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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, 1999.
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, $0.0004 Par Value 1,845,759
- ------------------------------- -----------------------------
(Title of Each Class) (Number of Shares Outstanding
as of August 5, 1999)
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
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<PAGE>
Frederick Brewing Company
Consolidated Balance Sheet
<TABLE>
<CAPTION>
June 30, 1999
-------------
(Unaudited)
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 6,511
Cash - restricted 12,475
Trade receivables, net of allowance for doubtful accounts of $27.618 375,087
Inventories, net of reserve for obsolescence of $48,208 627,776
Prepaid expenses, and other current assets 158,332
-------------
Total current assets 1,180,181
Property and equipment, net 7,783,612
Intangibles, net of accumulated amortization of $170,347 372,651
Goodwill, net of accumulated amortization of $387,333 2,346,781
Other assets 72,396
-------------
Total assets $ 11,755,621
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 1,161,129
Capital lease obligations, current portion 44,717
Short term convertible notes 500,000
Accounts payable 1,655,325
Accrued liabilities 156,588
-------------
Total current liabilities 3,517,759
Long-term debt 1,019,794
Capital lease obligations 2,629,988
-------------
Total liabilities 7,167,541
-------------
Stockholders' equity:
Preferred stock - $.01 par value, 1,000,000 shares authorized:
Cumulative, convertible Series A, 1,543 shares issued and outstanding 581,687
Convertible Series F, 776 shares issued and outstanding 750,780
Convertible Series G, 231 shares issued and outstanding 297,152
Common stock - $0.0004 par value, 19,000,000 shares authorized,
1,812,845 shares issued and outstanding 724
Additional paid-in capital 20,718,591
Accumulated deficit (17,760,854)
-------------
Total stockholders' equity 4,588,080
-------------
Total liabilities and stockholders' equity $ 11,755,621
=============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
2
<PAGE>
Frederick Brewing Company
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Gross sales $ 1,003,550 $ 1,595,010 $ 1,994,508 $ 2,609,847
Less: Returns and allowances, and excise taxes 110,038 130,149 176,894 178,343
----------- ------------ ------------ ------------
Net sales 893,512 1,464,861 1,817,614 2,431,504
Cost of sales 900,850 986,458 1,757,227 1,803,231
----------- ------------ ------------ ------------
Gross profit (7,338) 478,403 60,387 628,273
Selling, general and administrative expenses 543,796 1,187,066 1,302,591 1,901,300
Amortization of deferred public relations costs - 1,020,938 - 1,089,000
----------- ------------ ------------ ------------
Operating loss (551,134) (1,729,601) (1,242,204) (2,362,027)
Loss on sale of equipment - 102,205 - 99,545
Interest expense, net 196,517 104,197 350,541 210,435
----------- ------------ ------------ ------------
Net loss (747,651) (1,936,003) (1,592,745) (2,672,007)
Preferred stock deemed dividend requirements - - - (28,627)
----------- ------------ ------------ ------------
Net loss attributable to common shareholders $ (747,651) $ (1,936,003) $ (1,592,745) $ (2,700,634)
=========== ============ ============ ============
Basic and diluted loss per common share:
Net loss before preferred stock dividend requirements $ (0.41) $ (2.04) $ (0.87) $ (3.40)
Preferred stock dividend requirements - - - (0.04)
----------- ------------ ------------ ------------
Net loss per common share $ (0.41) $ (2.04) $ (0.87) $ (3.44)
=========== ============ ============ ============
Weighted average common shares (basic and diluted) 1,821,363 950,283 1,821,363 784,867
</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,
----------------------------- ------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (747,651) $ (1,936,003) $ (1,592,745) $ (2,672,007)
Adjustments to reconcile net loss to net cash
for operating activities:
Depreciation and amortization 285,404 267,946 569,064 504,223
Writeoff of accounts receivable 2,325 - 2,325 -
Loss on writeoff of equity in minority interest - - 1,584 -
Amortization of deferred public relations costs - 1,020,938 - 1,089,000
Loss on sale of equipment - 102,205 - 99,545
Change in operating assets and liabilities:
Trade receivables (24,529) (118,067) 35,806 (182,458)
Inventories 183,282 (149,546) 171,010 (349,816)
Prepaid expenses and other current assets 776 48,357 (426) (137,150)
Other assets - 114,686 - 83,008
Accounts payable 180,377 92,078 440,097 137,304
Accrued liabilities 26,945 53,089 (21,063) (517,236)
---------- ------------ ------------ ------------
Net cash used in operating activities (93,071) (504,317) (394,258) (1,945,587)
---------- ------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (146,171) (254) (152,280) (288,320)
Purchase of intangibles (647) (90,711) (2,355) (90,711)
Proceeds from sale of equipment - 77,260 - 94,060
---------- ------------ ------------ ------------
Net cash used in investing activities (146,818) (13,705) (154,635) (284,971)
---------- ------------ ------------ ------------
Cash flows from financing activities:
Payments on debt obligations 51,493 (67,515) (15,871) (140,609)
Payments on capital leases (11,016) (31,704) (21,724) (45,896)
Proceeds from issuance of short term notes 198,061 - 500,000 -
Restricted cash - 12,475 - -
---------- ------------ ------------ ------------
Net cash provided by/(used in) financing activities 238,538 (86,744) 462,405 (186,505)
---------- ------------ ------------ ------------
Net decrease in cash and cash equivalents (1,351) (604,766) (86,488) (2,417,063)
Cash and cash equivalents, beginning of period 7,862 800,583 92,999 2,612,880
---------- ------------ ------------ ------------
Cash and cash equivalents, end of period $ 6,511 $ 195,817 $ 6,511 $ 195,817
========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE>
FREDERICK BREWING COMPANY
Index To Form 10-QSB
June 30, 1999
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (unaudited) at June 30, 1999
Consolidated Statements of Operations (unaudited) for the
Three and six months ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows (unaudited) for
the Three and six months ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults on Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports
PART III. SIGNATURES
5
<PAGE>
FREDERICK BREWING COMPANY
Notes To Consolidated Financial Statements
June 30, 1999
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Frederick
Brewing Company (the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial reporting, with
instructions from Form 10-QSB and Regulation S-B. As such, they do not include
all information and footnotes required by generally accepted accounting
principles for complete year-end financial reporting. In the opinion of Company
management, all normal recurring accruals and other adjustments considered
necessary for a fair presentation of an interim consolidated financial position
and the interim consolidated results of operations have been included.
Operating results for the three and six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for other interim
periods within 1999 or for the year ending December 31, 1999. Information
relating to the financial position, results of operations, and cash flows of the
Company as of and for the year ended December 31, 1998 may be found in the
financial statements included in the Company's Annual Report filed on Form
10-KSB for the year ended December 31, 1998.
Future Prospects
The Company's ability to meet its obligations is dependent on achieving
operating profitably and in generating positive cash flows. This operational
improvement requires the Company to either eliminate or substantially reduce
excess brewing capacity, and also requires the Company to obtain additional
financing from third parties.
On November 4, 1998, the Company retained West-Finance Corporation to advise and
assist the Company in: 1) refinancing the First Union National Bank debt, 2)
raising additional working capital, and 3) seeking candidates for acquisition by
the Company, a merger with the Company, or an acquisition of the Company. The
Company has made numerous contacts and engaged in preliminary, but unsuccessful,
discussions with numerous parties toward each of these objectives.
In April and June of 1999 the Company raised approximately $500,000 with a short
term loan from a consortium of investors collateralized by the Company's rights
in the Wild Goose brands, trademarks, copyrights and other intellectual
property. On June 30, 1999 the Company's Board of Directors agreed to grant
SIBG, an unrelated third party, the exclusive right to negotiate and perform due
diligence leading toward a transaction in which SIBG would acquire majority
control of the Company's voting stock in exchange for cash. The agreement
further provided that the exclusive right of SIBG was to terminate on July 25,
1999. On July 28, 1999 the Company received $50,000 cash from SIBG to extend
their exclusive right to negotiate with the Company through August 8, 1999. The
extended exclusivity agreement expired on August 8, 1999 with the mutual consent
of the parties. The Company and SIBG are, however, continuing to negotiate and
draft all of the documents necessary to complete the transaction, as well as the
documentation needed from third parties.
If the transaction with SIBG closes as discussed to date, management believes
SIBG may simultaneously acquire and exercise the Company's option to purchase
the brewery land and building in Frederick, Maryland; may enter into a contract
brewing agreement with the Company to commit to producing 5,000 to 35,000
barrels per year of various brands controlled by SIBG and affiliates; and may
arrange to refinance the Company's debt to First Union National Bank.
The Company has been in discussions with SIBG at various times since late 1998.
Negotiations concerning the stock purchase, real estate purchase, contract
brewing, the refinance of the First Union National Bank
6
<PAGE>
debt, negotiations to settle and compromised the Company's financial obligations
to its other creditors and to resolve issues with its preferred stock
shareholders are at an advanced stage, and if SIBG proceeds substantially as
contemplated, the terms of those transactions will likely prove acceptable to
the Company's Board of Directors.
However, the exclusivity agreement states in part "there has been no meeting of
the minds as to the material terms of any proposal". No definitive agreements
have been executed with SIBG, and there can be no assurance that such agreements
will be executed, or will be closed even if executed. Neither the Company nor
SIBG is yet obligated to execute agreements or to close on any transaction.
Several conditions must be satisfied before any transaction can be completed,
and many of these are beyond the control of the Company and management. Some of
these conditions include: 1) one or more of SIBG's members must agree to
contribute the cash needed to allow SIBG to purchase the Company's common stock;
2) SIBG, its counsel, auditors, and other advisors must complete and be
satisfied with the results of its due diligence review of the Company, its
condition, and its business prospects; 3) the Company and SIBG must agree to
terms and negotiate mutually acceptable agreements between themselves and with
third parties including: (a) a purchase or pay-off of the First Union National
Bank debt; (b) the approval of the United States Small Business Administration
which is a secured creditor of the Company; (c) the negotiation of a mutually
acceptable agreement for the purchase by SIBG of the real estate now owned by
Blue II, LLC; (d) the agreement of the Company's numerous unsecured creditors,
equipment lessors, and other suppliers to payment terms acceptable to SIBG; 4)
the termination or modification of the Company's employment contracts with
senior management; and 5) numerous others many of which may not be foreseen by
the Company.
No assurance can be given that these conditions can or will be met in a timely
manner or on terms that are acceptable or favorable to the Company. The
exclusivity agreement with SIBG generally prohibited the Company from
soliciting, encouraging, discussing, or considering other proposals or of
providing non-public information to other parties who may be interested in
providing the Company with financing until August 8, 1999. There is the risk
that the Company will not be able to raise funds to sustain operations if the
transaction with SIBG does not close or is not closed in a timely manner.
Presently the Company is in default under the payment terms of an equipment loan
to a national bank. In June 1999 the Company agreed to pay the bank $50,000 (in
two installments) in return for the banks agreement not to demand repayment of
the loan until June 30, 1999. The Company failed to make the second installment
payment and negotiated a further extension of the bank's forbearance through
August 15, 1999 as well as to refinance the loan. There can be no assurance that
the bank will agree to forbear beyond that date or that the loan can be
refinanced. The Company is also in default on numerous other obligations
including rental payments due to Blue II, payments due on several equipment
leases, and payments due to outside vendors and professionals. There can be no
assurance that these creditors will refrain from taking legal action against the
Company, or attempt to place the Company into involuntary bankruptcy.
The Company received a letter dated September 15, 1998 (the "notice letter")
from Nasdaq Stock Market Inc. ("Nasdaq") stating that the Company's common stock
may be de-listed from the Nasdaq Small-Cap Market for failure to maintain a
minimum bid of $1.00 per share. In summary, the notice letter stated that if the
Company failed to achieve a closing bid price of $1.00 per share for ten
consecutive trading days during the 90-day calendar period ending December 14,
1998, the common stock would be subject to de-listing. The Company requested,
and Nasdaq approved, an extension of time to allow shareholder approval of a
reverse stock split in an effort to boost the stock price. In March 1999 the
Company affected a 1 for 10 reverse stock split, however the stock price did not
remain above the $1.00 closing bid for ten consecutive trading days as required
by Nasdaq. In April 1999 Nasdaq notified the Company that its common stock had
been de-listed from the Nasdaq Small-Cap Market. As of August 5, 1999, the
common stock has been trading on the Electronic Bulletin Board under the symbol
BLUE.
If the Company is not successful in completing a transaction with SIBG it will
seek to obtain short-term financing from third parties that have previously
purchased equity or loaned funds to finance its operations.
7
<PAGE>
The Company is also exploring the option of merging with, or selling assets to,
another craft-brewer or industry participant with greater financial resources to
help ensure its meets its obligations. The Company could also seek protection
under Chapter 11 of the bankruptcy code to allow additional time to explore
other alternatives to eliminate or reduce excess capacity. The Company has not
yet decided on a definitive alternative course of action, but has been in active
discussions of such options since the expiration of the exclusivity agreement.
2. Principles of Consolidation
The Consolidated financial statements for the three and six months ended June
30, 1999 include the accounts of the Company and its wholly owned subsidiaries
Wild Goose Brewery, Inc. ("Wild Goose") and Brimstone Brewing Company
("Brimstone") since their acquisitions on January 28 and January 15, 1998
respectively.
3. Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates fair value, and
consists of amounts on hand and in a highly liquid short-term investment account
with a major bank. All cash equivalents have original maturities to three months
or less. A short-term investment of $12,475 is shown as restricted cash, and
represents pledged collateral to ensure the Company's performance of site
improvement work required by the local Frederick County government.
4. Trade Receivables
Trade receivable result primarily from product sales to wholesale distributors.
The Company periodically reviews the financial strength of its distributors, and
provides allowances for anticipated losses as necessary. At June 30, 1999 there
was $27,618 in allowance for doubtful accounts.
5. Inventories
Inventories consist of raw ingredients, work in process, packaging materials,
and finished product, and are valued at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method. The Company periodically
reviews the age and marketability if its inventory, and provides obsolescence
reserves as necessary. Net inventories at June 30, 1999 are as follows:
Raw ingredients......................................... $ 98,764
Work in process......................................... 68,536
Packaging materials..................................... 141,623
Finished goods.......................................... 367,061
Inventory, gross........................................ 675,984
Reserve for obsolescence................................ (48,208)
Inventory, net.......................................... $ 627,776
6. Property and Equipment
Property and equipment are recorded at cost and depreciated over the estimated
useful lives of the individual asset groups. Straight-line depreciation is used
for financial reporting, and accelerated methods used for tax reporting. The
estimated useful lives used for financial reporting are as follows: brewing
equipment, 7 to 20 years; automobiles and trucks, 5 years; furniture and
fixtures, 3 to 7 years. Leasehold improvements are recorded at cost and
amortized over the shorter of the terms of the related lease, or over the
estimated useful life of the improvement. On retirement or disposition of
property and equipment, its cost and accumulated depreciation are removed from
the accounts and any resulting gain or loss is reflected in operations. Repair
and maintenance costs to property and equipment is expended in the year
incurred. Property and equipment at June 30, 1999 are as follows:
8
<PAGE>
Brewing equipment....................................... $ 4,350,236
Brewery building........................................ 3,000,000
Leasehold improvements.................................. 1,621,833
Automobiles and trucks.................................. 184,204
Furniture and fixtures.................................. 138,395
Property and equipment, gross........................... 9,294,668
Accumulated depreciation................................ (1,511,056)
Property and equipment, net............................. $ 7,783,612
7. Intangible Assets
Intangible assets consist of trademarks, copyrights, and loan origination costs
related to existing debt obligations. Trademarks and copyrights are amortized
over 5 years on the straight-line basis. Loan origination costs are amortized
over the term of their related loan. Intangible asset amortization expense for
the three and six months ended June 30, 1999 was $23,728 and $46,330
respectively.
8. Goodwill
Goodwill represents the excess purchase price paid for Wild Goose over the value
of the net assets acquired, and is being amortized over 10 years (120 months)
from the date of its acquisition. Goodwill amortization expense for the three
and six months ended June 30, 1999 was $68,353 and $136,706 respectively.
9. Long-Term Debt
Long-term debt and the current maturity portion of long-term debt are $2,180,923
at June 30, 1999. Debt is itemized as follows: 1) a note for $1,113,756 payable
to a major bank, collateralize by the Company's brewing equipment; 2) a $947,482
loan payable to the United States Small Business Administration, secured by a
secondary lien on the Company's brewery equipment; 3) a $8,625 loan payable to a
major bank, collateralize by the Company's automobiles and trucks; and 4) a
$111,060 note payable to the local Frederick County government for sewer
connections.
10. Capital Leases
The Company leases the land and building housing the brewery, both of which
qualify for capital lease treatment. The current and long-term portion of the
capital lease is $2,674,705 at June 30, 1999. The Company has the option to
purchase the land and building after March 1, 2003.
11. Stockholders Equity
During the three months ended June 30, 1999 the Company issued 108,394 shares of
common stock on the conversion of 73 shares of Series G preferred stock. Total
weighted common shares for the three and six months ended June 30, 1999 were
1,821,363 and 1,821,363 respectively.
12. Revenue Recognition
Revenue is recognized upon shipment of finished product to wholesale
distributors. The Company has established 180 days as an acceptable shelf life
for product, and will reimburse distributors for 50% of all out of date product
destroyed in the first year of each new distribution agreement.
13. Income Taxes
The Company accounts for income taxes under the asset and liability method.
Deferred income taxes are recognized for their tax consequences in future years
by the differences between the tax basis of assets and liabilities and their
financial reporting values at each year-end. This is based on enacted tax laws
and statutory rates applicable to the periods in which the differences are
expected to affect taxable income.
9
<PAGE>
Valuation allowances are established as necessary to reduce deferred tax assets
to the amount they may realize if disposed. Income tax expense represents the
current tax provision for the period plus the change during the period in
deferred tax assets and liabilities. Net operating losses have been incurred in
the three and six months ended June 30, 1999 and 1998, and the Company has not
recorded a provision for income taxes payable.
14. Basic and Diluted Loss per Common Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share",
requires the presentation of basic (loss) per share and diluted (loss) per
share. Basic (loss) per share is based on the weighted-average number of
outstanding common shares for the period. Diluted (loss) per share adjusts the
weighted average common shares for any potential dilution that could occur if
stock options, warrants, or other convertible securities were exercised or
converted into common shares. There is no difference between basic and diluted
loss per share in 1999.
10
<PAGE>
FREDERICK BREWING COMPANY
Management's Discussion and Analysis of Financial Conditions and Results
For the Three and Six Months Ended June 30, 1999 and 1998
Overview of Significant Activities
A net loss of ($747,651) or ($0.41) per weighted-average common share was
generated during the second quarter of 1999, compared to a net loss of
($1,936,003) or ($2.04) per average common share in the second quarter of 1998.
Year to date 1999, a loss of ($1,592,745) or ($0.87) per average common share
compares favorably to the year to date 1998 loss of ($2,672,007) or ($3.40) per
common share before preferred stock deemed dividends.
There were 1,910,400 weighted-average common shares outstanding in the second
quarter ended June 30, 1999, and 1,910,400 average common shares outstanding in
the six months ending June 30, 1999. For the period ended June 30, 1998 there
were 950,283 (restated to reflect the one-for-ten reverse stock split approved
at the March 23, 1999 Special Meeting of Stockholders) weighted average common
shares outstanding during the second quarter, and 784,867 (restated) average
shares outstanding year-to-date.
The Company's second quarter 1999 gross sales decreased 37% to $1,003,550 from
$1,595,010 in the second quarter of 1998. The decrease resulted primarily from
fall-off in demand in all product lines as sales, marketing and promotional
efforts in remote markets were curtailed. However second quarter 1999 gross
sales are up 1.3% over first quarter gross 1999 gross sales of $990,958. 1999
year to date gross sales of $1,994,508 were 24% below the same period in 1998 at
$2,609,847, again reflecting curtailed sales, marketing, and promotional
efforts.
Concerted ongoing effort has been made to either eliminate or more closely
control overhead spending. For example, overall employment at the Company has
been reduced from 51 persons at the beginning of the second quarter of 1998 to
31 presently. The $543,796 of selling, general, and administrative expenses for
the second quarter of 1999 was down $643,270 or 54% from the $1,187,086 second
quarter 1998 spending. Cost savings were experienced in many operating areas.
Year to date 1999 SG&A expenses of $1,302,591 were $598,709 or 31% below year to
date 1998 spending of $1,901,300.
Review of Operations
The following table sets forth data derived from the Company's Consolidated
Statement of Operations expressed as a percentage of net sales, for the three
and six months ended June 30, 1999 and 1998.
Percentage of Net Sales
<TABLE>
<CAPTION>
Three Months Six Months
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross sales 112.3% 108.9% 109.7% 107.3%
Less: Returns and allowances, and excise taxes 12.3 8.9 9.7 7.3
Net sales 100.0 100.0 100.0 100.0
Cost of sales 101.4 67.3 97.3 74.2
Gross profit/(loss) (1.4) 32.7 2.7 25.8
Selling, general and administrative expenses 60.2 81.0 71.0 78.2
Amortization of deferred public relations costs 0.0 69.7 0.0 44.8
Operating loss (61.6) (118.0) (68.3) (97.2)
Loss on sale of equipment 0.0 7.0 0.0 4.1
Interest expense, net 22.0 7.1 19.3 8.6
Net loss (83.6) (132.1) (87.6) (109.9)
</TABLE>
11
<PAGE>
Per Barrel Operating Data
<TABLE>
<CAPTION>
Three Months Six Months Calendar Year
---------------------- ------------------ -------------
1999 1998 1999 1998 1998
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Barrels sold 5,717 8,861 11,314 14,567 31,464
Gross sales per barrel sold $ 175.54 $ 180.00 $ 176.29 $ 179.16 $ 175.49
Less: Returns and allowances, and excise taxes 19.25 14.69 15.63 12.24 11.98
Cost of sales per barrel sold:
Direct materials 74.97 58.16 71.19 59.27 74.78
Direct labor 14.85 10.63 14.04 11.92 11.86
Production overheads - variable 12.57 12.64 12.52 14.18 17.49
Production overheads - fixed 55.18 29.90 57.56 38.42 29.32
Total cost of sales per barrel sold 157.57 111.33 157.57 123.79 133.45
Gross profit per barrel sold $ (2.27) $ 53.98 $ 4.36 $ 43.13 $ 30.06
</TABLE>
Gross Sales
Gross sales for the second quarters of 1999 and 1998 were $1,003,550 and
$1,595,010 respectively, representing a quarter to quarter sales decrease of
$591,460 or 37%. Sales of Wild Goose and Brimstone product, which was originally
acquired in January 1998, accounted for $576,600 of the 1999 sales and $689,100
of the 1998 sales. Blue Ridge and Hempen product sales were $373,800 in 1999 and
$764,500 in 1998. Contract brewing revenues, merchandise sales, and billed
freight account for the remainder of revenue in the second quarters of both 1999
and 1998.
Unit sales volumes of 5,717 barrels in the second quarter of 1999, and 8,861
barrels in the second quarter of 1998 represent a 3,144 barrel (35%) quarter to
quarter decrease. While all brands showed volume declines, 1,411 barrels or 45%
of the decrease reflects lower shipments of the Hempen brand family and 403
barrels or 13% of the decrease reflects that the three small contract brewing
companies with which the Company previously did business have exited the
packaged beer market. The remaining decline of 1,328 barrels or 42% of the
decline is attributable to the Blue Ridge, Wild Goose and Brimstone product
lines.
Gross sale revenue per barrel sold in the second quarters of 1999 and 1998 were
$175.54 and $180.00 respectively. Unit sales revenues include sales to certain
discount beer clubs in 1999 and to certain foreign countries in 1998 at
discount. Reversing the effects of these discounted transactions produce second
quarter per barrel prices of $180.61 for 1999 and $179.95 for 1998.
Year to date June sales were $1,994,508 in 1999 and $2,609,847 in 1998,
representing a year to year decrease of $615,339 or 24%.
Unit sales volumes of 11,314 barrels for year to date June 1999 were 3,253
barrels (22%) below the 14,567 barrels of 1998. While sales of all brands
declined, 97% of this decline was experienced in the second quarter of 1999.
Gross sales revenue per barrel sold year to date June 1999 and 1998 was $176.29
and $179.16 respectively. Again these unit sales revenues include discounted
sales to beer clubs and foreign countries in 1999 and 1998 respectively.
Reversing the effects of these discount transactions would show per barrel
prices of $178.76 in 1999 and $180.53 in 1998.
Heightened competition among domestic craftbrewers as well as from importers,
which has become particularly intense in the Mid-Atlantic region, has harmed
craftbrewed brand sales and has caused numerous craftbrewing companies to
withdraw from the market, close or consolidate breweries in recent months. Both
the Company's brands and those formerly produced under contract for others have
suffered in this environment.
The Company is working to restore sales and revenue growth by taking
several steps, all of which should take effect by the end of 1999: (1) restore
some portion of the sales and marketing budget previously reduced; (2) align at
least some of the Company's brands with those of SIBG or another brewer to
provide sales and marketing support outside the Company's local market area; (3)
re-introduce National Premium, a super-premium brand of traditional North
American lager, in bottles and six-packs; and (4) increase brewing volume and
revenue perhaps by producing at lease some of SIBG's brands or those of another
brewer under contract. No assurances can be given that these steps will be taken
or that, if taken, they will result in future sales or revenue increases. In
particular, the Company's current liquidity position must improve substantially
to permit increased marketing and sales expenditures or the introduction of new
packaged products.
Returns and Allowances, and Excise Taxes
Returns and allowances decreased $3,000 to $37,100 in the second quarter of 1999
from $40,100 in the second quarter of 1998. Year to date returns and allowances
increased $25,600 in 1999 to $72,800 from $47,200 in 1998 reflecting Company
efforts to expand sales by granting additional wholesaler allowances.
12
<PAGE>
Excise taxes decreased $17,111 to $72,938 in the second quarter of 1999 from
$90,049 in 1998. Year to date excise taxes decreased $27,049 in 1999 to $104,094
from $131,143 in 1998. Excise taxes reflect the current sales mix of product
shipments between state jurisdictions and generally decline with volumes
shipped. Some states, including Maryland and Pennsylvania, require the brewer to
pay the excise tax. Other states, including Virginia and the District of
Columbia, require those distributors who receive the beer to pay the excise tax.
In addition, while the federal excise tax rate is standard at the Company's
production volume, state excise tax rates vary from state to state.
Cost of Sales
Second quarter 1999 cost of sales of $900,850, or $157.57 per barrel sold, is
made up of variable product costs (raw ingredients, packaging materials, and
direct production labor) of $428.600 or $89.82 per barrel; and production
overhead expenses (management and supervisory salaries and benefits, quality
assurance, brewery repairs and maintenance, depreciation and amortization,
utilities, equipment rentals, and building lease payments) of $472,250 or $67.75
per barrel sold. Second quarter 1998 cost of sales was $986,458 or $111.33 per
barrel sold, composed of direct variable costs of $609,600 or $68.79 per barrel
sold, and Management believes that neither second quarter 1999 or second quarter
1998 cost of sales accurately indicate either the Company's actual costs of
production or of trends in those costs. Reported second quarter 1999 costs were
artificially inflated due to a one-time adjustment in materials cost of $88,157
($15.42 per barrel) made necessary to adjust for a computational error in the
Company's report for the first quarter of 1999. Without this adjustment, cost of
goods would have been reduced to $812,693 ($142.15 per barrel) in the second
quarter of 1999.
The reported cost of sales during the second quarter of 1998 was artifically
depressed by two events: a positive adjustment of approximately $50,000 in
materials cost, reflecting the resolution in favor of the Company of a billing
dispute with one of the Company's suppliers and approximately a $34,640
understatement of materials costs due to an error in accounting for the usage of
certain materials inventory acquired from Wild Goose (this error was corrected
by way of an inventory adjustment at year end 1998). Absent these items, the
cost of sales for the second quarter of 1998 would have increased to ($120.88
per barrel).
Production overhead expenses experienced during the second quarter of 1999
include approximately $43,840 in expenses that will not continue into future
periods. Approximately $19,000 in salary and fringe benefits expenses were
incurred during the second quarter of 1999 for two employees whose positions
were eliminated during the quarter. An extraordinary $24,750 in additional rent
expense was incurred during the quarter to extend the Company's option to
purchase the brewery land and building. If the Company does exercise the
purchase option, the additional rent will be credited to the purchase price.
In any case, the additional rent liability ceased effective August, 1999.
Excluding these charges and ignoring the adjustment in materials costs as
discussed above would reduce cost of sales to $768,853 ($134.49 per barrel).
To provide what management considers to be a more meaningful comparison, a table
displaying full-year 1998 operating data is provided. The adjusted per barrel
cost of sales as derived above do not differ materially from corresponding data
for all of 1998, despite increased depreciation expense, higher health insurance
costs and significantly lower production volumes over which to spread those
fixed costs.
Year to date 1999 cost of sales was $1,757,227, or $155.31 per barrel sold,
composed of variable product costs of $964,200 or $85.23 per barrel sold, and
production overhead expense of $793,027 or $70.08 per barrel sold. Year to date
1998 cost of sales were $1,803,231, or $123.79 per barrel sold, made up of
$1,038,200 of variable product costs or $71.27 per barrel sold, and production
overhead expense of $765,031 or $52.52 per barrel sold.
For the reasons discussed above, management urges caution in drawing conclusions
concerning trends in the cost of sales or future production costs based on these
calculation.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") in the second quarters of
1999 and 1998 were $543,796 and $1,187,066 respectively, a decrease of $643,270
or 54%. Savings of $35,000 in depletion allowances, $105,200 in indirect salary
and benefits, $73,500 of sales department travel and entertainment, $129,000 of
advertising and other marketing expenses, $135,200 of outside audit, legal, and
financial relations, and $165,370 in other expenses make up the difference.
Year to date 1999 and 1998 SG&A expenses were $1,302,591 and $1,901,300
respectively, a decrease of $598,709 or 31%. A depletion cost increase of
$57,300; off-set by savings of $168,300 in indirect salary and benefits;
$115,000 in sales department travel and entertainment; $181,100 in advertising
and other marketing expense savings; $31,900 in outside audit, legal, and
financial relations savings; and $171,008 in other costs make up the decrease.
Amortization of Deferred Public Relations Costs
There was a one-time, $1,020,938, expense representing the accelerated
amortization of deferred investor relations expense in the second quarter of
1998, and $1,089,000 of investor relations year-to-date June 30, 1998. There
were no similar investor relations in 1999.
Loss on Sale of Equipment
There was a loss on the sale of equipment of $102,205 in the second quarter of
1998, and a year to date June 30, 1998 loss of $99,545. Both reflect the sale of
old Wild Goose equipment. There were no equipment sales in 1999.
13
<PAGE>
Interest Expense (net)
Net interest expense was $196,517 in the second quarter of 1999 compared to
$104,197 in the second quarter of 1998, and $350,541 for the first six months of
1999 versus $210,435 in the first half of 1998. A substantial portion of the
interest expenses incurred during 1999 and 1998 relates to the debt obligations
the Company has with a major bank for the building and equipment financing, and
with the United States Small Business Administration for additional equipment
financing.
Provision For Income Taxes
The Company has experienced net operating losses during both 1999 and 1998 and
no provisions for income taxes have been provided for on the Consolidated
Statements of Operations. The Company has recorded a full valuation allowance
against the net deferred tax asset.
Liquidity and Capital Resources
The Company has recorded losses from operations since 1993, and has funded its
operations primarily from private and public placements of common and preferred
stock. As of June 30, 1999 the Company had a working capital deficit of
$2,337,578.
Net cash used in operating activities was $93,071 in the second quarter of 1999,
versus a use of funds of $504,317 in the second quarter of 1999. Year-to-date
net cash used in operations activities was $394,258 in 1999 versus $1,945,587 in
1998.
Net cash used for investing was $146,818 in the second quarter of 1999 compared
to $13,705 in 1998 and $154,635 year-to-date 1999 versus $284,971 in 1998.
Net cash from financing in the second quarter of 1999 was $238,538 versus a use
of funds of $86,744 in the second quarter of 1998. Net cash from financing was
$462,405 year-to-date 1999 versus a use of funds of $186,505 in 1998.
The Company's ability to meet its obligations is dependent on achieving
operating profitably and in generating positive cash flows. This operational
improvement requires the Company to either eliminate or substantially reduce
excess brewing capacity, and also requires the Company to obtain additional
financing from third parties.
On November 4, 1998, the Company retained West-Finance Corporation to advise and
assist the Company in: 1) refinancing the First Union National Bank debt, 2)
raising additional working capital, and 3) seeking candidates for acquisition by
the Company, a merger with the Company, or an acquisition of the Company. The
Company has made numerous contacts and engaged in preliminary, but unsuccessful,
discussions with numerous parties toward each of these objectives.
In April and June of 1999 the Company raised approximately $500,000 with a short
term loan from a consortium of investors collateralized by the Company's rights
in the Wild Goose brands, trademarks, copyrights and other intellectual
property. On June 30, 1999 the Company's Board of Directors agreed to grant
SIBG, an unrelated third party, the exclusive right to negotiate and perform due
diligence leading toward a transaction in which SIBG would acquire majority
control of the Company's voting stock in exchange for cash. The agreement
further provided that the exclusive right of SIBG was to terminate on July 25,
1999. On July 28, 1999 the Company received $50,000 cash from SIBG to extend
their exclusive right to negotiate with the Company through August 8, 1999. The
extended exclusivity agreement expired on August 8, 1999 with the mutual consent
of the parties. The Company and SIBG are, however, continuing to negotiate and
draft all of the documents necessary to complete the transaction, as well as the
documentation needed from third parties.
14
<PAGE>
If the transaction with SIBG closes as discussed to date, management believes
SIBG may simultaneously acquire and exercise the Company's option to purchase
the brewery land and building in Frederick, Maryland; may enter into a contract
brewing agreement with the Company to commit to producing 5,000 to 35,000
barrels per year of various brands controlled by SIBG and affiliates; and may
arrange to refinance the Company's debt to First Union National Bank.
The Company has been in discussions with SIBG at various times since late 1998.
Negotiations concerning the stock purchase, real estate purchase, contract
brewing, the refinance of the First Union National Bank debt, negotiations to
settle and compromised the Company's financial obligations to its other
creditors and to resolve issues with its preferred stock shareholders are at an
advanced stage, and if SIBG proceeds substantially as contemplated, the terms of
those transactions will likely prove acceptable to the Company's Board of
Directors.
However, the exclusivity agreement states in part "there has been no meeting of
the minds as to the material terms of any proposal". No definitive agreements
have been executed with SIBG, and there can be no assurance that such agreements
will be executed, or will be closed even if executed. Neither the Company nor
SIBG is yet obligated to execute agreements or to close on any transaction.
Several conditions must be satisfied before any transaction can be completed,
and many of these are beyond the control of the Company and management. Some of
these conditions include: 1) one or more of SIBG's members must agree to
contribute the cash needed to allow SIBG to purchase the Company's common stock;
2) SIBG, its counsel, auditors, and other advisors must complete and be
satisfied with the results of its due diligence review of the Company, its
condition, and its business prospects; 3) the Company and SIBG must agree to
terms and negotiate mutually acceptable agreements between themselves and with
third parties including: (a) a purchase or pay-off of the First Union National
Bank debt; (b) the approval of the United States Small Business Administration
which is a secured creditor of the Company; (c) the negotiation of a mutually
acceptable agreement for the purchase by SIBG of the real estate now owned by
Blue II, LLC; (d) the agreement of the Company's numerous unsecured creditors,
equipment lessors, and other suppliers to payment terms acceptable to SIBG; 4)
the termination or modification of the Company's employment contracts with
senior management; and 5) numerous others many of which may not be foreseen by
the Company.
No assurance can be given that these conditions can or will be met in a timely
manner or on terms that are acceptable or favorable to the Company. The
exclusivity agreement with SIBG generally prohibited the Company from
soliciting, encouraging, discussing, or considering other proposals or of
providing non-public information to other parties who may be interested in
providing the Company with financing until August 8, 1999. There is the risk
that the Company will not be able to raise funds to sustain operations if the
transaction with SIBG does not close or is not closed in a timely manner.
Presently the Company is in default under the payment terms of an equipment loan
to a national bank. In June 1999 the Company agreed to pay the bank $50,000 (in
two installments) in return for the banks agreement not to demand repayment of
the loan until June 30, 1999. The Company failed to make the second installment
payment and negotiated a further extension of the bank's forbearance through
August 15, 1999 as well as to refinance the loan. There can be no assurance that
the bank will agree to forbear beyond that date or that the loan can be
refinanced. The Company is also in default on numerous other obligations
including rental payments due to Blue II, payments due on several equipment
leases, and payments due to outside vendors and professionals. There can be no
assurance that these creditors will refrain from taking legal action against the
Company, or attempt to place the Company into involuntary bankruptcy.
The Company received a letter dated September 15, 1998 (the "notice letter")
from Nasdaq Stock Market Inc. ("Nasdaq") stating that the Company's common stock
may be de-listed from the Nasdaq Small-Cap Market for failure to maintain a
minimum bid of $1.00 per share. In summary, the notice letter stated that if the
Company failed to achieve a closing bid price of $1.00 per share for ten
consecutive trading days during the 90-day calendar period ending December 14,
1998, the common stock would be subject to de-
15
<PAGE>
listing. The Company requested, and Nasdaq approved, an extension of time to
allow shareholder approval of a reverse stock split in an effort to boost the
stock price. In March 1999 the Company affected a 1 for 10 reverse stock split,
however the stock price did not remain above the $1.00 closing bid for ten
consecutive trading days as required by Nasdaq. In April 1999 Nasdaq notified
the Company that its common stock had been de-listed from the Nasdaq Small-Cap
Market. As of August 5, 1999, the common stock has been trading on the
Electronic Bulletin Board under the symbol BLUE.
If the Company is not successful in completing a transaction with SIBG it will
seek to obtain short-term financing from third parties that have previously
purchased equity or loaned funds to finance its operations. The Company is also
exploring the option of merging with, or selling assets to, another craft-brewer
or industry participant with greater financial resources to help ensure its
meets its obligations. The Company could also seek protection under Chapter 11
of the bankruptcy code to allow additional time to explore other alternatives to
eliminate or reduce excess capacity. The Company has not yet decided on a
definitive alternative course of action, but has been in active discussions of
such options since the expiration of the exclusivity agreement.
Impact of Inflation
The Company has not attempted to calculate the impact of inflation on
operations, but does not believe that inflation has had a material impact in
recent years. Management does believe any future cost increases in raw
ingredients, packaging materials, direct labor costs, overhead payroll costs,
and general operating expenses due to inflation could have a significant impact
on the Company's results of operations to the extent that these additional costs
could not be transferred to distributors.
Impact of Year 2000 Issue
The Company has developed a plan to review and, as appropriate, to modify or
replace certain portions of its computer system software in order to recognize
and utilize dates beyond December 31, 1999. The Company presently believes that
with modifications to existing software and conversion to new software the Year
2000 issue will be resolved within its own systems. The Company has also
established an internal auditing process to track and verify the results of its
plan and tests. With the exception of the Company's telecommunications system,
the Company and its vendors have determined that all mission-critical computer
hardware and software, including PLC's and other computer chips embedded in
brewing, packaging and other mechanical systems are either Y2K compliant or are
not date-sensitive. The Company has repaired or replaced, tested and is
currently operating all such systems identified as sensitive to the Y2K problem.
Revised software for the telecommunications system has been ordered and should
be installed and tested by September 15, 1999. Management believes the Company
is currently on schedule to substantially complete the renovation, validation,
and implementation phases of its plan with respect to mission-critical systems
in September 1999.
The Company is working with key external parties, including banks, utilities,
other vendors, and third party payers, to assess the efforts made by these
parties with respect to their own systems and to determine the extent to which
their systems are vulnerable to the Year 2000 issue. The Company has not yet
received sufficient information from these parties about their plans to be able
to predict the outcome of their efforts. The Company is also developing a
contingency plan that is expected to address financial and operational problems
that might arise on January 1, 2000. This contingency plan will include
identifying back-up processes that do not rely on computers whenever possible.
The Company has incurred and expects to continue to incur expenses for internal
staff time, as well as costs for software modification or replacement in order
to achieve Year 2000 compliance. It is expected that conversion of the primary
software programs will be completed in August 1999 with testing to follow in
September 1999. The Company estimates that these costs will total approximately
$15,000 with the majority of this being incurred by August 1999. The cost of the
Year 2000 program and the date on which the Company plans to complete Year 2000
modifications are based on estimates which reflect numerous assumptions about
future events such as continued availability of certain resources, the timing
and effectiveness of third party modification plans, and other factors. The
Company can give no assurance that these estimates will be achieved, and actual
results could differ materially from the Company's plans. Specific factors that
might cause material differences include the availability and cost of personnel
trained in this area of expertise, the ability to locate and correct relevant
computer source codes and embedded
16
<PAGE>
technology, the results of internal and external testing, and the timeliness and
effectiveness of third party modification efforts.
If the modifications and conversions referred to above are not made, or are not
completed on a timely basis, the Year 2000 issue could have a material and
adverse effect on the Company's business, financial condition, and results of
operations. Even if the Company's internal efforts are successful, failure of
third parties to which the Company is financially or operationally linked to
address their own system problems could have a material impact on the Company.
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 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 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 risk and uncertainty there are important
factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements.
17
<PAGE>
FREDERICK BREWING COMPANY
Other Information
For the Three and Six Months Ended June 30, 1999 and 1998
Item 1. Legal Proceedings
The Company's landlord Blue II, LLC has been granted an Order of Restitution,
permitting Blue II to re-enter and evict the Company from the brewery premises.
The Company has also been the subject of legal actions that have been initiated
by certain of its other creditors. While no single action is, by itself,
material, the total amount sought exceeds $35,000. The Company and SIBG are
negotiating with these creditors to settle and compromise the claims, subject to
closing the SIBG transaction.
Item 2. Changes in Securities
During the three months ended June 30, 1999, the Company issued 108,394 shares
of the Company's common stock upon the conversion of 73 shares of Series G
Preferred Stock. During the six months ended June 30, 1999, the Company issued
3,795,102 shares (379,510 post-split shares) of common stock on the conversion
of 210 shares of Series E, 224 shares of Series F, and 270 shares of Series G
Preferred Stock.
Item 3. Defaults Upon Senior Securities
The Company is in default of its secured loans from First Union National Bank
and the Small Business Administration. The Bank has granted the Company
forbearance from further collection action through August 15, 1999. The Company
and SIBG is negotiating to settle and compromise the amounts due to these
creditors whose debts are expected to be paid by August 31, 1999, subject to
closing the SIBG transaction.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed
10.1 Agreement Between Snyder International Brewing Group, LLC and
Frederick Brewing Co. Dated June 30, 1999
10.2 Agreement Between Snyder International Brewing Group, LLC and
Frederick Brewing Co. Dated July 25, 1999
10.3 Third Forbearance Agreement by and among First Union National Bank,
the Maryland Economic Development Corporation, the Maryland
Industrial Development Financing Authority and Frederick Brewing Co.
dated July 19, 1999.
27.1 Financial Data Schedule
99.1 Safe Harbor Under the Private Securities Litigation Reform Act of
1995
99.2 Press Release, July 26, 1999
99.3 Press Release, August 9, 1999
(b) Reports on Form 8-K
None.
18
<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 12, 1999 /s/ Kevin E. Brannon
-----------------------------------
Kevin E. Brannon
Chairman of the Board and
Chief Executive Officer
Date: August 12, 1999 /s/ Leslie P. Harper
-----------------------------------
Leslie P. Harper
Chief Financial Officer
19
Exhibit 10.1
June 30, 1999
CONFIDENTIAL
- ------------
Snyder International Brewing Group, LLC
C/O Crooked River Brewing Company, LLC
1101 Center Street
Cleveland, Ohio 44114
Gentleman:
We understand that, in connection with a proposed investment by you or
your affiliate in Frederick Brewing Co. (the "Company"), you wish to update and
complete your due diligence review of the Company and its business, financial,
environmental and legal affairs. In consideration of the time and resources that
you will devote to such diligence review as well as the preparation and
negotiation of definitive agreements relating to such investment, we hereby
agree that from the date hereof through and including July 25, 1999 (the
"Exclusive Period"), the Company will not, and will cause its affiliates and
representatives not to, take any action to solicit, initiate or encourage any
Acquisition Proposal (as hereinafter defined) or engage in negotiations with, or
disclose any non-public information relating to, the Company to any person or
entity that may be considering making an Acquisition Proposal with respect to
the Company. During the Exclusive Period, you agree that nothing contained in
this letter shall prevent the Board of Directors of the Company from
considering, negotiating, discussing, approving and recommending to the
stockholders of the Company a bona fide Acquisition Proposal not solicited in
violation of this letter, provided the Board of Directors of the Company
determines in good faith (upon advice of outside counsel) that it is required to
do so in order to discharge properly its fiduciary duties. If the Company takes
any action during the Exclusive Period based on the immediately preceding
sentence, the Company shall reimburse you for your reasonable out-of-pocket
expenses (including legal, accounting and other professional fees, travel
expenses, etc.) incurred on and after June 24, 1999 in connection with the
transactions referred to herein. As used herein, "Acquisition Proposal" means an
offer or proposal for, or any indication of interest in, (i) a merger or other
business combination involving the Company or any subsidiary thereof, or (ii)
the acquisition in any manner of any equity interest in, or a portion of the
assets of, the Company or any subsidiary thereof, in each case other than the
transactions contemplated hereby. During the Exclusive period, the Company shall
promptly notify you of any Acquisition Proposal or any request for non-public
information by any person or entity that informs the Company that it is
considering making or has made an Acquisition Proposal.
<PAGE>
Other than as expressly set forth herein and in the Confidentiality
Agreement, dated June 22, 1999, between the company and you, neither you nor the
Company undertakes any binding obligation with respect to a possible transaction
or investment. Such binding commitments will be made only upon the execution and
delivery of a definitive agreement setting forth the obligations of the parties.
Until such a definitive agreement is executed and delivered, you and we agree
that there has been no meeting of the minds as to the material terms of any
proposal.
Very truly yours,
FREDERICK BREWING CO.
- ---------------------------
By: Kevin E. Brannon
Chairman and CEO
The foregoing is hereby agreed to and accepted:
Snyder International
Brewing Group, LLC
- ---------------------------
By: C. David Snyder
Chairman
Exhibit 10.2
July 25, 1999
Mr. C. David Snyder
C/o Crooked River Brewing Company, LLC
1101 Center St.
Cleveland OH 44114
VIA FAX
Gentlemen:
Reference is made to the Letter Agreement, dated June 30, 1999 (the
"Agreement"), by and between Frederick Brewing Co. (the "Company") and Snyder
International Brewing Group, LLC ("SIBG"). The Company hereby agrees to extend
the Exclusive Period (as defined in the Agreement) from June 26, 1999 through
and including August 8, 1999. In consideration therefor, SIBG will pay, via wire
transfer to the Company's designated account, the sum of $50,000 (the "Extension
Payment") no later than the close of business on July 27, 1999. The Extended
Exclusive period shall terminate at 10:00 a.m. E.T., if said sum is not received
by the Company before such time. Said sum will be utilized for the benefit of
the Company in a manner agreed upon by the Company and SIBG and shall be
credited against the purchase price paid by SIBG for its investment in the
Company but shall not be refunded if SIBG does not make the entire contemplated
investment in the Company. All of the terms of and conditions of the Letter
Agreement will continue in full forced and effect during the Extended Exclusive
Period.
Sincerely,
Kevin E. Brannon
Chairman and CEO
The foregoing is hereby agreed to and accepted:
C. David Snyder
Chairman
Snyder International Brewing Group, LLC
Exhibit 10.3
THIRD FORBEARANCE AGREEMENT
THIS THIRD FORBEARANCE AGREEMENT ("Agreement") is made and entered into
as of the 19th day of July, 1999, by and among FIRST UNION NATIONAL BANK,
successor by merger to Signet Bank (the "Bank"), the MARYLAND ECONOMIC
DEVELOPMENT CORPORATION ("MEDCO"), the MARYLAND INDUSTRIAL DEVELOPMENT FINANCING
AUTHORITY ("MIDFA") and FREDERICK BREWING CO. (the "Borrower").
R E C I T A L S
R-1. Pursuant to and in accordance with Article 83A, Title 5, Subtitle
2 of the Annotated Code of Maryland, MEDCO issued and sold to the Bank its
Taxable Economic Development Revenue Bond (Frederick Brewing Co. Facility), 1996
Issue, dated July 19, 1996 in the original principal amount of $1,500,000 (as
amended, modified, supplemented, extended, renewed or restated from time to
time, the "Bond").
R-2. The proceeds of the sale of the Bond were loaned to the Borrower
in accordance with the terms and conditions of a Loan and Financing Agreement
dated July 19, 1996 by and among the Bank, the Borrower and MEDCO (as amended,
modified, supplemented, extended, renewed or restated from time to time, the
"Loan Agreement").
R-3. The loan by MEDCO to the Borrower of the proceeds of the sale of
the Bond is evidenced by a Promissory Note dated July 19, 1996 in the original
principal amount of $1,500,000.00 executed by the Borrower in favor of MEDCO and
assigned by MEDCO to the Bank (as amended, modified, supplemented, extended,
renewed or restated from time to time, the "Note").
R-4. The Borrower's obligations under the Note and the Loan Agreement
are secured by, inter alia, a blanket security interest in the assets of the
Borrower, including, without limitation, the Borrower's present and future
accounts, contract rights, receivables, inventory, equipment, fixtures,
instruments and general intangibles (collectively, the "Collateral").
R-5. MIDFA insures a portion of the Obligations (as hereafter defined)
pursuant to the terms of an Insurance Agreement dated July 19, 1996 (the
"Insurance Agreement").
R-6. The terms of the Loan Agreement were modified pursuant to the
following (collectively, the "Modification Documents"): (a) Forbearance
Agreement dated February 27, 1997; (b) letter agreement dated January 9, 1998;
(c) Loan Modification Agreement dated May 27, 1998; (d) Forbearance Agreement
dated May 12, 1999; and (e) Second Forbearance Agreement dated June 4, 1999.
<PAGE>
R-7. The Loan (as hereafter defined) matured on April 1, 1999 (the
"Maturity Date"). On the Maturity date, all of the Obligations (as hereafter
defined) became due and payable in full.
R-8. As of July 13, 1999, the balance due and owing on the Loan (as
hereafter defined) was $1,278,376.76 (consisting of principal in the amount of
$1,183,199.98, accrued interest in the amount of $32,257.45 and late charges in
the amount of $458.49), plus attorneys' fees and expenses. In addition, interest
continues to accrue from July 13, 1999 at the per diem rate of $295.80.
R-9. The Bond and the interest thereon are limited obligations of
MEDCO, the principal of, premium, if any, and interest on which are payable
solely from the security described in Section 2.7 of the Loan Agreement or from
the Property (as defined in the Loan Agreement); provided, however, that under
the Loan Agreement, MEDCO has reserved to itself, and has not pledged or
assigned, the Reserved Rights of the Issuer (as defined in the Loan Agreement).
Neither the Bond nor the interest thereon shall ever constitute an indebtedness
or a charge against the general credit or taxing powers of MEDCO, the State of
Maryland, the Maryland Department of Business and Economic Development, MIDFA,
any other public instrumentality or any public body within the meaning of any
constitutional or charter provision or statutory limitation, and neither shall
ever constitute or give rise to any pecuniary liability of MEDCO, the State of
Maryland, the Maryland Department of Business and Economic Development, MIDFA
(except in regard to the Insurance Agreement), any other public instrumentality
or any public body.
R-10. The Borrower's obligations under the Bond, the Note, the Loan
Agreement and the other Loan Documents (as hereafter defined) are hereafter
collectively referred to as the "Obligations." The Bond, the Note, the Loan
Agreement, this Agreement and all documents previously, now or hereafter
executed and delivered to evidence, secure, guarantee or in connection with the
Obligations, as the same may from time to time be amended, modified,
supplemented, extended, renewed or restated, are hereafter collectively referred
to as the "Loan Documents." The loan evidenced by the Loan Documents is
hereafter referred to as the "Loan."
R-11. The Borrower has requested that the Bank forbear from exercising
its rights and remedies under the Loan Documents. The Bank has agreed to this
request, subject to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. RECITALS.
The recitals to this Agreement are true and correct, and are
incorporated into and made a substantive part of this Agreement.
- 2 -
<PAGE>
2. CONFIRMATION AND RATIFICATION OF LOAN DOCUMENTS.
The Borrower agrees that the Loan Documents are in full force and
effect and that each Loan Document shall remain in full force and effect unless
and until modified or amended in writing in accordance with its terms. The
Borrower confirms and ratifies its obligations under the Loan Documents, and
agrees that the execution and delivery of this Agreement shall not in any way
diminish or invalidate any of its obligations under the Loan Documents. All
parties hereto consent to the execution and delivery of this Agreement, and to
all the provisions of this Agreement to the extent that such provisions may
modify the terms and provisions of any of the Loan Documents.
3. ACKNOWLEDGMENT OF DEFAULT.
The Borrower acknowledges and agrees that it has defaulted on its
obligations under the Loan Documents. The Borrower further acknowledges and
agrees that the Bank, in the absence of the specific agreement to forbear set
forth in this Agreement, would have the immediate and unconditional right to
exercise its rights and remedies under the Loan Documents and/or applicable law.
4. FORBEARANCE.
4.1. Forbearance Period. Subject to the terms and conditions of this
Agreement, the Bank agrees to forbear from exercising its rights and remedies
under the Loan Documents until August 15, 1999, or such earlier date upon which
an Event of Default (as hereafter defined) occurs under this Agreement (the
"Forbearance Period"). The Bank shall have no obligation to consider or grant
any extension of the Forbearance Period.
4.2. Events of Default. The occurrence of one or more of the following
events (individually, an "Event of Default" and, collectively, the "Events of
Default") shall constitute defaults under this Agreement:
(a) failure of the Borrower to timely make any payment required under
this Agreement;
(b) failure of the Borrower To duly perform, comply with or observe, as
and when required, any of the other terms, conditions or covenants in this
Agreement or any document executed in connection with this Agreement;
(c) if any representation or warranty made in this Agreement, or any
report, certificate, financial statement or other document provided to the Bank
in connection with this Agreement, should prove to have been materially false or
misleading as of the date on which it was made;
- 3 -
<PAGE>
(d) if the Borrower should make an assignment for the benefit of
creditors, admit in writing inability to pay debts as they mature, be or become
the subject, voluntarily or involuntarily, of any insolvency, adjustment of
debt, reorganization, liquidation, receivership or similar proceeding under any
present or future statute, law or regulation, or suffer the appointment of any
receiver, trustee, liquidator or other custodian;
(e) if any other creditor of the Borrower, including any state or
federal taxing authority, should attach, garnish, levy, seize and/or assert a
lien interest in any property of the Borrower; or
(f) a default (other than a payment default) should occur or exist
under any of the Loan Documents.
4.3. Remedies Upon Event of Default. Immediately upon the occurrence of
any Event of Default, the Bank, without any requirement of notice to the
Borrower, shall have the right to exercise any and all rights and remedies
available to the Bank under the Loan Documents. All rights and remedies
available to the Bank may be asserted concurrently, cumulatively or
successively, from time to time, as long as the Borrower is indebted to the
Bank.
5. PAYMENT OBLIGATIONS.
On or before July 31, 1999, the Borrower shall deliver to the Bank a
payment in the amount of $25,000.
6. MINIMUM ACCOUNTS RECEIVABLE.
During the Forbearance Period, the Borrower shall maintain minimum
Eligible Accounts Receivable of $213,500. For purposes of this Agreement,
"Eligible Accounts Receivable" means any trade account meeting all the following
specifications: (a) it is lawfully owned by the Borrower and subject to no lien,
security interest or prior assignment, and the Borrower has the right of
assignment thereof and the power to grant a security interest therein; (b) it is
a valid and enforceable account, representing the undisputed indebtedness of an
account debtor to the Borrower that is owing less than 90 days past the original
invoice date, and the entire balance of any account of any single account debtor
will be ineligible whenever the portion of the account which has not been paid
within ninety (90) days from the original invoice date is in excess of fifty
percent (50%) of the total amount outstanding on the account; (c) it is not
subject to any defense, set-off, counter-claim, credit, allowance or adjustment;
(d) no substantial part of any goods, the sale of which has given rise to the
account, has been returned, rejected, lost or damaged; (e) if it arises from
sale of goods by the Borrower, such sale was an absolute sale and not on a
future sale or advance basis or on consignment or on approval or on a sale or
return basis nor subject to any other repurchase, return or rebate agreement,
and such goods have been shipped to the account debtor; (f) it arose in the
ordinary course of the Borrower's business; (g) no notice of the bankruptcy,
receivership, reorganization, insolvency or financial embarrassment of the
account debtor has been received; (h) the account debtor is not a subsidiary or
affiliate of
- 4 -
<PAGE>
the Borrower, does not control the Borrower, and is not under the control of or
under common control with the Borrower, (i) the account debtor is not an account
debtor whose chief executive office or principal place of business is outside
the United States; (j) the account meets such other specifications and
requirements which the Bank may reasonably establish from time to time; (k) if
it arises from sale of goods by the Borrower, such sale is not a "future" sale,
nor a sale based on extended payment terms; (l) it is not a receivable arising
out of the sales of catalogs; and (m) it is not a receivable arising out of
finance charges. The term "account" as used herein shall have the meaning set
forth in the Uniform Commercial Code as adopted in the State of Maryland.
7. REPLACEMENT FINANCING.
During the Forbearance Period, the Borrower shall use best efforts to
secure debt and/or equity financing in an amount sufficient to pay in full the
Obligations prior to August 15, 1999.
8. FINANCIAL REPORTING.
During the Forbearance Period, the Borrower shall continue to provide
to the Bank the same financial documents as the Borrower is currently providing
to the Bank and, further, shall provide to the Bank such other financial
documents as the Bank may request from time to time. Without limiting the
generality of the foregoing, during the Forbearance Period, the Borrower shall
provide to the Bank detailed accounts receivable aging and listing reports as of
July 15, 1999 (to be delivered to the Bank on or before July 20, 1999) and as of
July 31, 1999 (to be delivered to the Bank on or before August 5, 1999).
9. FEES AND EXPENSES.
The Borrower shall be responsible for all fees and expenses, including
all attorneys' fees and expenses, incurred by the Bank in connection with the
negotiation and preparation of this Agreement and with the enforcement of the
Bank's rights under the Loan Documents, which fees and expenses shall be
considered part of the Obligations. As of July 13, 1999, the Bank's attorneys'
fees and expenses total $28,513.45.
10. BORROWER'S REPRESENTATIONS AND WARRANTIES.
As inducement to enter into this Agreement, the Borrower hereby
represents and warrants to the Bank as follows:
10.1. Authorization and Validity. The execution and delivery of this
Agreement and any related documents by the Borrower and the performance of its
obligations hereunder have been duly authorized, and this Agreement constitutes
the legal, valid and binding obligation of the Borrower in accordance with its
terms.
10-2. Compliance With Other Instruments. The Borrower is not in default
under any provision of its articles of incorporation, by-laws or other
organizational documents, if
- 5 -
<PAGE>
applicable, or of any existing judgment, decree, law, governmental order, rule
or regulation applicable to it, or of any agreement or other instrument to which
it is a party or by which its assets are bound. The execution and delivery by
the Borrower of this Agreement and related documents, the consummation of the
transactions herein and therein contemplated, and the compliance with the terms
and provisions hereof and thereof: (a) has not and will not constitute or result
in a breach of the Borrower's articles of incorporation, by-laws or other
organizational documents, if applicable, any presently existing applicable law,
order, writ, injunction or decree of any court or governmental department,
commission, board, bureau, agency or instrumentality or (b) conflict or be
inconsistent with or result in any breach of any of the terms, covenants,
conditions or provisions thereof, or constitute a default under any indenture,
mortgage, deed of trust, lease, sublease, instrument, document, agreement or
contract of any kind to which the Borrower is a party or by which the Borrower
may be bound or subject.
10.3. Taxes. The Borrower has paid or caused to be paid all federal,
state, local and foreign taxes, to the extent that such taxes have become due
and have filed or caused to be filed all federal, state, local and foreign tax
returns which the Borrower is currently required to file.
10.4. Title to Collateral and Existing Liens on Collateral. The
Borrower has good and marketable title to the collateral that secures the
Borrower's liability to the Bank, and the collateral is not subject to any
existing liens or encumbrances except those disclosed to the Bank in writing.
10.5 Litigation. There is no litigation, at law or in equity, nor any
proceeding before any federal, state or other governmental or administrative
agency or any arbitrator pending or threatened against the Borrower, except as
has been disclosed to the Bank in writing.
10.6. Benefit. The Borrower has derived direct or indirect benefit from
this Agreement and the transactions contemplated hereby.
10.7. Truth of Representations. Any and all documents, reports,
certificates and statements provided to the Bank by or on behalf of the Borrower
in connection with the Loan Documents or this Agreement are true, correct and
complete, do not contain any untrue statements of material fact and do not omit
any facts to make information contained therein not misleading.
10.8. No Claims, Defenses or Setoffs. The Borrower does not have any
claims, defenses or setoffs with respect to the Loan Documents, or with respect
to the debt evidenced or secured thereby or with respect to the collection or
enforcement of any of the same (and to the extent any such claim, setoff or
defense exists, they are each waived and relinquished in their entirety).
10.9. No Representations by Bank. The Bank has made no representations
or commitments, oral or written, or undertaken any obligations other than as
expressly set forth in this Agreement.
- 6 -
<PAGE>
10. 10. Arm's Length Agreement. The Borrower acknowledges: (a) that it
has had access to independent legal counsel in the negotiation of the terms of
and in the preparation and execution of this Agreement, and that it has had the
opportunity to review, analyze and discuss with counsel this Agreement, and the
underlying factual matters relevant to this Agreement, for a sufficient period
of time before the execution and delivery hereof; (b) that all of the terms of
this Agreement were negotiated at arm's-length; (e) that this Agreement was
prepared and executed without fraud, duress, undue influence, or coercion of any
kind exerted by any of the parties upon the others; and (d) that the execution
and delivery of this Agreement is the free and voluntary act of each party.
11. RELEASE OF BANK, MEDCO AND MIDFA.
The Borrower, for itself and its current or former owners, directors,
officers, partners, members, employees, representatives, insurers, attorneys,
agents, successors and assigns, and any affiliates, subsidiaries and related
entities of the Borrower and their current or former owners, directors,
officers, partners, members, employees, representatives, insurers, attorneys,
agents, successors and assigns (individually and collectively, the "Borrower
Group"), hereby RELEASES and FOREVER WAIVES and RELINQUISHES all claims,
demands, obligations, liabilities and causes of action of whatsoever kind or
nature, whether known or unknown, which it has, may have, or might have or
assert now or in the future against the Bank, MEDCO or MIDFA and/or their
current or former owners, directors, officers, partners, members, employees,
representatives, insurers, attorneys, agents, successors or assigns, or any
affiliates, subsidiaries or related entities of the Bank, MEDCO or MIDFA and/or
their current or former owners, directors, officers, partners, members,
employees, representatives, insurers, attorneys, agents, successors or assigns
(individually and collectively, the "Bank Group"), directly or indirectly,
arising out of, based upon or in any manner connected with any Prior Related
Event. For purposes of this Agreement, "Prior Related Event" means any
transaction, event, circumstance, action, failure to act or occurrence of any
sort or type, whether known or unknown, which occurred, existed, was taken,
permitted or begun prior to the execution of this Agreement arising out of or
related in any way to the Loan, the Obligations, the Bond, the Note, all or any
of the Loan Documents, the Collateral, the Bank, MEDCO, MIDFA, the Insurance
Agreement, the Modification Documents and/or the relationship by and among all
or any members of the Borrower Group and all or any members of the Bank Group.
The execution of this Agreement by the Bank, MEDCO and MIDFA shall not
constitute an acknowledgment or admission by the Bank, MEDCO or MIDFA of any
liability for any matter or precedent upon which any liability may be asserted.
12. GENERAL PROVISIONS.
12.1. Headings. The headings and subheadings in this Agreement are
intended for convenience only and shall not be used or deemed to limit or
diminish any of the provisions hereof.
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<PAGE>
12.2. Construction. Unless the context requires otherwise, singular
nouns and pronouns used in this Agreement shall be deemed to include the plural,
and pronouns of one gender shall be deemed to include the equivalent pronoun of
the other gender.
12.3. Interpretation. The parties to this Agreement acknowledge that
each of them has participated in the negotiation of this Agreement, and no
provision of this Agreement shall be construed against or interpreted to the
disadvantage of any party hereto by any court or other governmental or judicial
authority by reason of such party having or being deemed to have structured,
dictated or drafted such provision.
12.4. Further Assurances and Corrective Instruments. The parties to
this Agreement shall execute, acknowledge and deliver, or cause to be executed,
acknowledged and delivered, from time to time, such supplements hereto and such
further instruments and documents as may be required to facilitate the carrying
out of the intentions of the parties to this Agreement.
12.5. Survival; Successors and Assigns. Whenever in this Agreement any
of the parties hereto is referred to, such reference shall be deemed to include
the successors and assigns of such party. All covenants, agreements,
representations and warranties made herein, and in any documents executed in
connection with this Agreement, shall survive this Agreement and continue in
full force and effect.
12.6. Waiver of Jury Trial. The parties to this Agreement agree that
any suit, action or proceeding brought or instituted by any party hereto or any
successor or assign of any party which in any way relates, directly or
indirectly, to Loan, the Obligations, the Bond, the Note, all or any of the Loan
Documents, the Collateral, the Bank, MEDCO, MIDFA, the Insurance Agreement, the
Modification Documents and/or the relationship by and among all or any members
of the Borrower Group and all or any members of the Bank Group shall be tried
only by a court and not a jury. EACH PARTY HEREBY EXPRESSLY WAIVES ANY RIGHT TO
A TRIAL BY JURY IN ANY SUCH SUIT, ACTION OR PROCEEDING. The Borrower represents,
acknowledges and agrees that this provision is a specific and material aspect of
this Agreement, and that the Bank would not agree to the terms of this Agreement
if this waiver of jury trial provision were not a part of this Agreement. The
Borrower further represents, acknowledges and agrees that this waiver is
knowingly, intelligently and voluntarily made, that neither the Bank nor any
person acting on behalf of the Bank has made any representations to induce this
waiver, that the Borrower has been represented (or has had the opportunity to be
represented) in the signing of this Agreement and in the making of this waiver
by independent legal counsel selected by the Borrower and that the Borrower has
had the opportunity to discuss this waiver with counsel.
12.7. Modification. No modification of any provision of this Agreement,
or of any document executed in connection with this Agreement, shall in any
event be effective unless the same is in writing, and then such modification
shall be effective only in the specific instance or for the purpose for which
given.
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<PAGE>
12.8. Waiver. Neither any failure nor any delay on the part of any of
the parties in exercising any right, power or remedy under this Agreement, any
documents executed in connection with this Agreement or under applicable law
shall operate as a waiver thereof, nor shall a single or partial exercise
thereof preclude any other or further exercises thereof or the exercise of any
other right, power or remedy.
12.9. Severability. If any term, provision or condition, or any part
thereof, of this Agreement, or any of the documents executed in connection with
this Agreement, shall for any reason be found or held to be invalid or
unenforceable by any court or governmental agency of competent jurisdiction,
such invalidity or unenforceability shall not affect the remainder of such term,
provision or condition or any other term, provision or condition, and this
Agreement, and all documents executed in connection with this Agreement, shall
survive and be construed as if such invalid or unenforceable term, provision or
condition had not been contained therein.
12.10. Merger and Integration. This Agreement, and the documents
executed in connection with this Agreement, contain the entire agreement of the
parties hereto with respect to the matters covered and the transactions
contemplated hereby, and no other agreement, statement or promise made by any
party hereto, or any employee, officer, attorney, agent or other representative
of any party hereto, shall be valid or binding.
12.11. No Novation. Nothing contained in this Agreement is intended to
or shall act to nullify, discharge or release any obligation incurred in
connection with the Loan and/or the Loan Documents or to waive or release any
collateral which secures the Loan, nor shall this Agreement be deemed or
considered to operate as a novation of the Loan Documents. Except to the extent
of any express conflict with this Agreement, all of the terms and conditions of
the Loan Documents shall remain in full force and effect. In the event of any
express conflict between the terms and conditions of the Loan Documents and this
Agreement, this Agreement shall be controlling and the terms and conditions of
the Loan Documents shall be deemed to be amended to conform with this Agreement.
12.12. Notices. Any notice required or permitted by or in connection
with this Agreement shall be in writing and shall be made by one of the
following means: (a) hand delivery; (b) overnight delivery service; or (c)
certified mail, unrestricted delivery, return receipt requested. Notice shall be
directed to the appropriate address set forth below or to such other address as
may be hereafter specified by written notice. Notice shall be considered given
as of the date of the hand delivery, one (1) calendar day after delivery to the
overnight delivery service, or three (3) calendar days after the date of
mailing, independent of the date of actual delivery or whether delivery is ever
in fact made, as the case may be, provided the giver of notice can establish
that notice was given as provided herein.
- 9 -
<PAGE>
If to the Bank: First Union National Bank
1970 Chain Bridge Road
7th Floor, South Tower
McLean, Virginia 22102
ATTN: Mr. David A. Dix, Vice President
with a copy to: Richard M. Kremen, Esquire
Piper & Marbury L.L.P.
Charles Center South
36 South Charles Street
Baltimore, Maryland 21201
If to MEDCO: Maryland Economic Development Corporation
Suite 1911
36 South Charles Street
Baltimore, Maryland 21201
ATTN: Mr. Hans F. Mayer
Executive Director
with a copy to: John R. Devine, Esquire
Miles & Stockbridge P.C.
10 Light Street
Baltimore, Maryland 21202
If to MIDFA: Maryland Industrial Development Financing
Authority
22nd Floor
217 East Redwood Street
Baltimore, Maryland 21202
ATTN: Mr. Charles E, Kohlerman
Manager, Special Assets Division
with a copy to: James G. Davis, Esquire
Suite 1105
217 East Redwood Street
Baltimore, Maryland 21202
If to the Borrower: Frederick Brewing Co.
4607 Wedgewood Boulevard
Frederick, Maryland 21703
ATTN: Mr. Kevin E. Brannon, Chairman
and Chief Executive Officer
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<PAGE>
with a copy to: --------------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
12.13. Applicable Law. The performance, construction and enforcement
of this Agreement and the documents executed in connection with this Agreement
shall be governed by the laws of the State of Maryland.
12.14. Time of Essence. Time is of the essence.
12.15. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same agreement.
12.16. Binding Effect. This Agreement shall have no effect unless and
until it has been executed by all parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed or caused to be
executed, this Agreement under seal as of the day and year first written above.
WITNESS/ATTEST: FIRST UNION NATIONAL BANK,
successor by merger to Signet Bank
/s/ [illegible] By: /s/ [illegible] (SEAL)
- --------------------------- --------------------------
Name: [illegible]
---------------------------
Title: Vice President
---------------------------
WITNESS/ATTEST: MARYLAND ECONOMIC DEVELOPMENT
CORPORATION
By: (SEAL)
- --------------------------- --------------------------
Name:
---------------------------
Title:
---------------------------
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<PAGE>
with a copy to: --------------------------------------
--------------------------------------
--------------------------------------
--------------------------------------
12.13. Applicable Law. The performance, construction and enforcement of
this Agreement and the documents executed in connection with this Agreement
shall be governed by the laws of the State of Maryland.
12.14. Time of Essence. Time is of the essence.
12.15. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same agreement.
12.16. Binding Effect. This Agreement shall have no effect unless and
until it has been executed by all parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed or caused to be
executed, this Agreement under seal as of the day and year first written above.
WITNESS/ATTEST: FIRST UNION NATIONAL BANK,
successor by merger to Signet Bank
By: (SEAL)
- --------------------------- --------------------------
Name:
---------------------------
Title:
---------------------------
WITNESS/ATTEST: MARYLAND ECONOMIC DEVELOPMENT
CORPORATION
/s/ [illegible] By:/s/ Hans F. Mayer (SEAL)
- --------------------------- --------------------------
Name: Hans F. Mayer
---------------------------
Title: Executive Director
---------------------------
- 11 -
<PAGE>
WITNESS/ATTEST: MARYLAND INDUSTRIAL DEVELOPMENT
FINANCING AUTHORITY
/s/ [illegible] By: /s/ D. Gregory Cole (SEAL)
- --------------------------- --------------------------
Name: D. Gregory Cole
---------------------------
Title: Executive Director
---------------------------
WITNESS/ATTEST: FREDERICK BREWING CO.
By: (SEAL)
- --------------------------- --------------------------
Name:
---------------------------
Title:
---------------------------
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<PAGE>
WITNESS/ATTEST: MARYLAND INDUSTRIAL DEVELOPMENT
FINANCING AUTHORITY
By: (SEAL)
- --------------------------- --------------------------
Name:
---------------------------
Title:
---------------------------
WITNESS/ATTEST: FREDERICK BREWING CO.
/s/ [illegible] By: /s/ Kevin E. Brannon (SEAL)
- --------------------------- --------------------------
Name: Kevin E. Brannon
---------------------------
Title: Chief Executive Director
---------------------------
- 12 -
Exhibit 99.2
FOR IMMEDIATE RELEASE--JULY 26, 1999
Contact: Kevin Brannon
Frederick Brewing Co.
(301) 694-7899 x 100
FREDERICK BREWING CO., SNYDER
INTERNATIONAL EXTEND AGREEMENT
FREDERICK, MD--Frederick Brewing Co. (OTC:BLUE) today announced that it its
board of directors had agreed to extend, until August 8, 1999 by two weeks a
previous agreement giving Snyder International Brewing Group, LLC ("SIBG") the
exclusive right to negotiate a transaction whereby SIBG would purchase a
majority interest in the Maryland brewer.
According to Frederick's chief executive officer, Kevin Brannon, the companies
have "made good progress toward completing their due diligence investigations
and negotiating the terms of the various agreements necessary to making the deal
happen but a lot of work has yet to be done and substantial issues have yet to
be resolved." Brannon also said that SIBG had agreed to make a cash payment in
consideration of the extension. If the deal closes, the payment will be credited
to the purchase price, otherwise it will be retained by Frederick.
C. David Snyder, SIBG's chairman, said "We are pleased with the progress we have
made so far and with the cooperation we have received from Frederick's creditors
and management. There is much left to clarify and negotiate but I believe we are
moving forward at a good rate."
On June 30th Frederick announced that it had given SIBG the exclusive right to
negotiate a strategic alliance that would call for SIBG to invest a substantial
amount of cash in the company in exchange for newly-issued shares constituting a
majority of the stock outstanding. SIBG would arrange to re-finance Frederick's
bank debt on more favorable terms and would purchase the brewery building from
its current owners. If the transaction is completed, Frederick's brewery might
contract brew 5,000 to 35,000 barrels per year of SIBG's brands, beginning as
soon as possible.
<PAGE>
Privately-held SIBG is based in Cleveland, Ohio and, since entering the beer
business in August of 1998, has acquired two Ohio breweries and several brands
which together are projected to ship as much as 70,000 barrels in 1999. Its
brands include Crooked River, Little Kings, Hudy Delight and Christian Moerlein.
Its strategy is to consolidate companies and brands in all segments of the
domestic beer industry.
Except for historical information, this press release contains forward-looking
statements that involve risks and uncertainties including, but not limited to,
the Company's financial condition and liquidity, the requirement that third
parties, including the Company's creditors, must approve, consent to or
otherwise cooperate as a condition to closing the contemplated transactions, the
lack of audited financial statements for SIBG, SIBG's brief operating history,
the potential difficulties inherent in shifting and coordinating production
among various facilities, probable management changes, the effects of
competition; the failure of the Company and SIBG to enter into definitive
agreements; the inability of the Company or SIBG to satisfy any closing
conditions contained in such agreements or otherwise fail to complete the
transactions contemplated by such agreements; and other risks detailed in the
Company's SEC filings. Actual results may differ materially from the
forward-looking information set out above.
Exhibit 99.3
FOR IMMEDIATE RELEASE--August 9, 1999
Contact: Kevin Brannon
Frederick Brewing Co.
(301) 694-7899 x 100
FREDERICK BREWING CO., SNYDER
INTERNATIONAL AGREEMENT LAPSES
But Negotiations Continue
FREDERICK, MD--Frederick Brewing Co. (OTCBB:BLUE) today announced that its
agreement giving Snyder International Brewing Group, LLC ("SIBG") the exclusive
right to negotiate a transaction with the Maryland brewer expired on Sunday,
August 8th. Under the deal, SIBG proposed to purchase newly-issued stock
amounting to a controlling interest in the Maryland beer maker.
According to Frederick's chief executive officer, Kevin Brannon, the companies
have not broken off negotiations and talks will continue. Brannon said, "We are
continuing to work toward completing the transaction without the exclusivity
agreement. We have made excellent progress in negotiations to restructure and
strengthen the Company's balance sheet and believe that process can be completed
within a few days." Brannon said that, while the Company is now free to explore
deals with other parties and had received some preliminary inquiries, he
continued to believe a deal with SIBG will be worked out. Frederick first
disclosed the talks with SIBG on June 30th and announced a two week extension of
the exclusivity agreement on July 26th.
On June 30th Frederick disclosed that it had given SIBG the exclusive right to
negotiate a strategic alliance that would call for SIBG to invest a substantial
amount of cash in the company in exchange for newly-issued shares constituting a
majority of the stock outstanding. SIBG would arrange to re-finance Frederick's
bank debt on more favorable terms and would purchase the brewery building from
its current owners. If the transaction is completed, Frederick's brewery might
contract brew 5,000 to 35,000 barrels per year of SIBG's brands, beginning as
soon as possible. On July 25th, SIBG agreed to pay an undisclosed fee to
Frederick to extend the exclusive talks through Sunday's deadline.
<PAGE>
C. David Snyder, SIBG's chairman, said "We are still enthusiastic about our
potential investment in Frederick and we are working hard to complete a deal in
the next few days."
Privately-held SIBG is based in Cleveland, Ohio and, since entering the beer
business in August of 1998, has acquired two Ohio breweries and several brands
which together are projected to ship as much as 70,000 barrels in 1999. Its
brands include Crooked River, Little Kings, Hudy Delight and Christian Moerlein.
Its strategy is to consolidate companies and brands in all segments of the
domestic beer industry.
Except for historical information, this press release contains forward-looking
statements that involve risks and uncertainties including, but not limited to,
the Company's financial condition and liquidity, the requirement that third
parties, including the Company's creditors and preferred stockholders, must
approve, consent to or otherwise cooperate as a condition to closing the
contemplated transactions, the lack of audited financial statements for SIBG,
SIBG's brief operating history, the potential difficulties inherent in shifting
and coordinating production among various facilities, probable management
changes, the effects of competition; the failure of the Company and SIBG to
enter into definitive agreements; the inability of the Company or SIBG to
satisfy any closing conditions contained in such agreements or otherwise fail to
complete the transactions contemplated by such agreements; and other risks
detailed in the Company's SEC filings. Actual results may differ materially from
the forward-looking information set out above.
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