SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 27, 1997
Frederick Brewing Co.
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(Exact name of Registrant as Specified in Charter)
Maryland 0-27800 52-1769647
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(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
4607 Wedgewood Boulevard, Frederick, Maryland 21703
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(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (301) 694-7899
Not Applicable
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(Former name or former address, if changed since last report)
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Item 5. Other Events.
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On February 27, 1997, Frederick Brewing Co. (the "Company") executed
two Forbearance Agreements with Signet Bank (the "Bank"). The first Forbearance
Agreement (the "Blue II Forbearance Agreement") related to the $3.0 million
Maryland Economic Development Corporation ("MEDCO") Taxable Economic Development
Revenue Bond (the "Blue II Facility") the proceeds of which were, on July 19,
1996, to be loaned to Blue II, LLC, a Maryland limited liability company ("Blue
II"), to purchase the land and to construct a new brewery which has been leased
to the Company. The other Forbearance Agreement (the "FBC Forbearance
Agreement") related to the $1.5 million MEDCO Taxable Economic Development
Revenue Bond (the "FBC Facility"), and to a $1.0 million bridge loan from the
Bank (the "Bridge Loan"), the proceeds of which were to be loaned to the Company
to purchase brewing equipment for the new brewery. The Forbearance Agreements
were executed by the Company as a result of an approximately $340,000 difference
between the amount of the Blue II Facility and the cost to construct the new
brewery as well as a decline in the Company's cash position which resulted from
significant weather-related delays during construction, and an approximately
$250,000 difference between the FBC Facility and the Bridge Loan and the cost to
acquire certain brewing equipment. These so-called "funding deficiencies" caused
the Bank to claim that the Bridge Loan was in default and to temporarily cease
funding the Blue II Facility and the Bridge Loan as of January 22, 1997 subject
to the execution of the Forbearance Agreements. The Forbearance Agreements will
facilitate the full funding of the Blue II Facility and the Bridge Loan, as set
forth below. During the negotiation of the Forbearance Agreements, work on the
new brewery has continued unabated. The Company anticipates that the new brewery
will begin production and shipment of beer in March 1997. The Company has issued
a press release relating to this matter; see Exhibit 99.1.
The Blue II Forbearance Agreement recites that Blue II has defaulted
under the Blue II Facility due to its failure to cure a funding deficiency
thereunder and that an Event of Default has occurred under the Bridge Loan.
However, the Bank has agreed, pursuant to the Blue II Forbearance Agreement, to
forbear in the exercise of its rights and remedies under the Blue II Facility
loan documents and to continue to make loan advances to Blue II to facilitate
the completion of the new brewery, provided: (i) no other event of default
occurs under the Blue II Facility loan documents, and (ii) Blue II and the
Company perform their obligations under the Blue II Forbearance Agreement. The
Bank's agreement to forbear from exercising its rights and remedies under the
Blue II Facility loan documents and to make advances thereunder are conditioned
upon, among other things: (i) Blue II providing to the Bank the amount by which
the proceeds of the Blue II Facility will be insufficient to satisfy the unpaid
Acquisition Costs (as defined in the Blue II Facility) of the new brewery
through final completion of the new brewery (the "Final Net Funding
Deficiency"); (ii) the sale by the Company of its Series A 8% Cumulative
Convertible Preferred Stock (the "Preferred Stock") to the general contractor of
the new brewery in an amount equal to the Final Net Funding Deficiency; (iii)
the revision of the Projected Completion Date (as defined in the Blue II
Facility) of the new brewery to be March 14, 1997; (iv) the use of certain funds
escrowed with the Bank to pay current requisitions for funding under the Blue II
Facility; (v) the payment by the Company of all of the Bank's fees and expenses
relating to these Forbearance Agreements; and (vi) the waiver by the
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Company of all causes of action against the Bank, MEDCO and the Maryland
Industrial Financial Authority ("MIDFA"). The Bank has agreed to provide a
letter to the general contractor prior to its purchase of the Preferred Stock
that it will complete the funding of the Blue II Facility upon the general
contractor's acquisition of such shares. If Blue II and the Company perform
their obligations under the Blue II Forbearance Agreement, the events of
defaults recited therein will be deemed by the Bank to have been cured and/or
waived. A copy of the Blue II Forbearance Agreement is attached hereto as
Exhibit No. 10.1.
The FBC Forbearance Agreement recites that the Bank by letter dated
February 3, 1997, advised the Company that certain events of default have
occurred with respect to the FBC Facility, including (i) the occurrence of
adverse changes deemed material by the Bank with the respect to the business,
assets, operations or financial condition of the Company and (ii) the failure of
Blue II to cure the funding deficiency under the Blue II Facility. However, the
Bank has agreed, pursuant to the FBC Forbearance Agreement, to forbear in the
exercise of its rights and remedies under the FBC Facility loan documents and to
continue to make loan advances (up to $250,000 immediately and the remaining
loan balance upon the satisfaction of the conditions set forth below) to the
Company under the Bridge Loan to facilitate the purchase of the brewing
equipment, provided: (i) no other event of default occurs under the FBC Facility
loan documents, and (ii) the Company performs its obligations under the FBC
Forbearance Agreement. The Bank's agreement to forbear from exercising its
rights and remedies under the FBC Facility loan documents and to fund the
remaining balance of the Bridge Loan are conditioned upon, among other things:
(i) the maintenance by the Company of Eligible Accounts Receivable (as defined
in the FBC Forbearance Agreement) of not less than $100,000 until March 31, 1997
and of not less than $200,000 thereafter, tested twice monthly; (ii) the payment
to the Bank of a fee of $25,000 in cash or Company Common Stock; (iii) the
execution of an unconditional personal guarantee of the Bridge Loan by the Chief
Executive Officer and the President of the Company; (iv) the payment over to the
Bank of any proceeds obtained from the sale of the equipment at the old brewery
to be held to further collateralize the Bridge Loan; (v) the Bank not having
been advised that the Small Business Administration ("SBA") has terminated its
commitment to extend a $1.0 million loan to the Company; (vi) the payment by the
Company of all of the Bank's fees and expenses relating to the Forbearance
Agreements; and (vii) the waiver by the Company of all causes of action against
the Bank, MEDCO and MIDFA. If the Company performs its obligations under the FBC
Forbearance Agreement, the events of default recited therein will be deemed by
the Bank to have been cured and/or waived. A copy of the FBC Forbearance
Agreement is attached hereto as Exhibit 10.2.
The Company has also entered into an agreement with Morgan-Keller,
Inc., the general construction contractor of the brewery ("M-K"), pursuant to
which the Company would make a final payment to M-K under the construction
contract of an amount totaling $1,175,719, a major portion of which would come
from remaining loan proceeds under the Blue II Facility (which the Bank has
committed to fund), a portion from a Company's escrow account at the Bank which
was serving as collateral for the Blue II Facility and $315,000 in cash from the
Company. M-K has agreed to purchase 630 shares of the Preferred Stock (as
described below) with a purchase price totaling approximately $315,000. The
Company has agreed to redeem such shares from M-K if, when and to the extent
that: (i) sales of the Preferred Stock result in a capital infusion of more than
$1.7 million; and (ii) certain claims of the Company result in a net recovery by
the Company. See Exhibit 99.2.
The Company is currently in the process of raising up to $2.0 million
pursuant to a private placement of its Preferred Stock to "accredited investors"
as that term is defined by Regulation D promulgated under the Securities Act of
1933, as amended. The following is a brief description of the terms of the
Preferred Stock: (i) the number of shares of Preferred Stock being offered is a
minimum of 600 shares and a maximum of 4,000 shares;
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(ii) the Preferred Stock will rank senior to the Common Stock with respect to
dividend and liquidation rights; (iii) dividends on the Preferred Stock are
payable at the annual rate of $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 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 the
Bank and the Company's other future lenders. The FBC Forbearance Agreement
states that the Bank will not permit dividends to be paid in 1997; (iv) the
liquidation preference of the Preferred Stock is $500.00 per share upon
voluntary or involuntary liquidation, plus accrued but unpaid dividends (without
interest) in either case before any distribution to holders of the Common Stock
or any other class of junior stock; (v) the Preferred Stock is non-voting; (vi)
each share of the Preferred Stock may be converted into a number of shares of
Common Stock upon the demand of the holder at any time after the 365th day
following the closing date of the sale of such Preferred Stock ("Closing Date")
or immediately preceding any public sale of Common Stock by the Company pursuant
to any registration with the Securities and Exchange Commission ("SEC"),
whichever is first to occur (the "Conversion Date"), but prior to the mailing of
any notice of redemption by the Company subject to the approval of the SEC. The
conversion rate used to determine the number of shares into which each share of
Preferred Stock is convertible shall equal the formula of $500.00 divided by the
product of .83 times the average closing price (the "ACP") of the Common Stock
as reported in the Wall Street Journal over the thirty (30) days immediately
preceding the Closing Date if the Conversion Date is within two (2) years after
the Closing Date; thereafter, the conversion rate will be $500.00 divided by
100% of the ACP. If (i) the ACP were $4.00 and (ii) the Company sold all 3,000
shares of the Preferred Stock offered thereby, the total number of shares of
Common Stock into which the Preferred Stock would be convertible would be
453,000 shares, which represented 23.17% of the total number of shares of Common
Stock issued and outstanding as of January 29, 1997; (vii) the Preferred Stock
may be redeemed at any time after the third anniversary of the Closing Date, by
the Company in whole or in part, at $500.00 per share plus unpaid dividends
(without interest) upon thirty (30) days' prior notice to the holders of the
Preferred Stock. There is no mandatory redemption of the Preferred Stock; (viii)
the holders of the Preferred Stock have no right to have the Preferred Stock
registered by the Company. The holders of the Common Stock into which the
Preferred Stock is convertible will have the right to require the Company to
register for sale, after any Conversion Date, all or any portion of such Common
Stock in the event and at any time, for a period of the earlier of three (3)
years from the date of the issuance of the Preferred Stock or two (2) years from
the Conversion Date, if the Company shall register any of its Common Stock with
the SEC for sale to the public. These registration rights contain a number of
limitations and qualifications; (ix) the Preferred Stock, and the Common Stock
into which the Preferred Stock may be converted, will not be listed on any stock
exchange or on the Nasdaq Stock Market. No market exists for the Preferred Stock
and no market is expected to develop therefor. Moreover, a purchaser's
investment in the Preferred Stock (and in the Common Stock into which it is
convertible) will be subject to certain restrictions on transferability and
resale; and (x) the
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holders of the Preferred Stock will have no rights other than as summarized
above and as set forth in the Articles Supplementary to the Company's Articles
of Incorporation. See Exhibit 3.0.
The Company expects to consummate a portion of the private Preferred
Stock offering on or before March 7, 1997 and additional sales thereof before
April 11, 1997. The sale of the Preferred Stock may be suspended by the Company
to obtain stockholder approval, if deemed necessary by the Company, or may be
terminated at any time in the Company's sole discretion. The Company may seek to
raise additional equity capital in the private or public markets from time to
time in the future on terms and conditions to be determined by the Company at
such time or times.
The primary purpose of the private offering of the Preferred Stock is
to provide funds for the completion of the new brewery, payment of the offering
expenses, the payment of the hiring and training of administrative and sales
personnel, and the payment of certain promotional, marketing and advertising
expenses. The balance of the net proceeds will be used for working capital and
general corporate purposes. The Company may also use a portion of the net
proceeds for the acquisition of stock, debt, assets or businesses or products
from other brewers or independent third parties that are complementary to those
of the Company, although no such acquisitions are planned or being negotiated as
of the date of the Company's private placement memorandum, and no portion of the
net proceeds has been allocated for such expansion or for any specific
acquisition. Pending such uses, the net proceeds of the offering will be
invested in short-term, interest or dividend-bearing securities.
On February 12 and 13, 1997, the Company held an open house at the new
brewery for invited guests and the press. The Company issued a press release
regarding this event on February 12, 1997, a copy of which is attached hereto as
Exhibit 99.3. There was also a ceremonial outpouring and open house at the new
brewery for stockholders of the Company and the public on February 22, 1997.
The information contained in this Form 8-K contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"), and are subject to the safe harbor created by the
Reform Act. The words "estimate," "project," "anticipate," "expect," "intend,"
"believe," "plans," and similar expressions are intended to identify
forward-looking statements. Because such forward looking statements involve
risks and uncertainties, there are important factors that could cause actual
results to differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to, the failure of the Company to
perform under the Blue II Forbearance Agreement or the FBC Forbearance
Agreement, changes in the Bank's, MEDCO's or MIDFA's position with respect to
the Blue II Facility or the FBC Facility, the ability of the Company to
consummate the sale of the Preferred Stock, changes in general economic and
business conditions, changes in business strategies and other factors as set
forth in the Company's final Prospectus dated March 5, 1996, its Form 10-QSB for
the quarters ended March 31, 1996, June 30, 1996 and September 30, 1996, and as
set forth in Exhibit 99.4 attached hereto.
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Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
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(a) No financial statements are required.
(b) No pro forma financial information is required.
(c) Exhibits: 3.0... Draft of Articles Supplementary to the Amended
--------- and Restated Articles of Incorporation.
10.1... Blue II Forbearance Agreement.
10.2... FBC Forbearance Agreement.
99.1... Press release dated February 27, 1997.
99.2... Agreement between the Company and Morgan-
Keller, Inc. dated February 27, 1997.
99.3... Press release dated February 12, 1997.
99.4... Safe Harbor Under the Private
Securities Litigation Reform
Act of 1995.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FREDERICK BREWING CO.
By: /s/ Kevin E. Brannon
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Kevin E. Brannon
Chief Executive Officer
Dated: February 27, 1997
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EXHIBIT 3.0
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 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 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 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 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 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 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 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 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 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 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 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
EXHIBIT 10.1
BLUE II FORBEARANCE AGREEMENT
FORBEARANCE AGREEMENT
---------------------
THIS FORBEARANCE AGREEMENT ("Forbearance Agreement") is made as of
February 27, 1997, by and among BLUE II, LLC, a Maryland limited liability
company ("Blue II), FREDERICK BREWING CO., a Maryland corporation ("FBC"),
SIGNET BANK ("Bank"), and EDWARD D. SCOTT, ROBERT SCHUERHOLZ, NICHOLAS P. FORIS
and VISHNAMPET S. JAYANTHIMATH, jointly and severally (individually and
collectively, the "Guarantors" and each a "Guarantor").
RECITALS
--------
Pursuant to and in accordance with Article 83A, Title 5, Subtitle 2, of
the Annotated Code of Maryland, as amended, the Maryland Economic Development
Corporation, a body politic and corporate and a public instrumentality of the
State of Maryland (the "Issuer"), has issued and sold to Bank its Taxable
Economic Development Revenue Bond (Blue II, LLC Facility), 1996 Issue, in the
original principal amount of $3,000,000 (the "Bond"), and has agreed to loan to
Blue II the proceeds from the sale of the Bond upon the terms and conditions set
forth in the Loan and Financing Agreement dated July 19, 1996, by and among the
Issuer, Bank, FBC, and Blue II (the "Financing Agreement"). The loan by the
Issuer to Blue II of the proceeds from the sale of the Bond (the "Loan") is
evidenced by a promissory note dated July 19, 1996, in the principal amount of
$3,000,000, made by Blue II to the Issuer (the "Blue II Note"), which promissory
note has been assigned by the Issuer to Bank.
Pursuant to a certain Guaranty dated July 19, 1996, and subject to the
limitations and conditions therein contained (the "Guaranty"), the Guarantors
have guaranteed to the Issuer, its successors and assigns (including, without
limitation, Bank), all present and future obligations of Blue II under the
Financing Agreement and all other documents executed and/or delivered in
connection therewith.
By letter dated January 22, 1997, Bank advised Blue II that unadvanced
Bond proceeds were insufficient to complete the Facility and pay the remaining
Acquisition Costs, and that a condition precedent advance of Bond proceeds
remained unsatisfied. To date, Blue II has failed to cure the funding deficiency
and is in default under the provisions of Section 6.2(c) of the Financing
Agreement. As further described in that certain Forbearance Agreement of even
date herewith by and between Bank and FBC (the "FBC Forbearance Agreement"),
Events of Default have occurred under the Bridge Loan, which represent Events of
Default pursuant to Section 10.1(y) of the Financing Agreement.
Blue II and FBC have requested (a) certain forbearance on the part of
Bank in exercising its rights and remedies under the Documents, and (b) that
Bank to continue to honor requests for advances under the Financing Agreement in
accordance with the terms thereof.
As set forth in and subject to the terms of this Forbearance Agreement,
Bank has agreed to forbear in the exercise of its rights and remedies under the
Documents, and to
<PAGE>
make advances under the Financing Agreement in accordance with the terms
thereof.
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein, Blue II, FBC and Bank do hereby agree as follows:
1. Defined Terms. All capitalized terms not otherwise defined herein
which are defined in the Financing Agreement shall have the same meanings
assigned to them in the Financing Agreement.
2. Acknowledgments. Blue II and FBC hereby acknowledge that (a) Blue II
is in default of its obligations under Section 6.2(c) of the Financing
Agreement, (b) an Event of Default exists under Subsection 8(k) of the Bridge
Loan Agreement (as defined in the FBC Forbearance Agreement), (b) Bank is a
fully secured creditor with valid and perfected first priority security
interests in the "Security" as defined in the Financing Agreement, (c) all
previous payments to Bank under the Financing Agreement have been made in the
ordinary course, and (d) Bank is not required to make any additional advances to
Blue II under Section 6.4(h) of the Financing Agreement.
3. Forbearance by Lender. Subject to the terms and conditions of
Paragraph 4 hereof, Bank agrees to forbear from exercising its rights and
remedies pursuant to the Documents and to fund requests for advances under the
Financing Agreement in accordance with the terms thereof; provided, however,
that Bank's agreements provided under this Agreement shall, in Bank's
discretion, terminate at any time after (a) the occurrence of any default under
or "Event of Default" as defined in the Financing Agreement subsequent to the
date of this Forbearance Agreement (other than the continuation of an Event of
Default existing on the date hereof), or (b) the breach or default by Blue II or
FBC with respect to any of their respective obligations under this Forbearance
Agreement.
4. Terms of Forbearance. Bank's agreement to forbear from exercising
its rights and remedies under the Financing Agreement and its agreement to fund
requests for advances under the Financing Agreement as provided in Paragraph 3
above is subject to each of the following conditions:
(a) On or before the funding of the next advance under the Financing
Agreement, and in no event later than March 7, 1997, Blue II shall have provided
or caused to be provided to the Bank written evidence in form and substance
acceptable to the Bank (i) as to the amount (after application of the amounts
described in clause (c) below) by which the proceeds of the Bond are
insufficient to satisfy the unpaid Acquisition Costs incurred or to be incurred
through final completion of the Facility (the "Final Net Funding Deficiency"),
and (ii) that FBC shall have sold to Morgan-Keller, Inc. preferred stock of FBC
in a private placement with dividend payment terms acceptable to the Bank, with
a purchase price of not less than the Final Net Funding Deficiency, and that the
proceeds from such sale have been applied as required to fully satisfy the Final
Net Funding Deficiency. Bank agrees to advise Morgan-Keller immediately prior to
Morgan-Keller's payment of the purchase price of the preferred stock referred to
in clause (ii) above whether Bank will commit to fund the remaining balance of
the Bond Loan proceeds; provided, however, that the failure of
<PAGE>
Morgan-Keller to purchase such stock as a result of Bank's failure to provide a
commitment to Morgan-Keller to fund such remaining balance shall not represent
an independent default by Blue II or FBC hereunder, assuming the condition set
forth in clause (i) above has been satisfied.
(b) The "Projected Completion Date" as defined in the Financing
Agreement and in the FBC Financing Agreement shall be March 14, 1997.
(c) Subject to the satisfaction of the conditions to funding set forth
in clause (a) above, FBC and Bank hereby consent and agree to the application of
funds in Account No. 89000189 (the "Account") against current requisitions for
funding under the Financing Agreement. There is currently a balance of
$619,208.03 in the Account, with respect to which the following amounts have
been reserved against outstanding letter of credit reimbursement obligations of
FBC: (i) $12,475 (Letter of Credit Reference #18), (ii) $4,875 (Letter of Credit
Reference #26), and (iii) $3,621.89 (Letter of Credit Reference #34).
5. Fees and Expenses. FBC agrees to pay, within thirty (30) days
following Bank's demand, all expenses paid or incurred by Bank (including the
documented expenses and fees of its counsel) in connection with (a) the
administration of the credit accommodations extended to Blue II under the
Documents to the date hereof (including, without limitation, the preparation and
negotiation of this Forbearance Agreement and all documents referenced or
referred to herein), and (b) all future matters arising in connection with
Bank's credit accommodations to Blue II.
6. Confirmation, Merger, Integration and Amendment. Unless specifically
modified, consented to or suspended by this Forbearance Agreement, all of the
terms and provisions of the Documents remain in full force and effect. Blue II,
FBC and Guarantors hereby ratify and confirm all provisions of the Documents,
which Documents are incorporated herein by reference as if set forth in full,
except to the extent that they are specifically modified by, consented to or
suspended the terms of this Forbearance Agreement. This Forbearance Agreement
shall not be construed or intended as a novation of any of the Documents. In the
event of any internal inconsistency between any provisions of the Documents as a
result of the execution of this Forbearance Agreement, the provisions contained
in this Forbearance Agreement shall be controlling and the conflicting
provisions deemed amended to the extent necessary to eliminate such
inconsistency. This Forbearance Agreement, together with the Documents to the
extent not modified hereby, contain the entire agreement of the parties with
respect to the matters covered and the transactions contemplated hereby and no
other agreement, statement or promise made by any party hereto or by any
employee, officer, agent or attorney of any party hereto, which is not contained
in such documents shall be valid or binding. This Forbearance Agreement may not
be modified in any manner, except by written agreement signed by all parties.
This Forbearance Agreement shall be one of the Documents.
7. Waivers. Without limitation of the provisions of Paragraph 6 above,
as part of the consideration of this Forbearance Agreement, Blue II, FBC and
Guarantors, for Blue II, FBC and Guarantors and for their heirs, personal
representatives, successors and assigns,
<PAGE>
do hereby remise, release and forever discharge Issuer, Bank and the Maryland
Industrial Development Financing Authority ("MIDFA") and each of their
respective past, present and future officers, employees, agents, directors, and
stockholders, of and from all manner of actions, causes and causes of action,
suits, debts, sums of money, account reckonings, bonds, bills, specialties,
coverages, judgments, executions, claims, and demands whatsoever, at law or in
equity, and particularly, without limiting the generality of the foregoing, all
claims relating to the transactions which are the subject of the Documents and
to this Forbearance Agreement, which Blue II, FBC and/or Guarantors or their
respective heirs, personal representatives, successors and assigns ever had or
now have for, upon or by reason of any matter, cause, or thing, whatsoever. Blue
II, FBC and Guarantors further waive any and all defenses, offsets, and
counterclaims to Bank's enforcement of the Documents or any action by Bank to
foreclose any security interest, whether secured by real or personal property,
which exist as of the date hereof.
8. Non-Waiver by Bank. Except as specifically provided herein, neither
Bank's entering into this Forbearance Agreement, nor any failure on the part of
Bank in exercising any right, power, or privilege under one or more of the
Documents, shall operate as a waiver thereof, nor shall a single or partial
exercise thereof preclude any other or further exercise of any other right,
power or privilege. The parties agree that except as specifically provided
herein, nothing in this Forbearance Agreement or any other document to be
executed simultaneously herewith shall be deemed to be a waiver, limitation or
modification of any right or remedy of Bank provided under the Documents, by law
or otherwise. Notwithstanding the foregoing, the Bank agrees that if Blue II
complies with the terms of this Forbearance Agreement, and if FBC complies with
the terms of the FBC Forbearance Agreement, based on the facts and circumstances
presently known to Bank, those defaults or Events of Default identified in
Paragraph 2 above shall be deemed cured and/or waived.
9. Severability. Wherever possible, each provision of this Forbearance
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Forbearance Agreement shall
be prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provisions of this Forbearance Agreement.
10. Governing Law. This Forbearance Agreement shall be governed and
construed according to the substantive laws of the State of Maryland.
11. Counterparts. This Forbearance Agreement may be executed in any
number of counterparts and by different parties hereto on separate counterparts,
each of which, when so executed and delivered, shall be an original, but all
such counterparts shall together constitute one and the same instrument.
12. Effective Date. This Agreement shall not become effective unless
and until executed by the parties hereto.
<PAGE>
IN WITNESS WHEREOF, the parties have executed or caused to be executed
this Agreement under seal as of the date first above written.
WITNESS/ATTEST: BLUE II, LLC
By: /s/ Edward D. Scott
__________________________(SEAL)
Edward D. Scott
Managing Member
FREDERICK BREWING CO.
By: /s/ Kevin Brannon
__________________________(SEAL)
Kevin Brannon
Chief Executive Officer
SIGNET BANK
By: /s/ David A. Dix
__________________________(SEAL)
David A. Dix
Vice President
GUARANTORS
/s/ Edward D. Scott
_________________________(SEAL)
Edward D. Scott
/s/ Robert Schuerholz
_________________________(SEAL)
Robert Schuerholz
/s/ Nicholas P. Foris
_________________________(SEAL)
Nicholas P. Foris
/s/ Vishnampet S. Jayanthimath
__________________________(SEAL)
Vishnampet S. Jayanthimath
<PAGE>
The undersigned hereby acknowledges and consents to the terms of the
foregoing Forbearance Agreement as of the 27th day of February, 1997.
MARYLAND INDUSTRIAL DEVELOPMENT
FINANCING AUTHORITY
By: /s/ A.P. Ramsey Crosby
--------------------------
Name: A.P. Ramsey Crosby
------------------------
Title: Executive Director
------------------------
EXHIBIT 10.2
FBC FORBEARANCE AGREEMENT
FORBEARANCE AGREEMENT
---------------------
THIS FORBEARANCE AGREEMENT ("Forbearance Agreement") is made as of
February 27, 1997, by and between FREDERICK BREWING CO., a Maryland corporation
("FBC"), and SIGNET BANK ("Bank").
RECITALS
--------
Pursuant to and in accordance with Article 83A, Title 5, Subtitle 2, of
the Annotated Code of Maryland, as amended, the Maryland Economic Development
Corporation, a body politic and corporate and a public instrumentality of the
State of Maryland (the "Issuer"), has issued and sold to Bank its Taxable
Economic Development Revenue Bond (Frederick Brewing Co. Facility), 1996 Issue,
in the original principal amount of $1,500,000 (the "Bond"), and has agreed to
loan to FBC the proceeds from the sale of the Bond upon the terms and conditions
set forth in the Loan and Financing Agreement dated July 19, 1996, by and among
the Issuer, Bank, and FBC (the "Financing Agreement"). The loan by the Issuer to
FBC of the proceeds from the sale of the Bond (the "Bond Loan") is evidenced by
a promissory note dated July 19, 1996, in the principal amount of $1,500,000,
made by FBC to the Issuer (the "Bond Loan Note"), which promissory note has been
assigned by the Issuer to Bank.
Pursuant to a certain Loan and Security Agreement dated July 19, 1996, by
and between Bank and FBC (the "Bridge Loan Agreement"), Bank agreed to extend
credit to FBC in the aggregate principal amount of $969,000 (the "Bridge Loan").
The Bridge Loan is evidenced by a promissory note dated July 19, 1996, in the
principal amount of $969,000 made by FBC to the order of Bank (the "Bridge Loan
Note").
By letter dated February 3, 1997, Bank advised FBC of the existence of
certain Events of Default under the Bridge Loan Agreement, including (a) the
occurrence of adverse changes deemed material by Bank with respect to the
business, assets, operations or financial condition of FBC (Subsection 8(k) of
the Bridge Loan Agreement), and (b) the occurrence of a default under the Blue
II Bond Financing documents resulting from the failure of Blue II to remedy
existing funding deficiencies as required under Section 6.2(c) of the Loan and
Financing Agreement (the "Blue II Financing Agreement") dated July 19, 1996, by
and among MEDCO, Blue II, FBC and Bank (Subsection 8(s)(iii) of the Bridge Loan
Agreement).
FBC has requested (a) certain forbearance on the part of Bank in
exercising its rights and remedies under the Financing Documents (as hereinafter
defined), and (b) that Bank to continue to honor requests for advances under the
Bridge Loan Agreement in accordance with the terms thereof.
As set forth in and subject to the terms of this Forbearance Agreement,
Bank has agreed to forbear in the exercise of its rights and remedies under the
Financing
<PAGE>
Documents, and to make advances under the Bridge Loan Agreement in accordance
with the terms thereof.
NOW, THEREFORE, in consideration of the mutual covenants set forth herein,
FBC and Bank do hereby agree as follows:
1. Defined Terms. All capitalized terms not otherwise defined herein which
are defined in the Financing Agreement shall have the same meanings assigned to
them in the Financing Agreement. For purposes hereof, "Financing Documents"
shall mean and include, collectively, (a) the "Documents" as defined in the
Financing Agreement, and (b) the Bridge Loan Agreement and the "Other
Agreements" as defined in the Bridge Loan Agreement.
2. Acknowledgments. FBC hereby acknowledges that (a) Events of Default
have occurred under (i) Subsections 8(k) and 8(s)(iii) of the Bridge Loan
Agreement, and (ii) Sections 10.1(s) and 10.1(w) of the Financing Agreement, (b)
Bank is a fully secured creditor with valid and perfected first priority
security interests in (i) the Security, and (ii) the "Collateral" as defined in
the Bridge Loan Agreement, (c) all previous payments to Bank under the Financing
Documents have been made in the ordinary course, and (d) Bank is not required to
make any additional advances to FBC under Subsection 5.02 of the Bridge Loan
Agreement.
3. Forbearance by Bank. Bank agrees to forbear from exercising its rights
and remedies pursuant to the Financing Documents upon the execution of this
Forbearance Agreement and to fund requests for additional advances under the
Bridge Loan Agreement in an amount not to exceed $250,000 in the aggregate (the
"Initial Forbearance Funding Amount"); provided, however, that the foregoing
forbearance and agreement shall, in Bank's discretion, terminate at any time
after (a) the occurrence of any default under or "Event of Default" as defined
in any of the Financing Documents subsequent to the date of this Forbearance
Agreement (other than the continuation of an Event of Default disclosed to or
otherwise actually known by Bank which exists on the date hereof), or (b) the
breach by FBC of or default by FBC under any of the terms of this Forbearance
Agreement.
4. Terms of Forbearance. Subject to the terms and conditions of this
Paragraph 4, Bank agrees to forbear from exercising its rights and remedies
under the Financing Documents, and to fund the balance of the Bridge Loan
remaining after the Initial Forbearance Funding Amount, subject to each of the
following conditions:
(a) FBC shall have realized (net of all costs and expenses incurred in
connection therewith) from a private placement of additional preferred stock the
sum of (a) $560,000 on or before March 7, 1997, and (b) $760,000 in the
aggregate on or before April 11, 1997. Bank shall consent to the declaration and
payment of dividends on such preferred stock provided (x) no dividends may be
declared or paid in calendar year 1997, (y) at the time of the declaration and
payment of any such dividend after 1997, FBC
<PAGE>
must be in full compliance with all financial and other covenants contained in
the Financing Documents, and no Default or Event of Default (other than a
continuation of an Event of Default disclosed to or actually known by Bank which
exists on the date hereof) shall have occurred and be continuing, and (z)
permitted dividends would be payable quarterly in arrears at a rate not to
exceed 8% per annum.
(b) FBC covenants and agrees to maintain Eligible Accounts Receivable as
of the testing dates set forth below (as hereinafter defined) of not less than
(a) $100,00 from the date hereof to (and including March 31, 1997), and (b)
$200,000 as of the testing dates set forth below thereafter. For purposes
hereof, "Eligible Accounts Receivable" shall mean accounts receivable of FBC
which are legitimate, fully invoiced, not subject to offset by or dispute with
the applicable account debtor, and not outstanding more than 60 days from
invoice date. Compliance with the provisions of this Paragraph 4(b) shall be
tested as of the fifteenth (15th) day and the end of each calendar month, and
FBC shall submit month-end reports within five days after the end of each
calendar month in form and substance satisfactory to Bank with respect to
current levels of Eligible Accounts Receivable.
(c) On or before the sixtieth (60th) day following the date of this
Agreement, FBC shall have either (a) paid to Bank a fee of $25,000, or (b)
issued to Bank unrestricted perpetual warrants with a value of not less than
$25,000, in form and substance acceptable to Bank and convertible for no
consideration into shares of the common stock of FBC. The number of shares to be
acquired by the exercise of such warrants shall be determined by dividing
$25,000 by the average closing price of the common stock of FBC for the thirty
trading days immediately preceding the date of issuance of such warrants, as
reported by The Wall Street Journal.
(d) Concurrently with the execution hereof, Kevin Brannon and Marjorie A.
McGinnis shall have unconditionally guarantied the payment and performance of
the obligations of FBC under the Bridge Loan Agreement and the "Note" (as
therein defined) pursuant to a written guaranty agreement in form and substance
satisfactory to Bank.
(e) FBC shall cause to be delivered to Bank, immediately following its
receipt thereof, all proceeds from the sale of "Equipment" (as defined in the
Bridge Loan Agreement) used or located at the existing business premises of FBC
at 103 South Carroll Street, Frederick, Maryland 21701. Bank shall hold such
proceeds to further collateralize the Bridge Loan, and agrees to promptly
release such funds upon the satisfaction of the obligations of FBC under the
Bridge Loan (whether by payment with the proceeds of the "SBA Loan" (as defined
in the Bridge Loan Agreement), or otherwise).
(f) Bank shall not have been advised by either Mid-Atlantic Business
Finance Company or the SBA that the SBA commitment to extend the "SBA Loan" (as
defined in the Bridge Loan Agreement) has been terminated, suspended, or
otherwise not in full force and effect.
<PAGE>
5. Fees and Expenses. FBC agrees to pay, within thirty (30) days following
Bank's demand, all expenses paid or incurred by Bank (including the documented
expenses and fees of its counsel) in connection with (a) the administration of
the credit accommodations extended to FBC under the Financing Documents to the
date hereof (including, without limitation, the preparation and negotiation of
this Forbearance Agreement and all documents referenced or referred to herein),
and (b) all future matters arising in connection with Bank's credit
accommodations to FBC.
6. Confirmation, Merger, Integration and Amendment. Unless specifically
modified, consented to or suspended by this Forbearance Agreement, all of the
terms and provisions of the Financing Documents remain in full force and effect.
FBC hereby ratifies and confirms all provisions of the Financing Documents,
which Financing Documents are incorporated herein by reference as if set forth
in full, except to the extent that they are specifically modified by, consented
to or suspended the terms of this Forbearance Agreement. This Forbearance
Agreement shall not be construed or intended as a novation of any of the
Financing Documents. In the event of any internal inconsistency between any
provisions of the Financing Documents as a result of the execution of this
Forbearance Agreement, the provisions contained in this Forbearance Agreement
shall be controlling and the conflicting provisions deemed amended to the extent
necessary to eliminate such inconsistency. This Forbearance Agreement, together
with the Financing Documents to the extent not modified hereby, contain the
entire agreement of the parties with respect to the matters covered and the
transactions contemplated hereby and no other agreement, statement or promise
made by any party hereto or by any employee, officer, agent or attorney of any
party hereto, which is not contained in such documents shall be valid or
binding. This Forbearance Agreement may not be modified in any manner, except by
written agreement signed by all parties. This Forbearance Agreement shall be one
of the "Documents" as defined in the Financing Agreement, and one of the "Other
Agreements" as defined in the Bridge Loan Agreement.
7. Waivers. Without limitation of the provisions of Paragraph 6 above, as
part of the consideration of this Forbearance Agreement, FBC, for FBC and for
its successors and assigns, does hereby remise, release and forever discharge
Issuer, Bank and the Maryland Industrial Development Financing Authority
("MIDFA") and each of their respective past, present and future officers,
employees, agents, directors, and stockholders, of and from all manner of
actions, causes and causes of action, suits, debts, sums of money, account
reckonings, bonds, bills, specialties, coverages, judgments, executions, claims,
and demands whatsoever, at law or in equity, and particularly, without limiting
the generality of the foregoing, all claims relating to the transactions which
are the subject of the Financing Documents and to this Forbearance Agreement,
which FBC or its successors and assigns ever had or now have for, upon or by
reason of any matter, cause, or thing, whatsoever. FBC further waives any and
all defenses, offsets, and counterclaims to Bank's enforcement of the Financing
Documents or any action by Bank to foreclose any security interest, whether
secured by real or personal property, which exist as of the date hereof.
<PAGE>
8. Non-Waiver by Bank. Except as specifically provided herein, neither
Bank's entering into this Forbearance Agreement, nor any failure on the part of
Bank in exercising any right, power, or privilege under one or more of the
Financing Documents, shall operate as a waiver thereof, nor shall a single or
partial exercise thereof preclude any other or further exercise of any other
right, power or privilege. The parties agree that except as specifically
provided herein, nothing in this Forbearance Agreement or any other document to
be executed simultaneously herewith shall be deemed to be a waiver, limitation
or modification of any right or remedy of Bank provided under the Financing
Documents, by law or otherwise. Notwithstanding the foregoing, Bank agrees that
if FBC complies with the terms of this Forbearance Agreement, and if Blue II
complies with the terms of that certain Forbearance Agreement of even date
herewith by and among, inter alia, Blue II and Bank, based on the facts and
circumstances presently known to Bank, those Events of Default identified in
Paragraph 2 above shall be deemed cured and/or waived.
9. Severability. Wherever possible, each provision of this Forbearance
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law, but if any provision of this Forbearance Agreement shall
be prohibited by or invalid under applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provisions of this Forbearance Agreement.
10. Governing Law. This Forbearance Agreement shall be governed and
construed according to the substantive laws of the State of Maryland.
11. Counterparts. This Forbearance Agreement may be executed in any number
of counterparts and by different parties hereto on separate counterparts, each
of which, when so executed and delivered, shall be an original, but all such
counterparts shall together constitute one and the same instrument.
12. Effective Date. This Agreement shall not become effective unless and
until executed by the parties hereto.
<PAGE>
IN WITNESS WHEREOF, the parties have executed or caused to be executed
this Agreement under seal as of the date first above written.
WITNESS/ATTEST: FREDERICK BREWING CO.
__________________________ By: /s/ Kevin Brannon
________________________(SEAL)
Kevin Brannon
Chief Executive Officer
SIGNET BANK
__________________________ By: /s/ David A. Dix
________________________(SEAL)
David A. Dix
Vice President
The undersigned hereby acknowledges and consents to the terms of the
foregoing Forbearance Agreement as of the 27th day of February, 1997.
MARYLAND INDUSTRIAL DEVELOPMENT
FINANCING AUTHORITY
By: /s/ A.P. Ramsey Crosby
--------------------------
Name: A.P. Ramsey Crosby
------------------------
Title: Executive Director
------------------------
Press Release EXHIBIT 99.1
FOR IMMEDIATE RELEASE: NEWS
February 27, 1997 Nasdaq-BLUE
FREDERICK BREWING CO. EXECUTES FORBEARANCE AGREEMENTS
WITH SIGNET BANK
FREDERICK, Maryland -- Frederick Brewing Co. (Nasdaq-BLUE), has announced that
on February 27, 1997, it executed two forbearance agreements with Signet Bank.
The first related to a $3 million Maryland Economic Development Corporation
(MEDCO) Taxable Economic Development Revenue Bond, the proceeds of which were to
be loaned to Blue II, LLC, a Maryland limited liability company, to purchase
land and construct a new brewery. The brewery has been leased to Frederick
Brewing Co.
The second forbearance agreement related to a $1.5 million MEDCO Taxable
Economic Development Revenue Bond, and to a $1 million bridge loan, the combined
proceeds of which were to be loaned to the Company to purchase brewing equipment
for the new brewery. Signet Bank/Maryland is the lender on each loan.
The first forbearance agreement was executed by the Company as a result of an
approximately $340,000 budget overrun in constructing the new brewery as well as
a decline in the Company's cash position, which resulted from significant
weather-related delays during construction. The second forbearance agreement
was executed as a result of an approximately $250,000 budget overrun in
acquiring certain brewing equipment.
These funding deficiencies caused Signet on January 22, 1997 to claim that the
bridge loan was in default and to temporarily cease funding to Blue II, LLC and
the Company subject to the execution of the forbearance agreements. Under terms
of the forbearance agreements, Signet will forbear in the exercise of its rights
under the loan documents and continue to make loan advances to facilitate the
final completion of the new brewery, provided the Company and Blue II, LLC meet
certain terms and conditions established by the agreements.
The Company is in the process of raising up to $2 million in a private equity
transaction.
Additional information related to both forbearance agreements and other matters
can be found in the Company's Form 8-K filed February 27, 1997 with the
Securities and Exchange Commission.
Frederick Brewing Co., which participates in the growing "craft" beer segment of
the $50 billion domestic beer market, produces 10 styles of distinctive,
all-natural beers. The Company's products are distributed in Maryland, the
District of Columbia, Virginia, West Virginia, Pennsylvania, New Jersey,
Delaware, Georgia and South Carolina.
# # #
Frederick Brewing Co. CONTACTS: Pfeiffer Public Relations, Inc.
Kevin Brannon CEO Geoff High
301/694-7899 303/393-7044
EXHIBIT 99.2
PAYMENT AND REDEMPTION AGREEMENT
WHEREAS, Frederick Brewing Co. ("FBC") and Blue II, LLC ("Blue II")
entered into a contract with Morgan-Keller, Inc. ("MK") for the construction of
the Blue II building on Lot 13, Wedgewood Business Park, Frederick, Maryland
("Construction Contract"); and
WHEREAS, Signet Bank/Maryland ("Signet"), the lender for FBC and Blue
II, claimed a default under certain of the loan documents and refused to advance
further payment for the construction work by MK; and
WHEREAS, a Forbearance Agreement has been reached between Signet, FBC,
Blue II and certain guarantors of the obligations of Blue II whereby Signet will
advance funds to pay the moneys due to MK subject to certain conditions set
forth therein; and
WHEREAS, the parties hereto are entering into this Agreement in order
to, among other things, facilitate the payment of funds to MK pursuant to the
Forbearance Agreement.
The parties hereto, for good and valuable consideration, the receipt of
which is hereby acknowledged, intending to be bound, agree as follows:
1. The total amount due and owing to MK pursuant to the Construction
Contract, including all change orders and retainage, is $1,175,718.97.
2. That sum shall be paid to MK as follows:
a. $839,532.18 by payments out of the remaining construction
loan proceeds of $241,296.04 and FBC's construction escrow account of
$598,236.14;
b. $20,971.89 by an assignment by FBC of its interest in the
current balance of the construction escrow account, which is currently being
held by Signet to support three letters of credit issued for the benefit of the
Frederick County Commissioners
<PAGE>
to assure completion of certain site improvements and public improvements on and
about the new brewery property;
c. $214.90 in cash by FBC out of current cash reserves; and
d. $315,000.00 by cash or certified check by FBC
simultaneously with the payment by MK, or one or more of its principal
shareholders, of $315,000.00 to FBC as payment for 630 shares of FBC Series A 8%
Cumulative Convertible Preferred Stock ("preferred stock") at $500.00 per share.
3. FBC will redeem, at the purchase price, the preferred stock issued
pursuant to paragraph 2 above, if, when and to the extent that;
a. Sales of preferred stock by FBC in its presently
contemplated private offerings result in a capital infusion in excess of
$1,700,000; or
b. Claims against Harris, Smariga & Associates result in a
recovery by FBC net of attorney fees and other actual out-of-pocket costs
incurred by FBC in the course of pursuing those claims. FBC hereby undertakes to
vigorously pursue its claims against Harris, Smariga and Associates.
4. FBC and Blue II, on the one hand, and MK, on the other, hereby waive
all claims against each other arising from or relating to the Construction
Contract that arose prior to the date hereof, including, but not limited to,
claims for untimely completion, challenges to change order amounts and claims
for late payment. Notwithstanding the foregoing, FBC specifically reserves and
does not waive any claims it may have under construction warranties, express or
implied, which warranties run from MK, its subcontractors, or suppliers to MK or
its subcontractors.
2
<PAGE>
5. MK is entering into this Agreement based on the following express
representations by FBC;
a. $336,186.84 is the Final Net Funding Deficiency as defined
in the Forbearance Agreement, P. 4(a).
b. FBC, and the officer signing therefore, is authorized to
enter into this Agreement, including but not limited to the agreement to redeem
the preferred stock as set forth in paragraph 3 above, and that the sale and
redemption of the preferred stock contemplated herein will not violate the
preemptive or redemption rights of any current or future shareholder of FBC; and
c. Entry into and performance of this agreement will not
violate any agreement between FBC and its lenders.
6. MK and Blue II each represent that they and the persons signing on
their behalf are authorized to enter into this Agreement.
7. The Whereas clauses are an integral part of this Agreement.
8. This Agreement shall be construed pursuant to the laws of the State
of Maryland without regard to any rules of construction based on authorship.
9. The date of this Agreement shall be the date of the last signature
hereon.
Frederick Brewing Company
By: /s/ Kevin Brannon
---------------------------
Kevin Brannon
Chief Executive Officer
Date: February 27, 1997
3
<PAGE>
Blue II, LLC
By: /s/ Edward D. Scott
---------------------------
Edward D. Scott
Managing Member
Date: February 27, 1997
Morgan-Keller, Inc.
By: /s/ Bradley Guyton
---------------------------
Bradley Guyton
Executive Vice President
Date: February 27, 1997
4
EXHIBIT 99.3
Frederick Brewing Co. Completes New Brewery; $8 Million, 57,000-Square-Foot
Facility Becomes Maryland's Largest Brewery
FREDERICK, Md., Feb. 12 /PRNewswire/ -- Frederick Brewing Co. (Nasdaq: BLUE),
brewer of the Blue Ridge family of beers, has put the finishing touches on its
new 57,000- square-foot brewery.
The $8 million facility, which immediately expands the Company's brewing
capacity from 12,600 to 45,000 barrels a year, today held a grand opening
celebration attended by several area dignitaries. The new facility makes
Frederick Brewing Company the largest brewery in Maryland.
"We are extremely pleased that we have reached this milestone in our Company's
history," said Kevin Brannon, CEO. "We have worked very hard to get to this
point, and we are now solidly positioned to meet the increasing demand for our
quality line of specialty beers."
The facility, located in the Wedgewood Business Park in Frederick, Maryland, was
financed in part by proceeds from the Company's March 1996 initial public
offering, which netted $3.8 million. The Company also utilized $4.5 million in
economic development bonds issued by the Maryland Economic Development
Corporation and partially guaranteed by the Maryland Industrial Development and
Financing Authority, and a $1 million loan from the Small Business Association.
With additional equipment, the brewery can be expanded to produce 150,000
barrels per year, and by adding 20,000-30,000 square-feet, it will have the
capacity to produce as much as 300,000 barrels annually.
"The opening of this brewery is a tribute to the effort put forth by everyone at
Frederick Brewing Company," Brannon said. "We are now looking forward to
expanding into new markets and capitalizing on the long-term growth
opportunities currently facing the Company."
Frederick Brewing Co., which participates in the growing "craft" beer segment of
the $50 billion domestic beer market, produces 10 styles of distinctive,
all-natural beers. The Company's products are distributed throughout Maryland,
the District of Columbia, Virginia, West Virginia, Pennsylvania, New Jersey,
Delaware, Georgia, South Carolina, Colorado and Illinois.
EXHIBIT 99.4
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for forward-looking statements to encourage companies
to provide prospective information about their companies, so long as those
statements are identified as forward- looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those discussed in the statement. The Company
desires to take advantage of the "safe harbor" provisions of the Act. Certain
information, particularly information regarding future economic performance and
finances and plans and objectives of management, contained, or incorporated by
reference, in the Company's Current Report on Form 8-K dated as of February
[19], 1997 is forward-looking. In some cases, information regarding certain
important factors that could cause actual results to differ materially from any
such forward-looking statement appear together with such statement in the Form
8-K. Also, the following factors, in addition to other possible factors not
listed, could affect the Company's actual results and cause such results to
differ materially from those expressed in forward-looking statements.
Limited Operating History; Past and Possible Future Operating Losses;
Management's Discretion Over Proceeds of Preferred Stock Offering. The Company
was founded in 1992 and has operated at a loss for each year since such date.
The Company's limited operating history makes the prediction of future sales and
operating results difficult. Accordingly, although the Company has experienced
sales growth, such growth should not be considered indicative of future sales
growth, if any, or of future operating results. There can be no assurance that
the Company's sales will grow or be sustained in future periods or that the
Company will become or remain profitable in any future period. Due to the
expenses involved in the expansion of the Company's operations with respect to
the completion of the new brewery (including increased overhead, depreciation,
marketing and salaries), 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. Management will have broad
discretion over the allocation of the net proceeds of the private offering of
the Preferred Stock.
Lack of Liquidity; Inadequate Working Capital. The Company has, in the
last ten 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 currently requires additional working capital
for the completion of the new brewery, the hiring and
<PAGE>
training of administrative and sales personnel and the payment of certain
promotional, marketing and advertising expenses in anticipation of the
commencement of production at the new brewery which is expected to occur in
March 1997.
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 $1,000,000 Bridge Loan. 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.
Heavy Dependence on Wholesale Distributors. The Company distributes its
products only through independent wholesale distributors for resale to retailers
such as liquor and wine and beer stores, restaurants, taverns, pubs, bars and
sporting arenas. Accordingly, the Company is dependent upon these wholesale
distributors to sell the Company's beers and to assist the Company in creating
demand for, and promoting market acceptance of, the Company's products and
providing adequate service to its retail customers. There can be no assurance
that the Company's wholesale distributors will devote the resources necessary to
provide effective sales and promotion support to the Company.
Dependence on Major Customer. Sales to The Kronheim Co., Inc.,
Baltimore, Maryland ("Kronheim"), the Company's largest wholesale distributor,
represented 50.6%, 35.7% and 56.5% of the Company's beer revenues in 1996, 1995
and 1994. Sales to all other wholesale distributors represented 49.4%, 64.3% and
43.5% of the Company's beer revenues in 1996, 1995 and 1994. (The 1994
percentages for sales to other wholesale distributors include beer sold directly
to retailers by the Company.) The Company expects sales to its largest wholesale
distributor to continue to represent a significant portion of its sales in the
near term. The Company believes that its future growth and success will continue
to depend in large part upon this significant wholesale distributor, but such
dependence should decrease as the Company expands its market area.
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
-2-
<PAGE>
would be able to replace a significant wholesale distributor in a timely manner
or at all in the event it were to discontinue selling the Company's products. In
addition, there is always a risk that the Company's wholesale distributors will
give higher priority to the products of other beverage companies, including
products directly competitive to the Company's beers, thus reducing their
efforts to sell the Company's products. This risk is exacerbated by the fact
that many of the Company's wholesale distributors (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, advertising, distribution capabilities, brand recognition,
packaging and price. There can be no assurance that the Company will be able to
compete successfully against current and future competitors based on these and
other factors. The Company competes with a variety of domestic and international
brewers, many of whom have substantially greater financial, production,
distribution and marketing resources and have achieved a higher level of brand
recognition than the Company.
The Company anticipates increased competition in the specialty beer
segment from the major domestic brewers such as Anheuser-Busch Companies, Inc.
("Anheuser-Busch"), Miller Brewing Co. ("Miller") and Adolph Coors Co.
("Coors"), each of whom has introduced and is marketing fuller flavored beers
designed to compete directly in the specialty beer segment. These large domestic
brewers dominate the overall domestic beer market and the Company expects that
certain of these companies, with their superior financial resources and
established distribution networks, will continue to seek further participation
in the specialty beer segment through the acquisition of equity positions in, or
the formation of distribution alliances with, smaller
-3-
<PAGE>
craft brewers (such as Anheuser-Busch's equity position in, and distribution
agreement with, Redhook Ale Brewery, Incorporated).
The Company also faces and will face increasing competition from import
specialty beer companies such as Heineken N.V., Bass PLC and Guinness PLC and
existing domestic specialty and contract brewers such as The Boston Beer
Company, Inc., Pete's Brewing Co., Redhook Ale Brewery, Incorporated, Sierra
Nevada Brewing Co. and Anchor Brewing Co., as well as the regional specialty
brewers and local microbreweries in the markets where the Company distributes
its beers. Recent growth in the sales of specialty beers is expected to result
in increased competition in the segment, including a continuing proliferation of
microbrewers and efforts by micro and regional brewers to expand their
production capacity, marketing expenditures and geographical distribution areas.
Increased competition could result in price reductions, reduced profit margins
and loss of market share, all of which would have a material adverse effect on
the Company's financial condition and results of operations.
The Company's products also compete generally with other alcoholic
beverages, including products offered in other segments of the beer industry and
low- or no-alcohol products. The Company competes with other beer and beverage
companies not only for consumer acceptance and loyalty but also for shelf and
tap space in retail establishments and for marketing focus by the Company's
wholesale distributors and their customers, all of which also distribute and
sell other beers and alcoholic beverage products. Finally, there can be no
assurance that the recent growth in consumer demand for craft beers will
continue, or even if such growth continues, that consumers will choose the
Company's beers.
Potential Fluctuations in Quarterly Results. The Company's quarterly
operating results have in the past and may in the future vary significantly
depending on factors such as sales for the quarter, fixed and semi-variable
operating costs during periods when the Company's brewery is producing below
maximum designed production capacity, professional fees and expenses relating to
the Company's planned expansion, increased competition, fluctuations in the
price of ingredients or packaging materials, seasonality of sales of the
Company's beers, general economic factors, trends in consumer preferences,
regulatory developments, including changes in excise and other tax rates,
changes in the sales mix between kegs and bottles, changes in average selling
prices or market acceptance of the Company's beers, increases in packaging and
marketing costs associated with initial production of new products and
variations in shipping and transportation costs.
The Company's operating results may be significantly impacted in the
future by, among other things, the costs attendant to the commencement of
production at the new brewery, 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
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the Company and other expansion activities engaged in by the Company. The
Company's expense levels are based, in part, on its expectations of future sales
levels. If sales levels are below expectations, operating results are likely to
be materially adversely affected. In particular, because the Company operates
its own production facility, a significant portion of its overhead is fixed and
cannot be reduced for short-term adjustments such as sales below management's
expectations, and an excess of production capacity could therefore have a
significant negative impact on the Company's operating results. However, the
Company has historically operated with little or no backlog. The absence of
backlog increases the difficulty of predicting sales and operating results. In
addition, the Company's decision to undertake a significant media advertising
campaign after the commencement of construction of the new brewery could
substantially increase the Company's expenses in a particular quarter, while any
increase in sales from such advertising may be realized in subsequent periods.
Based upon the risks of potential fluctuations in quarterly results
discussed above and seasonality and the unpredictability of demand, discussed
below, the Company believes that quarterly sales and operating results are
likely to vary significantly in the future and that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Further, it is possible that
in some future quarter the Company's revenue or operating results will be below
the expectations of public market analysts and investors. In such event, the
price of the Company's Common Stock could be materially adversely affected.
Sales Fluctuations Due to Seasonality. The Company's wholesale
distributors have historically experienced higher sales in the second and fourth
quarters of the calendar year due to increased consumption of the Company's
beers during periods of warmer weather and from Halloween through New Year's
Day. Although the Company has not yet experienced sale fluctuations due to
seasonality because the Company has continued to expand its wholesale
distribution network over the past three years, fluctuations in the Company's
sales due to seasonality may become evident in the future as the Company's sales
increase.
No Assurance of Geographic Expansion. While the Company has recently
expanded its distribution network 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 continued promotion and sale of the Company's products by suitable local
wholesale distributors, the retention of skilled sales and other
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personnel, the ability to adapt management and other operational systems to
accommodate increased volume, the success of advertising and promotion
campaigns, and other factors, some of which are beyond the control of the
Company. Furthermore, consumer tastes vary by region and there can be no
assurance that consumers located in new geographic regions will be receptive to
the Company's beers. The Company believes that consumer demand for its products
is greater in certain areas than others due to demographic, economic and other
factors. The Company's efforts to increase sales by further penetrating market
areas may be limited by such factors. The inability of the Company to expand
sales in a timely manner would have a material adverse effect on the Company's
operating results and financial condition.
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 beer market is highly competitive and characterized by
changing consumer preferences and continuous introduction of new products. The
Company intends to introduce new products from time to time to maintain
wholesale distributor and retailer interest and appeal to varying consumer
preferences and to create consumer demand. The Company believes that its future
growth will depend, in part, on its ability to anticipate changes in consumer
preferences or to create consumer demand and develop and introduce, in a timely
manner, new beers that adequately address such changes. There can be no
assurance that the Company will be successful in developing, introducing and
marketing new products on a timely basis. If the Company is unable to introduce
new products or if the Company's new products are not successful, the Company's
sales may be adversely affected as customers seek competitive products. In
addition, the introduction of new products by the Company could result in
reduction of sales of the Company's existing beers, requiring the Company to
manage carefully product introductions in order to minimize disruption in sales
of existing products. There can be no assurance that the introduction of new
product offerings by the Company will not cause wholesale distributors,
retailers and consumers to reduce purchases or consumption of existing Company
products. Such reduction of purchases or
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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, 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
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a delay in shipments from the alternative suppliers.
As with most agricultural products, the supply and price of raw
materials used to produce the Company's beers can be affected by a number of
factors beyond the control of the Company such as floods, frosts, droughts,
other weather conditions, economic factors affecting growing decisions, various
plant diseases and pests. To the extent that any of the foregoing affects the
ingredients used to produce the Company's beers, the Company's results of
operations would be materially and adversely affected. In addition, the Company
keeps only approximately a 30 day supply of hops and a seven day supply of malt
on its premises. Moreover, its purchases are limited to pre-packaged quantities,
rather than in bulk. Therefore, the Company is highly dependent upon the ability
of its suppliers to deliver its ingredients in a timely fashion. Such delivery,
which is by truck, is dependent upon certain factors beyond the control of the
Company, including but not limited to weather and labor relations. The Company's
operations are dependent upon its ability to accurately forecast its need for
ingredients. Any failure by the Company to accurately forecast its requirements
of raw materials could result in the Company either being unable to meet higher
than anticipated demand for its products or producing excess inventory, either
of which may adversely affect the Company's results of operations.
Ability to Manage Growth. The Company has experienced rapid growth that
has resulted in new and increased responsibilities for management personnel
which has challenged and continues to challenge the Company's management,
operating and financial systems and resources. To compete effectively and manage
future growth, if any, the Company will be required to continue to implement and
improve its operational, financial and management information systems,
procedures and controls on a timely basis and to expand, train, motivate and
manage its work force. There can be no assurance that the Company's personnel,
systems, procedures and controls will be adequate to support the Company's
existing and future operations. Any failure to implement and improve the
Company's operational, financial and management systems or to expand, train,
motivate or manage employees could have a material adverse effect on the
Company's operating results and financial condition.
No Assurance of Ability to Protect Intellectual Property Rights. The
Company considers its trademarks and pending trademarks, particularly the "Blue
Ridge" brand names, proprietary beer recipes and the design of product
packaging, advertising and promotional design and art work (the "Intellectual
Property") 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
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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 beer industry or significant business
experience. The competition for qualified personnel is intense and the loss of
any of such persons as well as the failure to recruit additional key personnel
in a timely manner, could adversely affect the Company. There can be no
assurance that the Company will be able to continue to attract and retain
qualified management and sales personnel for the development of its business.
Failure to attract and retain key personnel could have a material adverse effect
on the Company's operating results and financial condition.
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Operating Hazards; No Assurance of Adequate Insurance. The Company's
operations are subject to certain hazards and liability risks faced by all
brewers, such as bottle flaws or potential contamination of ingredients or
products by bacteria or other external agents that may be accidentally or
wrongfully introduced into products or packaging. The Company's products are not
pasteurized and require careful product rotation to prevent spoilage. However,
neither spoiled beer nor the bacteria introduced in the brewing process is known
to be harmful to human health. The Company runs periodic diagnostic tests on all
of its products to assure that they meet Company quality control guidelines and
comply with federal and state regulatory requirements. While the Company has not
experienced a serious contamination problem in its products, the occurrence of
such a problem could result in a costly product recall and serious damage to the
Company's reputation for product quality. The Company's operations are also
subject to certain injury and liability risks normally associated with the
operation and possible malfunction of brewing and packaging equipment. Although
the Company maintains insurance against certain risks under various general
liability and product liability insurance policies, there can be no assurance
that the Company's insurance will be adequate.
Government Regulation. The Company's business is highly regulated by
federal, state and local laws and regulations. The Company must comply with
extensive laws and regulations regarding such matters as state and regulatory
approval and licensing requirements, trade and pricing practices, permitted and
required labeling, advertising, promotion and marketing practices, relationships
with distributors and related matters. For example, federal and state regulators
require warning labels and signage on the Company's products. The Company
believes that it has obtained all regulatory permits and licenses necessary to
operate its business in the states where the Company's products are currently
being distributed. Failure on the part of the Company to comply with federal,
state or local regulations could result in the loss or revocation or suspension
of the Company's licenses, permits or approvals and accordingly could have a
material adverse effect on the Company's business. In addition, changes to
federal and state excise taxes on beer production, federal, state and local
environmental regulations, including laws relating to packaging and waste
discharge, or any other laws or regulations which affect the Company's products
could have a material adverse effect on the Company's results of operations. The
federal government and each of the states levy excise taxes on alcoholic
beverages, including beers. The federal government currently imposes an excise
tax of $18.00 per barrel on every barrel of beer produced for consumption in the
United States by each brewing company with annual production of over 2,000,000
barrels. The federal excise tax for brewing companies with annual production
under 2,000,000 barrels is $7.00 per barrel on all barrels up to the first
60,000 barrels produced and $18.00 per barrel for each barrel produced in excess
of 60,000. Any increase in the excise tax for small brewers could have a
material adverse effect on the Company's operating results and financial
condition.
Public Attitudes Toward Alcohol Consumption. In recent years, there
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has been an increase in the level of health-consciousness in the United States
and considerable debate has occurred concerning alcohol-related social problems,
such as alcoholism and drunk driving. In addition, a number of anti-alcohol
groups are advocating increased governmental action on a variety of fronts
unfavorable to the beer industry, including the legislation of new labeling or
packaging requirements and restrictions on advertising and promotion that could
adversely affect the sale of the Company's products. Restrictions on the sale
and consumption of beer or increases in the retail cost of beer due to increased
governmental regulations, taxes or otherwise, could materially and adversely
affect the Company's financial condition and results of operations.
Concentration of Ownership of Management. As of the date of this
Memorandum, the present executive officers and directors of the Company
beneficially own approximately 27.50% of the Common Stock. However, such
ownership will be diluted to approximately 21.36% if the maximum number of
shares are sold in the private Preferred Stock offering. Notwithstanding, these
stockholders will be able to significantly influence all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may have the
effect of delaying or preventing a change in control of the Company.
Antitakeover Provisions in the Company's Corporate Documents. The
Company's Board of Directors has the authority to issue up to 1,000,000 shares
of preferred stock, $.01 par value per share, of the Company and to determine
the price, rights, preferences, privileges and restrictions thereof, including
voting rights, without any further vote or action by the Company's stockholders.
The voting and other rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The Company's Board may similarly issue
additional shares of Common Stock without any further vote or action by
stockholders. Such an issuance could occur in the context of another public or
private offering of shares of Common Stock or preferred stock or in a situation
where the Common or preferred stock is used to acquire the assets or stock of
another company. The issuance of Common or preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no current plans to issue any
shares of Common or preferred stock other than as described herein.
Moreover, the Restated and Amended Articles of Incorporation
("Articles") and Restated and Amended Bylaws ("Bylaws") of the Company contain
certain provisions which, among other things, maintain a "staggered" Board of
Directors, limit the personal liability of, and provide indemnification for, the
directors of the Company, require that stockholders comply with certain
requirements before they can nominate someone for director or submit a proposal
before a meeting of stockholders,
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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.
Potential Volatility of Stock Price. Stock prices of many growing
consumer-product companies fluctuate widely, often for reasons that are
unrelated to their actual operating performance. Announcement of new facilities
or products by the Company or its competitors, regulatory developments, and
economic or other external factors, as well as period-to-period fluctuations in
financial results, may have a significant impact on the market price and
marketability of the Common Stock. In the past, following periods of volatility
in the market price of a company's securities, securities class action
litigation has often been initiated against such company. Such litigation could
result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect upon the Company's
operating results and financial condition.
Common Stock Equivalents. If the maximum number of shares of Preferred
Stock are sold in the private Preferred Stock offering, such shares may be
converted into approximately 453,000 shares of Common Stock (assuming that the
average closing price of the Company's Common Stock for the prior thirty trading
days is $4.00 per share). An increase in the number of shares of Common Stock
(or Common Stock equivalents) outstanding will have a negative effect on the
Company's per share ratios, including earnings per share, which could negatively
impact the market for the Company's Common Stock and the price of the Common
Stock in the market.
Dividends. The Company has never paid a dividend on its Common Stock
and currently expects to retain its future earnings, if any, for use in the
operation and expansion of its business and does not anticipate paying any such
cash dividends on its Common Stock in the foreseeable future. In addition, the
Preferred Stock offered hereby has a priority on funds available for dividends
and dividends on the Preferred Stock must be paid in full before dividends may
be paid on the Common Stock. Dividends to be paid on the Preferred Stock must be
approved by the Bank prior to payment. The Bank has stated in the Forbearance
Agreement that it will not approve such dividend payments in 1997. Any dividend
not approved shall accumulate but will not be paid by the Company until approval
of such dividend is obtained from the Bank. Future loan agreements may similarly
restrict or limit the payment of dividends on the Preferred Stock.
Certain Related-Party Transactions. The Company has borrowed money from
time to time to provide cash for operations and for other corporate purposes
from its directors, stockholders and persons having business relationships with
its directors. In addition, the Company has agreed to lease the new brewery
premises from a company which is owned, in part, by one of the Company's
directors and by other
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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 attorneys' fees as well as any judgment, fine or amounts
paid in settlement of such action provided that the indemnified party meets
certain standards of conduct necessary for indemnification under applicable law.
Such indemnity may or may not be covered by officer and director liability
insurance and could result in an expense to the Company even if such person is
not successful in the action. This provision is designed to protect such persons
against the costs of litigation which may result from his or her actions on
behalf of the Company. In addition, the Company has purchased insurance to cover
its directors and officers under certain circumstances.
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