PROSPECTUS
INDEPENDENCE BREWING COMPANY [LOGO]
900,000 SHARES OF COMMON STOCK AND
4,000,000 REDEEMABLE WARRANTS
Independence Brewing Company (the 'Company') hereby offers 900,000 shares
(the 'Shares') of common stock, no par value per share (the 'Common Stock') and
4,000,000 redeemable Common Stock purchase warrants (the 'Redeemable Warrants').
The Shares and the Redeemable Warrants (collectively, the 'Securities') may be
purchased separately and will be separately tradeable immediately upon issuance.
It is currently anticipated that the initial public offering prices of the
Shares and the Redeemable Warrants will be $5.00 and $0.50, respectively. Each
Redeemable Warrant entitles the registered holder thereof to purchase one share
of Common Stock at an exercise price of $6.00, subject to adjustment, commencing
on the date of this Prospectus until February 11, 2002 at which time the
Redeemable Warrants shall expire. The Redeemable Warrants are redeemable by the
Company, with the consent of A.S. Goldmen & Co., Inc. (the 'Underwriter'), at
any time commencing on February 11, 1998, at a redemption price of $0.10 per
Redeemable Warrant, provided that the average closing bid price of the Common
Stock equals or exceeds $8.00 per share for any 20 trading days within a period
of 30 consecutive trading days ending on the fifth trading day prior to the date
of the notice of redemption. See 'Description of Securities -- Redeemable
Warrants.'
Prior to this offering (the 'Offering'), there has been no public market for
the Securities, and no assurance can be given that such a market will develop
upon completion of this Offering, or if developed, that it will be sustained.
The initial public offering price of the Securities and the exercise price and
other terms and conditions of the Redeemable Warrants have been arbitrarily
determined by negotiations between the Company and the Underwriter and do not
necessarily bear any relationship to the Company's assets, book value, results
of operations or other generally accepted criteria of value. See 'Underwriting.'
The Common Stock and the Redeemable Warrants have been approved for quotation on
the Nasdaq SmallCap Market ('Nasdaq SmallCap') upon notice of issuance under the
symbols IBCO and IBCOW, respectively. See 'Risk Factors' and 'Underwriting.'
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE 'RISK FACTORS' BEGINNING ON PAGE 6 AND 'DILUTION.'
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. AND REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE UNDERWRITING PROCEEDS TO
TO PUBLIC DISCOUNTS (1) COMPANY (2)
- --------------------------------------------------------------------------------------------------------------------
Per Share.................................... $5.00 $0.50 $4.50
- --------------------------------------------------------------------------------------------------------------------
Per Redeemable Warrant....................... $0.50 $0.05 $0.45
- --------------------------------------------------------------------------------------------------------------------
Total........................................ $6,500,000 $650,000 $5,850,000
====================================================================================================================
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(1) Does not include additional compensation to the Underwriter in the form of a
non-accountable expense allowance equal to 3% of the gross proceeds of this
Offering. For indemnification arrangements with, and additional compensation
payable to, the Underwriter, see 'Underwriting.'
(2) Before deducting expenses estimated at $550,000 in the aggregate, payable by
the Company, including the non-accountable expense allowance payable to the
Underwriter.
(3) The Company has granted to the Underwriter a 45 day option to purchase up to
an additional 135,000 shares of Common Stock and/or 600,000 Redeemable
Warrants on the same terms and conditions as set forth above solely to cover
over-allotments, if any. If such over-allotment option is exercised in full,
the total Price to Public, Underwriting Discount and Proceeds to Company
will be $_______, $_______ and $________, respectively. See 'Underwriting.'
------------------------
The Securities are being offered by the Underwriter, subject to prior sale,
when, as and if delivered to and accepted by the Underwriter, and subject to the
approval of certain legal matters by its counsel and certain other conditions.
The Underwriter reserves the right to withdraw, cancel or modify the Offering
and to reject any order in whole or in part. It is expected that delivery of the
certificates representing the Securities and payment therefor will be made at
the offices of A.S. Goldmen & Co., Inc. at 99 Wood Avenue South, Iselin, New
Jersey 08830, or its counsel, on or about February 14, 1997.
A.S. GOLDMEN & CO., INC.
The date of this Prospectus is February 11, 1997
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[Photographs]
[A photograph depicting the Company's Brewmaster, William Moore,
standing in the brewery.]
William Moore, The Company's Brewmaster
[A photograph depicting the Company's award-winning products at the 1996 Great
American Beer Festival.]
1996 Great American Beer Festival
[A photograph depicting the Company's bottled products.]
The Company's Bottled Products
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND THE REDEEMABLE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
The Company intends to furnish the holders of the Common Stock with annual
reports containing audited financial statements after the close of each fiscal
year and make available such periodic reports as the Company may deem
appropriate or as may be required by law.
This Prospectus contains trademarks of other companies.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and must be read in
conjunction with, the more detailed information and financial data appearing
elsewhere in this Prospectus. Unless otherwise indicated herein, all share and
per share information does not give effect to (i) the exercise of the
Underwriter's over-allotment option to purchase up to an additional 135,000
shares of Common Stock and/or 600,000 Redeemable Warrants and the issuance of up
to 600,000 shares of Common Stock upon exercise of the Redeemable Warrants
included in the Underwriter's over-allotment option; (ii) the issuance of
4,000,000 shares of Common Stock issuable upon exercise of the Redeemable
Warrants; (iii) the issuance upon exercise of warrants granted to the
Underwriter (the 'Underwriter Warrants') of up to 90,000 shares of Common Stock,
400,000 Redeemable Warrants and the underlying 400,000 shares of Common Stock
issuable upon exercise of the Redeemable Warrants contained in the Underwriter's
Warrants; (iv) 300,000 shares of Common Stock reserved for issuance upon the
exercise of stock options that may be granted pursuant to the Company's stock
option plan; (v) the issuance of 3,500,000 shares of Common Stock issuable upon
exercise of the Company's Series B Warrant; and (vi) the redemption of
fractional shares aggregating approximately four shares of Common Stock at $5.00
per share upon consummation of the Offering. See 'Management -- Stock Plan,'
'Certain Transactions -- Private Placements' and 'Underwriting.' This Prospectus
contains forward-looking statements that involve certain risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under 'Risk Factors' and elsewhere in this Prospectus.
THE COMPANY
Independence Brewing Company (the 'Company') is a regional producer of
fresh, high-quality, preservative-free craft-brewed ales, lagers, porters and
seasonal beers. The Company's products are marketed under the 'Independence'
label. The Company produces seven products: four styles of beer which are
offered year-round, Independence Ale, Independence Lager, Independence Gold and
Independence Porter; and three which are seasonal beers, Independence
Franklinfest (Fall), Winter Warmer (Winter) and Quaker City Wheat (Summer). The
Company brews, kegs and bottles its products at its brewery in Philadelphia,
Pennsylvania for distribution generally by 17 independent wholesale distributors
in seven states and the District of Columbia. The Company's brewing equipment
currently has the capacity to brew approximately 12,000 - 14,000 barrels per
year, which is in part dependent on the style of beer produced. However,
currently the Company can only package a limited portion of its brewing capacity
due primarily to its current bottling line deficiencies. For the nine months
ended September 30, 1996, the Company produced approximately 3,000 barrels. In
addition to brewing its own products, the Company has entered into contract
brewing arrangements under which the Company produces beers for third parties
which market and sell such products under their own label. The Company may also
in the future develop and operate brewpubs, independently or with third parties,
that offer for sale, in addition to food, the Company's beer brewed on the
premises.
The market for beer in the United States consists of essentially three
segments: (i) economy beers, which are generally brewed by the largest domestic
brewers, such as Anheuser-Busch, Inc. ('Anheuser-Busch'), Miller Brewing Co.
('Miller'), Adolph Coors Co. ('Coors') and The Stroh Brewing Co. ('Stroh'); (ii)
imported beers, including widely promoted brands such as Heineken, Amstel,
Corona, Bass and Guinness; and (iii) craft-brewed beers. The Company operates in
the growing craft-brewing segment of the domestic brewing industry which
generally consists of small, independent brewers whose predominant product is
brewed with high-quality ingredients. Craft-brewing refers to beers produced by
microbreweries, regional specialty breweries, brewpubs and contract brewers. The
Company believes that the growing demand for craft-brewed beers in the United
States is part of a broader shift in preferences on the part of a certain
segment of consumers from mass-produced products toward high-quality distinctive
foods and beverages. According to industry data, the craft-brewing segment of
the domestic beer market has had an average annual growth rate of approximately
46% from 1986 through 1995 and, in 1995, the total combined sales for this
segment
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reached approximately 3.8 million barrels, with its total share of the domestic
beer market increasing to 2% from 1.3% in 1994.
The Company believes that the quality of its products is enhanced by its
Brewmaster, Mr. William Moore. The Company recently received a gold medal for
its Independence Franklinfest in the Marzen/Oktoberfest category at the 1996
Great American Beer Festival(Registered) and a bronze medal in the Golden
Ale/Canadian-Style Ale Category for its Independence Gold at both the 1996 Great
American Beer Festival and the Association of Brewers' 1996 World Beer Cup
International Competition. Prior to joining the Company, Mr. Moore served as the
head brewer at Stoudt Brewery, a craft-brewer in Adamstown, Pennsylvania. During
Mr. Moore's tenure, Stoudt received fourteen medals at the Great American Beer
Festival.
The Company's goal is to be one of the leading brewers of craft-brewed
beers in the United States. The Company intends to pursue this goal by (i)
expanding its product offerings, (ii) increasing the Company's distribution
network both within existing markets and in new markets, (iii) developing
consumer awareness through increased marketing and special events that showcase
the Company's products and (iv) developing consumer loyalty through the
production of high-quality products.
The Company was incorporated in Pennsylvania in May 1994. The Company's
executive offices are located at 1000 East Comly Street, Philadelphia,
Pennsylvania 19149, and its telephone number is (215) 537-2337.
4
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THE OFFERING
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SECURITIES OFFERED............................. 900,000 shares of Common Stock and 4,000,000 Redeemable Warrants.
Each Redeemable Warrant entitles the holder thereof to purchase
one share of Common Stock at an initial exercise price of $6.00
per share, from the date of this Prospectus until February 11,
2002. The Redeemable Warrants are redeemable by the Company, with
the consent of the Underwriter, at any time commencing February
11, 1998, at a redemption price of $0.10 per Redeemable Warrant,
provided that the average closing bid price of the Common Stock,
as reported by Nasdaq SmallCap, or if not quoted on Nasdaq
SmallCap, as reported by any other recognized quotation system on
which the price of the Common Stock is quoted, equals or exceeds
$8.00 per share for any 20 trading days within a period of 30
consecutive trading days ending on the fifth trading day prior to
the date of notice of redemption to the holders of the Redeemable
Warrants. See 'Description of Securities.'
COMMON STOCK OUTSTANDING:
Prior to the Offering........................ 2,307,078 shares
After the Offering........................... 3,207,078 shares
USE OF PROCEEDS................................ Repayment of the Company's Debentures, repayment of certain other
outstanding indebtedness, mandatory redemption of the Company's
Series B Preferred Stock, marketing and sales, capital
expenditures and working capital. See 'Use of Proceeds,' 'Certain
Transactions -- Private Placements' and 'Description of
Securities -- Preferred Stock.'
RISK FACTORS................................... The Securities offered hereby involve a high degree of risk and
immediate and substantial dilution. See 'Risk Factors' and
'Dilution.'
NASDAQ SMALLCAP SYMBOLS:
Common Stock................................. IBCO
Redeemable Warrants.......................... IBCOW
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RISK FACTORS
In addition to the other information in this Prospectus, the following
matters should be considered carefully in evaluating an investment in the shares
of Common Stock and the Redeemable Warrants offered by this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results and the timing of certain events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this Prospectus.
Limited Operating History; Past and Possible Future Operating Losses. The
Company was founded in May 1994 and commenced distribution of its Independence
Ale in kegs and bottles in May 1995 and June 1995, respectively. The Company has
had significant losses since inception, including net losses of $36,111 for the
period May 17, 1994 (inception) through December 31, 1994 and $648,302 for the
year ended December 31, 1995. In addition, the Company had net losses of
$576,862 and $687,999 for the nine months ended September 30, 1995 and 1996,
respectively. As of September 30, 1996, the Company had an accumulated deficit
of $799,228 and working capital of $195,048. For the period from May 1994
through February 1995, the Company's principal activities were raising capital,
securing third party financing and completing construction of its manufacturing
facility. In March 1995, the Company commenced brewing. The Company's limited
operating history makes any prediction of future sales and operating results
difficult. Accordingly, although the Company has experienced sales growth, such
growth should not be considered indicative of future sales growth, if any, or of
future operating results. The considerable resources expended by the Company's
management in connection with this Offering may have had and may have a material
adverse effect on the Company's operating results in the last quarter of 1996
and the first half of 1997. Furthermore, there can be no assurance that the
Company's sales will grow or be sustained in future periods or that the Company
will become or remain profitable in any future period. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
the Company's Financial Statements and Notes related thereto.
Unanticipated Manufacturing Limitations. The Company is currently
operating a refurbished bottling line which does not include all originally
manufactured parts. Incompatibility in re-manufactured parts has resulted in
unanticipated machine down-time, decreased bottling capacity and problems with
the adhesion of product labels to bottles. Under normal circumstances, using
originally manufactured parts, the Company's current bottling line would have
the capacity to fill 300 bottles per minute. However, due to the aforementioned
problems, the bottling line only has been able to fill 35 bottles per minute. In
addition, the Company has experienced problems with product labels falling off
bottles during production. The Company anticipates purchasing a new bottling
line soon after the completion of this Offering with approximately $500,000 of
the net proceeds of this Offering. See 'Use of Proceeds.' The new bottling line,
which the Company anticipates will be operational in the first quarter of 1997,
will be designed to increase the Company's bottling capacity and alleviate its
labeling problems. The Company recently utilized $55,000 of the net proceeds
from the sale of the Debentures to pay a deposit on this new bottling line. See
'Certain Transactions -- Private Placements.' However, in the absence of this
new bottling line, the Company's business, financial condition and results of
operations will continue to be materially adversely affected by the performance
of its current bottling line. In addition, there can be no assurance that the
new bottling line will not have unanticipated operating problems. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and 'Certain Transactions -- Private Placements.'
Capacity Utilization. Although the Company's current brewing equipment has
the capacity to brew approximately 12,000 - 14,000 barrels per year, problems
with the Company's existing bottling line have limited the Company's packaging
capacity. For the nine months ended September 30, 1996, the Company produced
3,000 barrels, approximately 560 barrels of which were produced for third
parties pursuant to contract brewing arrangements. The Company has incurred
substantial capital costs associated with building its facility and commencing
its brewing operations. As a result, production levels below capacity have
negatively impacted gross margins. There can be no assurance that the Company
will reach full capacity based on the current bottling line or the new bottling
line or that the
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loss of a contract brewing client will not negatively impact capacity
utilization. Unutilized capacity could have a material adverse effect on the
Company's business, financial condition and results of operations. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations,' 'Business -- Brewing Facility' and 'Business -- Contract Brewing
Arrangements.'
Conflict of Interest and Trademark Conflict. The Company is subject to
risk associated with a potential conflict of interest that may arise out of the
relationship between the Company and a third party. Robert W. Connor, Jr.,
President and Chief Executive Officer of the Company, was a director, officer
and a shareholder of Independence Brewing Company of Florida, Inc.
('Independence Florida'), a corporation that is currently operating a brewpub in
Ft. Lauderdale, Florida, utilizing the 'Independence' name and logo and the name
'Independence Brewery and Restaurant' (the 'Independence Marks'). In addition,
Independence Florida has filed federal trademark and service mark applications
for 'Independence Brewery and Restaurant' (the 'Applications'). The Company has
entered into an agreement with Independence Florida (the 'Florida Agreement')
whereby (i) Independence Florida transferred and assigned all of its rights,
title and interest in the Independence Marks and the Applications to the
Company, (ii) Independence Florida was granted a perpetual royalty free license
to use the Independence Marks for its one location only, subject to termination
upon certain conditions, and (iii) the Company agreed not to operate a bar or
restaurant in Broward County, Florida, Independence Florida's geographic region,
without the consent of Independence Florida. In addition, pursuant to Mr.
Connor's employment agreement with the Company, Mr. Connor will offer to
transfer his shares of common stock of Independence Florida to the Company if
such transfer is permitted pursuant to an existing agreement among Independence
Florida and its shareholders. If such shares are not transferred, the Company
and Mr. Connor have agreed that the Company will receive any economic benefit
from Mr. Connor's shares of common stock of Independence Florida, including
dividends and sale proceeds in excess of Mr. Connor's original purchase price of
such shares. See 'Certain Transactions -- Florida Agreement.'
Risk of Third Party Claims of Infringement of Intellectual Property;
Uncertainty of Trademark Protection. The trademark application for the Company's
logo has been refused registration by the United States Patent and Trademark
Office based on a prior registration by Moosehead Breweries Limited
('Moosehead') for 'The Taste of Independence' (the 'Registration'). The Company
has abandoned its federal trademark application for its logo. In addition,
Moosehead has a pending U.S. trademark application for the mark 'Independence'
for brewed alcoholic beverages (together with the Registration, the 'Moosehead
Marks'). The Company has entered into an exclusive license and purchase
agreement with Moosehead that allows the Company to use the Moosehead Marks in
the United States and to purchase the Moosehead Marks at the end of a two year
period (the 'Moosehead License'). If the Moosehead License is terminated in the
future, the Company may find it necessary to change the brand name of its
products, thereby losing any existing brand recognition in its markets. Such
change may involve considerable expense, including costs involved with building
goodwill in a new brand, and may have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Moosehead License will not prevent the Company from entering into the Florida
Agreement and licensing the Independence Marks and the Applications to
Independence Florida. The Company relies and will continue to rely on a
combination of trade secret, copyright and trademark laws, non-disclosure and
other arrangements to protect its proprietary rights, including its beer
recipes, product packaging, advertising, promotional designs and artwork.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy or obtain and use information that the Company
regards as proprietary. There can be no assurance that the steps taken by the
Company to protect its proprietary information will prevent the misappropriation
and the unauthorized use of the Company's proprietary information and such
protections may not preclude competitors from developing confusingly similar
brand names or promotional materials or developing products with taste and other
qualities similar to the Company's products. See 'Business -- Trademarks.'
Possible Need For Additional Financing. The Company anticipates that the
net proceeds of the Offering will be sufficient to finance its activities for at
least the 12 months following the date of this
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Prospectus. However, there can be no assurance that the Company will not require
additional financing or, if required, that such additional financing will be
available to the Company on acceptable terms or at all. In addition,
substantially all of the Company's assets are currently pledged as collateral
securing certain indebtedness that will remain outstanding after this Offering.
This may materially adversely affect the Company's ability to obtain additional
financing in the future. Furthermore, the exercise of the outstanding Redeemable
Warrants, the Series B Warrant and the Underwriter's Warrants at a time when the
Company would in all likelihood be able to obtain equity capital on terms more
favorable than those provided in such instruments may materially adversely
affect the Company's business, financial condition and results of operations.
See 'Certain Transactions -- Private Placements.' Factors that may lead to a
need for additional financing include delays in market acceptance of the
Company's products, the need for the Company to expand production to meet market
demand and the acquisition and the development of brewpubs. There can be no
assurance that the Company will not experience any of these or any other
problems, which may materially adversely affect the Company's financial
condition and results of operations. See 'Management's Discussion and Analysis
of Financial Condition and Results of Operations,' 'Business -- Property' and
'Certain Transactions -- Private Placements.'
Ability to Manage Growth; Expansion into New Markets. The Company's future
success depends in part on its ability to manage growth as it increases its
production capacity, replace its current bottling line, broaden the distribution
of its products to both existing and new markets, expand its product offerings
and, possibly, enter the brewpub business. In attempting to broaden the
distribution of products, the Company will be required to establish and manage
relationships with third party wholesale distributors, retailers and consumers
in numerous markets. Consumer tastes may vary from market to market and,
therefore, there can be no assurance that the Company will be successful in
entering new markets or in maintaining its existing markets. Continued expansion
of the Company's present business and possible entrance into the brewpub
business will require hiring several additional key employees, such as sales
managers and individuals experienced in the restaurant business. There can be no
assurance that the Company will be able to hire such persons when needed or on
favorable terms or that any such new employees will be successfully integrated
into the Company's management.
Competition. The Company competes primarily with other participants in the
craft-brewing segment of the domestic beer market in its region such as Dock
Street Brewing Company, Red Bell Brewing Company, Stoudt's Brewing Company,
Lancaster Malt Brewing Company, Weyerbacher Brewing Company and Victory Brewing
Company, and with producers of imported beers, such as Heineken, Amstel, Corona,
Bass and Guinness brands, and mass-market national brewers such as Miller,
Anheuser-Busch, Coors and Stroh. The craft-brewing segment is highly competitive
due to the increased number of new craft-brewers, the recent emergence of
products developed by large domestic brewers designed to compete in the
craft-brewing segment, the efforts by other craft-brewers to expand their
production capacities and distribution and a general surplus of underutilized
domestic brewing capacity, which facilitates existing contract brewer expansion
and the entry of new contract brewers. Although domestic demand for craft-brewed
beers has increased over the past ten years, there can be no assurance that this
demand will continue. The Company anticipates intensifying competition in the
craft-brewing segment, and believes that, as a result, prices may fluctuate and
could decline. In addition, the Company's products also compete generally with
other beverages, including other segments of the domestic beer market and
soft-drinks. The Company competes with other beer and beverage companies not
only for consumer acceptance and loyalty but also for shelf and tap space in
retail establishments and for marketing focus by the Company's third party
wholesale distributors and their customers, many of which also distribute and
sell other beverage products. See 'Business -- Competition.' Many of the
Company's competitors possess marketing, financial and other resources
substantially greater than those of the Company, and there can be no assurance
that the Company will be able to achieve continued success in the face of
intensified competition from within the craft-brewing segment, from other
segments of the beer market and from beverages in general.
Entrance into the Brewpub Business. The growth of the Company may involve
acquiring existing brewpubs and/or developing new brewpubs, some or all of which
may include third party
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investors and/or third party financing. In addition, pursuant to the provision
in Mr. Connor's employment agreement with the Company concerning the possible
transfer of his ownership interest in Independence Florida to the Company, the
Company may obtain an approximately 10% ownership interest in Independence
Florida. See ' -- Conflict of Interest and Trademark Conflict.' The Company is
currently in the process of evaluating acquisition targets and/or sites to
develop brewpubs. As of the date of this Prospectus, the Company has not entered
into any agreements to either acquire or develop brewpubs. The Company's ability
to enter into the brewpub business will depend upon a variety of factors,
including the availability and cost of suitable acquisition candidates and/or
building sites, the employment and training of management, brewpub staff and
other personnel, regulatory limitations regarding common ownership of breweries
and restaurants in certain states, acceptable leasing or financing terms of
equipment, cost effective and timely construction of new brewpubs (which
construction can be delayed due to, among other reasons, labor disputes, local
zoning and licensing matters and weather conditions) and securing required
governmental permits and approvals. There can be no assurance that the Company
will be successful in acquiring or opening new brewpubs, that those brewpubs
will be opened in a timely manner, or that, if opened, those brewpubs will be
operated profitably. New brewpubs typically operate with below normal
profitability and incur certain additional costs in the process of achieving
operational efficiencies during the first several months of operation.
Consequently, future financial condition and results of operations may be
materially adversely affected by costs associated with entering the brewpub
business.
Dependence on Key Personnel; Inexperience of Management. The Company's
success substantially depends upon the efforts of the Company's President and
Chief Executive Officer, Robert W. Connor, Jr., and the Company's Brewmaster and
Secretary, William Moore. The loss of Mr. Connor or Mr. Moore could have a
material adverse effect on the Company's financial condition and results of
operations. The Company has recently entered into employment agreements with
each of these officers. The Company has a key-man insurance policy for its
benefit on the life of Mr. Connor in the amount of $1,500,000. The Company's
only two executive officers are Mr. Connor and Mr. Moore. The Company does not
have any other full-time executives, including one with financial or accounting
experience. Mr. Connor, who does not have significant accounting or financial
experience, is currently functioning as the Company's principal financial
officer. In addition, although Mr. Connor has five years of experience in
various aspects of brewing operations, Mr. Connor has overseen the operations of
a brewery only since forming the Company. The success of the Company is
dependent upon its ability to hire and retain qualified financial, operational,
technical, marketing and other personnel. However, there can be no assurance
that the Company will be able to hire or retain such necessary personnel. See
'Use of Proceeds' and 'Management.'
Dependence on Distributors. Except for two counties in Pennsylvania where
the Company distributes its own products, the Company relies on third party
wholesale distributors, 17 as of the date of this Prospectus, for the
distribution of its products to retailers. Two wholesale distributors accounted
for approximately 21% and 22% of the Company's sales for the year ended December
31, 1995, the same two wholesale distributors accounted for approximately 25%
and 24% of the Company's sales for the nine month period ended September 30,
1995 and three wholesale distributors accounted for approximately 11%, 11% and
10% of the Company's sales for the nine month period ended September 30, 1996.
The Company's largest and third largest distributors in 1995 merged and the
aggregate entity was for the nine months ended September 30, 1996 the Company's
largest distributor. The Company's second largest distributor for the year ended
December 31, 1995 is no longer among the Company's largest distributors due to
the Company's decision to distribute products itself in the Philadelphia region.
The Company has chosen to directly distribute products in the Philadelphia
region primarily in order to reduce its advertising, promotional and selling
expenses in connection with the sale of such products. The loss of any wholesale
distributor, if not immediately replaced, could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company generally depends upon its distributors to sell and create demand for
the Company's products among the distributors' retail customers. Such
distributors do not exclusively distribute the Company's products. The Company's
distributors often represent competing craft-brewed brands, as well as economy
and import brands. There can be no assurance that the Company's distributors
will devote
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sufficient resources to provide effective sales and promotion support to the
Company or continue to distribute the Company's products. The Company generally
sells to its distributors on a purchase order/invoice basis. To the extent the
Company has executed a written contract with a distributor, such contract may be
terminated by such distributor without notice. See 'Business -- Product
Distribution.'
Dependence on Suppliers. The Company purchases from its suppliers certain
ingredients, such as hops, malt and brewer's yeast, and packaging materials used
in the Company's products. Although to date the Company has been able to obtain
adequate supplies of these ingredients and materials in a timely manner from
existing sources, if the Company were unable to obtain sufficient quantities of
ingredients and materials, delays or reductions in product shipments could occur
which would have a material adverse effect on the Company's financial condition
and results of operations. Although the Company believes that there are
alternative sources available for its raw materials, there can be no assurance
that the Company will be able to acquire these products from other sources on a
timely or cost-effective basis if current suppliers are unable to supply them.
The Company purchases its supplies on a purchase order basis and does not have
long-term purchase contracts with its suppliers. The loss of a material supplier
could materially adversely affect the Company's business, financial condition
and results of operations if there were a delay in shipments from alternative
suppliers. See 'Business -- Brewing Operations -- Ingredients and Raw
Materials.'
Shortages of Supply. The supply, quality and price of raw materials used
to produce the Company's products can be affected by factors beyond the control
of the Company, such as drought, frost, other weather conditions, economic
factors affecting growing decisions, various plant diseases and pests. If any of
the foregoing were to occur, the Company's business, financial condition and
results of operations would be materially adversely affected. In addition, the
Company's results of operations are dependent upon its ability to accurately
forecast its requirements of raw materials. Any failure by the Company to
accurately forecast its demand for raw materials could result in the Company
either being unable to meet higher than anticipated demand for its products or
producing excess inventory, either of which may materially adversely affect the
Company's business, financial condition and results of operations. See 'Business
- -- Brewing Operations -- Ingredients and Raw Materials.'
Limited Product Line. The sale of a limited number of styles of beer has
accounted for substantially all revenue of the Company since the Company's
inception. The Company currently produces seven products consisting of four
styles of beer which are offered year-round and three which are seasonal beers
offered during certain times of the year. The Company believes that the sale of
these beers will continue to account for a significant portion of the Company's
sales for the foreseeable future. Therefore, the Company's future operating
results, particularly in the near term, are significantly dependent upon the
market acceptance of these limited products. Two of the Company's customers
accounted for 21% and 22% of the Company's sales during the year ended December
31, 1995, the same two wholesale distributors accounted for approximately 25%
and 24% of the Company's sales for the nine month period ended September 30,
1995 and three customers accounted for 11%, 11% and 10% of the Company's sales
during the nine months ended September 30, 1996. The loss of any such customer,
if not immediately replaced, could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
may offer an old fashioned root beer soft-drink in the future. There can be no
assurance that the Company's current management can develop the expertise
necessary to enter the soft-drink business or that the Company can recruit, hire
and retain individuals experienced in the soft-drink business. There can be no
assurance that the Company will be successful in developing, introducing and
marketing new products on a timely and regular basis. If the Company is unable
to introduce new products or if the Company's new products are not successful,
the Company's sales may be materially adversely affected as customers seek
competitive products. The Company may also experience increased costs in
connection with developing new products in the period prior to the distribution
of such new products. In addition, the introduction or announcement of new
products by the Company could result in reduction of sales of the Company's
existing products, requiring the Company to manage carefully product
introductions in
10
<PAGE>
order to minimize disruption in sales of existing products. There can be no
assurance that the introduction of new product offerings by the Company will not
cause consumers to reduce purchases or consumption of existing Company products.
Such reduction of purchases or consumption could have a material adverse effect
on the Company's business, financial condition and results of operations. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and 'Business -- Products.'
Single-Site Manufacturing Facility. All of the Company's brewing and
bottling operations are performed at its facility in Philadelphia, Pennsylvania.
In the event this facility were damaged by fire or other casualty, which damage
could not be repaired in a short period of time, the Company's production would
be substantially interrupted and such casualty would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company has obtained general commercial liability insurance in the amount of
$2,000,000 and an additional $1,000,000 of commercial catastrophe insurance. See
'Business -- Brewing Facility' and ' -- Property.'
Portions of Offering Proceeds Benefiting President and Chief Executive
Officer. A portion of the net proceeds of the Offering will be used to repay
the amount outstanding pursuant to the Company's promissory note in favor of
CoreStates Bank, N.A. in connection with a Small Business Administration Loan
(the 'SBA Loan'), which totaled $408,496 at September 30, 1996. Robert W.
Connor, Jr., President and Chief Executive Officer of the Company, personally
guaranteed the SBA Loan. The application of a portion of the net proceeds of
this Offering to the repayment of such obligation will result in the termination
of such guarantee. See 'Use of Proceeds,' 'Certain Transactions -- Guaranties'
and the Company's Financial Statements and Notes related thereto.
Sales Fluctuations Due to Seasonality. The Company believes that its third
party distributors have historically experienced decreased sales in the first
calendar quarter due to decreased consumption of beer after the holiday season.
Although the Company has not yet experienced sales fluctuations due to
seasonality because the Company has continued to expand its wholesale
distributors network, fluctuations in the Company's sales due to seasonality may
become evident in the future if and as the Company's sales increase.
Control By Existing Shareholders. Upon completion of this Offering, Mr.
Connor and Winfield Capital Corp., a Small Business Investment Company ('SBIC')
licensed by the Small Business Administration ('Winfield'), will own an
aggregate of approximately 47% of the outstanding Common Stock. Consequently,
Mr. Connor and Winfield will likely continue to be able to elect the Company's
directors, to determine the outcome of corporate actions requiring shareholder
approval and otherwise to control the business affairs of the Company. Mr.
Connor has agreed to vote in favor of the election of one nominee for the Board
of Directors of the Company selected by Winfield, as long as Winfield owns
greater than 10% of the outstanding Common Stock. Upon exercise of the Series B
Warrant (as further described in 'Management's Discussion and Analysis of
Financial Results and Operations -- Liquidity and Capital Resources'), Winfield
would own an aggregate of 66.3% of the outstanding Common Stock (assuming no
exercise of the Redeemable Warrants). However, Winfield has indicated to the
Company that, due to restrictions imposed by regulations governing SBICs, it
does not intend to exercise the Series B Warrant to the extent that such
exercise would result in Winfield owning 50% or more of the outstanding Common
Stock. See 'Principal Shareholders.'
Operating Hazards. The Company's operations are subject to certain hazards
and liability risks faced by all brewers, such as potential contamination of
ingredients or products by bacteria or other external agents that may be
wrongfully or accidentally introduced into products or packaging. There can be
no assurance that any such contamination will not occur. The occurrence of such
a problem could result in a costly product recall and serious damage to the
Company's reputation for product quality, as well as claims for product
liability. In addition, the Company's products are not pasteurized and have a
limited shelf-life. Upon expiration of shelf-life, the Company's products are
returned to the Company by the distributors or retailers for disposal by the
Company. The Company may incur cost in connection with such returns, including
shipping expenses. The Company's operations are also subject to certain injury
and liability risks normally associated with the operation and possible
malfunction of
11
<PAGE>
brewing and other equipment. Although the Company maintains insurance against
certain risks under a general liability and product liability insurance policy,
there can be no assurance that the Company's insurance will be adequate. See
'Business -- Brewing Operations.'
Government Regulation. The manufacture and sale of alcoholic beverages is
a business that is highly regulated and taxed at the federal, state and local
levels. The Company's operations may be subject to more restrictive regulations
and increased taxation by federal, state and local governmental agencies than
are those of non-alcohol related businesses. For instance, brewery and wholesale
operations require various federal, state and local licenses, permits and
approvals. In addition, some states prohibit wholesalers and/or retailers from
holding an interest in any supplier such as the Company. Furthermore, some state
regulations may restrict the ability of the Company to change prices for its
products. Violation of such regulations can result in the loss, revocation or
suspension of existing licenses by the wholesaler, retailer and/or supplier. The
loss, revocation or suspension of any existing licenses, permits or approvals
could have a material adverse effect on the Company's business. Because of the
many and various state and federal licensing and permitting requirements, there
is a risk that one or more regulatory authorities could determine that the
Company has not complied with applicable licensing or permitting regulations or
does not maintain the approvals necessary for it to conduct business within
their jurisdictions. There can be no assurance that any such regulatory action
would not have a material adverse effect upon the Company's business. The
federal government and each of the states levy excise taxes on alcoholic
beverages, including beers. The federal government currently imposes an excise
tax of $18.00 per barrel on every barrel of beer produced for consumption in the
United States by each brewing company with annual production of over 2,000,000
barrels. The federal excise tax for brewing companies with annual production
under 2,000,000 barrels is $7.00 per barrel on all barrels up to the first
60,000 barrels produced and $18.00 per barrel for each barrel produced in excess
of 60,000. In addition, sale of alcoholic beverages is subject to state excise
and other taxes which vary with each state. While the Company believes that it
is in compliance with its federal, state and local tax obligations, any
determination that the Company has additional federal, state or local tax
liability could have a material adverse effect on the Company's financial
condition and results of operations. See 'Business -- Government Regulation.'
Dram Shop Laws. The serving of alcoholic beverages to a person known to be
intoxicated may, under certain circumstances, result in the server's being held
liable to third parties for injuries caused by the intoxicated customer. If the
Company opens brewpubs, the Company will attempt to address this concern by
implementing employee training and designated-driver programs. The Company has
obtained host liquor and legal liquor liability insurance coverage for such
liability in connection with the Company hosting special events where liquor is
served. If the Company opens brewpubs, this coverage may be required to be
increased. There can be no assurance that increased coverage will be available
or, if available, will not be cost prohibitive. Future increases in premiums
could make it prohibitive for the Company to obtain adequate insurance coverage,
and large uninsured damage awards against the Company could have a material
adverse effect on the Company's financial condition and results of operations.
See 'Business -- Government Regulations.'
Public Attitudes. The alcoholic beverage industry has become the subject
of considerable societal and political attention in recent years due to
increasing public concern over alcohol-related social problems including drunk
driving, underage drinking and health consequences from the misuse of alcohol,
including alcoholism. As an outgrowth of these concerns, the possibility exists
that advertising by beer producers could be restricted, that additional
cautionary labeling or packaging requirements might be imposed or that there may
be renewed efforts to impose increased excise or other taxes on beer sold in the
United States. If beer consumption in general were to come into disfavor among
domestic consumers, or if the domestic beer industry were subjected to
significant additional governmental regulations, the Company's business could be
materially adversely affected. See 'Business -- Government Regulation.' In
addition, consumer tastes may change over time or may vary in the markets which
the Company currently operates and new markets in which the Company intends to
enter and there is no assurance that the same level of sales and operating
margins can be maintained in the Company's existing market or achieved in new
markets. Similarly, there can be no
12
<PAGE>
assurance that the Company's products will be successful in its existing market
or will penetrate new markets.
Demand in Domestic Beer Market; No Assurance of Future Consumer Demand for
Craft-brewed Beer. Per capita beer consumption in the United States has
declined in all but two of the last 10 years and consecutively for the last five
years. In the last 10 years, industry reports indicate that per capita annual
U.S. beer consumption has dropped to 21.1 gallons from 22.7 gallons in 1985.
However, during the same period, the craft-brewed beer segment of the domestic
beer market has grown. The Company believes that one factor in such growth has
been consumer demand for more flavorful beers offered in a wider variety of
styles. No assurance can be given, however, that consumer demand for
craft-brewed beers will continue in the future. The Company's success also
depends upon a number of factors related to the level of discretionary consumer
spending, including the general state of the economy, federal and state tax laws
and consumer confidence in future economic conditions. Changes in consumer
spending can affect both the price of and demand for the Company's products and
may, therefore, affect the Company's business, financial condition and results
of operations. See 'Business -- Industry Background.'
Arbitrary Determination of Public Offering Prices; Potential Volatility of
Common Stock and Redeemable Warrants. The initial public offering prices of the
Securities and the terms of the Redeemable Warrants were arbitrarily determined
by negotiations between the Company and the Underwriter and, as a result, the
prices of the Securities offered herein may bear no relationship to the
Company's asset value, net worth or any other recognized criteria of value. See
'Underwriting' for a discussion of the factors to be considered in determining
the initial public offering prices. The trading price of the Common Stock or
Redeemable Warrants may be volatile and may be significantly affected by factors
such as actual or anticipated fluctuations in the Company's operating results,
announcements of new products by the Company or its competitors, developments
with respect to conditions and trends in the craft beer segment of the domestic
beer market, government regulation, general market conditions and other factors,
many of which are beyond the Company's control. In addition, the stock market
has from time to time experienced significant price and volume fluctuations that
have materially adversely affected the market prices of securities of companies'
irrespective of such companies' operating performances.
No Dividends. The Company has never paid and does not anticipate paying
cash dividends on the Common Stock in the foreseeable future. See 'Dividend
Policy.'
Dilution. Purchasers of shares of Common Stock in the Offering will
experience immediate and substantial dilution of $3.43 (or approximately 69%) in
the net tangible book value of their shares (assuming an initial public offering
price of $5.00 per share for the Common Stock). See 'Dilution.'
Impact of Private Placements. In connection with the sale of $800,000 of
Debentures and the issuance of $700,000 of Series B Preferred Stock in the
Private Placements (as such terms are defined in 'Management's Discussion and
Analysis of Financial Condition and Results of Operations'), the Company issued
common stock warrants at a per share exercise price below the assumed initial
public offering price such warrants which have been fully exercised. The Company
intends to utilize a portion of the net proceeds from this Offering to repay the
Debentures and redeem the Series B Preferred Stock. See 'Use of Proceeds.' As a
result, the Company will write off (i) unamortized original issue discount of
$1,223,764 and deferred financing costs of $31,200 in connection with the
Debentures and (ii) unamortized original issue discount of $1,851,090 and
deferred financing costs of $27,736 in connection with the Series B Preferred
Stock. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations.'
Broad Discretion in Application of Proceeds. The Company intends to use
approximately $941,000, or 18% of the net proceeds to the Company from the
Offering (approximately $1,740,000 million, or 29%, of the net proceeds to the
Company from the Offering if the Underwriters' over-allotment option is
exercised in full), for working capital and general corporate purposes, and the
Company has not yet identified more specific uses for such net proceeds.
Accordingly, the specific uses for the net proceeds will be at the complete
discretion of management of the Company and the
13
<PAGE>
Board of Directors and may be allocated based upon circumstances arising from
time to time in the future. See 'Use of Proceeds.'
No Assurance of Public Trading Market or Continued Nasdaq SmallCap
Inclusion; Risk of Low-Priced Securities. Prior to the Offering, there has been
no public market for the Securities, and there can be no assurance that an
active public market will develop or, if developed, be sustained. In order to
qualify for continued quotation on Nasdaq SmallCap, a company, among other
things, must have $2 million in total assets, $1 million in capital and surplus
and a minimum bid price of $1.00 per share. Nasdaq SmallCap has proposed
modifying such requirements so that a company must have, among other things, (i)
$2,000,000 in net tangible assets or a $35 million market capitalization or
$500,000 in net income in two of the last three years, (ii) a market value of
its publicly held shares equal to $1 million and (iii) a minimum bid price of $1
per share. However, there is no assurance that these proposed listing
requirements will be adopted. Quotation of the Securities on Nasdaq SmallCap
provides no assurance that an active or liquid market will develop or, if such
market develops, that it will be sustained. If the Company were unable to
satisfy the maintenance requirements for quotation on Nasdaq SmallCap, of which
there can be no assurance, it is anticipated that the Securities would be quoted
in the over-the-counter market National Quotation Bureau 'pink sheets' or on the
NASD OTC Electronic Bulletin Board. As a result, an investor may find it more
difficult to dispose of, or obtain, accurate quotations as to the market price
of the Securities, which may materially adversely affect the liquidity of the
market for the Securities. In addition, if the Securities are delisted from
Nasdaq SmallCap, they might become subject to the low-priced security or
so-called 'penny stock' rules that impose additional sales practice requirements
on broker-dealers who sell such securities. For any transaction involving a
penny stock, the rules require, among other things, the delivery, prior to the
transaction, of a disclosure schedule required by the Securities and Exchange
Commission (the 'Commission') relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information for the penny stocks held in the customer's account.
Although the Company believes that the Securities will not be defined as a
penny stock due to their anticipated inclusion on Nasdaq SmallCap, in the event
the Securities subsequently become characterized as a penny stock, the market
liquidity for the Securities could be severely affected. In such an event, the
regulations relating to penny stocks could limit the ability of broker-dealers
to sell the Securities and, thus, the ability of purchasers in this Offering to
sell their Securities in the secondary market.
Current Prospectus and State Registration Required to Exercise Redeemable
Warrants. The Redeemable Warrants are not exercisable unless, at the time of
exercise, the Company has a current prospectus covering the shares of Common
Stock issuable upon exercise of the Redeemable Warrant and such shares have been
registered, qualified or deemed to be exempt under the securities or 'blue sky'
laws of the state of residence of the exercising holder of the Redeemable
Warrants. In addition, in the event that any holder of the Redeemable Warrants
attempts to exercise any Redeemable Warrants at any time after nine months from
the date of this Prospectus, the Company will be required to file a
post-effective amendment to the Registration Statement of which this Prospectus
is a part and deliver a current prospectus before the Redeemable Warrants may be
exercised. Although the Company has undertaken to use its best efforts to have
all of the shares of Common Stock issuable upon exercise of the Redeemable
Warrants registered or qualified on or before the exercise date and to maintain
a current prospectus relating thereto until the expiration of the Redeemable
Warrants, there is no assurance that it will be able to do so, and it may be
required to incur significant costs in connection therewith. The value of the
Redeemable Warrants may be greatly reduced if a current prospectus covering the
Common Stock issuable upon the exercise of the Redeemable Warrants is not kept
effective or if such Common Stock is not qualified or exempt from qualification
in the states in which the holders of the Redeemable Warrants then reside. The
Redeemable Warrants will be separately tradeable immediately upon issuance and
may be purchased separately from the Common Stock. Although the Securities will
not knowingly be sold to purchasers in jurisdictions in which the
14
<PAGE>
Securities are not registered or otherwise qualified for sale, investors may
purchase the Redeemable Warrants in the secondary market or may move to
jurisdictions in which the shares underlying the Redeemable Warrants are not
registered or qualified during the period that the Redeemable Warrants are
exercisable. In such event, the Company will be unable to issue shares to those
persons desiring to exercise their Redeemable Warrants unless and until the
shares are qualified for sale in jurisdictions in which such purchasers reside,
or an exemption from such qualification exists in such jurisdictions, and
holders of the Redeemable Warrants would have no choice but to attempt to sell
the Redeemable Warrants in a jurisdiction where such sale is permissible or
allow them to expire unexercised. See 'Description of Securities -- Redeemable
Warrants.'
Speculative Nature of Redeemable Warrants; Adverse Effect of Possible
Redemption of Redeemable Warrants. The Redeemable Warrants do not confer any
rights of Common Stock ownership on the holders thereof, such as voting rights
or the right to receive dividends, but rather merely represent the right to
acquire shares of Common Stock at a fixed price for a limited period of time.
Specifically, holders of the Redeemable Warrants may, immediately upon issuance,
exercise their right to acquire Common Stock and pay an exercise price of $6.00
per share, subject to adjustment in the event of certain dilutive events, prior
to five years from the date of this Prospectus, after which date any unexercised
Redeemable Warrants will expire and have no further value. There can be no
assurance that the market price of the Common Stock will ever equal or exceed
the exercise price of the Redeemable Warrants, and consequently, whether it will
ever be profitable for holders of the Redeemable Warrants to exercise the
Redeemable Warrants.
The Redeemable Warrants are subject to redemption by the Company, with the
consent of the Underwriter, at any time, commencing 12 months following the date
of this Prospectus, on 30 days prior written notice, at a price of $0.10 per
Redeemable Warrant, provided that the average closing bid price for the Common
Stock equals or exceeds $8.00 per share for any 20 trading days within a period
of 30 consecutive trading days ending on the fifth trading day prior to the date
of the notice of redemption. Redemption of the Redeemable Warrants could force
the holders thereof to exercise the Redeemable Warrants and pay the exercise
price at a time when it may be disadvantageous for such holders to do so, to
sell the Redeemable Warrants at the current market price when they might
otherwise wish to hold the Redeemable Warrants or to accept the redemption
price, which may be substantially less than the market value of the Redeemable
Warrants at the time of redemption. The holders of the Redeemable Warrants will
automatically forfeit their rights to purchase shares of Common Stock issuable
upon exercise of the Redeemable Warrants unless the Redeemable Warrants are
exercised before they are redeemed. See 'Description of Securities -- Redeemable
Warrants.'
Shares Eligible For Future Sale. Upon completion of this Offering, the
Shares and Redeemable Warrants will be freely tradeable unless acquired by
affiliates of the Company. The remaining 2,307,078 shares of Common Stock and
the Series B Warrant to purchase 3,500,000 shares of Common Stock which will be
outstanding upon consummation of the Offering were issued by the Company in
private transactions in reliance upon the 'private placement' exception under
Section 4(2) of the Securities Act of 1933, as amended (the 'Securities Act') at
various times between February 1994 and September 1996, and are therefore
'restricted securities' within the meaning of Rule 144 promulgated under the
Securities Act ('Restricted Securities'). Accordingly, such Restricted
Securities may not be sold unless they are registered under the Securities Act
or unless an exemption from registration, such as the exemption provided by Rule
144, is available. The market price of the Shares and/or Redeemable Warrants of
the Company could be materially adversely affected by the availability for sale
of substantial amounts of Common Stock in the public market following the
Offering. No prediction can be made as to the effect that future sales of Common
Stock and of the availability of the shares of Common Stock for future sale will
have on the market prices of the Shares and the Redeemable Warrants prevailing
from time to time. The Redeemable Warrants being offered by the Company entitle
the holders of such Redeemable Warrants to purchase up to an aggregate of
4,000,000 shares of Common Stock at any time during the period commencing on the
date of this Prospectus and expiring five years from the date of this
Prospectus. Sales of either the Redeemable Warrants or the underlying shares of
Common Stock, the exercise of the Series B Warrant
15
<PAGE>
or even the existence of the Redeemable Warrants or the Series B Warrant may
depress the price of the Common Stock or the Redeemable Warrants in any market
which may develop for such securities. See 'Description of Securities --
Redeemable Warrants.' All of the current holders of the Common Stock (including
shares issuable upon the exercise of outstanding options) have agreed that they
will not sell, offer to sell, pledge, contract to sell or otherwise attempt to
transfer or dispose of any beneficial interest in any shares of Common Stock for
a period of 13 months from the date of this Prospectus (the 'Initial Lock-up
Period') without the prior written consent of the Underwriter. Winfield has
further agreed unconditionally that it will not sell, offer to sell, pledge,
contract to sell or otherwise attempt to transfer or dispose of any beneficial
interest in any equity or derivative securities it received in connection with
the Private Placements for so long as requested by Nasdaq, not to exceed a
period of thirty-six (36) months from the date of purchase. The officers and
directors of the Company and Winfield also have agreed not to transfer any
securities of the Company owned prior to the offering for 12 months from the
date of the Prospectus and, for the subsequent 12 month period, will not
transfer any of such securities for a price below the initial public offering
price of such securities. In addition, certain shareholders have the right
to have their shares of Common Stock and the Series B Warrant registered at the
expense of the Company under the Securities Act for public sale. See 'Shares
Eligible for Future Sale' and 'Description of Securities -- Registration
Rights.'
Authorization of Preferred Stock; Anti-Takeover Protections. The Company's
Articles of Incorporation, as amended (the 'Articles'), authorize the issuance
of 'blank check' preferred stock with such designations, rights and preferences
as may be determined from time to time by the Company's Board of Directors (the
'Board'). Accordingly, the Board is empowered, without shareholder approval, to
issue preferred stock with dividend, liquidation, conversion, voting or other
rights which could materially adversely affect the voting power or other rights
of the holders of the Common Stock (including those of the purchasers in the
Offering). Holders of the Common Stock will have no preemptive rights to
subscribe for a pro rata portion of any capital stock which may be issued by the
Company. In the event of issuance, such preferred stock could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. Although the Company has no present intention
to issue any shares of preferred stock, there can be no assurance that the
Company will not do so in the future. See 'Description of Securities.'
Furthermore, the Company is subject to certain anti-takeover provisions of the
Pennsylvania Business Corporation Law of 1988, as amended (the 'BCL'). The
existence of these provisions would be expected to have an anti-takeover effect,
including possibly discouraging takeover attempts that might result in a premium
over the market price for the Common Stock. See 'Description of Securities --
Pennsylvania Anti-Takeover Laws.'
Administrative Proceeding Involving Underwriter. On December 19, 1996, the
National Association of Securities Dealers, Inc. ('NASD') District Business
Conduct Committee filed a complaint against the Underwriter and certain
employees of the Underwriter. The complaint alleges that during the period
between July 26 and July 29, 1994, the Underwriter violated certain NASD rules
in connection with the distribution and sale of certain securities underwritten
by the Underwriter. The Underwriter has advised the Company that it intends to
vigorously defend against such claims. In the event that the NASD succeeds in
finding a rule violation against the Underwriter, sanctions may be imposed on
the Underwriter which could materially adversely affect the Underwriter's
ability to act as a market maker for the Securities, which in turn could have an
adverse effect on the market price and liquidity of the Securities.
See 'Underwriting.'
New Jersey Securities Registration. The Securities offered hereby are not
registered or qualified for offer and sale to residents of certain states,
including the State of New Jersey. The New Jersey Bureau of Securities (the 'New
Jersey Bureau') has recently taken the position that the Underwriter may not
offer or sell any securities 'from' its New Jersey office which are not
registered in New Jersey, including offers and sales to residents of states in
which the securities are registered and/or qualified for offer and sale. On
November 20, 1996, in a case entitled A.S. Goldmen & Co., Inc. v. New Jersey
Bureau of Securities, No. 96-5280 (DRD), the United States District Court for
the District of New Jersey (the 'District Court') issued a preliminary
injunction holding that the state statute upon which the New Jersey Bureau's
position is based is unconstitutional as applied to offers or sales of
securities to non-New Jersey residents. The New Jersey Bureau has contested that
ruling. If the New Jersey Bureau succeeds in overturning or vacating the ruling
of the District Court's decision, the Underwriter could be prohibited from
offering or selling these Securities from its offices in New Jersey. Such a
prohibition could, in turn, have a negative effect upon the market price of the
Securities.
16
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Securities offered by the Company
hereby, after deducting the underwriting discount and estimated offering
expenses, will be approximately $5,300,000 (or approximately $6,100,000 if the
Underwriter exercises its over-allotment option in full). The Company intends to
use the net proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
AMOUNT PERCENT
------------- ---------------
<S> <C> <C>
Repayment of Debentures(1)........................................................... $ 812,020 15%
Repayment of Certain Other Outstanding Indebtedness(2)............................... 408,496 8
Redemption of Preferred Stock(3)..................................................... 738,111 14
Marketing and Sales(4)............................................................... 1,500,000 28
Capital Expenditures(5).............................................................. 900,000 17
Working capital and general corporate purposes(6).................................... 941,373 18
------------- -----
Total.............................................................................. $ 5,300,000 100%
------------- -----
------------- -----
</TABLE>
- ------------------
(1) Reflects repayment of the Company's Debentures, including all accrued and
unpaid interest outstanding on an assumed repayment date of January 31,
1997. The Debentures accrue interest at a rate of 12.75% per annum (which
increases to 14% upon the completion of a public offering) and absent
certain conditions, including a public offering, mature in August, 2001.
Accordingly, the Company must repay the Debentures upon the closing of the
Offering. See 'Certain Transactions -- Private Placements.'
(2) Consists of the principal amount outstanding at September 30, 1996 pursuant
to the SBA Loan, which was issued on January 17, 1995, accrues interest at a
rate equal to the prime rate plus 2% (effective rate of 10.25% at September
30, 1996) and matures on January 17, 2002.
(3) Payment of principal and all accrued and unpaid dividends at an assumed
repayment date of January 31, 1997 in connection with the mandatory
redemption of the Company's Series B Preferred Stock upon the consummation
of the Offering. See 'Description of Securities -- Preferred Stock.'
(4) Consists of anticipated expenditures in connection with advertising,
attendance at trade shows, public relations activities and merchandising
activities. Also includes anticipated expenses in connection with the
potential acquisition by the Company of existing brewpubs and/or the
development of new brewpubs.
(5) Consists of anticipated expenditures in connection with the purchase of
additional fermenting equipment, a new bottling line, kegs and laboratory
equipment for testing facilities.
(6) To the extent that the Company's cash flow from operations is not sufficient
to pay Mr. Connor's and Mr. Moore's salaries pursuant to their employment
agreements, the Company may utilize net proceeds from the Offering that are
otherwise allocated to working capital and general corporate purposes to pay
such salaries. See 'Risk Factors -- Broad Discretion in Application of
Proceeds' and 'Management -- Employment Arrangements.'
The initial application of the net proceeds of the Offering represents
management's estimate based upon current business and economic conditions.
Although the Company does not contemplate material changes in the proposed
allocation of the use of proceeds, to the extent the Company finds that an
adjustment is required by reason of existing business conditions, the amounts
shown may be adjusted among the uses indicated above.
17
<PAGE>
Although the Company believes that the net proceeds of the Offering will be
sufficient to finance its activities for at least 12 months following the date
of this Prospectus, there can be no assurance in that regard. See 'Risk Factors
- -- Possible Need For Additional Financing' and 'Management's Discussion and
Analysis of Financial Condition and Results of Operations.'
To the extent that the Company's application of the net proceeds set forth
above are less than is initially estimated or if the net proceeds of the
Offering increase as a result of the exercise by the Underwriter of its
over-allotment option, or as a result of the exercise of the Redeemable
Warrants, the resulting balances will be used either for the purposes set forth
above or for general working capital purposes. The net proceeds of the Offering
that are not expended immediately will be deposited in interest-bearing
accounts, or invested in government obligations, certificates of deposit or
similar short-term, low risk investments.
DIVIDEND POLICY
The Company has never paid cash dividends and does not expect to pay any
cash dividends in the foreseeable future with respect to its Common Stock. The
Company's future dividend policy will depend upon the Company's earnings,
capital requirements, financial condition and other factors considered relevant
by the Board. The Company presently intends to retain any earnings which the
Company may realize in the foreseeable future to finance the growth of the
Company.
18
<PAGE>
DILUTION
The Company had a negative net tangible book value of $(472,676) or $(0.20)
per share as of September 30, 1996. Net tangible book value per share is equal
to the total tangible assets of the Company less total liabilities, divided by
the number of shares of Common Stock outstanding. After giving effect to the
receipt of the net proceeds from the sale of the Securities offered hereby
(after deducting the underwriting discount and estimated offering expenses) and
the initial application of the net proceeds therefrom, the as adjusted net
tangible book value of the Company at September 30, 1996 would have been
$5,034,110 or $1.57 per share, representing an immediate dilution of $3.43 (or
approximately 69%) per share to the public investors as illustrated by the
following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share of Common Stock..................................... $5.00
Negative net tangible book value per share of Common Stock before the Offering(1)......... $(0.20)
Increase in net tangible book value per share of Common Stock attributable to public
investors.............................................................................. $1.77
---------
As adjusted net tangible book value per share of Common Stock after the Offering.......... $1.57
---------
Dilution per share of Common Stock to public investors(1)................................... $3.43
---------
---------
</TABLE>
- ------------------
(1) In the event that the Underwriter exercises its over-allotment option in
full, the as adjusted net tangible book value after this Offering would be
approximately $1.76 per share, which would result in immediate dilution to
public investors of approximately $3.24 per share.
The following table sets forth, as of the date of this Prospectus, the
number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing shareholders and by new investors purchasing shares of Common Stock
from the Company in this Offering.
<TABLE>
<CAPTION>
NUMBER OF PERCENT PERCENT OF TOTAL TOTAL
SHARES OF TOTAL CONSIDERATION CONSIDERATION AVERAGE PRICE
PURCHASED SHARES PAID PAID PER SHARE
----------- -------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Present Shareholders............... 2,307,078 72% 19% $1,072,155 $0.46
Public Investors................... 900,000 28% 81% 4,500,000(1) $5.00
----------- ----- ----- ----------
Total.............................. 3,207,078 100% 100% $5,572,155
----------- ----- ----- ----------
----------- ----- ----- ----------
</TABLE>
- ------------------
(1) Allocates no value to the Redeemable Warrants offered hereby.
The foregoing table assumes no exercise of the Redeemable Warrants or the
Series B Warrant. To the extent that any options issued by the Company in the
future or the Redeemable Warrants or the Series B Warrant are exercised, there
may be further dilution to the new investors in this Offering.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996. This information should be read in conjunction with the
financial statements and the notes thereto which are included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------
ACTUAL AS ADJUSTED(1)
------------- --------------
<S> <C> <C>
Short-term debt, including current portion of long-term debt................. $ 75,600 $ 32,400
------------- --------------
------------- --------------
Long-term debt............................................................... $ 1,353,764 $ 188,468
Series A Preferred Stock, $10.00 par value,
500,000 shares authorized; no shares issued and
outstanding, and no shares issued and outstanding,
pro forma, as adjusted..................................................... -- --
Series B Preferred Stock, $10.00 par value,
500,000 shares authorized; 70,000 shares issued and
outstanding, actual; 70,000 shares issued
and outstanding, and no shares issued and outstanding,
as adjusted................................................................ 700,000 --
Shareholders' equity:
Common Stock, no par value, 19,000,000
shares authorized, 2,307,078 shares issued and
outstanding, actual; 3,207,078 shares issued and
outstanding, as adjusted................................................ 3,691,428 8,991,428
Accumulated deficit........................................................ (799,228) (3,946,982)
------------- --------------
Total shareholders' equity................................................... 2,892,200 5,044,446
------------- --------------
Total capitalization......................................................... $ 4,945,964 $ 5,232,914
------------- --------------
------------- --------------
</TABLE>
- ------------------
(1) Gives effect on an as adjusted basis to (i) the sale of 900,000 shares of
Common Stock and 4,000,000 Redeemable Warrants in connection with this
Offering, (ii) the repayment of the SBA Loan of $408,496, (iii) the
repayment of the $800,000 of Debentures and accrued and unpaid interest of
$9,336, plus the write off of unamortized original issue discount of
$1,223,764 and write off of deferred financing costs of $31,200 and (iv) the
redemption of $700,000 of Series B Preferred Stock and accrued and unpaid
dividends of $4,628, plus the write off of unamortized original issue
discount of $1,851,090 and write off of deferred financing costs of
approximately $27,736. See 'Use of Proceeds.'
20
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for the Company's statement of
operations data for the period from March 17, 1994 (inception) through December
31, 1994 and for the year ended December 31, 1995 and the balance sheet data at
December 31, 1995 are derived from the audited financial statements of the
Company which appear elsewhere in this Prospectus. The statement of operations
data for the nine months ended September 30, 1996 and September 30, 1995 and the
balance sheet data at September 30, 1996 are derived from unaudited financial
statements which appear elsewhere in this Prospectus. In the opinion of the
Company's management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the information set forth therein have
been made. The results of operations for the most recent interim period are not
necessarily indicative of the Company's financial results for the entire current
fiscal year. The selected financial data should be read in conjunction with the
financial statements and the notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations, which are included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MAY 17, 1994
(INCEPTION) NINE MONTHS ENDED
TO YEAR ENDED --------------------------
DECEMBER 31, DECEMBER 31, SEPT. 30, SEPT. 30,
1994 1995 1995 1996
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................................ -- $ 237,644 $ 120,549 $ 428,835
Excise taxes......................................... -- 13,338 6,760 24,213
----------- ----------- -----------
Net sales........................................ -- 224,306 113,789 404,622
Cost of goods sold................................... -- 486,229 374,781 582,098
----------- ----------- -----------
Gross loss....................................... -- (261,923) (260,992) (177,476)
----------- ----------- -----------
Advertising, promotional and selling expenses........ -- 93,039 59,985 101,468
General and administrative expenses.................. $ 38,538 278,565 246,936 277,010
----------- ----------- ----------- -----------
Operating loss................................... (38,538) (633,527) (567,913) (555,954)
Interest expense..................................... -- (51,729) (36,710) (151,918)
Other income, (expense) net.......................... 2,427 38,450 28,654 19,873
----------- ----------- ----------- -----------
Loss before income taxes......................... (36,111) $ (646,806) $ (575,969) $ (687,999)
Income taxes(1)...................................... 1,496 893 --
----------- ----------- ----------- -----------
Net loss......................................... $ (36,111) $ (648,302) $ (576,862) $ (687,999)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net loss per share of Common Stock................... $ (0.02) $ (0.30) $ (0.28) $ (0.31)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average shares outstanding(2)............... 1,867,595 2,201,662 2,049,941 2,229,773
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
<TABLE>
<S> <C> <C> <C>
SEPTEMBER 30, 1996
DECEMBER 31, ---------------------------
1995 ACTUAL AS ADJUSTED(3)
------------- ----------- --------------
BALANCE SHEET DATA:
Working capital (deficit)............................................ $ (237,543) $ 195,048 $ 3,836,538
Total assets......................................................... 1,104,126 5,601,815 5,845,565
Total liabilities.................................................... 948,587 2,009,615 801,119
Shareholders' equity................................................. 155,539 2,892,200 5,044,446
</TABLE>
- ------------------
(1) The Company had elected to be taxed pursuant to Subchapter S of the Internal
Revenue Code of 1986, as amended, for the year ended December 31, 1995, but
on December 1, 1995, the Company exceeded the maximum number of shareholders
as permitted under Subchapter S. Accordingly, all taxable income or loss and
tax credits are the responsibility of the Company's shareholders for the
period from January 1, 1995 through November 30, 1995. The Company
terminated its Subchapter S election and is now taxed as a C corporation,
effective December 1, 1995. Effective with the change to a C corporation,
the Company accounts for its income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Income taxes reported for the year ended
December 31, 1995 represent federal and state income taxes prior to 1995
when the Company was taxed as a C corporation.
(2) Loss per share of Common Stock was computed based on the weighted average
number of common shares and common share equivalents outstanding during the
year, as restated for the 100% stock dividend, effected in the form of a
stock split, payable on February 10, 1996 to shareholders of record on
December 6, 1995. In August and September 1996, 1,038,188 shares issued have
been treated as outstanding for all periods in calculating loss per common
share because such shares were issued for consideration below the proposed
public offering price of $5.00 per share.
(3) Gives effect on an as adjusted basis to (i) the sale of 900,000 shares of
Common Stock and 4,000,000 Redeemable Warrants in connection with this
Offering, (ii) the repayment of the Company's SBA Loan of $408,496,
(iii) the repayment of the $800,000 of Debentures and accrued and unpaid
interest of $9,336, plus the write off of unamortized original issue
discount of $1,223,764 and write off of deferred financing costs of
approximately $31,200 and (iv) the redemption of $700,000 of Series B
Preferred Stock and accrued and unpaid dividends of $4,628, plus the write
off of unamortized original issue discount of $1,851,090 and write off of
deferred financing costs of approximately $27,736. See 'Use of Proceeds.'
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations is intended to assist in understanding the financial condition and
results of operations of the Company. The information contained in this section
should be read in conjunction with the financial statements and accompanying
notes thereto and the other sections contained in this Prospectus. Management's
Discussion and Analysis of Financial Condition and Results of Operations,
contains certain forward-looking statements that involve substantial risks and
uncertainties. When used in this section, the words 'anticipate,' 'believe,'
'estimate,' and 'expect' and similar expressions as they relate to the Company
or its management are intended to identify such forward-looking statements. The
Company's actual results, performance or achievements could differ materially
from the results expressed in, or implied by, these forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed in 'Risk Factors.'
OVERVIEW
Independence Brewing Company was incorporated in May 1994 and began
distribution of its Independence Ale in kegs and bottles in May 1995 and June
1995, respectively. The Company's brewery, located in Philadelphia,
Pennsylvania, was completed and became operational in late February 1995 and
commenced brewing in March 1995. For the period from June 1994 through February
1995, the Company's principal activities were raising capital, securing third
party financing and completing construction of its brewing facility. The Company
produces seven products: four styles of beer which are offered year-round,
Independence Ale, Independence Lager, Independence Gold and Independence Porter;
and three which are seasonal beers, Independence Franklinfest (Fall), Winter
Warmer (Winter) and Quaker City Wheat (Summer). The Company's current brewing
equipment has the capacity to brew approximately 12,000 - 14,000 barrels per
year, which is in part dependent on the style of beer produced. However,
currently the Company can only package a limited portion of its brewing capacity
due primarily to its current bottling line deficiencies. For the nine months
ended September 30, 1996, gross sales totaled $428,835 on approximately 3,000
barrels of production, as compared to gross sales of $120,549 for the comparable
period in 1995 on 806 barrels of production. For the year ended December 31,
1995, sales totaled $237,644 on 1,414 barrels of production. The Company had no
sales for the period from May 17, 1994 (inception) through December 31, 1994.
The Company believes that period-to-period comparisons of its financial results
should not be relied upon as an accurate indicator of future performance. The
considerable resources expended by the Company's management in connection with
this Offering may have a material adverse effect on the Company's operating
results in the last quarter of 1996 and the first half of 1997. The Company's
revenues are generated predominantly from sales of beer to independent third
party wholesale distributors. In addition, the Company derives revenues from the
sale of its products directly to retailers and from contract brewing
arrangements in which the Company utilizes a portion of its excess capacity to
produce beers for third parties which market and sell such products under their
own label. To the extent that the Company is not able to utilize this excess
capacity, the Company believes that operating margins may be negatively
impacted. For the nine month period ended September 30, 1996, approximately 18%
of the Company's revenues resulted from its contract brewing operations.
Although margins for contract brewing are lower compared to the sale of the
Company's own products to wholesale distributors, the Company expects this
business to continue until such time as the Company's own products fully utilize
production capacity.
The Company is currently operating a refurbished bottling line which does
not include all originally manufactured parts. Incompatibility in
re-manufactured parts has resulted in unanticipated machine down-time, decreased
bottling capacity and problems with the adhesion of product labels to bottles.
Under normal circumstances, using originally manufactured parts, the Company's
current bottling line would have the capacity to fill 300 bottles per minute.
However, due to the unanticipated problems, the bottling line has been able to
fill only 35 bottles per minute. In addition, the Company has experienced
problems with product labels falling off during production. As the Company has
grown, demand for the Company's products has at times exceeded its bottling
capacity. In addition, this decreased capacity has resulted in spreading smaller
revenue over existing fixed and semi-variable costs, which has negatively
impacted the Company's operating margins. The Company anticipates
22
<PAGE>
purchasing a new bottling line shortly after completion of this Offering with
approximately $500,000 of the net proceeds from this Offering. This new bottling
line, which the Company anticipates will be operational in the first quarter of
1997, will be designed to increase the Company's bottling capacity and alleviate
its labeling problems. The Company recently paid a $55,000 deposit on this new
bottling line. The Company also anticipates purchasing additional kegs,
laboratory equipment and fermenting equipment, for which it anticipates
expending approximately $90,000, $10,000 and up to $300,000, respectively, of
the net proceeds from this Offering. See 'Risk Factors -- Unanticipated
Manufacturing Limitations,' 'Use of Proceeds,' and 'Certain Transactions --
Private Placements.'
In addition to the level of consumer demand and the availability of
bottling capacity, the Company's sales are also affected by other factors such
as new product introductions, a limited marketing budget, third party wholesaler
promotions and competitive considerations. Sales in the beer industry generally
reflect a degree of seasonality, with lower sales in the first quarter of the
calendar year generally due to decreased consumption of beer after the holiday
season. The Company operates with little or no backlog of orders because of
distributor demand for immediate inventory and because its ability to predict
sales in future periods has, to date, been limited.
The Company's capacity utilization has a significant impact on gross
profits. Most capital costs associated with building a brewery and fixed and
semi-variable costs related to operating a brewery are incurred prior to or
beginning upon commencement of production at the brewery. Although the Company's
brewing equipment has the capacity to brew approximately 12,000 - 14,000 barrels
per year, for the nine months ended September 30, 1996 the Company produced
approximately 3,000 barrels due primarily to its current bottling line
deficiencies. Because the initial production level has been substantially below
the brewery's maximum designed brewing capacity, operating margins have been
negatively impacted. The Company expects this impact to be reduced if and as the
brewery's actual production increases. In addition, the Company expects the
incremental costs of shipping beer from the Company's existing brewery to
continue to increase as the volume of beer supplied to more distant markets
increases.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1995 Compared to Nine Months Ended September
30, 1996
Sales. Gross sales increased from $120,549 in the first nine months of
1995 to $428,835 for the same period in 1996. The substantial increase in gross
sales was due in part to the Company's commencing distribution of its beer
products in May of 1995 and, to a greater extent, to the expansion of the
Company's third party wholesale distribution network from four distributors at
September 30, 1995 to 17 distributors at September 30, 1996. This revenue
increase reflected an increase in sales volume from 806 barrels in the first
nine months of 1995 to 3,003 barrels for the same period in 1996, with
relatively stable sales prices.
Excise taxes. Excise taxes increased from $6,760 in the first nine months
of 1995 to $24,213 for the same period in 1996, reflecting the increased level
of sales volume on which federal and certain local excise taxes are paid. Excise
taxes as a percentage of sales remained constant at approximately 6% in the
first nine months of 1996 as compared to the same period in 1995. The Company
pays federal and certain local excise taxes on sales volume. Accordingly as
sales increase, excise taxes paid by the Company will increase unless the
Company increases shipments to jurisdictions where local excise taxes are paid
by the third party wholesale distributor rather than the brewer, as is the case
in Maryland and the District of Columbia.
Cost of goods sold. Cost of goods sold increased from $374,781 in the
first nine months of 1995 to $582,098 for the same period in 1996, primarily due
to the increase in sales volume in 1996. Cost of goods sold as a percentage of
sales declined from approximately 311% in the first nine months of 1995 to
approximately 136% as compared to the same period in 1996, primarily due to
increased sales which reduced per barrel fixed and semi-variable costs
associated with operating the brewery. Increases in raw materials costs and
utility costs from $153,718 in the first nine months of 1995 compared to
$278,642 in the same period in 1996 are associated with increased sales and the
utilization of the production facility from the time the Company commenced
brewing in March 1995. Repairs and
23
<PAGE>
maintenance increased from $16,582 for the nine months ended September 30, 1995
to $44,924 for the same period in 1996 due primarily to repairs and maintenance
related to the Company's bottling line.
Advertising, promotional and selling expenses. Advertising, promotional
and selling expenses increased from $59,985 in the first nine months of 1995 to
$101,468 for the same period in 1996. Advertising, promotional and selling
expenses as a percentage of sales declined from approximately 50% in the first
nine months of 1995 to approximately 24% as compared to the same period in 1996,
primarily due to initial purchases of promotional items, such as apparel and
other retail items used by third party wholesale distributors, in the first nine
months of 1995 which were not made in the comparable 1996 period.
General and administrative expenses. General and administrative expenses
increased from $246,936 in the first nine months of 1995 to $277,010 for the
same period in 1996. General and administrative expenses as a percentage of
sales declined from approximately 205% in the first nine months of 1995 to
approximately 65% in the same period in 1996. Increases in professional fees
from $14,633 for the first nine months ended September 30, 1995 to $50,352 for
the nine months ended September 30, 1996 in connection with financing activities
and other relatively small increases in general and administrative expenses as
compared to the increased level of sales represented the primary increases.
Interest expense. Interest expense increased from $36,710 in the first
nine months of 1995 to $151,918 for the same period in 1996, due to the increase
in the outstanding principal of subordinated convertible notes from $25,000 at
September 30, 1995 to $263,300 at September 30, 1996 and the amortization of
deferred financing costs associated with these obligations, as well as the write
off of unamortized deferred financing costs when these obligations were
converted into Common Stock in August 1996 and the write off of original issue
discount for the nine months ended September 30, 1996. Interest expense as a
percentage of sales increased from approximately 30% in the first nine months of
1995 compared to approximately 35% in the same period in 1996.
Other income (expense), net. Other income (expense), net decreased from
$28,654 in the first nine months of 1995 to $19,873 for the same period in 1996,
due primarily to reduced event income received from Company sponsored events
held in 1996. Other income (expense), net as a percentage of sales, decreased
from approximately 24% in the first nine months of 1995 compared to
approximately 5% in the same period in 1996.
YEAR ENDED DECEMBER 31, 1995
The Company was incorporated in May 1994 and commenced brewing beer in
March 1995. The Company began distributing its Independence Ale in kegs and
bottles in May 1995 and June 1995, respectively. Therefore, the comparison of
the year ended December 31, 1994 to the year ended December 31, 1995 is not
meaningful and has not been presented.
Sales. Gross sales totaled approximately $237,644 for the year ended
December 31, 1995 on 1,415 barrels of production.
Excise taxes. Excise taxes totaled approximately $13,338 for the year
ended December 31, 1995. Excise taxes as a percentage of sales was approximately
6% for the year ended December 31, 1995.
Cost of goods sold. Cost of goods sold totaled approximately $486,229 for
the year ended December 31, 1995. Cost of goods sold as a percentage of sales
was approximately 205% for the year ended December 31, 1995. Raw materials costs
and utility costs totaled $183,250 for the year ended December 31, 1995. Repairs
and maintenance totaled $19,312 for the year ended December 31, 1995 reflecting
repairs and maintenance relating to the Company's bottling line.
Advertising, promotional and selling expenses. Advertising, promotional
and selling expenses totaled $93,039 for the year ended December 31, 1995.
Advertising, promotional and selling expenses as a percentage of sales were
approximately 39% for the year ended December 31, 1995. During 1995, the Company
made initial purchases of promotional items, such as apparel and other retail
items used by wholesale distributors.
24
<PAGE>
General and administrative expenses. General and administrative expenses
totaled $278,565 for the year ended December 31, 1995. General and
administrative expenses as a percentage of sales were approximately 117% for the
year ended December 31, 1995. Professional fees totaled $24,816 for the year
ended December 31, 1995. Also included in general and administrative expenses
for the year ended December 31, 1995 is $15,000 of non-cash compensation paid to
certain individuals who received Common Stock valued at $3.00 per share in lieu
of services rendered to the Company.
Interest expense. Interest expense totaled $51,729 for the year ended
December 31, 1995. Interest expense as a percentage of sales was approximately
22% for the year ended December 31, 1995. This interest is associated with the
Company's SBA Loan and Philadelphia Industrial Development Corporation ('PIDC')
notes and to a lesser extent with the Company's subordinated convertible notes
of $75,000, which were issued in late December 1995.
Other income (expense), net. Other income (expense), net totaled $38,450
for the year ended December 31, 1995. Other income (expense), net as a
percentage of sales was approximately 16% for the year ended December 31, 1995.
Other income (expense), net primarily represents income received from two
Company sponsored events held in 1995.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded its operations and capital requirements
through the issuance of Common Stock, the SBA Loan and PIDC debt and the
issuance of certain subordinated convertible notes in 1995 and during the nine
months ended September 30, 1996. Net cash used in operating activities in 1994
and 1995 and for the nine months ended September 30, 1996 was $61,155, $444,663
and $216,283, respectively. Net cash used in operating activities was primarily
generated by net losses for the respective periods and increases in accounts
receivable and inventories, offset in part by increases in accounts payable and
accrued expenses.
Net cash used in investing activities in 1994 and 1995 and for the nine
months ended September 30, 1996 was $610,003, $413,709 and $561,139,
respectively. Cash used in investing activities was primarily for the purchase
of fixed assets relating to brewery equipment and other equipment. The Company
expects to incur approximately $900,000 of additional capital expenditures in
the first half of 1997 for the purchase of additional kegs, laboratory equipment
and fermenting equipment and the replacement of the Company's bottling line. The
Company has paid a deposit of $55,000 toward this new bottling line. See 'Use of
Proceeds' and 'Certain Transactions -- Private Placements.' Net cash provided by
financing activities in 1994 and 1995 and for the nine months ended September
30, 1996 was $598,994, $933,318, and $1,435,826, respectively.
In anticipation of the closing of the financing transactions described
below (the 'Private Placements'), the Company was advanced an aggregate of
$200,000 on May 6, 1996 and July 16, 1996 by Winfield to fund short term
operations. This advance was repaid in connection with the closing of the
Private Placements.
To fund operations, on August 12, 1996, September 13, 1996 and September
20, 1996, the Company sold an aggregate of $800,000 of debentures convertible
into shares of Series A Preferred Stock of the Company (the 'Debentures') to
Winfield and certain shareholders of the Company (collectively referred to as
the 'Purchasers'). To the extent that such shareholders did not so participate,
Winfield agreed to act as 'standby' purchaser for the entire $800,000 in
Debentures being offered.
In consideration of the purchase by the Purchasers of the Debentures, the
Purchasers received warrants which entitled them to purchase 415,275 shares of
Common Stock for the aggregate exercise price of $2,081 (the 'Series A
Warrants'). All of the Series A Warrants were exercised by the Purchasers on
September 13, 1996 and September 20, 1996. The Company assigned a deferred
interest charge of $3.00 per share, totaling $1,245,825, to these shares and is
amortizing it over the term of the Debentures. In addition, in consideration of
the purchase by Winfield of the Debentures, Winfield received (i) a warrant (the
'Preferred Warrant') that entitled Winfield to purchase 70,000 shares of Series
B Preferred Stock of the Company, par value $10.00 (the 'Series B Preferred
Stock'), exercisable immediately for an aggregate exercise price of $700,000 and
(ii) a warrant (the 'Series C Warrant') that entitles Winfield to purchase
622,913 shares of Common Stock for the aggregate
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exercise price of $3,115. The Preferred Warrant and the Series C Warrant were
exercised by Winfield on September 13, 1996. The Company assigned a deferred
interest charge of $3.00 per share, totaling $1,868,739, to these shares and is
amortizing it over the term of the Series B Preferred Stock.
In consideration for agreeing to act as standby purchaser for the balance
of the Debentures not purchased by the Company shareholders and for agreeing to
allow all of the qualified shareholders of the Company to participate in the
purchase of the Debentures, Winfield received a warrant (the 'Series B Warrant')
which entitles Winfield to purchase 3.5 million shares of Common Stock of the
Company at a price of $6.00 per share. The Series B Warrant is immediately
exercisable and expires five years following the Company's initial public
offering.
In connection with the Private Placements, Winfield received a $15,000
processing fee and a $45,000 commitment fee. In connection with the issuance and
anticipated repayment of the Debentures and the Series B Preferred Stock from
the net proceeds of this Offering, the Company will write off (i) unamortized
original issue discount of $1,223,764 and $1,851,090, respectively, and (ii)
deferred financing costs of $31,200 and $27,736 relating to the Debentures and
the Series B Preferred Stock, respectively.
The Company had cash and cash equivalents at December 31, 1995 and
September 30, 1996 of $2,782 and $661,186, respectively. The Company believes
that cash flow from the Private Placements will be sufficient to meet short-term
liquidity needs. Additionally, the net proceeds from the Offering will be used
to redeem the Debentures and Series B Preferred Stock described above, repay the
SBA Loan, expand marketing and sales, fund certain capital expenditures and
finance working capital expenditures. See 'Use of Proceeds.'
During the period June 25, 1994 through December 1, 1995, the Company
offered for sale and sold to investors a total of 207,914 shares of Common Stock
(the 'Original Shares'). During the period of December 1995 through May 1996,
the Company offered and sold to investors notes, convertible into shares of
Common Stock at maturity, in the aggregate principal amount of $263,300, such
notes which were later converted into shares of Common Stock (together with the
Original Shares, the 'Rescission Securities'). Because certain of the applicable
provisions of federal and state securities laws relating to the registration of
securities for offer and sale may have not been complied with in connection with
the offer and sale of the Rescission Securities, the Company offered to
repurchase the Rescission Securities for cash in an amount equal to the original
purchase price plus interest from the date of purchase, less any dividends,
interest payments or cash distributions in respect to the Rescission Securities.
The Company received rescission acceptances from five shareholders whose
investment totaled $24,750 for 18,000 shares of Common Stock. On September 27,
1996, the Company repurchased such shares of Common Stock for an aggregate
purchase price, including interest, of $26,927. On September 27, 1996, the
Company also sold 18,000 shares of Common Stock to four shareholders for an
aggregate purchase price of $24,750. No underwriters were involved and no
commissions were paid in the foregoing transactions.
IMPACT OF INFLATION
Although the Company has not attempted to calculate the effect of
inflation, management does not believe inflation has had a material effect to
date on its results of operations. However, production and raw material costs
are expected to increase over time as a result of general economic inflation,
and there can be no assurance that the Company will be able to offset the
resulting negative effects on its business through increasing the sale prices of
its product.
NET OPERATING LOSS CARRYOVERS
As a result of the Offering, the Company will experience an 'ownership
change' for purposes of determining its ability to use its net operating loss
('NOL') carryovers as deductions against future taxable income under federal
income tax law. Its annual NOL deductions after the Offering will be limited to
a dollar amount determined by multiplying the value of the Company's outstanding
stock as of the Offering date by an index rate determined under federal law. The
annual limitation is expected to be approximately $900,000.
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BUSINESS
GENERAL
Independence Brewing Company, which was incorporated in Pennsylvania in
1994, is a regional producer of fresh, high-quality, preservative-free
craft-brewed ales, lagers, porters and seasonal beers. The Company's products
are marketed under the 'Independence' label. The Company produces seven
products: four styles of beer which are offered year-round, Independence Ale,
Independence Lager, Independence Gold and Independence Porter; and three which
are seasonal beers, Independence Franklinfest (Fall), Winter Warmer (Winter) and
Quaker City Wheat (Summer). The Company brews, kegs and bottles its products at
its brewery in Philadelphia, Pennsylvania for wholesale distribution generally
by 17 independent wholesale distributors in seven states and the District of
Columbia. The Company's brewing equipment currently has the capacity to brew
approximately 12,000 - 14,000 barrels per year, which is in part dependent on
the style of beer produced. However, currently the Company can only package a
limited portion of its brewing capacity due primarily to its current bottling
line deficiencies. For the nine months ended September 30, 1996, the Company
produced approximately 3,000 barrels. In addition to brewing its own products,
the Company has entered into contract brewing arrangements in which the Company
produces beers for third parties which market and sell such products under their
own label. The Company may also in the future develop and operate brewpubs with
third parties that offer for sale, in addition to food, the Company's beer
brewed on the premises.
INDUSTRY BACKGROUND
The market for beer in the United States consists of essentially three
segments: economy beers, imports and craft-brewed beers. Economy beers are
brewed by the largest domestic producers, such as Anheuser-Busch, Miller, Coors
and Stroh, each of which measures yearly volume in tens of millions of barrels,
and mid-sized and regional breweries, each of which produces hundreds of
thousands of barrels per year. The second largest segment of the U.S. beer
market is the import segment, which accounted for approximately 6% of all U.S.
beer sales in 1995. This segment includes well known, widely promoted brands
such as Heineken, Amstel, Corona, Bass and Guinness, as well as hundreds of
lesser known brands from dozens of countries.
The third segment of the U.S. beer market, and the segment in which the
Company operates, is made up of craft-brewed beers. The craft-brewing segment
generally consists of small, independent brewers whose predominant product is
preservative-free, hand-crafted beer that is brewed with high-quality, fresh
ingredients. Craft-brewing refers to beers produced by microbreweries, regional
specialty breweries, brewpubs and contract brewers. Small breweries which
generally produce less than 15,000 barrels per year are referred to as
microbreweries. Those breweries which were founded as microbreweries, but have
since outgrown the category, are referred to as regional specialty breweries.
Breweries that sell their beers exclusively or primarily at their own bar or
restaurant are referred to as brewpubs. Companies which do not have their own
brewery, but rather market beer produced 'under contract' by an existing,
usually regional, brewery are referred to as contract brewers.
Craft beers are full-flavored beers brewed with quality hops, malted
barley, yeast and water without adjuncts such as rice, corn or stabilizers or
water dilution used to lighten beer and dilute flavor for mass production and
consumption. According to industry data, the craft-brewing segment of the
domestic beer market has had an annual average growth rate of approximately 46%
from 1986 through 1995 and, in 1995, the total combined sales for this segment
reached approximately 3.8 million barrels, with total share of the domestic beer
market, excluding exports, increasing to 2% from 1.3% in 1994.
The Company believes that the growing demand for craft-brewed beers in the
United States is part of a broader shift in preferences on the part of a certain
segment of consumers from mass-produced products toward high-quality distinctive
foods and beverages. The Company also believes that the primary cause for the
rapid growth of craft-brewed beers is consumers' rediscovery of and demand for
more traditional, full-flavored beers. Before Prohibition, the domestic beer
industry consisted of
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hundreds of small breweries that brewed such full-flavored beers. Since the end
of Prohibition, large domestic breweries have shifted production to milder,
lighter beers, which use lower cost ingredients, and can be mass-produced to
take advantage of economies of scale in production and advertising. This shift
toward these mass-produced beers has coincided with the consolidation in the
beer industry. According to industry reports, the domestic beer market is
dominated by five large companies. Anheuser-Busch, Miller, Coors, Stroh and
G. Heileman Brewing Co. produced approximately 92.5% of the beer sold in the
domestic beer market, including the craft-brewed beer market, in 1995.
Per capita beer consumption in the United States has declined in all but
two of the last 10 years and consecutively for the last five years. The Company
believes that as consumers began to drink less beer, they focused their
consumption on more flavorful, full bodied or otherwise distinctive beers.
Initially, the Company believes that this demand was met by imported beers from
the Netherlands, Germany, Canada and Mexico. Beginning in the late 1980's and
early 1990's, a number of domestic craft-brewers began selling flavorful, more
full-bodied beers, usually in small local geographic markets, and often through
their own brewpubs. In response to increased demand for more flavorful beers,
the number of craft-brewed beers has increased dramatically. This growth has
also been fueled by craft-brewers' ability to (i) deliver locally produced beer
fresher than beer made far away, (ii) promote the notion that beers made in
small quantities from all natural ingredients is better than mass produced beer,
(iii) appeal to regional loyalties and (iv) capitalize on the growing consumer
interest in beer making and brewing history. Currently, there are more than 900
craft-brewers in the United States. In addition to the many microbrewers and
contract brewers, the three major brewers (Anheuser-Busch, Miller and Coors)
have all entered this market, either through developing their own specialty
beers or by acquiring or forming partnerships with existing craft-brewers.
STRATEGY
The Company's goal is to be one of the leading brewers of craft-brewed
beers in the United States. To attain this goal, the Company intends to employ
the following strategies:
EXPAND PRODUCT OFFERINGS
The Company intends to develop new products in order to introduce beer
drinkers to various styles of beer and to promote the Company's products. These
new products allow the Company's customers to try new styles of beer while
remaining loyal to the Independence brand. New products also help the Company
generate increased distribution and retailer focus on the Company's products.
The Company produces seven products, three of which are seasonal brands and all
of which are marketed under the 'Independence' label. The Company anticipates
adding additional seasonal beers as well as other 'draft only' beers in the
future. In addition, in light of the minimal additional production costs, the
Company may produce an old-fashioned root beer soft-drink in the future.
INCREASE DISTRIBUTION NETWORK
The Company currently distributes its products generally through 17
independent wholesale distributors for resale in bars, restaurants, liquor
stores and other retail liquor license holders in Pennsylvania, New Jersey,
Delaware, Virginia, Maryland, Florida, the District of Columbia and
Massachusetts. The Company plans to expand its network of distributors both
within its existing markets and to new markets. In order to service an increased
distribution network and build relationships with additional distributors, the
Company intends to hire additional sales representatives to motivate
distributors to increase sales of the Company's products and to stimulate
retailer and consumer demand. The Company intends to implement market
penetration and sales goals with each new distributor, to regularly monitor the
achievement of such goals, to establish effective incentive programs for the
distributors and their sales forces, to train the distributors' sales forces and
to hold motivational sessions for them and accompany distributor sales people on
their sales calls.
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DEVELOP CONSUMER AWARENESS
The Company intends to supplement its wholesale distributors' marketing
efforts by increasing the public's awareness of the Independence brand in the
territories in which its beers are marketed. A key component of the Company's
marketing strategy is to provide opportunities for potential consumers to learn
about and sample the Company's beers. The Company may in the future open
brewpubs which offer for sale, in addition to food, the Company's beer brewed on
the premises. See 'Use of Proceeds.' In addition, the Company anticipates that
it will continue to sponsor beer events throughout the year, such as September's
'Great Barley Fest,' the Halloween 'Broo Party,' the 'Midwinter Blues & Brews'
and the 'Big East Brew Review' in the Spring, which bring consumers to its
brewing facility and promote the Independence product line, and continue to
participate in local events that highlight the Company's products. Moreover, the
Company has built and is currently expanding its database of customers. The
Company utilizes this database in a direct mail program which conveys
information concerning the Company's products and beer events and other general
information about brewery happenings. The Company believes that consumers will
attend such events and will receive such Company literature, which the Company
believes will create a public awareness of the Company's products.
DEVELOP CONSUMER LOYALTY THROUGH HIGH-QUALITY PRODUCTS
The Company believes that it can develop brand loyalty by producing
consistent high-quality products. The Company currently produces its beers under
the supervision of its Brewmaster, Mr. William Moore. The Company recently
received a gold medal for its Independence Franklinfest at the 1996 Great
American Beer Festival and a bronze medal for its Independence Gold at both the
1996 Great American Beer Festival and the Association of Brewers' 1996 World
Beer Cup International Competition. In addition, the Company leases and operates
its owns brewing facility to optimize the quality and consistency of its
products and to achieve the greatest control over its production costs. The
Company uses high-quality natural ingredients in its brewing process and employs
third party testing laboratories to assure that high-quality standards are
maintained. Management believes that its award-winning Brewmaster, its emphasis
on product quality and its control over its production process are critical
competitive advantages which have resulted in superior quality award winning
products. The Company intends to capitalize on its high-quality products to
build brand loyalty.
PRODUCTS
The Company produces a variety of unpasteurized full-flavored craft beers
using traditional European brewing methods which do not employ any cereal
adjuncts, syrups, sugars, additives or preservatives. The Company brews its
beers using high-quality two row malts, specialty roasted malts, imported and
domestic hops, cultured ale or lager yeast strains and other natural
ingredients. All of the Company's product formulas and brewing procedures have
been developed by Mr. Moore. Mr. Moore has extensive experience in product
formulation. The Company recently received a gold medal for its Independence
Franklinfest brand in the Marzen/Oktoberfest category at the 1996 Great American
Beer Festival and a bronze medal in the Golden Ale/Canadian-Style Ale Category
for its Independence Gold brand at both the 1996 Great American Beer Festival
and the Association of Brewers' 1996 World Beer Cup International Competition.
In addition, while at Stoudt Brewery, a craft-brewer in Adamstown, Pennsylvania,
Mr. Moore produced beers which won seven gold, six silver, and one bronze medal
at the Great American Beer Festival.
The Company produces seven products, three of which are seasonal brands and
each of which has its own distinctive combination of flavor, color and clarity.
The Company's product offerings consist of:
Independence Ale. A pale ale with both English and American
influences, Independence Ale is light amber in color due to the recipe's
specialty malts. This ale is made from two row malt and four specialty
malts, plus a touch of wheat, and three varieties of hops. It is
full-bodied and has a hoppy flavor with a dry nutty finish.
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Independence Gold. Independence Gold has a golden color and a
full-bodied taste resulting from four distinctive malts. This beer has
three different kinds of hops which results in a clean, crisp finish.
Independence Lager. A full-bodied European-style lager with medium
bitterness, Independence Lager has a slight malt sweetness and a deep, rich
gold color. This lager is made from four different malts and three
varieties of domestic and imported hops resulting in a clean taste with a
pleasant finish.
Independence Franklinfest. Independence Franklinfest, the Company's
version of a traditional Marzen style lager/Octoberfest, is light copper in
color and has a malt sweetness. Rich, creamy and full bodied, Franklinfest
is brewed with seven different malts and three varieties of imported and
domestic hops, as well as authentic Bavarian lager yeast.
Independence Porter. Independence Porter is a traditional American
porter brewed with five different malts resulting in a crisp dry finish.
This brew contains roasted and chocolate malts and is lightly hopped. The
chocolate malts help give this porter a rich brown color.
Winter Warmer. A strong traditional English style ale, Winter Warmer
employs both English and American malt and hops and has a high alcohol
content (6% - 7% by weight). Winter Warmer has a sweet toffee flavor with a
malty texture and a bronze color.
Quaker City Wheat. Quaker City Wheat is an unfiltered, Bavarian style
Hefe Weizen summer seasonal. This top fermented wheat beer has a 1-to-1
wheat to barley ratio and is lightly hopped, which contributes to its full
flavor.
In an effort to be responsive to changing consumer style and flavor
preferences, the Company engages continually in the development and testing of
new products. The Company believes that the continued success of craft brewers
will increasingly depend upon their ability to be innovative and attentive to
consumer desires for new and distinctive taste experiences. The Company's
brewing equipment enables it to develop and produce small batches of
experimental beer within 14 to 28 days for tasting, testing and analysis by
management. The Company intends to continue to introduce new and different
seasonal brews from time to time utilizing new ingredients which it hopes will
appeal to its target market.
BREWING FACILITY
In November 1994, the Company leased a 32,000 square foot facility on
approximately 3.5 acres in Philadelphia, Pennsylvania and hired brewery
engineers to design and install a brewery to meet its special requirements.
Production began in March 1995, and the Company produced approximately 3,000
barrels in the nine months ended September 30, 1996, approximately 560 barrels
of which were produced for third parties pursuant to contract brewing
arrangements. See '-- Contract Brewing Arrangements.' The Company's current
brewing equipment has the capacity to brew 12,000 - 14,000 barrels per year,
which is dependent in part on the style of products produced. However, currently
the Company can only package a limited portion of its brewing capacity due
primarily to its current bottling line deficiencies. For the nine months ended
September 30, 1996, the Company produced approximately 3,000 barrels. With the
Company's anticipated new bottling line, this brewing capacity may be
incrementally expanded by the addition of fermentation tanks, finishing tanks
and refrigeration equipment at the existing facility.
BREWING OPERATIONS
Brewing Process. Beer is made primarily from four natural ingredients:
malted grain, hops, yeast and water. The grain most commonly used in brewing is
barley, owing to its distinctive germination characteristics, which make it easy
to ferment. The Company believes that it uses the finest barley crops, typically
using strains having two rows of grain in each ear. A wide variety of hops may
be used to add balance to the brew; some varieties best confer bitterness, while
others are chosen for their ability to impart distinctive aromas to the beer.
Nearly all the yeasts used to induce or augment
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fermentation of beer are of the species Saccharomyces cerevisiae and
Saccharomyces carlesbergenes, the top-fermenting yeasts used in ale production
and the bottom-fermenting yeasts associated with lager, respectively.
Prior to the Company receiving the malts, third parties begin the malting
process by placing barley into a maltster which steeps the barley or wheat grain
in water, thereby facilitating germination, and then dries and cures the grain
through roasting. This process breaks down complex carbohydrates and proteins so
that they can be easily extracted. The malting process imparts color and adds
the distinctive flavor characteristic of barley. At this point, the malts are
delivered to the brewery where various malts are milled to a coarse grist and
mixed with warm water. This mixture, or 'mash,' is heated and stirred in the
mash mixer, a large mixing vessel. Mashing time and temperature affect the
flavor of the beer allowing the simple carbohydrates and proteins to be
converted into fermentable sugars. Naturally occurring enzymes cause this
biochemical conversion. The mash is then moved to the lauter tun where it is
strained and sparged (showered with hot water) to produce a liquid, high in
fermentable sugars, called 'wort,' which then is pumped into a brew kettle to be
boiled, concentrated and clarified. Hops are added during the boil to impart
bitterness, balance, and aroma. The specific blend of hops further affects the
flavor of the beer. After the boil, the wort is transferred to the whirlpool for
clarifying by separating any impurities and solids. Then, the wort is cooled by
heat exchanging. The entire brewing process, from mashing through heat
exchanging, is typically completed in 6 - 9 hours, depending on the formation
and style of the product being brewed. Next, the wort is moved to a fermenting
tank, where specially cultured, sterilized yeast is added to initiate
fermentation. During fermentation, the wort's sugars are metabolized by the
yeast cells, producing carbon dioxide, a natural source of carbonation, alcohol,
esters and ketones along with many other flavor compounds. After fermentation,
the beer is aged at cool temperatures for several weeks, at which time the beer
is clarified and the full flavor develops. Filtration, where called for by the
beer style, is the final step, removing unwanted yeast and naturally occurring
sediment. The beer is then moved to the finishing tank which is used to hold the
finished product for the calculation of tax. At this point, the beer is in its
peak condition and ready for bottling or keg racking.
Brewing Equipment. The Company uses state of the art brewing equipment,
which is supplied by JV Northwest, one of the United States' leading brewing
equipment manufacturers. The Company's facility contains a four vessel 40 barrel
brewhouse with separate hot and cold liquor tanks. The four vessel system best
utilizes the Company's brewer's time as the flow process is constantly moving
forward from mash-mixer to lauter tun, brew kettle and whirlpool to enable
multiple batch brewing in a 10 to 12 hour day. An indoor silo houses 50,000 lbs
of two row malt which enables a lower bulk rate purchase cost. The mill room
features a digitally programmed grist case which weighs the milled malts prior
to auguring into the brewhouse. Current capacity is determined by the Company's
fermentation vessels, which consist of three 80 barrel and two 160 barrel
fermenters, thus enabling annual brewing of between 12,000 - 14,000 barrels
depending on the style of products produced. Two 160 barrel finishing tanks are
used to measure production and check for proper carbonation. The Company
believes that its brewing methods are cost effective and produce high-quality
ales and lagers.
Bottling and Kegging. Like many other craft-brewed beers, the Company's
products are not pasteurized. Accordingly, they must be kept cool so that
oxidation and heat-induced aging will not adversely affect the original taste.
The Company packages its craft beers in both bottles and kegs. Bottled beer must
be polished filtered to more thoroughly remove undesirable spoiling elements and
enable at least a 90 day shelf-life. Twelve ounce bottles are rinsed through a
twist rinser, filled on a 34 valve filler, labeled on an automatic labeler, then
hand packed and sent to a case sealer before being stored in a 2,000 square foot
cold box. The bottles are freshness-dated for the benefit of consumers. Draft
beer is packaged in new sankey style kegs which are more expensive yet preferred
by retailers for their ease of handling and storage. Draft beer is also stored
in the Company's on-site cold storage. The Company's current bottling line is
manufactured with rebuilt parts and has the efficiency capacity to package 35
bottles per minute. The Company has paid a $55,000 deposit and intends to
purchase a new bottling line soon after the completion of this Offering that
will be capable of packaging 150 bottles per minute. The Company anticipates
this new bottling line will be operational in the first
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quarter of 1997. This new bottling line, with its 24 valve double pre-evacuation
filler, will lower the quantity of air in each bottle, thereby allowing the
Company's product to have a shelf-life of up to 120 days. See 'Risk Factors --
Unanticipated Manufacturing Limitations,' 'Management's Discussion and Analysis
of Financial Condition and Results of Operations' and 'Certain Transactions --
Private Placements.'
Product Development and Quality Control. Research and product development
activities are on-going. Opportunities identified by the Company are formulated
and developed by the Company's Brewmaster, Mr. William Moore. Mr. Moore is
responsible for developing new beers, managing raw material selection,
optimizing efficiency and educating Company personnel regarding taste and other
qualities. Since most beer types fall into major categories or subcategories, an
extensive development process is not required to bring new products to market.
Quality control is managed by Mr. Moore who has received quality control
training at the University of California at Davis' specially designed program
for microbiology and quality control. Mr. Moore monitors all major parameters to
ensure compliance with its specifications and the consistency of each brand from
beer to beer. These parameters include gravity, alcohol, bitterness, color, foam
formation and stability, acid, airs, carbon dioxide, and fill levels, in
addition to all the requisite microbiological checks and shelf life stability
measurements. The Company currently uses third party testing laboratories to
assure that high-quality standards are maintained. After the Offering, the
Company anticipates adding the capability to do this testing on its own
premises. See 'Use of Proceeds.'
Ingredients and Raw Materials. The Company has several sources for the
purchase of ingredients or other raw materials. Malt, specialty malt, hops, and
yeast can be purchased from a number of suppliers whose prices are all
relatively competitive. The Company uses local municipal water supplied by the
City of Philadelphia for the Company's brewing operations, with a carbon
filtration system at the brewery to remove chlorine and other impurities. The
Company's operations also utilize glass bottles, caps, labels, kegs and
corrugated and other paper products, all of which are anticipated to be
available from several sources. As with most agricultural products, the supply
and price of raw materials used to produce the Company's beers can be affected
by a number of factors beyond the control of the Company, such as frosts,
droughts, other weather conditions, economic factors affecting growing
decisions, various plant diseases and pests. If any of the foregoing were to
occur, no assurance can be given that such condition would not have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company's results of operations are dependent upon
its ability accurately to forecast its demand for raw materials. Any failure by
the Company accurately to forecast its demand for raw materials could result in
the Company either being unable to meet higher than anticipated demand for its
products or producing excess inventory, either of which may materially adversely
affect the Company's business, results of operations and financial condition.
PRODUCT DISTRIBUTION
The Company's products are available for sale to consumers from kegs or in
bottles at restaurants, taverns, bars, sporting events and liquor stores, as
well as at supermarkets, directly at the brewery and at convenience stores. The
Company's products are generally delivered to these retail outlets through a
network of 17 independent wholesale distributors, whose principal business is
the distribution of beer and, in some cases, other alcoholic beverages, and who
typically have local distribution relationships with one or more national beer
brands. In addition, in two counties in Pennsylvania, the Company exclusively
sells its products directly to retailers. Two wholesale distributors accounted
for approximately 21% and 22% of the Company's sales for the year ended December
31, 1995, the same two wholesale distributors accounted for approximately 25%
and 24% of the Company's sales for the nine month period ended September 30,
1995 and three wholesale distributors accounted for approximately 11%, 11% and
10% of the Company's sales for the nine month period ended September 30, 1996.
The Company's largest and third largest distributors in 1995 merged and the
aggregate entity was for the nine months ended September 30, 1996 the Company's
largest distributor. The Company's second largest distributor for the year ended
December 31, 1995 is no longer among the Company's
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largest distributors, due to the Company's decision to distribute products
itself in the Philadelphia region. The Company has chosen to directly distribute
products in the Philadelphia region primarily in order to reduce its
advertising, promotional and selling expenses in connection with the sale of
such products. The loss of any wholesale distributor, if not immediately
replaced, could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company, together with its
distributors, markets its products to retail outlets and generally relies on its
distributors to provide regular delivery to retailers, to maintain retail shelf
space, create demand for its products and to oversee timely rotation of
inventory to ensure the continuing freshness of its products. The Company will
also offer its products directly to consumers at brewpubs if the Company
establishes such operations in the future.
MARKETING AND SALES
Sales of the Company's draft beer began in May 1995, with bottle sales
commencing in June 1995. As of January 1, 1997, the Company maintained a sales
and marketing staff of three sales representatives, whose efforts are focused
primarily on assisting the Company's distributors with promotions and product
placements. In addition, the Company has retained seven additional sales
representatives on a commission basis, who provide similar services. The Company
has recently hired a sales manager to manage the growth and productivity of its
sales force. In order to service an increased distribution network and build
relationships with additional distributors, the Company intends to hire
additional sales representatives to motivate distributors to increase sales of
the Company's products and to stimulate retailer and consumer demand. The
Company presently markets its products in a region comprised of Pennsylvania,
New Jersey, Delaware, Virginia, Maryland, Florida, the District of Columbia and
Massachusetts.
The Company intends to advertise its products in local newspapers, on the
radio, and in specialty beer publications within these markets. In addition, the
Company promotes its products through its direct mail program, including a
quarterly newsletter, advertising in specialty beer publications, its beer
events and the use of point of sale promotional materials, such as table tents,
posters and signs in retail outlets. The advertising and promotional materials
are designed to stress the unique qualities of the Company's products, such as
product freshness and the styles of beers offered. These advertising and
promotional materials also highlight the Company's Brewmaster and the Company's
primary focus on product quality. The Company believes that this promotional
campaign will help develop and maintain a high-quality image for the Company's
brewery and its products which the Company anticipates will result in increased
sales of the Company's products. The Company currently conducts public relations
activities internally. See '-- Strategy -- Develop Consumer Awareness.'
To promote retail product sales, the Company periodically offers
'post-offs,' or volume price discounts to distributors. Distributors and
retailers often participate in these price discounts. In addition, the Company
anticipates that it may in the future offer such promotions in additional
markets in response to local competition.
COMPETITION
The highly fragmented craft beer segment is one of the fastest growing
segments of the domestic beer industry. The Company competes primarily with
other participants in the craft beer segment of the domestic beer market in its
region such as Dock Street Brewing Company, Red Bell Brewing Company, Stoudt's
Brewing Company, Lancaster Malt Brewing Company, Weyerbacher Brewing Company and
Victory Brewing Company, and with imported beers such as Heineken, Amstel,
Corona and Guinness brands and mass-market national brewers such as Miller,
Anheuser-Busch, Coors and Stroh. See 'Risk Factors -- Competition' and '--
Industry Background.' Competition within the domestic craft beer segment is
based on product quality, taste, consistency and freshness, ability to
differentiate products, promotional methods and product support, transportation
costs, distribution coverage and, to a lesser degree, price.
33
<PAGE>
As the Company expands its distribution network within the mid-Atlantic
region and beyond, and as other craft brewers expand their distribution
networks, the Company expects to encounter increasing competition from other
regional specialty brewers, as well as from contract brewers. Although certain
of these competitors distribute their products nationally and may have superior
financial or other resources than the Company, management believes that the
Company possesses certain competitive advantages, such as a regional brewing
facility, and its high-quality products produced by the Company's Brewmaster.
The Company also competes against producers of imported beers. Although
imported beers currently account for a much greater share of the domestic beer
market than craft beers, the Company believes that it possesses significant
competitive advantages over certain importers, including lower transportation
costs, no importation duties, proximity to and familiarity with local consumers,
a high degree of product freshness, eligibility for lower federal excise taxes
and freedom from currency fluctuations.
In response to the rapid growth of the craft beer segment, several of the
major domestic brewers have introduced fuller-flavored beers, and others may be
expected to do so in the future. The Company expects that certain of the major
national brewers, with their superior financial resources, access to raw
materials and established national distribution networks, will seek further
participation in the continuing growth of the craft beer segment through
investments in, or the formation of distribution alliances with, craft brewers.
The increasing participation of the major national brewers will likely increase
competition for market share and increase price competition within the craft
beer segment. The Company believes that the participation by the major national
brewers will tend to increase advertising, distribution and consumer education
and awareness of craft beers, and thus contribute to further rapid growth of
this industry segment. See 'Risk Factors -- Competition.'
CONTRACT BREWING ARRANGEMENTS
The Company has entered into arrangements to utilize a portion of its
excess production capacity to provide contract brewing services to third parties
which market and sell beer produced by the Company, under the third party's own
proprietary labels. Although margins for contract brewing are lower compared to
the sale of the Company's own products to wholesale distributors, the Company
expects this business to continue until such time as the Company's own products
fully utilize production capacity. Approximately 9% and 18% of the Company's
revenues resulted from contract brewing in 1995 and the nine month period ended
September 30, 1996, respectively.
The Company is currently under contract to brew 'Jersey Shore Gold' and
'Jersey Harvest Ale' for Hunterdon Brewing Company, based in Hunterdon, New
Jersey. This arrangement involves a minimum order size of 80 barrels and an
annual production minimum of 5,500 cases. The Company was engaged in January
1997 to brew a pilsner style lager under contract for the Greater Providence
Brewing Company. In addition to these contract arrangements, the Company
produces the house brand beer for a national entertainment chain. With eight
current locations and one location which is anticipated to open by the first
quarter of 1997, this entertainment chain operates locations which range in size
from a minimum of 35,000 square feet to as much as 70,000 square feet. Its house
brand is currently provided in both bottle and keg versions in its Philadelphia
and Florida locations and will soon be available in its Atlanta and Chicago
locations. The Company has applied to receive licensing for sales to this
entertainment company's Texas locations. There is no assurance that the Company
will receive the appropriate license in Texas, that this relationship will
continue or that this relationship will provide significant future sales.
GOVERNMENT REGULATION
The Company's business is highly regulated at federal, state and local
levels. Various permits, licenses and approvals necessary to the Company's
brewery and pub operations and the sale of alcoholic beverages are required from
various agencies, including the U.S. Treasury Department, Bureau of Alcohol,
Tobacco and Firearms (the 'BATF'), state alcohol regulatory agencies in the
states in which the Company sells its products and state and local health,
sanitation, safety, fire and environmental agencies. In addition, the beer
industry is subject to substantial federal excise taxes,
34
<PAGE>
although the Company benefits from favorable treatment granted to brewers
producing less than 2 million barrels per year.
Management believes that the Company currently has all licenses, permits
and approvals necessary for its current brewing operations. However, existing
permits or licenses could be lost, revoked or suspended if the Company were to
fail to comply with the terms of such permits or licenses, and additional
permits or licenses could in the future be required for the Company's existing
or expanded brewing operations. If licenses, permits or approvals necessary for
the Company's brewery or pub operations were unavailable or unduly delayed, or
if any such permits or licenses were lost, revoked or suspended, the Company's
ability to conduct its business could be materially adversely affected.
ALCOHOLIC BEVERAGE REGULATION AND TAXATION
The Company's brewery is subject to licensing and regulation by a number of
governmental authorities. The Company operates its brewery under federal
licensing requirements imposed by the BATF. The BATF requires the filing of a
'Brewer's Notice' upon the establishment of a new commercial brewery. In
addition, commercial brewers are required to file an amended Brewer's Notice
every time there is a material change in the brewing process or brewing
equipment, change in the brewery's location, change in the brewery's management
or a material change in the brewery's ownership. The Company's operations are
subject to audit and inspection by the BATF at any time. The Company will be
required to amend its Brewer's Notice in connection with the Offering. Although,
the Company does not anticipate any governmental concerns in connection with
such amendment, there can be no assurance that none will be raised.
In addition to the regulations imposed by the BATF, the Company's brewery
is subject to various regulations concerning retail sales, deliveries and
selling practices in states in which the Company sells its products. Failure by
the Company to comply with applicable federal or state regulations could result
in limitations on the Company's ability to conduct its business. The BATF's
permits can be revoked for failure to pay taxes, to keep proper accounts, to pay
fees, to bond premises, and to abide by federal alcoholic beverage production
and distribution regulations, or if holders of 10% or more of the Company's
equity securities are found to be of questionable character. Permits from state
regulatory agencies can be revoked for many of the same reasons.
The Pennsylvania Liquor Control Board ('PLCB') issues operating licenses to
manufacturers of beverages containing alcohol located in the Commonwealth of
Pennsylvania. The PLCB also ensures compliance with state tax provisions. The
PLCB regulations provide certain operating, record-keeping and marketing
requirements for license holders. These requirements include posting of a
$10,000 bond upon issuance of a license, inspections of the brewery by
representatives of the PLCB, maintaining records of the amount of beer produced
and sold, limiting certain promotional activities and prohibiting sales by the
Company on Sunday. Failure by the Company to comply with the PLCB requirements
could result in fines, penalties or sanctions being imposed against the Company
which could range from written warnings to revocation of the Company's license.
The temporary or permanent loss of the Company's PLCB license would have a
material adverse effect on the Company's financial condition and results of
operations. PLCB regulations limit the Company's ability to increase its prices
to distributors within 180 days after a price decrease, except under certain
limited circumstances or with the prior consent of the PLCB. In addition, the
license issued by the PLCB to the Company will not be transferable or assignable
without the approval of the PLCB. As a result, a sale of the Company or its
business would be subject to, and may be delayed by, the required approval by
the PLCB.
The U.S. federal government currently imposes an excise tax of $18 per
barrel on every barrel of beer produced for consumption in the United States.
However, any brewer with production under 2 million barrels per year instead
pays federal excise tax in the amount of $7 per barrel on the first 60,000
barrels it produces annually. While the Company is not aware of any plans by the
federal government to reduce or eliminate this benefit to small brewers, any
such reduction in a material amount could have a material adverse effect on the
Company. In addition, the Company will lose the
35
<PAGE>
benefit of this rate structure if it exceeds the 2 million barrel production
threshold, which the Company believes is not likely in the near future.
Individual states also impose excise taxes on alcoholic beverages in varying
amounts, which have also been subject to change. It is possible that excise
taxes will be increased in the future by both the federal government and several
states. In addition, increased excise taxes on alcoholic beverages have been
considered in connection with various governmental budget-balancing or funding
proposals. Any such increases in excise taxes, if enacted, could materially
adversely affect the Company.
STATE AND FEDERAL ENVIRONMENTAL REGULATION
The Company's brewery operations are subject to environmental regulations
and local permitting requirements regarding, among other things, air emissions,
water discharges and the handling and disposal of wastes. While the Company has
no reason to believe the operations of its facility violate any such regulation
or requirement, if such a violation were to occur, the Company's business may be
materially adversely affected. In addition, if environmental regulations were to
become more stringent in the future, the Company could be materially adversely
affected.
DRAMSHOP LAWS
The serving of alcoholic beverages to a person known to be intoxicated may,
under certain circumstances, result in the server's being liable to third
parties for injuries caused by the intoxicated customer. If the Company opens
brewpubs, the Company will attempt to address this concern by implementing
employee training and designated-driver programs. The Company has obtained host
liquor and legal liquor liability insurance coverage for its activities in
connection with marketing and promotional events that involve selling liquor.
Future increases in premiums could make it prohibitive for the Company to obtain
adequate insurance coverage or maintain its existing coverage, and large
uninsured damage awards against the Company could have a material adverse affect
on the Company's financial condition and results of operations.
PROPERTY
The Company currently leases an approximately 32,000 square foot facility
on approximately 3.5 acres in Philadelphia, Pennsylvania for its executive
offices and its brewery at a current cost of $5,733.33 per month, plus all
applicable taxes, insurance premiums, expenses for utilities and costs for any
other services assessed against the property. The lease on this facility
terminates on November 30, 2004. The rent expense increases each year of the
lease up to $9,333.33 per month in the final year of the lease. The Company has
an option to purchase such property for $700,000, increasing each year up to
$800,000 on November 30, 2001, at which time such option expires. The Company
believes it has adequate space to conduct its operations.
TRADEMARKS
The Company has filed applications to register '1776' and 'FranklinFest'
with the United States Patent and Trademark office. Although the Company expects
'1776' and 'FranklinFest' to be registered in due course, there can be no
assurance any such trademarks will be registered, or if registered, there can be
no assurance that they will not be challenged at some later date. The Company
has entered into an agreement with Independence Florida whereby (i) Independence
Florida transferred and assigned all of its rights, title and interest in the
Independence Marks and the Applications to the Company, (ii) Independence
Florida was granted a perpetual royalty free license to use the Independence
Marks for its one location only, subject to termination upon certain conditions,
and (iii) the Company agreed not to operate a bar or restaurant in Broward
County, Florida, Independence Florida's geographic region, without the consent
of Independence Florida. See 'Risk Factors -- Conflict of Interest and Trademark
Conflict.'
The Company has entered into an exclusive license and purchase agreement
with Moosehead for the use of the Moosehead Marks. This agreement is for a two
year license for use of the
36
<PAGE>
Moosehead Marks in the United States whereby the Company will pay Moosehead
$30,000 per year for such right and, upon termination of such two-year period,
all rights to the use of 'Independence' will be transferred to the Company for
an additional payment of $30,000. See 'Risk Factors -- Risk of Third Party
Claims of Infringement of Intellectual Property; Uncertainty of Trademark
Protection.'
The Company utilizes a number of recipes in the production of its beers and
protects these recipes as trade secrets. In addition, product packaging,
advertising and promotional design and artwork are important to the Company's
success, and such materials are considered protected by common law copyright.
See 'Risk Factors -- Risk of Third Party Claims of Infringement of Intellectual
Property; Uncertainty of Trademark Protection.'
EMPLOYEES
At January 1, 1997 the Company had 17 employees, including 10 in
production, three in sales and marketing, and four in administration. Of these,
six are part-time employees. The Company believes its relations with its
employees to be good.
LEGAL PROCEEDINGS
The Company is not currently engaged in any legal proceedings that are
expected, individually or in the aggregate, to have a material adverse effect on
the business, results of operations or financial condition of the Company.
37
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
Set forth below is certain information regarding the Company's directors
and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert W. Connor, Jr............. 34 Chairman of the Board, President, Chief Executive Officer and
Treasurer
William Moore.................... 40 Director, Brewmaster and Secretary
Stefan Karnavas.................. 34 Director
Michael R. Thompson.............. 44 Director
Jacques de Saint Phalle.......... 36 Director
</TABLE>
Robert W. Connor, Jr. Mr. Connor, founder of the Company, has been the
Chairman of the Board, President, Chief Executive Officer and Treasurer of the
Company since May 1994. From 1991 to 1994, Mr. Connor was an Investment
Consultant with Pennsylvania Merchant Group Ltd. Mr. Connor was also the Vice
President, Secretary and a member of the Board of Directors of Independence
Florida from April 1995 until January 1997.
William Moore. Mr. Moore has been the Company's Brewmaster and Secretary
since May 1994. From 1990 to 1994, Mr. Moore was the head brewer for Stoudt's
Brewery in Adamstown, Pennsylvania.
Stefan Karnavas. Mr. Karnavas has been a director of the Company since
July 1996. Mr. Karnavas has been the Chief Financial Officer of the Cobblestone
Golf Group, Inc. since April 1996. From 1990 to 1996, Mr. Karnavas was the
Treasurer of Horizon Cellular Telephone Company.
Michael R. Thompson. Mr. Thompson has been a director of the Company since
December 1996. Since April 1991, Mr. Thompson has been employed by Turner
Investments Partners, Inc. ('TIP') and is responsible for new business
activities and client services. TIP provides investment management services
primarily to institutional investors.
Jacques de Saint Phalle. Mr. de Saint Phalle has been a director of the
Company since December 1996. Since March 1996, Mr. de Saint Phalle has been
employed by Bear Stearns & Co. as a Managing Director in its securities
division. From 1993 to 1995, Mr. de Saint Phalle was employed by Bankers Trust
New York Corporation as a Managing Director in its securities division. From
1989 to 1993, Mr. de Saint Phalle was employed by Citicorp as a Vice President
in its securities division.
The Company is currently searching for and anticipates hiring a Chief
Operating Officer and a controller as soon as practicable after the Offering.
Each member of the Board was elected to hold office for a period of one
year and until his successor is elected and qualified or until such director's
earlier death, resignation or removal. Directors will not receive any
compensation for serving on the Board. The officers are elected by the Board and
serve at the Board's discretion.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the Company's Chief
Executive Officer for the year ended December 31, 1996 (the 'Named Executive
Officer'). No other executive officer of the Company received total annual
salary and bonus in excess of $100,000 during the year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
--------------------------- --------- ---------
<S> <C> <C>
Robert W. Connor, Jr................................................... $ 36,581 --
Chairman of the Board, President,
Chief Executive Officer and Treasurer
</TABLE>
- ------------------
(1) Mr. Connor has entered into an employment agreement which provides for
certain increases in his annual salary upon completion of the Offering. See
' -- Employment Arrangements.'
EMPLOYMENT ARRANGEMENTS
Mr. Connor entered into a three-year employment agreement (the 'Connor
Agreement') with the Company on August 12, 1996. Mr. Connor will serve as
President and Chief Executive Officer of the Company and will receive for his
services a base salary of $50,000 per year, such base salary to be increased to
$100,000 upon the closing of the Offering, plus annual increases of not less
than 10% of the prior year's salary for the first two years after the Offering.
The Company anticipates that such salary increases will be funded from cash flow
from operations. However, to the extent that cash flow from operations is not
sufficient to pay such salary increases, the Company may utilize net proceeds
from the Offering that are otherwise allocated to working capital and general
corporate purposes. See 'Use of Proceeds.' Mr. Connor is also eligible for an
annual bonus as determined by the Board. In addition, the Company has agreed
after the Offering to grant Mr. Connor options to purchase that number of shares
of Common Stock pursuant to the Company's Stock Plan equal to 2.5% of the issued
and outstanding shares of Common Stock as of August 12, 1996 (not including
shares issuable pursuant to any warrants of the Company). The Connor Agreement
provides that Mr. Connor is subject to a covenant not to compete with the
Company during the term of his employment and for a two-year period after his
employment with the Company terminates. If Mr. Connor is terminated for any
reason other than 'cause', 'total disability', as defined therein, or the death
of Mr. Connor, the Company must pay Mr. Connor his salary as accrued through the
date of termination and for two years thereafter. 'Cause' is generally defined
as: (i) failure to fulfill his employment duties; (ii) breach of certain
covenants in the Connor Agreement; (iii) commission of a felony or crime of
moral turpitude, fraud or misrepresentation, whether or not related to the
Company; (iv) any willful act injuring the Company; or (v) the breach of duty of
loyalty to the Company. During the term of the Connor Agreement and at all times
after his termination, Mr. Connor has agreed to retain in confidence and not
otherwise use any confidential or proprietary information of the Company.
Mr. Moore entered into an employment agreement (the 'Moore Agreement') with
the Company effective as of August 12, 1996 and terminating on December 31,
1999. Mr. Moore will serve as the Brewmaster of the Company and will receive a
base salary of $45,000 per year, plus annual increases based upon the salary
policies of the Company and Mr. Moore's contributions to the Company. Mr. Moore
is also eligible for an annual bonus as determined by the Board. Mr. Moore is
subject to a covenant not to compete with the Company during the term of his
employment and for a two-year period after his employment with the Company
terminates. In addition, if Mr. Moore is terminated for any reason other than
'cause', as defined in the Moore Agreement, 'total disability', as defined
therein, or the death of Mr. Moore, the Company must pay Mr. Moore, or his
heirs, his salary as accrued through the date of termination and for two years
thereafter. 'Cause' is generally defined as: (i) failure to fulfill his
employment duties; (ii) breach of certain covenants in the Moore Agreement;
39
<PAGE>
(iii) commission of a felony or crime of moral turpitude, fraud or
misrepresentation, whether or not related to the Company; (iv) any willful act
injuring the Company; or (v) the breach of duty of loyalty to the Company.
During the term of the Moore Agreement and at all times after his termination,
Mr. Moore has agreed to retain in confidence and not otherwise use any
confidential or proprietary information of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
In January 1997, the Board formed an Audit Committee and a Compensation
Committee. The Audit Committee will review the engagement of the independent
accountants, will review and approve the scope of the annual audit undertaken by
the independent accountants and will review the independence of the accounting
firm. The Audit Committee will also review the audit and non-audit fees of the
independent accountants and the adequacy of the Company's internal control
procedures. The members of the Audit Committee are Messrs. Karnavas, Thompson
and de Saint Phalle. The Compensation Committee will review all salary and
executive compensation issues for the Company's employees and directors. The
members of the Compensation Committee are Messrs. Karnavas, Thompson and de
Saint Phalle.
STOCK PLAN
The Company has adopted the Independence Brewing Company Omnibus Stock Plan
(the 'Stock Plan') which provides for the grant of stock options to purchase up
to an aggregate of 300,000 shares of the Common Stock, stock appreciation rights
(including free-standing, tandem and limited stock appreciation rights)
('SARs'), restricted or unrestricted share awards, phantom stock, performance
awards, or any combination of the foregoing (collectively, 'Awards').
Participation in the Stock Plan is open to all employees, directors and
consultants of the Company (the 'Participants'). The Company believes that the
Stock Plan will promote the long-term growth and profitability of the Company by
providing key people associated with the Company with incentives to improve
shareholder value and to contribute to the growth and financial success of the
Company. Moreover, the Company believes that the Stock Plan will enable the
Company to attract, retain and reward the best available persons for positions
of substantial responsibility.
The Stock Plan will be administered by the Board, or in the alternative, a
committee appointed by the Board whose members are deemed to be 'Non-Employee
Directors' as that term is defined in Rule 16b-3 under the Exchange Act of 1934
(the 'Exchange Act') (such group administering the Stock Plan will be referred
to as the 'Committee'). The persons eligible to receive Awards under the Stock
Plan are those Participants selected by the Committee in its discretion from
time to time.
All terms and conditions of Awards granted under the Stock Plan are
determined by the Committee, including the selection of Participants to whom
Awards will be granted, the types of Awards to be granted, the number of shares
to be covered by or used for reference purposes for each Award, the exercise
price or base price, respectively, of each stock option or SAR granted (price
may not be less than 100% of the fair market value for incentive stock options
('ISOs')), the expiration date of each stock option and SAR granted (subject to
a maximum of 10 years from the date of the grant), the vesting schedule and any
other material provisions.
In the event of any stock dividend, stock split, recapitalization,
reclassification, combination of shares, or other similar event, appropriate
proportional adjustments will be made in the number of shares reserved for
issuance under the Stock Plan, the number, kind and price of shares covered by
outstanding Awards, and any other matters which relate to Awards and which are
affected by the changes set forth above. The Stock Plan also provides for the
ability of the Committee to accelerate or change the exercise date of Awards,
and provides discretion to the Committee to take whatever other actions it deems
necessary or desirable with respect to all outstanding Awards upon the
occurrence of a 'Change of Control,' as such term is defined in the Stock Plan.
Stock options and SARs may not be exercised more than 10 years after the date of
grant (five years after the date of grant with respect to an ISO granted to any
person who owns stock of the Company possessing 10% or more of the total voting
40
<PAGE>
power of all the Company's stock) and Awards granted under the Stock Plan are
not transferable other than by will or the laws of descent and distribution.
The Committee has the discretion to award stock options to Participants as
either ISOs (employees only) or as non-qualified stock options ('NQSOs'). Stock
options awarded to Participants who are not employees are NQSOs. The exercise
price of an ISO must be not less than the fair market value of the Common Stock
on the date the option is granted (110% of fair market value with respect to an
ISO granted to any person who owns stock of the Company possessing 10% or more
of the total voting power of all the Company's stock), and is payable upon the
exercise of the option. The exercise price of a NQSO may be less than the fair
market value of the Common Stock on the date the option is granted. The number
of shares covered by ISOs granted to any optionee is limited such that the
aggregate fair market value of stock (determined as of the date of the grant)
with respect to which ISOs are exercisable for the first time by such optionee
in any calendar year shall not exceed $100,000. The excess ISOs, if any, will be
treated as NQSOs.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock at January 1, 1997, including the effect of the
exercise of any outstanding warrants, and as adjusted to reflect the sale of the
Common Stock in the Offering by (i) each person known to the Company to
beneficially own more than 5% of the Common Stock, (ii) each director and the
Named Executive Officer of the Company and (iii) all directors and the Named
Executive Officer as a group.
<TABLE>
<S> <C> <C> <C>
PERCENTAGE OF
NUMBER OF OUTSTANDING SHARES
SHARES OF COMMON STOCK
NAME AND ADDRESS OF BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
------------------- ----------------- ----------- -----------
Robert W. Connor, Jr.................................................. 574,166 24.9% 17.9%
7501 McCallum Street
Philadelphia, PA 19118
Winfield Capital Corp.(2)............................................. 4,449,941 76.6% 66.3%
237 Mamaroneck Avenue
White Plains, NY 10605
William Moore......................................................... 50,000 2.2% 1.6%
274 Diamond Street
Pottstown, PA 19464
Stefan Karnavas....................................................... 19,220 * *
Cobblestone Golf
5220 Fiore Terrace
Apartment M-304
San Diego, CA 92122
Michael R. Thompson................................................... 18,194 * *
1 Springton Pointe Drive
Newtown Square, PA 19073
Jacques de Saint Phalle............................................... 62,977 2.7% 2.0%
108 Fifth Avenue #4C
New York, NY 10011
All officers and directors as a group (five persons).................. 724,557 31.4% 22.6%
</TABLE>
- ------------------
<TABLE>
<S> <C>
* Represents less than 1% of the outstanding shares of Common Stock.
(1) As used in this table, 'beneficial ownership' means the sole or shared power to vote or direct the voting of a
security, or the sole or shared investment power with respect to a security (i.e., the power to dispose, or
direct the disposition, of a security). A person is deemed as of any date to have 'beneficial ownership' of
any security that such person has the right to acquire within 60 days after such date.
(2) Includes 3,500,000 shares of Common Stock issuable upon the exercise of the Series B Warrant granted to
Winfield, which is exercisable immediately at an exercise price of $6.00 per share. See 'Certain Transactions
-- Private Placements.'
</TABLE>
42
<PAGE>
CERTAIN TRANSACTIONS
PRIVATE PLACEMENTS
In anticipation of the closing of the financing transactions described
below (the 'Private Placements'), the Company was advanced an aggregate of
$200,000 on May 6, 1996 and July 16, 1996 from Winfield to fund short term
operations. The Company's President and Chief Executive Officer, Mr. Robert W.
Connor, Jr., personally guaranteed each of the notes. The entire principal
amount of each note was repaid in connection with the closing of the Private
Placements and the personal guarantees were released.
To fund operations, on August 12, 1996, September 13, 1996 and September
20, 1996, the Company sold $800,000 of debentures convertible into shares of
Series A Preferred Stock of the Company (the 'Debentures') to Winfield and
certain shareholders of the Company (collectively referred to as the
'Purchasers'). To the extent that such shareholders did not so participate,
Winfield agreed to act as 'standby' purchaser for the entire $800,000 in
Debentures being offered.
In consideration of the purchase by the Purchasers of the Debentures, the
Purchasers received warrants which entitled them to purchase 415,275 shares of
Common Stock for the aggregate exercise price of $2,081 (the 'Series A
Warrants'). All of the Series A Warrants were exercised by the Purchasers on
September 13, 1996 and September 20, 1996. The Company assigned a deferred
interest charge of $3.00 per share totaling $1,245,825 to these shares and is
amortizing it over the term of the Debentures.
In addition, in consideration of the purchase by Winfield of the
Debentures, Winfield received (i) a warrant (the 'Preferred Warrant') that
entitled Winfield to purchase 70,000 shares of Series B Preferred Stock of the
Company, par value $10.00 (the 'Series B Preferred Stock'), exercisable
immediately for an aggregate exercise price of $700,000 and (ii) a warrant (the
'Series C Warrant') that entitled Winfield to purchase 622,913 shares of Common
Stock for the aggregate exercise price of $3,115. Winfield exercised the
Preferred Warrant and the Series C Warrant on September 13, 1996. The Company
assigned a deferred interest charge of $3.00 per share, totaling $1,868,739, to
these shares and is amortizing it over the term of the Series B Preferred Stock.
The Company has an obligation to redeem all outstanding shares of Series B
Preferred Stock upon the consummation of the Offering, including dividends
payable to date. Holders of the Series B Preferred Stock are entitled to receive
dividends at the rate of $1.40 per share per year. See 'Use of Proceeds' and
'Description of Securities -- Preferred Stock -- Series B Preferred Stock.'
In consideration for agreeing to act as standby purchaser for the balance
of the Debentures not purchased by the Company shareholders and for agreeing to
allow certain shareholders of the Company to participate in the purchase of the
Debentures, Winfield received a warrant (the 'Series B Warrant') which entitles
Winfield to purchase 3.5 million shares of Common Stock of the Company at a
price of $6.00 per share. The Series B Warrant is immediately exercisable and
expires five years following the Company's initial public offering.
The holders of the shares of Common Stock that were issued upon exercise of
the Series A Warrants, the holders of the shares of Common Stock that were
issued upon exercise of the Series C Warrant and the holders of the Series B
Warrant are entitled to certain rights with respect to the registration under
the Securities Act, for resale to the public, of (i) the shares of Common Stock
that were issued upon exercise of the Series A Warrants and the Series C Warrant
and (ii) the Series B Warrant, respectively. See 'Description of Securities --
Registration Rights.'
The Company received approximately $1,310,000 of net proceeds from the sale
of the Debentures and the Series B Preferred Stock after accounting for a
$15,000 processing fee and a $45,000 commitment fee paid to Winfield and
approximately $130,000 in professional fees and expenses. Such net proceeds, a
substantial amount of which has already been expended, were allocated, in
approximate amounts, as follows: (i) working capital ($755,000); (ii) new
bottling line deposit ($55,000); (iii) marketing and sales ($200,000); (iv)
trademark and patent expenses ($100,000); (v) kegs and keg
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equipment ($75,000); (vi) brewery improvements ($50,000); (vii) packaging
materials ($40,000); and (viii) point of sales equipment ($35,000). The
foregoing are estimated allocations of such proceeds from which the actual use
may differ. The Company intends to repay the Debentures with a portion of the
net proceeds from this Offering. See 'Use of Proceeds.'
In connection with the issuance and anticipated repayment of the Debentures
and the Series B Preferred Stock, the Company will write off (i) unamortized
original issue discount of $1,223,764 and $1,851,090, respectively, and (ii)
deferred financing costs of approximately $31,200 and $27,736, respectively.
Winfield has agreed unconditionally that it will not sell, offer to sell,
pledge, contract to sell or otherwise attempt to transfer or dispose of any
beneficial interest in any equity or derivative securities it received in
connection with the Private Placements for so long as requested by Nasdaq, not
to exceed a period of thirty-six (36) months from the date of purchase.
In addition, Mr. Connor has agreed to vote in favor of the election of one
nominee for the Board of Directors of the Company selected by Winfield, as long
as Winfield owns greater than 10% of the outstanding Common Stock.
GUARANTIES
On January 18, 1995, the Company borrowed $430,000 pursuant to the SBA
Loan. The SBA Loan is evidenced by a promissory note bearing interest at the
prime rate plus 2% (effective rate of 10.25% at September 30, 1996). Principal
and interest are payable monthly through January 18, 2002 when all unpaid
interest and principal are due in full. Robert W. Connor, Jr. personally
guaranteed the SBA Loan. Upon the consummation of the Offering, the SBA Loan
will be repaid in full with a portion of the net proceeds from this Offering,
thereby releasing Mr. Connor's guarantee. See 'Use of Proceeds.'
On February 1, 1995, the Company borrowed $250,000 pursuant to a
Philadelphia Industrial Development Corporation loan. The loan is evidenced by a
promissory note bearing annual interest at 3.75%. Principal and interest are
payable monthly through July 1, 2002. Robert W. Connor, Jr. personally
guaranteed this loan. The Company does not anticipate repaying this loan in the
near future.
FLORIDA AGREEMENT
From April 1995 until January 1997, Robert W. Connor, Jr., President and
Chief Executive Officer of the Company, was a director, officer and a
shareholder of Independence Florida, a corporation that is currently operating a
brewpub in Ft. Lauderdale, Florida, utilizing the Independence Marks. In
addition, Independence Florida has filed federal trademark and service mark
applications for 'Independence Brewery and Restaurant.' The Company has entered
into an agreement with Independence Florida whereby (i) Independence Florida
transferred and assigned all of its rights, title and interest in the
Independence Marks and the Applications to the Company, (ii) Independence
Florida was granted a perpetual royalty free license to use the Independence
Marks for its one location only, subject to termination upon certain conditions,
and (iii) the Company agreed not to operate a bar or restaurant in Broward
County, Florida, Independence Florida's geographic region, without the consent
of Independence Florida. In addition, pursuant to Mr. Connor's employment
agreement with the Company, Mr. Connor will offer to transfer his shares of
common stock of Independence Florida to the Company if such transfer is
permitted pursuant to an existing agreement among Independence Florida and its
shareholders. If such shares are not transferred, the Company and Mr. Connor
have agreed that the Company will receive any economic benefit from Mr. Connor's
shares of common stock of Independence Florida, including dividends and sale
proceeds in excess of Mr. Connor's original purchase price of such shares.
All future transactions between the Company and its officers, directors and
principal shareholders and their affiliates will be approved by a majority of
the non-employee members of the Board, and will be on terms no less favorable to
the Company than could be obtained from unaffiliated third parties.
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SUBORDINATED CONVERTIBLE NOTES
During December 1995, $75,000 was loaned to the Company from certain
shareholders of the Company. These notes accrued interest at a rate of 10% per
annum and were payable within one year of issuance. These notes were convertible
at maturity, at the discretion of the noteholders, into shares of Common Stock
at $3.00 per share. As a condition to the extension of credit, the Company
agreed to issue to each holder a number of shares of Common Stock equal to 12.5%
of the principal amount of such holder's loan. Accordingly, the Company issued a
total of 3,124 shares of Common Stock associated with these notes. These notes
were subordinated to the Company's long-term debt.
In December 1995 and February, March and May 1996 an aggregate of $188,300
was loaned to the Company from certain shareholders and directors of the
Company. These notes accrued interest at a rate of 10% per annum and were
payable within one year of issuance. These notes were convertible at maturity,
at the discretion of the noteholders, into shares of Common Stock at $3.00 per
share. As a condition to the extension of credit, the Company agreed to issue to
each holder a number of shares of Common Stock equal to 12.5% of the principal
amount of such holder's loan. Accordingly, the Company issued a total of 7,844
shares of Common Stock associated with these notes. These notes were
subordinated to the Company's long-term debt.
On August 12, 1996, the outstanding principal amount of the foregoing
notes, including accrued interest of $13,246, was converted into 92,182 shares
of Common Stock.
The Company believes that all prior transactions between the Company, its
officers, directors or other affiliates of the Company have been on terms no
less favorable than could have been obtained from unaffiliated third parties.
Any future transactions with officers, directors, 5% stockholders or affiliates
will be for valid business reasons, be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties, and be approved by a
majority of the independent outside members of the Company's Board of Directors
who do not have an interest in the transaction.
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DESCRIPTION OF SECURITIES
As of the date of this Prospectus, the authorized capital of the Company
consists of 19,000,000 shares of Common Stock, no par value per share, 500,000
shares of Series A Preferred, $10.00 par value per share, and 500,000 shares of
Series B Preferred, $10.00 par value per share. As of the date of this
Prospectus, 2,307,078 shares of Common Stock are currently issued and
outstanding to approximately 48 holders, no shares of Series A Preferred are
currently issued and outstanding and 70,000 shares of Series B Preferred are
currently issued and outstanding to one holder. Upon completion of the Offering,
all of the outstanding shares of Series B Preferred will be redeemed, 5,000,000
additional shares of undesignated preferred stock will be authorized, and the
provisions establishing the Series A Preferred and Series B Preferred will be
eliminated. See 'Use of Proceeds' and 'Certain Transactions -- Private
Placements.'
There will be 3,207,078 shares of Common Stock issued and outstanding after
giving effect to the sale of the Common Stock offered hereby (3,342,078 shares
of Common Stock if the Underwriter's over-allotment option is exercised in
full).
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of shareholders and do not have cumulative voting
rights. Subject to applicable provisions of the BCL, shareholders holding a
majority of the shares of Common Stock constitute a quorum for the purposes of
convening a shareholders' meeting. Accordingly, a majority of the quorum may
elect all of the directors standing for election. Holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared on the
Common Stock by the Board at such time and in such amounts as the Board may deem
advisable. Upon the liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to receive ratably the net assets of the
Company available for distribution after the payment of all debts and other
liabilities of the Company, subject to prior and superior rights of holders of
Preferred Stock. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are, and
the shares offered hereby, when issued and paid for, will be, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common Stock
will be subject to the rights of the holders of shares of any series of
Preferred Stock that the Company may issue in the future.
PREFERRED STOCK
Series A Preferred Stock
Holders of Series A Preferred Stock are entitled to receive dividends at a
rate of $1.80 per share per year, payable monthly in arrears. With respect to
the payment of dividends, the Series A Preferred ranks senior to the Common
Stock and the Series B Preferred. The Company must redeem the Series A Preferred
Stock on the five (5) year anniversary date of issuance thereof. In addition,
the Company has an obligation to redeem the Series A Preferred Stock under
certain terms and conditions, including if the Company: (i) makes a public
offering of its stock; (ii) undergoes a change of management or control
(including the sale of substantially all of its assets, or a merger,
consolidation or other combination of the Company into another business entity);
(iii) terminates Robert W. Connor, Jr. for any reason; (iv) files for protection
under the provisions of the Bankruptcy Code; or (v) materially breaches the
terms of the financing agreement pursuant to which the Series A Preferred Stock
would be issued. Although there are currently no shares outstanding, the Series
A Preferred Stock is issuable upon conversion of the Company's outstanding
Debentures.
Series B Preferred Stock
Holders of Series B Preferred Stock are entitled to receive dividends at a
rate of $1.40 per share per year, payable monthly in arrears. The dividend rate
increases to $1.80 per share per year whenever the Company fails to timely pay
any dividend. The dividend rate remains at such rate until all accrued and
unpaid dividends have been paid in full, at which time the dividend rate reverts
back to $1.40 per
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share per year. With respect to dividends, the Series B Preferred ranks senior
to the Common Stock. The Company must redeem the Series B Preferred Stock on the
five (5) year anniversary date of the issuance thereof. In addition, the Company
has an obligation to redeem the Series B Preferred Stock under certain terms and
conditions, including if the Company: (i) makes a public offering of its stock;
(ii) undergoes a change of management or control (including the sale of
substantially all of its assets, or a merger, consolidation or other combination
of the Company into another business entity); (iii) terminates Robert W. Connor,
Jr. for any reason; (iv) files for protection under the provisions of the
Bankruptcy Code; or (v) materially breaches the terms of the financing agreement
pursuant to which the Series B Preferred Stock was issued. The outstanding
Series B Preferred Stock will be redeemed at $10.00 cash per share plus all
accrued and unpaid dividends upon the consummation of the Offering. See 'Use of
Proceeds.'
Undesignated Preferred Stock
Pursuant to an amendment to the Company's Articles of Incorporation to be
filed prior to the completion of the Offering, the Board will be authorized,
without further action by the shareholders, to issue up to 5,000,000 shares of
Preferred Stock in one or more series and to establish the designations,
preferences, qualifications, privileges, limitations, restrictions, options,
conversion rights and other special or relative rights of any series of
Preferred Stock so issued. The issuance of shares of Preferred Stock could
materially adversely affect the voting power and other rights of holders of the
Common Stock. Because the terms of the Preferred Stock may be fixed by the Board
without shareholder action, the Preferred Stock could be issued quickly with
terms designated to defeat a proposed takeover of the Company, or to make the
removal of management and directors of the Company more difficult. The authority
to issue Preferred Stock or rights to purchase such stock could be used to
discourage a change in control of the Company. Management of the Company is not
aware of any such threatened transactions to obtain control of the Company, and
the Board has no current plans to designate and issue any additional shares of
Preferred Stock.
REDEEMABLE WARRANTS
The Redeemable Warrants will be issued pursuant to a Warrant Agreement (the
'Warrant Agreement') between the Company and Continental Stock Transfer & Trust
Company, as Warrant Agent (the 'Warrant Agent'). The following discussion of
certain terms and provisions of the Redeemable Warrants is qualified in its
entirety by reference to the detailed provisions of the Redeemable Warrants and
of the Warrant Agreement, the forms of which have been filed as exhibits to the
Registration Statement, of which this Prospectus forms a part.
Each Redeemable Warrant, when exercisable, will enable the holder to
purchase one share of Common Stock at an initial purchase price of $6.00 per
share, subject to adjustment for anti-dilutive events (the 'Exercise Price'), at
any time for a period of 60 months commencing on the date of this Prospectus,
unless earlier redeemed by the Company as described below.
The Redeemable Warrants are redeemable by the Company, with the consent of
the Underwriter, at any time commencing ________, 1998 [12 months from the date
of this Prospectus] at a redemption price of $0.10 per Redeemable Warrant, on 30
days' prior written notice if the average closing bid price for Common Stock, as
reported on the Nasdaq SmallCap Market, or if the Common Stock is not quoted on
the Nasdaq SmallCap Market, as reported by any other recognized quotation system
on which the price of the Common Stock is quoted, equals or exceeds $8.00 per
share for any 20 trading days within a period of 30 consecutive trading days
ending on the fifth trading day prior to the date of notice of redemption. In
the event that the Redeemable Warrants are redeemed by the Company, holders of
the Redeemable Warrants will lose their right to exercise their Redeemable
Warrants except during the 30 day notice period. Upon receipt of notice of
redemption, holders of Redeemable Warrants would be required to: (i) exercise
the Redeemable Warrants and pay the exercise price at a time when it may be
disadvantageous for them to do so; (ii) sell the Redeemable Warrants at the then
market price, if any, when they might otherwise wish to hold the Redeemable
Warrants; or (iii) accept the redemption price, which is likely to be
substantially less than the market value of the Redeemable Warrants at the time
of redemption. In the event that holders of the Redeemable Warrants elect not to
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exercise their Redeemable Warrants upon notice of redemption thereof, and the
Redeemable Warrants are subsequently redeemed prior to exercise, the holders
thereof would lose the benefit of the appreciated market price of the Redeemable
Warrants, if any, and/or the difference between the market price of the
underlying Common Stock as of such date and the exercise price of such Warrants,
as well as any possible future price appreciation in the Common Stock. See 'Risk
Factors -- Speculative Nature of Redeemable Warrants; Adverse Effect of Possible
Redemption of Redeemable Warrants.'
The Redeemable Warrants contain anti-dilution provisions regarding certain
events, including, but not limited to, stock dividends, stock splits and
reclassifications. The holders of Redeemable Warrants, as such, have no right to
vote on matters submitted to the shareholders of the Company or to receive
dividends and are not entitled to share in the assets of the Company in the
event of liquidation, dissolution or the winding-up of the Company's affairs.
However, upon the exercise of the Redeemable Warrants and issuance of shares of
Common Stock to the holder, such shares of Common Stock shall have rights
identical to all other shares of Common Stock.
No Redeemable Warrant will be exercisable unless, at the time of exercise,
the Company has filed a current Prospectus with the Commission covering the
shares of Common Stock to be issued upon exercise of such Redeemable Warrant and
such shares have been registered or qualified or deemed to be exempt under the
securities laws of the state of residence of the holder of such Redeemable
Warrant. The Company will use its best efforts to have all such shares so
registered or qualified on or before the exercise date of the Redeemable
Warrants and to maintain a current Prospectus relating thereto until the
expiration of the Redeemable Warrants, subject to the terms of the Warrant
Agreement. While it is the Company's intention to do so, there is no assurance
that it will be able to do so.
SERIES B WARRANT
The Company has issued a warrant which entitles Winfield to purchase 3.5
million shares of Common Stock of the Company at a price of $6.00 per share (the
'Series B Warrant'). The Series B Warrant is immediately exercisable and expires
five years following the Company's initial public offering. The Series B Warrant
contains weighted-average anti-dilution provisions regarding certain events,
including, but not limited to, the issuance of Common Stock at a price below the
then existing exercise price of the Series B Warrants, stock dividends, stock
splits and reclassifications.
LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS
As permitted by the BCL, the Company's Articles of Incorporation provide
that, subject to certain limited exceptions, directors of the Company shall not
be personally liable, as such, for monetary damages for any action taken unless
the director has breached or failed to perform the duties of his office under
the BCL and the breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness. The effect of this provision is to limit the ability
of the Company and its shareholders (through shareholder derivative suits on
behalf of the Company) to recover monetary damages against a director for the
breach of certain fiduciary duties as a director (including breaches resulting
from grossly negligent conduct). In addition, the Company's Articles of
Incorporation provide that the Company shall, to the full extent permitted by
the BCL, indemnify all persons whom it has the power to indemnify pursuant
thereto, including directors and officers of the Company.
The Company's Bylaws provide that a director shall not be liable to the
Company for monetary damages as such for any action taken or omitted unless such
person did not act in good faith and in a manner he or she reasonably believed
to be in, or not opposed to, the best interests of the Company, and failed to
act with such care, including reasonable inquiry, skill and diligence, as a
person of ordinary prudence would use under similar circumstances. The Company
believes that this provision will assist it in securing and maintaining the
services of directors who are not employees of the Company. The Company's Bylaws
also provide for indemnification of the Company's directors and officers to the
fullest extent permitted by law for expenses (including attorneys' fees)
incurred as a result of the officer's or director's status as an officer or
director of the Company.
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The Company may procure a directors' and officers' insurance policy
subsequent to the Offering to afford officers and directors coverage for losses
arising from claims based on breaches of duty, negligence, error and other
wrongful acts.
PENNSYLVANIA ANTI-TAKEOVER LAWS
Pennsylvania has adopted certain laws that may be deemed to be
'anti-takeover' in effect. One provision permits directors, in considering the
best interests of the Company, to consider the effects of any action upon its
employees, suppliers, customers, shareholders and creditors and the communities
in which the Company maintains facilities as well as other pertinent factors.
The effect of this provision is to put the considerations of these
constituencies on parity with one another, with the result that no one group,
including shareholders, is required to be the dominant or controlling concern of
directors in determining what is in the best interests of the Company.
In addition, the Company is also subject to certain additional
anti-takeover provisions under Pennsylvania law, including the following:
Control Transactions. This provision generally requires any person or
group that acquires 20% of the voting power over shares entitled to cast
votes in an election of directors to offer to purchase all outstanding
shares for cash at the statutory minimum fair value for their stock.
Business Combinations. This provision generally prohibits any person
or group that acquires at least 20% of the voting power of a corporation
from effecting a business combination with the corporation, such as a
merger, an asset sale and certain recapitalizations, for a period of up to
five years from the date such control was acquired. A corporation may opt
out of this provision on a case-by-case basis by approving a particular
business combination in compliance with applicable Pennsylvania statutory
provisions prior to the date such person or group acquires 20% of the
voting power.
Control-Share Acquisition. This provision generally prevents a person
or group that crosses certain stock ownership thresholds of 20%, 33 1/3% or
50% for the first time from voting those shares the ownership of which puts
that person over the relevant threshold unless voting power is restored to
such shares by a vote of shareholders as a whole and a vote of
disinterested shareholders at a shareholders meeting. Even if voting rights
are restored by approval of a resolution of shareholders, those rights will
lapse and be lost if any proposed control-share acquisition which is the
subject of the shareholder approval is not consummated within 90 days after
shareholder approval is obtained. Also, any business combinations occurring
after the restoration of voting power may require the acquiring person to
pay severance compensation to Pennsylvania employees of the corporation
whose employment is terminated within 90 days before or 24 months after the
restoration of voting power.
Disgorgement. This provision generally requires any person or group
that acquires 20% or more of the voting power of a corporation to disgorge
to the corporation all profits realized from the sale of equity securities
of the corporation within 18 months after acquiring this control status if
the person or group purchased equity securities of the corporation within
24 months prior to, or 18 months after, the acquisition of control status.
Each of these provisions will make it difficult and time-consuming for any
person or group to acquire the Company without the consent of the existing
shareholders. The Company may opt out of one or more of these provisions only by
an amendment to the Company's Articles of Incorporation approved by both the
Board of Directors and the shareholders. With respect to the control-share
acquisition and disgorgement provisions, such amendment would be required to be
adopted within 90 days after the date the shares offered hereby are registered
under the Exchange Act. The Company does not intend to opt out of any of these
provisions.
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REGISTRATION RIGHTS
The holders of the shares of Common Stock issued upon exercise of the
Series A Warrants and the Series C Warrant are entitled to specific rights with
respect to the registration under the Securities Act, for resale to the public,
of a total of 415,275 shares of Common Stock and 622,913 shares of Common Stock,
respectively, and the holder of the Series B Warrant is entitled to specific
rights with respect to the registration under the Securities Act for resale to
the public of the Series B Warrant (collectively, the 'Registration
Securities'), pursuant to the terms of Registration Rights Agreements executed
in connection with the Private Placements (the 'Agreements'). The Agreements
provide that at any time after the Offering, the holders of each of the
Registration Securities may twice require the Company, whether or not the
Company proposes to register its Common Stock for sale, to register all or part
of their Registration Securities and the Company must use its best efforts to
register such Registration Securities. In addition, the Agreements provide that,
with certain exceptions, in the event the Company proposes to register any
shares of Common Stock under the Securities Act by registration on Forms S-1,
S-2 or S-3 for its own account or otherwise, such holders are entitled to
include their Registration Securities in such registration, subject to certain
conditions and limitations, which include the right of the managing underwriter
of any such offering to exclude all or a portion of such Registration Securities
from such registration which the managing underwriter believes would materially
adversely affect such registration. The Company is required to bear the expenses
of all such registrations (except underwriting discounts and selling
commissions). The holders of the Registration Securities have agreed not to
exercise such registration rights for a period of 13 months after the date of
this Prospectus without the prior consent of the Underwriter.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Continental Stock
Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, 3,207,078 shares of Common Stock,
4,000,000 Redeemable Warrants and the Series B Warrant to purchase 3,500,000
shares of Common Stock will be outstanding. The 900,000 shares of Common Stock
and 4,000,000 Redeemable Warrants sold in the Offering (1,035,000 shares of
Common Stock and 4,600,000 Redeemable Warrants if the Underwriter's
over-allotment option is exercised in full) will be freely tradeable without
restriction or further registration under the Securities Act unless acquired by
an 'affiliate' of the Company (as that term is defined in the Securities Act)
which securities will be subject to the resale limitations of Rule 144 under the
Securities Act ('Rule 144'). See 'Underwriting.'
The remaining 2,307,078 shares of Common Stock and the Series B Warrant to
purchase 3,500,000 shares of Common Stock which will be outstanding upon
consummation of the Offering were issued by the Company in private transactions
in reliance upon the 'private placement' exception under Section 4(2) of the
Securities Act at various times between February 1994 and September 1996, and
are therefore 'restricted securities' within the meaning of Rule 144
('Restricted Securities'). Accordingly, such Restricted Securities may not be
sold unless they are registered under the Securities Act or unless an exemption
from registration, such as the exemption provided by Rule 144, is available. In
general, Rule 144 allows a person who has beneficially owned Restricted
Securities for at least two years, including persons who may be deemed
affiliates of the Company, to sell, within any three-month period, up to the
number of Restricted Securities that does not exceed the greater of (i) one
percent of the Common Stock or other units of the class outstanding, and (ii)
the average weekly trading volume in such securities during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Commission. A person who is not deemed to have been an affiliate of the Company
at any time during the 90 days preceding a sale and who has beneficially owned
his Restricted Securities for at least three years would be entitled to sell
such Restricted Securities without regard to the volume limitations described
above and the other conditions of Rule 144. The Commission has proposed certain
amendments to Rule 144 that would reduce by one year the
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holding periods required for shares subject to Rule 144 to become eligible for
resale in the public market. This proposal, if adopted, would increase the
number of shares of Common Stock eligible for immediate resale following the
expiration of the Lockup Period. No assurance can be given as to whether or when
the proposal will be adopted by the Commission.
Notwithstanding the foregoing, each officer and director of the Company,
all holders of the shares of Common Stock and all holders of any options,
warrants or other securities convertible, exercisable or exchangeable for shares
of Common Stock have agreed not to, directly or indirectly, sell, offer, sell,
transfer, pledge, assign, hypothecate or otherwise encumber or dispose of any of
the Company's securities, whether presently owned, for a period of 13 months
after the date of this Prospectus without the prior consent of the Underwriter
(the 'Initial Lock-Up Period'). The foregoing restriction does not apply to the
4,000,000 Redeemable Warrants (4,600,000 Redeemable Warrants if the
Underwriter's over-allotment option is exercised in full) and the underlying
shares of Common Stock. Winfield has further agreed unconditionally that it will
not sell, offer to sell, pledge, contract to sell or otherwise attempt to
transfer or dispose of any beneficial interest in any equity or derivative
securities it received in connection with the Private Placements for so long as
requested by Nasdaq, not to exceed a period of thirty-six (36) months from the
date of purchase. In addition, the officers and directors of the Company and
Winfield have agreed not to transfer any securities of the Company owned prior
to the offering for 12 months from the date of the Prospectus and, for the
subsequent 12 month period, will not transfer any of such securities for a price
below the initial public offering price of such securities. An appropriate
legend shall be marked on the back of the stock certificates representing all
such securities. See 'Underwriting.' In addition, the Company intends to file a
registration statement on Form S-8 to register 300,000 shares subject to the
Stock Plan following the date of this Prospectus. See 'Management -- Stock
Plan.' Market sales of a substantial number of shares of Common Stock, or the
availability of such shares for sale in the public market, could materially
adversely affect prevailing market prices of the Common Stock. In addition,
sales of either the Redeemable Warrants or the underlying shares of Common
Stock, the exercise of the Series B Warrant or even the existence of the
Redeemable Warrants or the Series B Warrant, may depress the price of the Common
Stock or the Redeemable Warrants in any market which may develop for such
securities. Upon termination of the Initial Lock-Up Period, approximately
1,151,205 Restricted Shares will be immediately eligible for sale in the public
market in reliance on Rule 144.
UNDERWRITING
A.S. Goldmen & Co., Inc. (the 'Underwriter') has entered into an
Underwriting Agreement with the Company pursuant to which, and subject to the
terms and conditions thereof, it has agreed to purchase all of the Shares and
Redeemable Warrants offered by the Company hereby.
The Underwriter has advised the Company that it initially proposes to offer
the Shares and Redeemable Warrants to the public at the public offering prices
set forth on the cover page of this Prospectus and that the Underwriter may
allow to certain dealers who are members of the National Association of
Securities Dealers, Inc. (the 'NASD') concessions of not in excess of $0.125 per
Share and of which amount a sum not in excess of $0.0625 per Share may in turn
be reallowed by such dealers to other dealers. After execution of the
Underwriting Agreement and initial distribution of the Securities to the public,
the public offering prices, the concessions and the reallowances may be changed
by the Underwriter in the course of its market making activities. The
Underwriter has informed the Company that it does not expect sales to
discretionary accounts to exceed five percent of the total number of Securities
offered by the Company hereby.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments which the Underwriter may be required to make in respect thereof. The
Company has agreed to pay the Underwriter a non-accountable expense allowance
equal to three percent of the gross proceeds derived from the sale of the Shares
and Redeemable Warrants underwritten.
The Company has agreed that, at the request of the Underwriter, for five
years after the date of this Prospectus, it will use its best efforts to cause
one individual designated by the Underwriter and acceptable to the Company to be
elected to the Company's Board of Directors, which individual may be a director,
officer, employee or affiliate of the Underwriter. As of the date of this
Prospectus, the Underwriter has not determined if it will designate an
individual to the Company's Board of Directors.
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Upon the exercise of any Redeemable Warrants more than one year after the
date of this Prospectus, which exercise was solicited by the Underwriter and to
the extent not inconsistent with the guidelines of the NASD and the Rules and
Regulations of the Commission, the Company has agreed to pay the Underwriter a
commission of four percent of the aggregate exercise price of such Redeemable
Warrants. However, no compensation will be paid to the Underwriter in connection
with the exercise of the Redeemable Warrants if (a) the market price of the
Common Stock is lower than the exercise price, (b) the Redeemable Warrants are
held in a discretionary account or (c) the Redeemable Warrants are exercised in
an unsolicited transaction where the holder of the Redeemable Warrant has not
stated in writing that the transaction was solicited and has not designated in
writing the Underwriter as the soliciting agent. Unless granted an exemption by
the Commission from Rule 10b-6 under the Exchange Act, as amended, the
Underwriter and any soliciting broker-dealers are prohibited from engaging in
any market-making activities or solicited brokerage activities with regard to
the Company's securities during the periods prescribed by exemption (xi) to Rule
10b-6 before the solicitation of the exercise of any Redeemable Warrants until
the later of termination of such solicitation activity or the termination (by
waiver or otherwise) of any right that the Underwriter and any soliciting
broker-dealers may have to receive a fee for the exercise of the Redeemable
Warrants following such solicitation. As a result, the Underwriter and any
soliciting broker-dealers may be unable to continue to provide a market for the
Company's securities during certain periods while the Redeemable Warrants are
exercisable. If the Underwriter has engaged in any of the activities prohibited
by Rule 10b-6 during the periods described above, the Underwriter undertakes to
waive unconditionally its right to receive a commission on the exercise of such
Redeemable Warrants.
Each director and officer of the Company, all present holders of the shares
of Common Stock and all holders of any options, warrants or other securities
convertible, exercisable or exchangeable for shares of Common Stock have agreed
not to directly or indirectly, offer, sell, transfer, pledge, assign,
hypothecate or otherwise encumber or dispose of any of the Company's securities,
whether or not presently owned, for a period of 13 months after the date of this
Prospectus without the prior written consent of the Company and the Underwriter.
Winfield has further agreed unconditionally that it will not sell, offer to
sell, pledge, contract to sell or otherwise attempt to transfer or dispose of
any beneficial interest in any equity or derivative securities it received in
connection with the Private Placements for so long as requested by Nasdaq, not
to exceed a period of thirty-six (36) months from the date of purchase. In
addition, the officers and directors of the Company and Winfield have agreed not
to transfer any securities of the Company owned prior to the offering for 12
months from the date of the Prospectus and, for the subsequent 12 month period,
will not transfer any of such securities for a price below the initial public
offering price of such securities. The foregoing restrictions do not apply to
the 4,000,000 Redeemable Warrants (4,600,000 Redeemable Warrants if the
Underwriter exercises its over-allotment option in full) and the underlying
shares of Common Stock. An appropriate legend shall be marked on the back of
stock certificates representing all such securities.
The Company has granted to the Underwriter an option exercisable during the
45-day period commencing on the date of this Prospectus to purchase from the
Company, at the offering price less underwriting discount, up to an aggregate of
an additional 135,000 shares of Common Stock and/or an additional 600,000
Redeemable Warrants, for the sole purpose of covering over-allotments, if any.
Upon consummation of the Offering, the Company shall sell to the
Underwriter or its designees, for nominal consideration, warrants (the
'Underwriter's Warrants') to purchase from the Company 90,000 shares of Common
Stock and 400,000 Redeemable Warrants. The Underwriter's Warrants are initially
exercisable at a price of $6.00 per share of Common Stock and $0.60 per
Redeemable Warrant for a period of four years commencing one year from the date
of this Prospectus. The Redeemable Warrants underlying the Underwriter's
Warrants are exercisable at a price of $7.50 per share of Common Stock.
The Underwriter's Warrants provide for adjustment of the type of securities
issuable upon exercise of the Underwriter's Warrants to reflect certain
subdivisions and combinations of the Common Stock. The Underwriter's Warrants
grant to the holders thereof certain rights of registration of the securities
issuable upon exercise of the Underwriter's Warrants.
During the term of the Underwriter's Warrants, the holders are given the
opportunity to profit from a rise in the market price of the Common Stock with a
resulting dilution in the interest of other shareholders. Moreover, the holders
may exercise the Underwriter's Warrants at a time when the
52
<PAGE>
Company would in all likelihood be able to obtain equity capital on terms more
favorable than those provided in the Underwriter's Warrants.
On December 19, 1996, the NASD District Business Conduct Committee filed a
complaint against the Underwriter and certain employees of the Underwriter. The
complaint alleges, among other things, that during the period between July 26
and July 29, 1994, the Underwriter engaged in manipulative trading practices and
received compensation that was not fair or reasonable in connection with the
distribution and sale of a certain security underwritten by the Underwriter.
The Underwriter has advised the Company that it intends vigorously to defend
against such claims. See 'Risk Factors -- Administrative Proceeding Involving
Underwriter.'
Prior to this Offering, there has been no public market for any of the
Company's securities. Accordingly, the offering prices of the Shares and the
Redeemable Warrants and the terms of the Redeemable Warrants were determined by
negotiation between the Company and the Underwriter. Factors considered in
determining such price and terms, in addition to prevailing market conditions,
included the prospects for the industry in which the Company competes, an
assessment of the Company's management, the prospects of the Company, its
capital structure and such other factors which are deemed relevant.
The foregoing is a summary of certain terms of the Underwriting Agreement,
copies of which were filed with the Commission as an exhibit to the Registration
Statement of which this Prospectus is a part. Reference is hereby made to such
exhibit for a detailed description of the provisions thereof as summarized
above. See 'Additional Information'.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by Pepper, Hamilton & Scheetz LLP, Philadelphia,
Pennsylvania. Orrick, Herrington & Sutcliffe LLP, New York, New York, has acted
as counsel to the Underwriter in connection with the Offering.
EXPERTS
The financial statements of the Company as of December 31, 1995 and for the
period from May 17, 1994 (inception) through December 31, 1994 and the year
ended December 31, 1995 included in this Prospectus or in the Registration
Statement of which this Prospectus forms a part, have been audited by Grant
Thornton LLP, independent certified public accountants, whose reports thereon
appear herein and elsewhere in this Registration Statement. Such financial
statements are included in reliance upon the reports of Grant Thornton LLP,
given upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is not currently subject to the information requirements of the
Exchange Act. As a result of the Offering, the Company will be required to file
reports and other information with the Commission pursuant to the informational
requirements of the Exchange Act.
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act, with respect to the Securities offered hereby. As
permitted by the rules and regulations of the Commission, this Prospectus, which
is part of the Registration Statement, omits certain information, exhibits,
schedules and undertakings set forth in the Registration Statement. For further
information pertaining to the Company and the Common Stock, reference is made to
such Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents or provisions of any documents
referred to herein are not necessarily complete, and in each instance, reference
is made to the copy of the document filed as an exhibit to the Registration
Statement. The Registration Statement may be inspected without charge at the
Office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the Registration Statement may be obtained from the Commission at
prescribed rates from the Public Reference Section of the Commission at such
address, and at the Commission's regional offices located at 7 World Trade
Center, Suite 1300, New York, New York 10048, and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. In addition,
registration statements and certain other filings made with the Commission
through its Electronic Data Gathering, Analysis and Retrieval ('EDGAR') system
are publicly available through the Commission's site on the Internet's World
Wide Web, located at http://www.sec.gov. The Registration Statement, including
all exhibits thereto and amendments thereof, has been filed with the Commission
through EDGAR.
53
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Certified Public Accountants......................................... F-2
Independence Brewing Company Financial Statements.......................................... F-3
Notes to Independence Brewing Company Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Independence Brewing Company
We have audited the accompanying balance sheet of Independence Brewing
Company as of December 31, 1995, and the related statements of operations,
changes in shareholders' equity and cash flows for the period from May 17, 1994
(inception) through December 31, 1994 and for the year ended December 31, 1995.
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 Independence Brewing Company
as of December 31, 1995, and the results of its operations and cash flows for
the period from May 17, 1994 (inception) through December 31, 1994 and for the
year ended December 31, 1995 in conformity with generally accepted accounting
principles.
Grant Thornton LLP
Philadelphia, Pennsylvania
September 27, 1996
F-2
<PAGE>
INDEPENDENCE BREWING COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents...................................................... $ 2,782 $ 661,186
Accounts receivable............................................................ 15,080 33,842
Inventories.................................................................... 90,355 113,273
Advances to officer............................................................ -- 10,000
------------- -------------
Total current assets........................................................ 108,217 818,301
Equipment and leasehold improvements, net........................................ 956,593 1,401,627
Deferred charges................................................................. 21,273 3,144,126
Deferred stock issuance costs.................................................... -- 220,750
Other............................................................................ 18,043 17,011
------------- -------------
$ 1,104,126 $ 5,601,815
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt.............................................. $ 75,600 $ 75,600
Current portion of capital lease obligations................................... 3,228 3,427
Subordinated convertible notes................................................. 75,000 --
Advances from officer.......................................................... 5,150 --
Accounts payable and accrued expenses.......................................... 186,782 544,226
------------- -------------
Total current liabilities................................................... 345,760 623,253
Long-term liabilities
Deferred rent.................................................................. 21,676 31,999
Capital lease obligations...................................................... 3,195 599
Convertible debentures......................................................... -- 800,000
Long-term debt................................................................. 577,956 553,764
------------- -------------
Total liabilities........................................................... 948,587 2,009,615
------------- -------------
Commitments and contingencies.................................................... -- --
------------- -------------
Series A preferred stock, $10.00 par value -- authorized, 500,000 shares; no
shares issued and outstanding.................................................. -- --
------------- -------------
Series B preferred stock, $10.00 par value -- authorized, 500,000 shares; issued
and outstanding, 70,000 shares................................................. -- 700,000
------------- -------------
Shareholders' equity
Common stock, no par value -- authorized, 19,000,000 shares; issued and
outstanding, 1,166,538 and 2,307,078 shares in 1995 and 1996,
respectively................................................................ 266,768 3,691,428
Accumulated deficit............................................................ (111,229) (799,228)
------------- -------------
Total shareholders' equity.................................................. 155,539 2,892,200
------------- -------------
$ 1,104,126 $ 5,601,815
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
INDEPENDENCE BREWING COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<S> <C> <C> <C> <C>
PERIOD FROM
MAY 17, 1994 NINE MONTHS ENDED
(INCEPTION) SEPTEMBER 30,
THROUGH YEAR ENDED ----------------------------
DECEMBER 31, 1994 DECEMBER 31, 1995 1995 1996
------------------ ------------------ ------------- -------------
(UNAUDITED)
Sales..................................... $ -- $ 237,644 $ 120,549 $ 428,835
Less excise taxes......................... -- 13,338 6,760 24,213
-------------- -------------- ------------- -------------
Net sales............................ -- 224,306 113,789 404,622
Cost of goods sold........................ -- 486,229 374,781 582,098
-------------- -------------- ------------- -------------
Gross loss........................... -- (261,923) (260,992) (177,476)
-------------- -------------- ------------- -------------
Advertising, promotional and selling
expenses................................ -- 93,039 59,985 101,468
General and administrative
expenses................................ 38,538 278,565 246,936 277,010
-------------- -------------- ------------- -------------
38,538 371,604 306,921 378,478
-------------- -------------- ------------- -------------
Operating loss....................... (38,538) (633,527) (567,913) (555,954)
-------------- -------------- ------------- -------------
Other income (expense)
Interest expense........................ -- (51,729) (36,710) (151,918)
Other income, net....................... 2,427 38,450 28,654 19,873
-------------- -------------- ------------- -------------
2,427 (13,279) (8,056) (132,045)
-------------- -------------- ------------- -------------
Loss before income taxes............. (36,111) (646,806) (575,969) (687,999)
Income taxes.............................. -- 1,496 893 --
-------------- -------------- ------------- -------------
NET LOSS............................. $ (36,111) $ (648,302) $ (576,862) $ (687,999)
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Per share data
Net loss per common share............... $ (0.02) $ (0.30) $ (0.28) $ (0.31)
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
Weighted average shares outstanding..... 1,867,595 2,201,662 2,049,941 2,229,773
-------------- -------------- ------------- -------------
-------------- -------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
INDEPENDENCE BREWING COMPANY
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
PERIOD FROM MAY 17, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994,
YEAR ENDED DECEMBER 31, 1995 AND NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------- TOTAL
NUMBER OF AMOUNT ACCUMULATED SHAREHOLDERS'
SHARES 1995 DEFICIT EQUITY
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Issuance of common stock....................... 444,750 $ 427,744 $ -- $ 427,744
Net loss for the period from May 17, 1994
(inception) through December 31, 1994........ -- -- (36,111) (36,111)
------------- ------------- ------------- -------------
Balance at December 31, 1994................... 444,750 427,744 (36,111) 391,633
Issuance of common stock....................... 140,081 412,208 -- 412,208
100% stock dividend............................ 581,707 -- -- --
Net loss for the year ended
December 31, 1995............................ -- -- (648,302) (648,302)
Reclassification of previously
undistributed losses......................... -- (573,184) 573,184 --
------------- ------------- ------------- -------------
Balance at December 31, 1995................... 1,166,538 266,768 (111,229) 155,539
Issuance of common stock (unaudited)........... 1,140,540 3,424,660 -- 3,424,660
Net loss for the nine months ended
September 30, 1996 (unaudited)............... -- -- (687,999) (687,999)
------------- ------------- ------------- -------------
Balance at September 30, 1996 (unaudited)...... $ 2,307,078 $ 3,691,428 $ (799,228) $ 2,892,200
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
INDEPENDENCE BREWING COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 17, 1994 NINE MONTHS ENDED
(INCEPTION) SEPTEMBER 30,
THROUGH YEAR ENDED ------------------------
DECEMBER 31, 1994 DECEMBER 31, 1995 1995 1996
------------------ ------------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss..................................... $ (36,111) $ (648,302) $ (576,862) $ (687,999)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization.............. -- 61,865 42,373 58,734
Amortization of original issue discount.... -- -- -- 72,617
Issuance of common stock for services...... 13,750 18,000 15,000 --
Increase in accounts receivable............ (5,350) (9,730) (1,601) (18,762)
Increase in inventories.................... (14,208) (76,147) (61,677) (22,918)
Decrease (increase) in other............... (20,589) 2,545 7,552 1,032
Increase in accounts payable and accrued
expenses................................. 1,353 185,430 182,194 370,690
Increase in deferred rent.................. -- 21,676 12,726 10,323
------------------ ------------------ ----------- -----------
Net cash used in operating activities.... (61,155) (444,663) (380,295) (216,283)
Cash flows from investing activities
Purchases of property and equipment.......... (610,003) (400,071) (341,920) (501,139)
Other........................................ -- (13,638) (13,638) (60,000)
------------------ ------------------ ----------- -----------
Net cash used in investing activities.... (610,003) (413,709) (355,558) (561,139)
Cash flows from financing activities
Stock issuance costs paid.................... -- -- -- (220,750)
Proceeds from subordinated convertible
notes...................................... -- 75,000 -- 188,300
Proceeds from long-term debt................. 180,000 473,482 513,570 --
Repayments of long-term debt................. -- -- -- (24,192)
Proceeds from issuance of preferred stock.... -- -- -- 700,000
Proceeds from issuance of common stock....... 413,994 384,836 296,300 10,015
Payments under capital lease obligations..... -- -- (2,450) (2,397)
Advances from (repayments to) officers,
net........................................ 5,000 -- 150 (15,150)
Proceeds from convertible debentures......... -- -- -- 800,000
------------------ ------------------ ----------- -----------
Net cash provided by financing
activities............................ 598,994 933,318 807,570 1,435,826
------------------ ------------------ ----------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS.......... (72,164) 74,946 71,717 658,404
Cash and cash equivalents (deficit) at
beginning of year............................ -- (72,164) (72,164) 2,782
------------------ ------------------ ----------- -----------
Cash and cash equivalents (deficit) at
end of year.................................. $ (72,164) $ 2,782 $ (447) $ 661,186
------------------ ------------------ ----------- -----------
------------------ ------------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
INDEPENDENCE BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Independence Brewing Company (the Company) is a regional producer of fresh,
high-quality, preservative-free, craft brewed ales, lagers, porters and seasonal
beers. The Company competes with other beer and beverage companies not only for
consumer acceptance and loyalty but also for shelf and tap space in retail
establishments and for marketing focus by the Company's third-party wholesale
distributors and their customers, all of which also distribute and sell other
beers and alcoholic beverage products.
The manufacture and sale of alcoholic beverages is a business that is
highly regulated and taxed at the federal, state and local levels. The Company's
operations may be subject to more restrictive regulations and increased taxation
by federal, state and governmental agencies than are those of non-alcohol
related businesses.
1. Interim Financial Information
The financial statements of the Company as of September 30, 1996 and for
the nine months ended September 30, 1995 and 1996 and related footnote
information are unaudited. All adjustments (consisting only of normal recurring
adjustments) have been made which, in the opinion of management, are necessary
for a fair presentation. Results of operations for the nine months ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for any future period.
2. Basis of Financial Statement Presentation
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and predominant practices within the brewing
industry.
The 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 and
disclosure of contingent assets and liabilities at the date of the financial
statements. These estimates and assumptions also affect reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
3. Supplemental Cash Flow Information
Cash and cash equivalents include cash on hand and short-term, highly
liquid investments with original maturities at the time of purchase of three
months or less. Cash paid for income taxes for the period from May 17, 1994
(inception) through December 31, 1994 and for the year ended December 31, 1995
was $-0- and $1,496, respectively, and for the nine months ended September 30,
1995 and 1996 was $893 and $-0-, respectively. Cash paid for interest for the
period from May 17, 1994 (inception) through December 31, 1994 and for the year
ended December 31, 1995 was $-0- and $51,729, respectively, and for the nine
months ended September 30, 1995 and 1996 was $36,710 and $80,064, respectively.
4. Inventories
Inventories, which consist principally of hops, bottles and packaging, are
stated at the lower of cost or market determined on the first-in, first-out
basis.
5. Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company places its temporary cash investments with
high credit quality financial institutions. The Company sells primarily
F-7
<PAGE>
INDEPENDENCE BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
to independent beer and ale distributors primarily in the Mid-Atlantic area.
Receivables arising fromthese sales are not collateralized; however; credit risk
is minimized as a result of the diverse nature of the Company's customer base.
Additionally, the Company maintains cash balances in a financial
institution in Philadelphia. These funds are insured by the Federal Deposit
Insurance Corporation up to $100,000. At September 30, 1996, uninsured amounts
held at this financial institution totalled approximately $560,000.
6. Revenue Recognition
The Company recognizes revenue when goods are shipped to its customers. The
Company records bad debt expense at the time it is judged that an account
receivable is uncollectible.
7. Depreciation and Amortization
Equipment and leasehold improvements are carried at cost. Depreciation of
equipment and amortization of leasehold improvements are computed using the
straight-line method over the estimated useful lives of the assets or the term,
if less. Amortization of intangibles is provided by the straight-line method
over periods ranging from three to five years.
The Financial Accounting Standards Board (FASB) issued a new standard,
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which provides guidance on when to recognize and how to measure impairment
losses of long-lived assets and certain identifiable intangibles and how to
value long-lived assets to be disposed of. The adoption of this new statement is
not expected to have a material impact on the Company's financial position or
results of operations. The Company is required to adopt this new standard for
the year ending December 31, 1996.
8. Advertising, Promotional and Selling Expenses
Advertising, promotional and selling expenses are charged to expense during
the period in which they are incurred. Total advertising, promotional and
selling expenses for the period from May 17, 1994 (inception) through December
31, 1994 and for the year ended December 31, 1995 were $-0- and $93,039,
respectively, and for the nine months ended September 30, 1995 and 1996 were
$59,985 and $101,468, respectively.
9. Income Taxes
The Company had elected to be taxed pursuant to Subchapter S of the
Internal Revenue Code for the year ended December 31, 1995, but on December 1,
1995, the Company exceeded the maximum number of shareholders as permitted under
Subchapter S. Accordingly, all taxable income or loss and tax credits are the
responsibility of the Company's shareholders for the period from January 1, 1995
through November 30, 1995. Accordingly, the Company terminated its Subchapter S
election and is now taxed as a C corporation, effective December 1, 1995.
Effective with the change to a C corporation, the Company accounts for its
income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under
the liability method specified by SFAS No. 109, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted tax
rates which will be in effect when these differences reverse. Deferred tax
expense is the result of changes in deferred tax assets and liabilities. The
principal type of account resulting in differences between assets and
liabilities for financial statement and tax return purposes is accumulated
depreciation. Income taxes reported on the statement of operations represents
federal and state income taxes prior to 1995 when the Company was taxed as a C
corporation.
F-8
<PAGE>
INDEPENDENCE BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
As a result of the Proposed Public Offering (note O), the Company will
experience an 'ownership change' for purposes of determining its ability to use
its net operating loss (NOL) carryovers as deductions against future taxable
income under federal income tax law. Its annual NOL deductions after the
Proposed Public Offering will be limited to a dollar amount determined by
multiplying the value of the Company's outstanding stock as of the offering date
by an index rate determined under federal law. The annual limitation is expected
to be approximately $900,000.
10. Fair Value of Financial Instruments
The Company adopted, effective January 1, 1995, SFAS No. 107, Disclosures
about Fair Value of Financial Instruments, which requires entities to disclose
the estimated fair value of their assets and liabilities considered to be
financial instruments. Financial instruments consist primarily of cash and cash
equivalents, accounts receivable and long-term debt. Based on the borrowing
rates currently available to the Company, long-term debt approximates fair value
at December 31, 1995 and September 30, 1996.
11. Related Party Transactions
The Company has entered into numerous related party transactions involving
indebtedness, including the guaranteeing of certain indebtedness. These
transactions are described in notes E, F, G, I3, I5, L and M.
12. Loss Per Common Share
Loss per common share was computed based on the weighted average number of
common shares and common share equivalents outstanding during the year, as
restated for the 100% stock dividend, effected in the form of a stock split,
issued on January 5, 1996 to shareholders of record on December 6, 1995 (note
J). Warrants were not considered because they are antidilutive. In connection
with the Private Placements (note L), 1,038,188 shares issued have been treated
as outstanding for all periods in calculating loss per common share because such
shares were issued for consideration below the Proposed Public Offering price of
$5.00 per share (note O). Fully dilutive loss per common share has not been
presented because it was antidilutive.
13. Reclassification
Certain 1995 amounts have been reclassified to conform to the 1996
financial statement presentation.
NOTE B -- INVENTORIES
Inventories consist of the following:
DECEMBER SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
Raw materials........................ $ 10,661 $ 26,732
Work in process...................... 8,128 20,659
Finished goods....................... 12,387 14,614
Packaging............................ 59,179 51,268
------------ -------------
$ 90,355 $ 113,273
------------ -------------
------------ -------------
F-9
<PAGE>
INDEPENDENCE BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31, SEPTEMBER 30,
USEFUL LIVES 1995 1996
--------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Brewing equipment.................................. 5 to 20 years $ 859,815 $ 1,308,929
Leasehold improvements............................. 10 years 156,906 193,681
Transportation equipment........................... 5 years -- 15,250
------------ -------------
1,016,721 1,517,860
Less accumulated depreciation and amortization..... 60,128 116,233
------------ -------------
$ 956,593 $ 1,401,627
------------ -------------
------------ -------------
</TABLE>
Depreciation and amortization expense for the period from May 17, 1994
(inception) through December 31, 1994 and for the year ended December 31, 1995
was $-0- and $60,128, respectively, and for the nine months ended September 30,
1995 and 1996 was $41,160 and $56,105, respectively.
NOTE D-- DEFERRED CHARGES
Deferred charges consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
Deferred interest (original issue discount)........................... $ 9,372 $ 3,147,471
Financing fees........................................................ 11,221 71,221
Organizational costs.................................................. 2,417 2,417
------------ -------------
23,010 3,221,109
Less accumulated amortization....................................... 1,737 76,983
------------ -------------
$ 21,273 $ 3,144,126
------------ -------------
------------ -------------
</TABLE>
NOTE E -- SUBORDINATED CONVERTIBLE NOTES
During December 1995, $75,000 was loaned to the Company from certain
shareholders of the Company. These notes accrued interest at a rate of 10% per
annum and were payable within one year of origination. These notes were
convertible at maturity, at the discretion of the noteholders, into shares of
Common Stock at $3.00 per share. As a condition to the extension of credit, the
Company agreed to issue to the holders Common Stock valued at $3.00 per share in
an amount equal to 12.5% of the principal amount borrowed on the date the
obligation became due or the date of repayment of the principal and interest,
whichever was earlier. Accordingly, the Company issued a total of 3,124 shares
of Common Stock associated with these notes. These obligations are subordinated
to the Company's long-term debt. A deferred interest charge of $3.00 per share
was assigned to these shares and is being amortized over the terms of the notes
to which they relate. At December 31, 1995, a deferred interest charge of $9,372
was recorded. No amortization was taken for the year ended December 31, 1995 due
to the origination dates of the notes. Amortization expense for the nine months
ended September 30, 1995 and 1996 was $-0- and $5,728, respectively.
Subsequent to year-end, another $188,300 was loaned to the Company from
certain shareholders and directors of the Company. These notes accrued interest
at a rate of 10% per annum and were payable within one year of origination.
These notes were convertible at maturity, at the discretion of the noteholders,
into shares of Common Stock at $3.00 per share. As a condition to the extension
of
F-10
<PAGE>
INDEPENDENCE BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- SUBORDINATED CONVERTIBLE NOTES -- (CONTINUED)
credit, the Company issued to the noteholders Common Stock valued at $3.00 per
share in an amount equal to 12.5% of the respective notes. Accordingly, the
Company has issued a total of 7,844 shares of Common Stock associated with these
notes. In 1996, a deferred interest charge of $23,532, or $3.00 per share, was
assigned to these shares and is being amortized over the terms of the notes to
which they relate. These notes are subordinated to the Company's long-term debt.
Amortization expense for the nine months ended September 30, 1996 was $9,468.
On August 12, 1996, all of the foregoing notes, including accrued interest
of $13,246, were converted into 92,182 shares of Common Stock. Additionally,
aggregate unamortized deferred interest charges of $17,708 were written off as
of August 12, 1996 (note J).
NOTE F -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
Small Business Administration (SBA) Note (1).......................... $ 419,248 $ 408,496
Philadelphia Industrial Development Corporation (PIDC) Note (2)....... 234,308 220,868
------------ -------------
653,556 629,364
Less current portion................................................ 75,600 75,600
------------ -------------
$ 577,956 $ 553,764
------------ -------------
------------ -------------
</TABLE>
(1) Principal and interest payments of $3,584 are due monthly and increase to
$6,082 on March 1, 1997. Interest is payable at the prime rate plus 2%
(10.50% and 10.25% at December 31, 1995 and September 30, 1996,
respectively). Interest expense for the year ended December 31, 1995 was
$42,392 and for the nine months ended September 30, 1995 and 1996 was
$25,998 and $32,428, respectively. The note is secured by substantially all
of the Company's assets, an annuity and certificate of deposit, and personal
guarantees of the Company's President.
(2) Principal and interest payments of $3,389 are due monthly. Interest is
payable at 3.75%. Interest expense for the year ended December 31, 1995 was
$6,763 and for the nine months ended September 30, 1995 and 1996 was $4,765
and $6,505, respectively. The note is secured by substantially all of the
Company's assets and personal guarantees of the Company's President.
Approximate principal repayments due on long-term debt at September 30,
1996 are as follows (unaudited):
YEAR ENDED SEPTEMBER 30,
- ------------------------
1997............................................................... $ 75,600
1998............................................................... 107,300
1999............................................................... 108,600
2000............................................................... 110,000
2001............................................................... 111,400
Thereafter......................................................... 116,464
-----------
$ 629,364
-----------
-----------
F-11
<PAGE>
INDEPENDENCE BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- ADVANCES TO (FROM) OFFICER
Advances from the President totalled $5,150 and $-0- at December 31, 1995
and September 30, 1996, respectively. An additional $10,000 was advanced from
the President during the nine months ended September 30, 1996, and the Company
repaid all these advances during the same time period. These advances did not
bear interest and have been classified as current at December 31, 1995.
Advances to the President totalled $10,000 at September 30, 1996. These
advances bear interest at the prime rate (8.25% as of September 30, 1996). These
advances, including accrued interest, were paid subsequent to September 30,
1996.
NOTE H -- CAPITAL LEASE OBLIGATIONS
In May 1996, the Company entered into an equipment lease which qualified as
a capital lease. Monthly payments totaled $302, with the lease expiring in
November 1997. The related asset, with a cost of $9,640 and accumulated
depreciation of $1,928 and $3,374 as of December 31, 1995 and September 30,
1996, respectively, is reflected on the balance sheet in brewing equipment.
Depreciation is being provided over the estimated useful lives of the assets
(three years) and totaled $1,928 and $1,446 for the year ended December 31, 1995
and nine months ended September 30, 1996, respectively.
Future minimum payments under the capital lease at September 30, 1996 are
as follows (unaudited):
YEAR ENDED SEPTEMBER 30,
- ------------------------
1997................................................................. $ 3,625
1998................................................................. 604
---------
4,229
Less amount representing interest.................................. 203
---------
Present value of minimum lease payments.............................. 4,026
Less current portion............................................... 3,427
---------
Long-term capital lease obligations.................................. $ 599
---------
---------
NOTE I -- COMMITMENTS AND CONTINGENCIES
1. Operating Leases
The Company has entered into noncancellable agreements for the purposes of
renting its manufacturing facility and leasing certain office and
manufacturing-related equipment. In connection with the lease on the
manufacturing facility, the Company has the option to purchase the building
beginning after the second year of the lease for terms, as defined therein. The
following is a schedule by year of approximate future minimum payments for such
agreements with terms in excess of one year (unaudited):
YEAR ENDED SEPTEMBER 30,
- ------------------------
1997............................................................... $ 68,500
1998............................................................... 70,100
1999............................................................... 71,800
2000............................................................... 74,700
2001............................................................... 79,200
Thereafter......................................................... 325,300
-----------
$ 689,600
-----------
-----------
F-12
<PAGE>
INDEPENDENCE BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
The Company has entered into a sublease agreement for a portion of its
rented manufacturing facility. This sublease is on a month-to-month basis and
has provided approximately $8,000 of rental income for the year ended December
31, 1995. Rental income for the nine months ended September 30, 1995 and 1996
was $6,015 and $6,696, respectively. Rent expense for the year ended December
31, 1995 was $82,321. Rent expense for the nine months ended September 30, 1995
and 1996 was $56,494 and $56,156, respectively.
2. Other
In the normal course of business, the Company has been named as a defendant
in certain lawsuits. Although the ultimate outcome of these suits cannot be
ascertained at this time, it is the opinion of management that the resolution of
such suits will not have a material adverse effect on the financial position or
results of operations of the Company.
3. Employment Agreements
On August 12, 1996, the Company entered into a three-year employment
agreement with the President and Chief Executive Officer expiring on August 12,
1999. Compensation under this agreement is $50,000 per year, such salary to be
increased to $100,000 upon closing of the Proposed Public Offering (note O),
plus annual increases of not less than 10% of the prior year's salary for the
first two years after the Proposed Public Offering and annual bonuses as
determined by the Board. The agreement provides a covenant not to compete with
the Company during the term of employment and for a two-year period after
employment ends. Finally, if terminated for any reason, other than 'cause,'
'disability' or 'death,' each as defined therein, the Company shall pay salary
accrued through the date of termination and for two years thereafter.
Additionally, on August 12, 1996, the Company entered into an employment
agreement with the Brewmaster expiring on December 31, 1999. Compensation under
this agreement is $45,000 per year, plus annual increases and bonuses as
determined by the Board. The agreement provides a covenant not to compete with
the Company during the term of employment and for a two-year period after
employment ends. Finally, if terminated for any reason, other than 'cause,'
'disability' or 'death,' each as defined therein, the Company shall pay salary
accrued through the date of termination and for two years thereafter.
4. Purchase Commitments
The Company has entered into a purchase agreement to purchase new
production equipment approximating $400,000. At December 31, 1995, the Company
had paid $30,000 towards the commitment. During the third quarter of 1996, this
equipment was purchased and the agreement was satisfied.
F-13
<PAGE>
INDEPENDENCE BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
5. Trademarks Protection
Robert W. Connor, Jr., President and Chief Executive Officer of the
Company, was a director, officer and a shareholder of Independence Brewing
Company of Florida, Inc. (Independence Florida), a corporation that is currently
operating a brew pub in Ft. Lauderdale, Florida, utilizing the 'Independence'
name and logo and the name 'Independence Brewery and Restaurant' (the
Applications). The Company has entered into an agreement with Independence
Florida whereby (i) Independence Florida transferred and assigned all of its
rights, title and interest in the Independence Marks and the Applications to the
Company; (ii) Independence Florida was granted a perpetual royalty-free license
to use the Independence Marks for its one location only, subject to termination
upon certain conditions; and (iii) the Company agreed not to operate a bar or
restaurant in Broward County, Florida, Independence Florida's geographic region,
without the consent of Independence Florida (the Florida Agreement). In
addition, pursuant to Mr. Connor's employment agreement with the Company, Mr.
Connor will offer to transfer his shares of common stock of Independence Florida
to the Company if such transfer is permitted pursuant to an existing agreement
among Independence Florida and its shareholders. If such shares are not
transferred, the Company will receive any economic benefit from Mr. Connor's
shares of common stock of Independence Florida, including dividends and sale
proceeds in excess of Mr. Connor's original purchase price of such shares.
The trademark application for the Company's logo has been refused
registration by the United States Patent and Trademark Office based on a prior
registration by Moosehead Brewing Company (Moosehead) of a registration for 'The
Taste of Independence' (the Registration). The Company has abandoned its federal
trademark application for its logo. In addition, Moosehead has a pending U.S.
trademark application for the mark 'Independence' for brewed alcoholic beverages
(together with the Registration, the Moosehead Marks). The Company has entered
into an exclusive license and purchase agreement with Moosehead for the
Moosehead Marks (the Moosehead License). If the Moosehead License is terminated
in the future, the Company may find it necessary to change the brand name of its
products, thereby losing any existing brand recognition in its markets. Such
change may involve considerable expense, including costs involved with building
goodwill in a new brand, and may have a material adverse effect on the Company's
business, financial condition and result of operations. In addition, the
Moosehead License will not prevent the Company from entering into the Florida
Agreement and licensing the Independence Marks and the Applications to
Independence Florida.
NOTE J -- SHAREHOLDERS' EQUITY
For the period from May 17, 1994 (inception) through December 31, 1994, the
Company sold 439,750 shares of its Common Stock priced at $2.75 per share
through private offerings aggregating $413,994. In addition, the Company issued
5,000 shares of its Common Stock valued at $2.75 per share to an individual who
provided services to the Company.
During 1995, the Company sold 130,957 shares of its Common Stock priced at
$2.75 or $3.00 per share through private offerings aggregating $384,836. In
addition, the Company issued 6,000 shares of its Common Stock valued between
$2.75 and $3.00 per share to individuals who provided services to the Company.
On December 6, 1995, the Board of Directors declared a 100% stock dividend,
effected in the form of a stock split, issued on January 5, 1996 to shareholders
of record on December 6, 1995. As a result of this dividend, issued and
outstanding shares increased from 581,707 to 1,163,414 in 1995 prior to the
Company issuing certain convertible investor notes. Finally, 3,124 shares of
Common Stock valued at $3.00 per share were issued to holders of the convertible
notes discussed in note E.
F-14
<PAGE>
INDEPENDENCE BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE J -- SHAREHOLDERS' EQUITY -- (CONTINUED)
As a result of the Company's termination of its Subchapter S status on
November 30, 1995, the Company has reclassified its previously undistributed
accumulated Subchapter S corporation losses of $573,184 to Common Stock.
During the nine months ended September 30, 1996, the Company sold 2,332
shares of its Common Stock priced at $3.00 per share through private offerings
aggregating $6,996. Additionally, 7,844 shares of Common Stock valued at $3.00
per share were issued to holders of the convertible investor notes discussed in
note E.
The Company, in connection with the Private Placements discussed in note L,
amended and restated its Articles of Incorporation whereby the Company is
authorized to issue 20,000,000 shares of capital stock, of which 19,000,000
shares are Common Stock, no par value; 500,000 shares are Series A preferred
stock, par value $10.00 per share (Series A Preferred Stock); and 500,000 shares
are Series B preferred stock, par value $10.00 per share (Series B Preferred
Stock).
Holders of outstanding shares of Series A Preferred Stock shall be entitled
to receive cumulative cash dividends at a rate of $1.80 per share per annum.
Holders of outstanding shares of Series B Preferred Stock shall be entitled to
receive cumulative cash dividends at a rate of $1.40 per share per annum. Both
the Series A Preferred Stock and Series B Preferred Stock contain mandatory
redemption provisions whereby the Company shall redeem all outstanding shares on
the five-year anniversary date of the date of issuance of such shares at $10.00
cash per share on the occurrence of certain events, as defined, together with an
amount on each redemption date equal to the accrued and unpaid dividends on such
shares to the redemption date.
NOTE K -- CUSTOMER INFORMATION
1. Major Customers
Two customers accounted for approximately 21% and 22% of the Company's
sales during the year ended December 31, 1995. The same two customers accounted
for approximately 25% and 24% of the Company's sales during the nine months
ended September 30, 1995. Three customers accounted for approximately 11%, 11%
and 10% of the Company's sales during the nine months ended September 30, 1996.
2. Contract Brewing Arrangements
The Company has entered into arrangements to provide contract brewing
services to third parties which market and sell beer produced by the Company,
but marketed by the third party under such party's own proprietary labels.
Approximately 9% and 18% of the Company's revenues resulted from contract
brewing in 1995 and the nine months ended September 30, 1996, respectively.
NOTE L -- PRIVATE PLACEMENTS
In anticipation of the closing of the financing transactions described
below (the Private Placements), the Company was advanced $100,000 on each of May
6, 1996 and July 16, 1996, respectively, from Winfield Capital Corporation
(Winfield). These notes accrued interest at a rate of 12.75% per annum and were
due no later than August 15, 1996. The Company's President personally guaranteed
each of the notes. The entire principal amount of each note was repaid in
connection with the closing of the Private Placements, and the personal
guarantees were released.
On August 12, 1996, September 13, 1996 and September 20, 1996, the Company
sold $800,000 of debentures convertible into shares of Series A Preferred Stock
of the Company (the Debentures) to Winfield and certain shareholders of the
Company (collectively, the Purchasers). To the extent that such shareholders did
not so participate, Winfield agreed to act as 'standby' purchaser for the entire
$800,000 in Debentures being offered. The Debentures bear interest at a rate of
12.75% per annum,
F-15
<PAGE>
INDEPENDENCE BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L -- PRIVATE PLACEMENTS -- (CONTINUED)
provided that if the Debentures are prepaid, as otherwise permitted, the
Debentures will bear interest at a rate of 14% per annum from the date of
issuance. The Debentures are due five years from date of issuance. The Company
is obligated to make monthly principal payments aggregating $22,222 along with
accrued interest, commencing 24 months after the sale of the Debentures. The
Company intends to repay the Debentures with a portion of the net proceeds from
the Proposed Public Offering (notes O and P).
In consideration of the purchase by the Purchasers of the Debentures, the
Purchasers received warrants which entitled them to purchase 415,275 shares of
Common Stock for the aggregate exercise price of $2,081 (the Series A Warrants).
All of the Series A Warrants were exercised by the Purchasers on September 13,
1996 and September 20, 1996. A deferred interest charge of $3.00 per share,
totalling $1,245,825, was assigned to these shares and is being amortized over
the terms of the Debentures.
In addition, in consideration of the purchase by Winfield of the
Debentures, Winfield received (i) a warrant (the Preferred Warrant) that
entitled Winfield to purchase 70,000 shares of Series B Preferred Stock of the
Company, par value $10.00, exercisable immediately for an aggregate exercise
price of $700,000 and (ii) a warrant (the Series C Warrant) that entitled
Winfield to purchase 622,913 shares of Common Stock for the aggregate exercise
price of $3,115. Winfield exercised the Preferred Warrant and the Series C
Warrant on September 13, 1996. The Company has an obligation to redeem all
outstanding shares of Series B Preferred Stock five years from the date of
issuance or upon the consummation of the Proposed Public Offering (notes O and
P), including dividends payable to date. A deferred charge of $3.00 per share,
totalling $1,868,739, was assigned to these shares and is being amortized over
the terms of the Series B Preferred Stock.
In consideration for agreeing to act as standby purchaser for the balance
of the Debentures not purchased by the Company shareholders and for agreeing to
allow certain shareholders of the Company to participate in the purchase of the
Debentures, Winfield received a warrant (the Series B Warrant) which entitles
Winfield to purchase 3,500,000 shares of Common Stock of the Company at a price
of $6.00 per share. The Series B Warrant is immediately exercisable and expires
five years following the Company's initial public offering (notes O and P).
The holders of the shares of stock that were issued upon exercise of the
Series A Warrants, the Series C Warrant and the holders of shares of Common
Stock that were issued upon exercise of the holders of the Series B Warrant are
entitled to certain rights with respect to the registration under the Securities
Act, for resale to the public, of the shares of Common Stock underlying the
Series A Warrants and the Series C Warrant and of the Series B Warrant,
respectively. Winfield has agreed unconditionally that it will not offer to
sell, pledge, contract or sell or otherwise attempt to transfer or dispose of
any beneficial interest in any equity or derivative securities it received in
connection with the Private Placements for so long as requested by Nasdaq, not
to exceed a period of 36 months from the date of purchase.
NOTE M -- RESCISSION OFFER
During the period from June 25, 1994 through December 1, 1995, the Company
offered for sale and sold to investors a total of 207,914 shares of the
Company's Common Stock (the Original Shares). During the period from December
1995 through May 1996, the Company offered and sold to investors notes,
convertible into shares of Common Stock at maturity in the aggregate principal
amount of $263,300 (together with the Original Shares, the Rescission
Securities). Because certain of the applicable provisions of federal and state
securities laws relating to the registration of securities for offer and sale
may not have been complied with in connection with the offer or sale of the
Rescission Securities, the Company offered to repurchase the Rescission
Securities for cash in an amount equal to the original purchase price plus
interest from the date of purchase, less any dividends, interest
F-16
<PAGE>
INDEPENDENCE BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE M -- RESCISSION OFFER -- (CONTINUED)
payments or cash distributions in respect to the Rescission Securities. The
Company received rescission acceptances from five shareholders whose investment
totalled $24,750 for 9,000 shares of Common Stock. On September 27, 1996, the
Company repurchased such shares of Common Stock for an aggregate purchase price,
including interest, of $26,927. The Company subsequently sold 9,000 shares of
Common Stock to four shareholders for an aggregate purchase price of $24,750. No
underwriters were involved and no commissions were paid.
The investors to which various notes were sold rejected the Rescission
Offer, and on August 12, 1996, these investors converted these notes into Common
Stock (note E).
NOTE N -- STOCK OPTION PLAN
The Company adopted a nonqualified stock option plan under which it may
grant up to 300,000 shares of Common Stock. The Company may not grant any
incentive stock options with a purchase price of less than fair market value of
the Common Stock as of the date of the grant. Through September 27, 1996, the
Company has not granted any options under the Plan.
The FASB issued a new standard, SFAS No. 123, Accounting for Stock-Based
Compensation, which contains a fair value-based method for valuing stock-based
compensation that entities may use, which measures compensation cost at the
grant date based on the fair value of the award. Compensation is then recognized
over the service period, which is usually the vesting period. Alternatively, the
standard permits entities to continue accounting for employee stock options and
similar equity instruments under Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees. Entities that continue to account
for stock options using APB Opinion No. 25 are required to make pro forma
disclosures of net income and earnings per share, as if the fair value-based
method of accounting defined in SFAS No. 123 had been applied. Management
anticipates that the Company will continue to follow APB Opinion No. 25. The
Company will be required to adopt the new standard for its year ending December
31, 1996.
NOTE O -- PROPOSED PUBLIC OFFERING (UNAUDITED)
The Company anticipates a public offering in January 1997 of 900,000 shares
(the Shares) of Common Stock, no par value per share (the Common Stock) and
4,000,000 redeemable Common Stock purchase warrants (the Redeemable Warrants).
The Shares and the Redeemable Warrants (collectively, the Securities) may be
purchased separately and will be separately tradable immediately upon issuance.
It is currently anticipated that the initial public offering prices of the
Shares and the Redeemable Warrants will be $5.00 and $0.50, respectively. In
anticipation of the public offering, the Company will redeem all its outstanding
fractional shares for cash. Each Redeemable Warrant entitles the registered
holder thereof to purchase one share of Common Stock at an exercise price of
$6.00 subject to adjustment, commencing on the date of this Prospectus until 60
months from the date of the Prospectus at which time the Redeemable Warrants
shall expire. The Redeemable Warrants are redeemable by the Company, with the
consent of the underwriter, at any time commencing one year, after the offering,
at a redemption price of $0.10 per Redeemable Warrant, provided that the average
closing bid price of the Common Stock equals or exceeds $8.00 per share for any
20 trading days within a period of 30 consecutive trading days ending on the
fifth trading day prior to the date of the notice of redemption.
The Company has granted to the underwriter a 45-day option to purchase up
to an additional 135,000 shares of Common Stock and/or 600,000 Redeemable
Warrants on the same terms and conditions as set forth above solely to cover
overallotments.
The underwriter of the public offering will receive a discount of 10% and a
nonaccountable expense allowance equal to 3% of the gross proceeds of the public
offering. In addition, the Company
F-17
<PAGE>
INDEPENDENCE BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE O -- PROPOSED PUBLIC OFFERING (UNAUDITED) -- (CONTINUED)
has agreed to sell to the underwriter, for nominal consideration, warrants to
purchase 90,000 shares of Common Stock and 400,000 Redeemable Warrants (the
Underwriter's Warrants). The Underwriter's Warrants are initially exercisable at
a price of $6.00 per share of Common Stock and $0.60 per Redeemable Warrant for
a period of four years commencing one year from the date of this Prospectus. The
Redeemable Warrants underlying the Underwriter's Warrants are exercisable at a
price of $7.50 per share of Common Stock.
NOTE P -- PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following represents the unaudited pro forma, as adjusted balance sheet
and statement of operations of the Company as if the Proposed Public Offering
(note O) occurred on September 30, 1996. The pro forma, as adjusted condensed
financial statements are unaudited and have been prepared using the historical
financial statements of the Company, and are qualified entirely by reference to,
and should be read in conjunction with, such historical financial statements.
The pro forma, as adjusted financial statements are provided for informational
and comparative purposes only. The pro forma, as adjusted financial statements
do not purport to be indicative of the results of operations and financial
position of the Company had such transactions in fact occurred on September 30,
1996 or during the periods presented or during any future period.
The unaudited pro forma, as adjusted balance sheet as of September 30, 1996
is as follows:
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
SEPTEMBER 30, PRO FORMA SEPTEMBER 30,
1996 ADJUSTMENTS 1996
------------- -------------- -------------
ASSETS
<S> <C> <C> <C>
Current assets............................................ $ 818,301 $ 5,520,750 (1) $ 4,416,591
$ (408,496)(2)
$ (700,000)(3)
$ (800,000)(4)
$ (13,964)(3)(4)
Equipment and leasehold improvements...................... 1,401,627 -- 1,401,627
Other..................................................... 3,381,887 $ (3,074,854)(3)(4) 27,347
$ (58,936)(3)(4)
$ (220,750)(5)
------------- -------------
$ 5,601,815 $ 5,845,565
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities....................................... $ 623,253 $ (43,200)(2) $ 580,053
Long-term debt............................................ 2,053,764 $ (365,296)(2) 188,468
$ (800,000)(4)
$ (700,000)(3)
Other liabilities......................................... 32,598 -- 32,598
Shareholders' equity...................................... 2,892,200 $ 5,520,750(1) 5,044,446
$ (3,074,854)(3)(4)
$ (58,936)(3)(4)
$ (13,864)(3)(4)
$ (220,750)(5)
------------- -------------
$ 5,601,815 $ 5,845,565
------------- -------------
------------- -------------
</TABLE>
F-18
<PAGE>
INDEPENDENCE BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE P -- PRO FORMA FINANCIAL INFORMATION (UNAUDITED) -- (CONTINUED)
The unaudited pro forma, as adjusted statement of operations for the nine
months ended September 30, 1996 is as follows:
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
SEPTEMBER 30, PRO FORMA SEPTEMBER 30,
1996 ADJUSTMENTS 1996
------------- ------------- --------------
<S> <C> <C> <C>
Net sales................................................. $ 404,622 $ 404,622
Cost of goods sold........................................ 582,098 582,098
------------- --------------
Gross loss.............................................. (177,476) (177,476)
Advertising, promotional and selling expenses............. 101,468 101,468
General and administrative expenses....................... 277,010 277,010
Interest expense.......................................... 151,918 $ 3,074,854(3)(4) 3,299,672
$ 58,936(3)(4)
$ 13,964(3)(4)
Other income, net 19,873 19,873
------------- --------------
Loss before income taxes................................ (687,999) (8,835,753)
Income taxes.............................................. -- --
NET LOSS................................................ $ (687,999) $ (3,835,753)
------------- --------------
------------- --------------
Net loss per common share................................. $ (0.31) $ (1.23)
------------- --------------
------------- --------------
Weighted average shares outstanding....................... 2,229,773 3,129,773
------------- --------------
------------- --------------
</TABLE>
Notes to the unaudited pro forma, as adjusted financial statements are as
follows:
(1) The sale of 900,000 shares of Common Stock and 4,000,000 Redeemable
Warrants in connection with this offering at an assumed initial public
offering price of $5.00 and $0.50, respectively, net of underwriting
discounts, commissions and offering expenses (note O).
(2) Repayment of the Company's SBA loan of $408,496 (note F).
(3) Reflects the write-off of unamortized original issue discount of
$1,851,090 and write-off of deferred financing costs of $27,736 as a
result of the redemption of $700,000 of Series B Preferred Stock and
accrued dividends of $4,628 (note L).
(4) Reflects the write-off of unamortized original issue discount of
$1,223,764 and write-off of deferred financing costs of $31,200 as a
result of the repayment of the $800,000 of convertible debentures and
accrued interest of $9,336 (note L).
(5) Eliminations of deferred issuance costs.
F-19
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary............................... 3
Risk Factors..................................... 6
Use of Proceeds.................................. 17
Dividend Policy.................................. 18
Dilution......................................... 19
Capitalization................................... 20
Selected Financial Data.......................... 21
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 22
Business......................................... 27
Management....................................... 38
Principal Shareholders........................... 42
Certain Transactions............................. 43
Description of Securities........................ 46
Shares Eligible for Future Sale.................. 50
Underwriting..................................... 51
Legal Matters.................................... 53
Experts.......................................... 53
Additional Information........................... 53
Index to Financial Statements.................... F-1
------------------------
UNTIL MARCH 8, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
INDEPENDENCE BREWING
COMPANY
[ LOGO ]
900,000 SHARES OF
COMMON STOCK
AND
4,000,000 REDEEMABLE WARRANTS
------------------------
PROSPECTUS
------------------------
A.S. GOLDMEN & CO., INC.
FEBRUARY 11, 1997
================================================================================
<PAGE>
