brought about
by the introduction of Hempen Ale and the acquisitions of Wild Goose and
Brimstone. As we move into the "high season" and have the opportunity to sell
the new brands for a full quarter, we expect these improvements to accelerate."
Brannon also said FBC had taken steps, effective in April, to reduce its costs
and improve cash flow. The Company's sales force has been cut and re-directed to
focus on the Company's core Mid-Atlantic market, reducing salary and other sales
expenses. Administrative staffing has also been reduced. Brannon announced that
most senior managers have agreed to accept significant salary reductions, in
exchange for grants of the Company's stock. "These steps demonstrate
management's commitment to improve the Company's bottom line and increase
shareholder value, as well as our belief that we will succeed in doing so."
According to McGinnis, "The substantial gains we have made in increasing sales
and improving brewery capacity utilization should continue throughout the year,
improving our bottom line performance. March was one of the best months in
Company history and April revenues were again up by 290% on a 243% increase in
barrels sold over last year. With our intensified focus on cost controls and
cash flow, we are very optimistic about our future performance."
<PAGE>
Frederick Brewing Co. was founded in 1993 with the Blue Ridge brand of beers. In
January 1998, the Company acquired two other Maryland microbreweries, Wild Goose
Brewery and Brimstone Brewing Co., nearly doubling the Company's sales and
revenues, creating the Mid-Atlantic's largest craft brewery. All FBC brands are
brewed at the Company's 57,000 square foot facility in Frederick and are
distributed in 35 states and the District of Columbia. FBC shares are traded
under the NASDAQ symbol: BLUE. Free public tours and tastings are held at the
brewery every Saturday and Sunday at 1:30 p.m. Visit Frederick Brewing Co.
online at http://www.fredbrew.com.
Except for historical information, this press release contains forward-looking
statements that involve risks and uncertainties including, but not limited to,
quarterly fluctuations in results, the actual management of growth, competition
and other risks detailed in the Company's SEC filings. Actual results may differ
materially from such information set forth herein.
EXHIBIT 99.5
FOR IMMEDIATE RELEASE CONTACT Andrea J. Keller
May 15, 1998 Frederick Brewing Co.
301-694-7899 x120
MARYLAND BEER ON A BOAT TO CHINA
Frederick Brewing Co. Begins Distribution in China
FREDERICK, MD -- Frederick Brewing Co. (NASDAQ: BLUE) announced today that it
has agreed to begin distributing three of its best-selling beers in China: Wild
Goose(TM) IPA, Blue Ridge(R) Golden Ale and Brimstone(TM) Honey Red(TM). In
agreement with Jin Ming International Trade Co. Ltd., 2,800 cases of the beer
are currently en route to Zhejiang, China.
"As the world's second largest beer market, China represents a vast, virtually
untapped market for our products," said Frederick Brewing Co. President and COO
Marjorie McGinnis. "We're very pleased to have taken this first step."
Founded in 1992, Frederick Brewing Co. completed a successful initial public
offering (IPO) in 1996. In March 1997, the company moved from a converted
warehouse to a purpose-built, 57,000 square foot facility. In December 1997,
Frederick Brewing Co. merged with two other Maryland microbreweries, Wild Goose
Brewery, Inc. of Cambridge, MD and Brimstone Brewing Company of Baltimore, MD.,
creating the largest craft brewery in the Mid-Atlantic region. Frederick Brewing
Co.'s beers are sold in 31 states and the District of Columbia.
Free public tours and tastings are held at Frederick Brewing Co.'s brewery every
Saturday and Sunday at 1:30 p.m. Reservations are not required. Directions are
available by calling the brewery at 888-258-7434, visiting the Frederick Brewing
Co. website at http://www.fredbrew.com or referring to the map on the bottom of
a six-pack. Downloadable label artwork and brewery photographs are available at
http://www.fredbrew.com/prphotos.
# # #
EXHIBIT 99.6
FOR IMMEDIATE RELEASE CONTACT Andrea J. Keller
May 19, 1998 Frederick Brewing Co.
301-694-7899 ext. 108
ADVERTISING IS "PERFECTLY LEGAL"
Frederick Brewing Co. Launches New Advertising Campaign for Hempen(TM) Beers
FREDERICK, MD -- Frederick Brewing Co. (NASDAQ: BLUE) announced today the launch
of its new advertising campaign for Hempen Ale(TM) and Hempen Gold(TM), North
America's first beers brewed with hemp seeds.
The work of Baltimore-based agency, The Campbell Group (TCG), the campaign,
which consists of print, radio and point-of-purchase materials, mocks the absurd
laws on the books across the country with the tagline, "Hempen Ale(TM) and
Hempen Gold(TM): It's Perfectly Legal."
In developing the campaign, TCG discovered several hundred actual laws on the
books across the country, including an Illinois law that prohibits giving
lighted tobacco products to domesticated animals, and California's law against
setting a mousetrap without a hunting license. Print ads use the work of
"outsider" artists to underscore the campaign's counter-culture message. In
addition to the POP, print and radio advertisements, the campaign also includes
an under-the-cap promotion that encourages consumers to collect bottle caps and
redeem them for prizes.
"The Campbell Group did a terrific job communicating the brand's counter-culture
positioning," said Cameron Barry, Frederick Brewing Co. vice president of
marketing. The campaign is set to kick-off in San Francisco, where Hempen
Ale(TM) and Hempen Gold(TM) have recently begun distribution.
Frederick Brewing Co. revolutionized the craft beer industry with the
introduction of Hempen Ale(TM) in April 1997, spawning an entirely new category
of craft beers brewed with hemp seeds. One year later, at least five North
American breweries have developed similar products.
more
<PAGE>
Page 2 of 2
In 1997, Hempen Ale(TM) was awarded a bronze medal for brewing excellence in the
herb/spice category at the 16th Great American Beer Festival(TM), the nation's
largest and most prestigious beer event. Hempen Ale(TM) was also an award-winner
at the 1997 Hemp Industries Association conference, where it was recognized by
HempWorld magazine for product innovation. Most recently, readers of
BarleyCorn's Bay Schooner edition, the Mid-Atlantic's leading beer trade
publication, voted Hempen Ale(TM) "New Craft Beer of the Year."
Headquartered in Baltimore, The Campbell Group is an advertising and public
relations agency that provides a full range of communications services to its
clients, which include Inter-Continental Hotels and Resorts, the Baltimore Area
Convention & Visitors Association, National Geographic and Paradise Island
Airways. In addition to the Hempen Ale(TM) campaign, The Campbell Group is
developing communications for Frederick Brewing Co.'s Blue Ridge(R), Wild
Goose(TM) and Brimstone(TM) brands.
Founded in 1992, Frederick Brewing Co. completed a successful initial public
offering (IPO) in 1996. In March 1997, the company moved from a converted
warehouse to a purpose-built, 57,000 square foot facility. In December 1997,
Frederick Brewing Co. merged with two other Maryland microbreweries, Wild Goose
Brewery, Inc. of Cambridge, MD and Brimstone Brewing Company of Baltimore, MD,
creating the largest craft brewery in the Mid-Atlantic region. Today, Frederick
Brewing Co.'s award-winning beers are sold in 31 states and the District of
Columbia.
Free public tours and tastings are held at Frederick Brewing Co.'s brewery every
Saturday and Sunday at 1:30 p.m. Reservations are not required. Directions are
available by calling the brewery at 888-258-7434, visiting the Frederick Brewing
Co. website at http://www.fredbrew.com, or referring to the map on the bottom of
a six-pack. Downloadable label artwork and brewery photographs are available at
http://www.fredbrew.com/prphotos.
# # #
EXHIBIT 99.7
FOR IMMEDIATE RELEASE CONTACT Andrea J. Keller
May 22, 1998 Frederick Brewing Co.
301-694-7899 ext. 120
Brewery Named to Top 20
Food & Wine Magazine Names Frederick Brewing Co. Among Top U.S. Breweries
FREDERICK, MD -- Frederick Brewing Co. (NASDAQ: BLUE) announced today that it
has been named to Food & Wine magazine's list of "America's 20 Best Breweries."
The list, compiled from among 1,300 breweries across the country, appeared in
the magazine's June 1998 issue.
Relying on the opinions of bartenders, "brewspaper" editors, beer writers and
industry analysts, as well as his own palate, writer David Lynch included
Frederick Brewing Co. in his top 20 picks. "A growing Maryland producer,
Frederick makes a wide range of brews, including Hempen Ale(TM) [North America's
first beer brewed with hemp seeds]."
"We're very excited to be on this prestigious list," said Frederick Brewing Co.
President and COO Marjorie McGinnis. "As a young company, such recognition is
essential to developing a loyal following and generating product interest,
especially as we prepare to enter new markets."
Founded in 1992, Frederick Brewing Co. completed a successful initial public
offering (IPO) in 1996. In March 1997, the company moved from a converted
warehouse to a purpose-built, 57,000 square foot facility. In December 1997,
Frederick Brewing Co. merged with two other Maryland microbreweries, Wild Goose
Brewery, Inc. of Cambridge, MD and Brimstone Brewing Company of Baltimore, MD,
creating the largest craft brewery in the Mid-Atlantic region. Today, Frederick
Brewing Co.'s award-winning beers are sold in 31 states and the District of
Columbia.
Free public tours and tastings are held at Frederick Brewing Co.'s brewery every
Saturday and Sunday at 1:30 p.m. Reservations are not required. Directions are
available by calling the brewery at 888-258-7434, visiting the Frederick Brewing
Co. website at http://www.fredbrew.com, or referring to the map on the bottom of
a six-pack. Downloadable label artwork and brewery photographs are available at
http://www.fredbrew.com/prphotos.
# # #
EXHIBIT 99.8
FOR IMMEDIATE RELEASE CONTACT Andrea J. Keller
June 8, 1998 Frederick Brewing Co.
301-694-7899 ext. 120
BAY AREA HIGH ON HEMP
First Craft Beers Brewed with Hemp Seeds Now Available in San Francisco
FREDERICK, MD -- Frederick Brewing Co. (NASDAQ: BLUE) announced today the San
Francisco launch of Hempen Ale(TM), a brown ale, and Hempen Gold(TM), a cream
ale, the first U.S. craft beers brewed with hemp seeds. The award-winning Hempen
Ale(TM), first released April 1997, and Hempen Gold(TM), launched October 1997,
are now available in the Bay Area.
"The beer is doing very well," said Patrick Mace of Bay Area Distributing, which
also distributes competitor Humbolt Brewing Company's hemp beer, Humbolt Hemp.
"Hempen Ale(TM) is easily outselling Humbolt," Mace asserts, "it's just a better
product with better packaging."
"As the originators of North America's first hemp beers, we consider the recent
development of several other hemp beers as not only a compliment, but as
evidence that Hempen Ale(TM) has created a whole new product category," said
Steven T. Nordahl, Frederick Brewing Co.'s vice president of brewing operations
and creator of Hempen Ale(TM) and Hempen Gold(TM).
The hemp seeds used in Hempen Ale(TM) and Hempen Gold(TM) do not contain
tetrahydrocannabinol (THC), the psychoactive ingredient in marijuana, although
hemp and marijuana are botanically related. The U.S. Bureau of Alcohol, Tobacco
and Firearms has approved both Hempen Ale(TM) and Hempen Gold(TM) for
distribution.
In 1997, Hempen Ale(TM) was awarded a bronze medal for brewing excellence in the
herb/spice category at the 16th Great American Beer Festival(TM), the nation's
largest and most prestigious beer event. Hempen Ale(TM) was also an award-winner
at the 1997 Hemp
<PAGE>
Page 2 of 2
Industries Association conference, where it was recognized by HempWorld magazine
for product innovation. Most recently, readers of BarleyCorn's Bay Schooner
edition, the Mid-Atlantic's leading beer trade publication, voted Hempen Ale(TM)
"New Craft Beer of the Year."
Founded in 1992, Frederick Brewing Co. completed a successful initial public
offering (IPO) in 1996. In March 1997, the company moved from a converted
warehouse to a purpose-built, 57,000 square foot facility. In December 1997,
Frederick Brewing Co. merged with two other Maryland microbreweries, Wild Goose
Brewery, Inc. of Cambridge, MD and Brimstone Brewing Company of Baltimore, MD,
creating the largest craft brewery in the Mid-Atlantic region. Today, Frederick
Brewing Co.'s award-winning beers are sold in 31 states and the District of
Columbia.
Free public tours and tastings are held at Frederick Brewing Co.'s brewery every
Saturday and Sunday at 1:30 p.m. Reservations are not required. Directions are
available by calling the brewery at 888-258-7434, visiting the Frederick Brewing
Co. website at http://www.fredbrew.com, or referring to the map on the bottom of
a six-pack. Downloadable label artwork and brewery photographs are available at
http://www.fredbrew.com/prphotos.
# # #
EXHIBIT 99.9
FOR IMMEDIATE RELEASE CONTACT: Jonathan Gambill
June 8, 1998 Frederick Brewing Co.
(888) 258-7434, x122
Ahtanum Hop Selected for Blue Ridge(R) Hopfest(TM) 1998
FREDERICK, MD -- Frederick Brewing Co. announced today that the hop to be
featured in its Blue Ridge(R) Hopfest(TM) 1998 will be the Ahtanum variety. Blue
Ridge(R) Hopfest(TM) is an unfiltered American brown ale, brewed every fall
since 1994 in celebration of the annual hop harvest. Each year a different
single hop variety is chosen and used exclusively and liberally -- from the
kettle, to the whirlpool, to the hopback, to dry hopping in the fermenter. This
year's brew features twelve (12) hop additions and will be available in limited
quantities beginning August 10.
The Ahtanum hop is grown exclusively by Yakima Chief, Inc. of Sunnyside,
Washington. In the Yakama Indian language, Ahtanum means "a quiet place for many
people," and is also the name of a large ridge separating the main hop growing
regions of the Yakima Valley. The Ahtanum hop is a relatively new variety, of
about 6% alpha acid, and is noted for its aromatic properties. Hops previously
featured in Blue Ridge(R) Hopfest(TM) include: Mt. Hood (1994), Ultra (1995),
Columbus (1996), and Crystal (1997).
In 1995, Blue Ridge(R) Hopfest(TM) was voted "Beer of the Year" by readers of
BarleyCorn magazine, the mid-Atlantic's leading beer newspaper. In 1997,
BarleyCorn editors named Blue Ridge(R) Hopfest(TM) "Beer of the Year".
Product Specifications
Malts: 2-Row, Caramel 40, Munich 20, Carapils, Chocolate
Original Gravity: 13.0 Plato (1.052 OG)
Bitterness (Bus): 60
Alcohol by volume: 4.8%
Color: Light Brown, 26 SRM
Founded in 1992 with the Blue Ridge brand of beers, Frederick Brewing Co.
completed a successful initial public offering in 1996. In March 1997, the
company moved from a converted warehouse to a purpose-built, 57,000 square foot
facility. In December 1997, FBC acquired two other Maryland micro-breweries,
Wild Goose Brewery and Brimstone Brewing Co., creating the largest craft brewery
in the Mid-Atlantic region. Today Frederick Brewing Co.'s award-winning beers
are sold in 31 states and the District of Columbia. FBC shares are traded under
the NASDAQ symbol: BLUE.
Free public tours are held at the brewery every Saturday and Sunday at 1:30 p.m.
Visit the Frederick Brewing Co. online at http://www.fredbrew.com.
EXHIBIT 99.10
FOR IMMEDIATE RELEASE: CONTACT: Andrea J. Keller
June 17, 1998 Frederick Brewing Co.
888-258-7434, x120
Hempen Ale(TM) Nominated
For International Food Industry Award
Frederick Brewing Co.'s Hemp Beer Chosen to Compete
for Prestigious Sial D'or Award
FREDERICK, MD -- As announced in the June issue of Progressive Grocer magazine,
(circulation 70,049) Frederick Brewing Co.'s Hempen Ale(TM) has been selected as
one of eight American products--representing the most distinguished products
from the United States--in the competition for the international Sial D'or food
industry awards.
Singled out for its commercial success and innovative character, Hempen Ale(TM)
is representing the United States' entry in the alcohol beverage category and
will be presented to the 33-member Sial D'or jury (one juror per participating
country) on June 24-25, 1998 in Paris, France. Of the international category
winners, the Global Sial D'or prize will be conferred upon the world's most
outstanding product of the year.
"This is a tremendous accomplishment," said Frederick Brewing Co. President and
COO Marjorie McGinnis. "And further affirmation that Hempen Ale(TM) and Hempen
Gold(TM) are exciting new products that will continue to prove successful in
chain and independent retail stores."
The hemp seeds used in Hempen Ale(TM) and Hempen Gold(TM) do not contain
tetrahydrocannabinol (THC), the psychoactive ingredient in marijuana, although
hemp and marijuana are botanically related. The U.S. Bureau of Alcohol, Tobacco
and Firearms has approved both Hempen Ale(TM) and Hempen Gold(TM) for
distribution.
<PAGE>
Sial D'or Nomination
Page 2 of 2
In 1997, Hempen Ale(TM) was awarded a bronze medal for brewing excellence in the
herb/spice category at the 16th Great American Beer Festival(TM), the nation's
largest and most prestigious beer event. Hempen Ale(TM) was also an award-winner
at the 1997 Hemp Industries Association conference, where it was recognized by
HempWorld magazine for product innovation. Most recently, readers of
BarleyCorn's Bay Schooner edition, the Mid-Atlantic's leading beer trade
publication, voted Hempen Ale(TM) "New Craft Beer of the Year."
Founded in 1992 with the Blue Ridge brand of beers, Frederick Brewing Co.
completed an initial public offering (IPO) in 1996. In March 1997, the company
moved from a converted warehouse to a purpose-built, 57,000 square foot
facility. In December 1997, FBC acquired two other microbreweries, Wild Goose
Brewery and Brimstone Brewing Co., creating the largest craft brewery in the
Mid-Atlantic region. Today, Frederick Brewing Co.'s award-winning beers are sold
in 31 states and the District of Columbia. FBC shares are traded under the
NASDAQ symbol: BLUE.
Free public tours and tastings are held at Frederick Brewing Co.'s brewery every
Saturday and Sunday at 1:30 p.m. Reservations are not required. Directions are
available by calling the brewery at 888-258-7434, visiting the Frederick Brewing
Co. website at http://www.fredbrew.com, or referring to the map on the bottom of
a six-pack. Downloadable label artwork and brewery photographs are available at
http://www.fredbrew.com/prphotos.
# # #
