As filed with the Securities and Exchange Commission on April 24, 1997
Registration No. 333-________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
FREDERICK BREWING CO.
(Name of registrant as specified in its charter)
Maryland 52-1769647
(State or Jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
4607 Wedgewood Boulevard Kevin E. Brannon
Frederick, Maryland 21703 4607 Wedgewood Boulevard
(301) 694-7899 Frederick, Maryland 21703
Facsimile (301) 694-2971 (301) 694-7899
(Address, including zip code, and telephone number, including area code (Name,
address, including zip code, and of Registrant's principal executive offices)
telephone number, including area code, of agent for service)
COPY TO:
Jehu Hand, Esq.
Hand & Hand
24901 Dana Point Harbor Drive, Suite 200
Dana Point, California 92629
(714) 489-2400
Facsimile (714) 489-0034
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after the effective date of this registration
statement.
If the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant
to Rule 415 under the Securities Act of 1933 other than securities offered only
in connection with dividend or
interest reinvestment plan, please check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box:
[ ]
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CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to Offering Price Aggregate Amount of
Securities to be Registered Be Registered Per Share(1) Offering Price Registration Fee
<S> <C> <C> <C> <C>
Common Stock issuable upon
conversion of Series B
convertible Preferred Stock(2)....... 1,071,376 $4.125 $4,415,301.00 $1,337.97
Common Stock offered by
selling shareholder(3)............... 56,250 $4.125 $232,031.25 $ 70.31
Common Stock, issuable upon
exercise of warrants(4).............. 100,000 $4.375 $437,500.00 $132.58
Common Stock, issuable upon
exercise of warrants(5).............. 100,000 $4.875 $487,500.00 $147.73
Common Stock, issuable upon
exercise of options(6)(7)............ 100,000 $4.125 $412,500.00 $125.00
Common Stock, issuable upon
exercise of options(8)............... 100,000 $4.80 $ 480,000.00 $ 145.45
Common Stock, issuable upon
exercise of options(9)............... 100,000 $5.60 $ 560,000.00 $ 169.70
Common Stock, issuable upon
exercise of options(10).............. 100,000 $6.40 $ 640,000.00 $ 193.94
Common Stock, issuable upon
exercise of options(11).............. 100,000 $7.20 $ 720,000.00 $ 218.18
Common Stock, issuable upon
conversion of 8% Cumulative
Convertible Preferred Stock,
Series A, par value $.01(12)......... 251,660 $4.125 $1,038,097.50 $314.58
Common Stock, issuable upon
exercise of warrants(13)............. 25,000 $5.00 $ 125,000.00 $ 37.87
Common Stock, issuable upon
exercise of warrants(14)............. 28,360 $5.29 $ 150,024.40 $ 45.46
Common Stock, issuable upon
exercise of warrants(7)(15).......... 28,785 $4.125 $ 118,738.12 $ 35.98
Total(16).............................. 2,161,431 $ 9.816,692.20 $ 2.974.75
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(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes 1,071,376 shares issuable upon conversion of 3,750 shares
($3,750,000 aggregate principal amount) of Series B Convertible Preferred
Stock at 70% of the closing bid price of the Common Stock averaged over
the five trading days prior to the date of conversion. The maximum
offering price per share is based upon the closing price of the Common
Stock on April 18, 1997, or $4.125 since it is higher than the estimated
conversion price per share of the Series B Convertible Preferred Stock
(in accordance with Rule 457(g)).
(3) Includes 56,250 shares issued in connection with the placement of the
Series B Convertible Preferred Stock.
(4) Includes 100,000 shares issuable upon exercise of warrants to purchase
100,000 shares at $4.375.
(5) Includes 100,000 shares issuable upon exercise of warrants to purchase
100,000 shares at $4.875. (6) Includes 100,000 shares issuable upon exercise of
options at $4.00 per share. (7) The maximum offering price per share is based
upon the closing price of the Common Stock on April 18, 1997, or $4.125 since it
is
higher than the exercise price of the option (in accordance with Rule
457(g)).
(8) Includes 100,000 shares issuable upon exercise of options at $4.80 per
share.
(9) Includes 100,000 shares issuable upon exercise of options at $5.60 per
share.
(10) Includes 100,000 shares issuable upon exercise of options at $6.40 per
share.
(11) Includes 100,000 shares issuable upon exercise of options at $7.20 per
share.
(12) Includes 251,660 shares of common stock issuable upon conversion of 1,848
shares of 8% Cumulative Convertible Preferred Stock, Series A ($924,000
aggregate principal amount) at an average conversion price of $3.67 per
share. The maximum offering price per share is based upon the closing
price of the Common Stock on April 18, 1997, or $4.125 since it is higher
than the estimated conversion price per share of the 8% Cumulative
Convertible Preferred Stock, Series A (in accordance with Rule 457(g)).
(13) Includes 25,000 shares issuable upon exercise of warrants at $5.00 per
share until December 31, 2001. (14) Includes 28,360 shares issuable upon
exercise of warrants at $5.29 per share until November 19, 1999. (15) Includes
28,785 shares issuable at $3.21 per share until February 28, 2000. (16) Includes
in each case reoffers of the Common Stock offered hereby and shares issuable
pursuant to antidilution provisions pursuant to
Rule 416.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION
PROSPECTUS
FREDERICK BREWING CO.
2,161,431 Shares of Common Stock
($.00004 par value)
The estimated 2,161,431 shares (the "Shares") of Common Stock, par value
$.00004 per share (the "Common Stock") of Frederick Brewing Co., a Maryland
corporation (the "Company") are being offered by the selling stockholders (the
"Selling Stockholders") and include 251,660 shares issuable upon conversion of
$924,000 in principal amount of 8% Cumulative Convertible Preferred Stock,
Series A (the "Series A Preferred"), an estimated 1,071,376 shares issuable upon
conversion of $3,750,000 in principal amount of Series B Convertible Preferred
Stock (the "Series B Preferred"), 782,145 shares issuable upon exercise of
warrants and options, and 56,250 shares currently outstanding. The Company will
not receive any proceeds from the sale of Common Stock by the Selling
Stockholders. See "Selling Stockholders." The expenses of the offering,
estimated at $20,000, will be paid by the Company.
The Common Stock currently trades on NASDAQ under the symbol "BLUE" On
March 26, 1997, the last sale price of the Common Stock as reported on NASDAQ
was $4.375 per share.
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 ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PURCHASE OF THESE SECURITIES INVOLVES RISKS. See Risk Factors.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
The date of this Prospectus is ___________, 1997
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No person has been authorized in connection with this offering to give any
information or to make any representation other than as 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. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any
securities covered by this Prospectus in any state or other jurisdiction to any
person to whom it is unlawful to make such offer or solicitation in such state
or jurisdiction. Neither the delivery of this Prospectus nor any sales made
hereunder shall, under any circumstances, create an implication that there has
been no change in the affairs of the Company since the date hereof.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, as well as proxy statements and
other information filed by the Company with the Commission, can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at its Regional
Offices located at 7 World Trade Center, New York, New York 10048, and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained at prescribed rates from the Public
Reference Section of the Commission, Washington, D.C. 20549, during regular
business hours. The Commission maintains a Web site that contains reports, proxy
and information statements and other information regarding issuers such as the
Company that file electronically with the Commission at http.//www.sec.gov.
This Prospectus incorporates by reference the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996, and the description of
securities included in the Company's Registration Statement on Form 8-A, File
No. 0-27800, and all other documents subsequently filed by the Company pursuant
to Section 13(a), 13(c) or 14 of the Exchange Act prior to the termination of
the offering made hereby. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete, and in
each instance reference is made to the copy of such contract or document filed
as an exhibit to the Registration Statement, each such statement being qualified
in its entirety by such reference. The Company will provide, without charge upon
oral or written request of any person, a copy of any information incorporated by
reference herein. Such request should be directed to the Company at 4607
Wedgewood Boulevard, Frederick, Maryland 21703, telephone (301) 694-7899.
INDEMNIFICATION
Pursuant to the Company's Articles of Incorporation, as amended, the
Company may indemnify each of its directors and officers with respect to all
liability and loss suffered and reasonable expense incurred by such person in
any action, suit or proceeding in which such person was or is made or threatened
to be made a party or is otherwise involved by reason of the fact that such
person is or was a director of the Company. In addition, the Company may pay the
reasonable expenses of indemnified directors and officers incurred in defending
such proceedings if the indemnified party agrees to repay all amounts advanced
should it be ultimately determined that such person is not entitled to
indemnification.
In addition, as permitted by the Maryland General Corporation Law, the
Company's Articles of Incorporation provides that the Company's directors will
not be held personally liable to the Company or its stockholders for monetary
damages for a breach of fiduciary duty as a director except to the extent such
exemption from liability or limitation thereof is not permitted under the
Maryland General Corporation Law. This provision does not eliminate the duty of
care, and injunctive or other forms of non-monetary equitable relief will remain
available under Maryland law. In addition, each director continues to be liable
for monetary damages for (i) misappropriation of any corporate opportunity in
violation of the director's duties, (ii) acts or omissions in bad faith or
involving intentional dishonesty, (iii) knowing violations of law, and (iv) any
transaction from which a director derives an improper personal benefit. The
provision does not affect a director's responsibilities under any other law,
such as the federal securities laws of state or federal environmental laws.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the information
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety.
The Company
The Company's principal executive offices are located at 4607 Wedgewood
Boulevard, Frederick, Maryland 21703. Its telephone number is (301) 694-7899 and
its fax number is (301) 694-2971.
The Offering
Securities Offered:
...................... An estimated 2,161,431 shares of Common Stock,
$.00004 par value per share, including 251,660 shares
issuable upon conversion of 1,848 shares of Series A
Preferred, an estimated 1,071,376 shares issuable upon
conversion of 3,750 shares of Series B Preferred Stock
at a conversion price per share of Preferred Stock equal
to $1,000 divided by 70% of the average closing bid
price of the Common Stock on the five trading days
prior to conversion, 782,145 shares issuable upon
exercise of warrants and options, and 56,250 shares
currently outstanding.
Common Stock Outstanding(1) Before Offering:............. 1,954,876(1) shares
Common Stock Outstanding After Offering:................. 4,116,307(1) shares
NASDAQ symbol............................................ BLUE
(1) Based on shares outstanding as of March 31, 1997. The 56,250 shares
offered which are already outstanding
were issued subsequent to March 31, 1997.
Risk Factors
Investment in the Shares offered hereby involves a high degree of risk,
including the limited operating history of the Company and competition.
Investors should carefully consider the various risk factors before investing in
the Shares. This Prospectus contains forward looking statements which may
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors." See "Risk Factors."
RISK FACTORS
The shares of Common Stock offered hereby are highly speculative and
involve a high degree of risk. The following risk factors should be considered
carefully in addition to the other information in this Prospectus before
purchasing the shares of Common Stock offered hereby. The discussion in this
Prospectus contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere herein.
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Limited Operating History; Past and Possible Future Operating Losses.
The Company was founded in March 1992 and has operated at a loss for each year
since such date. As of December 31, 1996 the cumulative loss since inception was
$3,088,109. The Company's limited operating history makes the prediction of
future sales and operating results difficult. Accordingly, although the Company
has experienced sales growth, such growth should not be considered indicative of
future sales growth, if any, or of future operating results. There can be no
assurance that the Company's sales will grow or be sustained in future periods
or that the Company will become or remain profitable in any future period. Due
to the expenses involved in the expansion of the Company's operations in
connection with the completion of the new brewery (including increased overhead,
depreciation, marketing and salaries and its plan to increase production to
50,000 barrels per year), the Company does not expect to operate profitably for
approximately 12 to 24 months after the closing of its initial public offering
of Common Stock which occurred in March 1996.
Lack of Liquidity; Inadequate Working Capital; Default in Financial
Covenants. The Company has, in the last twelve months spent a significant amount
of working capital on machinery and equipment and on salaries and benefits and
advertising, all in connection with the completion of the Company's new brewery,
the expansion of its brewing capacity and its attempts to increase demand for
its products. In addition, growth in sales has not been sufficient to fund such
expenditures. As a consequence thereof, the Company has been required to obtain,
by the sale of the Series A Preferred and Series B Preferred, additional working
capital for the hiring and training of administrative and sales personnel and
the payment of certain promotional, marketing and advertising expenses in
connection with the commencement of full production at the new brewery which
occurred in March 1997.
In connection with the construction of the new brewery and the purchase
of brewing and other equipment, MEDCO issued $4.5 million in taxable economic
development bonds on July 19, 1996, including $1.5 million borrowed by the
Company to purchase brewery equipment for the new brewery (the "FBC Facility")
and $3.0 million loaned to a partnership controlled by affiliates of the Company
to construct the brewery (the "Blue II Facility"), and the Company borrowed an
additional $976,000 from Signet Bank in a Bridge Loan (which it expects to
refinance with an SBA loan in April 1997). On January 22, 1997, Signet declared
the Bridge Loan in default and on February 3, 1997 advised the Company that it
was in default with respect to the FBC Facility. The primary causes of these
alleged defaults were (a) cost overruns of $340,000, in the construction of the
new brewery; and (b) a $250,000 deficiency between the amount of the FBC
Facility and the cost of the new equipment. On February 27, 1997 the Company
entered into two Forbearance Agreements with Signet. The terms of the
Forbearance Agreement with respect to the Blue II Facility were complied with
(including by the issuance of 630 shares of Series A Preferred to the general
contractor of the brewery building) and all defaults were cured by March 27,
1997; the Forbearance Agreement with respect to the FBC facility required that
the Company maintain Eligible Accounts Receivable (as defined) of not less than
$100,000 until March 31, 1997 and $200,000 thereafter, tested twice monthly; and
required the personal guaranty of the Chief Executive Officer and the President.
Furthermore, the FBC Facility and the Blue II Facility imposed additional
restrictive covenants which the Company did not comply with as of December 31,
1996 and for which it has obtained a waiver from Signet. There can be no
assurance that the Company will not incur additional defaults under the Bridge
Loan, the Blue II Facility, or the FBC Facility. If such defaults occur and are
not waived by Signet, it would have a material adverse effect upon the Company.
Possible Need for Additional Financing. The Company has received an
approval from an SBA development company for a $1,000,000 SBA loan, subject to
final SBA approval, to refinance the $969,000 Signet Bridge Loan. Although the
Company expects that the loan will close in April 1997, there can be no
assurance that such SBA loan will close, will close pursuant to the terms of the
approval, will close in a timely fashion, or that the terms of the approvals
will not be altered or revised. In addition, the Company intends to continue to
expend funds to increase its market share in the states where its products are
currently being sold and, possibly, in other states in the future. The failure
of the SBA loan to close as planned and/or the additional marketing costs may
require additional funds not currently available to the Company. Accordingly,
the Company may require additional debt or equity financing for these or other
general corporate purposes. There can be no assurance that the Company will be
able to obtain additional debt or equity financing on terms favorable to the
Company, or at all, or if obtained, there can be no assurance that such debt or
equity financing will be sufficient for the financing needs of the Company.
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Heavy Dependence on Wholesale Distributors. The Company distributes its
products only through independent wholesale distributors for resale to retailers
such as liquor and wine and beer stores, restaurants, taverns, pubs, bars and
sporting arenas. Accordingly, the Company is dependent upon these wholesale
distributors to sell the Company's beers and to assist the Company in creating
demand for, and promoting market acceptance of, the Company's products and
providing adequate service to its retail customers. There can be no assurance
that the Company's wholesale distributors will devote the resources necessary to
provide effective sales and promotion support to the Company.
Dependence on Major Customers. Sales to The Kronheim Co., Inc.,
Baltimore, Maryland ("Kronheim"), the Company's largest wholesale distributor,
represented 50.6%, 35.7% and 56.5% of the Company's revenues in 1996, 1995 and
1994. Sales to all other wholesale distributors represented 49.4%, 64.3% and
43.5% of the Company's revenues in 1996, 1995 and 1994. (The 1994 percentages
for sales to other wholesale distributors include beer sold directly to
retailers by the Company.) The Company expects sales to its largest wholesale
distributor to continue to represent a significant portion of its sales in the
near term. The Company believes that its future growth and success will continue
to depend in large part upon the significant wholesale distributor, but such
dependence should decrease as the Company expands its market area.
No Assurance of Continued Wholesale Distributor Support. If Kronheim or
any other significant wholesale distributor were to discontinue selling, or
decrease the level of orders for, the Company's products, the Company's business
would be adversely affected in the areas serviced by such wholesale distributors
until the Company retained replacements. There can be no assurance however that
the Company would be able to replace a significant wholesale distributor in a
timely manner or at all in the event it were to discontinue selling the
Company's products. In addition, there is always a risk that the Company's
wholesale distributors will give higher priority to the products of other
beverage companies, including products directly competitive to the Company's
beers, thus reducing their efforts to sell the Company's products. The risk is
exacerbated by the fact that many of the Company's wholesale distributors (not
including Kronheim) are reliant on the beers of one of the major domestic beer
producers for a large percentage of their revenues and, therefore, may be
influenced by such producer. The Company's distributors are not contractually
committed to make future purchases and therefore could discontinue carrying the
Company's products in favor of a competitor's product or another beverage at any
time or for any reason.
If any of the Company's significant wholesale distributors were to
experience financial difficulties, or otherwise become unable or unwilling to
promote or sell the Company's products, the Company's results of operations
would be adversely affected. Many of the Company's distribution agreements
(other than its agreement with Kronheim which does not specify such a date)
permit their termination upon 90 days' prior notice. The Company's ability to
terminate poorly performing distributors may be hindered by laws that restrict
the Company's right to terminate the services of its wholesale distributors.
There can be no assurance that the Company will be able to attract reliable,
effective new distributors in markets it will enter as a result of its planned
geographic expansion or that the Company's business will not be adversely
affected by the loss or declining performance of any of its current or future
wholesale distributors.
Intense and Increasing Competition. The Company competes in the
specialty or craft beer segment of the domestic beer market. The principal
competitive factors affecting the market for the Company's beers include product
quality and taste, distribution capabilities, brand recognition, packaging and
price. There can be no assurance that the Company will be able to compete
successfully against current and future competitors based on these and other
factors. The Company competes with a variety of domestic and international
brewers, many of whom have substantially greater financial, production,
distribution and marketing resources and have achieved a higher level of brand
recognition than the Company.
The Company anticipates increased competition in the specialty beer
segment from the major domestic brewers such as Anheuser-Busch Companies, Inc.
("Anheuser-Busch"), Miller Brewing Co. ("Miller") and Adolph Coors Co.
("Coors"), each of whom has introduced and is marketing fuller flavored beers
designed to compete directly in the specialty beer segment. These large domestic
brewers dominate the overall domestic beer market and the Company expects that
certain of these companies, with their superior financial resources and
established distribution networks, will continue to seek further participation
in the specialty beer segment through the acquisition
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of equity positions in, or the formation of distribution alliances with, smaller
craft brewers (such as Anheuser-Busch's equity position in, and distribution
agreement with, Redhook Ale Brewery, Incorporated).
The Company also faces and will face increasing competition from import
specialty beer companies such as Heineken N.V., Bass PLC and Guinness PLC and
existing domestic specialty and contract brewers such as The Boston Beer
Company, Inc., Pete's Brewing Co., Redhook Ale Brewery, Incorporated, Sierra
Nevada Brewing Co. and Anchor Brewing Co., as well as the regional specialty
brewers and local microbreweries in the markets where the Company distributes
its beers. Recent growth in the sales of specialty beers is expected to result
in increased competition in the segment, including a continuing proliferation of
microbrewers and efforts by micro and regional brewers to expand their
production capacity, marketing expenditures and geographical distribution areas.
Increased competition could result in price reductions, reduced profit margins
and loss of market share, all of which would have a material adverse effect on
the Company's financial condition and results of operations.
The Company's products also compete generally with other alcoholic
beverages, including products offered in other segments of the beer industry and
low-or-no-alcohol products. The Company competes with other beer and beverage
companies not only for consumer acceptance and loyalty but also for shelf and
tap space in retail establishments and for marketing focus by the Company's
wholesale distributors and their customers, all of which also distribute and
sell other beers and alcoholic beverage products. Finally, there can be no
assurance that the recent growth in consumer demand for craft beers will
continue, or even if such growth continues, that consumers will choose the
Company's beers.
Potential Fluctuations in Quarterly Results. The Company's quarterly
operating results have in the past and may in the future vary significantly
depending on factors such as fixed and semi-variable operating costs during
periods when the Company's brewery is producing below maximum designed
production capacity, professional fees and expenses relating to the Company's
planned expansion, increased competition, fluctuations in the price of
ingredients or packaging materials, seasonality of sales of the Company's beers,
general economic factors, trends in consumer preferences, regulatory
developments, including changes in excise and other tax rates, changes in the
sales mix between kegs and bottles, changes in average selling prices or market
acceptance of the Company's beers, increases in packaging and marketing costs
associated with initial production of new products and variations in shipping
and transportation costs.
The Company's operating results may be significantly impacted in the
future by, among other things, the timing of the construction of the new brewery
and the costs attendant to the commencement of production there, the timing of
new product announcements by the Company or its competitors, the impact of
increasing average federal and state excise tax as sales volume increases, the
timing of new advertising and promotional campaigns by the Company and other
expansion activities engaged in by the Company. The Company's expense levels are
based, in part, on its expectations of future sales levels. If sales levels are
below expectations, operating results are likely to be materially adversely
affected, In particular, because the Company operates its own production
facility, a significant portion of its overhead is fixed and cannot be reduced
for short-term adjustments such as sales below management's expectations, and an
excess of production capacity could therefore have a significant negative impact
on the Company's operating results. However, the Company has historically
operated with little or no backlog. The absence of backlog increases the
difficulty of predicting sales and operating results. In addition, the Company's
decision to undertake a significant media advertising campaign in 1997 could
substantially increase the Company's expenses in a particular quarter, while any
increase in sales from such advertising may be realized in subsequent periods.
Based upon the risks of potential fluctuations in quarterly results
discussed above and seasonality and the unpredictability of demand, discussed
below, the Company believes that quarterly sales and operating results are
likely to vary significantly in the future and that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Further, it is possible that
in some future quarter the Company's revenues or operating results will be below
the expectations of public market analysts and investors. In such event, the
price of the Company's Common Stock could be materially adversely affected.
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Sales Fluctuations Due to Seasonality. The Company's wholesale
distributors have historically experienced higher sales in the second and fourth
quarters of the calendar year due to increased consumption of the Company's
beers during periods of warmer weather and from Halloween through New Year's
Day. Although the Company has not yet experienced sale fluctuations due to
seasonality because the Company has continued to expand its wholesale
distribution network over the past three years, fluctuations in the Company's
sales due to seasonality may become evident in the future as the Company's sales
increase.
No Assurance of Geographic Expansion. While Frederick Brewing has
recently expanded in distribution network in Virginia, Pennsylvania, New Jersey
and Delaware, sales in Maryland accounted for over 62.8% of the Company's sales
in 1996. The Company has only recently identified and appointed distributors and
established distribution in Virginia, Pennsylvania, New Jersey and Delaware. The
Company's continued growth depends upon its ability to expand sales in these and
other new regions. There can be no assurance that the Company's efforts to
expand sales in new regions will be successful or that such expansion can be
accomplished on a profitable basis. The Company's timely and successful
expansion of sales will depend on a number of factors, including competition,
the continue promotion and sale of the Company's products by suitable local
wholesale distributors, the retention of skilled sales and other personnel, the
ability to adapt management and other operational systems to accommodate
increased volume, the success of advertising and promotion campaigns, and other
factors, some of which are beyond the control of teh Company. Furthermore,
consumer tastes vary by region and there can be no assurance that consumers
located in new geographic regions will be receptive to the Company's beers. The
Company believes that consumer demand for its products is greater in certain
areas than others due to demographic, economic and other factors. The Company's
efforts to increase sales by further penetrating market areas may be limited by
such factors. The inability of the Company to expand sales in a timely manner
would have a material adverse effect on the Company's operating results and
financial condition.
Limited Product Line. The sale of a limited number of styles of beers
has accounted for substantially all of the Company's revenues since inception.
The Company currently offers five styles of beer year-around and usually one
seasonal brew during any part of the year, and 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 continued
market acceptance of these products. There can be no assurance that the
Company's beers will continue to achieve market acceptance. A decline in the
demand for any of the Company's beers as a result of competition, changes in
consumer tastes and preferences, government regulation or other factors would
have a material adverse effect on the Company's operating results and financial
condition. In addition, there can be no assurance that the Company will be
successful in developing, introducing and marketing additional new beers that
will sustain sales growth in the future.
No Assurance of Future Ability to Satisfy Changing Consumer
Preferences. The craft beet market is highly competitive and characterized by
changing consumer preferences and continuous introduction of new products. The
Company intends to introduce new products from time to time to maintain
wholesale distributor and retailer interest and appeal to varying consumer
preferences and to create consumer demand. The Company believes that its future
growth will depend, in part, on its ability to anticipate changes in consumer
preferences or to create consumer demand and develop and introduce, in a timely
manner, new beers that adequately address such changes. There can be no
assurance that the Company will be successful in developing, introducing and
marketing new products on a timely basis. If the Company is unable to introduce
new products or if the Company's new products are not successful, the Company's
sales may be adversely affected as customers seek competitive products. In
addition, the introduction of new products by the Company could result in
reduction of sales of the Company's existing beers, requiring the Company to
manage carefully product introductions in order to minimize disruption in sales
of existing products. There can be no assurance that the introduction of new
product offering by the Company will not cause wholesale distributors, retailers
and consumers to reduce purchases or consumption of existing Company products.
Such reduction of purchases or consumption could have a material adverse effect
on the Company's operating results and financial condition.
No Assurance of Future Consumer Demand for Craft Beer. The craft beer
segment of the domestic beer market has grown dramatically over the past decade.
The Company believes that one factor in such growth has been consumer demand for
more flavorful beers offered in a wider variety of styles. No assurance can be
given, however,
7
<PAGE>
that consumer demand for craft beers will continue in the future. The Company's
success also depends upon a number of factors related to the level of
discretionary consumer spending, including the general state of the economy,
federal and state tax laws and consumer confidence in future economic
conditions. Changes in consumer spending can affect both the quantity and the
price of the Company's products and may therefore affect the Company's operating
results. For example, reduced consumer confidence and spending may result in
reduced demand for the Company's products, limitations on its ability to
increase or maintain prices and increases in required levels of selling,
advertising and promotional expenses.
No Assurance of Future Satisfaction of Demand. The production schedule
for the Company's beers is based on forecasts of the Company's sales in general
and the rate of sales of each of the Company's styles of beer. The Company
currently has the flexibility to modify short-term production schedules and is
currently able, on a short-term basis, to satisfy fully most changes in demand
for its product. The ability of the Company to estimate demand may be less
precise during periods of rapid growth or with respect to new products. The
failure of the Company to accurately forecast its sales could lead to inventory
shortages or surpluses that could adversely affect results of operations and
lead to further fluctuations in quarterly operating results.
Dependence on Certain Suppliers. The Company purchases from, and is
dependent upon, its suppliers for certain agricultural ingredients and packaging
materials used in the Company's products. Although to date the Company has been
able to obtain adequate supplies of these ingredients and materials in a timely
manner from existing sources and has changed suppliers from time to time with
minimal disruption, if the Company were unable to obtain sufficient quantities
of ingredients and materials, delays or reductions in product shipments could
occur which would have a material adverse effect on the Company's financial
condition and results of operations. To date, the Company has not experienced
material difficulties in obtaining timely delivery from its suppliers. Although
the Company believes that there are alternative sources available for its raw
materials, there can be no assurance that the Company will be able to acquire
these products from other sources on a timely or cost-effective basis if current
suppliers are unable to supply them. In 1996, the Company experienced a
significant increase in the price of its ingredients and packaging materials.
Except for suppliers who provide glass bottles and corrugated cardboard cartons,
the Company does not have long-term purchase contracts with its suppliers. The
loss of a material supplier could materially adversely affect the Company's
results of operations and financial condition if there were a delay in shipments
from the alternative suppliers.
As with most agricultural products, the supply and price of raw
materials used to product 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. To the extent that any of the foregoing affects the
ingredients used to produce the Company's beers, the Company's results of
operations would be materially and adversely affected. In addition, the Company
keeps only approximately a 30 day supply of hops and a seven day supply of malt
on its premises. Moreover, its purchases are limited to pre-packaged quantities,
rather than in bulk. Therefore, the Company is highly dependent upon the ability
of its suppliers to deliver its ingredients in a timely fashion. Such delivery,
which is by truck, is dependent upon certain factors beyond the control of the
Company, including but not limited to weather and labor relations. The Company's
operations are dependent upon its ability to accurately forecast its need for
ingredients. Any failure by the Company to accurately forecast its requirements
of raw materials could result in the Company either being unable to meet higher
than anticipated demand for its products or producing excess inventory, either
of which may adversely affect the Company's results of operations.
Ability to Manage Growth. The Company has experienced rapid growth that
has resulted in new and increased responsibilities for management personnel
which has challenged and continues to challenge the Company's management,
operating and financial systems and resources. To compete effectively and manage
future growth, if any, the Company will be required to continue to implement and
improve its operational, financial and management information systems,
procedures and controls on a timely basis and to expand, train, motivate and
manage its work force. There can be no assurance that the Company's personnel,
systems, procedures and controls will be adequate to support the Company's
existing and future operations. Any failure to implement and improve the
Company's operational, financial and management systems or to expand, train,
motivate or manage employees could have a material adverse effect on the
Company's operating results and financial condition.
8
<PAGE>
No Assurance of Ability to Protect Intellectual Property Rights. The
Company considers its trademarks and pending trademarks, particularly the "Blue
Ridge" brand names, proprietary beer recipes and the design of product
packaging, advertising and promotional design and art work (the "Intellectual
Property") to be of considerable value and critical to its business. The Company
relies on a combination of trade secret, copyright and trademark laws,
non-disclosure, non-competition and other arrangements to protect its
proprietary rights. However, the Company has discovered that the "Blue Ridge"
name has been used by other companies, some of whom directly or indirectly
compete with the Company. In January 1995, the Company entered into an agreement
with a contract brewer to stop that contract brewer from using the Blue Ridge
name and to acquire any federal trademark rights that such brewer had to the
name "Blue Ridge Lager" at a cost to the Company of approximately $7,900
(excluding legal fees and expenses). The Company applied for trademark
protection on its "Blue Ridge" brands in 1994, 1995 and 1996 and there can be no
assurance that trademarks will be issued by the U.S. Patent and Trademark
Office. Failure to obtain trademark protection could have a material adverse
effect upon the Company's results of operations and financial condition. In
addition, despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy or obtain and use information that the
Company regards as proprietary. There can be no assurance that the steps taken
by the Company to protect its proprietary information will be adequate to obtain
the legal protection sought or will prevent misappropriation of such information
and such protection may not preclude competitors from developing confusingly
similar brand names or promotional materials or developing products with taste
and other qualities similar to the Company's products.
Risk of Third Party Claims of Patent Infringement. While the Company
believes that its Intellectual Property does not infringe upon the proprietary
rights of third parties, there can be no assurance that the Company will not
receive future communications from third parties asserting that the Company's
Intellectual Property infringes, or may infringe, upon the proprietary rights of
third parties. The potential for such claims will increase as the Company
increases distribution in recently entered and new geographic areas. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation and diversion of management's attention, cause product distribution
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
economical or acceptable to the Company or at all. In the event of a successful
claim of infringement against the Company and failure or inability of the
Company to license the infringed or similar proprietary information, the
Company's operating results and financial condition could be materially
adversely affected.
Dependence on Key Personnel. The Company's success depends to a
significant degree upon the continuing contributions of, and on its ability to
attract and retain, qualified management, sales, production and marketing
personnel, particularly Kevin E. Brannon, Chairman of the Board and Chief
Executive Officer, Marjorie A. McGinnis, President, Steven T. Nordahl, Vice
President - Brewing Operations and Craig J. O'Connor, Vice President - Finance
and Administration. The Company entered into employment agreements with each of
these officers in 1996. Prior to their employment by the Company, none of these
officers had prior experience in the brewing industry or significant business
experience. The competition for qualified personnel is intense and the loss of
any of such persons as well as the failure to recruit additional key personnel
in a timely manner, could adversely affect the Company. There can be no
assurance that the Company will be able to continue to attract and retain
qualified management and sales personnel for the development of its business.
Failure to attract and retain key personnel could have a material adverse effect
on the Company's operating results and financial condition.
Operating Hazards; No Assurance of Adequate Insurance. The Company's
operations are subject to certain hazards and liability risks faced by all
brewers, such as bottle flaws or potential contamination of ingredients or
products by bacteria or other external agents that may be accidentally or
wrongfully introduced into products or packaging. The Company's products are not
pasteurized and require careful product rotation to prevent spoilage. However,
neither spoiled beer nor the bacteria introduced in the brewing process is known
to be harmful to human health. The Company runs periodic diagnostic tests on all
of its products to assure that they meet Company quality control guidelines and
comply with federal and state regulatory requirements. While the Company has not
experienced a serious contamination problem in its products, the occurrence of
such a problem could result in a costly product recall and serious damage to the
Company's reputation for product quality. The Company's operations are also
subject to certain injury and liability risks normally associated with the
operation and possible malfunction of brewing and packaging equipment. Although
the Company maintains insurance against certain risks under various
9
<PAGE>
general liability and product liability insurance policies, there can be no
assurance that the Company's insurance will be adequate.
Government Regulation. The Company's business is highly regulated by
federal, state and local laws and regulations. The Company must comply with
extensive laws and regulations regarding such matters as state and regulatory
approval and licensing requirements, trade and pricing practices, permitted and
required labeling, advertising, promotion and marketing practices, relationships
with distributors and related matters. For example, federal and state regulators
require warning labels and signage on the Company's products. The Company
believes that it has obtained all regulatory permits and licenses necessary to
operate its business in teh states where the Company's products are currently
being distributed. Failure on the part of the Company to comply with federal,
state or local regulations could result in the loss or revocation or suspension
of the Company's licenses, permits or approvals and accordingly could have a
material adverse effect on the Company's business. In addition, changes to
federal and state excise taxes on beer production, federal, state and local
environmental regulations, including laws relating to packaging and waste
discharge, or any other laws or regulations which affect the Company's products
could have a material adverse effect on the Company's results of operations. The
federal government and each of the states levy excise tax of $18.00 per barrel
on every barrel of beer produced for consumption in the United States by each
brewing companies with annual production of over 2,000,000 barrels. The federal
excise tax for brewing companies with annual production under 2,000,000 barrels
is $7.00 per barrel on all barrels up to the first 60,000 barrels produced and
$18.00 per barrel for each barrel produced in excess of 60,000. Any increase in
the excise tax for small brewers could have a material adverse effect on the
Company's operating results and financial condition.
Public Attitudes Toward Alcohol Consumption. In recent years, there has
been an increase in the level of health-consciousness in the United States and
considerable debate has occurred concerning alcohol-related social problems,
such as alcoholism and drunk driving. In addition, a number of anti-alcohol
groups are advocating increased governmental action on a variety of fronts
unfavorable to the beer industry, including the legislation of new labeling or
packaging requirements and restrictions on advertising and promotion that could
adversely affect the sale of the Company's products. Restrictions on the sale
and consumption of beer or increases in the retail cost of beer due to increased
governmental regulations, taxes or otherwise, could materially and adversely
affect the Company's financial condition and results of operations.
Antitakeover Provisions in the Company's Corporate Documents. The
Company's Board of Directors has the authority to issue to up 1,000,000 shares
of preferred stock, $.01 par value per share (the "Preferred Stock"), of the
Company including the 1,848 shares of Series A Preferred and the 3,500 shares of
Series B Preferred which are already outstanding and to determine the price,
rights, preferences, privileges and restrictions thereof, including voting
rights, without any further vote or action by the Company's stockholders. The
voting and other rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The Company's Board may similarly issue
additional shares of Common Stock without any further vote or action by
stockholders. Such an issuance could occur in the context of another public or
private offering of shares of Common stock or Preferred Stock or in a situation
where the Common or Preferred Stock is used to acquire the assets or stock of
another company. The issuance of Common or Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no current plans to issue any
additional shares of Common or Preferred Stock other than as described herein.
See "Description of Securities."
Moreover, the Restated and Amended Articles of Incorporation
("Articles") and Restated and Amended Bylaws ("Bylaws") of the Company contain
certain provisions which, among other things, maintain a "staggered" Board of
Directors, limit the personal liability of, and provide indemnification for, the
directors of the Company, require that stockholders comply with certain
requirements before they can nominate someone for director or submit a proposal
before a meeting of stockholders, prohibit the ability of stockholders to call
special meetings of stockholders, limit the ability of stockholders to act by
written consent and require a supermajority vote of stockholders in the event
that a "related person" (as defined) attempts to engage in a business
combination with the Company.
10
<PAGE>
Potential Volatility of Stock Price. Stock prices of many growing
consumer-product companies fluctuate widely, often for reasons that are
unrelated to their actual operating performance. Announcement of new facilities
or products by the Company or its competitors, regulatory developments, and
economic or other external factors, as well as period-to-period fluctuations in
financial results, may have a significant impact on the market price and
marketability of the Common Stock. In the past, following periods of volatility
in the market price of a company's securities, securities class action
litigation has often been initiated against such company. Such litigation could
result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect upon the Company's
operating results and financial condition.
Certain Related-Party Transactions. The Company has borrowed money from
time to time to provide cash for operations and for other corporate purposes
from its directors, stockholders and persons having business relationships with
its directors. In addition, the Company leases its brewery from a company which
is owned, in part, by one of the Company's directors and by other affiliated
persons.
Limitations on Liability of Management. The Company has adopted
provisions in its Articles that eliminate to the fullest extent permissible
under Maryland law the liability of its directors for monetary damages except to
the extent that it is proved that the director actually received an improper
benefit or profit in money, property or services or the director's action or
failure to act was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. While it may
limit stockholder actions against the directors of the Company for various acts
of misfeasance, the provision is designed to ensure that the ability of the
Company's directors to exercise their best business judgment in managing the
Company's affairs, subject to their continuing fiduciary duties to the Company
and its stockholders, is not unreasonably impeded by exposure to potentially
high personal costs or other uncertainties of litigation.
Indemnification of Management. The Company's Articles consistent with
Maryland law, provide that the Company will indemnify and advance expenses to
any director, officer, employee or agent of the Company who is, or is threatened
to be made, a party to any action, suit or proceeding. Such indemnification
would cover the cost of attorney's fees as well as any judgment, fine or amounts
paid in settlement of such action provided that the indemnified party meets
certain standards of conduct necessary for indemnification under applicable law.
Such indemnity may or may not be covered by officer and director liability
insurance and could result in an expense to the Company even if such person is
not successful in the action. This provision is designed to protect such persons
against the costs of litigation which may result from his or her actions on
behalf of the Company.
11
<PAGE>
Selected Financial and Operating Data
The following selected financial and operating data should be read in
conjunction with the Company's financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Annual Report on Form 10-KSB delivered
concurrently with this Prospectus (the "Annual Report"). The balance sheet data
and statement of operations data as of and for the years ended December 31, 1996
and 1995 are derived from financial statements of the Company that have been
audited by Coopers & Lybrand L.L.P., independent accountants. The balance sheet
data and statement of operations data as of and for the years ended December 31,
1994, 1993 and 1992 are derived from financial statements of the Company that
are not included in the Annual Report. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in the Annual Report.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992(1)
(In thousands, except per share and barrel data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Sales $ 1,872 $ 1,832 $ 1,186 $ 106 $ --
Excise taxes 101 87 59 4 --
Cost of sales 1,744 1,253 847 89 --
Gross profit 27 492 280 13 --
Selling, general and
administrative expenses 2,041 831 470 259 22
Loss from operations (2,655) (339) (206) (246) (22)
Interest (expense), net (29) (79) (52) (11) --
Other income (expense) 42 5 (1) --
Loss before income taxes 2,625 (376) (253) (258) (22)
Provision for income taxes (17) (17) -- --
Net loss $ 2,625 $ (359) $ (270) $ (258) $ (22)
Net loss per share $ (1.45) $ (.30) $ (.24) $ (.29) $ (.04)
Shares used in per share
calculation(2) 1,805 1,205 1,122 887 596
Operating Data (In Barrels)(3):
Barrels sold 10,910 10,031 6,436 660 --
Net sales per barrel sold $ 162.32 $ 173.96 $ 175.11 $ 154.55 $ --
Gross profit per barrel sold 2.47 49.05 43.51 19.70 --
As of December 31,
1996 1995 1994 1993 1992
Balance Sheet Data:
Working Capital (deficit) $ 2 $ (199) $ (53) $ 5 $ 2
Total assets 4,766 1,659 1,316 723 32
Long-term debt, net of
current portion 1,723 303 481 315 --
Stockholders' equity 1,823 581 394 323 26
</TABLE>
(1) The Company was incorporated on March 4, 1992.
(2) See Note 2 of the Notes to the Financial Statements in the Annual
Report for an explanation of shares used in computing net loss per share.
(3) A barrel is equivalent to 31 gallons, two domestic kegs or 13.8 cases
of twenty-four 12 ounce bottles of beer. All barrels sold data is as of the
end of period.
12
<PAGE>
MARKET PRICE OF COMMON STOCK
The Company's Common Stock has been listed on the Automated Quotation
System of the National Association of Securities Dealers, Inc. (NASDAQ)
Small-Cap Market under the symbol "BLUE" since March 11, 1996. As of March 20,
1997 the last sale price as reported on NASDAQ was $4.375.
The following table sets forth the high and low bid prices for the
Common Stock as reported on NASDAQ for each quarter since March 11, 1996, the
closing date of the Company's initial public offering, for the periods
indicated. Such information reflects inter dealer prices without retail mark-up,
mark down or commissions and may not represent actual transactions.
Quarter Ended High Low
------------- ---- ---
March 31, 1996 7-1/4 5-1/4
June 30, 1996 5-3/4 4-7/8
September 30, 1996 5-1/4 4-1/4
December 31, 1996 5-1/8 3-7/8
March 31, 1997 4-5/8 4-1/8
(through March 20, 1997)
The Company has not paid any dividends on its Common Stock.
The Company currently intends to retain any earnings for use in its business,
and therefore does not anticipate paying cash dividends in the foreseeable
future.
As of March 20, 1997, there were approximately 1,500 record
holders of Company Common Stock.
13
<PAGE>
SELLING STOCKHOLDERS
The shares of Common Stock of the Company offered by the Selling
Stockholders (the "Shares") will be offered at market prices, as reflected on
NASDAQ. The shares include 56,250 shares currently outstanding as well as shares
being offered by the holders upon conversion of the Series A Preferred and the
Series B Preferred and shares being issued upon exercise of warrants and
options. The aggregate number of shares offered for resale upon conversion of
the Series B Preferred will be based on the conversion rate in effect at the
time of conversion. It is anticipated that registered broker-dealers will be
allowed the commissions which are usual and customary in open market
transactions.
The number of shares of Common Stock issuable upon conversion of each
of the 3,750 shares of Series B Preferred, and the consequent number of shares
of Common Stock available for resale under this Prospectus, is based upon a
conversion ratio which is $1,000 divided by 70% of the closing bid price of the
Common Stock on NASDAQ averaged over the five trading days immediately prior to
the date of conversion. The number of shares in the table below is based upon
the bid price on the date of this Prospectus, or $4.375, or approximately 285.7
shares of Common Stock per share of Series B Preferred. The Selling Stockholders
do not own any Common Stock except as registered hereby and will own no shares
after the completion of the offering. The relationship, if any, between the
Company and any Selling Stockholder is set forth below.
<TABLE>
<CAPTION>
Percent of
Number of Number of Common Stock
Series A Series B Number of Before
Name Preferred Shares Preferred Shares Common Shares Offering
<S> <C> <C> <C>
Arsden Financial SA 625 178,563 8.4%
Talb Bank E.C. 250 71,425 3.5
Joseph Havas 100 28,570 1.4
Colbo Kft 200 57,140 2.8
Matthew P.T. Holstein 25 7,143 *
Philip M. Holstein Jr. 50 14,285 *
Barry Seidman 750 214,275 9.9
Castle Creek Valley Ranch
Defined Benefit Pension Plan 50 14,285 *
Willorn Company Limited 500 142,850 6.8
Bruce R. Knox 100 28,570 1.4
Frederick A. Lenz 50 14,285 *
Jon Lane 50 14,285 *
Lee & Rich's Oyster Bar #2 Inc. 100 28,570 1.4
John T. Mitchell 50 14,285 *
Nostradamus, S.A. 500 142,850 6.8
Pegasus Investment Holdings Limited 100 28,570 1.4
Albert Yanni 100 28,570 1.4
Lampton, Inc. 150 42,855 2.1
Earl L. Bennet 20 2,605 1.4
David & Janelle K. Schmedt, JTROS 20 2,605 *
Thomas A. Luse 40 5,210 *
David A. & Toni A. McGill, JTROS 40 5,210 *
R. Dale Wiege 60 7,815 *
Evelyn Taghon, Trustee 20 2,605 *
Farmington Valley C/F D and
L. Helmreich IRA 88 11,462 *
James Zwicker 20 2,677 *
Frances Zarndt 20 2,835 *
Marvin Zwicker 20 2,754 *
14
<PAGE>
David Helmreich 100 13,769 *
James Schuyler 50 6,787 *
Robert Drehman 20 2,921 *
Steven Saunders 30 4,381 *
Robert A. Strausse 100 14,604 *
Farmington Valley C/F Dennis E. Kopp 40 5,842 *
Ryan Blentlinger 40 5,430 *
Daniel R. and Julie K. Roling, JTROS 20 2,715 *
William and Cynthia Mosier JTROS 20 2,715 *
Mark R. and Sharon I. Schlueter, JTROS 20 2,715 *
David A. Marrone 20 2,754 *
Marvin W. Solomonson 20 2,754 *
David and Janelle Schmedt, JTROS 20 2,754 *
Randy J. and Debbie Edmund, JTROS 20 2,715 *
Farmington Valley C/F
Michael M. Blentlinger 50 6,787 *
Michael M. Blentlinger 40 5,430
L.H. Granke 40 5,430 *
Ted Wurschmidt 20 2,715 *
Brian J. and Julie P. Berhorst, Trustee 20 2,715 *
Nancy B. Marshall 50 6,787 *
Farmington Valley C/F
Clayton W. Varner 20 2,715 *
Lewis, Blickham, Longlett & Timmerwilke
401K PS FBO John Longlett 20 2,715 *
Arley R. Whitsell 30 4,072 *
Rowlan L. Miller 60 8,144 *
Morgan Keller
General contractor for
company facilities 630 85,516 4.2
World Capital Funding, Inc.(1) 256,250 11.6
Corporate Relations Group, Inc.(2)
Financial Public
Relations Consultant 500,000 20.4
John Pfeiffer(3)
Consultant 25,000 1.3
Marvin W. Solomonson(4)
Placement Agent 28,785 1.5
Compass Capital, Inc.(5)
Consultant 28,360 1.4
-------- --------- ------------ ------
TOTALS 1,848 3,750 2,161,431 52.5%
</TABLE>
*less than 1%
(1) Includes 100,000 shares issuable upon exercise of options at $4.375 and
100,000 shares issuable upon
exercise of options at $4.875 per share.
(2) Represents shares exercisable at each of the following prices and
terms: 100,000 shares at $4.00 until March 27, 1998; 100,000 shares at
$4.80 until March 27, 1999; 100,000 shares at $5.60 until March 27,
2000; 100,000 shares at $6.40 until March 27, 2001; and 100,000 shares
at $7.20 until March 27, 2002.
(3) Represents 25,000 shares issuable upon exercise of warrants at $5.00
per share expiring December 31, 2001.
(4) Represents 28,785 shares issuable upon exercise of warrants at $3.21
per share until February 28, 2000.
(5) Represents 28,360 shares issuable upon exercise of warrants at $5.29 per
share until November 19, 1999.
15
<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
The Company's Articles of Incorporation authorizes the issuance of
9,000,000 shares of Common Stock, $.00004 par value per share, of which
1,954,876 shares were outstanding as of March 31, 1997. Holders of shares of
Common Stock are entitled to one vote for each share on all matters to be voted
on by the shareholders. Holders of Common Stock have no cumulative voting
rights. Holders of shares of Common Stock are entitled to share ratably in
dividends, if any, as may be declared, from time to time by the Board of
Directors in its discretion, from funds legally available therefor. In the event
of a liquidation, dissolution or winding up of the Company, the holders of
shares of Common Stock are entitled to share pro rata all assets remaining after
payment in full of all liabilities. Holders of Common Stock have no preemptive
rights to purchase the Company's Common Stock. There are no conversion rights or
redemption or sinking fund provisions with respect to the Common Stock. All of
the outstanding shares of Common Stock are validly issued, fully paid and
non-assessable.
The transfer agent for the Common Stock is Registrar & Transfer
Company, 10 Commerce Drive, Cranford, New Jersey 07016.
Preferred Stock
The Company's Articles of Incorporation authorize the issuance of
1,000,000 shares of preferred stock, $.01 par value, of which 1,848 shares of
Series A Preferred and 3,500 shares of Series B Preferred are outstanding. The
Series A and Series B Preferred Stock is convertible into shares of common stock
(see "Selling Stockholders"). The holders of Series A Preferred are senior to
the Common Stock with respect to dividend rights and are entitled to a
liquidation preference of $500 per share. The annual dividend rate is $40.00 per
share per annum, when, as and if declared by the Company's Board of Directors.
If not declared, dividends will accumulate and be payable in the future. Full
dividends must be paid or set aside on the Series A Preferred Stock before
dividends may be paid or set aside on the Company's Common Stock. All dividend
payments will be subordinated to the Company's debt obligations, and will be
subject to the prior approval of Signet and the Company's other future lenders.
Signet has stated that it will not permit dividends to be paid on the Series A
Preferred Stock in 1997. The holders of Series B Preferred have a liquidation
preference of $1,000 per share over the Common Stock and the Series A Preferred.
Dividends on the Series B Preferred may be declared and paid if, when and to the
extent determined from time to time by the Company's Board of Directors,
provided that such dividends shall be declared with respect to the Series B
Preferred Stock on par with dividends declared with respect to the Company's
Common Stock. The Company does not expect to declare or pay such dividends in
the foreseeable future. The Company may issue additional preferred stock in the
future. The Company's Board of Directors has authority, without action by the
shareholders, to issue all or any portion of the authorized but unissued
preferred stock in one or more series and to determine the voting rights,
preferences as to dividends and liquidation, conversion rights, and other rights
of such series.
The Company considers it desirable to have preferred stock available to
provide increased flexibility in structuring possible future acquisitions and
financings and in meeting corporate needs which may arise. If opportunities
arise that would make desirable the issuance of preferred stock through either
public offering or private placements, the provisions for preferred stock in the
Company's Articles of Incorporation would avoid the possible delay and expense
of a shareholder's meeting, except as may be required by law or regulatory
authorities. Issuance of the preferred stock could result, however, in a series
of securities outstanding that will have certain preferences with respect to
dividends and liquidation over the Common Stock which would result in dilution
of the income per share and net book value of the Common Stock. Issuance of
additional Common Stock pursuant to any conversion right which may be attached
to the terms of any series of preferred stock may also result in dilution of the
net income per share and the net book value of the Common Stock. The specific
terms of any series of preferred stock will depend primarily on market
conditions, terms of a proposed acquisition or financing, and other factors
existing at the time of issuance. Therefore, it is not possible at this time to
determine in what respect a particular series of preferred stock will be
superior to the Company's Common Stock or any other series of preferred stock
which the Company may issue. The Board of Directors may issue additional
preferred stock in future financings.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. Further, certain provisions of Maryland law could delay
16
<PAGE>
or make more difficult a merger, tender offer or proxy contest involving the
Company. While such provisions are intended to enable the Board of Directors to
maximize stockholder value, they may have the effect of discouraging takeovers
which could be in the best interest of certain stockholders. There is no
assurance that such provisions will not have an adverse effect on the market
value of the Company's stock in the future.
LEGAL MATTERS
The legality of the Shares offered hereby will be passed upon for the
Company by Hand & Hand, a law corporation, Dana Point, California.
EXPERTS
The financial statements of the Company as of December 31, 1996 and
1995 and for the years ended December 31, 1996 and 1995, incorporated by
reference in this Prospectus from the Annual Report on Form 10-KSB, have been
incorporated herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
17
<PAGE>
No dealer, salesman or other person is authorized to give any
information or to make any representations not contained in this Prospectus in
connection with the offer made hereby, and, if given or made, such information
or representations must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer to sell or a solicitation
to an offer to buy the securities offered hereby to any person in any state or
other jurisdiction in which such offer or solicitation would be unlawful.
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
age
Additional Information...................... 2
Prospectus Summary.......................... 3
Risk Factors................................ 6
Market Price of Common Stock................ 8
Selling Stockholders........................ 10
Description of Securities................... 10
Legal Matters............................... 11
Experts..................................... 11
2,161,431 SHARES
FREDERICK BREWING CO.
PART II
Item 14. Other Expenses of Issuance and Distribution.
Filing fee under the Securities Act of 1933 $ 3,090.24
Blue Sky qualification fees and expenses(1) 1,000.00
Printing and engraving(1) 2,000.00
Legal Fees 10,000.00
Accounting Fees 3,000.00
Miscellaneous(1) 909.76
TOTAL $ 20,000.00
==========
(1) Estimates
Item 15. Indemnification of Directors and Officers.
Frederick Brewing is a Maryland corporation. Section 2-405.1(c) of
the Maryland General Corporation Law (the "MGCL") states:
PROSPECTUS
"(c) A person who performs his duties in accordance with the
standard provided in this section shall have the immunity
from liability described under Section 5-248 of the Courts
and Judicial Proceedings Article."
Section 5-348 of the Maryland Courts and Judicial Proceedings
article states:
"A person who performs the duties of that person in
accordance with the standard provided under
SectionA2-405.1,of9the Corporations and Associations Article
has no liability by reason of being or having been a director
of a corporation."
Section 2-418 of the MGCL states:
"(a) In this section the following words have the meaning
indicated.
(1) "Director" means any person who is or was a director
of a corporation and any person who, while a director of a
corporation, is or was serving at the request of the
corporation as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, other
enterprise, or employee benefit plan.
(2) "Corporation" includes any domestic or foreign
predecessor entity of a corporation in a merger,
consolidation, or other transaction in which the
predecessor's existence ceased upon consummation of the
transaction.
(3) "Expenses" include attorney's fees.
(4) "Official capacity" means the following:
When used with respect to a director, the office of director in the
corporation; and
(ii) When used with respect to a person other than a
director as contemplated in subsection (j), the elective or
appointive office in the corporation held by the officer, or
the employment or agency relationship undertaken by the
employee or agent in behalf of the corporation.
<PAGE>
(iii) "Official capacity" does not include service
for any other foreign or domestic corporation or any
partnership, joint venture, trust, other enterprise, or
employee benefit plan.
(5) "Party" includes a person who was, is, or is
threatened to be made a named defendant or respondent in a
proceeding.
(6) "Proceeding" means any threatened, pending or
completed action, suit or proceeding, whether the civil,
criminal, administrative, or investigative.
(b)(1) A corporation may indemnify any director made a party
to any proceeding by reason of service in that capacity
unless it is established that:
The act or omission of the director was material to the matter
giving rise to the proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and deliberate
dishonesty; or
(ii) The director actually received an improper
personal benefit in
money, property, or services; or
(iii) In the case of any criminal proceeding, the
director had reasonable cause to believe that the act or
omission was unlawful.
(2)(i) Indemnification may be against judgments,
penalties, fines, settlements, and reasonable expenses
actually incurred by the director in connection with the
proceeding.
(ii) However, if the proceeding was one by or in the
right of the corporation, indemnification may not be made in
respect of any proceeding in which the director shall have
been adjudged to be liable to the corporation.
(3)(i) The termination of any proceeding by
judgment, order, or settlement does not create a presumption
that the director did not meet the requisite standard of
conduct set forth in this subsection.
(ii) The termination of any proceeding by
conviction, or a plea of nolo contendere or its equivalent,
or an entry of an order of probation prior to judgment,
creates a rebuttable presumption that the director did not
meet that standard of conduct.
(c) A director may not be indemnified under subsection (B) of
this section in respect of any proceeding charging improper
personal benefit to the director, whether or not involving
action in the director's official capacity, in which the
director was adjudged to be liable on the basis that person
benefit was improperly received.
(d) Unless limited by the charter:
(1) A director who has been successful, on the merits or
otherwise, in the defense of any proceeding referred to in
subsection (B) of this section shall be indemnified against
reasonable expenses incurred by the director in connection
with the proceeding.
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<PAGE>
(2) A court of appropriate jurisdiction upon application
of a director and such notice as the court shall require, may
order indemnification in the following circumstances:
(i) If it determines a director is entitled to
reimbursement under paragraph (1) of this subsection, the
court shall order indemnification, in which case the director
shall be entitled to recover the expenses of securing such
reimbursement; or
(ii) If it determines that the director is fairly
and reasonably entitled to indemnification in view of all the
relevant circumstances, whether or not the director has met
the standards of conduct set forth in subsection (b) of this
section or has been adjudged liable under the circumstances
described in subsection (c) of this section, the court may
order such indemnification as the court shall deem proper.
However, indemnification with respect to any proceeding by or
in the right of the corporation or in which liability shall
have been adjudged in the circumstances described in
subsection (c) shall be limited to expenses.
(3) A court of appropriate jurisdiction may be the same
court in which the proceeding involving the director's
liability took place.
(e)(1) Indemnification under subsection (b) of this section
may not be made by the corporation unless authorized for a specific
proceeding after a determination has been made that indemnification
of the director is permissible in the circumstances because the
director has met the standard of conduct set forth in subsection (b)
of this section.
(2) Such determination shall be made:
(i) By the board of directors by a majority vote of a
quorum consisting of directors not, at the time, parties to
the proceeding, or, if such a quorum cannot be obtained, then
by a majority vote of a committee of the board consisting
solely of two or more directors not, at the time, parties to
such proceeding and who were duly designated to act in the
matter by a majority vote of the full board in which the
designated directors who are parties may participate;
(ii) By special legal counsel selected by the board of
directors or a committee of the board by vote as set forth in
subparagraph (i) of this paragraph, or, if the requisite
quorum of the full board cannot be obtained therefor and the
committee cannot be established, by a majority vote of the
full board in which director who are parties may participate;
or
(iii) By the stockholders.
(3) Authorization of indemnification and determination as to
reasonableness of expenses shall be made in the same manner as the
determination that indemnification is permissible. However, if the
determination that indemnification is permissible is made by special
legal counsel, authorization of indemnification and determination as
to reasonableness of expenses shall be made in the manner specified
in subparagraph (ii) of paragraph (2) of this subsection for
selection of such counsel.
(4) Shares held by directors who are parties to the
proceeding may not be voted on the subject matter under this
subsection.
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<PAGE>
(f)(1) Reasonable expenses incurred by a director who is
a party to a proceeding may be paid or reimbursed by the
corporation in advance of the final disposition of the
proceeding upon receipt by the corporation of:
(i) A written affirmation by the director of the
director's good faith belief that the standard of conduct
necessary for indemnification by the corporation as
authorized in this section has been met; and
(ii) A written undertaking by or on behalf of the
director to repay the amount if it shall ultimately be
determined that the standard of conduct has not been met,
(2) The undertaking required by subparagraph (ii) of
paragraph (1) of this subsection shall be an unlimited
general obligation of the director but need not be secured
and may be accepted without reference to financial ability to
make the repayment.
(3) Payments under this subsection shall be made as
provided by the charter, bylaws, or contract or as specified
in subsection (e) of this section.
(g) The indemnification and advancement of expenses provided
or authorized by this section may not be deemed exclusive of any
other rights, by indemnification or otherwise, to which a director
may be entitled under the charter, the bylaws, a resolution of
stockholders or directors, an agreement or otherwise, both as to
action in an official capacity and as to action in another capacity
while holding such office.
(h) This section does not limit the corporation's power to
pay or reimburse expenses incurred by a director in connection with
an appearance as a witness in a proceeding at a time when the
director has not been made a named defendant or respondent in the
proceeding.
(i) For purposes of this section:
(1) The corporation shall be deemed to have requested a
director to serve an employee benefit plan where the
performance of the director's duties to the corporation also
imposes duties on, or otherwise involves services by, the
director to the plan or participants or beneficiaries of the
plan;
(2) Excises taxes assessed on a director with respect to
an employee benefit plan pursuant to applicable law shall be
deemed fines; and
(3) Action taken or omitted by the director with respect
to an employee benefit plan in the performance of the
director's duties for a purpose reasonably believed by the
director to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose
which is not opposed to the best interests of the
corporation.
(j) Unless limited by the charter:
(1) An officer of the corporation shall be indemnified
as and to the extent provided in subsection (d) of this
section for a director and shall be entitled, to the same
extent as a director, to seek indemnification pursuant to the
provisions of subsection (d);
(2) A corporation may indemnify and advance expenses to
an officer, employee, or agent of the corporation to the same
extent that it may indemnify directors under this section;
and
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<PAGE>
(3) A corporation, in addition, may indemnify and
advance expenses to an officer, employee, or agent who is not
a director to such further extent, consistent with law, as
may be provided by its charter, bylaws, general or specific
action of its board of directors or contract.
(k)(1) A corporation may purchase and maintain insurance
on behalf of any person who is or was a director, officer,
employee, or agent of the corporation, or who, while a
director, officer, employee, or agent of the corporation, is
or was serving at the request of the corporation as a
director, officer, partner, trustee, employee, or agent of
another foreign or domestic corporation, partnership, joint
venture, trust, other enterprise, or employee benefit plan
against any liability asserted against and incurred by such
person in any such capacity or arising out of such person's
position, whether or not the corporation would have the power
to indemnify against liability under the provisions of this
section.
(2) A corporation may provide similar protection,
including a trust fund, letter of credit, or surety bond, not
inconsistent with this section.
(3) The insurance or similar protection may be provided
by a subsidiary
or an affiliate of the corporation.
(l) Any indemnification of, or advance of expenses to, a
director in accordance with this section, if arising out of a
proceeding by or in the right of the corporation, shall be reported
in writing to the stockholders with the notice of the next
stockholders' meeting or prior to the meeting."
The Amended and Restated Articles of Incorporation ("Articles") of
the Company also limit the liability of, and provide indemnification to,
directors and officers of the Company. Article VIII of the Company's Article
states:
"A. Limitation of Liability. No director who has performed his or
her duties in accordance with the standard set forth in Section 2-405.1 of the
MGCL (or any successor provision thereto) shall be personally liable to the
Corporation or its stockholders for monetary damages for any act or omission by
such director as a director; provided that a director's liability shall not be
limited or eliminated to the extent that: (i) it is proved that the director
actually received an improper benefit or profit in money, property or services
for the amount of the benefit or profit in money, property or services actually
received; or (ii) a judgment or other final adjudication adverse to the director
in entered in a proceeding based on a finding in the proceeding that the
director's action, or failure to act, was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. No amendment to or repeal of this Article VIII.A. shall apply to or
have any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment.
B. Indemnification. The Corporation shall indemnify any person
who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative, arbitrative or
investigative, by reason of the fact
that such person is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise or employee
benefit plan, against liability and expenses (including court costs and
attorney's fees), judgments, fines, excise taxes and amounts paid in
satisfaction, settlement or compromise actually and
reasonably incurred by such person in
connection with such action, suit or proceeding to the full extent authorized by
Section 2-418 of the MGCL or any
successor provision thereto.
C. Advancement of Expenses. Reasonable expenses incurred by a
director, officer, employee or agent
of the Corporation in defending a civil or criminal action, suit or proceeding
describe din Article VIII.B. shall be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding as authorized by the
II-5
<PAGE>
Board of Directors only upon receipt of written affirmation by or on behalf of
such person of his good faith belief that he has met the standard of conduct
necessary for indemnification under relevant law and a written undertaking to
repay such amount if it shall ultimately be determined that the person has not
met that standard.
D. Other Rights and Remedies. The indemnification provided by this
Article VIII shall not be deemed to exclude any other rights to which those
seeking indemnification or advancement of expenses may be entitled under the
Corporation's Articles of Amendment, any insurance or other agreement, trust
fund, letter of credit, surety bond, vote of stockholders or disinterested
directors or otherwise, both as to actions in their official capacity and as to
actions in another capacity while holding such office, and shall continue as to
a person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such person;
provided that no indemnification shall be made to or on behalf of an individual
if a judgment or other final adjudication establishes that his actions, or
omissions to act, were material to the cause of action as adjudicated and (i)
were committed in bad faith; or (ii) were the result of active and deliberate
dishonesty; or (iii) the director actually received an improper personal benefit
in money, property or services; or (iv) in the case of any criminal proceedings,
the director had reasonable cause to believe that the act or omission was
unlawful; provided, however, that a director who has been successful, on the
merits or otherwise, in the defense of proceedings referred to under clauses (i)
through (iv) above, may still be indemnified as to reasonable expenses actually
incurred by such person in connection with the proceeding as to approved by a
disinterested majority of the Board of Directors.
E. Insurance. Upon resolution passed by the Board of Directors,
the Corporation may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation,
or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation,
partnership, joint venture, trust or another enterprise or employee benefit
plan, against any liability asserted against him or incurred by him in any such
capacity, or arising out of his status,
whether or not the Corporation would have
the power to indemnify him against such liability under the provisions of this
Article or the MGCL.
F. Modification. The duties of the Corporation to indemnify and
to advance expenses to a director,
officer, employee or agent provided in this Article VIII shall be in the nature
of a contract between the Corporation and each such director, officer, employee
or agent and no amendment or repeal of
any provision of this Article VIII
shall alter, to the detriment of such director, officer, employee or agent, the
right of such person to the advance of expenses or indemnification related to a
claim based on an act or failure to act
which took place prior to such
amendment or repeal.
G. Proceedings Initiated by Indemnified Persons. Notwithstanding any
other provision of this Article VIII, the Corporation shall not indemnify a
director, officer, employee or agent for any liability incurred in an action,
suit or proceeding initiated by (which shall not be deemed to include
counter-claims or affirmative defenses) or participated in as an intervenor or
amicus curiae by the person seeking indemnification unless such initiation of or
participation in the action, suit or proceeding is authorized, either before or
after its commencement, by the affirmative vote of a disinterested majority of
the directors then in office."
Article X of the Company's Bylaws states:
"(a) A director of the Corporation shall not be personally
liable for monetary damages for action taken, or any failure to take action, as
a director, to the extent set forth in the Corporation's Amended and Restated
Articles of Incorporation, which provisions are incorporated herein with the
same affect as if they were set forth herein.
(b) The Corporation shall indemnify any person who is a
director, officer, employee or agent of the Corporation to the extent set forth
in the Corporation's Amended and Restated Articles of Incorporation, which
provisions are incorporated herein with the same affect as if they were set
forth herein."
In addition, the Company intends to obtain a directors and officers
liability insurance policy relating to certain actions or omissions which may be
taken, or omitted to be taken, by the directors and officers of the Company, as
well as a policy which insures against error and omissions in the offering
documents relating to the offer and sale of the Common stock to the public.
II-6
<PAGE>
Item 16. Exhibits
The Exhibits attached hereto are as follows:
(1)(i) Underwriting Agreement(1)
(ii) Underwriter Warrant(1)
(iii) Selected Dealers Agreement(1)
(iv) Escrow Agreement(3)
(v) Amendment to Underwriting Agreement dated January 29, 1996(2)
(vi) Amendment to Underwriting Agreement dated February 12, 1996(3)
(3)(i) Amended and Restated Articles of Incorporation(1)
(ii) Amended and Restated Bylaws(1)
(iii) Articles Supplementary for 8% Cumulative Convertible Preferred
Stock, Series A(5)
(iv) Articles Supplementary for Series B Convertible Preferred
Stock(5)
(4) Form of Stock Certificate(1)
(5) Opinion of Hand & Hand(5)
(10) Material contracts:
(i) Stock Option Agreement dated April 15, 1993 between
the Company, Edward D. Scott,
Kevin E. Brannon and Marjorie A. McGinnis;(1)
(ii) Stock Option Agreement dated April 15, 1993 between
the Company and Chad Kristen
Mortgage & Investment Corporation ("CKMIC");(1)
(iii) Promissory Note dated April 15, 1993 from the Company
to CKMIC;(1)
(iv) Security Agreement dated April, 1993 between the
Company and CKMIC;(1)
(v) Subordination Agreement dated September 17, 1993
between the Company, CKMIC and
Farmers and Mechanics National Bank ("FMNB");(1)
(vi) Modification Agreement dated September 21, 1993
between the Company and CKMIC;(1)
(vii) Form of Shareholder Agreement;(1)
(viii) Form of Termination of Shareholder Agreement;(1)
(ix) Employment Agreement dated December 9, 1995 between
the Company and Kevin E.
Brannon;(1)
(x) Employment Agreement dated December 9, 1995 between
the Company and Marjorie A.
McGinnis;(1)
(xi) Employment Agreement dated December 9, 1995 between
the Company and Craig J.
O'Connor;(1)
(xii) Employment Agreement dated February 20, 1993 between
the Company and Steven
Tluszcz;(1)
(xiv) Lease Agreement dated February 15, 1994 between the
Company and Carroll Creek
LLC;(1)
(xv) Lease Agreement dated March 25, 1994 between the
Company and Carroll Creek LLC;(1)
(xvi) Addendum to Agreement of Lease dated March 30, 1995
between the Company and
Carroll Creek LLC;(1)
II-7
<PAGE>
(xii) Agreement of Lease dated January 21, 1993 between the
Company, Kevin Brannon and
South Carroll Street Partnership;(1)
(xviii) Letter lease dated January 18, 1995 between the
Company and Frederick Produce
Company, Inc.;(1)
(xix) Form of Distribution Agreement;(1)
(xx) Letter from the Company dated October 30, 1993 to the
Kronheim Company, Inc.(1)
(xxi) Installment Loan Agreement dated October 3, 1994
between the Company and FMNB;(1)
(xxii) Authorization and Loan Agreement dated November 9,
1993 between FMNB (lender) and
the Company (borrower);(1)
(xxiii) Authorization and Loan Agreement dated June 10, 1994
between FMNB (lender) and the
Company (borrower);(1)
(xxiv) Commercial Security Agreement dated December 16, 1993
between FMNB and the
Company;(1)
(xxv) Commercial Security Agreement dated June 28, 1994
between the Company and
FMNB;(1)
(xxvi) Non-employee Directors Stock Option Plan;(1)
(xxvii) 1995 Stock Option Plan;(1)
(xxviii) Form of Promissory Note dated various dates from the
Company to certain
stockholders;(1)
(xxix) Promissory Note dated June 18, 1994 between the
Company and Dr. Nicholas Foris;(1)
(xxx) Promissory Note dated March 18, 1993 between the
Company and Dr. Nicholas Foris;(1)
(xxxi) Contact Brewing Agreement dated December 12, 1995 by
The Johnson Beer Company
and the Company;(2)
(xxxii) Confidential private rescission offer memorandum
regarding rescission offer to Maryland
stockholders; letter to Pennsylvania stockholders;(2)
(xxxiii) Rescission Offer Purchase Agreement dated December
19, 1995 by and between Ryan,
Lee & Company, Incorporated and the Company;(2)
(xxxiv) Promissory Note by the Company to FCNB Bank dated
November 24, 1995 with a
guarantee by Dr. Nicholas Foris;(1)
(xxxv) Letter from the Company to the Selling Stockholders
dated December 5,1 1995;(2)
(xxxvi) Agreement of Sale by and between the Company and SOPM
Limited Partnership dated
November 7, 1995;(2)
(xxxvii) Assignment and Extension of Agreement of Sale by and
between the Company and Blue
II, LLC dated December 19, 1995;(2)
(xxxviii) Letter of Intent for Build-to-Suit Light Industrial
Space by and between the Company and
Blue II, LLC dated December 21, 1995;(2)
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<PAGE>
(xxxix) Resolutions adopted by the Maryland Industrial
Development Financing Authority;(2)
(xxxx) Letter dated January 30, 1996 from the Maryland
Economic Development Corp;(2)
(xxxxi) Letter dated January 30, 1996 from Ryan, Lee &
Company, Incorporated;(2)
(xxxxii) Letter dated January 24, 1996 from the Mid-Atlantic
Business Finance Company;(2)
(xxxxiii) Letter from Signet Bank/Maryland dated January 16,
1996;(2)
(11)(i) Calculation of Net Loss Per Share;(4)
(ii) Calculation of Pro Forma Net Loss Per Share;(1)
(16) Letter from McLean, Koehler, Sparks & Hammond dated
December 12, 1995 to the
Company regarding change in certifying accountants(1)
(21) Subsidiaries of Small Business Issuer; None.
(23)(i) Consent of Hand & Hand is contained in the legal
opinion included in Exhibit 5.
(ii) Consent of Coopers & Lybrand L.L.P.,
independent accountants.(5)
(24) Power of Attorney is contained in the signature page
to this Registration Statement.(5)
(1) Incorporated by reference to such exhibit as filed with the
Company's Registration Statement on Form SB-2, file number 333-80355
(the "Registration Statement").
(2) Incorporated by reference to such exhibit as filed with Amendment
Number 1 to the Registration
---------
Statement.
(3) Incorporated by reference to such exhibit as filed with Amendment
Number 2 to the Registration
---------
Statement.
(4) Incorporated by reference to such exhibit as filed with the
Company's Annual Report on Form 10-KSB for the year ended December
31, 1996.
(5) Filed herewith.
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by section 10
(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which
individually or in the aggregate, represent a
fundamental change in the information set forth in
the registration statement;
(iii) To include any material information with respect
to the plan of distribution not previously
disclosed in the registration statement or any
material change to such information in the
registration statement;
Provided, however, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the information
required to be included in a post-effective
amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant
to section 13 or section
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<PAGE>
15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein,
and the offering of such securities offered at that time
shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel that matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(i) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Item 18. Not Applicable.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Frederick,
State of Maryland on March 29, 1997.
FREDERICK BREWING CO.
By: /s/ Kevin E. Brannon
Kevin E. Brannon
Chairman and Chief Executive Officer
The undersigned officer and/or director of Frederick Brewing Co., a
Maryland corporation (the "Corporation"), hereby constitutes and appoints Kevin
E. Brannon and Craig J. O'Connor, with full power of substitution and
resubstitution, as attorney to sign for the undersigned in any and all
capacities this Registration Statement and any and all amendments thereto, and
any and all applications or other documents to be filed pertaining to this
Registration Statement with the Securities and Exchange Commission or with any
states or other jurisdictions in which registration is necessary to provide for
notice or sale of all or part of the securities to be registered pursuant to
this Registration Statement and with full power and authority to do and perform
any and all acts and things whatsoever required and necessary to be done in the
premises, as fully to all intents and purposes as the undersigned could do if
personally present. The undersigned hereby ratifies and confirms all that said
attorney-in-fact and agent, or any of his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof and incorporate such changes as
any of the said attorneys-in-fact deems appropriate.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on March 29, 1997.
By: /s/ Kevin E. Brannon Chairman, and Chief Executive Officer
Kevin E. Brannon (principal executive officer) and Director
By: /s/ Craig J. O'Connor Vice President - Finance and Administration
Craig J. O'Connor (principal accounting and financial officer)
By: /s/ Marjorie A. McGinnis Director and President
Marjorie A. McGinnis
By: /s/ Nicholas P. Foris, M.D. Director
Nicholas P. Foris, M.D.
By: /s/ Carl R. Hildebrand Director
Carl R. Hildebrand
By: /s/ Jerome M. Pool Director
Jerome M. Pool
By: /s/ Peter C. Spellar Director
Peter C. Spellar
By: /s/ Steven T. Nordahl Secretary and Director
Steven T. Nordahl
II-11
<PAGE>
SUPPLEMENTARY SECTION TO THE AMENDED AND
RESTATED ARTICLES OF INCORPORATION
FREDERICK BREWING CO.
8% CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES A
(Par Value $.01 Per Share)
The undersigned duly authorized officers of Frederick Brewing Co., a
corporation organized and existing under the Corporations and Associations
Article of the Annotated Code of Maryland (the "Company"), DOES HEREBY CERTIFY:
That the Amended and Restated Articles of Incorporation (the "Articles") of
the Company authorize the creation of up to 1,000,000 shares of the Company's
preferred stock; and
That pursuant to the authority conferred upon the Board of Directors by the
Articles of the Company, the Board of Directors of the Company, on January 23,
1997, approved the creation, issuance and voting powers of a series of the
Company's preferred stock, each designated as set forth below:
RESOLVED, that pursuant to the authority expressly granted to and vested in
the Board of Directors of the Company by provisions of the Articles of the
Company and the Corporations and Associations Article of the Annotated Code of
Maryland, the issuance of a series of 8% Cumulative Convertible Preferred Stock,
Series A, par value $.01 per share, be, and the same hereby, is authorized, and
the Board hereby fixes the powers, designations, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions thereof, of the shares of such series (in addition
to the powers, designations, preferences and relative, participating, optional
or other special rights, and the qualifications, limitations or restrictions
thereof, set forth in the Articles which may be applicable to preferred stock)
as follows:
1. Designation and Rank. The designation of the series of preferred stock
authorized by this resolution shall be the 8% Cumulative Convertible Preferred
Stock, Series A (the "Series A Preferred Stock"). The Series A Preferred Stock
shall be perpetual unless redeemed at the option of the Company pursuant to
Section 3 hereof. The minimum number of shares of Series A Preferred Stock shall
be 600 and the maximum number of shares of Series A Preferred Stock shall be
4,000, all of which shall be issuable solely in whole shares. The Series A
Preferred Stock shall be junior to all outstanding indebtedness of the Company.
The Series A Preferred Stock shall rank prior to the Company's Common Stock, par
value $.00004 per share (the "Common Stock"), and to all other classes and
series of equity securities of the Company now or hereafter authorized, issued
or outstanding (the Common Stock and such other classes and series of equity
securities collectively may be
<PAGE>
referred to herein as the "Junior Stock"), other than any classes or series of
equity securities of the Company expressly designated as ranking on a parity
with (the "Parity Stock") or senior to (the "Senior Stock") the Series A
Preferred Stock as to dividend rights and/or rights upon liquidation, winding up
or dissolution of the Company. The Series A Preferred Stock shall be subject to
creation of Senior Stock, Parity Stock and Junior Stock to the extent not
expressly prohibited by the Articles or otherwise, and shall be initially issued
at a price of $500.00 per share.
2. Dividends.
(a) Payment of Cash Dividends. (i) Holders of shares of Series A Preferred
Stock shall be entitled to receive when, as and if declared by the Company's
Board of Directors, out of funds legally available therefor and as permitted by
Signet Bank, N.A. and any of the Company's other lenders whose loan agreements
so require (the "Lender"), cumulative cash only dividends payable on the shares
of the Series A Preferred Stock at a rate of 8% per annum ($40.00 per share per
annum) which shall be payable quarterly in arrears on the fifteenth day of
March, June, September and December of each year or, if such day is not a
Business Day (as defined below), on the next Business Day (each of such dates
being a "Dividend Payment Date"), provided that the first Dividend Payment Date
shall be March 15, 1997. Each declared dividend shall be paid to the holders of
record of the Series A Preferred Stock at the close of business on the date
specified by the Board of Directors of the Company at the time such dividend is
declared; provided, however, that such date shall not be more than 60 days nor
less than 20 days prior to the respective Dividend Payment Date (each such date,
a "Record Date"). The initial period for which dividends shall be paid shall
commence on the date of initial issuance of the Series A Preferred Stock (the
"Issue Date") and shall end on and include March 15, 1997 (the "Initial Dividend
Period"). Thereafter, quarterly dividend periods (each, a "Quarterly Dividend
Period") shall commence on and include June 15, September 15, December 15 and
March 15 of each year and shall end on and include the date next preceding the
first day of the following Quarterly Dividend Period. The dividend for the
Initial Dividend Period shall be fully cumulative and shall accrue, without
interest, from the Issue Date. Dividends for a Quarterly Dividend Period also
shall be fully cumulative and shall accrue, without interest, from the first day
of the Quarterly Dividend Period. Dividends on the Series A Preferred Stock
shall accrue on a daily basis without regard to the occurrence of a Dividend
Payment Date and whether or not such dividends are declared by the Board of
Directors of the Company. For purposes hereof, "Business Day" means any day
except a Saturday, Sunday or other day on which banking institutions in the City
of Baltimore, State of Maryland are authorized by law to close.
(ii) The amount of dividends payable on each share of the
Series A Preferred Stock for each Quarterly Dividend Period during
which such shares are outstanding shall be $10.00 per share. For
<PAGE>
the Initial Dividend Period and for any subsequent Quarterly Dividend Period
during which such shares were not outstanding for a full Quarterly Dividend
Period, the amount of dividends payable on each share of the Series A Preferred
Stock shall be computed by multiplying $10.00 by a fraction, the numerator of
which shall be the number of days (but in no event more than 90 days with
respect to any one calendar quarter) in such Dividend Period that such shares
were outstanding (excluding the last such day) and the denominator of which
shall be 90.
(iii) Holders of the Series A Preferred Stock shall not be entitled to any
interest, or any sum of money in lieu of interest, in respect of any accrued but
unpaid dividends on the Series A Preferred Stock. Any cash dividend payment made
on the Series A Preferred Stock shall first be credited against the earliest
declared but unpaid cash dividend with respect to the Series A Preferred Stock.
(b) Priority as to Dividends. (i) No full dividends shall be declared or
paid or set apart for payment on any class or series of stock ranking, as to
dividends, on a parity with or junior to the Series A Preferred Stock for any
period unless full dividends on all outstanding shares of Series A Preferred
Stock for all past Dividend Periods and for the then-current Dividend Period
shall have been or contemporaneously are declared and paid (or declared and a
sum sufficient for the payment thereof set apart for such payment). When
dividends are not paid in full (or declared and a sum sufficient for such full
payment so set apart) upon the Series A Preferred Stock and any other Preferred
Stock ranking on a parity as to dividends with the Series A Preferred Stock, all
dividends declared upon shares of Series A Preferred Stock and any other
Preferred Stock ranking on a parity as to dividends shall be declared pro rata
with respect thereto, so that in all cases the amount of dividends declared per
share on the Series A Preferred Stock and such other Preferred Stock shall bear
to each other the same ratio that accrued dividends for the then-current
Dividend Period per share on the shares of Series A Preferred Stock (including
any accumulation in respect of unpaid dividends from prior Dividend Periods) and
accrued dividends, including accumulations, if any, on such other Preferred
Stock, bear to each other.
(ii) Full dividends on the Series A Preferred Stock must be declared and
paid or set apart for payment for all past Dividend Periods and for the
then-current Dividend Period before (A) any cash dividend or other distribution
shall be declared or paid or set aside for payment upon the Common Stock or any
other Junior Stock (other than dividends to be paid in the form of Common Stock
or Junior Stock), (B) any Common Stock or any other Junior Stock is redeemed,
purchased or otherwise acquired by the Company for any consideration (or any
moneys are paid to or made available for a sinking fund for the redemption of
any shares of any such stock) except by conversion into or exchange for Junior
Stock, or (C) any Series A Preferred Stock or Parity Stock is redeemed,
purchased or
<PAGE>
otherwise acquired by the Company for any consideration (or any moneys are paid
to or made available for a sinking fund for the redemption of any shares of any
such stock) otherwise than pursuant to a pro rata offer to purchase or a
concurrent redemption of all, or a pro rata portion, of the outstanding shares
of Series A Preferred Stock and Parity Stock (except by conversion into or
exchange for Junior Stock).
(iii) No cash dividends shall be paid on the Series A Preferred Stock if
such payment (A) is not approved in advance by the Lender; or (B) would violate
the terms of any instrument governing indebtedness of the Company.
3. Redemption.
(a) Optional Redemption. Subject to the applicable restrictions set forth
in this Section 3 and applicable law, the shares of Series A Preferred Stock may
be redeemed, in whole or in part, solely at the election of the Company (subject
to the prior permission of the Lender), upon notice as provided in subsection
(b) hereof, by resolution of its Board of Directors, at any time or from time to
time out of funds legally available therefor, in cash at a redemption price of
$500.00 per share plus all accrued and unpaid dividends (whether or not earned
or declared) without interest (the "Redemption Price") to (but not including)
the date fixed for redemption (the "Redemption Date"), provided that no shares
of Series A Preferred Stock may be redeemed pursuant to this subsection (a) if
such redemption would violate the terms of any instrument governing indebtedness
of the Company. If less than all of the outstanding shares of Series A Preferred
Stock shall be redeemed, the particular shares to be redeemed shall be allocated
by the Company in its sole discretion, which may, but need to not be, pro rata,
by lot or by a substantially equivalent method selected by the Board of
Directors of the Company.
(b) Notice of Redemption. (i) In the event the Company shall redeem shares
of Series A Preferred Stock, notice of such redemption shall be given as set
forth in Section 10 hereof, not less than 20 nor more than 60 calendar days
prior to the Redemption Date, to each holder of record of the shares to be
redeemed at such holder's address as the same appears on the stock register of
the Company, unless such holder shall waive such notice. Each such notice shall
state: (A) the Redemption Date; (B) the total number of shares of Series A
Preferred Stock to be redeemed and the number of shares of Series A Preferred
Stock to be redeemed from such holder; (C) the Redemption Price; (D) the place
or places where certificates for such shares are to be surrendered for payment
of the Redemption Price; and (E) that on and after the calendar day immediately
prior to the Redemption Date dividends on the shares to be redeemed will cease
to accrue.
(c) Effect of Redemption. Any notice that is mailed as herein provided
shall be conclusively presumed to have been duly given, whether or not the
holder of shares of Series A Preferred Stock
<PAGE>
receives such notice; and failure to give such notice by mail, or any defect in
such notice to the holders of any shares designated for redemption shall not
affect the validity of the proceedings for the redemption of any other shares of
Series A Preferred Stock. On or after the Redemption Date as stated in such
notice, each holder of the shares called for redemption shall surrender the
certificate evidencing such shares to the Company at the place designated in
such notice and shall thereupon be entitled to receive payment of the Redemption
Price for each such share. If less than all the shares evidenced by any such
surrendered certificate are redeemed, a new certificate shall be issued
evidencing the unredeemed shares. Notice having been given as aforesaid, if, on
the Redemption Date, funds necessary for the redemption shall be available
therefor and shall have been irrevocably deposited or set aside, then
notwithstanding that the certificates evidencing any shares so called for
redemption shall not have been surrendered, dividends with respect to the shares
so called shall cease to accrue as of 5:00 p.m. (Baltimore, Maryland time) on
the day before the date fixed for redemption, such shares shall no longer be
deemed outstanding, the holders thereof shall cease to be stockholders of the
Company with respect to such shares and all rights whatsoever with respect to
the shares so called for redemption (except the right of the holders to receive
the Redemption Price for each share without interest upon surrender of their
certificates therefor) shall terminate. If funds legally available for such
purpose are not sufficient for redemption of the shares of Series A Preferred
Stock which were to be redeemed, then the certificates evidencing such shares
shall not be deemed to be surrendered, such shares shall remain outstanding and
the right of holders of shares of Series A Preferred Stock thereafter shall
continue to be only those of a holder of shares of the Series A Preferred Stock.
(d) No Mandatory Redemption. Holders of the Series A Preferred
Stock may not require the Company to redeem their shares.
(e) Status of Shares Redeemed. Shares of Series A Preferred Stock redeemed,
purchased or otherwise acquired for value by the Company, shall, after such
acquisition, have the status of authorized and unissued shares of preferred
stock and may be reissued by the Company at any time as shares of any series of
preferred stock other than as shares of Series A Preferred Stock.
4. Voting Rights. The Series A Preferred Stock shall have no
voting rights.
5. No Sinking Fund. No sinking fund will be established for
the retirement or redemption of shares of Series A Preferred Stock.
6. Conversion Rights.
(a) Right to Convert. Each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the 365th
day following the date of issuance of such share or immediately preceding any
public sale of the Company's
<PAGE>
Common Stock pursuant to the registration of such Common Stock with the
Securities and Exchange Commission ("SEC"), whichever is first to occur, but
prior to the mailing of any notice of redemption by the Company, (the
"Conversion Date"), into such number of fully paid and non-assessable shares of
Common Stock as determined in subsection (c) hereof.
(b) Mechanics of Conversion. Before any holder of Series A Preferred Stock
shall be entitled to convert the same into shares of Common Stock, such holder
shall surrender the certificate or certificates therefor, duly endorsed, and
shall give written notice to the Company, at its principal corporate office, of
the election to convert the same and shall state therein the name or names in
which the certificate or certificates for shares of Common Stock are to be
issued and the address to which the certificates for the Common Stock are to be
mailed. The Company shall, as soon as practicable after receipt thereof and if
permitted by applicable law, regulation or policy, issue and deliver to such
holder of Series A Preferred Stock at the address specified in such notice, or
to the nominee or nominees of such holder, a certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Series A Preferred Stock
to be converted, and the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of Common Stock as of the next
Business Day. If the conversion is in connection with an offering of securities
registered with SEC, the conversion may, at the option of any holder tendering
Series A Preferred Stock for conversion, be conditioned upon the closing with
the sale of the converted Common Stock pursuant to such offering, in which event
the person(s) entitled to receive the Common Stock upon conversion of the Series
A Preferred Stock shall not be deemed to have converted such Series A Preferred
Stock until immediately prior to the closing of such sale of securities.
(c) Conversion Rate. The number of shares of Common Stock into which each
share of the Series A Preferred Stock may be converted shall be determined by
the formula: $500.00 divided by the product of .83 times the average closing
price of the Common Stock as reported by the Wall Street Journal over the 30
days immediately preceding the Closing Date (the "ACP"), in the event the
Conversion Date is within two years of the date of issuance of the Series A
Preferred Stock. Thereafter, the number of shares of Common Stock into which
each share of the Series A Preferred Stock may be converted will be equal to
$500.00 divided by 100% of the ACP.
(d) No Impairment. The Company will not, by amendment of its Articles or
through any reorganization, recapitalization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed under this Section 6 by the Company, but will at all
<PAGE>
times in good faith assist in the carrying out of all the provisions of this
Section 6 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series A Preferred Stock against impairment. Notwithstanding the foregoing, the
Company will not be obligated to convert the Series A Preferred Stock where such
conversion would be violative of any applicable statute or regulation or policy
of any appropriate regulatory agency or governmental authority or where such a
conversion would, in the opinion of the Company or its underwriter, adversely
affect a private or public offering of the Company's Common Stock.
(e) No Fractional Shares and Certificate as to Adjustments. No fractional
shares shall be issued upon the conversion of any share or shares of the Series
A Preferred Stock, and the number of shares of Common Stock to be issued shall
be rounded to the nearest whole share.
(f) Reservation of Stock Issuable Upon Conversion. The Company shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the conversion of the shares
of the Series A Preferred Stock, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock; and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the Series A
Preferred Stock, in addition to such other remedies as shall be available to the
holder of such Series A Preferred Stock, the Company will take such corporate
action as may be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purposes,
including, without limitation, engaging in best efforts to obtain the requisite
shareholder approval of any necessary amendment to the Articles. The rights
granted hereby do not include any right to receive an adjustment in the number
of shares of Common Stock which may be received as of result of a Conversion in
the event of a recapitalization of the Company.
7. Registration Rights.
(a) Registration Opportunity and Time for Acceptance. (i) The
holders of the Series A Preferred Stock have no right to request
that the Series A Preferred Stock be registered for sale under the
Act.
(ii) Notwithstanding the foregoing, if at any time, or from time to time,
after the holders of the Series A Preferred Stock convert such shares in
accordance with Section 6 hereof, the Company determines to register shares of
its Common Stock with the SEC for sale to the public for its own account, other
than by means of a registration on Form S-4 or Form S-8 or any similar forms,
the Company will: (i) give to each record owner of the Series A Preferred Stock
written notice thereof as soon as practicable prior
<PAGE>
to the filing of the Registration Statement (the "Registration Statement") with
the SEC, and (ii) include in such registration and in any underwriting involved
therein all shares of Common Stock into which the Series A Preferred Stock has
previously been converted (the "Piggyback Shares") as specified in a written
request made by such holder (the "Piggyback Holder") within 15 days after
receipt of such written notice from the Company, provided, that if, at any time
after giving such notice the Company shall determine for any reason or for no
reason not to register or to delay the registration of the securities of the
Company which were to be included in the Registration Statement, the Company
may, at its election give written notice of such determination to each Piggyback
Holder and, thereupon, in the case of a determination not to register, the
Company shall be relieved of its obligation to register any of the Piggyback
Holders' Piggyback Shares in connection with such registration, and (B) in the
case of a delay in registering, the Company shall be permitted to delay
registering all Piggyback Holders' Piggyback Shares for the same period as the
delay in registering such other securities. Such registration rights may be
exercised only once by each record holder of the Series A Preferred Stock. The
Company will pay all costs relating to the registration of the shares included
in the Registration Statement, including the Piggyback Shares. In no event shall
any registration rights provided herein endure beyond the earlier of the period
which is three years from the date of issuance of the Series A Preferred Stock
or the second anniversary of the Conversion Date of the Series A Preferred
Stock. Each Piggyback Holder shall comply in good faith and respond timely to
all reasonable requests of the Company and, if utilized, of the underwriter, in
the registration of such holder's Piggyback Shares.
(iii) No such registration of Piggyback Shares shall occur in the event it
is impermissible by applicable law, regulation or the policy of any appropriate
regulatory agency or governmental authority.
(b) Required Participation and Future Lock Up. The Company will have the
option, in its sole discretion, to request all holders of the Common Stock into
which the Series A Preferred Stock has been converted prior to the effective
date of the Registration Statement to participate in the underwriting and to
become Piggyback Holders. If such holders refuse, then all shares of Common
Stock held thereby shall automatically become subject to any "lock up" provision
required of the Company and/or the other Piggyback Holders by the underwriter
which will restrict the right to sell such shares during a specified period. In
addition, each holder of Common Stock into which the Series A Preferred Stock
has been converted, whether or not the holder becomes a Piggyback Holder, by
virtue of such holder's acquisition of the Series A Preferred Stock, agrees, if
so required by the underwriter, not to effect any public sale or distribution of
the Common Stock or sales pursuant to Rule 144 during the seven days prior to
and the 90 days after any firm commitment underwritten registration pursuant to
this Section 7 has become effective, or if the underwriter advises
<PAGE>
the Company in writing that, in its opinion, no public sale or distribution
should be effected for a specified period longer than 90 days after such
underwritten registration in order to complete the sale and distribution of
securities included in such registration and the Company gives notice to such
holder of such advice, during a reasonably longer period after such underwritten
registration but in no event longer than 120 days, except as part of such
underwritten registration.
(c) Proration. If the shares to be sold pursuant to a Registration
Statement will be sold in an underwritten public offering and if the underwriter
advises the Company that, in its opinion, the number of shares required by the
Piggyback Holders to be included in the Registration Statement exceeds the
number which can be sold in the public offering without materially and adversely
affecting the success of such offering, the Company will include in the
registration of the Common Stock to be sold, first all of the shares of Common
Stock to be sold for its own account and next, a number of shares of Common
Stock allocated to any holders of "demand" registration rights, and lastly to
the Piggyback Holders and to any other holder of "piggyback" registration rights
and to the directors, officers or employees of the Company, pro rata, based on
the total number of shares of Common Stock to be included in the Registration
Statement.
(d) Selection of Underwriters. The Company will have the right, in its sole
discretion, to select the underwriters for any underwritten public offering.
Piggyback Holders will agree to the use of underwriter or underwriters selected
by the Company and will become parties to any underwriting agreement between the
Company and its underwriters. The Company is under no obligation to select an
underwriter that is acceptable to the Piggyback Holders. No Piggyback Holder may
participate in an underwritten public offering unless such holder: (i) agrees to
sell his or her Common Stock on the terms and conditions set forth in the
underwriting agreement, (ii) completes, executes and timely delivers all
documents requested by the Company in connection with the underwriting, (iii)
agrees not to effect any sale of his or her Common Stock, whether pursuant to
Rule 144 or otherwise, during the "lock-up" period required by the underwriter
and agrees not to effect any purchase of the Common Stock during the
distribution of such shares which may be violative of Rule 10b-6 under the
Securities Exchange Act of 1934 (the "Exchange Act"), and (iv) delivers his or
her shares promptly to the Company's transfer agent. Piggyback Holders will have
the right to obtain legal representation of their interests in the offering at
their own expense.
(e) Alternative Sales in Reliance on Exemption. The Company will not be
required to register any shares of Common Stock held by the Piggyback Holder if
such holder would, at that time or as of the proposed effective date of the
Registration Statement, be entitled to sell shares of his or her Common Stock
publicly without registration pursuant to Rule 144 or 145 or another available
exemption, such availability to be determined for purposes of
<PAGE>
inclusion of such shares in the Registration Statement by the
Company in its sole discretion.
(f) Repurchase. The Company has the option, exercisable in its sole
discretion, to repurchase any Piggyback Shares at a price equal to the net
proceeds that the Piggyback Holder would receive if such shares were sold
pursuant to the Registration Statement. The Company shall give notice of the
exercise of this repurchase option to the Piggyback Holder whose shares are to
be repurchased prior to the effective date of the Registration Statement. If the
Company exercises such option, it will close such repurchase promptly after the
closing of the offering of the shares of Common Stock pursuant to the
Registration Statement. Shares of Common Stock repurchased by the Company in
this manner shall have the status of authorized but unissued shares of Common
Stock and may be reissued at any time as shares of Common Stock.
(g) Obligations of the Company. The Company will use its reasonable
efforts, to the extent permissible by applicable law, regulation or policy of
appropriate regulatory agencies or governmental authorities, to remain in timely
compliance with all of its reporting obligations under the Exchange Act, prepare
and file with the SEC the Registration Statement and cause it to become
effective, furnish to each Piggyback Holder copies of the Registration
Statement, register or qualify such the shares subject to the Registration
Statement under applicable state securities laws, list such shares on the market
where the Company Common Stock trades, and make available for inspection all
pertinent information reasonably requested by the Piggyback Holders relating to
such offering.
8. Liquidation Preference.
(a) Amount and Type of Liquidation Preference. In the event of any
liquidation, dissolution or winding up of the affairs of the Company, whether
voluntary or involuntary, after payment or provision for payment of the debts
and other liabilities of the Company, the holders of shares of Series A
Preferred Stock shall be entitled to receive, out of the assets of the Company
available for distribution to stockholders, an amount in cash equal to $500.00
for each share outstanding (the "Liquidation Preference"), plus an amount equal
to all accrued and unpaid dividends thereon (without interest) to (but not
including) the date fixed for liquidation, dissolution or winding up, and no
more, before any distribution shall be made to the holders of the Common Stock
or any other class of stock or series thereof ranking junior to the Series A
Preferred Stock with respect to the distribution of assets. If upon such
voluntary or involuntary dissolution, liquidation or winding up of the affairs
of the Company, the net assets of the Company shall be insufficient to permit
payment in full of the amounts required to be paid to the holders of the Series
A Preferred Stock and to the holders of any class of stock or series thereof
ranking on a parity with the Series A Preferred Stock in respect of the
distribution of assets, then a pro rata portion of the full amount required to
be
<PAGE>
paid upon such dissolution, liquidation or winding up shall be paid to (i) the
holders of Series A Preferred Stock and (ii) the holders of any class of stock
or series thereof ranking on a parity with the Series A Preferred Stock in
respect of the distribution of assets in proportion to the respective
preferential amounts to which they are entitled (but only to the extent of such
preferential amounts). Such pro rata portion shall be calculated upon the ratio
that the total amount available for distribution to such holders bears to the
total distribution required to be made on the Series A Preferred Stock and such
parity stock. After payment of the full amount of the liquidating distribution
to which they are entitled, the holders of the Series A Preferred Stock will not
be entitled to any further participation in any distribution of assets of the
Company.
(b) No Effect or Right of Redemption. Nothing contained in this Section 8
shall be deemed to prevent redemption of shares of the Series A Preferred Stock
by the Company in the manner provided in Section 3. Neither a change in control,
merger nor consolidation of the Company into or with any other company, nor the
merger or consolidation of any other company into or with the Company, nor a
sale, transfer or lease of all or any part of the assets of the Company, shall
be deemed to be a liquidation, dissolution or winding up of the Company within
the meaning of this Section 8.
(c) Notice of Liquidation. Written notice of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Company, stating a
payment date and the place where the distributable amounts shall be payable,
shall be given as set forth in Section 10 hereof, no less than 30 days prior to
the payment date stated therein, to the holders of record of the Series A
Preferred Stock at their respective addresses as the same shall appear on the
stock register of the Company.
9. No Other Rights. The shares of Series A Preferred Stock are not entitled
to any preferences, powers or rights (including but not limited to, preemptive
rights to acquire any equity or debt securities of the Company) except as set
forth in this Supplementary Section to the Articles. The Board of Directors
shall have the full authority to interpret and construe the terms and conditions
and rights, privileges and limitations set forth herein and any such written
interpretation or construction by the Board shall be final and binding upon the
holders of the Series A Preferred Stock or the Common Stock into which it is
convertible.
10. Notices. Any notice required by the provisions of this Supplementary
Section to the Articles to be given to the holders of shares of Series A
Preferred Stock shall be deemed given if deposited in the United States mail,
postage prepaid, and addressed to each holder of record at his address appearing
on the books of the Company.
11. Severability of Provisions. Whenever possible, each
provision hereof shall be interpreted in a manner as to be
<PAGE>
effective and valid under applicable law, but if any provision hereof is held to
be prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating or otherwise adversely affecting the remaining provisions hereof.
If a court of competent jurisdiction should determine that a provision hereof
would be valid or enforceable if a period of time were extended or shortened or
a particular percentage were increased or decreased, then such court may make
such change as shall be necessary to render the provision in question effective
and valid under applicable law.
IN WITNESS WHEREOF, Frederick Brewing Co. has caused this Certificate to be
signed by Kevin E. Brannon, its Chairman of the Board and Chief Executive
Officer, and attested by its corporate Secretary, this ____ day of _______ 1997.
Attest: FREDERICK BREWING CO.
__________________________________ By:
______________________________________ Name: Marjorie McGinnis
Name: Kevin E. Brannon Title: Assistant Secretary
Title: Chairman of the Board and Chief
Executive Officer
<PAGE>
ARTICLES SUPPLEMENTARY
(As amended by Certificate of Correction)
Kevin E. Brannon and Maribeth Visco certify that they are the Chairman and
Secretary, respectively, of Frederick Brewing Co., a Maryland corporation
(hereinafter referred to as the "Corporation" or the "Company"); that, pursuant
to the Articles of Incorporation, as amended, and Section 2-208 of the Maryland
General Corporation Law, the Board of Directors of the Corporation adopted the
following resolutions on March 21, 1997; and that none of the Series B
Convertible Preferred Stock referred to in these Articles Supplementary has been
issued.
1. Creation of Series B Convertible Preferred Stock. There is hereby
created a series of preferred stock consisting of 3,750 shares and designated as
the Series B Convertible Preferred Stock, having the voting powers, preferences,
relative, participating, limitations, qualifications optional and other special
rights and the qualifications, limitations and restrictions thereof that are set
forth below.
2. Dividend Provisions. The holders of shares of Series B Convertible
Preferred Stock shall be entitled to receive, when and as declared by the Board
of Directors out of any funds at the time legally available therefor, dividends
at a par with holders of Common Stock as if the Series B Convertible Preferred
Stock had been converted into Common Stock on the record date for the payment of
the dividend. Dividends shall be waived with respect to any shares of Series B
Convertible Preferred Stock which are converted prior to any dividend payment
date. Each share of Series B Convertible Preferred Stock shall rank on a parity
with each other share of Series B Convertible Preferred Stock with respect to
dividends.
3. Redemption Provisions. The Series B Convertible Preferred Stock is
not redeemable except
with the written consent of the holders thereof.
4. Liquidation Provisions. In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the Series B
Convertible Preferred Stock shall be entitled to receive an amount equal to
$1,000.00 per share. After the full preferential liquidation amount has been
paid to, or determined and set apart for the Series B Convertible Preferred
Stock and all other series of Preferred Stock hereafter authorized and issued,
if any, the remaining assets of the Corporation available for distribution to
shareholders shall be distributed ratably to the holders of the common stock. In
the event the assets of the Corporation available for distribution to its
shareholders are insufficient to pay the full preferential liquidation amount
per share required to be paid the Corporation's Series B Convertible Preferred
Stock, the entire amount of assets of the Corporation available for distribution
to shareholders shall be paid up to their respective full liquidation amounts
first to the Series B Convertible Preferred Stock, then to any other series of
Preferred Stock hereafter authorized and issued, all of which amounts shall be
distributed ratably among holders of each such series of Preferred Stock, and
the common stock shall receive nothing. A reorganization or any other
consolidation or merger of the Corporation with or into any other corporation,
or any other sale of all or substantially all of the assets of the Corporation,
shall not be deemed to be a liquidation, dissolution or winding up of the
Corporation within the meaning of this Section 4, and the Series B Convertible
Preferred Stock shall be entitled only to (i) the right provided in any
agreement or plan governing the reorganization or other consolidation, merger or
sale of assets transaction, (ii) the rights contained in the Maryland General
Corporation Law and (iii) the rights contained in other Sections hereof.
1
<PAGE>
5. Conversion Provisions. The holders of shares of Series B Convertible
Preferred Stock shall
have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. (1) Each share of Series B Convertible Preferred
Stock (the "Preferred Shares") shall be convertible, at the option of its
holder, at any time after May 15, 1997, into a number of shares of common
stock of the Company (the "Common Stock") at the initial conversion rate
(the "Conversion Rate") defined below. The initial Conversion Rate, subject
to the adjustments described below, shall be a number of shares of Common
Stock equal to $1,000 divided by the lower of (i) Seventy Percent (70%) of
the average Market Price of the Common Stock for the five trading days
immediately prior to the Conversion Date (defined below) or (ii) $3.0625,
increased proportionally for any reverse stock split and decreased
proportionally for any forward stock split or stock dividend. For purposes
of this Section 5(a)(1), Market Price for any date shall be the closing bid
price of the Common Stock on such date, as reported by the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"), or
the closing bid price in the over-the-counter market if other than Nasdaq.
(2) No fractional shares of Common Stock shall be issued upon conversion of
the Preferred Shares, and in lieu thereof the number of shares of Common
Stock issuable for each Preferred Share converted shall be rounded to the
nearest whole number. Such number of whole shares of Common Stock issuable
upon the conversion of one Preferred Share shall be multiplied by the
number of Preferred Shares submitted for conversion pursuant to the Notice
of Conversion (defined below) to determine the total number of shares of
Common Stock issuable in connection with any conversion.
(3) In order to convert the Preferred Shares into shares of Common Stock,
the holder of the Preferred Shares shall: (i) complete, execute and deliver
to the Corporation the conversion certificate attached hereto as Exhibit A
or Exhibit B, as applicable (the "Notice of Conversion"); and (ii)
surrender the certificate or certificates representing the Preferred Shares
being converted (the "Converted Certificate") to the Corporation. The
Notice of Conversion shall be effective and in full force and effect if
delivered to the Corporation by facsimile transmission at (301) 694-2971.
Provided that a copy of the Notice of Conversion is delivered to the
Corporation on such date by facsimile transmission or otherwise, and
provided that the original Notice of Conversion and the Converted
Certificate are delivered to the Corporation within three (3) business days
thereafter at 4607 Wedgewood Boulevard, Frederick, Maryland 21703, the date
on which notice of conversion is given (the "Conversion Date") shall be
deemed to be the date set forth therefor in the Notice of Conversion; and
the person or persons entitled to receive the shares of Common stock
issuable upon conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock as of the Conversion Date.
If the original Notice of Conversion and the Converted Certificate are not
delivered to the Corporation within three (3) business days following the
Conversion Date, the Notice of Conversion shall become null and void as if
it were never given and the Corporation shall, within two (2) business days
thereafter, return to the holder by overnight courier any Converted
Certificate that may have been submitted in connection with any such
conversion. In the event that any Converted Certificate submitted
represents a number of Preferred Shares that is greater than the number of
such shares that is being converted pursuant to the Notice of Conversion
delivered in connection therewith, the Corporation shall deliver, together
with the certificates for the shares of Common Stock
2
<PAGE>
issuable upon such conversion as provided herein, a certificate
representing the remaining number of Preferred Shares not converted.
(4) Upon receipt of a Notice of Conversion, the Corporation shall
absolutely and unconditionally be obligated to cause a certificate of
certificates representing the number of shares of Common Stock to which a
converting holder of Preferred Shares shall be entitled as provided herein,
which shares shall constitute fully paid and nonassessable shares of Common
Stock that are freely transferable on the books and records of the
Corporation and its transfer agents, to be issued to, delivered by
overnight courier to, and received by such holder by the fifth (5th)
calendar day following the Conversion Date. Such delivery shall be made at
such address as such holder may designate therefor in its Notice of
Conversion or in its written instructions submitted together therewith.
(5) No less than 25 shares of Series B Convertible Preferred Stock may be
converted at any one time.
(b) Adjustments to Conversion Rate. (1) Reclassification, Exchange and
Substitution. If the Common Stock issuable on conversion of the Series B
Convertible Preferred Stock shall be changed into the same or a different
number of shares of any other class or classes of stock, whether by capital
reorganization, reclassification, reverse stock split or forward stock
split or stock dividend or otherwise (other than a subdivision or
combination of shares provided for above), the holders of the Series B
Convertible Preferred Stock shall, upon its conversion, be entitled to
receive, in lieu of the Common Stock which the holders would have become
entitled to receive but for such change, a number of shares of such other
class or classes of stock that would have been subject to receipt by the
holders if they had exercised their rights of conversion of the Series B
Convertible Preferred Stock immediately before that change.
(2) Reorganizations, Mergers, Consolidations or Sale of Assets. If at any
time there shall be a capital reorganization of the Corporation's common
stock (other than a subdivision, combination, reclassification or exchange
of shares provided for elsewhere in this Section (5) or merger of the
Corporation into another corporation, or the sale of the Corporation's
properties and assets as, or substantially as, an entirety to any other
person, then, as a part of such reorganization, merger or sale, lawful
provision shall be made so that the holders of the Series B Convertible
Preferred Stock shall thereafter be entitled to receive upon conversion of
the Series B Convertible Preferred Stock, the number of shares of stock or
other securities or property of the Corporation, or of the successor
corporation resulting from such merger, to which holders of the Common
Stock deliverable upon conversion of the Series B Convertible Preferred
Stock would have been entitled on such capital reorganization, merger or
sale if the Series B Convertible Preferred Stock had been converted
immediately before that capital reorganization, merger or sale to the end
that the provisions of this paragraph (b)(2) (including adjustment of the
Conversion Rate then in effect and number of shares purchasable upon
conversion of the Series B Convertible Preferred Stock) shall be applicable
after that event as nearly equivalently as may be practicable.
(c) No Impairment. The Corporation will not, by amendment of its Articles
of Incorporation
or through any reorganization, recapitalization, transfer of assets,
merger, dissolution, or any
other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms
3
<PAGE>
to be observed or performed hereunder by the Corporation, but will at all
times in good faith assist in the carrying out of all the provision of this
Section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series B Convertible Preferred Stock against impairment.
(d) Certificate as to Adjustments. Upon the occurrence of each adjustment
or readjustment of the Conversion Rate for any shares of Series B
Convertible Preferred Stock, the Corporation at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof
and prepare and furnish to each holder of Series B Convertible Preferred
Stock effected thereby a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at
any time of any holder of Series B Convertible Preferred Stock, furnish or
cause to be furnished to such holder a like certificate setting forth (i)
such adjustments and readjustments, (ii) the Conversion Rate at the time in
effect, and (iii) the number of shares of Common Stock and the amount, if
any, of other property which at the time would be received upon the
conversion of such holder's shares of Series B Convertible Preferred Stock.
(e) Notices of Record Date. In the event of the establishment by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, the
Corporation shall mail to each holder of Series B Preferred Stock at least
twenty (20) days prior to the date specified therein, a notice specifying
the date on which any such record is to be taken for the purpose of such
dividend or distribution and the amount and character of such dividend or
distribution.
(f) Reservation of Stock Issuable Upon Conversion. The Corporation shall at
all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion
of the shares of the Series B Convertible Preferred Stock such number of
its shares of Common Stock as shall from time to time be sufficient, based
on the Conversion Rate then in effect, to effect the conversion of all then
outstanding shares of the Series B Preferred Stock. If at any time the
number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Preferred Stock, then, in addition to all rights, claims and damages to
which the holders of the Series B Convertible Preferred Stock shall be
entitled to receive at law or in equity as a result of such failure by the
Corporation to fulfill its obligations to the holders hereunder, the
Corporation will take any and all corporate or other action as may, in the
opinion of its counsel, be helpful, appropriate or necessary to increase
its authorized but unissued shares of Common Stock to such number of shares
as shall be sufficient for such purpose.
(g) Notices. Any notices required by the provisions hereof to be given to
the holders of shares of Series B Convertible Preferred Stock shall be
deemed given if deposited in the United States mail, postage prepaid and
return receipt requested, and addressed to each holder of record at its
address appearing on the books of the Corporation or to such other address
of such holder or its representative as such holder may direct.
6. Voting Provisions. Except as otherwise expressly provided or required
by law, the Series
B Convertible Preferred Stock shall have no voting rights.
4
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Articles Supplementary of
Series B Convertible Preferred Stock to be duly executed by its Chairman and
attested to by its Secretary this 25th day of March, 1997 who, by signing their
names hereto, acknowledge that these Articles supplementary are the act of the
Company and state to the best of their knowledge information and belief, under
the penalties of perjury, that the above matters and facts are true in all
material respects.
FREDERICK BREWING CO.
Kevin E. Brannon, Chairman
Maribeth Visco, Secretary
5
<PAGE>
EXHIBIT A
CONVERSION CERTIFICATE
FREDERICK BREWING CO.
Series B Convertible Preferred Stock
The undersigned holder ( the "Holder") is surrendering to Frederick
Brewing Co., a Maryland corporation (the "Company"), one or more certificates
representing shares of Series B Convertible Preferred Stock of the Company (the
"Preferred Stock") in connection with the conversion of all or a portion of the
Preferred Stock into shares of Common Stock, $.00004 par value per share, of the
Company (the "Common Stock") as set forth below.
1. The Holder understands that the Preferred Stock were issued by the
Company pursuant to the exemption from registration under the United States
Securities Act of 1933, as amended (the "Securities Act"), provided by
Regulation D promulgated thereunder.
2. The Holder represents and warrants that all offers and sales of the
Common Stock issued to the Holder upon such conversion of the Preferred Stock
shall be made (a) pursuant to an effective registration statement under the
Securities Act, (b) in compliance with Rule 144, or (c) pursuant to some other
exemption from registration.
Number of Shares of Preferred Stock being converted:
Applicable Conversion Price:
Number of Shares of Common Stock Issuable:
Conversion Date:
Delivery Instructions for certificates of Common Stock and for new
certificates representing any remaining shares of Preferred Stock:
NAME OF HOLDER:
(Signature of Holder)
6
<PAGE>
EXHIBIT B
CONVERSION CERTIFICATE
FREDERICK BREWING CO.
Series B Convertible Preferred Stock
The undersigned holder ( the "Holder") is surrendering to Frederick
Brewing Co., a Maryland corporation (the "Company"), one or more certificates
representing shares of Series B Convertible Preferred Stock of the Company (the
"Preferred Stock") in connection with the conversion of all or a portion of the
Preferred Stock into shares of Common Stock, $.00004 par value per share, of the
Company (the "Common Stock") as set forth below.
1. The Holder understands that the Preferred Stock were issued by the
Company pursuant to the exemption from registration under the United States
Securities Act of 1933, as amended (the "Securities Act"), provided by
Regulation S thereunder ("Regulation S");
2. The Holder represents and warrants that either (a) the Holder is not
a "U.S. person," as defined in Regulation S or (b) the Holder is not the
original purchaser of the Preferred Stock being surrendered for conversion and
the Holder acquired the Preferred Stock in a transaction or under circumstances
exempt from registration under the Securities Act;
3. The Holder represents and warrants that all offers and sales of the
Common Stock issued to the Holder upon such conversion of the Preferred Stock
shall be made (a) pursuant to an effective registration statement under the
Securities Act, (b) in compliance with Regulation S, or (c) pursuant to an
exemption from registration; and
4. The undersigned has not engaged in any "directed selling
efforts" (as such term
is defined in Regulation S) with respect to the Preferred Stock or Common Stock.
Number of Shares of Preferred Stock being converted:
Applicable Conversion Price:
Number of Shares of Common Stock Issuable:
Conversion Date:
Delivery Instructions for certificates of Common Stock and for new
certificates representing any remaining shares of Preferred Stock:
7
April 24, 1997
Frederick Brewing Co.
4607 Wedgewood Boulevard
Frederick, MD 21703
Re: Registration Statement on
Form S-3 File ("Registration Statement")
Gentlemen:
You have requested our opinion as to the legality of the issuance by
you (the "Corporation") of an estimated 2,161,431 shares of common stock, par
value $.00004 ("Shares") including 56,250 Shares currently outstanding; an
estimated 1,071,376 Shares issuable upon conversion of the Series B Convertible
Preferred Stock ("Series B Stock"), 251,660 Shares issuable upon conversion of
the 8% Cumulative Convertible Preferred Stock Series A ("Series A Stock") and
782,145 Shares issuable upon exercise of warrants and options, all as further
described in the Registration Statement in the form filed today with the U.S.
Securities and Exchange Commission.
As your counsel, we have reviewed and examined:
1. The Articles of Incorporation of the Corporation;
2. The Bylaws of the Corporation;
3. A copy of certain resolutions of the corporation;
4. The Registration Statement;
5. The Articles Supplementary filed with the Maryland Secretary
of State describing
the terms of the Series A Stock and Series B Stock;
6. Engagement letter dated November 19, 1996 between the Company
and Compass
Capital;
<PAGE>
Frederick Brewing Co.
April 24, 1997
Page -2-
7. Term sheet between the Company and Aragon Investment Services;
8. Lead Generation/Corporate Relations Agreement between the
Company and
Corporate Relations Group Inc.;
9. Form of Warrants between the Company and World Capital
Funding, Inc.; and
10. Such other matters as we have deemed relevant in order to form
our opinion.
In giving our opinion, we have assumed without investigation the
authenticity of any document or instrument submitted us as an original, the
conformity to the original of any document or instrument submitted to us as a
copy, and the genuineness of all signatures on such originals or copies.
Based upon the foregoing, we are of the opinion that the Shares to be
offered pursuant to the Registration Statement, if sold as described in the
Registration Statement (and as to shares issuable upon warrants or options if
the warrants or options are exercised in accordance with their terms), will be
legally issued, fully paid and nonassessable, provided that no less than par
value is paid for any Shares.
No opinion is expressed herein as to the application of state securities
or Blue Sky laws.
This opinion is furnished by us as counsel to you and is solely for your
benefit. Neither this opinion nor copies hereof may be relied upon by, delivered
to, or quoted in whole or in part to any governmental agency or other person
without our prior written consent.
Notwithstanding the above, we consent to the reference to our firm name
in the Prospectus filed as a part of the Registration Statement and the use of
our opinion in the Registration Statement. In giving these consents, we do not
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities and Exchange Commission promulgated
thereunder.
Very truly yours,
HAND & HAND
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement on
Form S-3 of our report dated February 26, 1997, except as to Note 11 for which
the date is March 31, 1997, on our audits of the financial statements of
Frederick Brewing Co. as of December 31, 1996 and 1995, and for the years then
ended, which report in included in the Frederick Brewing Co. Annual Report on
Form 10-KSB. We also consent to the references to our firm under the captions
"Experts" and "Selected Financial and Operating Data".
COOPERS & LYBRAND LLP
Rockville, Maryland
April 22, 1997
