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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the year ended December 31, 1998.
Commission File Number: 000-27800
Frederick Brewing Co.
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(Exact name of small business issuer as specified in its charter)
Maryland 52-1769647
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4607 Wedgewood Boulevard, Frederick, Maryland 21703
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(Address of principal executive offices) (Zip Code)
(301) 694-7899
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(Issuer's telephone number, including area code)
Not Applicable
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(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. [ ] Yes [X] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
the Regulation S-B is not contained in this Form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Common Stock, $0.00004 Par Value 14,333,346
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(Title of Each Class) (Number of Shares Outstanding
as of December 31, 1998)
Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]
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<PAGE>
FREDERICK BREWING CO.
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INDEX TO FORM 10-KSB
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<TABLE>
<CAPTION>
PART I.
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<S> <C> <C>
ITEM 1. DESCRIPTION OF BUSINESS 2
ITEM 2. DESCRIPTION OF PROPERTY 3
ITEM 3. LEGAL PROCEEDINGS 3
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 3
PART II.
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ITEM 5. MARKET FOR FREDERICK BREWING CO.'S COMMON STOCK
AND RELATED SHAREHOLDER MATTERS 4
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 4
ITEM 7. FINANCIAL STATEMENTS 10
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 11
PART III.
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ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF FREDERICK BREWING CO.; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT 11
ITEM 10. EXECUTIVE COMPENSATION 12
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 13
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 14
ITEM 13. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K 14
SIGNATURES
</TABLE>
<PAGE>
PART I.
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Item 1 - Description of Business
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Since entering business in 1993, Frederick Brewing Co. (the "Company"), has been
one of the fastest growing microbreweries in the United States. The Company
brews, kegs and bottles at its brewery in Frederick, Maryland, for wholesale to
its 145 independent distributors, 26 styles of fresh, full flavored beers and
under the brand names of "Blue Ridge," "Hempen," and beginning in February of
1998, "Wild Goose" and "Brimstone,". By catering to the segment of the beer
drinking market which is seeking full-bodied, full-flavored beers at prices
considerably higher than those charged for mass-produced American lagers and
light lagers, the Company has been able to capture a significant share of the
specialty beer market in the Mid-Atlantic region of the United States.
The Company's beers have been critically acclaimed and continue to attract new
consumers. Sales have grown from 660 barrels in 1993 to 17,300 barrels in 1997.
On December 15, 1997, the Company announced that it had reached definitive
agreements to acquire Wild Goose Brewery, Inc. of Cambridge, Maryland and to
acquire the brands, formulas and trademarks of Brimstone Brewing Company, Inc.
of Baltimore. These two companies together had sales of approximately 17,500
barrels in 1997 and revenues of approximately $2.75 million. Pro-forma sales of
the Company, including the acquired brands, for 1997 were over $6.0 million on
shipments of 34,800 barrels, making the Company the largest craftbrew producer
in the Mid-Atlantic region. The transactions closed in late January, 1998 and
sales of those products by the Company began in mid-February.
In March of 1997 the Company substantially completed construction of its new
brewery and increased the Company's production capacity from 12,600 barrels to
approximately 40,000 barrels per year. Full-scale production was delayed,
however until June of 1997 due to unanticipated problems with certain re-built
packaging equipment purchased from a financially troubled vendor. The Company
was unable to produce enough beer to fully meet demand at times during the first
and second quarters of the year. Additional fermentation tanks were installed
during the second quarter of the year, bringing total annual production capacity
to approximately 80,000 barrels. As demand warrants, additional fermentation
tanks may be added in existing building space to increase the Company's brewing
capacity to more than 160,000 barrels per year. The brewery is modularly
designed to permit an additional expansion of brewing capacity up to 300,000
barrels per year.
The Market Environment
The Company competes in the domestic specialty category of the U.S. brewing
industry. Management believes that this category currently comprises
approximately 3% of the $50 billion U.S. retail beer market. Domestic specialty
beers are distinguished from mass-market domestic beers in that they typically:
(1) are heavier-bodied and more flavorful; (2) use traditional brewing
techniques and ingredients, rather than the corn, rice and other unmalted grains
and added enzymes used to create the light color and body of mass-market
domestic lagers; and (3) are sold to consumers at prices of $4.79 to $7.99 per
six-pack of 12 ounce bottles. The domestic specialty category has been created
and expanded since the early 1980's by innovative, entrepreneurial companies.
There are now more than 1300 of these companies in the United States, each
producing several brands or styles of beer.
The specialty brewing category experienced more than 15 years of extremely rapid
growth; however growth in overall sales by domestic specialty brewers slowed
substantially, beginning in late 1996 and continuing through 1997 in part, due
to the fact that some large markets, such as the Pacific Northwest, upper New
England, Colorado and Northern California have matured and are saturated to the
point that further rapid growth appears unlikely. Management also believes that
other market forces have affected the growth of the domestic specialty segment.
Primary among those forces is the aggressive marketing of import beers over the
past two years. Many of these beers which share flavor profiles and competitive
price points with domestic specialty beers appear to have achieved substantial
sales increases, perhaps at the expense of domestic specialties through these
marketing efforts. In addition, some wholesale
<PAGE>
distributors who had aggressively added many new domestic specialty brands to
their portfolios and devoted high levels of effort to promoting those brands saw
declining returns to their investments in marketing and inventory due to
increasing competition and began re-allocating their resources to higher volume
products (sometimes under pressure from the suppliers of those products). This
growth factor may have been further affected by some retailers who had devoted a
relatively large share of shelf space and sales effort to promote a wide variety
of domestic specialty beers in an attempt to gain competitive advantage for a
small but attractive base of consumers also re-allocated their resources as more
of their competitors also began to offer at least the more widely known domestic
specialty products.
Nevertheless, management believes that, in the long run, the domestic specialty
category will continue to grow, along with the remainder of the higher priced
segments of the beer industry, at rates considerably higher than that of the
beer industry as a whole. Within the category, management believes growth will
increasingly accrue to companies whose brands have already developed a degree of
consumer awareness and loyalty and are supported with coherent and effective
sales and marketing programs.
Management's long-term goal is to build the Company into one of the leading
brewers of domestic specialty beers in the United States. The Company's core
markets are in the Mid-Atlantic states. On a selective basis distribution has
and continues to expand to certain markets outside the Mid-Atlantic states. Most
recently the Company added a distributor for all of its brands in Wisconsin. The
Company primarily distributes its products to large, licensed whole sale
distributors, who then distribute the product to off premise and on premise
accounts. In 1998 three of the Company's distributors accounted for over 10% of
sales each compared to two in 1997. Management has and continues to seek
additional expansion opportunities through the formation of strategic alliances,
via acquisition, merger or long-term licensing agreements with owners of
established beer brands with strong sales and distribution bases in markets
outside the Maryland-District of Columbia region, thereby more fully utilizing
the Company's production, sales and marketing assets.
Item 2 - Description of Property
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All of the Company's brewing, packaging and office functions have, since March
of 1997, been carried out at its 55,000 square foot facility located on
approximately 5.5 acres in a light industrial park at 4607 Wedgewood Boulevard,
Frederick Maryland. The facility was designed and built according to the
Company's specifications from April 1996 through March of 1997. The Company
leases the land and building from Blue II, LLC a Maryland limited liability
company, under a capital lease that expires on March 1, 2017. The Company has
the option to purchase these real estate assets at any time after March 1, 2003
at a price of $3.0 million. Prior to moving into the new brewery, all Company
operations were conducted in approximately 7,700 feet of leased space. The
Company's obligations under that lease terminated in September 1997. The Company
believes its facilities are adequate for at least the next 12 months.
Item 3 - Legal Proceedings
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In June of 1997, the Company filed a complaint in the Circuit Court of Frederick
County Maryland against Intertrade Packaging Machinery Corp. ("IPMC") of
Cincinnati, OH and its two principal officers, alleging, among other things,
breach of contract, breach of warranty and fraud in connection with IPMC's sale
of certain re-built packaging and conveyor equipment to the Company.
The case was transferred to the U.S. District Court for the District of Maryland
upon motion of the Defendants. The matter was settled before trial and the case
was dismissed with prejudice in December of 1997, when the defendants paid the
Company $190,000.
Item 4. Submission of Matters to a Vote of Security Holders
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The Company plans to have an annual meeting during 1999; however, no date has
been set. The Company will notify its shareholders, by form of a proxy
statement, when a date has been set.
<PAGE>
PART II.
Item 5. Market for Frederick Brewing Co.'s Common Stock and Related Shareholder
Matters
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The Company's common stock, par value $.0004 per share ("Common Stock") trades
on the Over The Counter Exchange under the symbol "BLUE". The number of record
shareholders at June 30, 1999 was approximately 8,000. The following table shows
the range of high and low closing prices and year end closing prices for the
Common Stock for the most recent fiscal year, on a quarterly basis. The
Company's Series A, E, F and G Convertible Preferred Stock (the "Preferred
Stock") is not traded publicly.
1997 1998
High Low High Low
---- --- ---- ---
First Quarter $4 5/8 $4 1/8 $ 2 19/32 $ 13/16
Second Quarter 5 5/8 2 1/2 2 7/16 1
Third Quarter 2 3/4 1 31/32 1 3/32 9/16
Fourth Quarter 2 5/8 1 1/2 25/32 17/64
Year End Close $1 7/8 $ 5/16
The Company paid no dividends in 1998.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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The following selected financial data and Management's Discussion and Analysis
of Financial Conditions and Results of Operations should be read in conjunction
with the Company's 1998 financial statements and the notes thereto, included
elsewhere in this Form 10-KSB. (See Item 7).
Selected Financial Data
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(in thousands, except share and per share data)
<TABLE>
<CAPTION>
For the year ended December 31,
1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Sales $ 5,522 $ 3,287 $ 1,872 $ 1,832 $ 1,186
Less excise taxes, returns, allowances 377 209 152 87 59
---------- --------- --------- --------- ---------
Net sales 5,145 3,078 1,720 1,745 1,127
Cost of sales 4,199 2,838 1,743 1,253 847
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Gross Profit 946 240 (23) 492 280
Selling, general, and administrative expenses 4,033 4,434 1,990 831 485
1,132 188 0 0 0
Loss on assets to be disposed 0 0 641 0 0
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Loss from operations (4,219) (4,382) 2,654 (339) (205)
Interest (income) expense, net 558 140 (29) 79 52
Other (income) expense 291 (159) - (42) (5)
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Loss before income taxes (4,685) (4,363) (2,625) (376) (253)
(Benefit) provision for income taxes - - - (17) 17
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Net loss $ (5,105) $ (4,363) $ (2,625) $ (359) $ (269)
========== ========= ========= ========= =========
Net loss per common share $(0.52) $(2.91) $(1.45) $(0.30) $(0.24)
====== ====== ======
Weighted average common shares and
common share equivalents outstanding 10,544,244 2,741,583 1,804,503 1,204,719 1,122,437
========== ========= ========= ========= =========
</TABLE>
<PAGE>
Overview of Significant Activities and Expenses
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The year ending December 31, 1998 saw the achievement of significant
improvements over 1997 results in several key operating areas:
o 1998 gross sales of $5,521,558 were 68% higher than 1997 sales of
$3,286,766.
o 31,464 barrels sold in 1998, were 14,164 barrels (81.9%) more than the
17,300 barrels sold in 1997.
o Cost of sales fell to 81.6% of net sales in 1998 from 92.2% in 1997.
o Per barrel production costs fell from $164.00 in 1997 to $133.45 in 1998.
A net loss attributable to common shareholders of ($5,104,919) or ($0.48)
per share was incurred during the year ending December 31, 1998, versus a
common shareholder loss of ($7,975,081) or ($2.91) per share in 1997.
Included in the above net losses were $420,208 of deemed dividend
requirements in 1998, and $3,611,641 of deemed dividends in 1997.
There were 10,544,244 weighted average common shares (basic and diluted)
outstanding at December 31, 1998, compared to 2,741,583 weighted average
common shares in 1997. The year to year increase in weighted average shares
reflects the conversion of certain of the Company's preferred shares into
common stock, and the issuance of common stock for the acquisition of Wild
Goose Brewery, Inc., and Brimstone Brewing Company.
Sales
Gross sales in 1998 and 1997 were $5,521,558 and $3,286,766 respectively,
an increase of $2,234,792 or 68%. Production volume grew to 31,464 barrels in
1998 from 17,300 barrels in 1997, an increase of 14,164 barrels or 81.9%. Sales
and production volume increases were due primarily to Wild Goose and Brimstone
products which were acquired in the first quarter of 1998, and contributed
$2,190,590 and $236,492 respectively to gross sales, and 12,950 and 1,410
respectively to barrels sold.
Revenues per barrel fell to $175 in 1998 from $190 in 1997. This is
attributed to a near doubling of the percentage of the Company's beer sold in
kegs, rather than in bottles, during 1998.
Returns and Allowances
Product returns and allowances were $110,658 (2.1% of net sales) in 1998
versus $39,859 (1.3% of net sales) in 1997. The higher rate of returns and
discounts in 1998 resulted from the Company's efforts to reduce wholesaler
inventory levels following the acquisition of Wild Goose in the first and second
quarters, in anticipation of new packaging and higher quality product from the
FBC brewery.
Excise Taxes
State and federal excise taxes were $266,239 in 1998 and $169,236 in 1997,
representing 5.2% and 5.5% of net sales respectively. State excise tax rates and
methods of computing taxes vary, depending on where the beer is sold. In some
states, such as Maryland and Pennsylvania, the brewer is required to pay the
tax; in other states, such as the District of Columbia and Virginia, the tax is
paid by the purchasing distributor. The Company currently pays $7 per barrel
federal excise tax on all beer sold within the United States. The increase in
excise taxes paid results from higher volumes shipped in 1998. The decrease in
excise taxes paid as a percentage of net sales reflects the lack of excise taxes
paid on beer shipments to Canada and China in 1998.
<PAGE>
Cost of Sales
Cost of sales for 1998 and 1997 were $4,198,783 and $2,837,229
respectively, an increase of $1,361,554 or 48.0%, on a net sales increase of
67%. Costs of material, labor, and production overheads declined from 92.2% of
net sales in 1997 to 81.6% in 1998. On a per barrel cost basis, direct costs
decreased from $164.00 in 1997 to $133.45 in 1998.
Production costs, as a percentage of net sales, declined due to more
efficient use of existing direct labor and production overhead expenses. Direct
labor was 8.7% of net sales in 1997, and 7.3% of 1998 net sales. Production
overheads (management and supervisory salaries and benefits, depreciation
charges, utility costs, equipment rent and lease payments, and brewery repair
and maintenance costs) was 37.2% of net sales in 1997, and 28.6% of 1998 net
sales.
Per barrel production costs declined due to higher production volumes
passing through the brewery - bulk purchasing of raw ingredients, glass bottles,
and paper packing supplies in greater volumes decreased material costs from
$82.34 per barrel in 1997 to $74.78 per barrel in 1998; more efficient
utilization of the Company's direct labor pool made possible by larger batch
sizes and more continuous production cycles decreased labor costs per barrel
from $15.56 in 1997 to $11.86 in 1998; production overhead costs of $66.10 per
barrel in 1997 fell to $46.81 per barrel in 1998.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") were $4,033,045 in
1998 and $4,433,529 in 1997, a decrease of $400,484 or 9.0%. As a percent of net
sales SG&A was 78.4%% in 1998 versus 144.1% in 1997. Increases in 1998 costs
such as travel related sales expenses of $218,860, legal and outside accounting
fees of $358,982, new amortization costs for Wild Goose goodwill of $250,627,
and other expenses of $37,438, were more than offset by decreases in 1998
salaries , advertising and other marketing expenses, and CRG and other investor
relations cost.
In 1998, the Company terminated, prematurely, its contract with its
investor relations firm. Consequently, the Company wrote off the remaining
deferred costs of $1.131,500 in 1998.
The Company instituted a SG&A expense reduction program in the second
quarter of 1998, eliminated 6 salaried staff positions, and granted senior
management restricted stock in exchange for salary reductions. Additional
expense reductions were undertaken in the third and fourth quarters of 1998.
Going forward, stricter expense reductions have been budgeted for 1999.
(Gain) Loss on Sales of Equipment
During 1998 the Company experienced a loss of $99,544 on the sale of Wild
Goose equipment which was not useable in the new brewing facility. In 1997 the
Company recorded a gain of $158,167 on old brewery equipment which had
previously written down in 1996 to reflect management's opinion of its fair
market value.
Interest Expense (Net)
Net interest expense was $557,646 in 1998 versus $140,030 in 1997. 1998
interest expense of $569,498 was partially offset by interest income of $11,852.
1997 interest expense was $140,862, partially offset by interest income of $832.
The increase in interest expense is due to the inclusion of full 12 months in
1998 versus a partial year in 1997 directly related to the period the related
debt was outstanding.
<PAGE>
Extraordinary Gain
The $191,146 extraordinary gain in 1998 reflects the savings derived from
the rollover of the Company's long-term lease on the brewery building from First
Union National Bank to FCNB Bank in December 1998.
Income Tax Provision
The Company has incurred net operating losses for the years ending 1996
through 1998. Accordingly, No provisions for income taxes have been provided in
the Statement of Operations.
Liquidity and Capital Resources
Due to losses experienced during start-up, expansion, and acquisitions,
operations to date have generally been funded by private and public placements
of common stock and preferred stock,. and loans from stockholders and financial
institutions. As of December 31, 1998, the Company had negative working capital
of $323,363, cash balances of $92,999, and $12,475 of cash equivalents
(short-term securities with original maturities of less than 90 days) pledged as
collateral to secure the Company's performance of certain site improvement work
required by Frederick County government. Net cash used for operating activities
was $2,256,598 in 1998 versus $4,907,087 in 1997.
Net cash used for investing activities in 1998 was $415,825. New brewery
equipment cost $432,215, and trademarks, copyrights, and other intangible assets
cost $84,161. The Company generated proceeds of $100,551 primarily on the sale
of old Wild Goose equipment. Net cash used for investing was $2,498,406 in 1997.
Net cash provided by financing activities was $932,066 in 1998. Gross
proceeds from the issuance of Series F and Series G preferred stock generated
$1,500,000 off set by $274,584 of issuance costs. Proceeds from common stock and
employees exercising stock options generated $73,343. Repayment of short and
long-term debt was $366,693. Net cash provided by financing was $9,969,383 in
1997.
See the Recent Events and Future Prospects Section for a further discussion
of the Company's liquidity problems and proposed solutions.
Impact of Inflation
Although the Company has not attempted to calculate the effects of
inflation, management does not believe inflation has had a material negative
effect on its results of operations. Material increases in costs and expenses,
particularly packaging, raw materials, and labor costs in the future, could have
a significant impact on the Company's operating results to the extent that the
effect of such increases cannot be transferred to its customers.
Impact of Year 2000 Issue
The Company has determined that it will be required to modify or replace
portions of its information technology software so that they will properly
recognize and utilize dates beyond December 31, 1999 ( the "Year 2000 issue").
As a result , the Company has developed a plan to review and, as appropriate,
modify or replace the software in its computer systems. The Company presently
believes that with modifications to existing software and conversions to new
software, the Year 2000 issue will be satisfactorily resolved in its own
systems. The Company has established an internal auditing process to tract and
verify the results of its plan and tests. Management believes the Company is
currently on schedule to substantially complete the renovation, validation and
implementation phases of its plan with respect to its mission-critical systems
by September 1999. The Company is also working with key external parties with
whom it has important financial and operational relationships, including banks,
utilities and other vendors and third party payers, to assess the remediation
efforts made by these parties with respect to their own systems and to determine
the extent to which such systems are vulnerable to the Year 2000 issue. The
Company has not yet received sufficient information from these parties about
their remediation plans to predict the outcome of their efforts. The Company is
also developing a contingency plan that is expected
<PAGE>
to address financial and operational problems that might arise on and around
January 1, 2000. This contingency plan would include identifying back-up
processes that do not rely on computer whenever possible. The Company has
incurred and expects to continue to incur expenses allocable to internal staff,
as well as costs for software remediation and replacement in order to achieve
Year 2000 compliance. The Company expect conversion of its primary software
programs to be completed in August 1999 with testing to follow in September
1999. The Company currently estimates that these costs will total approximately
$15,000 the majority of with will have been incurred by July 1999. The costs of
the Year 2000 program and the date on which the Company plans to complete year
2000 modifications are based on current estimates, which reflect numerous
assumptions about future events, including the continued availability of certain
resources, the timing an effectiveness of third party remediation 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 such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct relevant computer source codes and embedded
technology, the results of internal and external testing and the timeliness and
effectiveness of remediation efforts of third parities.
If the modifications and conversions referred to above are not made or are
not completed on a timely basis, the Year 200 issue could have a material
adverse effect on the Company's business, financial condition and results of
operations. Moreover, even if these changes 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 adverse effect on the Company.
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements made by the Company in its disclosures to
the public. There is certain information contained herein, in the Company's
press releases, and in oral statements made by authorized officers of the
Company which are forward-looking statements, as defined by such Act. When used
herein, in the Company's press releases, and in oral statements, the words
"estimate", "project", "anticipate", "expect", "intend", "believe", "plans", and
similar expressions are intended to identify forward-looking statements.
Recent Events and Future Prospects
Basis of Presentation
As explained below, the company has sustained recurring operating losses and
cash flow deficits. Also, the company has significant cash commitments to
creditors. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
described below. The financial statements do not contain any adjustments that
might result from the outcome of these uncertainties.
Future Prospects
The Company's ability to meet its obligations is dependent on generating
positive cash flow and ultimately operating profitably. Such an improvement
requires the Company to eliminate or substantially reduce its excess brewing
capacity and to obtain additional financing from third parties.
In April and June 1999, the Company obtained proceeds of $500,000 from a loan
collateralized by its Wild Goose brand. This same lender has purchased most of
the convertible preferred stock sold in 1997 and 1998.
On November 4, 1998, the Company retained Westfinance Corporation to advise and
assist Company in the following: 1) refinancing First Union National Bank bond
2) raising additional working capital, and 3) Seeking either candidates for
acquisition by the Company, merger with the Company or 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.
<PAGE>
In May of 1999, the Company raised approximately $550,000 by way of 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 to SIBG, an
unrelated third party, the exclusive right, through July 25, 1999, to negotiate
and perform due diligence with a view toward consummating a transaction pursuant
to which SIBG would acquire majority control of the Company's voting stock for
cash.
If the transaction closes as discussed to date, management believes that SIBG
will simultaneously acquire and may ultimately exercise the Company's option to
purchase the land and building in Frederick County, Maryland which contain the
Company's brewery; enter into contract brewing agreements whereby the Company
would commit to producing 5,000 - 35,000 barrels per year of various brands
controlled by SIBG and its affiliates; and arrange to refinance the Company's
debt to First Union National Bank.
The Company has been in discussions with SIBG, its principals and affiliates at
various times since late 1998. The negotiations concerning the stock
purchase, contract brewing, real estate purchase and First Union National Bank
re-finance transactions are at an advanced stage and, if SIBG proceeds
substantially as contemplated, the terms of those transactions will prove
acceptable to the Company's Board of Directors. However, the exclusivity letter
agreement specifically states in part "there has been no meeting of the minds as
to the material terms of any proposal."
Furthermore, no definitive agreements have been executed and there can be no
assurance either that such agreements will be executed or that, even if
executed, will be closed. Neither SIBG nor the Company is yet obligated to
execute agreements or close on any transaction. Numerous conditions must be
satisfied before any transaction between the Company and SIBG can be completed,
many of which are beyond the control of the Company and management. Some of
these include: (1) one or more of SIBG's members must agree to contribute the
cash necessary to allow SIBG to purchase the Company's common stock; (2) SIBG,
its counsel, accountants and other advisors must complete, and be satisfied with
the results of, its due diligence review of the Company, its condition and
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 bond; (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 creditors 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 acceptable or favorable to the Company. The exclusivity
agreement generally prohibits the Company from soliciting, encouraging,
discussing or considering other proposals or providing, non-public information
to any other parties who may be interested in providing the Company with
financing until July 25, 1999. This creates the risk that the Company will be
unable to raise adequate funds to sustain its operations if the transactions
with SIBG do not close or if the transactions are not closed in a timely manner.
The exclusivity agreement does, however, provide that the Company may consider
other bonafide proposals, if the board of directors, on advice of outside
counsel, "determines that it is required to do so in order to discharge properly
its fiduciary duties."
Presently, the Company is in default under the payment terms of an equipment
loan to a local bank. In June 1999, the Company agreed to pay the bank a $50,000
fee (in two installments) and in return the bank agreed not to demand repayment
of the loan until June 30, 1999. The Company failed to make the second
installment payment and is attempting to negotiate an extension of the Bank's
forbearance and to refinance the loan. There can be no assurance either that the
bank will agree to forbear or that the loan can be refinanced.
<PAGE>
The Company is also in default of numerous other payment obligations, including
rental payments due to Blue II, LLC, payments due on several equipment leases,
and payments due to vendors and professionals. There can be no assurance that
these creditors, individually or in concert, will not take 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 the common stock may be
delisted from the Nasdaq SmallCap 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 demonstrate compliance through achieving a closing bid price of $1.00
per share for ten consecutive trading days during the 90 calendar day period
ending December 14, 1998, the common stock would be subject to delisting. 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 but
the stock price did not remain above the $1.00 minimum closing bid for ten
consecutive days as required by Nasdaq. In April 1999, Nasdaq informed the
Company that it had delisted its common stock from the Nasdaq SmallCap Market.
If the Company is unsuccessful in completing a transaction with SIBG, it will
seek to obtain short-term financing form third parties who have previously
purchased equity or loaned funds to finance operations. The Company may also
explore merging with or selling assets to, another craftbrewer or other industry
participant that has greater financial resources to help ensure that it meets
its obligations. Also, the Company could seek protection under Chapter 11 of the
bankruptcy code to allow additional time to explore other alternatives to
eliminate or reduce its excess capacity. The Company has not yet decided on a
definite course of action and is barred from pursuing such by the exclusivity
agreement with SIBG.
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130 "Comprehensive Income". SFAS No.
130 requires the reporting and display of comprehensive income and its
components in the financial statements. Comprehensive income is the change in
equity during the period from transactions with non-owner sources, and includes
net income and other comprehensive income including foreign currency translation
adjustments and gains and losses on certain marketable securities. SFAS No. 130
does not require a specific format for the financial statement in which
comprehensive income is reported, but does require an amount representing total
comprehensive income be reported in the statement. The Company has implemented
SFAS No. 130 in 1988.
In June 1987 the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 requires public companies to report information about segments of their
business in annual financial statements, and requires them to report selected
segment information in their quarterly reports issued to stockholders. It also
requires entity-wide disclosure about the products and services of an entity,
the countries in which the entity holds material assets and reports material
revenues, and its major customers. The Company has implemented SFAS No. 131 in
1998.
Statement of Financial Standards No. 133, `Accounting For Derivative
Instruments' (`SFAS 133') establishes accounting and reporting standards for
derivative instruments and hedging activities. SFAS 133 requires an entity to
recognize all derivatives as either assets or liabilities and to measure those
instruments at fair market value. Under certain circumstances a portion of the
derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into income when the
transaction affects earnings. For a derivative not designated as a hedging
instrument, the gain or loss is recognized as income in the period of change.
The Company will be required to adopt SFAS 133 during the first quarter of 2000.
Presently the Company does not use derivative instruments either in hedging
activities or as investments. Accordingly the Company believes that adoption of
SFAS 133 will have no impact on its financial position or results of operations.
Item 7. Financial Statements
See page F-1 for Index to Financial Statements.
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Reference is hereby made to the Company's Form 8-K Item 4, filed
December 15, 1998.
PART III.
Item 9. Directors and Executive Officers of Frederick Brewing Co.
As of December 31, 1998 the following individuals were directors or
officers of the Company:
<TABLE>
<CAPTION>
Name Age Position Since
---- --- -------- -----
<S> <C> <C>
Kevin E. Brannon 44 Chairman & Chief Executive Officer 1992
Marjorie A. McGinnis 37 President & Director 1992
Steven T. Nordahl 29 VP Brewing Operations 1994
Leslie P. Harper 50 Chief Financial Officer 1997
Patrick N. Helsel 35 VP Sales 1997
Nicholas P. Foris, M.D. 73 Director 1994
Carl R. Hildebrand 47 Director & Treasurer 1995
Jerome M. Pool 63 Director 1993
Maribeth Visco 41 Director & Secretary 1993
</TABLE>
Mr. Brannon, prior to starting the Company in 1992, was an attorney with the law
firm of Preston, Gates, & Ellis, in Portland, Oregon.
Ms. McGinnis, prior to starting the Company in 1992, was a partner of B&G
Partnership and Butler Brothers Farm and Orchard in Martinsburg, West Virginia.
Mr. Nordahl, prior to joining the Company in 1993, graduated from the Master
Brewer's program at the University of California at Davis, in Davis, California.
Mr. Nordahl resigned from the Company on April 12, 1999.
Mr. Helsel joined the Company as Sales Manager in March of 1996 and was promoted
to his current office in September of 1997. Prior to joining the Company, he
served as a regional sales representative for Mass Bay Brewing Co., Boston,
Massachusetts from 1994 to 1996 and as regional sales manager for Warsteiner
Imports Agency, Denver, Colorado from 1992 through 1994.
Dr. Foris is a general and thoracic cardiovascular surgeon who practices in
Frederick, Maryland. He is a member of the Compensation Committee of the Board.
Mr. Hildebrand has a certified public accounting practice, Hildebrand, Limparis,
and Hevey, in Rockville and Frederick, Maryland. Prior to August 1995, he was a
partner with the accounting firm of McLean, Koehler, Sparks and Hammond,
Frederick, Maryland. He serves as the Company's Treasurer and serves on the
Audit and Compensation Committees of the Board.
<PAGE>
Mr. Pool is retired and has been a business consultant since December 1991.
Prior thereto, he was the Chairman of the Board and President of Jantzen, Inc.
He is also a director of Pacific Metal Company, Portland, Oregon. He is a member
of the Audit and Compensation Committees of the Board.
Ms. Visco is a partner in the commercial leasing firm of Kline, Scott, Visco,
Frederick, Maryland. She serves as the Company's Secretary and is a member of
the Compensation Committee of the Board.
Section 16(a) of the Exchange Act requires the Company's officers, directors and
persons who own more than 10% of the Company's Common Stock to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the National Association of Securities Dealers, Inc. Officers, directors and
greater than 10% stockholders are required by regulation to furnish the Company
with copies of all forms they file pursuant to Section 16(a) of the Exchange
Act. The Company knows of no person who owns 10% or more of the Company's Common
Stock.
Based solely on review of copies of such forms furnished to the Company, or
written representations from its officers and directors, the Company believes
that during, and with the respect to, fiscal 1997, the Company's officers and
directors complied in all aspects with the reporting requirements promulgated
under Section 16(a) of the 1934 Act.
Item 10. Executive Compensation
The following table sets forth compensation awarded to, earned by, or
paid for services rendered to the Company in all capacities during the fiscal
year ended December 31, 1998, by the Company's named executive officers.
Annual Compensation Long-Term Compensation
------------------- ----------------------
SALARY BONUS OTHER OPTIONS ALL OTHER
------ ----- ----- ------- ---------
Kevin E. Brannon $115,100 $0 $9,500 (1) 0 0
Marjorie A. McGinnis 115,100 0 9,500 (1) 0 0
Steven T. Nordahl (2) 66,000 0 2,400 (1) 0 0
Leslie P. Harper (3) 68,500 0 1,500 (1) 6,667 0
Patrick N. Helsel 51,900 0 0 0 0
Cameron E. Barry (4) 19,900 0 800 (1) 0 0
James W. Lutz (5) 75,400 0 4,500 (1) 0 0
(1) In lieu of unpaid salaries, these individuals received an aggregate of
42,047 shares of the Company's Common Stock.
(2) At December 31, 1998, Mr. Nordahl had options to acquire 16,132 shares of
the Company's Common Stock at an exercise price of $0.18 per share; all
such options were immediately exercisable.
(3) As consideration for initial employment, Mr. Harper was granted options to
purchase 3,334 shares of the Company's Common Stock at an exercise price of
$2.563 per share, the market price as of the date his employment began.
During 1998, Mr. Harper received options for an additional 3,333 shares of
stock at $.313 per share. Assuming Mr. Harper remains employed by the
Company, he is entitled to receive another 3,333 options on the anniversary
date of the first option grant in 1999.
(4) Effective June 8, 1998 Ms. Barry resigned from her position as Vice
President of Marketing.
(5) Effective November 6, 1998 Mr. Lutz resigned from has position as Director.
<PAGE>
Employment Agreements
For a description of the employment agreements for the named officers of
the Company, reference is made to page 67 of the Company's final Prospectus
dated March 5, 1996, which is incorporated herein by reference from Form SB-2.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of February 16,1999 with
respect to directors, executive officers, certain employees of the Company, and
each person who is known by the Company to own beneficially more than 5% of the
shares of its Common Stock, and with respect to shares owned beneficially by all
directors and officers of the Company as a group. The following information does
not reflect the proposed Reverse Stock Split. The address for all directors and
executive officers of the Company is 4607 Wedgewood Blvd., Frederick, Maryland
21703.
Directors, Named Executive Shares Beneficially Owned
Officers. And 5% Stockholders As of December 31, 1998
----------------------------- -----------------------
Number (1) Percent (2)
---------- -----------
Kevin E. Brannon (3)(11)(13) 162,882 0.98%
Marjorie A. McGinnis (3)(11)(13) 162,882 0.98
Nicholas P. Foris, M.D. (4) 118,194 *
Carl R. Hildebrand(5) 5,000 *
Jerome M. Pool(6) 24.344 *
Maribeth Visco(7) 28,680 *
Steven T. Nordahl (8)(11)(13) 56,739 *
Leslie P. Harper(9)(13) 8,920 *
Patrick N. Helsel(10) 522 *
All directors and executive officers
as a group (11) persons (12) 568,163 3.41%
* Represents less than 1% of the Common Stock outstanding.
(1) Beneficial ownership of the Common Stock has been determined in accordance
with Rule 13d-3 under the Securities Exchange Act of 1934 ("exchange Act"),
under which a person is deemed to be the beneficial owner of securities if
he or she has or shares voting power or investment power with respect to
such securities, or has the right to acquire beneficial ownership within 60
days.
(2) Each beneficial owner's percentage of Common Stock is determined assuming
that options that are held by such person (but not those held by any other
person) and that are exercisable within 60 days have been exercised. Each
beneficial owner's percentage of Common Stock does not take into account
the 11,710,191 shares of Common Stock into which the 8% Cumulative
Convertible Preferred Stock, Series A ("Series A Preferred Stock"), Series
F Cumulative Convertible Preferred Stock ("Series F Preferred Stock"),
Series G Convertible Preferred Stock ("Series G Preferred Stock), Options
(other than those held by such beneficial owner) and Warrants that are
immediately convertible.
(3) The number of shares shown for each of Mr. Brannon and Ms. McGinnis
excludes the number of shares beneficially owned by the other.
Mr. Brannon and Ms. McGinnis are married.
(4) Includes 6,000 shares which may be received on the exercise of immediately
exercisable stock options. Does not include 210 shares of Series A
Preferred Stock which are immediately convertible into Common Stock at
$3.8388 per share.
(5) Includes 5,000 shares which may be received on exercise of immediately
exercisable stock options.
(6) Includes 7,000 shares which may be received on exercise of immediately
exercisable stock options.
(7) Includes 7,000 shares which may be received on exercise of immediately
exercisable stock options.
(8) Includes 16,132 shares which may be received on exercise of immediately
exercisable stock options.
(9) Includes 6,667 shares which may be received on exercise of immediately
exercisable stock options.
(10) Includes 522 shares which may be received on exercise of immediately
exercisable stock options.
(11) Includes the following shares of Common Stock granted in lieu of a
reduction in salary during 1997: Mr. Brannon, 2,667 shares; Ms. McGinnis,
2,667 shares; Mr. Nordahl, 2,667 shares.
(12) Includes 52,635 shares which may be acquired by all directors and officers
of the Company as a group on the exercise of immediately exercisable stock
options.
<PAGE>
(13) Includes the following shares of Common Stock granted in lieu of salary
reductions during 1998: Mr. Brannon, 14,418 shares; Ms. McGinnis, 14,418
shares; Mr. Nordahl, 3,605 shares; Mr. Harper, 2,253 shares.
Item 12. Certain Relationships and Related Transactions
The information provided on pages 72 and 73 of the Company's prospectus
dated March 5, 1996 entitled "Certain Transactions" is incorporated herein by
reference from the Pre-effective Amendment No. 5 to the Form SB-2 filed with the
Securities and Exchange Commission on March 5, 1996. The amount paid to Blue II,
LLC during the year of 1998 was $551,926 compared to $343,921 in 1997. 1997
payments were for less than the full year.
Item 13. Exhibit List and Reports on Form 8-K
(a) Documents filed as part of this report.
(1) The following documents are filed as part of this report and this
list includes the Index to the Financial Statements:
Reports of Independent Accountants
Financial Statements:
Balance Sheets as of December 31, 1998 and 1997.
Statements of Operations for the Years Ended December 31,
1998 and 1997.
Statements of Changes in Stockholders Equity for the Years
Ended December 31, 1998 and 1997.
Statement s of Cash Flows for the Years Ended December 31,
1998 and 1997.
Notes to Financial Statements.
(2) All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are omitted because they are not applicable or the required
information is included in the Financial Statements or notes
thereto.
<PAGE>
No. Description
3.1 Amended and Restated Articles of Incorporation (1)
(i) Articles Supplementary with respect to Series A Convertible Preferred
Stock; (2)
(ii) Articles Supplementary with respect to Series B Convertible Preferred
Stock; (2)
(iii) Articles Supplementary with respect to Series C Convertible Preferred
Stock; (3)
(iv) Articles Supplementary with respect to Series D Convertible Preferred
Stock; (4)
(v) Articles Supplementary with respect to Series E Convertible Preferred
Stock; (9)
(vi) Articles Supplementary with respect to Series F Convertible Preferred
Stock; (11)
(vii) Articles Supplementary with respect to Series G Convertible Preferred
Stock; (11)
3.2 Amended and Restated Bylaws (5)
4 Stock Certificate (5)
10 Material Contracts:
(i) Stock Option Agreement dated April 15, 1993 between the Company,
Edward D. Scott, Kevin E. Brannon and Marjorie A. McGinnis; (5)*
(ii) Form of Shareholder Agreement; (5) (iii) Form of Termination of
Shareholder Agreement (5)
(iv) Employment Agreement dated December 9, 1995 between the Company and
Kevin E. Brannon; (5)*
(v) Employment Agreement dated December 9, 1995 between the Company and
Marjorie A. McGinnis; (5)*
(vi) Employment Agreement dated December 9, 1995 between the Company and
Steven T. Nordahl; (5)*
(vii) Employment Agreement dated December 9, 1995 between the Company and
Craig J. O'Connor; (5)*
(viii) Employment Agreement dated December 9, 1995 between the Company and
Steven Tluszcz; (5)*
(ix) Lease Agreement dated February 15, 1994 between the Company and
Carroll Creek LLC; (5)
(x) Lease Agreement dated March 25, 1994 between the Company and Carroll
Creek LLC; (2)
(xi) Addendum to the Agreement of Lease dated March 30, 1995 between the
Company and Carroll Creek LLC; (5)
(xii) Agreement of Lease dated January 21, 1993 between the Company, Kevin
E. Brannon, and South Carroll Street Partnership; (5)
(xiii) Letter lease dated January 18, 1995 between the Company and Frederick
Produce Company, Inc; (5)
(xiv) Form of Distribution Agreement; (5)
(xv) Letter from the Company dated October 30, 1993 to the Kronheim
Company, Inc.; (5)
(xvi) Non-employee Directors Stock Option Plan; (5)*
(xvii) 1995 Stock Option Plan; (5)*
(xviii) Form of Promissory Note dated various dates from the Company to
certain stockholders; (5)
(xix) Promissory Note dated June 18, 1994 between the Company and Dr.
Nicholas Foris; (5)
(xx) Promissory Note dated March 18, 1994 between the Company and Dr.
Nicholas Foris; (5)
(xxi) Contract Brewing Agreement dated December 12, 1995 by the Johnson Beer
Company and the Company; (5)
(xxii) Promissory Note by the Company to FCNB Bank dated November 24, 1995
with a guarantee by Dr. Nicholas Foris; (5)
(xxiii) Agreement of Sale by and between the Company and SOPM Limited
Partnership dated November 7, 1995; (5)
(xxiv) Assignment and Extension of Agreement of Sale by and between the
Company and Blue II, LLC dated December 19, 1995; (5)
(xxv) Letter of Intent for Build-to-Suit Light Industrial Space by and
between the Company and Blue II, LLC dated December 21, 1995; (5)
(xxvi) Resolutions adopted by the Maryland Industrial Development Financing
Authority; (5)
<PAGE>
(xxvii) Letter dated January 30, 1996 from the Maryland Economic Development
Corp.; (5)
(xxviii) Letter dated January 30, 1996 from Ryan, Lee & Company, Inc.; (5)
(xxix) Letter dated January 24, 1996 from the Mid-Atlantic Business Finance
Co.; (5)
(xxx) Letter from Signet Bank/Maryland dated January 16, 1996; (5)
(xxxi) Loan and financing agreement between Blue II, MEDCO, Signet and the
Company; (6)
(xxxii) Promissory note; (6)
(xxxiii) $3,000,000 Economic Development Revenue Bond; (6)
(xxxiv) Construction contract between Blue II, Morgan Keller, Inc, and the
Company; (6)
(xxxv) Lease Agreement between Blue II, LLC and the Company
(xxxvi) Loan and financing agreement between MEDCO, Signet and the Company;
(6)
(xxxvii) Promissory note; (6)
(xxxviii) $1,500,000 Economic Development Revenue Bond; (6)
(xxxix) Loan and security agreement - $969,000 Bridge loan; (6)
(xl) Promissory note - bridge loan; (6)
(xli) Filler/capper equipment; (6)
(xlii) Bottling line; (6)
(xliii) Mechanical and electrical work; (6)
(xliv) Phase I Industrial wastewater treatment; (6)
(xlv) Bottle supply; (6)
(xlvi) Interior fit out of new brewery office space; (6)
(xlvii) Blue II Forbearance Agreement; (7)
(xlviii) FBC Forbearance Agreement; (7)
(xlix) Agreement and Plan of Reorganization by and among Frederick Brewing
Co., FBC Acquisition Corporation and Wild Goose Brewery, Inc. dated
December 15, 1997; (8)
(l) Asset Purchase Agreement by and between Brimstone Brewing Company and
Frederick Brewing Co. dated December 15, 1997 (8)
(li) Mutual and Reciprocal Final Release of all claims dated December 19,
1997; (8)
(lii) Loan Modification Agreement by and among First Union National Bank,
Blue II, LLC, Robert Schuerholz, Nicholas P. Foris, Edward D. Scott,
and Vishnampet S. Jayanthimath dated as of March 30, 1997; (8)
(liii) Loan Modification Agreement by and between First Union National Bank
and Frederick Brewing Co.; (8)
(liv) Loan Agreement between U.S. Small business Administration and the
Company; (3)
(lv) Financial Public Relations Agreement by and between I.W. Miller Group,
Inc., and Frederick Brewing Co. dated effective June 12, 1998; (10)
(lvi) Contract Brewing Agreement by and between MOJO Highway Brewing
Company, LLC and Frederick Brewing Co. dated June 19, 1998; (10)
(lvii) Operating Agreement by and between MOJO Highway Brewing Company, LLC
and Frederick Brewing Co. dated June 19, 1998; (10)
(lviii) Lease Modification Agreement by and between Blue II LLC and Frederick
Brewing Co. dated June 23, 1998;
(lix) Second Loan Modification Agreement by and among FCNB Bank, the
Maryland Economic Development Corporation, the Maryland Industrial
Development Financing Authority, Blue II, LLC, Frederick Brewing Co.,
Edward D. Scott, Robert Schuerholz, Nicholas Foris and Vishnampet S.
Jayanthimath dated December 31, 1998;
(lx) Letter dated September, 15, 1998 from NASDAQ to the Company;
(lxi) Agreement between Frederick Brewing Co. and Westfinance Corporation
dated November 4, 1998.
21 Subsidiaries of the Registrant Wild Goose Brewery Inc., a Maryland
corporation Brimstone Brewing Co., a Maryland corporation
22 Consent of Independent Accountants
27 Financial Data Schedule
99 Safe harbor Under the Private Securities Litigation Reform Act of 1995
(4)
99.1 Press Release dated October 5, 1998
99.2 Press Release dated November 6, 1998
<PAGE>
99.3 Press Release dated November 12, 1998
99.4 Press Release dated December 4, 1998
99.5 Press Release dated December 15, 1998
99.6 Press Release dated November 20, 1998
(3)(b) Reports filed on Form 8-K.
The form 8-K filed November 20, 1998
The form 8-K filed December 15, 1998
- --------------
(1) Incorporated by reference from Pre-effective Amendment No. 5 to the
Form SB-2 filed with the SEC on March 5, 1996.
(2) Incorporated by reference to such exhibit as filed with the Company's
Registration Statement on Form S-3, file number 333-25743.
(3) Incorporated by reference to exhibit 10(I) to the Company's Quarterly
Report on Form 10-QSB for the Quarter Ended June 30, 1997.
(4) Incorporated by reference to such exhibit as filed with the Company's
Registration Statement on For S-3, file number 333-35655.
(5) Incorporated by reference from Form SB-2 filed with the SEC on
December 12, 1995.
(6) Incorporated by reference from Form 10-QSB, Quarterly Report, filed
with the SEC on June 30, 1996.
(7) Incorporated by reference from Form 8-K, Current Report, filed with
the SEC on February 27, 1997.
(8) Incorporated by reference from Form 10-KSB, Annual Report for the year
ended December 31, 1997
(9) Incorporated by reference to such exhibit as filed with the Company's
Registration Statement on Form S-3, file number 333-54013
(10) Incorporated by reference from Form 10-QSB, Quarterly Report for the
quarter ending June 30, 1998.
(11) Incorporated by reference to such exhibit as filed with the Company's
Registration Statement on Form S-3, file number 333-65287
* Management contract or compensatory plan or agreement.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Accountants......................................F-2
Financial Statements:
Balance Sheets.................................................F-4
Statements of Operations.......................................F-5
Statements of Changes in Stockholders' Equity..................F-6
Statements of Cash Flows......................................F-10
Notes to Financial Statements.................................F-11
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
Frederick Brewing Copany
We have audited the accompanying consolidated balance sheet of Frederick Brewing
Company as of December 31, 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statement. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Frederick Brewing
Company at December 31, 1998, and results of their operations and their cash
flows for the year then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has sustained significant
recurring operating losses and cash flow deficits. Also, the Company has
significant cash commitments to creditors. These factors raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 1. The financial
statements do not contain any adjustments that might result from the outcome of
these uncertainties.
BDO Seidman,LLP
Washington, DC
February 8, 1999, except
for Notes 1 and 8 which are as
of June 30, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Frederick Brewing Co.
Frederick, Maryland
We have audited the accompanying balance sheet of Frederick Brewing
Co. as of December 31, 1997, and the related statements of operations,
changes in stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Frederick Brewing
Co. as of December 31, 1997, and the results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
McLean, Virginia
March 30, 1998
F-3
<PAGE>
Frederick Brewing Co.
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 92,999 $ 2,612,880
Cash restricted 12,475 12,475
Trade receivables, net of allowance for doubtful accounts of $27,618
and $35,544 respectively 410,983 333,437
Inventories, net of reserve for obsolesence of $48,208 in 1998 671,856 354,224
Prepaid expenses and other current assets 157,906 103,476
----------- -----------
Total current assets 1,346,219 3,416,492
Property and equipment, net 8,019,331 8,375,645
Intangibles, net of accumulated amortization of $124,017 and $48,705, respectively 416,627 258,225
Deferred public relations costs, net 1,131,500
Goodwill, net of accumulated amortization of $250,627 in 1998 2,483,486
Other assets 199,326 219,557
----------- -----------
Total assets $12,464,989 $13,401,419
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of longterm debt $ 1,262,407 $ 272,814
Capital lease obligations, current portion 44,717 88,976
Accounts payable 1,215,228 274,966
Accrued liabilities 177,651 406,943
----------- -----------
Total current liabilities 2,700,003 1,043,699
Longterm debt 934,387 2,208,736
Capital lease obligations 2,651,712 2,880,536
----------- -----------
Total liabilities 6,286,102 6,132,971
----------- -----------
Stockholders' Equity:
Preferred stock $.01 par value, 1,000,000 shares authorized:
Cumulative, convertible Series A, 1,543 and 1,828 shares outstanding 581,687 655,213
Convertible Series C, 0 and 2,100 shares outstanding respectively 1,762,500
Convertible Series D, 0 and 1,045 shares outstanding respectively 810,000
Convertible Series E, 210 and 2,700 shares outstanding respectively 162,750 2,325,000
Convertible Series F, 1,000 and 0 shares outstanding, respectively 967,500
Convertible Series G, 500 and 0 shares outstanding, respectively 644,581
Common stock $0.00004 par value, 19,000,000 shares authorized,
14,333,346 and 4,540,356 shares issued and outstanding 559 167
Additional paid-in capital 19,989,919 12,778,758
----------- -----------
Accumulated deficit (16,168,109) (11,063,190)
----------- -----------
Total stockholders' equity 6,178,887 7,268,448
----------- -----------
Total liabilities and stockholders' equity $12,464,989 $13,401,419
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
<PAGE>
Frederick Brewing Co.
Consolidated Statement of Operations
For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Gross Sales $ 5,521,558 $ 3,286,776
Less: Returns and allowances 110,658 39,859
Less: Excise taxes 266,239 169,236
----------- -----------
Net sales 5,144,661 3,077,681
Cost of sales 4,198,783 2,837,229
----------- -----------
Gross profit 945,878 240,452
Selling, general and administrative expenses 4,033,045 4,433,529
Amortization and writeoff in 1998 of deferred public relations costs 1,131,500 188,500
----------- -----------
Operating loss (4,218,667) (4,381,577)
(Gain) loss on sale or disposal of equipment 99,544 (158,167)
Interest expense, net 557,646 140,030
----------- -----------
Loss before extraordinary item and income taxes (4,875,857) (4,363,440)
Extraordinary gain on forgiveness of debt on capital leases 191,146
----------- -----------
Net loss (4,684,711) (4,363,440)
Preferred stock deemed dividend requirements (420,208) (3,611,641)
----------- -----------
Net loss attributable to common shareholders $(5,104,919) $(7,975,081)
=========== ===========
Basic and Diluted Loss per Common Share:
Net loss before extraordinary item and preferred stock dividend $ (0.46) $ (1.59)
Extraordinary item (0.02)
Preferred stock dividend requirements (0.04) (1.32)
----------- -----------
Net loss per common share $ (0.52) $ (2.91)
=========== ===========
Weighted average common shares (basic and diluted) 10,544,244 2,741,583
=========== ===========
</TABLE>
The accompanying notes are an intregal part of
these consolidated financial statements.
F-5
<PAGE>
Frederick Brewing Co.
Statements of Changes In Stockholders Equity
For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Convertible Convertible Convertible
Series A Preferred Series B Preferred Series C Preferred
Stock Stock Stock
----- ----- -----
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 - $ - - $ - - $ -
Issuance of preferred stock, net of
issuance costs 1,828 833,840 3,750 3,181,161 2,100 1,837,500
Fair value of warrants issued in
connection with preferred stock - (150,000) - (460,000) - -
Fair value of common stock issued in
connection with preferred stock - - - (232,031) - (75,000)
Beneficial conversion feature in
connection with Series A preferred - (114,505) - - - -
Deemed dividend in connection with
preferred stock - 85,878 - - - -
Pledge of common stock to manage-
ment in lieu of salary - - - - - -
Conversion of Series B preferred stock
stock to common stock - - (3,750) (2,489,130) - -
Fair value of warrants issued for
deferred public relations - - - - - -
Fair value of warrants issued to bank
for services - - - - - -
Net loss - - - - - -
----- --------- -------- ----------- ------ -----------
Balance, December 31, 1997 1,828 $ 655,213 - $ - 2,100 $ 1,762,500
Issuance of preferred stock, net of
issuance costs - - - - - -
Fair value of warrants issued in
connection with preferred stock - - - - - -
Deemed dividend in connection with
preferred stock - 28,627 - - - -
Conversion of Series A preferred stock
stock to common stock (285) (102,153) - - - -
Conversion of Series C preferred stock
stock to common stock - - - - (2,100) (1,762,500)
Conversion of Series D preferred stock
stock to common stock - - - - - -
Conversion of Series E preferred stock
stock to common stock - - - - - -
Pledge of common stock to manage-
ment in lieu of salary - - - - - -
Issuance of common stock for
acquisition of Wild Goose - - - - - -
Issuance of common stock for
acquisition of Brimstone - - - - - -
Employee Stock options excersized - - - - - -
Fair value of common stock issued in
connection with preferred stock - - - - - -
Net loss - - - - - -
----- --------- -------- ----------- ------ -----------
Balance, December 31, 1998 1,543 $ 581,687 - $ - - $ -
===== ========= ======== =========== ====== ===========
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
Convertible Convertible Convertible
Series D Preferred Series E Preferred Series F Preferred
Stock Stock Stock
----- ----- -----
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 - $ - - $ - - $ -
Issuance of preferred stock, net of
issuance costs 1,045 835,500 2,700 2,415,000 - -
Fair value of warrants issued in
connection with preferred stock - - - - - -
Fair value of common stock issued in
connection with preferred stock - (25,500) - (90,000) - -
Beneficial conversion feature in
connection with Series A preferred - - - - - -
Deemed dividend in connection with
preferred stock - - - - - -
Pledge of common stock to manage-
ment in lieu of salary - - - - - -
Conversion of Series B preferred stock
stock to common stock - - - - - -
Fair value of warrants issued for
deferred public relations - - - - - -
Fair value of warrants issued to bank
for services - - - - - -
Net loss - - - - - -
----- --------- ------ ----------- ----- --------
Balance, December 31, 1997 1,045 $ 810,000 2,700 $ 2,325,000 - $ -
Issuance of preferred stock, net of
issuance costs - - - - 1,000 795,100
Fair value of warrants issued in
connection with preferred stock - - - - - (74,600)
Deemed dividend in connection with
preferred stock - - - - - 247,000
Conversion of Series A preferred stock
stock to common stock - - - - - -
Conversion of Series C preferred stock
stock to common stock - - - - - -
Conversion of Series D preferred stock
stock to common stock (1,045) (810,000) - - - -
Conversion of Series E preferred stock
stock to common stock - - (2,490) (2,162,250) - -
Pledge of common stock to manage-
ment in lieu of salary - - - - - -
Issuance of common stock for
acquisition of Wild Goose - - - - - -
Issuance of common stock for
acquisition of Brimstone - - - - - -
Employee Stock options excersized - - - - - -
Fair value of common stock issued in
connection with preferred stock - - - - - -
Net loss - - - - - -
------ --------- ------ ----------- ----- --------
Balance, December 31, 1998 - $ - 210 $ 162,750 1,000 $967,500
====== ========= ====== =========== ===== ========
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
Convertible
Series G Preferred
Stock Common Stock
----- ------------ Additional
Shares Amount Shares Amount Paid in Capital
------ ------ ------ ------ ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 - $ - 1,954,876 $ 72 $ 4,911,424
Issuance of preferred stock, net of
issuance costs - - - - -
Fair value of warrants issued in
connection with preferred stock - - - - 610,000
Fair value of common stock issued in
connection with preferred stock - - 106,500 4 422,527
Beneficial conversion feature in
connection with Series A preferred - - - - 114,505
Deemed dividend in connection with
preferred stock - - - - 3,525,763
Pledge of common stock to manage-
ment in lieu of salary - - - - 17,500
Conversion of Series B preferred stock
stock to common stock - - 2,478,980 91 2,489,039
Fair value of warrants issued for
deferred public relations - - - - 670,000
Fair value of warrants issued to bank
for services - - - - 18,000
Net loss - - - - -
-------- -------- ---------- ----- ------------
Balance, December 31, 1997 - $ - 4,540,356 $ 167 $ 12,778,758
Issuance of preferred stock, net of
issuance costs 500 500,000 - - (69,684)
Fair value of warrants issued in
connection with preferred stock - - - - 74,600
Deemed dividend in connection with
preferred stock - 144,581 - - -
Conversion of Series A preferred stock
stock to common stock - - 38,362 2 102,151
Conversion of Series C preferred stock
stock to common stock - - 2,806,448 112 1,762,388
Conversion of Series D preferred stock
stock to common stock - - 1,534,377 61 809,939
Conversion of Series E preferred stock
stock to common stock - - 4,101,265 164 2,162,086
Pledge of common stock to manage-
ment in lieu of salary - - 42,047 2 28,140
Issuance of common stock for
acquisition of Wild Goose - - 1,068,933 43 2,105,755
Issuance of common stock for
acquisition of Brimstone - - 80,000 3 162,448
Employee Stock options excersized - - 1,558 - 1,363
Fair value of common stock issued in
connection with preferred stock - - 120,000 5 71,975
Net loss - - - - -
-------- -------- ---------- ----- ------------
Balance, December 31, 1998 500 $644,581 14,333,346 $ 559 $ 19,989,919
======== ======== ========== ===== ============
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
Total
Accumulated Stockholders
Deficit Equity
------- ------
<S> <C> <C>
Balance, December 31, 1996 $ (3,088,109) $ 1,823,387
Issuance of preferred stock, net of
issuance costs - 9,103,001
Fair value of warrants issued in
connection with preferred stock - -
Fair value of common stock issued in
connection with preferred stock - -
Beneficial conversion feature in
connection with Series A preferred - -
Deemed dividend in connection with
preferred stock (3,611,641) -
Pledge of common stock to manage-
ment in lieu of salary - 17,500
Conversion of Series B preferred stock
stock to common stock - -
Fair value of warrants issued for
deferred public relations - 670,000
Fair value of warrants issued to bank
for services - 18,000
Net loss (4,363,440) (4,363,440)
------------- -----------
Balance, December 31, 1997 $ (11,063,190) $ 7,268,448
Issuance of preferred stock, net of
issuance costs - 1,225,416
Fair value of warrants issued in
connection with preferred stock - -
Deemed dividend in connection with
preferred stock (420,208) -
Conversion of Series A preferred stock
stock to common stock - -
Conversion of Series C preferred stock
stock to common stock - -
Conversion of Series D preferred stock
stock to common stock - -
Conversion of Series E preferred stock
stock to common stock - -
Pledge of common stock to manage-
ment in lieu of salary - 28,142
Issuance of common stock for
acquisition of Wild Goose - 2,105,798
Issuance of common stock for
acquisition of Brimstone - 162,451
Employee Stock options excersized - 1,363
Fair value of common stock issued in
connection with preferred stock - 71,980
Net loss (4,684,711) (4,684,711)
------------- -----------
Balance, December 31, 1998 $ (16,168,109) $ 6,178,887
============= ===========
</TABLE>
F-9
<PAGE>
Frederick Brewing Co.
Consolidated Statements of Cash Flows
For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,684,711) $ (4,363,440)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,078,480 560,671
Writeoff of net deferred public relations costs 1,131,500 188,500
Foregiveness of debt on capital leases (191,146) -
(Gain) Loss on sale or disposal of equipment 99,544 (158,167)
Provision for doubtful accounts 45,592 37,090
Writeoff of accounts receivable (53,518) -
Provision for obsolete inventory 48,208 -
Fair value of stock issued to management in lieu of salary 28,142 17,500
Fair value of warrants issued to bank for services - 18,000
Change in operating assets and liabilities:
Trade receivables 156,746 (131,114)
Inventories (206,806) (143,661)
Prepaid expenses and other current assets (54,430) (21,064)
Other assets 20,231 (148,557)
Deferred public relations costs (650,000)
Accounts payable 392,488 (354,250)
Accrued liabilities (846,442) 241,405
----------- -----------
Net cash used in operating activities (3,036,122) (4,907,087)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (432,215) (2,748,745)
Purchase of intangibles (84,161) (52,900)
Proceeds from sale of equipment 100,551 303,239
----------- -----------
Net cash used in investing activities (415,825) (2,498,406)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of Series A preferred stock - 914,000
Proceeds from issuance of Series B preferred stock - 3,750,000
Proceeds from issuance of Series C preferred stock - 2,100,000
Proceeds from issuance of Series D preferred stock - 1,045,000
Proceeds from issuance of Series E preferred stock - 2,700,000
Proceeds from issuance of Series F preferred stock 1,000,000
Proceeds from issuance of Series G preferred stock 500,000
Offering costs associated with issuance of preferred stock (274,584) (1,405,999)
Proceeds from issuance of common stock 71,980
Proceeds from exercise of stock options 1,363
Proceeds from debt borrowings - 1,605,485
Payments on debt obligations (288,501) (1,193,036)
Payments on capital leases (78,192) (109,571)
Decrease in restricted cash - 627,525
Payment of loan origination fees - (64,021)
----------- -----------
Net cash provided by financing activities 932,066 9,969,383
----------- -----------
Net (decrease)/increase in cash and cash equivalents (2,519,881) 2,563,890
Cash and cash equivalents, beginning of period 2,612,880 48,990
----------- -----------
Cash and cash equivalents, end of period $ 92,999 $ 2,612,880
=========== ===========
</TABLE>
The accompanying notes are an intregal part of
these consolidated financial statements.
F-10
<PAGE>
Frederick Brewing Co.
NOTES TO FINANCIAL STATEMENTS
1. Recent Events and Future Prospects
Basis of Presentation
The accompanying financial statements have been prepared assuming that Frederick
Brewing Co. (the "Company") will continue as a going concern. As explained
below, the Company has sustained recurring operating losses and cash flow
deficits. Also, the Company has significant cash commitments to creditors. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are described
below. The financial statements do not contain any adjustments that might result
from the outcome of these uncertainties.
Future Prospects
The Company's ability to meet its obligations is dependent on generating
positive cash flow and ultimately operating profitably. Such an improvement
requires the Company to eliminate or substantially reduce its excess brewing
capacity and to obtain additional financing from third parties.
In April and June 1999, the Company obtained proceeds of $500,000 from a loan
collateralized by its Wild Goose brand. The same investor groups purchased most
of the convertible preferred stock sold in 1997 and 1998.
On November 4, 1998, the Company retained Westfinance Corporation to advise and
assist Company in the following: 1) refinancing First Union National Bank bond
2) raising additional working capital, and 3) Seeking either candidates for
acquisition by the Company, merger with the Company or 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 May of 1999, the Company raised approximately $550,000 by way of 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 to SIBG, an
unrelated third party, the exclusive right, through July 25, 1999, to negotiate
and perform due diligence with a view toward consummating a transaction pursuant
to which SIBG would acquire majority control of the Company's voting stock for
cash.
If the transaction closes as discussed to date, management believes that SIBG
will simultaneously acquire and may ultimately exercise the Company's option to
purchase the land and building in Frederick County, Maryland which contain the
Company's brewery; enter into contract brewing agreements whereby the Company
would commit to producing 5,000 - 35,000 barrels per year of various brands
controlled by SIBG and its affiliates; and arrange to refinance the Company's
debt to First Union National Bank.
The Company has been in discussions with SIBG, its principals and affiliates at
various times since late 1998. The negotiations concerning the stock
purchase, contract brewing, real estate purchase and First Union National Bank
re-finance transactions are at an advanced stage and, if SIBG proceeds
substantially as contemplated, the terms of those transactions will prove
acceptable to the Company's Board of Directors. However, the exclusivity letter
agreement specifically states in part "there has been no meeting of the minds as
to the material terms of any proposal."
Furthermore, no definitive agreements have been executed and there can be no
assurance either that such agreements will be executed or that, even if
executed, will be closed. Neither SIBG nor the Company is yet
F-11
<PAGE>
obligated to execute agreements or close on any transaction. Numerous conditions
must be satisfied before any transaction between the Company and SIBG can be
completed, many of which are beyond the control of the Company and management.
Some of these include: (1) one or more of SIBG's members must agree to
contribute the cash necessary to allow SIBG to purchase the Company's common
stock; (2) SIBG, its counsel, accountants and other advisors must complete, and
be satisfied with the results of, its due diligence review of the Company, its
condition and 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
bond; (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 creditors 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 acceptable or favorable to the Company. The exclusivity
agreement generally prohibits the Company from soliciting, encouraging,
discussing or considering other proposals or providing, non-public information
to any other parties who may be interested in providing the Company with
financing until July 25, 1999. This creates the risk that the Company will be
unable to raise adequate funds to sustain its operations if the transactions
with SIBG do not close or if the transactions are not closed in a timely manner.
The exclusivity agreement does, however, provide that the Company may consider
other bonafide proposals, if the board of directors, on advice of outside
counsel, "determines that it is required to do so in order to discharge properly
its fiduciary duties."
Presently, the Company is in default under the payment terms of an equipment
loan to a local bank. In June 1999, the Company agreed to pay the bank a $50,000
fee (in two installments) and in return the bank agreed not to demand repayment
of the loan until June 30, 1999. The Company failed to make the second
installment payment and is attempting to negotiate an extension of the Bank's
forbearance and to refinance the loan. There can be no assurance either that the
bank will agree to forbear or that the loan can be refinanced.
The Company is also in default of numerous other payment obligations, including
rental payments due to Blue II, LLC, payments due on several equipment leases,
and payments due to vendors and professionals. There can be no assurance that
these creditors, individually or in concert, will not take 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 the common stock may be
delisted from the Nasdaq SmallCap 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 demonstrate compliance through achieving a closing bid price of $1.00
per share for ten consecutive trading days during the 90 calendar day period
ending December 14, 1998, the common stock would be subject to delisting. 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 but
the stock price did not remain above the $1.00 minimum closing bid for ten
consecutive days as required by Nasdaq. In April 1999, Nasdaq informed the
Company that it had delisted its common stock from the Nasdaq SmallCap Market.
If the Company is unsuccessful in completing a transaction with SIBG, it will
seek to obtain short-term financing form third parties who have previously
purchased equity or loaned funds to finance operations. The Company may also
explore merging with or selling assets to, another craftbrewer or other industry
participant that has greater financial resources to help ensure that it meets
its obligations. Also, the Company could seek protection under Chapter 11 of the
bankruptcy code to allow additional time to explore other alternatives to
eliminate or reduce its excess capacity. The Company has not yet decided on a
definite course of action and is barred from pursuing such by the exclusivity
agreement with SIBG.
F-12
<PAGE>
2. Summary of Significant Accounting Policies
Business
The Company engages in the production, bottling, distribution, and sale of beer
primarily in the Mid-Atlantic region.
Principles of Consolidation
The consolidated financial statements for the year ended December 31,1998
include the accounts of the Company for the full year, and for its wholly owned
subsidiaries from the dates of their acquisition. Brimstone Brewing Company
(`Brimstone') was acquired on January 15, 1998, and Wild Goose Brewery,
Incorporated (`Wild Goose') was acquired on January 28, 1998. All significant
inter-company accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates fair value, and
consists of amounts on hand in an operating bank account and in a highly liquid
short-term investment account with a major bank. All cash equivalents have
original maturities of three months or less. The short-term investment of
$12,475 presented as restricted cash was pledged as collateral to ensure the
Company's performance of site improvement work required by the local Frederick
County government.
Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable. The
Company maintains cash and cash equivalents in separate accounts at a major
bank. The Company has not experienced any losses on these investments.
The Company's accounts receivable result primarily from beer sales to wholesale
distributors. The Company periodically assesses the financial strength of its
customers and provides allowances for anticipated losses as necessary.
Inventories
Inventories consist of raw ingredients, work in process, finished goods, and
packaging materials, and are valued at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are recorded at cost and depreciated using straight-line
and accelerated methods over the estimated useful lives of the assets. Estimated
useful lives 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 depreciated over the terms of
the related lease or of the estimated useful life of the related improvement,
whichever is shorter. On retirement or disposition of property and equipment,
the cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in operations. Repair and maintenance costs
are charged to expense in the year incurred.
F-13
<PAGE>
The Company leases its production facility under a long-term capital lease, that
is included in property and equipment. The facility is amortized over a
twenty-year lease term, and depreciation and amortization expense includes this
amortization.
Intangible Assets
Intangible assets consist primarily of trademarks, copyrights, and loan
origination costs related to existing debt obligations. Trademarks and
copyrights are amortized over a five-year period on a straight-line basis. Loan
origination costs are amortized over the term of the related loan. Intangible
amortization expense was $88,239 and $44,947 for the years ended December 31,
1998 and 1997 respectively.
Goodwill
The purchase price of the Wild Goose acquisition has been allocated to the
assets acquired and the liabilities assumed, based on their fair values. The
$2,734,113 excess of purchase price over the net assets acquired was recorded as
goodwill and is being amortized over 10 years from the date of acquisition.
Goodwill amortization was $250,627 for the year ended December 31, 1998. There
was no goodwill to be amortized during 1997. No goodwill was recorded in
connection with the acquisition of Brimstone.
Asset Impairment
The Company evaluates the recoverability of the carrying value of long-lived
assets, including property and equipment and intangible assets (including
goodwill), in accordance with the provisions of Statement of Accounting
Standards No. 121, `Accounting for the Impairment of Long Lived Assets to be
Disposed'. The Company considers historical performance and anticipated future
results in its evaluation of potential impairment. When indicators of impairment
are present the Company evaluates the carrying value of these assets in relation
to the operating performance of the business and future non-discounted cash
flows without interest expense expected to result from the use of these assets.
Impairment losses are recognized when the fair value of the asset or the present
value of expected future cash flows are less than the assets carrying value.
There were no impairment losses in 1998 or 1997.
Revenue Recognition
Revenue is recognized upon shipment of product to distributors. The Company has
established 180 days as an acceptable shelf life for its products, and will
reimburse distributors for 50% of all out of date product destroyed in the first
year of each new distribution agreement. Amounts reimbursed for out of date
products have historically been minimal.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future years of
the differences between the tax basis of assets and liabilities and their
financial reporting values at each year-end. They are based on enacted tax laws
and statutory rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established as
necessary to reduce deferred tax assets to the amount that may be realized.
Income tax expense represents the current tax provision for the period plus the
change during the period in deferred tax assets and liabilities.
Net Loss Per Common Share
Effective December 31, 1997 the Company adopted Statement of Financial
Accounting Standards No. 128 `Earnings Per Share', which requires the
presentation of basic earnings per share and diluted earnings per share for all
years presented. Basic per share earnings is based on weighted average number of
outstanding common shares for the period. Diluted per share earnings adjust the
weighted average for the potential dilution that could occur if stock options,
warrants, or other convertible securities were exercised or
F-14
<PAGE>
converted into common stock. Diluted earnings per share equals basic earnings
per share for 1998 and 1997 because the effects of such items were
anti-dilutive.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 130, `Reporting Comprehensive
Income' (`SFAS 130'), establishes standards for the reporting and display of
comprehensive income, and its component accumulated balances. Comprehensive
income as defined includes all changes in equity except that resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 states that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company adopted SFAS 130 during the first quarter of
1998 and has no items of comprehensive income to report.
Statement of Financial Standards No. 131, `Disclosure About Segments of a
Business Enterprise' (`SFAS 131'), establishes standards for reporting
information about operating segments in annual financial statements, and
requires reporting of selected information about operating segments in interim
financial statements issued after December 15, 1997. It also establishes
standards for disclosure regarding products and services, geographic areas and
major customers. SFAS 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Presently, the Company operates
in one business segment.
Statement of Financial Standards No. 133, `Accounting For Derivative
Instruments' (`SFAS 133') establishes accounting and reporting standards for
derivative instruments and hedging activities. SFAS 133 requires an entity to
recognize all derivatives as either assets or liabilities and to measure those
instruments at fair market value. Under certain circumstances a portion of the
derivative's gain or loss is initially reported as a component of other
comprehensive income and subsequently reclassified into income when the
transaction affects earnings. For a derivative not designated as a hedging
instrument, the gain or loss is recognized as income in the period of change.
The Company will be required to adopt SFAS 133 during the first quarter of 2000.
Presently the Company does not use derivative instruments either in hedging
activities or as investments. Accordingly the Company believes that adoption of
SFAS 133 will have no impact on its financial position or results of operations.
Use of Accounting Estimates
Preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities. It also requires the
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. Actual amounts could differ from these estimates.
Fair Value Information
The carrying value of current assets and current liabilities approximates fair
value because of their short-term maturity. The carrying amount of the Company's
debt approximates its fair value as the debt bears interest at rates
approximating current market values.
3. Deferred Public Relations Costs
Deferred public relations costs consisted of $650,000 cash in advance, and
$670,000 representing the estimated fair value of 500,000 warrants issued in
1997 to a third party for public and investor relations services to be rendered
over a five-year service period. These amounts were being amortized on a
straight-line basis over the five-year term of the service contract.
Amortization expense was $188,500 for the year
F-15
<PAGE>
ended December 31, 1997. In the second quarter of 1998, the Company terminated
this contract due to lack of performance. Accordingly, the Company expensed the
remaining $1,131,500 as of June 30, 1998, to reflect the termination of the
contract services.
4. Acquisitions
During 1998 the Company acquired 100% of the outstanding common stock and
preferred stock of Wild Goose, and all the brands, formulas, copy-rights,
trademarks, and related intangible assets of Brimstone. The consideration for
Wild Goose consisted of the issuance of 1,068,933 shares of common stock with an
aggregate value of $2,105,798 and the assumption of $524,029 in Wild Goose
liabilities. Another 38,565 shares of the Company's common stock will be issued
in 1999. Consideration for Brimstone consisted of the issuance of 80,000 shares
of the Company's common stock with an aggregate value of $162,480. These
acquisitions are being accounted for under the purchase method of accounting.
The following unaudited pro forma summary presents the consolidated results of
operations as if the acquisitions had been completed at the beginning of the
periods presented and does not purport to be indicative of what would have
occurred had the acquisitions been made as of such date:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net sales .................................................. $ 5,521,000 $ 5,769,000
Net loss ................................................... $(5,105,000) $ (4,564,000)
Net loss per common share before extradinory item in 1998
and preferred stock dividend ............................... $ (0.46) $ (1.59)
</TABLE>
5. Inventories
Inventories at December 31, consist of the following:
1998 1997
-------- --------
Raw materials.................................. $148,761 $ 64,194
Work in process................................ 64,053 51,677
Finished goods................................. 222,126 100,469
Packaging and marketing supplies............... 285,124 137,884
Reserve for obsolesence........................ (48,208) --
-------- --------
Total.......................................... $671,856 $354,224
-------- --------
6. Property and Equipment
Property and equipment at December 31, consist of the following:
1998 1997
-------- --------
Brewing equipment.............................. $ 4,344,492 4,117,219
Building....................................... 3,000,000 3,000,000
Leasehold improvements......................... 1,477,924 1,348,25
Automobiles and trucks......................... 184,204 201,499
Furniture and fixtures......................... 137,739 110,806
---------- ---------
Total.......................................... 9,144,359 8,777,778
Less accumulated depreciation.................. (1,125,028) (402,133)
Property and equipment, net.................... $ 8,019,331 $8,375,645
----------- ----------
The brewing equipment, building and leasehold improvements are pledged to
collateralize certain related debt (See Note 7).
F-16
<PAGE>
7. Debt Obligations
Long-Term Debt
Long-term debt at December 31, consists of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Note payable to bank, interest at LIBOR + 150 basis points, 108 monthly
payments at $13,889, starting Aug, 1997, collateralized by brewing
equipment, due July, 2006. Subsequent to December 31, 1998, the Company
has not been able to make the monthly payments of $13,889 and the note
payable is in default. Therefore, the note payable is classified as a
current liability. See further discussion in Note 1. $ 1,197,089 $ 1,366,756
Note payable to United States Small Business Administration, Interest at
7.68%, monthly payments at $7,967, collateralized by secondary lien on
all equipment, due May, 2017. 960,105 984,002
Notes payable to bank, monthly payments ranging from $268 to $808,
including interest ranging from 7.9% to 9.1%, collateralized by vehicles,
due May, 1999 - October, 2000. 30,649 93,676
Stockholder loans, monthly payments ranging from $425 To $655, including
interest ranging from 10% to 11%, due July, 1999. 8,951 37,116
----------- -----------
Total $ 2,196,794 $ 2,481.550
Less current maturities (1,262,407) (272,814)
----------- -----------
Total long-term debt $ 934,387 $ 2,208,736
----------- -----------
</TABLE>
Principal repayments required on all notes payable as of December 31, 1998 are
as follows:
1999 $1,262,407
2000 27,678
2001 29,788
2002 32,054
2003 34,502
Thereafter 810,365
----------
Total $2,196,794
----------
Capital Leases
The Company has entered into a lease for the land and building housing the
brewery which is classified as a capital lease. The Company has the option to
purchase the building housing the brewery at any time after March 1, 2023 at a
price of $3,000,000. Future minimum payments under the capital lease are as
follows at December 31, 1998:
1999 $350,208
2000 350,208
2001 350,208
F-17
<PAGE>
2002 350,208
2003 350,208
Thereafter 4,755,822
---------
Total minimum lease payments 6,506,862
Less amount representing interest (3,810,433)
----------
Present value of future minimum lease payments 2,696,429
Less current maturities (44,717)
----------
Long-term capital lease obligations $2,651,712
----------
8. Stockholders' equity
The Company's Articles of Incorporation authorize the issuance of 1,000,000
shares of preferred stock, at $.01 par value. As of December 31, 1998, 1,543
shares of non-voting Cumulative, Convertible Series A Preferred Stock (series
A), and 210 shares of Convertible Series E Preferred Stock (Series E) that were
issued during 1997 and are outstanding. During 1998 the Company recorded a
deemed dividend of $28,627 to reflect the beneficial conversion feature related
to Series A. The Series A shares are convertible at any time after one year from
the date of issuance, based on an average conversion price of $3.67 per share,
which was a discount at the date of issuance. The Series E shares are
convertible immediately upon issuance at 75% of the average market price of the
common stock for the five trading days immediately prior to the conversion date.
The Company has recorded a deemed dividend of $420,208 to reflect the beneficial
conversion feature related to each of the preferred stock issuances. The
discount amount is recognized over the period from the date of issuance to the
earliest point the shares are convertible. The beneficial conversion feature of
$114,505 related to the Series A shares is being recognized as a deemed dividend
over the one year period from the date of issuance of March 31, 1997, and the
deemed dividends related to the Series B, Series C, Series D, Series E,
Series F and Series G shares was recognized immediately upon issuance.
The holders of Series A shares are senior to the Common Stock with respect to
dividend rights and are entitled to a liquidation preference of $500 per
share. The annual dividend rate for Series A shares is $40 per share per annum,
with cumulative dividends in arrears of $134,840, and the annual dividend rate
for the Series B, Series C, Series D, Series E, Series F and Series G shares is
$80 per share, when and if declared by the Company's Board of Directors. Full
dividends may be paid or set aside on Series A, Series B, Series C, Series D,
Series E, Series F and Series G shares before dividends may be paid or set aside
on the common stock. All dividend payments will be subordinated to the Company's
debt obligations, and will be subject to the prior appraisal of the Company's
bank. No dividends were declared during 1998. The holders of Series B, Series C,
Series D, Series E, Series F and Series G shares have a liquidation preference
of $1000 per share over the Common Stock and the Series A shares. The Company
does not expect to declare or pay such dividends in the foreseeable future.
During 1998 the Company issued 1,000 shares of Convertible Series F Preferred
Stock (Series F). These preferred shares are immediately convertible into common
stock at the lesser of $.70 per share or 80% of the average of the three lowest
closing bid prices of the common stock for the seven days preceding the
conversion. A deemed dividend of $247,000 was recognized immediately on issuance
of Series F shares to recognize its' beneficial conversion feature. The Company
also issued 200,000 warrants with exercise prices ranging from $.75 per share to
$.98 per share. The Company determined the aggregate value of these warrants on
the date of grant to be approximately $74,600, based on the Black Scholes
valuation model with the following weighted average assumptions: dividend yield
of 0%, expected volatility of 58%, risk free interest of 8.5% and expected term
of 5 years. This value was recorded as a cost of the Series F offering and
deducted from proceeds. All 1,000 shares of Series F are outstanding as of
December 31, 1998. During 1998 the Company also issued 500 shares of Convertible
Series G Preferred Stock (Series G) that is convertible into common stock at 70%
of the average market price for the five days prior to the conversion. A deemed
dividend of $144,581 was recognized on Series G to reflect its' beneficial
conversion feature.
During 1998 the Company pledged an aggregate of 42,047 shares of common stock to
certain members of management in lieu of salary. The value of the common stock
on the date pledged was $28,140 and was recorded as compensation expense.
On March 23, 1999, the Company's Board of Directors approved a reverse 10 for 1
stock split of common stock.
The reverse stock split has been reflected in the accompanying financial
statements for all periods presented.
9. Stock Options
The Company has chosen to continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25 `Accounting for Stock Issued to Employees' and related interpretations for
issuance of stock options to employees. Accordingly, compensation cost for stock
options is measured as the excess of the quoted market price at the date of the
grant over the amount an employee must pay to acquire the stock.
Effective as of November 1. The Series E shares are convertible immediately upon
issuance at 75% of the average market price of the common stock for the five
trading days immediately prior to the conversion
F-18
<PAGE>
date.995 the Company adopted the 1995 Stock Option Plan in order to attract and
retain qualified personnel in key positions as well as to compensate members of
the Board of Directors. The exercise price of all options under the plan must be
equal to at least the fair value of the related common stock at the date of
grant. The vesting provisions for stock options is determined by the Board of
Directors, and all options are exercisable for ten years after vesting date.
A summary of the status of the Company's stock options is presented:
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
Weighted Weighted
Shares Avg Price Shares Avg Price
---------------- ----------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of period 59,701 1.78 50,056 1.60
Options exercised (1,558) (.875) 0 0
Options canceled (7,775) (.875) (355) (5.79)
Options granted 18,131 1.40 10,000 1.90
------ ---- ------ ----
Options outstanding at end of period 68,499 1.80 59,701 1.78
Options exercisable at end of period 68,499 1.80 59,701 1.78
</TABLE>
As of December 31, 1998 the weighted average remaining contractual life of the
options, which have exercise prices ranging from $0.18 to $5.25 is approximately
7 years.
As of December 31, 1998 and 1997 the pro forma tax effects under SFAS 109 would
not have a material impact on either the deferred tax asset or the valuation
allowance. Had compensation expense been determined based on fair value at the
grant dates for option awards, consistent with the method of SFAS 123, the
Company's net loss attributable to common shareholders and net loss per common
share at December 31 would have been as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net loss attributable to common shareholders $(5,104,919) $(7,975,081)
As reported
Pro forma (5,110,238) (7,961,471)
Net loss per common share (basic and diluted)
As reported $ (0.48) $ (2.91)
Pro forma (0.48) (2.91)
</TABLE>
The fair value of each option is estimated on the date of grant using a
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the year ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Annual dividend yield 0% 0%
Estimated volatility 58% 58%
Risk free interest rate 6.8% 6.8%
Expected term 8 years 8 years
</TABLE>
F-19
<PAGE>
10. Warrants
During 1997 the Company entered into an agreement with a third party for public
and investor relations services to be rendered over a five-year period. In
consideration for these services the Company paid $650,000 in cash and issued
500,000 warrants to purchase common stock of the Company to the public relations
firm. These warrants had various exercise prices and terms, and expired at
varying dates through March, 2002. The Company determined the estimated
aggregate fair value of the warrants on the date of the grant to be
approximately $670,000. The Company recorded the total consideration of
$1,320,000 as deferred public relations costs, and the component of the total
consideration related to warrants was recorded as an increase to additional paid
in capital.
The Company began 1998 with 807,864 outstanding warrants to purchase common
stock of the company at a weighted average exercise price of $5.32 per warrant.
During 1998 an additional 425,000 warrants were issued at a weighted average
exercise price of $1.29, and 100,000 shares were cancelled at a weighted average
exercise price of $4.00. Warrants can be exercised at various times until the
year 2003.
11. Commitments and Contingencies
Leases
In February 1997 the Company moved into its new facility which it is
leasing under a twenty year capital lease expiring in 2017. The Company
also leases certain of its equipment under an operating lease with net
aggregate future lease payments of $137,653 in 1999, and $45,884 in the
year 2000.
Contingencies
In the normal course of business the Company is involved in various claims
and litigation. Management is of the opinion that any liability or loss
resulting from such claims or litigation will not have a material adverse
impact on the Company's financial condition, results of operations, or cash
flows.
Employment agreements
The Company has entered into employment agreements with key members of
management, under the terms of which aggregate base salaries for 1999 of
all the individuals are $240,000. The employment agreements also include a
provision for annual cash bonuses not to exceed 25% of base salaries. No
such bonuses were paid or accrued based on management's decision in 1998 or
1997.
12. Wholesale distributors
The Company distributes its products only through independent wholesale
distributors for resale to retailers such as liquor and wine and beer stores,
restaurants, taverns, pubs, bars, and sporting arena. Accordingly the Company is
dependent upon these wholesale distributors to sell the Company's beers and to
assist the Company in creating demand for, and promoting market acceptance of
the Company's products and provide adequate service to all retail customers. If
a significant wholesale distributor were to discontinue selling, or decrease the
level of orders, for the Company's products, the Company's business would be
adversely affected in areas serviced by such wholesale distributors until the
Company retained replacements.
Sales to wholesale distributors representing greater than 10% of total sales
were as follows for the years ended December 31:
1998 1997
--------- ---------
Distributor A $1,549,000 $1,236,400
Distributor B 304,500 0
Distributor C 382,400 271,600
F-20
<PAGE>
13. Income taxes
The tax effects of the primary temporary differences giving rise to the
Company's deferred tax asset (liability) at December 31, 1998 and 1997 are
summarized below:
1998 1997
--------- ---------
Net operating loss carry forward $ 4,720,000 $ 2,710,000
Other 25,000 21,000
Depreciation (150,000) (130,000)
---------- ----------
Subtotal 4,595,000 2,601,000
Valuation allowance (4,595,000) (2,601,000)
---------- ----------
Net deferred taxes $ 0 $ 0
Realization of the net deferred tax asset at the balance sheet date is dependent
on future earnings which are uncertain. Accordingly, a full valuation allowance
was recorded against the asset.
As of December 31, 1998, the Company had net operating loss carry forwards of
approximately $11,800,000 expiring between 2010 and 2013 available to offset
future taxable income for federal income tax purposes, subject to limitations on
annual utilization due to recent issuances of common stock.
14. Supplemental Disclosure of Cash Flow Information
<TABLE>
CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash paid for interest $ 569,498 $ 140,030
Supplemental disclosure of non cash investing and financing:
Capital lease obligations 0 3,000,000
Common stock issued to acquire assets 2,268,249 0
Fair value of warrants issued to non-employees for services 0 670,000
Fair value of stock pledged to management in lieu of salary 28,142 17,500
Fair value of warrants issued to bank for services 0 18,000
Fair value of warrants issued in connection with preferred stock 74,600 610,000
Deemed dividend in connection with beneficial feature of preferred 420,208 3,611,641
Beneficial future connection with Series A preferred stock 0 114,505
Common stock issued in connection with preferred stock 71,980 0
</TABLE>
F-21
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Frederick Brewing Co.
Date: July 2, 1999 /s/ Kevin E. Brannon
------------------ ---------------------------
Kevin E. Brannon
Chairman of the Board and
Chief Executive Officer
Date: July 2, 1999 /s/ Leslie P. Harper
------------------ ---------------------------
Leslie P. Harper
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant an in the capacities and on the
dates indicated.
/s/ Kevin E. Brannon Date: July 2, 1999
- --------------------------------------------
Kevin E. Brannon
Chairman
/s/ Marjorie A. McGinnis Date: July 2, 1999
- --------------------------------------------
Marjorie A. McGinnis
/s/ Nicholas P. Foris, M.D. Date: July 2, 1999
- --------------------------------------------
Nicholas P. Foris, M.D.
/s/ Carl R. Hildebrand Date: July 2, 1999
- --------------------------------------------
Carl R. Hildebrand
/s/ Jerome M. Pool Date: July 2, 1999
- --------------------------------------------
Jerome M. Pool
/s/ Maribeth Visco Date: July 2, 1999
- --------------------------------------------
Maribeth Visco
Exhibit 10(lviii)
LEASE MODIFICATION AGREEMENT
This Lease Addendum and Modification Agreement (hereinafter referred to
as "the Modified Lease") is made this 23rd day of June, 1998, by and between
Blue II LLC (hereinafter referred to as "Landlord") and Frederick Brewing
Company, a Maryland corporation, (hereinafter referred to as "Tenant").
WHEREAS, Landlord and Tenant entered into a Lease Agreement dated July
17, 1996 (hereinafter referred to as "Lease") for the rental of the Blue Ridge
Brewery Building located at 4607 Wedgewood Boulevard, Frederick, MD 21703
(formerly Lot 13 at Wedgewood Business Park); and
WHEREAS, the rent set forth in the Lease needs to be modified to
reflect an increase in the interest charged by the Landlord's lender and for the
possibility of exercising the Tenant's option to purchase; and
WHEREAS, the option to purchase set forth in the Lease needs to be
modified to allow for the possible assignment of partial rent proceeds towards
the purchase;
WHEREAS, Tenant acknowledges that it desires, requests and freely
agrees to this Lease Modification after consultation with its board of directors
and counsel;
NOW, THEREFORE, WITNESSETH:
The undersigned, being all of the parties to said Lease, do hereby
agree, for good and valuable consideration, the receipt of which is hereby
acknowledged, to the following modifications:
I. Sections 4A, 4B and 4C of the Lease shall be deleted in their
entirety and replaced with the following:
<PAGE>
4A. (i) $17,857.14 (Landlord's equal monthly principal curtailments of
$3,000,000.00 loan over a 14-year period), or (ii) such other principal amounts
as may be applicable, from time to time, if Landlord's loan is modified,
adjusted or refinanced or defaulted and Tenant consents to such modification,
adjustment or refinancing and such default, if any, is not the result of any
act, omission or condition of Tenant;
4B. (i) Interest on the unpaid principal balance of such loan (on a
declining basis) which shall be equal to the prime rate announced from time to
time by First Union Bank, N.A., plus one and one-half percent (1.5%) annually
beginning on July 1, 1998, which can be adjusted up or down by First Union Bank,
N.A. (the successor to Signet Bank) or any assignee of said lender including,
but not limited to, FCNB Bank (the potential assignee from First Union, N.A.),
or (ii) such other rate and terms as may be applied from time to time if such
loan is modified, adjusted, refinanced or defaulted, and Tenant consents to such
modification, adjustment, refinancing and such default, if any, is not the
result of any act, omission or condition of Tenant; provided that, if Tenant
does not consent to such modification, adjustment or refinancing, Landlord may
nevertheless modify, adjust or refinance so long as Tenant's obligations to
Landlord under the lease are not increased;
4C. Eleven Thousand Two Hundred Fifty Dollars ($11,250.00) per month of
which Eight Thousand Two Hundred Fifty Dollars ($8,250.00) per month shall be
credited to the Tenant for the next twelve (12) months beginning June 1, 1998
towards the option to purchase amount as modified below in the event the Tenant
purchases the property or the membership interest of the Seller.
II. Section 39 (Purchase Option) shall be modified and amended as
follows:
2
<PAGE>
A. Beginning on the sixty (6th) line after ". . . following the" delete
"sixth (6th)" and insert "second (2nd)".
B. Delete "sixth (6th)" on the ninth (9th) line and insert "second
(2nd)".
C. Beginning on the thirteenth (13th) line after "The executed Contract
of Sale may . . .", delete the word "not".
D. Delete the eighteenth (18th) line starting with "If Tenant" through
the end of the sentence on the twenty-second (22nd) line.
III. Exhibit C to the Contract shall be modified and amended as
follows:
A new paragraph shall be added;
Section 12,
Notwithstanding anything in the Contract to the contrary, Purchaser
shall have the right to purchase the Seller's membership interest in their LLC
anytime after the first anniversary of the Modified Lease (June 30, 1999) for
the sum of Three Hundred Fifty Thousand Dollars ($350,000.00) plus assuming the
existing financing and related guarantees. In the event the Tenant chooses to
exercise this option, then in that event, the Landlord shall credit the sum of
Eight Thousand Two Hundred Fifty Dollars ($8,250.00) per month of the rent paid
times the number of months from July 1, 1998 through their settlement date,
which must occur on or before June 30, 1999 (i.e., Purchase of membership
interest June 30, 1999; $8,250.00 x 12 months = $100,000.00; $350,000.00
purchase price of membership interest minus $100,000.00 rent credit =
$250,000.00 remaining payment).
IV. The Lease Modification will remain in full force and effect upon
the refinancing of Landlord's mortgage loan on terms substantially similar to
those set out in the FCNB term
3
<PAGE>
sheet dated April 28, 1998, including the proposed reduction in the interest
rate to 1.25% above the Wall Street Journal's published Prime Rate. Landlord
will agree to execute such documents as may be required to effect such a
refinancing without further modifications of the lease or other concessions by
either Tenant and its individual officers or directors, or Landlord and its
guarantors.
V. The remaining provisions of the Lease shall remain in full force and
effect.
LANDLORD: BLUE II LLC
By: /s/ [Illegible]
--------------------------------
TENANT FEDERICK BREWING CO.
By: /s/ [Illegible]
--------------------------------
Name to Come
Chairman
STATE OF MARYLAND :
:
COUNTY OF :
I HEREBY CERTIFY that on this 25th day of June, 1998, before me, the
subscriber, a notary public of the above state and county, personally appeared
Edward D. Scott, known to me or satisfactorily proven to be the person who name
is subscribed to the foregoing Lease Modification Agreement, who acknowledged
himself to be the Managing Member of Blue II, LLC, and that he being authorized
to do so, executed the foregoing Lease Modification Agreement for the purposes
therein contained.
/s/ [Illegible]
------------------------------------
Notary Public
My Commission Expires: 8/26/01
4
<PAGE>
STATE OF MARYLAND :
:
COUNTY OF FREDERICK :
I HEREBY CERTIFY that on this 23rd day of June, 1998, before me, the
subscriber, a notary public of the above state and county, personally appeared
Kevin E. Brannon, known to me or satisfactorily proven to be the person who name
is subscribed to the foregoing Lease Modification Agreement, who acknowledged
himself to be the Chairman of Frederick Brewing Co., and that he being
authorized to do so, executed the foregoing Lease Modification Agreement for the
purposes therein contained.
/s/ [Illegible]
-----------------------------------
Notary Public
My Commission Expires: 6/13/99
blueII/lease.mem
5
Exhibit 10(lix)
FC1 I-311611M
122199:MHD
SECOND LOAN MODIFICATION AGREEMENT
($3,000,000 LOAN TO BLUE II, L.L.C.)
THIS SECOND LOAN MODIFICATION AGREEMENT ("Agreement") is made and
entered into as of the 21st day of December, 1998 by and among FCNB BANK (the
"Bank"), the MARYLAND ECONOMIC DEVELOPMENT CORPORATION ("MEDCO"), the MARYLAND
INDUSTRIAL DEVELOPMENT FINANCING AUTHORITY ("MIDFA"), BLUE II, LLC (the
"Borrower"), FREDERICK BREWING CO., ("FBC"), EDWARD D. SCOTT ("Scott"), ROBERT
SCHUERHOLZ ("Schuerholz"), NICHOLAS P. FORIS ("Foris") and VISHNAMPET S.
JAYANTHIMATH ("Jayanthimath"). Scott, Schuerholz, Foris and Jayanthimath are
hereafter collectively referred to as the "Guarantors". The Borrower, FBC and
the Guarantors are sometimes collectively referred to as the "Obligors".
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 Signet Bank
("Signet") its Taxable Economic Development Revenue Bond (Blue II, LLC
Facility), 1996 Issue, dated July 19, 1996, in the original principal amount of
$3,000,000 (as amended, modified, supplemented, extended, renewed and 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 Signet, the Borrower, FBC 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 $3,000,000.00 executed by the Borrower in favor of MEDCO and
assigned by MEDCO to Signet (the "Note").
R-4. The Borrower's obligations under the Loan Documents (as hereafter
defined) are secured by, inter alia, the following (collectively, the
"Collateral"): (a) a Deed of Trust dated July 19, 1996 (the "Deed of Trust")
recorded among the land records of Frederick County, Maryland at liber 2207,
folio 0857 encumbering certain real estate and improvements described therein
(the "Property"); and (b) an Assignment of Leases and Rents dated July 19, 1996
(the "Assignment of Rents") recorded among the land records of Frederick County,
Maryland at liber 2207, folio 0903.
R-5. The Borrower's obligations under the Loan Documents (as hereafter
defined) are guaranteed by the Guarantors as set forth in a Guaranty
(Deficiency) dated July 19, 1996 (the "Guaranty").
R-6. 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-7. The terms of the Loan Agreement were modified pursuant to the
terms of a Forbearance Agreement dated February 27, 1997 and a letter agreement
dated
LAW OFFICES
MILES & STOCKBRIDGE P.C.
30 WEST PATRICK STREET, SUITE 600
FREDERICK, MARYLAND 21701
<PAGE>
2
January 9, 1998 (collectively, the "Prior Modification Documents") and were
further modified pursuant to the terms of a certain Loan Modification Agreement
dated May 27, 1998, by and among First Union National Bank ("First Union"), as
successor by merger to Signet, MEDCO, MIDFA, FBC, the Borrower and the
Guarantors (the "First Loan Modification Agreement").
R-8. The Note and the Bond were also previously modified pursuant to a
certain Allonge attached thereto dated May 27, 1998, by and among First Union,
MEDCO and the Borrower (the "Allonge").
R-9. At the request of the Borrower, the Bank has purchased the Loan as
well as the Bond, the Note and the other Loan Documents from First Union, and
has taken an assignment of First Union's right, title and interest therein
pursuant to a certain Assignment of even date herewith by First Union in favor
of the Bank.
R-10. Pursuant to the terms of the First Loan Modification Agreement,
the Loan (as hereafter defined) is currently scheduled to mature on April 1,
1999 (the "Maturity Date").
R-11. The Borrower has requested that the Bank extend the Maturity Date
of the Loan to July 1, 2006 and to make certain other changes to the repayment
terms of the Loan as described hereinbelow, which the Bank has agreed to do on
the condition, among others, that the Borrower and Guarantors enter into this
Agreement.
R-12. 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-13. The Obligors' obligations under the Bond, the Note, the Loan
Agreement, the Guaranty and the other Loan Documents (as hereafter defined) are
hereafter collectively referred to as the "Obligations". The Bond, the Note, the
Loan Agreement, the Guaranty, 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 referred to herein as the "Loan".
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and for good and valuable consideration, the
LAW OFFICES
MILES & STOCKBRIDGE P.C.
30 WEST PATRICK STREET, SUITE 600
FREDERICK, MARYLAND 21701
<PAGE>
3
receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
1. RECITALS.
The Bank and the obligors acknowledge and agree that the recitals to
this Agreement are true and correct. The recitals to this Agreement are
incorporated into and made a substantive part of this Agreement.
2. CONFIRMATION AND RATIFICATION OF LOAN DOCUMENTS.
The Obligors, individually and collectively, agree that the Loan
Documents are in full force and effect and that each of the Loan Documents shall
remain in full force and effect as the same may be modified or amended in
writing in accordance with its terms. The Obligors confirm and ratify their
obligations under the Loan Documents, and agree that the execution and delivery
of this Agreement shall not in any way diminish or invalidate any of their
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. The Bank and the Obligors hereto do hereby agree
and acknowledge that as of the date of this Agreement, there is currently
evidenced by the Bond and the Note the total outstanding principal balance of
TWO MILLION SIX HUNDRED NINETY-SIX THOUSAND FOUR HUNDRED TWENTY-EIGHT DOLLARS
AND SIXTY-TWO CENTS ($2,696,428.62), with all accrued interest thereon through
the date hereof having been paid by the Borrower prior to the execution of this
Agreement.
3. CONFIRMATION AND RATIFICATION OF GUARANTY AND AGREEMENT TO MAKE
MODIFICATIONS THERETO.
The Guarantors, individually and collectively, for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
hereby consent to and join in this Agreement and hereby declare to and agree
with that the Guaranty is and shall continue in full force and effect for the
benefit of the Bank, MEDCO and MIDFA, that there are no offsets, claims or
defenses of the Guarantors with respect to the Guaranty nor, to the Guarantors'
knowledge, with respect to the Obligations, that the Guaranty is not released,
diminished or impaired in any way by this Agreement or the transactions
contemplated hereby, and that the Guaranty is hereby confirmed and ratified in
all respects. The Guarantors hereby reaffirm all of the representations and
warranties set forth in the Guaranty. The Guarantors do hereby agree to amend
and modify the Guaranty in accordance with the terms and provisions of the
Amendment to Guaranty attached hereto as EXHIBIT A, to be executed by the
Guarantors as of even date herewith. The Guarantors acknowledge that, without
this consent and reaffirmation, and the agreements described in this paragraph
3., the Bank, MEDCO and MIDFA would not execute this Agreement or otherwise
consent to its terms.
4. MODIFICATION OF MATURITY DATE.
The Loan shall mature on July 1, 2006 (the "Amended Maturity Date").
On the Amended Maturity Date, all of the Obligations, including all outstanding
principal, accrued interest, outstanding late charges, outstanding fees and all
LAW OFFICES
MILES & STOCKBRIDGE P.C.
30 WEST PATRICK STREET, SUITE 600
FREDERICK, MARYLAND 21701
<PAGE>
4
other amounts due under the Loan Documents, shall be due and payable in
full. The Bank shall have no obligation to consider or grant any extension of
the Amended Maturity Date.
5. MODIFICATION OF INTEREST RATE.
From and after the date of this Agreement, the Obligations shall
bear interest at a fixed rate equal to EIGHT AND THREE QUARTERS PERCENT (8 3/4%)
PER ANNUM, subject however, to any applicable default interest rate set forth in
the Loan Documents. All interest due with respect to the obligations shall be
calculated on a three hundred sixty (360)-day year, and shall be determined by
the actual number of days elapsed.
6. MODIFICATION OF PRINCIPAL AND INTEREST REPAYMENT PROVISIONS.
From and after the date of this Agreement, combined payments of
principal and interest on the Loan at the rate stated above on the outstanding
principal balance due under the Loan shall be made in equal consecutive monthly
installments of TWENTY-NINE THOUSAND ONE HUNDRED EIGHTY-THREE DOLLARS AND
NINETY-SEVEN CENTS ($29,183.97) each, commencing on the last day of January,
1999, and continuing on the last day of each and every month thereafter until
the Amended Maturity Date, at which time all Obligations, including all
outstanding principal, accrued interest thereon, late charges, outstanding fees
and all other amounts due under the Loan Documents, shall be due and payable in
full.
7. MODIFICATION OF FINANCIAL COVENANTS.
The amendments and modifications to the financial covenants set
forth in Section 5.4(b) and Section 5.4(e) of the Loan Agreement, which were
made in the First Loan Modification Agreement shall remain in full force and
effect from and after the date of this Agreement.
8. FEES AND EXPENSES.
The obligors' shall be responsible for all fees and expenses,
including all attorneys fees and expenses, incurred by the Bank, MIDFA and
MEDCO 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.
9. ALLONGE TO NOTE AND BOND.
The Bank, MEDCO and the Borrower do hereby agree to execute as of
even date herewith a Second Allonge to the Bond and the Note, in the form
attached hereto as EXHIBIT B, which incorporates therein the modifications to
the Maturity Date, interest rate, and principal and interest repayment
provisions set forth in paragraphs 4., 5. and 6. of this Agreement.
10. MIDFA APPROVAL AND CONFIRMATION AND RATIFICATION OF INSURANCE
AGREEMENT.
MIDFA hereby consents to the Bank's purchase of the Loan, the Bond,
the Note and other Loan Documents from First Union and does hereby consent to
LAW OFFICES
MILES & STOCKBRIDGE P.C.
30 WEST PATRICK STREET, SUITE 600
FREDERICK, MARYLAND 21701
<PAGE>
5
the modifications set forth herein and in the Amendment to Guaranty and the
Allonge in the form attached hereto as EXHIBIT A and EXHIBIT B, respectively.
MIDFA hereby declares and agrees that the Insurance Agreement is and shall
continue in full force and effect for the benefit of the Bank, subject however,
to the modifications and clarifications set forth in that certain letter dated
November 6, 1998 from Robert C. Brennan, Assistant Secretary Financing Programs
of MIDFA, to Michael H. Bodnar, Senior Vice President of the Bank, a copy of
which is attached hereto as EXHIBIT C, made a part hereof and incorporated
herein by reference.
11. OBLIGORS' REPRESENTATIONS AND WARRANTIES.
As inducement to enter into this Agreement, the obligors hereby
represent and warrant to the Bank, MEDCO and MIDFA as follows:
11.1. Authorization and Validity. The execution and delivery of this
Agreement, the Amendment to Guaranty, the Allonge, and any other related
documents by the Obligors and the performance of their obligations hereunder
have been duly authorized, and this Agreement, the Amendment to Guaranty, the
Allonge, and such other related documents constitute the legal, valid and
binding obligations of the Obligors in accordance with their respective terms.
11.2. Compliance With Other Instruments. The Obligors are not in
default under any provision of their articles of incorporation or organization,
by-laws or operating agreement or other organizational or governing documents,
as applicable, or of any existing judgment, decree, law, governmental order,
rule or regulation applicable to them, or of any agreement or other instrument
to which they are a party or by which their assets are bound. The execution and
delivery by the Obligors 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 their articles of incorporation or
organization, by-laws or operating agreement, or other organizational or
governing documents, as 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 Obligors are a party or by which the Obligors
may be bound or subject.
11.3. Benefit. The obligors have each derived direct or indirect
benefit from this Agreement and the transactions contemplated hereby.
11.4. Engagement of Counsel. The Obligors have each engaged (or have
had the opportunity to engage) independent legal counsel of their choice to
review this Agreement and any related documents. The Obligors each acknowledge
that they are executing and delivering this Agreement and any related documents
voluntarily, without coercion or duress of any kind, and with full understanding
of its content and meaning.
11-5.1 Truth of Representations. Any and all documents, reports,
certificates and statements provided to the Bank by or on behalf of any or all
LAW OFFICES
MILES & STOCKBRIDGE P.C.
30 WEST PATRICK STREET, SUITE 600
FREDERICK, MARYLAND 21701
<PAGE>
6
of the Obligors in connection with the transactions contemplated hereby 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.
11.6. 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 to the knowledge of the Obligors threatened
against the Obligors, except as has been disclosed to the Bank in writing.
12. RELEASE OF BANK, MEDCO AND MIDFA.
The Obligors, individually and collectively, hereby RELEASE and
FOREVER WAIVE and RELINQUISH all claims, demands, obligations, liabilities and
causes of action of whatsoever kind or nature, whether known or unknown, which
all or any of them has, may have, or might have or assert now or in the future
against the Bank, MEDCO or MIDFA and/or their respective current or former
directors, members, officers, employees, representatives, insurers, attorneys,
agents, successors or assigns, or any affiliates, subsidiaries or related
entities of the Bank, MEDCO or MIDFA and/or their respective directors, members,
officers, employees, representatives, insurers, attorneys, agents successors or
assigns (individually and collectively, the "Bank/MEDCO/MIDFA Group"), directly
or indirectly, arising out of, based upon or in any manner connected with any
Prior Related Event. As used herein, the term "Prior Related Event" means any
transaction, event, circumstance, action, failure to act or occurrence of any
sort or type, whether known or unknown, 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 Property, the Deed of Trust, the Assignment of Rents, the
Guaranty, the Insurance Agreement, any amendments or modifications of any of the
foregoing, the Bank, MEDCO, MIDFA and/or the relationship among all or any of
the Obligors and the Bank/MEDCO/MIDFA Group which occurred, existed, was taken,
permitted or begun prior to the execution of this Agreement. The execution of
this Agreement by the Bank, MEDCO and MIDFA shall not constitute an
acknowledgment or admission by the Bank, MEDCO and MIDFA of any liability for
any matter or precedent upon which any liability may be asserted.
13. GENERAL PROVISIONS.
13.1. 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.
13.2. 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.
13.3. 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.
LAW OFFICES
MILES & STOCKBRIDGE P.C.
30 WEST PATRICK STREET, SUITE 600
FREDERICK, MARYLAND 21701
<PAGE>
7
[INSERT MISSING COPY]
LAW OFFICES
MILES & STOCKBRIDGE P.C.
30 WEST PATRICK STREET, SUITE 600
FREDERICK, MARYLAND 21701
<PAGE>
8
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, agent or attorney of any party hereto,
shall be valid or binding. In the event any provisions in this Agreement is in
conflict with any provisions of any Loan Document, the provisions in this
Agreement shall prevail.
13.10. No Release or Discharge. Except as expressly provided herein,
nothing contained in this Agreement is intended to or shall act to nullify,
discharge or release any obligations or to release any collateral. Except to the
extent of any express conflict with this Agreement, each and every of the terms
and conditions of the Loan Documents shall remain in full force and effect.
13.11. Notices. Any notices required or permitted by this Agreement
shall be in writing and shall be deemed delivered if delivered by hand, by
overnight mail or by certified mail, return receipt requested, as follows,
unless such address is changed by written notice hereunder:
If to the Bank: FCNB Bank
P.O. Box 240
7200 FCNB Court
Frederick, Maryland 21705-0240
ATTN: Mr. Michael H. Bodnar
Senior Vice President
If to MEDCO: Maryland Economic Development Corporation
Suite 2410
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
LAW OFFICES
MILES & STOCKBRIDGE P.C.
30 WEST PATRICK STREET, SUITE 600
FREDERICK, MARYLAND 21701
<PAGE>
9
If to the Borrower: Blue II, LLC
117 West Patrick Street
Frederick, Maryland 21701
ATTN: Mr. Edward D. Scott
Managing Member
with a copy to: Roger C. Simmons, Esquire
Gordon & Simmons
131 West Patrick Street
Frederick, Maryland 21705
If to FBC: Frederick Brewing Co.
4607 Wedgewood Boulevard
Frederick, Maryland 21703
ATTN: Mr. Kevin E. Brannon, Chairman
and Chief Executive Officer
If to Scott: Edward D. Scott
117 West Patrick Street
Frederick, Maryland 21701
If to Schuerholz: Robert Schuerholz
13825 Manor Glen Road
Baldwin, Maryland 21013
If to Foris: Nicholas P. Foris
74 Thomas Johnson Drive
Frederick, Maryland 21702
If to Jayanthimath: Vishnampet S. Jayanthimath
5216 Ernie Lane
Frederick, Maryland 21701
The addresses set forth in this Section 13.11 shall amend, supersede
and replace the addresses set forth in the definition of "Notice" under Section
1.1 of the Loan Agreement.
13.12. 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.
13.13. Time of Essence. Time is of the essence.
13.14. 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.
13.15. Binding Effect. This Agreement shall have no effect unless
and until it has been executed by all parties.
13.16. Appointment of New Bond Registrar. Pursuant to Section 2.5 of
the Loan Agreement, MEDCO does hereby remove First Union as the Bond Registrar
and does hereby appoint FCNB Bank as Bond Registrar in the place and stead of
First Union. FCNB hereby accepts such appointment and does hereby
LAW OFFICES
MILES & STOCKBRIDGE P.C.
30 WEST PATRICK STREET, SUITE 600
FREDERICK, MARYLAND 21701
<PAGE>
10
agree to act as Bond Registrar.
IN WITNESS WHEREOF, the parties hereto have executed and caused to be
executed, this Agreement under seal as of the day and year first written above.
WITNESS/ATTEST: FCNB BANK
/s/ Illegible BY:/s/ Michael H. Bodnar (SEAL)
- ---------------------- -------------------------
Name to Come Michael H. Bodnar
Senior Vice President
WITNESS/ATTEST: MARYLAND ECONOMIC, DEVELOPMENT
CORPORATION
/s/ Lynne McLean BY:/s/ Hans F. Mayer (SEAL)
- ---------------------- -------------------------
Lynne McLean Hans F. Mayer
Executive Director
WITNESS/ATTEST: MARYLAND INDUSTRIAL DEVELOPMENT
FINANCING AUTHORITY
/s/ Illegible BY:/s/ D. Gregory Cole (SEAL)
- ---------------------- -------------------------
Name to Come Name: D. Gregory Cole
Title: Executive Director
WITNESS/ATTEST: BLUE II, LLC
/s/ Illegible BY:/s/ Edward D. Scott (SEAL)
- ---------------------- -------------------------
Name to Come Name: Edward D. Scott
Title: Member
WITNESS/ATTEST: FREDERICK BREWING CO.
BY:/s/ Kevin E. Brannon (SEAL)
-------------------------
Name: Kevin E. Brannon
Title: Chairman and Chief Executive
Officer
WITNESS/ATTEST: EDWARD D. SCOTT
BY:/s/ Edward D. Scott (SEAL)
-------------------------
Name:
Title:
WITNESS/ATTEST: ROBERT SCHUERHOLZ
BY:/s/ Robert Schuerholz (SEAL)
-------------------------
Name: Robert Schuerholz
Title:
WITNESS/ATTEST: NICHOLAS P. FORIS
BY:/s/ Nicholas P. Foris (SEAL)
-------------------------
Name: Nicholas P. Foris
Title:
WITNESS/ATTEST: VISHNAMPET S. JAYANTHIMATH
BY:/s/ Illegible (SEAL)
-------------------------
Name: Illegible
Title:
LAW OFFICES
MILES & STOCKBRIDGE P.C.
30 WEST PATRICK STREET, SUITE 600
FREDERICK, MARYLAND 21701
<PAGE>
11
STATE OF MARYLAND )
) ss:
COUNTY OF FREDERICK )
I HEREBY CERTIFY that on the 31st day of December, 1998, before me, the
subscribed, a notary public of the above state and county, personally appeared
Michael H. Bodnar, known to me or satisfactorily proven to be the person whose
name is subscribed to the foregoing Loan Modification Agreement, who
acknowledged himself to be the Senior Vice President of FCNB Bank, and that he
being authorized to do so, executed the foregoing Loan Modification Agreement
for the purposes therein contained.
/s/ Illegible
-------------------------
Notary Public
My commission expires: 5/5/2001
STATE OF MARYLAND )
) ss:
CITY/COUNTY OF BALTIMORE )
------
I HEREBY CERTIFY that on the 29th day of December, 1998, before me, the
subscribed, a notary public of the above state and county, personally appeared
Hans F. Mayer, known to me or satisfactorily proven to be the person whose name
is subscribed to the foregoing Loan Modification Agreement, who acknowledged
himself to be the Executive Director of the Maryland Economic Development
Corporation, and that he being authorized to do so, executed the foregoing Loan
Modification Agreement for the purposes therein contained.
Charlotte Base Trainor
-------------------------
Notary Public
My commission expires: March 1, 1999
STATE OF____________________)
) ss:
CITY/COUNTY OF______________)
I HEREBY CERTIFY that on the ___ day of December, 1998, before me, the
subscribed, a notary public of the above state and county, personally appeared
_____________________, known to me or satisfactorily proven to be the person
whose name is subscribed to the foregoing Loan Modification Agreement, who
acknowledged himself/herself to be the _________________________ of the Maryland
Industrial Development Financing Authority, and that he/she being authorized to
do so, executed the foregoing Loan Modification Agreement for the purposes
therein contained.
-------------------------
Notary Public
My commission expires:_______________
LAW OFFICES
MILES & STOCKBRIDGE P.C.
30 WEST PATRICK STREET, SUITE 600
FREDERICK, MARYLAND 21701
<PAGE>
12
STATE OF MARYLAND )
) ss:
CITY/COUNTY OF FREDERICK )
I HEREBY CERTIFY that on the 30th day of December, 1998, before me, the
subscribed, a notary public of the above state and county, personally appeared
Edward D. Scott, known to me or satisfactorily proven to be the person whose
name is subscribed to the foregoing Loan Modification Agreement, who
acknowledged himself/herself to be the member of Blue II, LLC, and that he/she
being authorized to do so, executed the foregoing Loan Modification Agreement
for the purposes therein contained.
/s/ Illegible
-------------------------
Notary Public
My commission expires: 11/01/01
STATE OF MARYLAND )
) ss:
CITY/COUNTY OF FREDERICK )
I HEREBY CERTIFY that on the 31st day of December, 1998, before me, the
subscribed, a notary public of the above state and county, personally appeared
Kevin E. Brannon, known to me or satisfactorily proven to be the person whose
name is subscribed to the foregoing Loan Modification Agreement, who
acknowledged himself/herself to be the Chairman and CEO of Frederick Brewing
Co., and that he/she being authorized to do so, executed the foregoing Loan
Modification Agreement for the purposes therein contained.
/s/ Illegible
-------------------------
Notary Public
My commission expires: 5/5/2001
STATE OF MARYLAND )
) ss:
CITY/COUNTY OF FREDERICK )
I HEREBY CERTIFY that on the 30th day of December, 1998, before me, the
subscribed, a notary public of the above state and county, personally appeared
Edward D. Scott, known to me or satisfactorily proven to be the person whose
name is subscribed to the foregoing Loan Modification Agreement who executed the
foregoing Loan Modification Agreement for the purposes therein contained.
/s/ Illegible
-------------------------
Notary Public
My commission expires: 11/01/01
LAW OFFICES
MILES & STOCKBRIDGE P.C.
30 WEST PATRICK STREET, SUITE 600
FREDERICK, MARYLAND 21701
<PAGE>
13
STATE OF MARYLAND )
) ss:
CITY/COUNTY OF FREDERICK )
I HEREBY CERTIFY that on the 29th day of December, 1998, before me,
the subscribed, a notary public of the above state and county, personally
appeared Robert Schuerholz, known to me or satisfactorily proven to be the
person whose name is subscribed to the foregoing Loan Modification Agreement,
who executed the foregoing Loan Modification Agreement for the purposes therein
contained.
My commission expires: [illegible] ------------------------
Notary Public
STATE OF MARYLAND )
) ss:
CITY/COUNTY OF FREDERICK )
I HEREBY CERTIFY that on the 30th day of December, 1998, before me, the
subscribed, a notary public of the above state and county, personally appeared
Nicholas P. Foris, known to me or satisfactorily proven to be the person whose
name is subscribed to the foregoing Loan Modification Agreement, who executed
the foregoing Loan Modification Agreement for the purposes therein contained.
------------------------
Notary Public
My commission expires: 3-30-99
STATE OF MARYLAND )
) ss:
CITY/COUNTY OF FREDERICK )
I HEREBY CERTIFY that on the 30th day of December, 1998, before me, the
subscribed, a notary public of the above state and county, personally appeared
Vishnampet S. Jayanthimath, known to me or satisfactorily proven to be the
person whose name is subscribed to the foregoing Loan Modification Agreement,
who executed the foregoing Loan Modification Agreement for the purposes therein
contained.
------------------------
Notary Public
My commission expires: 3-30-99
LAW OFFICES
MILES & STOCKBRIDGE P.C.
30 WEST PATRICK STREET, SUITE 600
FREDERICK, MARYLAND 21701
Exhibit 10(lx)
NASDAQ LOGO
The Nasdaq Stock Market, Inc.
1735 K Street, NW
Washington, DC 20006-1500
202 496 2500
Fax 202 496 2699
VIA FACSIMILE & REGULAR MAIL
September 15, 1998
Mr. Kevin Brannon
Chairman and CEO
Frederick Brewing Company
4607 Wedgewood Boulevard
Frederick, MD 21703
Dear Mr. Brannon:
The purpose of my letter is to bring to your attention a concern regarding the
continued listing of Frederick Brewing Company's shares of common stock (BLUE)
on The Nasdaq SmallCap Market. Based upon the staff's review of the price data
covering the last thirty consecutive trade dates, your Company's shares of
common stock have failed to maintain a closing bid price greater than or equal
to $1.00. To be eligible for continued listing, all securities, the Company's
shares of common stock, must maintain a minimum bid price of $1.00./1
We recognize this deficiency may be a temporary situation, and no delisting
action with respect to the bid price deficiency will be initiated at this time.
Instead, the Company will be provided ninety (90) calendar days in which to
regain compliance with the minimum bid price requirement./2 If at anytime within
the next ninety calendar days from the date of this letter, the shares of common
stock reports a closing bid price of $1.00 or greater for ten consecutive
trading days, it will have complied with the minimum bid price requirement.
However, if the Company is unable to demonstrate compliance with the minimum
$1.00 bid price on or before the end of the ninety day period December 14, 1998,
the Company's securities will be subject to delisting, effective with the close
of business on December 14, 1998. To stay the delisting, the Company may request
a hearing by the
- --------------
1/ Marketplace Rule 43 10(c)(04).
2/ The ninety day period relates exclusively to the bid price deficiency. The
Company may be delisted during the ninety day period for failure to maintain
compliance with any other listing requirement for which it is currently on
notice or which occurs during the period.
<PAGE>
close of business on December 14, 1998. For more information on the hearing
process, please contact the Listing Qualifications Hearing Department at (202)
496-2635.
If you have any questions concerning the compliance issues discussed above,
please call me at (202) 496-2669.
Very truly yours,
/s/ Robert J. McCormick
- -----------------------------
Robert J. McCormick
Analyst
Nasdaq Listing Qualifications
cc: Cam Funkhouser
Market Surveillance
Exhibit 10(lxi)
WESTFINANCE CORPORATION
3201 NEW MEXICO AVENUE. N.W.
SUITE 350
WASHINGTON, D.C. 20016
-------
(202)895-1390
AGREEMENT between
FREDERICK BREWING CO.
and
WESTFINANCE CORPORATION
for:
THE RETENTION OF WESTFINANCE CORPORATION AS FINANCING AGENT
1. For obtaining financing of Five Million ($5,000,000) dollars for
FREDERICK BREWING CO., Westfinance will be paid a cash fee equal to 6% of that
amount when provided by investors whom Westfinance identifies in writing to FBC,
whom FBC acknowledges as Westfinance's investors, and who are then placed in
direct contact with FBC by Westfinance. Such fee will be payable only upon
receipt of the monies and closing thereon by FBC. Should Westfinance obtain
financing for FBC of less than $5,000,000, its fee shall be 8% of the amount
obtained up to $500,000, 7% of the next $500,000 and 6% of the excess over
$1,000,000.
2.a. For financial advisory services provided by Westfinance it will be
paid a cash fee of 1% of all monies obtained from sources who are not
Westfinance investors, payable only upon receipt of the monies and closing
thereon by FBC. Notwithstanding the foregoing, monies obtained from pending
financing in an amount of approximately three million dollars in the form of
subordinated debt and/or equity if provided by Private Capital Source, Ltd. and
World Capital Funding respectively, are specifically excluded from the
provisions of this paragraph.
2.b. Westfinance shall also receive as additional compensation warrants
equal to 1% of the company's presently outstanding shares, exercisable no later
than five years from the date of this agreement, at the same price paid by the
investor(s). Should Westfinance obtain financing for FBC of less than $5,000,000
the number of warrants it shall receive will be reduced proportionately, but in
no event to a number less than 0.5% of FBC's presently outstanding shares. The
underlying shares shall have piggyback registration rights.
2.c. Westfinance's financial advice shall include but not be limited to
counseling FBC on the structuring of the financing, with particular emphasis on
identifying alternative structures and advising on the advantages and
disadvantages of each. Westfinance will also advise on valuation and pricing.
3. FBC will promptly reimburse Westfinance, upon receipt of invoice,
for all expenses specifically related to its service to FBC. Prior approval will
be secured by Westfinance if such expenses exceed $500. FBC will be responsible
for all of its own costs.
<PAGE>
TERM
Westfinance will be the exclusive financing agent for FBC for a period
of 90 days from the date of this agreement, unless extended by mutual consent.
Westfinance will be deemed to be the procuring cause with regard to any and all
prospective investors it identifies in writing to FBC during this period and
whom FBC acknowledges as Westfinance's investors, and thus will be entitled to
the compensation described above should any such prospective investors provide
FBC with funds; provided such investment occurs within twelve months following
the end of the term of this agreement unless such investment is part of a
scheduled investment extending over a longer period of time. FBC reserves the
right to accept or reject, at its own discretion, any investor or the terms of
any particular offer. This agreement constitutes the only valid agreement
between the parties.
AGREED AND ACCEPTED:
Date: November 4, 1998 /s/ C. Stevens Avery, II
----------------------- ------------------------
C. Stevens Avery, II
President
By: /s/ Kevin E. Brannon
-------------------------
Chairman & CEO
Frederick Brewing Co.
<PAGE>
WESTFINANCE CORPORATION
3201 NEW MEXICO AVENUE. N.W.
SUITE 350
WASHINGTON, D.C. 20016
-------
(202) 895-1390
MERGER & ACQUISITION TRANSACTION FEE AGREEMENT
Transaction Fee: Monthly Retainer:
- ---------------- -----------------
first and second million- 5%
third and fourth million- 4%
fourth and fifth million- 3%
fifth and sixth million- 2%
thereafter- 1%
1. Westfinance Corporation (WFC) will represent Frederick Brewing Co. ("FBC")
to potential M&A candidates relying on data and estimates furnished by
FBC. WFC will clear all contacts in advance; FBC will advise WFC of prior
efforts and all other contacts.
2. Transaction fee will be payable in cash at time of closing if FBC accepts
transaction
a. through the introduction or efforts of WFC within 24 months of date
below; or
b. with any source whatever during period of exclusivity.
3. Transaction fee will be reduced by the advance retainer and will
constitute full settlement for all transaction fees and expenses except:
a. out-of-pocket expenses (such as distant travel) specifically
authorized by FBC; and
b. subsequent payments of any description, including the assumption of
leases, that had been negotiated as part of the transaction.
4. FBC has corporate authority to pay the fees set forth above.
5. This agreement is exclusive, may be terminated in writing after 180 days
and will be arbitrated under the rules of the American Arbitration
Association in case of dispute, except that paragraphs 2(a) and 3 shall
survive such termination.
Frederick Brewing Co. Date: 11/4/98
/s/ Kevin E. Brannon /s/ C. Stevens Avery, II.
- -------------------------------- -------------------------
Kevin E. Brannon, Chairman & CEO C. Stevens Avery, II.
Frederick Brewing Co. President
Westfinance Corporation
Exhibit 22
CONSENT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Frederick Brewing Co.
Frederick, Maryland
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (File numbers 333-65287, 333-54013, 333-51207,
333-35655, 333-25743) of Frederick Brewing Co. (the Company) of our report
dated March 30, 1998 relating to the financial statements of the Company as
of and for the year ended December 31, 1997, which appear in this Form 10-K.
PricewaterhouseCoopers LLP
McLean, Virginia
July 2, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000926978
<NAME> Frederick Brewing Co.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<EXCHANGE-RATE> 1 1
<CASH> 105,474 2,625,355
<SECURITIES> 0 0
<RECEIVABLES> 438,601 368,981
<ALLOWANCES> 27,618 35,544
<INVENTORY> 671,856 354,224
<CURRENT-ASSETS> 1,346,219 3,416,492
<PP&E> 9,144,359 8,777,778
<DEPRECIATION> 1,125,028 402,133
<TOTAL-ASSETS> 12,464,989 13,401,419
<CURRENT-LIABILITIES> 2,700,003 1,043,699
<BONDS> 0 0
0 0
2,356,518 5,552,713
<COMMON> 559 167
<OTHER-SE> 3,821,810 1,715,568
<TOTAL-LIABILITY-AND-EQUITY> 12,464,989 7,268,448
<SALES> 5,144,661 3,077,681
<TOTAL-REVENUES> 5,144,661 3,077,681
<CGS> 4,198,783 2,837,229
<TOTAL-COSTS> 4,198,783 2,837,229
<OTHER-EXPENSES> 5,264,089 4,463,862
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 557,646 140,030
<INCOME-PRETAX> 4,684,711 4,363,440
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 4,684,711 4,363,440
<DISCONTINUED> 0 0
<EXTRAORDINARY> 420,208 3,611,641
<CHANGES> 0 0
<NET-INCOME> 5,104,919 7,975,081
<EPS-BASIC> .46 (1.59)
<EPS-DILUTED> .52 (2.91)
</TABLE>
Exhibit 99.1
[GRAPHIC OMITTED]
FOR IMMEDIATE RELEASE: CONTACT: Andrea J. Keller
October 13, 1998 Frederick Brewing Co.
301-694-7899 x120
FBC BRINGS HOME THE SILVER
Mid-Atlantic's Largest Craft Brewer Wins Two Medals at Prestigious Beer Festival
FREDERICK, MD -- Frederick Brewing Co. (NASDAQ: BLUE) announced today it is the
proud recipient of two medals at the 17th Annual Great American Beer
Festival(TM) (GABF) -- the nation's largest and most prestigious beer festival.
"We're very proud of what our brewers have accomplished," said FBC President and
COO Marjorie McGinnis. "Blue Ridge(R) Subliminator Dopplebock(TM) and
Brimstone(TM) Stone Beer are two of our most complex beers. They've done a
terrific job."
A previous GABF winner, Blue Ridge(R) Subliminator Dopplebock(TM) won a silver
medal in the bock category. Lagered for nearly three months, Subliminator(TM) is
brewed with more than 90 pounds of grain per barrel of Pacific Northwest hops,
yeast and water.
Brimstone Brewing Co.'s innovative Stone Beer won a bronze medal in the
experimental beer category. A resurrection of an early brewing technique used in
the days before copper kettles, Brimstone(TM) Stone Beer is brewed with hot
stones. The intense heat from the rocks caramelizes the wort sugars, which later
release toffee-like flavors into the beer.
Founded in 1993 with the Blue Ridge(R) beers, Frederick Brewing Co. completed a
successful initial public offering (IPO) in 1996. In March 1997, the Company
moved from a converted warehouse to a purpose-built, 57,000 square foot
facility. In December 1997, Frederick Brewing Co. merged with two other
Maryland microbreweries, Wild Goose Brewery, Inc. of Cambridge, MD and
Brimstone Brewing Co. of Baltimore, MD, creating the largest craft brewery in
the Mid-Atlantic region. Frederick Brewing Co. beers are sold in 33 states, the
District of Columbia and several international markets.
# # #
Exhibit 99.2
[GRAPHIC OMITTED]
FOR IMMEDIATE RELEASE CONTACT: Kym Cheseldine
November 6, 1998 Frederick Brewing Co.
(301) 694-7899 xll3
I.W. Miller Group, Inc.
(714) 833-9001
FREDERICK BREWING CO. SEES SIGNS OF
TURNAROUND IN 3RD QUARTER RESULTS
Teleconference Review with Brokers, Analysts Set for Tuesday, November 10
FREDERICK, MD - Frederick Brewing Co. (NASDAQ, Small Cap: BLUE) has announced
higher sales and reduced losses for the third quarter of 1998.
For the quarter ended September 30, 1998, Frederick Brewing Co. (FBC) reported
net sales of $1,413,617 a 53% increase over the same period of 1997. The Company
shipped 9,233 barrels of beer in the period, an increase of 61% over the third
quarter of 1997. Gross profit per barrel rose by 89%, to $37.07 from $19.61, as
direct labor, direct materials and production overhead costs per barrel all
declined. Selling, general and administrative expenses declined by 32% to
$863,277 compared to the third quarter of 1997, even though the 1998 figures
include a $91,000 quarterly charge for amortizing the goodwill associated with
the Company's acquisitions of the Wild Goose(R) and Brimstone(TM) brands in
early 1998. The Company's loss from operations fell by 53% to $526,018 in the
third quarter of 1998 from $1,115,664 in 1997 period.
Excluding charges for dividends deemed to have accrued to preferred
stockholders, the Company's net loss declined by 39% to ($735,493) in the third
quarter of 1998, compared to the same period a year ago. Including those
charges, which represent an estimate of the value of the discounts granted to
purchasers of certain preferred stock issued during the respective periods upon
the eventual conversion of the preferred stock to common stock, the loss
attributable to common shareholders was $982,493 an improvement of 54% compared
to the prior year.
Frederick Brewing Co. CEO Kevin Brannon said, "These results bear out what we
have been saying for the past six months: as production volume moves up and our
brewers and packaging people get more experience working in the new brewery, our
production costs will steadily decline. The cost reduction programs we have been
implementing over the past two quarters resulted in a reduction in selling,
general and administrative overhead expenses of $191,794 (18%) just since last
quarter. Excluding the extraordinary charge we took in the second quarter, our
operating loss declined by 18% compared to the second quarter, even though net
revenues did not increase very much. These efforts are continuing and we expect
them to result in even greater savings over the next three quarters." Brannon
said the net loss is not falling as fast as the operating loss because net
interest and rental expenses have increased due to higher interest rates imposed
by the Company's bank in April and payments made toward the Company's option to
purchase of the brewery building from its landlord. He said, "We have made
substantial progress in our efforts to re-finance these loans and expect to
complete the process within 90 days or so. We expect the re-financings to reduce
our debt service obligations considerably."
Marjorie McGinnis, FBC President and Chief Operating Officer, said she was
pleased with sales for the third quarter which she said, has historically been
the second
<PAGE>
slowest of the year, behind only the January to March quarter. "This report
proves how important our diverse portfolio of beers is to our success. Wild
Goose(R) sales were strong, we were able to introduce the Brimstone(TM) brand to
a nationwide audience via a beer club, and FBC became one of the very few
American craftbrewers in the Ontario, Canada market thanks to the unique
positioning of the Hempen Gold(TM) brand. We were able to enter critically
important New York chain stores late in the quarter with several different
products and expect to see significant results in those accounts during the next
few months. All of this bodes well for us as we enter the holiday season - the
fourth quarter is always our best as beer drinkers trade up to better beers and
our higher margin winter seasonal products take off."
For the first three quarters of 1998, FBC's net sales were up 95% to $3,722,719
and losses from operations, before an extraordinary second quarter charge of
$1,089,000, were $1,799,045, a reduction of 32% compared to the first nine
months of 1997. Including the charges, the operating losses for the year to date
is $2,888,045, an increase of 7% compared to the same period in 1997. Through
September 30, the Company's net loss, excluding the extraordinary charge and
before the deemed preferred stock dividend, was $2,318,500 compared to
$2,764,335 for the same period in 1997. Including both charges, the net loss
attributable to common shareholders was $3,683,127 for the first nine months of
1998, 27% less than the loss reported for the same period last year.
Members of Frederick Brewing Co.'s executive management team will be available
to discuss recent developments as part of an "open line" teleconference
scheduled for Tuesday, November 10, beginning shortly after the market close at
4:15 p.m. Eastern Standard Time (3:15 p.m. Central/2:15 p.m. Mountain/1:15 p.m.
Pacific).
All current and prospective investors, institutional portfolio managers,
investment brokers, securities analysts, members of the brokerage community and
representatives of the trade are welcome to participate in this conference call.
To take part in the Frederick Brewing Co. teleconference, which can be accessed
toll-free from anywhere in the U.S., participants are simply required to dial
(800) 553-0358 and register their name and corporate affiliation.
Consolidated Statement of Operations
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross Sales $1,603,212 $ 1,072,961 $ 4,213,059 $ 2,214,191
- ----------------------------------------------------------------------------------------------------------------
Less: Depletions, allowances and 189,595 147,363 490,340 305,127
excise taxes
- ----------------------------------------------------------------------------------------------------------------
Net sales 1,413,617 925,598 3,722,719 1,909,064
- ----------------------------------------------------------------------------------------------------------------
Cost of sales 1,071,373 813,071 2,851,091 1,940,890
- ----------------------------------------------------------------------------------------------------------------
Gross profit (loss) 342,244 112,527 871,628 (31,826)
- ----------------------------------------------------------------------------------------------------------------
Selling, general and administrative 863,277 1,228,191 2,665,688 2,663,738
expenses
- ----------------------------------------------------------------------------------------------------------------
Minority interest 4,985 - 4,985 -
- ----------------------------------------------------------------------------------------------------------------
Write-off of net deferred public - - 1,089,000 -
relations costs
- ----------------------------------------------------------------------------------------------------------------
Operating loss (526,018) (1,115,664) (2,888,045) (2,695,564)
- ----------------------------------------------------------------------------------------------------------------
(Gain)/loss on sale of equipment - - 99,545 (135,523)
- ----------------------------------------------------------------------------------------------------------------
Interest expense, net 209,475 95,927 419,910 204,294
- ----------------------------------------------------------------------------------------------------------------
Net loss (735,493) (1,211,591) (3,407,500) (2,764,335)
- ----------------------------------------------------------------------------------------------------------------
Preferred stock deemed dividend (247,000) (928,626) (275,627) (2,283,080)
requirements
- ----------------------------------------------------------------------------------------------------------------
Net loss attributable to common $ (982,49) $(2,140,217) $(3,683,127) $(5,047,415)
shareholders
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Exhibit 99.3
[GRAPHIC OMITTED]
FOR IMMEDIATE RELEASE: CONTACT: Andrea J. Keller
November 12, 1998 Frederick Brewing Co.
301-694-7899 x.120
Cheers to Five MORE Years
First Bottles of Blue Ridge(R) Beer Rolled off Bottling Line, November 12, 1993
FREDERICK, MD -- Frederick Brewing Co. (NASDAQ: BLUE) announced today the five
year anniversary of the first run of Blue Ridge(R) beer, the brewery's line of
award-winning, all-American craft beers.
"We're very proud to have come this far!" said Marjorie McGinnis, president and
COO of Frederick Brewing Co. "We're confident that we've successfully positioned
Frederick Brewing Co. to continue a rapid growth rate, expanding distribution
into new markets, both in the United States and abroad."
Since November 1993, Frederick Brewing Co. (FBC) has completed a successful
initial public offering, built a 57,000 square-foot brewery, developed the
country's first hemp beers, won four awards at the Great American Beer Festival,
merged with two other Maryland microbreweries, entered 33 states and several
international markets, and joined Food & Wine magazine's June 1998 list of
America's Top 20 Breweries.
FBC's most recent commendations include two medals from the 17th Annual Great
American Beer Festival for Blue Ridge(R) Subliminator Dopplebock(TM) and
Brimstone(TM) Stone Beer(TM), and a second place medal for Hempen Ale(TM) from
Los Angeles' Great Fall Beer Festival, BrewFest '98.
Signed and dated, limited edition framed posters featuring the signatures of the
Frederick Brewing Co. founders and first-run Blue Ridge(R) beer labels are
available from the brewery. Please call 888-258-7434 for purchasing information.
# # #
Exhibit 99.4
[GRAPHIC OMITTED]
FOR IMMEDIATE RELEASE: CONTACT: Kym Cheseldine
December 4, 1998 Frederick Brewing Co.
301-694-7899 x113
I.W. Miller Group
Ira Miller/Larry Fortune
949-833-9001
FREDERICK BREWING CO. TO REVERSE SPLIT STOCK
Mid-Atlantic's Largest Craft Brewer Takes Steps to Maintain NASDAQ Listing
FREDERICK, MD - Frederick Brewing Co. (NASDAQ: BLUE) board of directors has
announced a December 3, 1998 decision to recommend that shareholders approve a
plan to reverse split the Company's common shares by 5:1. This action would
reduce the Company's current outstanding shares from approximately 14.2 million
to approximately 2.8 million.
Frederick Brewing Co. Chairman and CEO Kevin Brannon said, "The board chose to
recommend this action to the shareholders in order to protect the listing of the
Company's shares on the NASDAQ stock exchange. We believe there are two main
advantages of maintaining the listing: NASDAQ listed companies are governed by
more stringent corporate governance standards, which provide a higher degree of
shareholder protection, than are companies trading on the OTC:BB [electronic
bulletin board] market; and liquidity is much better and pricing information
more reliable for shares listed on the NASDAQ exchange than on the bulletin
board."
Brannon also said that the Frederick Brewing Co. board of directors has
appointed a committee to prepare the relevant proxy materials and establish the
date of the shareholder meeting and vote. All proxy materials must be filed with
the Securities and Exchange Commission and distributed to all shareholders prior
to the meeting. The committee will announce within a week the schedule for
shareholder action.
This action is in response to a September, 1998 notification from NASDAQ that
Frederick Brewing Co. shares would be de-listed from the exchange unless the
closing bid price reached $1 per share for 10 consecutive trading days by
December 14, 1998.
# # #
Exhibit 99.5
FOR IMMEDIATE RELEASE: CONTACT: Kym Cheseldine
December 15, 1998 Frederick Brewing Co.
301-694-7899
I. Miller/L. Fortune
I.W. Miller Group
949-833-9001
Shareholder Meeting Date Set
Vote to Approve Reverse Stock Split Scheduled for February, 25, 1999
FREDERICK, MD -- Frederick Brewing Co. (NASDAQ: BLUE) has scheduled a special
meeting of shareholders to be held at the Company's brewery in Frederick,
Maryland at 10:00 a.m., Thursday, February 25, 1999.
In response to a September 15, 1998 notification from NASDAQ that the Company's
shares would be de-listed from the exchange unless the closing bid price reached
$1 per share for 10 consecutive trading days by December 14, 1998, Frederick
Brewing Co. shareholders will be asked to vote to approve a 1:5 reverse split of
its outstanding common stock. If approved, the reverse split will be effective
as of the meeting date. Proxy materials are being prepared and, after approval
by the Securities and Exchange Commission (SEC), will be distributed to all
shareholders of record as of January 12, 1999.
Separately, Frederick Brewing Co. announced that it has replaced its former
auditor and accountants and has retained BDO Seidman LLP, which will service
that Company from its Washington, DC office. Neither the Company nor its former
auditors, Pricewaterhouse Coopers LLP, expressed any disagreements of policy
differences in the SEC filings announcing the change.
# # #
Exhibit 99.6
FOR IMMEDIATE RELEASE: CONTACT: Andrea J. Keller
November 20, 1998 Frederick Brewing Co.
301-694-7899 x120
FBC Announces Personnel Changes
Mid-Atlantic's Largest Craft Brewer Takes Steps to Improve Financial Performance
FREDERICK, MD - Frederick Brewing Co. (NASDAQ: BLUE) announced today personnel
changes that the specialty brewer says will streamline its sales and
distribution management and help reduce costs in 1999.
The changes include the planned departures of Jim Lutz, president of Frederick
Brewing Co. (FBC) subsidiary, Wild Goose Brewery, and Marc Tewey, president of
FBC subsidiary, Brimstone Brewing Co. Both will leave the Company when their
current contracts expire in January, 1999. FBC President and COO, Marjorie
McGinnis, will then serve as president of all Companies, and current personnel
will absorb the sales and marketing functions of both subsidiaries. Jim Lutz
also resigned from FBC's Board of Directors, effective November 6, 1998. Lutz
had been a director since the merger between the Wild Goose Brewery and
Frederick Brewing Co. in January of 1998.
"Jim and Marc have been excellent contributors to the future of the Company,"
said Frederick Brewing Co. Chairman and CEO Kevin Brannon, "helping us integrate
their brands into the Frederick Brewing Co. portfolio. We will miss Jim's
experience and Marc's energy." Brannon said both men intend to pursue other
career interests outside the brewing industry.
Separately, the Company has also disclosed the departure of Craig O'Connor,
former director of new business development, who resigned October 6, 1998.
O'Connor had served as FBC Vice President of Finance and Administration, from
1994 - 1997, until moving to his most recent position in late 1997. His
position, created primarily to service new, outside markets, will not be filled
in the immediate future. Instead, existing personnel will absorb O'Connor's
responsibilities. "Craig's hard work, loyalty, and unflagging optimism had a lot
to do with this Company's growth from 600 barrels to 35,000 barrels," Brannon
said. "We will all miss him." O'Connor also intends to pursue career
opportunities outside the brewing industry.
FBC President Marjorie McGinnis noted, "These changes, although painful, reflect
our belief that these top-heavy management positions had to be eliminated to
maintain competitiveness in the current market environment. Together with
additional overhead reductions, these changes should ensure that we continue the
improvement in financial performance we've made in the second half of 1998."
# # #
