<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 2, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FREDERICK BREWING CO.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MARYLAND 52-1769647
(STATE OR JURISDICTION OF INCORPORATION OR ORGANIZATION) (IRS EMPLOYER IDENTIFICATION NO.)
</TABLE>
------------------------
<TABLE>
<S> <C>
4607 WEDGEWOOD BOULEVARD KEVIN E. BRANNON
FREDERICK, MARYLAND 21703 4607 WEDGEWOOD BOULEVARD
(301) 694-7899 FREDERICK, MARYLAND 21703
FACSIMILE (301) 694-2971 (301) 694-7899
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
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Copy to:
HANK GRACIN, ESQ.
LEHMAN & EILEN
SUITE 505
50 CHARLES LINDBERGH BOULEVARD
UNIONDALE, NEW YORK 11553
(516) 222-0888
FACSIMILE (516) 222-0948
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this registration
statement.
If the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 other than securities offered only in connection with dividend or interest
reinvestment plan, please check the following box: /x/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO BE PRICE PER OFFERING REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) FEE(2)
<S> <C> <C> <C> <C>
Common Stock, par value $.00004 per share(3)............. 2,850,000 $.625 $1,781,250 $525.47
Common Stock, par value $.00004 per share(4)............. 200,000 $.625 $ 125,000 $ 36.88
Total.................................................... 3,050,000 $.625 $1,906,250 $562.35
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee. The
Proposed Maximum Aggregate Offering Price was calculated pursuant to
Rule 457(c) under the Securities Act of 1933, as amended, on the basis of
the closing price reported in the NASDAQ SmallCap Market system on
September 30, 1998.
(2) Enclosed herewith.
(3) Based upon 150% of the shares of Common Stock which would have been issued
on October 1, 1998 upon the conversion of the $1,000,000 aggregate stated
value of the Series F Cumulative Convertible Preferred Stock of the
Company (the "Series F Preferred Stock") at a conversion price of $.53
per share, which is the lesser of (i) ninety (90%) percent of the closing
bid price of the Common Stock on September 2, 1998 reported in the Nasdaq
SmallCap Market System (or $.70) (the "Closing Bid Conversion Price"), or
(ii) eighty (80%) percent of the average of the three lowest closing bid
prices of the Common Stock for the seven trading days prior to, but not
including October 1, 1998 or $.53 (the "Three Day Average Conversion
Price"). The number of shares of Common Stock is subject to adjustment and
could be materially more or less than such estimated amount depending upon
factors that cannot be predicted by the Company at this time, including,
among others, the future market price of the Common Stock and whether the
actual conversion price is based upon the Closing Bid Conversion Price or
the Three Day Average Conversion Price. This is not intended to constitute a
prediction as to the number of shares of Common Stock into which the
Series F Preferred Stock will be converted.
(4) Issuable upon exercise of warrants evidencing the right to purchase 200,000
shares of Common Stock.
------------------------
PURSUANT TO RULE 416, THERE ARE ALSO REGISTERED HEREBY SUCH ADDITIONAL
INDETERMINATE NUMBER OF SHARES AS MAY BECOME ISSUABLE AS DIVIDENDS OR TO PREVENT
DILUTION RESULTING FROM STOCK SPLITS, STOCK DIVIDENDS OR SIMILAR TRANSACTIONS OR
TO PROVIDE FOR CHANGES IN THE NUMBER OF SHARES OF COMMON STOCK AS ARE ISSUABLE
UPON CONVERSION OF THE SERIES F PREFERRED STOCK.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 2, 1998. Information contained herein is
subject to completion or amendment. A registration statement relating to these
securities has been filed with the Securities and Exchange Commission. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy, nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under securities laws of any such State.
PROSPECTUS
FREDERICK BREWING CO.
3,050,000 SHARES OF COMMON STOCK
($.00004 PAR VALUE)
------------------------
The 3,050,000 shares (the "Shares") of Common Stock, par value $.00004 per
share (the "Common Stock") of Frederick Brewing Co., a Maryland corporation (the
"Company"), are being offered by the holders of shares of the Company's Series F
Cumulative Convertible Preferred Stock, $0.01 par value per share (the "Series F
Preferred Stock") and the holders of warrants to purchase 200,000 shares of the
Company's Common Stock (the "Warrants"). The shares so offered are issuable upon
the conversion of the Series F Preferred Stock and the exercise of the Warrants.
See "Selling Stockholders and Plan of Distribution." The expenses of the
offering, estimated at $35,000 will be paid by the Company.
The Common Stock currently trades on the NASDAQ SmallCap Market under the
symbol "BLUE". On September 30, 1998, the last sale price of the Common Stock
as reported on NASDAQ was $.625 per share.
------------------------
THIS PROSPECTUS RELATES TO AN AGGREGATE OF 3,050,000 SHARES OF COMMON
STOCK, $.00004 PAR VALUE PER SHARE, WHICH IS BASED ON 150% OF THE SHARES OF
COMMON STOCK WHICH WOULD HAVE BEEN ISSUED ON OCTOBER 1, 1998 UPON THE CONVERSION
OF THE $1,000,000 AGGREGATE STATED VALUE OF THE SERIES F CUMULATIVE CONVERTIBLE
PREFERRED STOCK OF THE COMPANY (THE "SERIES F PREFERRED STOCK") AT A CONVERSION
PRICE OF $.53 PER SHARE, WHICH IS THE LESSER OF (I) NINETY (90%) PERCENT OF THE
CLOSING BID PRICE OF THE COMMON STOCK ON SEPTEMBER 2, 1998 REPORTED IN THE
NASDAQ SMALLCAP MARKET SYSTEM (OR $.70) (THE "CLOSING BID CONVERSION PRICE").
OR (II) EIGHTY (80%) PERCENT OF THE AVERAGE OF THE THREE LOWEST CLOSING BID
PRICES OF THE COMMON STOCK FOR THE SEVEN TRADING DAYS PRIOR TO, BUT NOT
INCLUDING OCTOBER 1, 1998 OR $.53 (THE "THREE DAY AVERAGE CONVERSION PRICE").
SEE "SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION." THE EXACT NUMBER OF SHARES
THAT WILL BE ISSUED ON THE CONVERSION OF THE SERIES F PREFERRED STOCK WILL
DEPEND ON FACTORS THAT CANNOT BE PREDICTED BY THE COMPANY AT THIS TIME,
INCLUDING, AMONG OTHERS, THE FUTURE MARKET PRICE OF THE COMMON STOCK AND WHETHER
THE ACTUAL CONVERSION PRICE IS BASED UPON THE CLOSING BID CONVERSION PRICE OR
THE THREE DAY AVERAGE CONVERSION PRICE. SEE "DESCRIPTION OF SECURITIES--SERIES F
PREFERRED STOCK." ALL THE COMMON STOCK OFFERED HEREBY IS BEING SOLD BY THE
SELLING STOCKHOLDERS. THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS RECEIVED
BY THE SELLING STOCKHOLDERS FROM THE COMMON STOCK SOLD.
THE COMPANY WILL PAY ALL REASONABLE EXPENSES OF THIS OFFERING ESTIMATED AT
$35,000. THE SELLING STOCKHOLDERS, HOWEVER, WILL BEAR THE COST OF ALL BROKERAGE
COMMISSIONS AND DISCOUNTS INCURRED IN CONNECTION WITH THE SALE OF THEIR COMMON
STOCK. THE COMMON STOCK MAY BE SOLD BY THE SELLING STOCKHOLDERS DIRECTLY OR
THROUGH UNDERWRITERS, DEALERS OR AGENTS IN MARKET TRANSACTIONS OR PRIVATELY
NEGOTIATED TRANSACTIONS. SEE "SELLING STOCKHOLDERS AND PLAN DISTRIBUTION."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PURCHASE OF THESE SECURITIES INVOLVES RISKS, INCLUDING THE RISK THAT THE
COMMON STOCK MAY BE DELISTED FROM THE NASDAQ SMALLCAP MARKET. SEE "RISK FACTORS"
ON PAGE 5.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
No person has been authorized in connection with this offering to give any
information or to make any representation other than as contained in this
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any
securities covered by this Prospectus in any state or other jurisdiction to any
person to whom it is unlawful to make such offer or solicitation in such state
or jurisdiction. Neither the delivery of this Prospectus nor any sales made
hereunder shall, under any circumstances, create an implication that there has
been no change in the affairs of the Company since the date hereof.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, as well as proxy statements and
other information filed by the Company with the Commission, can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at its Regional
Offices located at 7 World Trade Center, New York, New York 10048, and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained at prescribed rates from the Public
Reference Section of the Commission, Washington, D.C. 20549, during regular
business hours. The Commission maintains a Web site that contains reports, proxy
and information statements and other information regarding issuers such as the
Company that file electronically with the Commission at http://www.sec.gov.
This Prospectus incorporates by reference the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997, as amended by the Company's
Annual Report on Form 10-KSB/A ("Annual Report"), its Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1998, its Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1998, its Current Reports on
Form 8-K dated February 12, 1998 and April 10, 1998, the Company's Proxy
Statement for its Annual Meeting of Stockholders held May 14, 1998, filed on
April 13, 1998, the description of securities included in the Company's
Registration Statement on Form 8-A, File No. 0-27800, and all other documents
subsequently filed by the Company pursuant to Section 13(a), 13(C) or 14 of the
Exchange Act prior to the termination of the offering made hereby. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
the copy of such contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in its entirety by such
reference. The Company will provide, without charge upon oral or written request
of any person, a copy of any information incorporated by reference herein. Such
request should be directed to the Company at 4607 Wedgewood Boulevard,
Frederick, Maryland 21703, telephone (301) 694-7899.
INDEMNIFICATION
Pursuant to the Company's Articles of Incorporation, as amended, the
Company may indemnify each of its directors and officers with respect to all
liability and loss suffered and reasonable expense incurred by such person in
any action, suit or proceeding in which such person was or is made or threatened
to be made a party or is otherwise involved by reason of the fact that such
person is or was a director of the Company. In addition, the Company may pay the
reasonable expenses of indemnified directors and officers incurred in defending
such proceedings if the indemnified party agrees to repay all amounts advanced
should it be ultimately determined that such person is not entitled to
indemnification.
In addition, as permitted by the Maryland General Corporation Law, the
Company's Articles of Incorporation provides that the Company's directors will
not be held personally liable to the Company or its stockholders for monetary
damages for a breach of fiduciary duty as a director except to the extent such
exemption from liability or limitation thereof is not permitted under the
Maryland General Corporation Law. This provision does not eliminate the duty of
care, and injunctive or other forms of non-monetary equitable relief will remain
available under Maryland law. In addition, each director continues to be liable
for monetary damages for (I) misappropriation of any corporate opportunity in
violation of the director's duties, (ii) acts or omissions in bad
2
<PAGE>
faith or involving intentional dishonesty, (iii) knowing violations of law, and
(iv) any transaction from which a director derives an improper personal benefit.
The provision does not affect a director's responsibilities under any other law,
such as the federal securities laws of state or federal environmental laws.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the information
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. This Prospectus and the documents
incorporated herein by reference contain forward-looking statements that are
based on current expectations, estimates and projections about the Company's
industry, management's beliefs and assumptions made by management. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates," variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict.
Accordingly, actual results may differ materially from those expressed or
forecasted in any such forward-looking statements. Such risks and uncertainties
include those risk factors and such other uncertainties noted herein and in the
documents incorporated herein by reference. The Company undertakes no obligation
to update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
THE COMPANY
The Company's principal executive offices are located at 4607 Wedgewood
Boulevard, Frederick, Maryland 21703. Its telephone number is (301) 694-7899 and
its facsimile number is (301) 694-2971.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by Selling
Stockholders............................ 3,050,000 shares (based upon 150% of the shares of Common Stock which
would have been issued on October 1, 1998 upon the conversion of the
$1,000,000 aggregate stated value of the Series F Preferred Stock at a
conversion price of $.53 per share which is the lesser of (i) the
Closing Bid Conversion Price or (ii) the Three Day Average Conversion
Price.
Common Stock to be offered by the
Company................................. 3,050,000 shares
Common Stock Outstanding Before
Offering (1)............................ 13,905,393 shares
Common Stock Outstanding After Offering... 16,955,393 shares
Use of Proceeds........................... All of the Shares offered hereby from time to time are being offered
by the Selling Stockholders. The Company shall not receive any
proceeds therefrom.
Risk Factors.............................. The Securities offered hereby involve a high degree of risk.
Investors should purchase the securities offered hereby only if they
can afford the loss of their entire investment.
NASDAQ symbol............................. BLUE
</TABLE>
- ------------------
(1) Based on shares outstanding as of September 30, 1998
RISK FACTORS
Investment in the Shares offered hereby involves a high degree of risk,
including the limited operating history of the Company and competition.
Investors should carefully consider the various risk factors before investing in
the Shares. This Prospectus contains forward looking statements which may
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors." See "Risk Factors."
4
<PAGE>
RISK FACTORS
The shares of Common Stock offered hereby are highly speculative and
involve a high degree of risk. The following risk factors should be considered
carefully in addition to the other information in this Prospectus before
purchasing the shares of Common Stock offered hereby. The discussion in this
Prospectus contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere herein.
POTENTIAL NASDAQ DELISTING; POTENTIAL ADVERSE EFFECTS OF DELISTING
The Company has received a letter dated September 15, 1998 (the "Notice
Letter") from The Nasdaq Stock Market, Inc. ("Nasdaq") stating that the Common
Stock may be delisted from the Nasdaq SmallCap Market for failure to maintain a
minimum bid price of $1.00 per share. The Notice Letter further stated that the
Common Stock had failed to maintain a closing bid price greater than or equal to
$1.00 per share during the thirty consecutive trading days prior to
September 15, 1998. The Notice Letter further stated that if the Company failed
to demonstrate compliance through achieving a closing bid price of $1.00 per
share for ten consecutive trading days during the ninety calendar day period
ending December 14, 1998, the Common Stock would be subject to delisting.
Delisting of the Common Stock would adversely affect the price of the Common
Stock and the ability of holders to sell their shares. In addition, in order to
be relisted on Nasdaq, the Company would be required to comply with the initial
listing requirements, which are substantially more onerous than the listing
maintenance standards.
If the Common Stock was delisted from the Nasdaq SmallCap Market and the
share price for Common Stock were to remain below $5.00 per share, unless the
Company satisfies certain asset or revenue tests (at least $5,000,000 in net
tangible assets if in business less than three years, at least $2,000,000 in net
tangible assets if in business at least three years, or average revenues of at
least $6,000,000 for the last three years), the Common Stock would become
subject to the so-called "penny stock" rules promulgated by the Securities and
Exchange Commission (the "Commission"). Under the penny stock rules, a broker or
dealer selling penny stock to anyone other than an established customer or
"accredited investor" (generally, an individual with net worth in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with his or
her spouse) must make a special suitability determination for the purchaser and
must receive the purchaser's written consent to the transaction prior to the
sale, unless the broker or dealer or the transaction otherwise is exempt. In
addition, the penny stock rules require the broker or dealer to deliver, prior
to any transaction, a disclosure schedule prepared by the Commission relating to
the penny stock market, unless the broker or dealer or the transaction otherwise
is exempt. A broker or dealer also is required to disclose commissions payable
thereto and to the registered representative and current quotations for the
securities. In addition, a broker or dealer is required to send monthly
statements disclosing recent price information with respect to the limited
market in penny stocks. These additional sales practice and disclosure
requirements could adversely affect the level of trading activity in the
secondary market and could impede the sale of the Company's Common Stock in that
market, with a concomitant adverse effect on the price of the Common Stock in
the secondary market.
LIMITED OPERATING HISTORY; PAST AND POSSIBLE FUTURE OPERATING LOSSES
The Company was founded in March 1992 and has operated at a loss for each
year since such date. As of June 30, 1998, the accumulated deficit was
$13,763,824. The Company's limited operating history makes the prediction of
future sales and operating results difficult. Accordingly, although the Company
has experienced sales growth, such growth should not be considered indicative of
future sales growth, if any, or of future operating results. There can be no
assurance that the Company's sales will grow or be sustained in future periods
or that the Company will become or remain profitable in any future period. Due
to the expenses involved in the expansion of the Company's operations in
connection with the completion of the new brewery (including increased overhead,
depreciation, marketing and salaries and its plan to increase production to
50,000 barrels per year), the Company does not expect to operate profitably
until at least calendar 1999.
5
<PAGE>
LACK OF LIQUIDITY; INADEQUATE WORKING CAPITAL; DEFAULT IN FINANCIAL COVENANTS
The Company has, in the last twenty-four 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 as well as the acquisition of the outstanding securities of Wild
Goose Brewery, Inc. and all of the brands, formulas, copyrights, trademarks, and
related intangible assets of Brimstone Brewing Company. In addition, growth in
sales has not been sufficient to fund such expenditures. As a consequence
thereof, the Company has been required to obtain, by the sale of its securities,
additional working capital for the hiring and training of administrative and
sales personnel and the payment of certain promotional, marketing and
advertising expenses in connection with the commencement of full production at
the new brewery which occurred in July 1997.
In connection with the construction of the new brewery and the purchase of
brewing and other equipment, the Maryland Economic Development Corporation
issued $4.5 million in taxable economic development bonds on July 19, 1996,
including $1.5 million borrowed by the Company to purchase brewery equipment for
the new brewery (the "FBC Facility") and $3.0 million loaned to a partnership
controlled by affiliates of the Company to construct the brewery (the "Blue II
Facility"), and the Company borrowed an additional $976,000 from Signet Bank,
now First Union National Bank, its recent successor ("Signet," "First Union" or
the "Bank") in a Bridge Loan (which it refinanced with an SBA loan in April
1997). The FBC facility contains certain other restrictive covenants, one of
which is a cash flow to debt service ratio. A violation of this covenant
represents an event of default on the note and also a cross default on the
Blue II Facility for the construction of the brewery for which the Company is a
guarantor. During the first quarter of 1998, for both the FBC Facility and the
Blue II Facility, First Union has waived compliance with the cash flow to debt
service covenant for the calendar quarters ending March 31, 1998, June 30, 1998,
September 30, 1998 and December 31, 1998. The Bank has also modified this
covenant for the calendar quarter ending March 31, 1999 and for each quarter
thereafter whereby the Company must maintain a cash flow to debt service ratio
of 1.0 to 1. In addition, the Bank modified the current ratio covenant whereby
the Company must maintain a ratio of current assets to current liabilities of
1.0 to 1 as of calendar quarter March 31, 1998 and each calendar quarter
thereafter. The Company was in compliance as of March 31, 1998 and anticipates
it will be able to comply with these modified covenants. In exchange for these
covenant modifications, the maturity date on the loans was revised to April 1,
1999, the interest rate increased to the prime rate plus 1.25% for the FBC
Facility and the prime rate plus 1.5% for the Blue II Facility, the Company is
required to pay a loan modification fee of $25,000 payable in two installments
of $10,000 and $15,000 on June 30, 1998 and September 30, 1998, respectively,
and be responsible for all fees and expenses incurred by First Union in
connection with preparation of the modification and use it best efforts to
obtain replacement financing.
The Company and Blue II are currently negotiating with a local financial
institution and the current bondholder, the bond issuer and the guarantee agency
which may agree to purchase both MEDCO bonds, thereby refinancing the Company's
long-term debt. If such a refinancing occurs, it is likely that the interest
rates will rise, the Company's rent payment to Blue II will rise and the
Company's Chief Executive Officer and President will be required to provide
personal guarantees of the FBC Facility and the Blue II building lease. There
can be no assurance that the Company will not incur additional defaults under
the Bridge Loan, the Blue II Facility, or the FBC Facility. If such defaults
occur and are not waived by First Union, it would have a material adverse effect
upon the Company.
On April 24, 1997, the Company closed a $1.0 million loan with the United
States Small Business Administration ("SBA"). The proceeds of this loan were
used to pay the principal balance of the Company's bridge loan with Signet Bank
which was incurred for the purchase of brewing and packaging equipment for the
Company's new facility. The loan has a twenty year term and a fixed interest
rate of 7.368%. See the Company's Pre-effective Amendment No. 5 to the Form SB-2
filed with the SEC on March 5, 1996, incorporated herein by reference.
6
<PAGE>
POSSIBLE NEED FOR ADDITIONAL FINANCING
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. In this regard, the Company also continues to
seek additional brand licenses and acquisitions and is in active discussions
with the owners of several suitable brands. Such acquisitions and additional
marketing costs may require additional funds not currently available to the
Company. Accordingly, the Company may require additional financing for these or
other general corporate purposes. There can be no assurance that the Company
will be able to obtain additional financing on terms favorable to the Company,
or at all, or if obtained, there can be no assurance that such 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 CUSTOMERS
Sales to The Kronheim Co., Inc., Baltimore, Maryland ("Kronheim"), the
Company's largest wholesale distributor, represented 47%, 51% and 36% of the
Company's revenues in 1997, 1996 and 1995, respectively, and 29% of the
Company's revenues in the six months ended June 30, 1998. Sales to all other
wholesale distributors represented 53%, 49%, and 64% of the Company's revenues
in 1997, 1996 and 1995, respectively, and 71% of the Company's revenues in the
six months ended June 30, 1998. The Company expects sales to its largest
wholesale distributor to continue to represent a significant portion of its
sales in the near term. The Company believes that its future growth and success
will continue to depend in large part upon the significant wholesale
distributor, but such dependence should decrease as the Company expands its
market area.
NO ASSURANCE OF CONTINUED WHOLESALE DISTRIBUTOR SUPPORT
If Kronheim or any other significant wholesale distributor were to
discontinue selling, or decrease the level of orders for, the Company's
products, the Company's business would be adversely affected in the areas
serviced by such wholesale distributors until the Company retained replacements.
There can be no assurance however that the Company would be able to replace a
significant wholesale distributor in a timely manner or at all in the event it
were to discontinue selling the Company's products. In addition, there is always
a risk that the Company's wholesale distributors will give higher priority to
the products of other beverage companies, including products directly
competitive to the Company's beers, thus reducing their efforts to sell the
Company's products. The risk is exacerbated by the fact that many of the
Company's wholesale distributors (not including Kronheim) are reliant on the
beers of one of the major domestic beer producers for a large percentage of
their revenues and, therefore, may be influenced by such producer. The Company's
distributors are not contractually committed to make future purchases and
therefore could discontinue carrying the Company's products in favor of a
competitor's product or another beverage at any time or for any reason.
If any of the Company's significant wholesale distributors were to
experience financial difficulties, or otherwise become unable or unwilling to
promote or sell the Company's products, the Company's results of operations
would be adversely affected. Many of the Company's distribution agreements
(other than its agreement with Kronheim which does not specify such a date)
permit their termination upon 90 days' prior notice. The Company's ability to
terminate poorly performing distributors may be hindered by laws that restrict
the Company's right to terminate the services of its wholesale distributors.
There can be no assurance that the Company will be able to attract reliable,
effective new distributors in markets it will enter as a result of its planned
geographic expansion or that the Company's business will not be adversely
affected by the loss or declining performance of any of its current or future
wholesale distributors.
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COMPETITION
The Company competes in the specialty beer segment of the domestic beer
market. The principal competitive factors affecting the market for the Company's
beers include product quality and taste, distribution capabilities, brand
recognition, packaging and price. There can be no assurance that the Company
will be able to compete successfully against current and future competitors
based on these and other factors. The Company competes with a variety of
domestic and international brewers, many of whom have substantially greater
financial, production, distribution and marketing resources and have achieved a
higher level of brand recognition than the Company.
The domestic specialty category has been created and expanded since the
early 1980's by innovative, entrepreneurial companies. The Company is in direct
competition in the specialty beer segment not only 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, but also from other domestic companies, each
producing several brands or styles of beer. The 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 craft brewers (such as Anheuser-Busch's
equity position in, and distribution agreement with, Redhook Ale Brewery,
Incorporated). During the past 15 years, the domestic specialty brewing category
has experienced extremely rapid growth; however growth in overall sales by
domestic specialty brewers slowed substantially, beginning in late 1996 and
continuing through 1997 in part, due to the fact that some large markets, such
as the Pacific Northwest, upper New England, Colorado and Northern California
have matured and are saturated to the point that further rapid growth appears
unlikely. Management also believes that other market forces have affected the
growth of the domestic specialty segment. Primary among those forces is the
aggressive marketing of import beers over the past two years from 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. Many of these beers which share
flavor profiles and competitive price points with domestic specialty beers and
appear to have achieved substantial sales increases, perhaps at the expense of
domestic specialties. In addition, some wholesale distributors who had
aggressively added many new domestic specialty brands to their portfolios and
devoted high levels of effort to promoting those brands saw declining returns to
their investments in marketing and inventory due to increasing competition and
began re-allocating their resources to higher volume products (sometimes under
pressure from the suppliers of those products). Increased competition could
result in price reductions, reduced profit margins and loss of market share, all
of which would have a material adverse effect on the Company's financial
condition and results of operations.
The Company's products also compete generally with other alcoholic
beverages, including products offered in other segments of the beer industry and
low-or-no-alcohol products. The Company competes with other beer and beverage
companies not only for consumer acceptance and loyalty but also for shelf and
tap space in retail establishments and for marketing focus by the Company's
wholesale distributors and their customers, all of which also distribute and
sell other beers and alcoholic beverage products. Finally, there can be no
assurance that the recent growth in consumer demand for craft beers will
continue, or even if such growth continues, that consumers will choose the
Company's beers.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly operating results have in the past and may in the
future vary significantly depending on factors such as fixed and semi-variable
operating costs during periods when the Company's brewery is producing below
maximum designed production capacity, professional fees and expenses relating to
the Company's planned expansion, increased competition, fluctuations in the
price of ingredients or packaging materials, seasonality of sales of the
Company's beers, general economic factors, trends in consumer preferences,
regulatory developments, including changes in excise and other tax rates,
changes in the sales mix between kegs and bottles, changes in average selling
prices or market acceptance of the Company's beers, increases in
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packaging and marketing costs associated with initial production of new products
and variations in shipping and transportation costs.
The Company's operating results may be significantly impacted in the future
by, among other things, the timing of new product announcements by the Company
or its competitors, the impact of increasing average federal and state excise
tax as sales volume increases, the timing of new advertising and promotional
campaigns by the Company and other expansion activities engaged in by the
Company. The Company's expense levels are based, in part, on its expectations of
future sales levels. If sales levels are below expectations, operating results
are likely to be materially adversely affected, In particular, because the
Company operates its own production facility, a significant portion of its
overhead is fixed and cannot be reduced for short-term adjustments such as sales
below management's expectations, and an excess of production capacity could
therefore have a significant negative impact on the Company's operating results.
However, the Company has historically operated with little or no backlog. The
absence of backlog increases the difficulty of predicting sales and operating
results. In addition, the Company's decision to undertake a limited media
advertising campaign in late 1997 through 1998 could substantially increase the
Company's expenses in a particular quarter, while any increase in sales from
such advertising may be realized in subsequent periods.
Based upon the risks of potential fluctuations in quarterly results
discussed above and seasonality and the unpredictability of demand, discussed
below, the Company believes that quarterly sales and operating results are
likely to vary significantly in the future and that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Further, it is possible that
in some future quarter the Company's revenues or operating results will be below
the expectations of public market analysts and investors. In such event, the
price of the Company's Common Stock could be materially adversely affected.
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
sales 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 distribution networks in all or parts of 31 states,
sales in Maryland and Washington, D.C. Metropolitan Area accounted for over 64%
and 63% of the Company's sales in 1996 and 1997, respectively, and 47.5% in the
six months ended June 30, 1998. The Company's continued growth depends upon its
ability to expand sales in these and other new regions. During the first two
quarters of 1998, the Company added 49 new wholesale distributors, including 21
new wholesalers who distribute the Wild Goose and Brimstone brands, bringing the
total number of wholesalers throughout its current network to 111. However,
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 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.
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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. Through June of
1997 the Company offered five styles of beer year-around and usually one
seasonal brew during any part of the year. With the successful introduction of
Hempen Ale in May 1997 and Hempen Gold in September 1997; and the opening of new
markets in the Company's distribution territory, primarily for the Hempen
product line, the number increased to seven beer styles. Presently, the Company
brews, kegs and bottles at its brewery in Frederick, Maryland, for wholesale to
its independent distributors, 26 styles of fresh, full flavored beers under the
brand names of "Blue Ridge," "Hempen," and beginning in February of 1998, "Wild
Goose" and "Brimstone". The Company's gross sales during the six months ended
June 30, 1998 of $2,609,847 included $94,400 of Brimstone products and
$799,000 of Wild Goose products. The Company believes that the sale of these
beers will continue to account for a significant portion of the Company's sales
for the foreseeable future. Therefore, the Company's future operating results,
particularly in the near term, are significantly dependent upon the 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 such as Hempen Ale or its newly acquired Wild Goose and
Brimstone brands are not successful, the Company's sales may be adversely
affected as customers seek competitive products. In addition, the introduction
of new products by the Company could result in reduction of sales of the
Company's existing beers, requiring the Company to manage carefully product
introductions in order to minimize disruption in sales of existing products.
There can be no assurance that the introduction of new product offering by the
Company will not cause wholesale distributors, retailers and consumers to reduce
purchases or consumption of existing Company products. Such reduction of
purchases or consumption could have a material adverse effect on the Company's
operating results and financial condition.
NO ASSURANCE OF FUTURE CONSUMER DEMAND FOR CRAFT BEER
The craft beer segment of the domestic beer market has grown dramatically
over the past decade. The Company believes that one factor in such growth has
been consumer demand for more flavorful beers offered in a wider variety of
styles. No assurance can be given, however, 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
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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. The Company's
production volume for the six months ended June 30, 1998 was 8,861 barrels, an
increase of 82.2%, compared to 4,864 barrels in the six months ended June 30,
1997. The increase in volume for the quarter reflects not only the enhanced
production capacity of the new brewery, but also the sales of the Company's
seasonal and newly added beer brands. Even with this increase in volume of
production, there can be no assurance that the Company will be able to meet
demand for its products, that sales will not be adversely affected nor that
demand will continue to increase. A prolonged inability to meet demand for its
products could lead to a loss of customers, impair the Company's expansion plans
and invite increased competition.
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.
Due to bulk purchasing, primarily of malted barley, glass bottles and paper
packaging materials and improved labor productivity made possible by larger
batch sizes and higher degree of automation in the new brewery, the Company
experienced a significant decrease in the price of its ingredients and packaging
materials. Except for suppliers who provide glass bottles and corrugated
cardboard cartons, the Company does not have long-term purchase contracts with
its suppliers. The loss of a material supplier could materially adversely affect
the Company's results of operations and financial condition if there were a
delay in shipments from the alternative suppliers.
As with most agricultural products, the supply and price of raw materials
used to produce the Company's beers can be affected by a number of factors
beyond the control of the Company such as frosts, droughts, other weather
conditions, economic factors affecting growing decisions, various plant diseases
and pests. 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. The Company keeps approximately a 30-day
supply of hops and a 30-day supply of malt on its premises. While certain of its
purchases are in bulk with the expanded storage provided by the new brewery, the
Company is nonetheless 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
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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" and "Hempen Ale" brand names as well as its newly acquired
"Wild Goose" and "Brimstone" brand names, proprietary beer recipes and the
design of product packaging, advertising and promotional design and art work
(the "Intellectual Property") to be of considerable value and critical to its
business. The Company relies on a combination of trade secret, copyright and
trademark laws, non-disclosure, non-competition and other arrangements to
protect its proprietary rights. However, the Company has discovered that the
"Blue Ridge" name has been used by other companies, some of whom directly or
indirectly compete with the Company. In January 1995, the Company entered into
an agreement with a contract brewer to stop that contract brewer from using the
Blue Ridge name and to acquire any federal trademark rights that such brewer had
to the name "Blue Ridge Lager" at a cost to the Company of approximately $7,900
(excluding legal fees and expenses). The Company applied for trademark
protection on its "Blue Ridge" brands in 1994, 1995 and 1996 and has applied for
trademark protections on its "Hempen Ale" brand in 1997 and the "Brimstone
Brands in 1998. The "Wild Goose "brands have been issued trademarks, which were
procured through the acquisition of Wild Goose Brewery by the Company. There can
be no assurance that pending applications will be approved and 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 INTELLECTUAL PROPERTY 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, and Steven T. Nordahl, Vice President--Brewing Operations
and Leslie Harper, Chief Financial Officer. The Company entered into employment
agreements with Ms. McGinnis and Messrs. Brannon and Nordahl in 1996. Prior to
their employment by the Company, beginning in 1992, none of these officers had
prior experience in the brewing industry or significant business experience. The
competition for qualified personnel is intense and the loss of any of such
persons as well as the failure to recruit additional key personnel in a timely
manner, could adversely affect the Company. There can be no assurance that the
Company will be able to continue to attract and retain qualified management and
sales personnel for the development of its business. Failure to attract and
retain key personnel could have a material adverse effect on the Company's
operating results and financial condition.
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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 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 has been an increase in the level of
health-consciousness in the United States and considerable debate has occurred
concerning alcohol-related social problems, such as alcoholism and drunk
driving. In addition, a number of anti-alcohol groups are advocating increased
governmental action on a variety of fronts unfavorable to the beer industry,
including the legislation of new labeling or packaging requirements and
restrictions on advertising and promotion that could adversely affect the sale
of the Company's products. Restrictions on the sale and consumption of beer or
increases in the retail cost of beer due to increased governmental regulations,
taxes or otherwise, could materially and adversely affect the Company's
financial condition and results of operations.
ANTITAKEOVER PROVISIONS IN THE COMPANY'S CORPORATE DOCUMENTS
The Company's Board of Directors has the authority to issue to up 1,000,000
shares of preferred stock, $.01 par value per share (the "Preferred Stock"), of
the Company including the 1,848 shares of Series A Preferred Stock, the 3,750
shares of Series B Preferred, the 2,100 shares of Series C Preferred, the 1,045
shares of Series D Preferred, the 3,000 shares of Series E Preferred and the
1,000 shares of Series F Preferred which have been issued to date 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
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holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The Company's Board may similarly issue additional shares of Common
Stock without any further vote or action by stockholders. Such an issuance could
occur in the context of another public or private offering of shares of Common
stock or Preferred Stock or in a situation where the Common or Preferred Stock
is used to acquire the assets or stock of another company. The issuance of
Common or Preferred Stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of delaying, deferring or preventing a change in control of the Company. The
Company has no current plans to issue any additional shares of Common or
Preferred Stock other than as described herein. See "Description of Securities."
Moreover, the Restated and Amended Articles of Incorporation ("Articles")
and Restated and Amended Bylaws ("Bylaws") of the Company contain certain
provisions which, among other things, maintain a "staggered" Board of Directors,
limit the personal liability of, and provide indemnification for, the directors
of the Company, require that stockholders comply with certain requirements
before they can nominate someone for director or submit a proposal before a
meeting of stockholders, prohibit the ability of stockholders to call special
meetings of stockholders, limit the ability of stockholders to act by written
consent and require a supermajority vote of stockholders in the event that a
"related person" (as defined) attempts to engage in a business combination with
the Company.
POTENTIAL VOLATILITY OF STOCK PRICE
Stock prices of many growing consumer-product companies fluctuate widely,
often for reasons that are unrelated to their actual operating performance.
Announcement of new facilities or products by the Company or its competitors,
regulatory developments, and economic or other external factors, as well as
period-to-period fluctuations in financial results, may have a significant
impact on the market price and marketability of the Common Stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been initiated against such
company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
upon the Company's operating results and financial condition.
CERTAIN RELATED-PARTY TRANSACTIONS
The Company has borrowed money from time to time to provide cash for
operations and for other corporate purposes from its directors, stockholders and
persons having business relationships with its directors. In addition, the
Company leases its brewery from a company which is owned, in part, by one of the
Company's directors and by other affiliated persons.
LIMITATIONS ON LIABILITY OF MANAGEMENT
The Company has adopted provisions in its Articles that eliminate to the
fullest extent permissible under Maryland law the liability of its directors for
monetary damages except to the extent that it is proved that the director
actually received an improper benefit or profit in money, property or services
or the director's action or failure to act was the result of active and
deliberate dishonesty and was material to the cause of action adjudicated in the
proceeding. While it may limit stockholder actions against the directors of the
Company for various acts of misfeasance, the provision is designed to ensure
that the ability of the Company's directors to exercise their best business
judgment in managing the Company's affairs, subject to their continuing
fiduciary duties to the Company and its stockholders, is not unreasonably
impeded by exposure to potentially high personal costs or other uncertainties of
litigation.
FUTURE SALES OF COMMON STOCK
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Future sales of substantial amounts of Common Stock in the public market, or the
perception that such sales may occur, could have a material adverse effect on
the market price of the Common Stock. Pursuant to its Articles, the Company has
the authority to issue additional shares of Common Stock and Preferred Stock.
The issuance of such shares could result in the dilution of the voting power of
Common Stock purchased in this Offering. See "Description of Securities."
DILUTION TO SHAREHOLDERS BY ISSUANCE OF PREFERRED SHARES
The Company's Articles and Bylaws provide that the Company may issue shares
of preferred stock without approval of the Company's shareholders. The terms and
preferences of any class of preferred stock, including conversion of preferred
shares into shares of the Company's common stock and preferred rights to the
assets of the Company upon liquidation, may be determined by the Company's Board
of Directors. Such terms and preferences may result in more shares of the
Company's common stock being issued, which would have a dilative effect on any
common shares or warrants not protected by anti-dilution provisions. Such terms
and preferences may otherwise adversely affect holders of the Company's common
stock. See "Description of Securities."
NO DIVIDENDS
The Company has not paid any dividends on its Common Stock and does not
intend to pay dividends in the foreseeable future. See "Dividend Policy."
INDEMNIFICATION OF MANAGEMENT
The Company's Articles, consistent with Maryland law, provide that the
Company will indemnify and advance expenses to any director, officer, employee
or agent of the Company who is, or is threatened to be made, a party to any
action, suit or proceeding. Such indemnification would cover the cost of
attorney's fees as well as any judgment, fine or amounts paid in settlement of
such action provided that the indemnified party meets certain standards of
conduct necessary for indemnification under applicable law. Such indemnity may
or may not be covered by officer and director liability insurance and could
result in an expense to the Company even if such person is not successful in the
action. This provision is designed to protect such persons against the costs of
litigation which may result from his or her actions on behalf of the Company.
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial and operating data should be read in
conjunction with the Company's financial statements and the notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Annual Report and its Quarterly Reports on
Form 10-QSB for the Three Months Ended March 31, 1998 and for the Six Months
Ended June 30, 1998 incorporated by reference herein. The balance sheet data and
statement of operations data as of and for the years ended December 31, 1997 and
1996 are derived from financial statements of the Company, incorporated by
reference herein, that have been audited by Coopers & Lybrand L.L.P.,
independent accountants. The balance sheet data and statement of operations data
as of and for the years ended December 31, 1995, 1994 and 1993 are derived from
financial statements of the Company that are not included in the Annual Report.
The balance sheet data as of June 30, 1998 and the statement of operations data
for the six months ended June 30, 1998 and 1997 are derived from unaudited
financial statements included in the June 30, 1998 10-QSB.
15
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ ---------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AND BARREL DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................ $ 2,610 $ 1,141 $ 3,287 $ 1,872 $ 1,832 $ 1,186 $ 106
Excise taxes......................... 301 158 209 152 87 59 4
Cost of sales........................ 2,309 983 2,838 1,743 1,253 847 89
Gross profit (loss).................. 1,780 1,128 240 (23) 492 280 13
Selling, general and administrative
expenses........................... 529 (144) 4,622 2,631 831 485 259
Loss from operations................. 1,802 1,436 (4,382) (2,655) (339) (206) (246)
Interest expense (income), net....... 1,089 -- 140 (29) (79) (52) (11)
Other (income) expense............... (2,362) (1,580) (158) -- 42 5 (1)
(Loss) income before income taxes.... 100 (136) (4,363) (2,625) (376) (253) (258)
Provision for income taxes........... 210 108 -- -- (17) (17) --
Net (loss)........................... (2,672) (1,553) (4,363) (2,625) (359) (270) (258)
Preferred stock dividend
requirements....................... (29) (1,354) (3,612) -- -- -- --
Net loss attributable to Common
Stockholders....................... (2,701) (2,907) (7,975) (2,625) (359) (270) (258)
BASIC AND DILUTED LOSS PER SHARE:
Net loss before Preferred Stock
Dividend Requirements.............. (0.34) (0.78) (1.59) (1.45) (0.30) (0.24) (0.29)
Preferred Stock Dividend
Requirements....................... (0.00) (1.68) (1.32) -- -- -- --
Net loss per Common Share............ (0.34) (1.46) (2.91) (1.45) (0.30) (0.24) (0.29)
Shares used in per share
calculation(1)..................... 7,849 1,991 2,742 1,805 1,205 1,122 887
OPERATING DATA (IN BARRELS)(2):
Barrels sold......................... 14,367 6,470 17,300 10,910 10,031 6,436 660
Net sales per barrel sold............ 158.52 152.00 177.90 162.32 173.96 175.11 154.55
Gross profit per barrel sold......... 36.34 (22.31) 13.90 2.47 49.05 43.51 19.70
BALANCE SHEET DATA:
Working Capital (deficit)............ 13,764 4,641 2,373 2 (199) (53) (5)
Total assets......................... 13,598 11,005 13,401 4,766 1,659 1,316 723
Long-term debt, net of current
portion............................ 2,068 2,294 4,726 1,683 373 481 315
Stockholders' equity................. 6,866 4,366 7,268 1,823 581 394 323
</TABLE>
- ------------------
(1) See Note 2 of the Notes to the Financial Statements in the Annual Report and
Note 7 of the Notes to the Financial Statements in the June 30, 1998 10-QSB
for an explanation of shares used in computing net loss per share.
(2) A barrel is equivalent to 31 gallons, two domestic kegs or 13.8 cases of
twenty-four 12 ounce bottles of beer. All barrels sold data is as of the end
of period.
16
<PAGE>
MARKET PRICE OF COMMON STOCK
The Company's Common Stock has been listed on the Automated Quotation
System of the NASDAQ Small-Cap Market under the symbol "BLUE" since March 11,
1996. As of September 30, 1998, the last sale price as reported on NASDAQ
was $.625.
The following table sets forth the high and low bid prices for the Common
Stock as reported on NASDAQ for each quarter since March 11, 1996, the closing
date of the Company's initial public offering, for the periods indicated. Such
information reflects inter dealer prices without retail mark-up, mark down or
commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------------------------------------------------------------------------------------- ---- ---
<S> <C> <C>
March 31, 1996............................................................................. 7 1/4 5 1/4
June 30, 1996.............................................................................. 5 3/4 4 7/8
September 30, 1996......................................................................... 5 1/4 4 1/4
December 31, 1996.......................................................................... 5 1/8 3 7/8
March 31, 1997............................................................................. 4 5/8 4 1/8
June 30, 1997.............................................................................. 4 5/8 2 3/4
September 30, 1997......................................................................... 2 11/16 2
December 31, 1997.......................................................................... 2 3/32 1 9/16
March 31, 1998............................................................................. 2 19/32 27/32
June 30, 1998.............................................................................. 2 14/30 1
September 30, 1998......................................................................... 1 3/30 21/30
</TABLE>
The Company has not paid any dividends on its Common Stock. The Company
currently intends to retain any earnings for use in its business, and therefore
does not anticipate paying cash dividends in the foreseeable future.
As of September 30, 1998, there were approximately 400 record holders of
Company Common Stock.
REGISTRATION RIGHTS
In connection with the Company's private placement of $500,000 aggregate
stated value of Series F Preferred Stock on September 3, 1998, and the issuance
of an additional $500,000 aggregate stated value of Series F Preferred Stock on
July 29, 1998 in exchange for 573,476 shares of Common Stock, pursuant to the
terms of those two certain subscription agreements dated as of September 3, 1998
by and between the Company and each of Austost Austalt Schaan and Balmore Funds
S.A. (the "Subscription Agreements"), the Company is obligated to cause this
registration statement to be filed by October 3, 1998 and to become effective
by December 2, 1998. The Company is further obligated to register and qualify
the registerable shares under such state securities laws as the Selling
Stockholders may reasonably request. The Company will bear the reasonable
expenses of the registration and qualification of the shares under the
Securities Act and state securities laws other than any underwriting discounts
and commissions and the expenses of counsel for the Selling Stockholders.
If the Registration Statement is not filed by October 3, 1998 or is not
effective by December 2, 1998, then the Company must make payments to the
Selling Stockholders in such amounts and at such times as determined pursuant to
Section 10.2(j) of the Subscription Agreements, which states that the amount to
be paid by the Company to the Selling Stockholders shall be equal to three (3%)
percent per month of the purchase price paid by the Selling Stockholders for the
Series F Preferred Stock. Thus, if the registration statement is not effective
by December 2, 1998, then for the period from December 2, 1998 to January 2,
1999, the Company must pay to the Selling Stockholders a penalty of $30,000.
If the registration statement still is not effective on January 2, 1999, then
for the period from January 2, 1999 to February 2, 1999, the Company must pay to
the Selling Stockholders an additional penalty of $30,000, and so on.
In connection with the Company's private placement of Series F Preferred
Stock, the Company also issued to the placement agents and certain of their
affiliates Warrants to purchase 200,000 shares of Common Stock, of which
Warrants to purchase 100,000 shares of Common Stock are exercisable at a price
of $.98125 per share and Warrants to purchase 100,000 shares of Common Stock
are exercisable at a price of $.75 per share. All of such Warrants are
exercisable for a
17
<PAGE>
period of three (3) years from the date of issuance. The Company is required to
prepare and file a registration statement under the Securities Act for the
number of shares of Common Stock issuable upon the exercise of the above
Warrants. Timely filing of the registration statement has been made.
USE OF PROCEEDS FROM SALE OF PREFERRED STOCK
None of the proceeds from the sale of the Common Stock registered hereunder
will accrue to the Company.
Through private placement, the Company has obtained $500,000 of financing
(before the payment of fees and other expenses of such private placement) from
the sale of $500,000 in aggregate stated value of the Series F Preferred Stock.
An additional $500,000 in aggregate stated value of the Series F Preferred Stock
was issued by the Company in exchange for 573,476 shares of its Common Stock.
The Company intends to apply the net proceeds of the sale of the Series F
Preferred Stock for working capital purposes.
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
The Selling Stockholders whose shares of Common Stock are issuable upon
conversion of the Series F Preferred Stock (the "Conversion Shares") are Austost
Anstalt Schaan ("Austost") and Balmore Funds S.A. ("Balmore"). Austost is a
Lichtenstein corporation with a principal place of business at 7440 Fuerstentum,
Lichtenstein, Landstrasse 163. Balmore is a British Virgin Islands corporation
with a principal place of business at P.O. Box 4603, Zurich, Switzerland.
Neither Austost nor Balmore has a domestic agent for service of process. Neither
Austost nor Balmore has any affiliation with the Company or its officers,
directors, promoters or principal shareholders.
It may be difficult for United States investors to effect service within
the United States upon Austost and/or Balmore and their respective officers and
directors, or to realize in the United States upon judgments rendered against
Austost and/or Balmore and their respective officers and directors by courts of
the United States predicated upon civil liabilities under the Securities Act of
1933 ("Securities Act") or state securities law.
As of the date of this Prospectus, Austost owned $500,000 aggregate stated
value of the Series F Preferred Stock. Upon conversion of its Series F Preferred
Stock, Austost will acquire shares of Common Stock on the basis set forth in the
second following paragraph, provided however, that Austost can never own more
that 4.99% of the outstanding shares of Common Stock.
As of the date of this Prospectus, Balmore owned $500,000 aggregate stated
value of the Series F Preferred Stock. Upon conversion of its Series F Preferred
Stock, Balmore will acquire shares of Common Stock on the basis set forth in the
following paragraph, provided however, that Balmore can never own more that
4.99% of the outstanding shares of Common Stock.
The Company has agreed to register the public offering of the Selling
Stockholder's shares of Common Stock under the Securities Act and to pay all
expenses in connection therewith other than brokerage commissions and discounts
in connection with the sale of the Conversion Shares and the expenses of
counsel. The aggregate number of Conversion Shares that may be offered and sold
pursuant to this Prospectus by the Selling Stockholders will be determined by
how many shares are issued upon conversion of the Series F Preferred Stock,
which will be determined by the conversion price applicable to the Conversion
Shares. See "Description of Securities". The Conversion Price for a Conversion
Share will be the lesser of: (i) 90% of the closing bid price of the Common
Stock for September 2, 1998 (the trading day immediately prior to payment by the
Selling Stockholders for the Series F Preferred Stock) or $.70, (the "Closing
Bid Conversion Price"), or (ii) 80% of the average of the three lowest closing
bid prices of the Common Stock for the seven trading days prior to, but not
including the first calendar day of the month during which, the date a notice of
conversion is given to the Company by the holders of the Series F Preferred
Stock (the "Three Day Average Conversion Price"), or $.53 if the Series F
Preferred Stock was converted on October 1, 1998. Using a Conversion Price of
$.53, the aggregate number of Conversion Shares issued upon conversion of the
Series F Preferred Stock would be 1,886,792.
18
<PAGE>
This Prospectus also relates to the offer and sale of 200,000 shares of
Common Stock issuable upon exercise of the Warrants (the "Warrant Shares"). The
Warrants are held by AIBC Investment Services Corp., Hunter Singer, Joseph
Donohue, Mark Angelo, Max Rockwell, May Davis Group and Libra Finance S.A. Such
persons hold 12,000 Warrants, 12,000 Warrants, 10,000 Warrants, 10,000 Warrants,
10,000 Warrants, 6,000 Warrants and 140,000 Warrants, respectively. Fifty (50%)
percent of each such person's Warrants are exercisable at a price of $.98125 per
share until July 29, 2001, and the other fifty (50%) percent of each such
person's Warrants are exercisable at a price of $.75 per share until
September 3, 2001.
The following table sets forth the names of the Selling Stockholders, the
number of shares of Common Stock owned beneficially by each of the Selling
Stockholders as of September 30, 1998, the number of shares which may be offered
for resale pursuant to this Prospectus of Common Stock and the number of shares
owned beneficially by each of the Selling Stockholders after the offering. Such
shares will be issued and outstanding only following (i) the conversion of the
Series F Preferred Stock into shares of Common Stock, and (ii) the exercise of
the Warrants to purchase shares of Common Stock, as the case may be. For the
purpose of calculating the number of shares of Common Stock beneficially owned
by the Selling Stockholders, the number of shares of Common Stock calculated to
be issuable in connection with the conversion of the Series F Preferred Stock is
based on a conversion price of $.53. The Certificate of Designation for the
Series F Preferred Stock provides however that the actual conversion price to be
utilized in connection with the conversion of the Series F Preferred Stock shall
be equal to the lesser of: (i) the Closing Bid Conversion Price and (ii) the
Three Day Average Conversion Price. The calculation of the total number of
shares of Common Stock to be offered by the holders of the Series F Preferred
Stock however is a hypothetical estimate based upon 150% of the shares of Common
Stock issuable upon conversion of the full $1,000,000 aggregate stated value of
the Series F Preferred Stock at a conversion price of $.53. The actual number
of shares issuable upon conversion of the Series F Preferred Stock cannot be
predicted at this time insofar as it shall be based, among other things, on
either the Closing Bid Conversion Price or the Three Day Average Conversion
Price and on the future market price of the Common Stock. The use of such
hypothetical number of shares of Common Stock is not intended to constitute a
prediction as to the number of shares of Common Stock into which the Series F
Preferred Stock will be converted.
The information included below is based upon information provided by the
Selling Stockholders. Because the Selling Stockholders may offer all, some or
none of their Common Stock, no definitive estimate as to the number of shares
thereof that will be held by the Selling Stockholders after such offering can be
provided and the following table has been prepared on the assumption that all
shares of Common Stock offered under this Prospectus will be sold.
<TABLE>
<CAPTION>
SHARES OF SHARES OF SHARES OF
COMMON STOCK COMMON STOCK COMMON STOCK
BENEFICIALLY OWNED BEING BENEFICIALLY OWNED
NAME PRIOR TO OFFERING(1)(2) OFFERED AFTER OFFERING(3) PERCENT(4)
- ----------------------------------------------- ----------------------- ------------ ------------------ ----------
<S> <C> <C> <C> <C>
Austost Anstalt Schaan(5)...................... 0 943,396 0 0%
Balmore Funds S.A.(6).......................... 0 943,396 0 0
AIBC Investment Services Corp.(7).............. 0 12,000 0 0
Hunter Singer(8)............................... 0 12,000 0 0
Joseph Donohue(9).............................. 0 10,000 0 0
Mark Angelo(10)................................ 0 10,000 0 0
Max Rockwell(11)............................... 0 10,000 0 0
May Davis Group(12)............................ 0 6,000 0 0
Libra Finance S.A.(13)......................... 0 140,000 0 0
-------------- ----------- ------------- ---------
Total.......................................... 0 3,050,000 0 0%
</TABLE>
- ------------------
* Less than 1%.
(Footnotes continued on next page)
19
<PAGE>
(Footnotes continued from previous page)
(1) Each of the parties listed has sole voting and investment power with
respect to all shares of Common Stock indicated.
(2) Beneficial ownership is calculated in accordance with Rule 13-d-3(d)
under the Exchange Act. The ownership of the shares deemed to be held by
Austost Anstalt Schaan and Balmore Funds S.A., due to their ownership of
$1,000,000 aggregate stated value of the Series F Preferred Stock is not
reflected due to their contractual obligations to the Company pursuant to
which they are not entitled to convert any shares of Series F Preferred
Stock to the extent that after such conversion the number of shares of
Common Stock beneficially owned by them and their respective affiliates
exceeds 4.99% of the outstanding Common Stock. The actual number of shares
shown as beneficially owned is subject to adjustment and could be
materially less or more than the estimated amount indicated depending upon
factors that cannot be predicted by the Company at this time, including,
among others, the future market price of the Common Stock and whether the
actual conversion price is based upon the Closing Bid Conversion Price or
the Three Day Average Conversion Price. See "Description of Securities".
(3) Assumes the sale of all shares offered hereby.
(4) Based upon 16,955,393 shares outstanding.
(5) The listed Selling Stockholder holds outstanding 500 shares of the Series F
Preferred Stock convertible into shares of Common Stock based upon a
conversion price equal to the lesser of the Closing Bid Conversion Price or
the Three Day Average Conversion Price. The number of shares shown as being
offered in the table is a hypothetical amount based upon 150% of the shares
of Common Stock issuable upon conversion of such 500 shares of the Series F
Preferred Stock at a conversion price of $.53. Notwithstanding the
foregoing, the Selling Stockholder can convert Series F Preferred Stock
into Common Stock only to the extent the number of shares issued thereby,
combined with the number of shares already held by it and its affiliates,
would not exceed 4.99% of the outstanding Common Stock. The listed Selling
Stockholder also owns 180 shares of the Series E Preferred Stock of the
Company.
(6) The listed Selling Stockholder holds outstanding 500 shares of the Series F
Preferred Stock convertible into shares of Common Stock based upon a
conversion price equal to the lesser of the Closing Bid Conversion Price or
the Three Day Average Conversion Price. The number of shares shown as being
offered in the table is a hypothetical amount based upon 150% of the shares
of Common Stock issuable upon conversion of such 500 shares of the Series F
Preferred Stock at a conversion price of $.53. Notwithstanding the
foregoing, the Selling Stockholder can convert Series F Preferred Stock
into Common Stock only to the extent the number of shares issued thereby,
combined with the number of shares already held by it and its affiliates,
would not exceed 4.99% of the outstanding Common Stock. The listed Selling
Stockholder also owns 180 shares of the Series E Preferred Stock of the
Company.
(7) The listed Selling Stockholder holds Warrants to purchase 12,000 shares of
the Common Stock. Fifty (50%) percent of such Warrants were issued as of
July 29, 1998 and are exercisable at a price of $.98125 per share, and the
remaining fifty (50%) percent of such Warrants were issued as of September
3, 1998, and are exercisable at a price of $.75 per share. Such Warrants
are exercisable in each case for a period of three (3) years from the date
of issuance.
(8) The listed Selling Stockholder holds Warrants to purchase 12,000 shares of
the Common Stock. Fifty (50%) percent of such Warrants were issued as of
July 29, 1998 and are exercisable at a price of $.98125 per share, and the
remaining fifty (50%) percent of such Warrants were issued as of
September 3, 1998, and are exercisable at a price of $.75 per share. Such
Warrants are exercisable in each case for a period of three (3) years from
the date of issuance.
(9) The listed Selling Stockholder holds Warrants to purchase 10,000 shares of
the Common Stock. Fifty (50%) percent of such Warrants were issued as of
July 29, 1998 and are exercisable at a price of $.98125 per share, and the
remaining fifty (50%) percent of such Warrants were issued as of September
3, 1998, and are exercisable at a price of $.75 per share. Such Warrants
are exercisable in each case for a period of three (3) years from the date
of issuance.
(10) The listed Selling Stockholder holds Warrants to purchase 10,000 shares of
the Common Stock. Fifty (50%) percent of such Warrants were issued as of
July 29, 1998 and are exercisable at a price of $.98125 per share, and the
remaining fifty (50%) percent of such warrants were issued as of
September 3, 1998, and are
(Footnotes continued on next page)
20
<PAGE>
(Footnotes continued from previous page)
exercisable at a price of $.75 per share. Such Warrants are exercisable in
each case for a period of three (3) years from the date of issuance.
(11) The listed Selling Stockholder holds Warrants to purchase 10,000 shares of
the Common Stock. Fifty (50%) percent of such Warrants were issued as of
July 29, 1998 and are exercisable at a price of $.98125 per share, and the
remaining fifty (50%) percent of such Warrants were issued as of September
3, 1998, and are exercisable at a price of $.75 per share. Such Warrants
are exercisable in each case for a period of three (3) years from the date
of issuance.
(12) The listed Selling Stockholder holds Warrants to purchase 6,000 shares of
the Common Stock. Fifty (50%) percent of such Warrants were issued as of
July 29, 1998 and are exercisable at a price of $.98125 per share, and the
remaining fifty (50%) percent of such Warrants were issued as of September
3, 1998, and are exercisable at a price of $.75 per share. Such Warrants
are exercisable in each case for a period of three (3) years from the date
of issuance.
(13) The listed Selling Stockholder holds Warrants to purchase 140,000 shares of
the Common Stock. Fifty (50%) percent of such Warrants were issued as of
July 29, 1998 and are exercisable at a price of $.98125 per share, and the
remaining fifty (50%) percent of such Warrants were issued as of September
3, 1998, and are exercisable at a price of $.75 per share. Such Warrants
are exercisable in each case for a period of three (3) years from the date
of issuance.
The Selling Stockholders' shares of Common Stock may be offered and sold
from time to time as market conditions permit, provided that a registration
statement covering such shares is effective at the time of such offer and/or
sale. Under Section 10(a)(3) of the Securities Act of 1933, as amended, when a
prospectus is used more than nine months after the effective date of the
registration statement, the information contained therein must be as of a date
not more than 16 months prior to such use.
The Selling Stockholders' shares of Common Stock may be offered and sold in
the over-the-counter market, or otherwise, at prices and terms then prevailing
or at prices related to the then-current market price, or in negotiated
transactions. The Selling Stockholders' shares of Common Stock may be sold by
one or more of the following methods, without limitation: (i) a block trade in
which a broker or dealer so engaged will attempt to sell the shares as agent but
may position and resell a portion of the block as principal to facilitate the
transaction; (ii) purchases by a broker or dealer as principal and resale by
such broker or dealer for its accounts pursuant to this Prospectus;
(iii) ordinary brokerage transactions and transactions in which the broker
solicits purchases; and (iv) transactions between sellers and purchasers without
a broker or dealer. In effecting sales, brokers or dealers engaged by Selling
Stockholders may arrange for other brokers or dealers to participate. Such
brokers or dealers may receive commissions or discounts from Selling
Stockholders in amounts to be negotiated. Such brokers and dealers and any other
participating brokers and dealers may be deemed to be "underwriters" within the
meaning of the Securities Act, in connection with such sales.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company's Amended and Restated Articles of Incorporation authorize the
issuance of 19,000,000 shares of Common Stock, $.00004 par value per share, of
which 13,905,393 shares were outstanding as of September 30, 1998. Holders of
shares of Common Stock are entitled to one vote for each share on all matters to
be voted on by the shareholders. Holders of Common Stock have no cumulative
voting rights. Holders of shares of Common Stock are entitled to share ratably
in dividends, if any, as may be declared, from time to time by the Board of
Directors in its discretion, from funds legally available therefor. In the event
of a liquidation, dissolution or winding up of the Company, the holders of
shares of Common Stock are entitled to share pro rata all assets remaining after
payment in full of all liabilities. Holders of Common Stock have no preemptive
rights to purchase the Company's Common Stock. There are no conversion rights or
redemption or sinking fund provisions with
21
<PAGE>
respect to the Common Stock. All of the outstanding shares of Common Stock are
validly issued, fully paid and non-assessable.
The transfer agent for the Common Stock is Registrar & Transfer Company, 10
Commerce Drive, Cranford, New Jersey 07016.
PREFERRED STOCK
The Company's Amended and Restated Articles of Incorporation also authorize
the issuance of 1,000,000 shares of preferred stock, $.01 par value, of which
1,828 shares of Series A Preferred, 0 shares of Series B Preferred, 829 shares
of Series C Preferred, 218 shares of Series D Preferred, 3,000 shares of Series
E Preferred and 1,000 shares of Series F Preferred are outstanding. The
Preferred Stock is convertible into shares of common stock. The holders of
Series A Preferred are senior to the Common Stock with respect to dividend
rights and are entitled to a liquidation preference of $500 per share. The
annual dividend rate for the Series A and Series E Preferred is $40.00 per share
per annum, and the annual dividend rate for the Series C and Series D Preferred
is $80.00 per share, when, as and if declared by the Company's Board of
Directors. The shares of the Series F Preferred are not entitled to receive
dividends unless declared by the Company. If not declared, dividends will
accumulate and be payable in the future. Full dividends must be paid or set
aside on the Series A, Series C, Series D and Series E 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 First Union and the Company's other future
lenders. The Company has the option to pay dividends on the Series C, Series D
and Series E Preferred by the issuance of Common Stock valued at the then
effective conversion rate of the Series C and Series D Preferred Stock. The
holders of Series C and Series D Preferred have a liquidation preference of
$1,000 per share over the Common stock and Series A Preferred. The holders of
Series E Preferred have a liquidation preference of $1,300 per share. The
holders of Series F Preferred have a liquidation preference of $1,000 per share.
The Company does not expect to declare or pay such dividends in the foreseeable
future. The Company may issue additional preferred stock in the future. The
Company's Board of Directors has authority, without action by the shareholders,
to issue all or any portion of the authorized but unissued preferred stock in
one or more series and to determine the voting rights, preferences as to
dividends and liquidation, conversion rights, and other rights of such series.
The Company considers it desirable to have preferred stock available to
provide increased flexibility in structuring possible future acquisitions and
financings and in meeting corporate needs which may arise. If opportunities
arise that would make desirable the issuance of preferred stock through either
public offering or private placements, the provisions for preferred stock in the
Company's Articles of Incorporation would avoid the possible delay and expense
of a shareholder's meeting, except as may be required by law or regulatory
authorities. Issuance of the preferred stock could result, however, in a series
of securities outstanding that will have certain preferences with respect to
dividends and liquidation over the Common Stock which would result in dilution
of the income per share and net book value of the Common Stock. Issuance of
additional Common Stock pursuant to any conversion right which may be attached
to the terms of any series of preferred stock may also result in dilution of the
net income per share and the net book value of the Common Stock. The specific
terms of any series of preferred stock will depend primarily on market
conditions, terms of a proposed acquisition or financing, and other factors
existing at the time of issuance. Therefore, it is not possible at this time to
determine in what respect a particular series of preferred stock will be
superior to the Company's Common Stock or any other series of preferred stock
which the Company may issue. The Board of Directors may issue additional
preferred stock in future financings.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. Further, certain provisions of Maryland law could delay or
make more difficult a merger, tender offer or proxy contest involving the
Company. While such provisions are intended to enable the Board of Directors to
maximize stockholder value, they may have the effect of discouraging takeovers
which could be in the best interest of certain stockholders. There is no
assurance that such provisions will not have an adverse effect on the market
value of the Company's stock in the future.
22
<PAGE>
DIVIDEND POLICY
The Company has not paid any cash or other dividends on its Common Stock
since its inception and does not anticipate paying any such dividends in the
foreseeable future. The Company intends to retain any earnings for use in the
Company's operations and to finance the expansion of its business. See "Risk
Factors--No Dividends."
LEGAL MATTERS
The legality of the Shares offered hereby will be passed upon for the
Company by ________________.
EXPERTS
The financial statements of the Company as of December 31, 1997 and 1996
and for the years ended December 31, 1997 and 1996, incorporated by reference in
this Prospectus from the Annual Report, have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of said firm as experts in accounting and auditing.
23
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................... F-2
Financial Statements:
Balance Sheets......................................... F-3
Statements of Operations............................... F-4
Statements of Changes in Stockholders' Equity.......... F-5
Statements of Cash Flows............................... F-6
Notes to Financial Statements.......................... F-7
</TABLE>
F-1
<PAGE>
FREDERICK BREWING CO.
NOTES TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Frederick Brewing Co.
Frederick, Maryland
We have audited the accompanying balance sheets of Frederick Brewing Co. as
of December 31, 1997 and 1996, and the related statements of operations, changes
in stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Frederick Brewing Co. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
McLean, Virginia
March 30, 1998
F-2
<PAGE>
FREDERICK BREWING CO.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 2,612,880 $ 48,990
Cash -- restricted..................................... 12,475 640,000
Trade receivables, net of allowance for doubtful
accounts of $35,544 and $25,000, respectively......... 333,437 239,413
Inventories, net....................................... 354,224 210,563
Prepaid expenses and other current assets.............. 103,476 82,412
------------ -----------
Total current assets................................ 3,416,492 1,221,378
Property and equipment, net................................. 8,375,645 3,287,696
Intangibles, net............................................ 258,225 186,251
Deferred public relations costs, net........................ 1,131,500 --
Other assets................................................ 219,557 71,000
------------ -----------
Total assets........................................ $ 13,401,419 $ 4,766,325
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt................... $ 273,814 $ 437,600
Capital lease obligations, current portion............. 88,976 27,506
Accounts payable....................................... 274,966 629,216
Accrued liabilities.................................... 406,943 165,538
------------ -----------
Total current liabilities........................... 1,043,699 1,259,950
Long-term debt.............................................. 2,208,736 1,631,411
Capital lease obligations................................... 2,880,536 51,577
------------ -----------
Total liabilities................................... 6,132,971 2,942,938
------------ -----------
Stockholders' equity:
Preferred stock -- $.01 par value, 1,000,000 shares
authorized:
Cumulative, convertible Series A, 1,828 shares issued
and outstanding, liquidation preference of
$914,000............................................ 655,213 --
Convertible Series B, 0 shares issued and
outstanding......................................... -- --
Convertible Series C, 2,100 shares issued and
outstanding, liquidation preference of $2,100,000... 1,762,500 --
Convertible Series D, 1,045 shares issued and
outstanding, liquidation preference of $1,045,000... 810,000 --
Convertible Series E, 2,700 shares issued and
outstanding, liquidation preference of $2,700,000... 2,325,000 --
Common stock -- $0.00004 par value, 9,000,000
shares authorized, 4,540,356 and 1,954,876
shares issued and outstanding...................... 167 72
Additional paid-in capital............................. 12,778,758 4,911,424
Accumulated deficit.................................... (11,063,190) (3,088,109)
------------ -----------
Total stockholders' equity........................ 7,268,448 1,823,387
------------ -----------
Total liabilities and stockholders' equity........ $ 13,401,419 $ 4,766,325
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
FREDERICK BREWING CO.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Gross sales................................................. $ 3,286,776 $ 1,871,593
Less: Returns and allowances................................ 39,859 50,463
Less: Excise taxes.......................................... 169,236 100,697
----------- -----------
Net sales.............................................. 3,077,681 1,720,433
Cost of sales.......................................... 2,837,229 1,743,896
----------- -----------
Gross profit (loss).................................... 240,452 (23,463)
Selling, general and administrative expenses................ 4,622,029 1,990,323
Loss on assets to be disposed............................... -- 640,815
----------- -----------
Operating loss......................................... (4,381,577) (2,654,601)
Gain on sale of equipment................................... (158,167) --
Interest (income) expense................................... 140,030 (29,427)
----------- -----------
Loss before income taxes............................... (4,363,440) (2,625,174)
Provision for income taxes.................................. -- --
----------- -----------
Net loss............................................... (4,363,440) (2,625,174)
Preferred stock deemed dividend requirements................ (3,611,641) 0
----------- -----------
Net loss attributable to common shareholders................ $(7,975,081) $(2,625,174)
=========== ===========
Basic and diluted earnings per common share:
Net loss before preferred stock dividend
requirements.......................................... $ (1.59) $ (1.45)
Preferred stock dividend requirements.................. (1.32) --
----------- -----------
Net loss per common share.............................. $ (2.91) $ (1.45)
=========== ===========
Weighted average common shares (basic and diluted).......... 2,741,583 1,804,503
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
FREDERICK BREWING CO.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
CUMULATIVE,
CONVERTIBLE CONVERTIBLE CONVERTIBLE CONVERTIBLE
SERIES A PREFERRED SERIES B PREFERRED SERIES C PREFERRED SERIES D PREFERRED
STOCK STOCK STOCK STOCK
------------------ -------------------- ------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ --------- ------ ----------- ------ ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995...... -- $ -- -- $ -- -- $ -- -- $ --
Issuance of common stock for
cash, net of issuance costs.... -- -- -- -- -- -- -- --
Exercise of options............. ..... -- -- -- -- -- -- --
Fair value of warrants issued to
non-employees for services..... -- -- -- -- -- -- -- --
Net loss........................ -- -- -- -- -- -- -- --
----- --------- ------ ----------- ----- ---------- ----- --------
Balance, December 31, 1996...... -- -- -- -- -- -- -- --
Issuance of preferred stock for
cash, net of issuance costs.... 1,828 833,840 3,750 3,181,161 2,100 1,057,500 1,045 835,500
Fair value of warrants issued in
connection with issuance of
preferred stock................ -- (150,000) -- (460,000) -- -- -- --
Fair value of common stock in
connection with issuance of
preferred stock................ -- -- -- (232,031) -- (75,000) -- (25,500)
Beneficial conversion feature in
connection with Series A
preferred stock................ -- (114,505) -- -- -- -- -- --
Deemed dividend in connection
with beneficial conversion
feature on preferred stock..... -- 85,878 -- -- -- -- -- --
Pledge of common stock to
management in lieu of salary... -- -- -- -- -- -- -- --
Conversion of Series B preferred
stock to common stock.......... -- -- (3,750) (2,459,130) -- -- -- --
Fair value of warrants issued
for deferred public relations
costs.......................... -- -- -- -- -- -- -- --
Fair value of warrants issued to
bank for services.............. -- -- -- -- -- -- -- --
Net loss........................ -- -- -- -- -- -- -- --
----- --------- ------ ----------- ----- ---------- ----- --------
Balance, December 31, 1997...... 1,828 $ 655,213 -- $ -- 2,100 $1,762,500 1,045 $810,000
===== ========= ====== =========== ===== ========== ===== ========
<CAPTION>
CONVERTIBLE
SERIES E PREFERRED
STOCK COMMON STOCK TOTAL
------------------- ------------------ ADDITIONAL ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL DEFICIT EQUITY
------ ---------- --------- ------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995...... -- $ -- 1,128,444 $ 42 $ 1,043,775 $ (462,935) $ 580,892
Issuance of common stock for
cash, net of issuance costs.... -- -- 771,154 28 3,847,701 -- 3,847,729
Exercise of options............. -- -- 55,278 2 9,948 -- 9,950
Fair value of warrants issued to
non-employees for services..... -- -- -- -- 10,000 -- 10,000
Net loss........................ -- -- -- -- -- (2,625,174) (2,625,174)
----- ---------- --------- ---- ----------- ------------ -----------
Balance, December 31, 1996...... -- -- 1,954,876 72 4,911,424 (3,088,109) 1,823,387
Issuance of preferred stock for
cash, net of issuance costs.... 2,700 2,415,000 -- -- -- -- 9,103,001
Fair value of warrants issued in
connection with issuance of
preferred stock................ -- -- -- -- 610,000 -- --
Fair value of common stock in
connection with issuance of
preferred stock................ -- (90,000) 106,500 4 422,527 -- --
Beneficial conversion feature in
connection with Series A
preferred stock................ -- -- -- -- 114,505 -- --
Deemed dividend in connection
with beneficial conversion
feature on preferred stock..... -- -- -- -- 3,525,763 (3,611,641) --
Pledge of common stock to
management in lieu of salary... -- -- -- -- 17,500 -- 17,500
Conversion of Series B preferred
stock to common stock.......... -- -- 2,473,980 91 2,489,039 -- --
Fair value of warrants issued
for deferred public relations
costs.......................... -- -- -- -- 670,000 -- 670,000
Fair value of warrants issued to
bank for services.............. -- -- -- -- 18,000 -- 18,000
Net loss........................ -- -- -- -- -- (4,363,440) (4,363,440)
----- ---------- --------- ---- ----------- ------------ -----------
Balance, December 31, 1997...... 2,700 $2,325,000 4,540,356 $167 $12,778,258 $(11,063,190) $ 7,268,448
===== ========== ========= ==== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
FREDERICK BREWING CO.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................... $(4,363,440) $(2,625,174)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization..................... 560,671 151,772
Amortization of deferred public relations costs... 188,500 --
(Gain) loss on sale or disposal of equipment...... (158,167) 640,815
Bad debt expense.................................. 37,090 109,484
Provision for inventory write-down................ -- 48,060
Fair value of stock pledged to management in lieu
of salary....................................... 17,500 --
Fair value of warrants issued to bank for
services........................................ 18,000 --
Changes in operating assets and liabilities:
Trade receivables............................ (131,114) (123,430)
Inventories.................................. (143,661) (48,108)
Prepaid expenses and other current assets.... (21,064) (39,779)
Other assets................................. (148,557) (71,000)
Deferred public relations costs.............. (650,000) --
Accounts payable............................. (354,250) 254,642
Accrued liabilities.......................... 241,405 71,463
----------- -----------
Net cash used for operating activities............ (4,907,087) (1,621,255)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment..................... (2,748,745) (2,833,176)
Purchase of intangibles................................ (52,900) (107,093)
Proceeds from sale of equipment........................ 303,239 --
----------- -----------
Net cash used for investing activities............ (2,498,406) (2,940,269)
----------- -----------
Cash flows from financing activities
Proceeds from issuance of Series A preferred stock..... 914,000 --
Proceeds from issuance of Series B preferred stock..... 3,750,000 --
Proceeds from issuance of Series C preferred stock..... 2,100,000 --
Proceeds from issuance of Series D preferred stock..... 1,045,000 --
Proceeds from issuance of Series E preferred stock..... 2,700,000 --
Offering costs associated with issuance of preferred
stock................................................. (1,405,999) --
Proceeds from debt borrowings.......................... 1,605,485 1,965,114
Payments on debt obligations........................... (1,193,036) (498,895)
Payments on capital leases............................. (109,571) (12,874)
Proceeds from common stock issuance.................... -- 4,636,924
Costs of common stock issuance......................... -- (769,245)
Decrease in restricted cash............................ 627,525 (640,000)
Payment of loan origination fees....................... (64,021) (70,510)
----------- -----------
Net cash provided by financing activities......... 9,969,383 4,610,514
----------- -----------
Net increase in cash and cash equivalents................... 2,563,890 48,990
Cash and cash equivalents, beginning of period.............. 48,990 --
----------- -----------
Cash and cash equivalents, ending of period................. $ 2,612,880 $ 48,990
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
FREDERICK BREWING CO.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND FINANCING
BUSINESS
Frederick Brewing Co. ("the Company") engages in the manufacture, bottling,
distribution and sale of beer primarily in the Mid-Atlantic region.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, stated at cost which approximates fair value,
consist of amounts on hand in operating bank account and a highly liquid
short-term investment account with a major bank. All cash equivalents have
original maturities of three months or less. The short-term investment, of
$12,475 which is presented as restricted cash, was pledged as collateral to
guarantee the Company's letter of credit to ensure the Company's performance of
site improvement work required by the Frederick County government.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of its cash and cash equivalents and accounts
receivable. The Company maintains cash and cash equivalents in separate accounts
at a major bank. The Company has not experienced any losses on these
investments.
The Company's accounts receivable result primarily from beer sales to
wholesale distributors (see Note 10). The Company periodically assesses the
financial strength of its customers and provides allowances for anticipated
losses when necessary.
INVENTORIES
Inventories, consisting of raw materials, work in process, finished goods,
and packaging and marketing supplies, are valued at lower of cost or market,
with cost based on a moving average method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using
straight-line and accelerated methods over the estimated useful lives of the
assets as follows:
<TABLE>
<S> <C>
Brewing equipment........................................... 7-20 years
Automobiles and trucks...................................... 5 years
Furniture and fixtures...................................... 3-7 years
</TABLE>
Leasehold improvements are recorded at cost and are depreciated over the
terms of the related lease or the estimated useful life of the related
improvement, whichever is shorter. Upon retirement or disposition of property
and equipment, the cost and accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in operations. Repairs and
maintenance are charged to expense as incurred.
The Company leases its production facility under a long-term capital lease.
The lease is included in property and equipment at its estimated fair value. The
production facility is being amortized over the twenty-year lease term.
Depreciation expense includes the amortization of the production facility under
the capital lease.
The Company evaluates the recoverability of the carrying value of
long-lived assets, including property and equipment and intangible assets, in
accordance with the provisions of Statement of Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of". The
Company considers historical performance and anticipated future results in its
evaluation of potential impairment. Accordingly,
F-7
<PAGE>
FREDERICK BREWING CO.
NOTES TO FINANCIAL STATEMENTS
when indicators of impairment are present, the Company evaluates the carrying
value of these assets in relation to the operating performance of the business
and future and undiscounted cash flows without interest expected to result from
the use of these assets. Impairment losses are recognized when the fair value of
the asset or the present value of expected future cash flows are less than the
assets' carrying value. There were no impairment losses in 1997. The Company
recorded a $640,815 impairment loss in 1996 (see note 5).
INTANGIBLE ASSETS
Intangible assets consist primarily of trademarks, copyrights and loan
origination costs related to existing debt obligations. Trademarks and
copyrights are being amortized over a five-year period on a straight-line basis.
Loan origination costs are amortized over the term of the related loan.
Amortization expense was $44,947 and $17,453 for the years ended December 1997
and 1996, respectively.
DEFERRED PUBLIC RELATIONS COSTS
Deferred public relations costs consist of $650,000 cash paid in advance
and $670,000, representing the estimated fair value of 500,000 warrants issued
to a third party for public and investor relations services to be rendered over
a five-year service period (see Note 8). These amounts are being amortized on a
straight-line basis over the five-year term of the service contract.
Amortization expense was $188,500 for the year ended December 31, 1997. In
addition, the Company paid $1,300,000 to this entity for public and investor
relations services rendered during 1997. The related cash payments were expensed
as incurred.
REVENUE RECOGNITION
Revenue is recognized upon shipment of product to distributors. The Company
has established 180 days as the acceptable inventory shelf life for its
products. The Company will reimburse distributors for 50% of all out-of-date
product destroyed in the first year of each new distribution agreement. Amounts
reimbursed for out-of-date products have historically been minimal.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years for differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
Income tax expense represents the current tax provision for the period plus the
change during the period in deferred tax assets and liabilities.
NET LOSS PER COMMON SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," which requires the
presentation of basic earnings per share and diluted earnings per share for all
years presented. Basic earnings per share is based on the weighted average
number of outstanding common shares for the period. Diluted earnings per share
adjusts the weighted average for the potential dilution that could occur if
stock options, warrants or other convertible securities were exercised or
converted into common stock. Diluted earnings per share equals basic earnings
per share for 1997 and 1996 because the effects of such items were
anti-dilutive. Differences between historical quarterly earnings per share
amounts, reported on a primary earnings per share basis and amounts now reported
as basic earnings per share are not material.
F-8
<PAGE>
FREDERICK BREWING CO.
NOTES TO FINANCIAL STATEMENTS
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," and Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in June 1997, which are both effective for
the year ending December 31, 1998. SFAS No. 130 establishes standards for
reporting comprehensive income in a full set of general purpose financial
statements either in the income statement or in a separate statement. SFAS No.
131 establishes standards for reporting information about operating segments,
including related disclosures about products and services, geographic areas and
major customers. These standards are not expected to have a material impact on
the Company's disclosures.
USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual amounts could differ from these estimates.
FAIR VALUE INFORMATION
The carrying amounts of current assets and current liabilities approximate
fair value because of their short term maturity. The carrying amount of the
Company's debt approximates its fair value as the debt bears interest at rates
approximating current market rates.
3. ACQUISITIONS
Subsequent to year-end, the Company acquired 100% of the outstanding common
stock of Wild Goose Brewery, Inc. (Wild Goose) and the brands, formulas,
copyrights, trademarks and related intangible assets of Brimstone Brewing
Company, Inc. (Brimstone). The consideration for Wild Goose consisted of the
issuance of approximately 1,100,000 shares of the Company's common stock with an
aggregate value of $2,206,000 and the assumption of approximately $580,000 in
outstanding Wild Goose notes payable. The actual number of shares to be issued
in connection with the Wild Goose acquisition is subject to adjustment based on
a final accounting of its 1997 operating results. The consideration for
Brimstone was 80,000 shares of the Company's common stock with an aggregate
value of approximately $162,000. These acquisitions will be accounted for under
the purchase method of accounting.
The purchase price for each acquisition will be allocated to the assets
acquired and liabilities assumed based on their estimated fair values. Results
of operations for Wild Goose and Brimstone will be included with those of the
Company for periods subsequent to the date of acquisition. The excess of the
purchase price over the net assets acquired will be recorded as goodwill and
amortized over 10 years. The purchase price allocation will be determined during
1998. The final allocation may have a material effect on the unaudited pro forma
information presented below.
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisitions had been completed at the beginning of the
periods presented and does not purport to be
F-9
<PAGE>
FREDERICK BREWING CO.
NOTES TO FINANCIAL STATEMENTS
indicative of what would have occurred had the acquisitions actually been made
as of such date or of results which may occur in the future.
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Net sales.......................................... $ 5,769,000 $ 4,347,000
Net loss........................................... $(4,564,000) $(2,869,000)
Net loss per common share.......................... $ (1.16) $ (0.96)
</TABLE>
4. INVENTORIES
Inventories at December 31, consist of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Raw materials............................................... $ 64,194 $ 35,957
Work in process............................................. 51,677 17,153
Finished goods.............................................. 100,469 15,749
Packaging and marketing supplies............................ 137,884 189,764
Inventory allowances........................................ -- (48,060)
-------- --------
Total.................................................. $354,224 $210,563
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment at December 31, consists of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Brewing equipment........................................... $4,117,219 $ 491,660
Building.................................................... 3,000,000 --
Leasehold improvements...................................... 1,348,254 --
Automobiles and trucks...................................... 201,499 201,499
Furniture and fixtures...................................... 110,806 68,821
Construction in progress.................................... -- 2,830,834
---------- ----------
Total.................................................. 8,777,778 3,592,814
Less accumulated depreciation............................... (402,133) (305,118)
---------- ----------
Property and equipment, net................................. $8,375,645 $3,287,696
========== ==========
</TABLE>
Construction in progress represented costs incurred in connection with the
preparation of purchased brewing equipment for their intended use. As a result
of the Company's move into its new brewery in early 1997, there was a
significant amount of brewing equipment housed in the old facility which was
sold in 1997. A loss of $640,815 was included in the statement of operations for
the year ended December 31, 1996 associated with the write-down of the brewing
equipment to its estimated fair value and the write-off of leasehold
improvements in the old facility. The company sold the related brewing equipment
in 1997 for cash proceeds of $303,329 resulting in a gain of $158,167.
Included in property and equipment as of December 31, 1997 and 1996 was
$3,022,497 and $101,869, respectively in assets held under capital lease.
Accumulated amortization as of December 31, 1997 and 1996 related to these
assets was $118,672 and $29,275, respectively.
F-10
<PAGE>
FREDERICK BREWING CO.
NOTES TO FINANCIAL STATEMENTS
6. DEBT OBLIGATIONS
Long-term debt
The long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
DESCRIPTION MATURITY 1997 1996
----------- ------------ ------------ ------------
<S> <C> <C> <C>
Note payable to bank, interest at LIBOR + 150 basis
points, 108 monthly payments at $13,889, commencing
Aug. 1997, collateralized by brewing equipment (see
below). ............................................ July 2006 $1,366,756 $1,500,000
Note payable to bank, interest at LIBOR + 150 basis
points, interest only payments, collateralized by
brewing equipment (see below). ..................... July 1997 -- 363,515
Note payable to United States Small Business
Administration, interest at 7.68%, monthly principal
and interest payments of $7,967, collateralized by
secondary lien on all equipment. ................... May 2017 984,002 --
Notes payable to bank, monthly payments ranging from
$268 to $808, including interest ranging from 7.9% May 1999 to
to 9.1%, collateralized by vehicles. ............... October 2000 93,676 143,920
Stockholder loans payable, monthly payments ranging
from $425 to $655 including interest ranging from
10% to 11%.......................................... To July 1999 37,116 61,666
---------- ----------
Total.......................................................... 2,481,550 2,069,101
Less current maturities........................................ (272,814) (437,690)
---------- ----------
Total long-term debt........................................... $2,208,736 $1,631,411
========== ==========
</TABLE>
During 1996, the Company entered into agreements to have a new brewery
built by Blue II, LLC, a limited liability company affiliated with certain
directors of the Company ("Blue II"). Blue II constructed the new brewery
building to the Company's specifications and is leasing the building to the
Company. On July 19, 1996, in connection with the purchase of the equipment to
be housed in the new brewery, the Company obtained a $1,500,000 revenue bond
from the Maryland Economic Development Corporation ("MEDCO") and a $969,000
bridge loan from a bank which has been repaid. The $1,500,000 revenue bond was
immediately assigned by MEDCO to a bank. In connection with the $1,500,000
revenue bond, the bank issued a note to the Company from the proceeds of the
revenue bond. There are certain restrictive covenants existing on the $1,500,000
note payable to the bank. Among those covenants is a cash flow to debt service
ratio for which the Company was not in compliance as of December 31, 1997. This
covenant violation represents an event of default on the note and also a cross
default on a $3,000,000 loan obtained by Blue II for the construction of the
brewery for which the Company is a guarantor of the Blue II loan. The Company
and Blue II has obtained a waiver of this covenant violation as of December 31,
1997. Subsequent to year end, for both the $1,500,000 loan and $3,000,000 Blue
II loan the bank has waived compliance with the cash flow to debt service
covenant for the calendar quarters ending March 31, 1998, June 30, 1998 and
September 30, 1998. The bank has also modified this covenant for the calendar
quarter ending December 31, 1998 and for each quarter thereafter whereby the
Company must maintain a cash flow to debt service ratio of 1.0 to 1. In
addition, the bank modified the current ratio covenant whereby the Company must
maintain a ratio of current assets to current liabilities of 1.0 to 1 as of
calendar quarter March 31, 1998 and each calendar quarter thereafter. The
Company anticipates it will be able to comply with these modified covenants. In
exchange for these covenant modifications, the maturity date on the loans was
revised to April 1, 1999, the interest rate increased to the prime rate plus
1.25% for the Company's loan and the prime rate plus 1.5% for the Blue II loan,
was required to pay a loan modification fee of $25,000 payable in two
installments of $10,000 and $15,000 on June 30, 1998 and September 30, 1998,
respectively, be responsible for all fees and
F-11
<PAGE>
FREDERICK BREWING CO.
NOTES TO FINANCIAL STATEMENTS
expenses incurred by the bank in connection with preparation of the modification
and use its best efforts to obtain replacement financing.
In February 1997, the bank declared that a material adverse change,
primarily caused by a $340,000 overrun in equipment purchases as compared to the
original budget, had occurred in the Company's business and declared the
Company's notes payable in default. The bank agreed, under a forbearance
agreement, dated February 27, 1997, to waive its rights under the events of
default and to fund the Company with additional advances of $250,000 under the
bridge loan. In connection with this forbearance agreement, the Company
committed to the issuance of certain shares of Series A Preferred Stock (See
Note 7), to maintain specified levels of accounts receivable at specified
measurement dates, and to pay to the bank the proceeds obtained from the sale of
the equipment at the old brewery. Further, in connection with the forbearance
agreement, the bridge loan was personally guaranteed by both the Chief Executive
Officer and the President of the Company. Additionally, the Company issued
warrants to the bank to purchase 5,750 shares of the Company's common stock for
no consideration as a fee for the forbearance agreement. The fair value of these
warrants on the date of grant was estimated to be $18,000 based on the
Black-Scholes valuation model with the following weighted-average assumptions:
dividend yield of 0%, expected volatility of 58%, risk free interest rate of
6.93% and expected term of 10 years. This amount has been reflected in the
Statement of Operations and has been recorded as an increase to additional paid
in capital.
On April 24, 1997, the Company obtained a $1,000,000 term loan with the
United States Small Business Administration (SBA). The proceeds from this loan
were used to repay the outstanding principal balance of the bridge loan. Each of
the existing loans contain restrictive covenants, including certain financial
ratios relating to the Company's liquidity and financial position at certain
dates set forth in the agreements and restrictions on the occurrence of adverse
changes deemed material by the bank with respect to the business, assets,
operations or financial condition of the Company. The note payable to the SBA
has been personally guaranteed by both the Chief Executive Officer and the
President of the Company.
Principal repayments required on all notes payable are due as follows:
<TABLE>
<S> <C>
1998........................................................ $ 272,814
1999........................................................ 239,940
2000........................................................ 197,250
2001........................................................ 196,456
2002........................................................ 198,140
Thereafter.................................................. 1,376,950
----------
Total.................................................. $2,481,550
==========
</TABLE>
During 1996 and in connection with the $3 million revenue bond obtained by
Blue II, the bank claimed that this loan was in default. Blue II obtained a
similar forbearance agreement which ensured the continued funding for the
construction. In connection with the Blue II forbearance agreement, the Company
sold certain shares of its Series A Preferred Stock (See Note 7) to the general
contractor of the brewery in an amount equal to the final net funding
deficiency. The proceeds from such sale were used to satisfy the funding
deficiency.
Capital leases
The Company has entered into leases for the land and building housing the
brewery as well as certain computer equipment which qualify as capital leases.
The Company has the option to purchase the building housing the brewery at any
time after March 1, 2023 at a price of $3,000,000.
F-12
<PAGE>
FREDERICK BREWING CO.
NOTES TO FINANCIAL STATEMENTS
Future minimum payments under all capital leases are as follows as of
December 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $ 464,234
1999........................................................ 444,702
2000........................................................ 428,803
2001........................................................ 412,174
2002........................................................ 369,049
Thereafter.................................................. 4,033,177
-----------
Total minimum lease payments................................ 6,152,139
Less amount representing interest........................... (3,182,627)
-----------
Present value of future minimum lease payments.............. 2,969,512
Less current maturities..................................... (88,976)
-----------
Long-term capital lease obligations......................... $ 2,880,536
===========
</TABLE>
7. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of 1,000,000
shares of preferred stock, $.01 par value, of which 1,828 shares of non-voting
Cumulative, Convertible Series A Preferred Stock (Series A), 2,100 shares of
Convertible Series C Preferred Stock (Series C), 1,045 shares of Convertible
Series D Preferred Stock (Series D) and 2,700 shares of Convertible Series E
Preferred Stock (Series E) were issued during 1997 and are outstanding as of
December 31, 1997. The Company also issued 3,750 shares of Convertible Series B
Preferred Stock (Series B), which were all converted to Common Stock during
1997.
The Series A shares are convertible at any time after one year from the
date of issuance, based on a conversion price of $3.67 per share, which was a
discount at the date of issuance. The Series B, Series C and Series D shares are
convertible immediately upon issuance at 70% of the average market price of the
common stock for the five trading days immediately prior to the conversion date.
The Series E shares are convertible immediately upon issuance at 75% of the
average market price of the common stock for the five trading days immediately
prior to the conversion date. The Company has recorded a deemed dividend of
$3,611,641 to reflect the beneficial conversion feature related to each of the
preferred stock issuance. The discount amount is recognized over the period from
the date of issuance to the earliest point the shares are convertible. The
beneficial conversion feature of $114,505 related to the Series A shares is
being recognized as a deemed dividend over the one year period from the date of
issuance of March 31, 1997, and the deemed dividends related to the Series B,
Series C, Series D and Series E shares was recognized immediately upon issuance.
The holders of Series A shares are senior to the Common Stock with respect
to dividend rights and are entitled to a liquidation preference of $500 per
share. The annual dividend rate for the Series A Shares is $40 per share per
annum, with cumulative dividends in arrears of $73,120, and the annual dividend
rate for the Series C, Series D and Series E shares is $80 per share, when and
if declared by the Company's Board of Directors. Full dividends must be paid or
set aside on the Series A, Series C, Series D and Series E shares before
dividends may be paid or set aside on the common stock. All dividend payments
will be subordinated to the Company's debt obligations, and will be subject to
the prior approval of the Company's bank. No dividends were declared during
1997. The holders of Series B, Series C, Series D and Series E shares have a
liquidation preference of $1,000 per share over the Common Stock and the Series
A shares. The Company does not expect to declare or pay such dividends in the
foreseeable future.
In connection with the issuance of the Series A shares, the Company issued
69,306 warrants with exercise prices ranging from $3.66 per share to $5 per
share as consideration to the entities responsible for attracting
F-13
<PAGE>
FREDERICK BREWING CO.
NOTES TO FINANCIAL STATEMENTS
the investors in the Series A shares. The Company determined the aggregate value
of these warrants on the date of grant to approximate $150,000, based on the
Black-Scholes valuation model, with the following weighted average assumptions:
dividend yield of 0%, expected volatility of 58%, risk free interest rate of
6.38% and expected term of 3 years. This value was recorded as a direct issuance
cost of the Series A offering and deducted from the proceeds. In connection with
the issuance of the Series B shares, the Company issued 200,000 warrants with
exercise prices ranging from $4.38 per share to $4.88 per share to the entity
responsible for attracting the investors. The Company determined the aggregate
value of these warrants on the date of grant to be approximately $460,000, based
on the Black-Scholes valuation model, with the following weighted average
assumptions: dividend yield of 0%, expected volatility of 58%, risk free
interest rate of 6.36% and expected term of 5 years. This value was recorded as
a cost of the Series B offering and deducted from the proceeds.
In connection with the issuance of Series B, Series C and Series D shares,
the Company also issued 56,250, 37,500 and 12,750 shares of common stock,
respectively, to the entity responsible for attracting the investors. In
connection with the issuance of Series E shares, the Company pledged 45,000
shares of common stock to the entity responsible for attracting the investors.
The shares were issued subsequent to December 31, 1997. Based on the market
value of the common stock on the date of issuance, the Company has reflected an
aggregate of $422,531 as a cost of the related preferred stock issuance.
During 1997, the Company pledged an aggregate of 10,000 shares of common
stock to certain members of management in lieu of their salary for past
services. The value of the common stock on the date pledged of $17,500 was
recorded as compensation expense and additional paid in capital.
Subsequent to December 31, 1997, certain holders of Series C preferred
shares converted their shares into 402,663 shares of common stock.
8. STOCK-BASED COMPENSATION
STOCK OPTIONS
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations for issuance of stock options to employees. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price at the date of the grant over the amount an employee must
pay to acquire the stock.
Effective November 20, 1995, the Company adopted the 1995 Stock Option Plan
("the Plan") in order to attract and retain qualified personnel in key positions
as well as to compensate members of the Board of Directors. The Company has
reserved approximately 152,000 shares of common stock for issuance under the
Plan. The exercise price of all options under the Plan must be equal to at least
the fair value of the related common stock on the date of grant. Vesting
provisions for the options are to be determined by the Board of Directors. All
options are exercisable for ten years after the vesting date.
F-14
<PAGE>
FREDERICK BREWING CO.
NOTES TO FINANCIAL STATEMENTS
A summary of the status of the Company's stock options is presented.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ ----------------- ------- -----------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of
period.................................... 39,987 1.60 85,489 0.18
Options exercised........................... -- -- (55,278) (0.18)
Options canceled............................ (355) (5.79) (3,334) (5.00)
Options granted............................. 10,000 1.90 13,110 5.79
------ -------
Options outstanding at end of period........ 49,632 1.63 39,987 1.60
====== =======
Options exercisable at end of period........ 49,632 1.63 39,987 1.60
====== =======
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1997 and 1996 was $1.32 per share and $2.38 per share respectively.
As of December 31, 1997, the weighted average remaining contractual life of
the options, which have exercise prices ranging from $0.18 to $6.00, is
approximately 8 years.
As of December 31, 1997 and 1996, the pro forma tax effects under SFAS 109
would not have a material impact to either the deferred tax asset or the
valuation allowance.
Had compensation expense been determined based on fair value at the grant
dates for option awards consistent with the method of SFAS 123, the Company's
net loss attributable to common shareholders and net loss per common share would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net loss attributable to common shareholders
As reported........................................... $(7,957,081) $(2,625,174)
Pro forma............................................. (7,961,471) (2,703,915)
Net loss per common share (basic and diluted)
As reported........................................... $ (2.91) $ (1.45)
Pro forma............................................. (2.91) (1.50)
</TABLE>
The fair value of each option is estimated on the date of grant using a
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the year ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Annual dividend yield....................................... 0% 0%
Estimated volatility........................................ 58% 33%
Risk free interest rate..................................... 6.8% 6.3%
Expected term............................................... 8 years 8 years
</TABLE>
Subsequent to December 31, 1997, the Board of Directors authorized the
modification of the terms of all stock options previously issued to
non-executive employees of the Company by changing the exercise price to $0.875
per share, representing the market value of the underlying common stock on March
28, 1998. There was no compensation charge associated with this modification,
since the revised exercise price is equal to the market value of the underlying
common stock on the date of re-measurement.
F-15
<PAGE>
FREDERICK BREWING CO.
NOTES TO FINANCIAL STATEMENTS
WARRANTS
In April 1997, the Company entered into an agreement with a third party for
public and investor relations services to be rendered over a five-year period.
In consideration for these services, the Company paid $650,000 in cash and
issued the public relations firm 500,000 warrants to purchase common stock of
the Company. These warrants have various exercise prices and terms of
exercisability, and expire at varying dates through March 13, 2002. The Company
determined the estimated aggregate fair value of these warrants on the date of
grant to be approximately $670,000, based on the Black-Scholes valuation model
with the following weighted average assumptions: dividend yield of 0%, expected
volatility of 58%, risk free interest rate of approximately 6.15% and expected
term of approximately 3 years. The Company recorded the total consideration of
$1,320,000 as deferred public relation costs. The component of the total
consideration related to the estimated value of the warrants was recorded as an
increase to additional paid in capital at the value on the date on which a
performance commitment existed. The total consideration is being amortized over
the five-year term of the agreement.
In connection with the initial public offering in 1996, the underwriter was
granted a warrant to purchase up to 38,558 shares of common stock at an exercise
price of $ 7.20 per share. In addition, during 1996, the Company entered into an
agreement with a financial consulting firm, and granted this firm warrants to
purchase $120,000 worth of the Company's common stock at an exercise price equal
to 125% of the average closing price of the shares for the twenty days prior to
the execution of the agreement between the Company and the consulting firm. The
Company recorded an expense of $10,000 and a corresponding increase to paid-
in-capital related to this grant based on the estimated fair value of the
warrants on their date of grant, determined using the Black-Scholes valuation
model.
9. COMMITMENTS AND CONTINGENCIES
LEASES
In February 1997, the Company moved into its new facility which it is
leasing under a twenty-year capital lease expiring March 2017. The monthly
capital lease payments, which began in March 1997, is equal to $20,857. The
Company also leases certain of its equipment under an operating lease with net
aggregate future lease payment as follows (see note 6).
<TABLE>
<S> <C>
1998........................................................ $137,653
1999........................................................ 137,653
2000........................................................ 45,884
--------
Total minimum rental payments............................... $321,190
========
</TABLE>
Rent expense for the year-ended December 31, 1997 and 1996 was
approximately $92,000 and $53,000, respectively.
CONTINGENCIES
In the normal course of business, the Company is involved in various claims
and litigation. Management is of the opinion that any liability or loss
resulting from such claims or litigation will not have a material adverse effect
on the Company's financial condition, results of operations or cash flows.
EMPLOYMENT AGREEMENTS
In December 1995, the Company entered into employment agreements with four
key members of management. Under the terms of the agreements, aggregate base
salaries for 1998 of all the individuals are
F-16
<PAGE>
FREDERICK BREWING CO.
NOTES TO FINANCIAL STATEMENTS
$375,000. The employment agreements also include a provision for annual cash
bonuses not to exceed 25% of base salaries. In 1997 and 1996, no such bonuses
were paid or accrued based on a management decision.
10. 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 all retail customers.
If a significant wholesale distributor were to discontinue selling, or decrease
the level of orders for, the Company's products, the Company's business would be
adversely affected in areas serviced by such wholesale distributors until the
Company retained replacements.
Sales to wholesale distributors representing greater than 10% of total
sales were as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Distributor A........................................ $1,236,400 $ 961,000
Distributor B........................................ -- 40,000
Distributor C........................................ 271,600 241,000
---------- ----------
$1,508,000 $1,242,000
========== ==========
</TABLE>
11. INCOME TAXES
The tax effects of the primary temporary differences giving rise to the
Company's deferred tax asset (liability) at December 31, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Net operating loss carry forward............................ $ 2,710,000 $1,028,000
Other....................................................... 21,000 8,000
Depreciation................................................ (130,000) (100,000)
----------- ----------
Subtotal............................................... 2,601,000 936,000
Valuation allowance......................................... (2,601,000) (936,000)
----------- ----------
Net deferred taxes..................................... $ -- $ --
=========== ==========
</TABLE>
Realization of the net deferred tax asset at the balance sheet date is
dependent on future earnings which are uncertain. Accordingly, a full valuation
allowance was recorded against the asset. During the year ended December 31,
1997 the valuation allowance was increased primarily related to the increase in
the net operating loss carryforwards.
As of December 31, 1997, the Company had net operating loss carry forwards
of approximately $6,800,000 expiring between 2009 and 2012 available to offset
future taxable income for federal income tax purposes, subject to Section 382
limitations.
F-17
<PAGE>
FREDERICK BREWING CO.
NOTES TO FINANCIAL STATEMENTS
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Cash paid for interest...................................... $ 140,030 $53,088
Supplemental disclosure of non cash investing
and financing activities:
Capital lease obligations................................... $3,000,000 $ 5,076
Fair value of warrants issued to non-employees for
services.................................................. $ 670,000 $10,000
Fair value of stock pledge to management in lieu of
salary.................................................... $ 17,500 $ --
Fair value of warrants issued to bank for services.......... $ 18,000 $ --
Fair value of warrants issued in connection with preferred
stock issuance............................................ $ 610,000 $ --
Common stock issued in connection with preferred stock
issuance.................................................. $ 422,531 $ --
Deemed dividend in connection with beneficial conversion
feature on preferred stock................................ $3,611,641 $ --
Beneficial conversion feature in connection with Series A
preferred stock........................................... $ 114,505 $ --
</TABLE>
F-18
<PAGE>
Frederick Brewing Company
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, 1998
-----------------
(Unaudited)
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $195,817
Cash-Restricted 12,475
Trade receivables, net of allowance for doubtful accounts of $35,076 742,261
Inventories, net 840,836
Prepaid expenses, and other current assets 225,146
-----------------
Total current assets 2,016,535
Property and equipment, net 8,245,231
Intangibles, net 457,436
Goodwill, net 2,620,192
Deferred cost & other assets 258,133
=================
TOTAL ASSETS $13,597,527
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $272,742
Capital lease obligations, current portion 85,504
Accounts payable 960,044
Accrued liabilities 506,857
-----------------
Total current liabilities 1,825,147
Long-term debt 2,068,199
Capital lease obligations 2,838,112
-----------------
Total liabilities 6,731,458
-----------------
Stockholders' Equity:
Preferred stock - $.01 par value, 1,000,000 shares authorized:
Cumulative, convertible Series A, 1,643 shares and outstanding, 614,633
Convertible Series B, 0 shares issued and outstanding --
Convertible Series C, 100 shares issued and outstanding 83,929
Convertible Series D, 0 shares issued and outstanding --
Convertible Series E, 1,765 shares issued and outstanding 1,367,875
1,367,875 Common stock - $0.00004 par value, 19,000,000 shares
authorized, 11,594,634 shares issued and outstanding 464
Additional paid-in capital 18,562,992
Accumulated deficit (13,763,824)
-----------------
Total stockholders' equity 6,866,069
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,597,527
=================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-19
<PAGE>
Frederick Brewing Company
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------------------------
1998 1997 1998 1997
-------------------- --------------------------------- -----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(1,936,003) $(907,243) $(2,672,007) $(1,552,744)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 199,884 220,748 504,223 265,386
Write-off of net deferred public relations costs 1,089,000 -- 1,089,000 --
(Gain) Loss on sale of equipment 102,205 -- 99,545 --
Changes in operating assets and liabilities:
Trade receivables (160,319) (310,697) (337,131) (191,043)
Inventories (162,557) (134,573) (362,827) (96,404)
Prepaid expenses and other current assets 49,491 444,313 (136,016) (356,647)
Other assets 8,582 (676,740) (23,096) (634,514)
Accounts payable 228,300 (169,557) 572,332 (57,450)
Accrued liabilities 124,590 16,637 99,914 (104,468)
-------------------- --------------------------------- -----------------
Net cash used for operating activities (456,827) (1,517,112) (1,166,063) (2,727,884)
-------------------- --------------------------------- -----------------
Cash Flows from Investing Activities:
Purchase of property and equipment (47,744) (733,470) (233,233) (1,479,899)
Purchase of intangibles (90,711) (59,242) (90,711) (126,894)
Purchase of business, net of cash acquired -- -- (834,611) --
Proceeds from sale of equipment 77,260 154,600 94,060 154,600
-------------------- --------------------------------- ---------------
Net cash used for investing activities (61,195) (638,112) (1,064,495) (1,452,193)
-------------------- --------------------------------- ---------------
Cash Flows from Financing Activities:
Proceeds from long-term debt -- 1,105,142 -- 1,636,485
Payments on debt obligations (67,515) (1,548,917) (140,609) (1,696,236)
Payments on capital leases (31,704) (12,388) (45,896) (15,700)
Proceeds from issuance of preferred stock, net -- (65,089) -- 4,025,001
Restricted cash 12,475 13,597 (12,475) 617,327
-------------------- --------------------------------- ---------------
Net cash provided by financing activities (86,744) (507,655) (198,980) 4,566,877
-------------------- --------------------------------- ---------------
Net Increase/(Decrease) in Cash and Cash Equivalents (604,766) (2,662,879) (2,417,063) 386,800
Cash and Cash Equivalents, Beginning of Period 800,583 3,098,669 2,612,880 48,990
==================== ================================= ===============
Cash and Cash Equivalents, End of Period $195,817 $435,790 $195,817 $435,790
==================== ================================= ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-20
<PAGE>
Frederick Brewing Company
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
----------------- -------------- --------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Gross Sales $1,595,010 $875,416 $2,609,847 $1,141,230
Less: Depletions, allowances, and excise taxes 205,624 106,223 300,745 157,764
----------------- ------------------------------- ----------------
Net sales 1,389,386 769,193 2,309,102 983,466
Cost of sales 974,916 730,353 1,779,718 1,127,819
----------------- ------------------------------- ----------------
Gross profit (loss) 414,470 38,840 529,384 (144,353)
Selling, general and administrative expenses 1,055,071 939,478 1,802,411 1,435,547
Write-off of net deferred public relations costs 1,089,000 - 1,089,000 -
----------------- ------------------------------- ----------------
Operating loss (1,729,601) (900,638) (2,362,027) (1,579,900)
(Gain)/loss on sale of equipment 102,205 (74,187) 99,545 (135,523)
Interest expense, net 104,197 80,792 210,435 108,367
----------------- ------------------------------- ----------------
Net loss (1,936,003) (907,243) (2,672,007) (1,552,744)
Preferred stock deemed dividend requirements -- (28,626) (28,627) (1,354,454)
================= =============================== ================
Net loss attributable to common shareholders $(1,936,003) $(935,869) $(2,700,634) $(2,907,198)
================= =============================== ================
Basic and Diluted Loss per Common Share:
Net loss before preferred stock dividend (0.20) (0.45) (0.34) (0.78)
requirements
Preferred stock dividend requirements -- (0.01) (0.00) (0.68)
================= =============================== ================
Net loss per common share (0.20) (0.46) (0.34) (1.46)
================= =============================== ================
Average common shares 9,502,833 2,026,309 7,848,674 1,990,593
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-21
<PAGE>
FREDERICK BREWING CO.
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Regulation
S-B. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. However, in the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation of
the interim Consolidated financial position and the interim Consolidated results
of operations of the Company have been included.
Operating results for the three and six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998, or for any other period. For information relating to the
financial position and the results of operations of the Company as of and for
the year ended December 31, 1997, refer to the financial statements included in
the Company's Annual Report on Form 10-KSB, as amended on April 24, 1998, for
the year ended December 31, 1997 and in its 1997 Annual Report to shareholders.
Note 2 - Principles of Consolidation
The consolidated financial statements as of and for the three and six months
ended June 30, 1998 include the accounts of the Company and its wholly-owned
subsidiaries, Wild Goose Brewery, Inc. (Wild Goose) and Brimstone Brewing
Company, Inc. (Brimstone), from their dates of acquisition during the first
quarter of 1998 (see Note 3). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Note 3 - Acquisitions
In January 1998, the Company acquired 100% of the outstanding equity securities
(comprised of 50,000 shares of preferred stock and 10,000 shares of common
stock) of Wild Goose and all of the brands, formulas, copyrights, trademarks and
related intangible assets of Brimstone.
F-22
<PAGE>
Notes to Financial Statements
June 30, 1998
(Unaudited)
Note 3 - Acquisitions (cont.)
The consideration paid for Wild Goose consisted of the issuance of 1,192,086
shares of the Company's common stock with an aggregate value of $2,419,935 plus
the repayment of approximately $532,000 in notes payable and the assumption of
other liabilities. 123,153 shares of the common stock are being withheld by the
Company to account for any undisclosed liabilities or uncollectible accounts
which may be discovered.
The consideration paid for Brimstone consisted of 80,000 shares of the Company's
common stock with a value of $162,000. Both the Wild Goose and Brimstone
acquisitions were accounted for under the purchase method of accounting.
The purchase price for each acquisition has been allocated to the assets
acquired and liabilities assumed, based on their estimated fair values. The
excess of the purchase price over the net assets acquired has been recorded as
goodwill and is being amortized over 10 years. Results of operations for Wild
Goose and Brimstone are included with those of the Company subsequent to the
date of acquisition.
Results for the three and six months ended June 30, 1998 reflect production of
Brimstone and Wild Goose products being transferred to the Company's facility in
January and February, respectively, that operations at the Wild Goose brewery
ceased as of the effective date of the acquisition (January 29, 1998) and that
the Company's gross sales from the dates of acquisition to June 30, 1998
included $84,400 of Brimstone products and $799,000 of Wild Goose products.
The following unaudited pro forma summary presents the consolidated results of
operations as if the acquisitions had been completed at the beginning of the
periods presented and does not purport to be indicative of what would have
occurred had the acquisitions actually been made as of such date or of results
which may occur in the future.
Six months ended Six months ended
June 30, 1998 June 30, 1997
------------- -------------
Net sales $2,309,000 $2,052,000
Net loss ($2,672,000) ($1,739,000)
Basic and diluted loss
per common share $(0.34) $(0.89)
Note 4 - Deferred public relations costs
During 1997, the Company recorded $1,270,000 in deferred public relations costs
associated with an agreement with a third party for public and investor
relations services to be rendered over a five-year service period. The amount
originally recorded included $650,000 in cash paid in advance and $670,000,
representing the estimated fair value of 500,000 warrants issued to the third
party. During the three months ended June 30, 1998, the Company had written off
the unamortized balance of the deferred public relations costs since the
services are no longer being provided by the investor relations firm. There are
still 400,000 warrants outstanding in connection with this agreement.
During the three months ended June 30, 1998, the Company has entered into a new
agreement for public and investor relations services to be provided over a
one-year service period. The terms of the new agreement include the issuance of
shares of common stock and warrants to purchase shares of the Company's common
stock in exchange for the services. The impact of this new agreement on the
consolidated financial statements as of and for the periods ended June 30, 1998
are immaterial.
Note 5 - Long-term Debt
During 1996, the Company entered into agreements to have a new brewery built by
Blue II, LLC, a limited liability company affiliated with certain directors of
the company ("Blue II"). Blue II constructed the new brewery building to the
Company's specifications and is leasing the building to the Company. On July 19,
1996, in connection with the purchase of the equipment to be housed in the new
brewery, the Company obtained a $1,500,00 revenue bond from the Maryland
Economic Development Corporation ("MEDCO") and a $969,000 bridge loan from a
bank which has been repaid. The $1,500,000 revenue bond was immediately assigned
by MEDCO to a bank. In connection with the $1,500,000 revenue bond, the bank
issued a note to the Company from the proceeds of the revenue bond. There are
certain restrictive covenants existing on the $1,500,000 note payable to the
bank. Among those covenants is a cash flow to debt service ratio for March 31,
1998. This covenant violation represents an event of default on the note and
also a cross default on a $3,000,000 loan obtained by Blue II for the
construction of the brewery for which the Company is a guarantor. During the
first quarter of 1998, for both the $1,500,000 loan and $3,000,000 Blue II loan
the bank has waived compliance with the cash flow to debt service covenant for
the calendar quarters ending March 31, 1998, June 30, 1998 and September 30,
1998. The bank has also modified this covenant for the calendar quarter ending
December 31, 1998 and for each quarter thereafter whereby the Company must
maintain a cash flow to debt service ratio of 1.0 to 1. In addition, the bank
modified the current ratio covenant whereby the Company must maintain a ratio of
current assets to current liabilities of 1.0 to 1 as of calendar quarter March
31, 1998 and each calendar quarter thereafter. The Company anticipates it will
be able to comply with these modified covenants. In exchange for these covenant
modifications, the maturity date on the loans and the related capital lease
obligation to Blue II was revised to May 1, 1999, the interest rate increased to
the prime rate plus 1.25% for the Company's loan and the prime rate plus 1.5%
for the Blue II loan, the Company is required to pay a loan modification fee of
$25,000 payable in two installments of $10,000 and $15,000 on June 30, 1998 and
September 30, 1998, respectively, and be responsible for all fees and expenses
incurred by the bank in connection with preparation of the modification and use
its best efforts to obtain replacement financing.
The Company and Blue II are currently negotiating with a local financial
institution to refinance the Company's long-term debt. If such a refinancing
occurs, it is likely that the interest rates will rise, the Company's rent
payment to Blue II will rise and the Company's Chief Executive Officer and
President will be required to provide personal guarantees of the $1,500,000 bond
and the Blue II building lease. While management believes this debt refinancing
will be completed during the third quarter of 1998, no assurances can be given
that this will occur.
Based on the negotiations in process to refinance the notes payable, the Company
has classified the majority of its loan and capital lease obligation as
non-current. Should the refinancing not be completed, the note payable to the
bank and the capital lease obligation would represent current liabilities.
Note 6 - Income Taxes
The Company accounts for income taxes under the asset and liability method. The
Company has not recorded a provision for income taxes for the six month periods
ended June 30, 1998 and 1997 based on the fact that the Company has incurred net
operating losses during those periods. The Company has provided a full valuation
allowance against its net deferred tax asset as of June 30, 1998.
Note 7 - Basic and Diluted Loss per Common Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," which requires the
presentation of basic earnings per share and diluted earnings per share for all
periods presented. Basic earnings per share is based on the weighted average
number of outstanding common shares for the period. Diluted earnings per share
adjusts the weighted average for the potential dilution that could occur if
stock options, warrants, or other convertible securities were exercised or
converted into common stock. Diluted earnings per share equals basic earnings
per share for all periods presented because the effects of such items were
anti-dilutive.
F-23
<PAGE>
Notes to Financial Statements
June 30, 1998
(Unaudited)
Note 8 - New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," and
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related information," in June 1997, which are both
effective for the year ending December 31, 1998. SFAS No. 130 establishes
standards for reporting comprehensive income in a full set of general purpose
financial statements either in the income statement or in a separate statement.
SFAS No. 131 establishes standards for reporting information about operating
segments, including related disclosures about products and services, geographic
areas and major customers. The Company has adopted SFAS No. 130 during the first
quarter of 1998 and has no items of comprehensive income to report.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and hedging Activities." This Statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company will be
required to adopt this new accounting standard by January 1, 2000. Management
does not anticipate early adoption. The Company believes that the effect of
adoption of SFAS No. 133 will not be material.
Note 9 - Issuance of Common Stock upon Conversion of Preferred Stock
During the three months ended June 30, 1998, the Company issued 3,114,670 shares
of common stock upon the conversion of 185 shares of Series A Preferred Stock,
729 shares of Series C Preferred Stock, 219 shares of Series D and 1,235 shares
of Series E Preferred Stock.
F-24
<PAGE>
================================================================================
NO DEALER, SALESMAN OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION
WITH THE OFFER MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
TO AN OFFER TO BUY THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY STATE OR
OTHER JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Additional Information......................... 2
Indemnification................................ 2
Prospectus Summary............................. 4
Risk Factors................................... 4
Selected Financial and Operating Data.......... 15
Market Price of Common Stock................... 17
Registration Rights............................ 17
Use of Proceeds from Sale of Preferred Stock... 18
Selling Stockholders and Plan of
Distribution................................. 18
Description of Securities...................... 21
Dividend Policy................................ 23
Legal Matters.................................. 23
Experts........................................ 23
================================================================================
================================================================================
================================================================================
<PAGE>
FREDERICK BREWING CO.
PART II
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Filing fee under the Securities Act of 1933................... $ 562.35
Blue Sky qualification fees and expenses(1)................... 1,000
Printing and engraving(1)..................................... 1,000
Legal Fees(1)................................................. 25,000
Accounting Fees(1)............................................ 3,000
Miscellaneous(1).............................................. 4,437.65
--------
TOTAL.................................................... $ 35,000
--------
--------
</TABLE>
- ------------------
(1) Estimates
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Frederick Brewing Co. is a Maryland corporation. Section 2-405.1 of the
Maryland General Corporation Law (the "MGCL") states:
PROSPECTUS
"(c) A person who performs his duties in accordance with the standard
provided in this section shall have the immunity from liability described
under Section 5-248 of the Courts and Judicial Proceedings Article."
Section 5-348 of the Maryland Courts and Judicial Proceedings article
states:
"A person who performs the duties of that person in accordance with
the standard provided under Section 2-405.1 of the Corporations and
Associations Article has no liability by reason of being or having been a
director of a corporation."
Section 2-418 of the MGCL states:
"(a) In this section the following words have the meaning indicated.
(1) "Director" means any person who is or was a director of a
corporation and any person who, while a director of a corporation, is or
was serving at the request of the corporation as a director, officer,
partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, jointventure, trust, other enterprise, or
employee benefit plan.
(2) "Corporation" includes any domestic or foreign predecessor entity
of a corporation in a merger, consolidation, or other transaction in which
the predecessor's existence ceased upon consummation of the transaction.
(3) "Expenses" include attorney's fees.
(4) "Official capacity" means the following:
(i) When used with respect to a director, the office of director in
the corporation; and
(ii) When used with respect to a person other than a director as
contemplated in subsection (j), the elective or appointive office in the
corporation held by the officer, or the employment or agency
relationship undertaken by the employee or agent in behalf of the
corporation.
(iii) "Official capacity" does not include service for any other
foreign or domestic corporation or any partnership, joint venture,
trust, other enterprise, or employee benefit plan.
(5) "Party" includes a person who was, is, or is threatened to be made
a named defendant or respondent in a proceeding.
II-1
<PAGE>
(6) "Proceeding" means any threatened, pending or completed action,
suit or proceeding, whether the civil, criminal, administrative, or
investigative.
(b)(1) A corporation may indemnify any director made a party to any
proceeding by reason of service in that capacity unless it is established
that:
(i) The act or omission of the director was material to the matter
giving rise to the proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and deliberate dishonesty; or
(ii) The director actually received an improper personal benefit in
money, property, or services; or
(iii) In the case of any criminal proceeding, the director had
reasonable cause to believe that the act or omission was unlawful.
(2)(i) Indemnification may be against judgments, penalties, fines,
settlements, and reasonable expenses actually incurred by the director in
connection with the proceeding.
(ii) However, if the proceeding was one by or in the right of the
corporation, indemnification may not be made in respect of any
proceeding in which the director shall have been adjudged to be liable
to the corporation.
(3)(i) The termination of any proceeding by judgment, order, or
settlement does not create a presumption that the director did not meet the
requisite standard of conduct set forth in this subsection.
(ii) The termination of any proceeding by conviction, or a plea of
nolo contendere or its equivalent, or an entry of an order of probation
prior to judgment, creates a rebuttable presumption that the director
did not meet that standard of conduct.
(c) A director may not be indemnified under subsection (B) of this
section in respect of any proceeding charging improper personal benefit to
the director, whether or not involving action in the director's official
capacity, in which the director was adjudged to be liable on the basis that
person benefit was improperly received.
(d) Unless limited by the charter:
(1) A director who has been successful, on the merits or otherwise, in
the defense of any proceeding referred to in subsection (B) of this section
shall be indemnified against reasonable expenses incurred by the director
in connection with the proceeding.
(2) A court of appropriate jurisdiction upon application of a director
and such notice as the court shall require, may order indemnification in
the following circumstances:
(i) If it determines a director is entitled to reimbursement under
paragraph (1) of this subsection, the court shall order indemnification,
in which case the director shall be entitled to recover the expenses of
securing such reimbursement; or
(ii) If it determines that the director is fairly and reasonably
entitled to indemnification in view of all the relevant circumstances,
whether or not the director has met the standards of conduct set forth
in subsection (b) of this section or has been adjudged liable under the
circumstances described in subsection (c) of this section, the court may
order such indemnification as the court shall deem proper. However,
indemnification with respect to any proceeding by or in the right of the
corporation or in which liability shall have been adjudged in the
circumstances described in subsection (c) shall be limited to expenses.
(3) A court of appropriate jurisdiction may be the same court in which
the proceeding involving the director's liability took place.
(e)(1) Indemnification under subsection (b) of this section may not be
made by the corporation unless authorized for a specific proceeding after a
determination has been made that indemnification of the director
II-2
<PAGE>
is permissible in the circumstances because the director has met the
standard of conduct set forth in subsection (b) of this section.
(2) Such determination shall be made:
(i) By the board of directors by a majority vote of a quorum
consisting of directors not, at the time, parties to the proceeding, or,
if such a quorum cannot be obtained, then by a majority vote of a
committee of the board consisting solely of two or more directors not,
at the time, parties to such proceeding and who were duly designated to
act in the matter by a majority vote of the full board in which the
designated directors who are parties may participate;
(ii) By special legal counsel selected by the board of directors or
a committee of the board by vote as set forth in subparagraph (i) of
this paragraph, or, if the requisite quorum of the full board cannot be
obtained therefor and the committee cannot be established, by a majority
vote of the full board in which director who are parties may
participate;
or
(iii) By the stockholders.
(3) Authorization of indemnification and determination as to
reasonableness of expenses shall be made in the same manner as the
determination that indemnification is permissible. However, if the
determination that indemnification is permissible is made by special legal
counsel, authorization of indemnification and determination as to
reasonableness of expenses shall be made in the manner specified in
subparagraph (ii) of paragraph (2) of this subsection for selection of such
counsel.
(4) Shares held by directors who are parties to the proceeding may not
be voted on the subject matter under this subsection.
(f)(1) Reasonable expenses incurred by a director who is a party to a
proceeding may be paid or reimbursed by the corporation in advance of the
final disposition of the proceeding upon receipt by the corporation of:
(i) A written affirmation by the director of the director's good
faith belief that the standard of conduct necessary for indemnification
by the corporation as authorized in this section has been met; and
(ii) A written undertaking by or on behalf of the director to repay
the amount if it shall ultimately be determined that the standard of
conduct has not been met,
(2) The undertaking required by subparagraph (ii) of paragraph (1) of
this subsection shall be an unlimited general obligation of the director
but need not be secured and may be accepted without reference to financial
ability to make the repayment.
(3) Payments under this subsection shall be made as provided by the
charter, bylaws, or contract or as specified in subsection (e) of this
section.
(g) The indemnification and advancement of expenses provided or
authorized by this section may not be deemed exclusive of any other rights,
by indemnification or otherwise, to which a director may be entitled under
the charter, the bylaws, a resolution of stockholders or directors, an
agreement or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office.
(h) This section does not limit the corporation's power to pay or
reimburse expenses incurred by a director in connection with an appearance
as a witness in a proceeding at a time when the director has not been made
a named defendant or respondent in the proceeding.
(i) For purposes of this section:
(1) The corporation shall be deemed to have requested a director to
serve an employee benefit plan where the performance of the director's
duties to the corporation also imposes duties on, or otherwise involves
services by, the director to the plan or participants or beneficiaries of
the plan;
II-3
<PAGE>
(2) Excises taxes assessed on a director with respect to an employee
benefit plan pursuant to applicable law shall be deemed fines; and
(3) Action taken or omitted by the director with respect to an
employee benefit plan in the performance of the director's duties for a
purpose reasonably believed by the director to be in the interest of the
participants and beneficiaries of the plan shall be deemed to be for a
purpose which is not opposed to the best interests of the corporation.
(j) Unless limited by the charter:
(1) An officer of the corporation shall be indemnified as and to the
extent provided in subsection (d) of this section for a director and shall
be entitled, to the same extent as a director, to seek indemnification
pursuant to the provisions of subsection (d);
(2) A corporation may indemnify and advance expenses to an officer,
employee, or agent of the corporation to the same extent that it may
indemnify directors under this section; and
(3) A corporation, in addition, may indemnify and advance expenses to
an officer, employee, or agent who is not a director to such further
extent, consistent with law, as may be provided by its charter, bylaws,
general or specific action of its board of directors or contract.
(k)(1) A corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, or agent of the
corporation, or who, while a director, officer, employee, or agent of the
corporation, is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee, or agent of another foreign
or domestic corporation, partnership, joint venture, trust, other
enterprise, or employee benefit plan against any liability asserted against
and incurred by such person in any such capacity or arising out of such
person's position, whether or not the corporation would have the power to
indemnify against liability under the provisions of this section.
(2) A corporation may provide similar protection, including a trust
fund, letter of credit, or surety bond, not inconsistent with this section.
(3) The insurance or similar protection may be provided by a
subsidiary or an affiliate of the corporation.
(l) Any indemnification of, or advance of expenses to, a director in
accordance with this section, if arising out of a proceeding by or in the
right of the corporation, shall be reported in writing to the stockholders
with the notice of the next stockholders' meeting or prior to the meeting."
The Amended and Restated Articles of Incorporation of the Company also
limit the liability of, and provide indemnification to, directors and officers
of the Company. Article VIII of the Company's Article states:
"A. Limitation of Liability. No director who has performed his or her
duties in accordance with the standard set forth in Section 2-405.1 of the
MGCL (or any successor provision thereto) shall be personally liable to the
Corporation or its stockholders for monetary damages for any act or
omission by such director as a director; provided that a director's
liability shall not be limited or eliminated to the extent that: (i) it is
proved that the director actually received an improper benefit or profit in
money, property or services for the amount of the benefit or profit in
money, property or services actually received; or (ii) a judgment or other
final adjudication adverse to the director in entered in a proceeding based
on a finding in the proceeding that the director's action, or failure to
act, was the result of active and deliberate dishonesty and was material to
the cause of action adjudicated in the proceeding. No amendment to or
repeal of this Article VIII.A. shall apply to or have any effect on the
liability or alleged liability of any director of the Corporation for or
with respect to any acts or omissions of such director occurring prior to
such amendment.
B. Indemnification. The Corporation shall indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative, arbitrative or investigative, by reason of the fact that
such person is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise or employee benefit plan, against
liability and expenses (including court costs and attorney's
II-4
<PAGE>
fees), judgments, fines, excise taxes and amounts paid in satisfaction,
settlement or compromise actually and reasonably incurred by such person in
connection with such action, suit or proceeding to the full extent
authorized by Section 2-418 of the MGCL or any successor provision thereto.
C. Advancement of Expenses. Reasonable expenses incurred by a
director, officer, employee or agent of the Corporation in defending a
civil or criminal action, suit or proceeding described in Article VIII.B.
shall be paid by the Corporation in advance of the final disposition of
such action, suit or proceeding as authorized by the Board of Directors
only upon receipt of written affirmation by or on behalf of such person of
his good faith belief that he has met the standard of conduct necessary for
indemnification under relevant law and a written undertaking to repay such
amount if it shall ultimately be determined that the person has not met
that standard.
D. Other Rights and Remedies. The indemnification provided by this
Article VIII shall not be deemed to exclude any other rights to which those
seeking indemnification or advancement of expenses may be entitled under
the Corporation's Articles of Amendment, any insurance or other agreement,
trust fund, letter of credit, surety bond, vote of stockholders or
disinterested directors or otherwise, both as to actions in their official
capacity and as to actions in another capacity while holding such office,
and shall continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors
and administrators of such person; provided that no indemnification shall
be made to or on behalf of an individual if a judgment or other final
adjudication establishes that his actions, or omissions to act, were
material to the cause of action as adjudicated and (I) were committed in
bad faith; or (ii) were the result of active and deliberate dishonesty; or
(iii) the director actually received an improper personal benefit in money,
property or services; or (iv) in the case of any criminal proceedings, the
director had reasonable cause to believe that the act or omission was
unlawful; provided, however, that a director who has been successful, on
the merits or otherwise, in the defense of proceedings referred to under
clauses (I) through (iv) above, may still be indemnified as to reasonable
expenses actually incurred by such person in connection with the proceeding
as to approved by a disinterested majority of the Board of Directors.
E. Insurance. Upon resolution passed by the Board of Directors, the
Corporation may purchase and maintain insurance on behalf of any person who
is or was a director, officer, employee or agent of the Corporation, or was
serving at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or
another enterprise or employee benefit plan, against any liability asserted
against him or incurred by him in any such capacity, or arising out of his
status, whether or not the Corporation would have the power to indemnify
him against such liability under the provisions of this Article or the
MGCL.
F. Modification. The duties of the Corporation to indemnify and to
advance expenses to a director, officer, employee or agent provided in this
Article VIII shall be in the nature of a contract between the Corporation
and each such director, officer, employee or agent and no amendment or
repeal of any provision of this Article VIII shall alter, to the detriment
of such director, officer, employee or agent, the right of such person to
the advance of expenses or indemnification related to a claim based on an
act or failure to act which took place prior to such amendment or repeal.
G. Proceedings Initiated by Indemnified Persons. Notwithstanding any
other provision of this Article VIII, the Corporation shall not indemnify a
director, officer, employee or agent for any liability incurred in an
action, suit or proceeding initiated by (which shall not be deemed to
include counter-claims or affirmative defenses) or participated in as an
intervenor or amicus curiae by the person seeking indemnification unless
such initiation of or participation in the action, suit or proceeding is
authorized, either before or after its commencement, by the affirmative
vote of a disinterested majority of the directors then in office."
Article X of the Company's Bylaws states:
"(a) A director of the Corporation shall not be personally liable for
monetary damages for action taken, or any failure to take action, as a
director, to the extent set forth in the Corporation's Amended and Restated
Articles of Incorporation, which provisions are incorporated herein with
the same affect as if they were set forth herein.
II-5
<PAGE>
(b) The Corporation shall indemnify any person who is a director,
officer, employee or agent of the Corporation to the extent set forth in
the Corporation's Amended and Restated Articles of Incorporation, which
provisions are incorporated herein with the same affect as if they were set
forth herein."
In addition, the Company intends to obtain a directors and officers
liability insurance policy relating to certain actions or omissions which may be
taken, or omitted to be taken, by the directors and officers of the Company, as
well as a policy which insures against error and omissions in the offering
documents relating to the offer and sale of the Common stock to the public.
ITEM 16. EXHIBITS
The exhibits attached hereto are as follows:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ------------------------------------------------------------------------------------------------------
<S> <C>
3(1) -- Amended and Restated Articles of Incorporation(1),(10)
(i) -- Articles Supplementary with respect to Series A Convertible Preferred Stock;(2)
(ii) -- Articles Supplementary with respect to Series B Convertible Preferred Stock;(2)
(iii) -- Articles Supplementary with respect to Series C Convertible Preferred Stock;(3)
(iv) -- Articles Supplementary with respect to Series D Convertible Preferred Stock;(4)
(v) -- Articles Supplementary with respect to Series E Convertible Preferred Stock;(10)
(vi) -- Articles Supplementary with respect to Series F Convertible Preferred Stock.(12)
3(2) -- Amended and Restated Bylaws.(5)
4 -- Stock Certificate.(5)
5 -- Opinion of .(13)
10 -- Material Contracts:
(i) -- Stock Option Agreement dated April 15, 1993 between the Company, Edward D. Scott, Kevin E.
Brannon, and Marjorie A. McGinnis;(5)*
(ii) -- Form of Shareholder Agreement;(5)
(iii) -- Form of Termination of Shareholder Agreement;(5)
(iv) -- Employment Agreement dated December 9, 1995 between the Company and Kevin E. Brannon;(5)*
(v) -- Employment Agreement dated December 9, 1995 between the Company and Marjorie A. McGinnis;(5)*
(vi) -- Employment Agreement dated December 9, 1995 between the Company and Steven T. Nordahl;(5)*
(vii) -- Employment Agreement dated December 9, 1995 between the Company and Craig J. O'Connor;(5)*
(viii) -- Employment Agreement dated February 20, 1993 between the Company and Steven Tluszcz;(5)
(ix) -- Lease Agreement dated February 15, 1994 between the Company and Carroll Creek LLC;(5)
(x) -- Lease Agreement dated March 25, 1994 between the Company and Carroll Creek LLC;(2)
(xi) -- Addendum to the Agreement of Lease dated March 30, 1995 between the Company and Carroll Creek
LLC;(5)
(xii) -- Agreement of Lease dated January 21, 1993 between the Company, Kevin E. Brannon, and South
Carroll Street Partnership;(5)
(xiii) -- Letter lease dated January 18, 1995 between the Company and Frederick Produce Company;(5)
(xiv) -- Form of Distribution Agreement;(5)
(xv) -- Letter from the Company dated October 30, 1993 to the Kronheim Company, Inc.;(5)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ------------------------------------------------------------------------------------------------------
<S> <C>
(xvi) -- Non-employee Directors Stock Option Plan;(5)*
(xvii) -- 1995 Stock Option Plan;(5)*
(xviii) -- Form of Promissory Note dated various dates from the Company to certain stockholders;(5)
(xix) -- Promissory Note dated June 18, 1994 between the Company and Dr. Nicholas Foris;(5)
(xx) -- Promissory Note dated March 18, 1994 between the Company and Dr. Nicholas Foris;(5)
(xxi) -- Contract Brewing Agreement dated December 12, 1995 by the Johnson Beer Company and the
Company;(5)
(xxii) -- Promissory Note by the Company to FCNB Bank dated November 24, 1995 with a guarantee by
Dr. Nicholas Foris;(5)
(xxiii) -- Agreement of Sale by and between the Company and SOPM Limited Partnership dated November 7,
1995;(5)
(xxiv) -- Assignment and Extension of Agreement of Sales by and between the Company and Blue II, LLC dated
December 19, 1995;(5)
(xxv) -- Letter of Intent for Build-to-Suit Light Industrial Space by and between the Company and
Blue II, LLC dated December 21, 1995;(5)
(xxvi) -- Resolutions adopted by the Maryland Industrial Development Financing Authority;(5)
(xxvii) -- Letter dated January 30, 1996 from the Maryland Economic Development Corp.;(5)
(xxviii) -- Letter dated January 30, 1996 from Ryan, Lee & Company, Inc.;(5)
(xxix) -- Letter dated January 24, 1996 from the Mid-Atlantic Business Finance Co.;(5)
(xxx) -- Letter from Signet Bank/Maryland dated January 16, 1996;(5)
(xxxi) -- Loan and financing agreement between Blue II, MEDCO, Signet and the Company;(6)
(xxxii) -- Promissory note;(6)
(xxxiii) -- $3,000,000 Economic Development Revenue Bond;(6)
(xxxiv) -- Construction contract between Blue II, Morgan Keller, Inc, and the Company;(6)
(xxxv) -- Lease Agreement between Blue II, LLC and the Company;(6)
(xxxvi) -- Loan and financing agreement between MEDCO, Signet and the Company;(6)
(xxxvii) -- Promissory note;(6)
(xxxviii) -- $1,500,000 Economic Development Revenue Bond;(6)
(xxxix) -- Loan and security agreement--$969,000 Bridge loan;(6)
(xxxx) -- Promissory note--bridge loan;(6)
(xxxxi) -- Filler/capper equipment;(6)
(xxxxii) -- Bottling line;(6)
(xxxxiii) -- Mechanical and electrical work;(6)
(xxxxiv) -- Phase I Industrial wastewater treatment;(6)
(xxxxv) -- Bottle supply;(6)
(xxxxvi) -- Interior fit out of new brewery office space;(6)
(xxxxvii) -- Blue II Forbearance Agreement;(7)
(xxxxviii) -- FBC Forbearance Agreement;(7)
(xxxxix) -- Agreement and Plan of Reorganization by and among Frederick Brewing Co., FBC Acquisition
Corporation and Wild Goose Brewery, Inc. dated December 15, 1997;(8)
(l) -- Asset Purchase Agreement by and between Brimstone Brewing Company and Frederick Brewing Co.
dated December 15, 1997;(8)
(li) -- Mutual and Reciprocal Final Release of all claims dated December 19, 1997;(8)
(lii) -- Loan Modification Agreement by and among First Union National Bank, Blue II, LLC, Robert
Schuerholz, Nicholas P. Foris, Edward D. Scott, and Vishnampet S. Jayanthimath dated March 30,
1997;(8) Vishnampet S. Jayanthimath dated March 30, 1997;(8)
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ------------------------------------------------------------------------------------------------------
<S> <C>
(liii) -- Loan Modification Agreement by and between First Union National Bankand Frederick Brewing
Co.;(8)
(liv) -- Loan Agreement between U.S. Small Business Administration and the Company;(3)
(lv) -- Financial Public Relations Agreement by and between I.W. Miller Group, Inc. and Frederick
Brewing Co. Dated effective June 12, 1998.(11)
(lv) -- Form of Subscription Agreement by and between Purchser of Series F Preferred Stock and the
Company dated September 3, 1998;(12)
(lvi) Contract Brewing Agreement by and between MOJO Highway Brewing Company, LLC and Frederick
Brewing Co. dated June 19, 1998.(11)
(lvi) -- Form of Common Stock Purchase Warrant issued to Warrantholder by the Company dated September 3,
1998;(12)
(lvii) -- Operating Agreement by and between MOJO Highway Brewing Company and Frederick Brewing Co. dated
June 19, 1998.(11)
11 -- Calculation of Net Loss Per Share.(8),(9)
16 -- Letter from McLean, Koehler, Sparks & Hammond dated December 12, 1995 to the Company regarding
change in certifying accountants.(1)
21 -- Subsidiaries of Small Business Issuer: Wild Goose Brewery, Inc., a Maryland corporation
Brimstone Brewing Co., a Maryland corporation.
23 -- (i) Consent of Counsel.(13)
-- (ii) Consent of Coopers & Lybrand L.L.P., independent accountants.(13)
24 -- Power of Attorney is contained in the signature page to this Registration Statement.(12)
</TABLE>
- ------------------
(1) Incorporated by reference from Pre-effective Amendment No. 5 to the
Form SB-2 filed with the SEC on March 5, 1996.
(Footnotes continued on next page)
II-8
<PAGE>
(Footnotes continued from previous page)
(2) Incorporated by reference to such exhibit as filed with the Company's
Registration Statement on Form S-3, file number 333-25743.
(3) Incorporated by reference to exhibit 10(I) to the Company's Quarterly
Report on Form 10-QSB for the Quarter Ended June 30, 1997.
(4) Incorporated by reference to such exhibit as filed with the Company's
Registration Statement on Form S-3, file number 333-35655.
(5) Incorporated by reference to such exhibit as filed with the Company's
Form SB-2 filed with the SEC on December 12, 1995.
(6) Incorporated by reference to such exhibit as filed with the Company's
Form 10-QSB, Quarterly Report, filed with the SEC on June 30, 1996.
(7) Incorporated by reference from Form 8-K, Current Report, filed with the SEC
on February 27, 1997.
(8) Incorporated by reference to such exhibit as filed with the Company's
Form 10-KSB for the year ended December 31, 1997.
(9) Incorporated by reference from the Company's Form 10-QSB for the quarter
ended March 31, 1998.
(10) Incorporated by reference to such exhibit as filed with the Company's
Registration Statement on Form S-3, file number 333-54013.
(11) Incorporated by reference to such exhibit as filed with the Company's
10-QSB for the quarter ended June 30, 1998.
(12) Filed herewith.
(13) To be filed by amendment.
* Management contract or compensatory plan or agreement.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement; Provided, however, that paragraphs (a)(1)(I) and
(a)(1)(ii) do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities offered at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of
II-9
<PAGE>
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel that
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(i) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-10
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF FREDERICK, STATE OF
MARYLAND ON OCTOBER 2, 1998.
FREDERICK BREWING CO.
By: /s/ Kevin E. Brannon
__________________________________
Kevin E. Brannon
Chairman and Chief Executive Officer
The undersigned officer and/or director of Frederick Brewing Co., a
Maryland corporation (the "Corporation"), hereby constitutes and appoints
Kevin E. Brannon and Leslie Harper, with full power of substitution and
resubstitution, as attorney to sign for the undersigned in any and all
capacities this Registration Statement and any and all amendments thereto, and
any and all applications or other documents to be filed pertaining to this
Registration Statement with the Securities and Exchange Commission or with any
states or other jurisdictions in which registration is necessary to provide for
notice or sale of all or part of the securities to be registered pursuant to
this Registration Statement and with full power an authority to do and perform
any and all acts and things whatsoever required and necessary to be done in the
premises, as fully to all intents and purposes as the undersigned could do if
personally present. The undersigned hereby ratifies and confirms all that said
attorney-in-fact and agent, or any of his substitutes, may lawfully do or cause
to be done by virtue hereof and incorporate such changes as any of the said
attorneys-in-fact deems appropriate.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON OCTOBER 2, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
/s/ Kevin E. Brannon Chairman, and Chief Executive Officer October 2, 1998
- ------------------------------------------ (principal executive officer) and Director
Kevin E. Brannon
/s/ Leslie Harper Chief Financial Officer October 2, 1998
- ------------------------------------------ (principal accounting and financial
Leslie Harper officer)
/s/ Marjorie A. McGinnis President and Director October 2, 1998
- ------------------------------------------
Marjorie A. McGinnis
/s/ Nicholas P. Foris, M.D. Director October 2, 1998
- ------------------------------------------
Nicholas P. Foris, M.D.
/s/ Carl R. Hildebrand Director October 2, 1998
- ------------------------------------------
Carl R. Hildebrand
/s/ James W. Lutz Director October 2, 1998
- ------------------------------------------
James W. Lutz
/s/ Jerome M. Pool Director October 2, 1998
- ------------------------------------------
Jerome M. Pool
</TABLE>
II-11
<PAGE>
<TABLE>
<C> <S> <C>
/s/ Maribeth Visco Secretary and Director October 2, 1998
- ------------------------------------------
Maribeth Visco
</TABLE>
II-12
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ------------------------------------------------------------------------------------------------------
<S> <C>
3(1) -- Amended and Restated Articles of Incorporation(1),(10)
(i) -- Articles Supplementary with respect to Series A Convertible Preferred Stock;(2)
(ii) -- Articles Supplementary with respect to Series B Convertible Preferred Stock;(2)
(iii) -- Articles Supplementary with respect to Series C Convertible Preferred Stock;(3)
(iv) -- Articles Supplementary with respect to Series D Convertible Preferred Stock;(4)
(v) -- Articles Supplementary with respect to Series E Convertible Preferred Stock;( )
(vi) -- Articles Supplementary with respect to Series F Convertible Preferred Stock.(12)
3(2) -- Amended and Restated Bylaws.(5)
4 -- Stock Certificate.(5)
5 -- Opinion of .(13)
10 -- Material Contracts:
(i) -- Stock Option Agreement dated April 15, 1993 between the Company, Edward D. Scott, Kevin E.
Brannon, and Marjorie A. McGinnis;(5)*
(ii) -- Form of Shareholder Agreement;(5)
(iii) -- Form of Termination of Shareholder Agreement;(5)
(iv) -- Employment Agreement dated December 9, 1995 between the Company and Kevin E. Brannon;(5)*
(v) -- Employment Agreement dated December 9, 1995 between the Company and Marjorie A. McGinnis;(5)*
(vi) -- Employment Agreement dated December 9, 1995 between the Company and Steven T. Nordahl;(5)*
(vii) -- Employment Agreement dated December 9, 1995 between the Company and Craig J. O'Connor;(5)*
(viii) -- Employment Agreement dated February 20, 1993 between the Company and Steven Tluszcz;(5)
(ix) -- Lease Agreement dated February 15, 1994 between the Company and Carroll Creek LLC;(5)
(x) -- Lease Agreement dated March 25, 1994 between the Company and Carroll Creek LLC;(2)
(xi) -- Addendum to the Agreement of Lease dated March 30, 1995 between the Company and Carroll Creek
LLC;(5)
(xii) -- Agreement of Lease dated January 21, 1993 between the Company, Kevin E. Brannon, and South
Carroll Street Partnership;(5)
(xiii) -- Letter lease dated January 18, 1995 between the Company and Frederick Produce Company;(5)
(xiv) -- Form of Distribution Agreement;(5)
(xv) -- Letter from the Company dated October 30, 1993 to the Kronheim Company, Inc.;(5)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ------------------------------------------------------------------------------------------------------
<S> <C>
(xvi) -- Non-employee Directors Stock Option Plan;(5)*
(xvii) -- 1995 Stock Option Plan;(5)*
(xviii) -- Form of Promissory Note dated various dates from the Company to certain stockholders;(5)
(xix) -- Promissory Note dated June 18, 1994 between the Company and Dr. Nicholas Foris;(5)
(xx) -- Promissory Note dated March 18, 1994 between the Company and Dr. Nicholas Foris;(5)
(xxi) -- Contract Brewing Agreement dated December 12, 1995 by the Johnson Beer Company and the
Company;(5)
(xxii) -- Promissory Note by the Company to FCNB Bank dated November 24, 1995 with a guarantee by
Dr. Nicholas Foris;(5)
(xxiii) -- Agreement of Sale by and between the Company and SOPM Limited Partnership dated November 7,
1995;(5)
(xxiv) -- Assignment and Extension of Agreement of Sales by and between the Company and Blue II, LLC dated
December 19, 1995;(5)
(xxv) -- Letter of Intent for Build-to-Suit Light Industrial Space by and between the Company and
Blue II, LLC dated December 21, 1995;(5)
(xxvi) -- Resolutions adopted by the Maryland Industrial Development Financing Authority;(5)
(xxvii) -- Letter dated January 30, 1996 from the Maryland Economic Development Corp.;(5)
(xxviii) -- Letter dated January 30, 1996 from Ryan, Lee & Company, Inc.;(5)
(xxix) -- Letter dated January 24, 1996 from the Mid-Atlantic Business Finance Co.;(5)
(xxx) -- Letter from Signet Bank/Maryland dated January 16, 1996;(5)
(xxxi) -- Loan and financing agreement between Blue II, MEDCO, Signet and the Company;(6)
(xxxii) -- Promissory note;(6)
(xxxiii) -- $3,000,000 Economic Development Revenue Bond;(6)
(xxxiv) -- Construction contract between Blue II, Morgan Keller, Inc, and the Company;(6)
(xxxv) -- Lease Agreement between Blue II, LLC and the Company;(6)
(xxxvi) -- Loan and financing agreement between MEDCO, Signet and the Company;(6)
(xxxvii) -- Promissory note;(6)
(xxxviii) -- $1,500,000 Economic Development Revenue Bond;(6)
(xxxix) -- Loan and security agreement--$969,000 Bridge loan;(6)
(xxxx) -- Promissory note--bridge loan;(6)
(xxxxi) -- Filler/capper equipment;(6)
(xxxxii) -- Bottling line;(6)
(xxxxiii) -- Mechanical and electrical work;(6)
(xxxxiv) -- Phase I Industrial wastewater treatment;(6)
(xxxxv) -- Bottle supply;(6)
(xxxxvi) -- Interior fit out of new brewery office space;(6)
(xxxxvii) -- Blue II Forbearance Agreement;(7)
(xxxxviii) -- FBC Forbearance Agreement;(7)
(xxxxix) -- Agreement and Plan of Reorganization by and among Frederick Brewing Co., FBC Acquisition
Corporation and Wild Goose Brewery, Inc. dated December 15, 1997;(8)
(l) -- Asset Purchase Agreement by and between Brimstone Brewing Company and Frederick Brewing Co.
dated December 15, 1997;(8)
(li) -- Mutual and Reciprocal Final Release of all claims dated December 19, 1997;(8)
(lii) -- Loan Modification Agreement by and among First Union National Bank, Blue II, LLC, Robert
Schuerholz, Nicholas P. Foris, Edward D. Scott, and Vishnampet S. Jayanthimath dated March 30,
1997;(8) Vishnampet S. Jayanthimath dated March 30, 1997;(8)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------ ------------------------------------------------------------------------------------------------------
<S> <C>
(liii) -- Loan Modification Agreement by and between First Union National Bankand Frederick Brewing
Co.;(8)
(liv) -- Loan Agreement between U.S. Small Business Administration and the Company;(3)
(lv) -- Financial Public Relations Agreement by and between I.W. Miller Group, Inc. and Frederick
Brewing Co. Dated effective June 12, 1998.(11)
(lv) -- Form of Subscription Agreement by and between Purchser of Series F Preferred Stock and the
Company dated September 3, 1998;(12)
(lvi) Contract Brewing Agreement by and between MOJO Highway Brewing Company, LLC and Frederick
Brewing Co. dated June 19, 1998.(11)
(lvi) -- Form of Common Stock Purchase Warrant issued to Warrantholder by the Company dated September 3,
1998;(12)
(lvii) -- Operating Agreement by and between MOJO Highway Brewing Company and Frederick Brewing Co. dated
June 19, 1998.(11)
11 -- Calculation of Net Loss Per Share.(8),(9)
16 -- Letter from McLean, Koehler, Sparks & Hammond dated December 12, 1995 to the Company regarding
change in certifying accountants.(1)
21 -- Subsidiaries of Small Business Issuer: Wild Goose Brewery, Inc., a Maryland corporation
Brimstone Brewing Co., a Maryland corporation.
23 -- (i) Consent of Counsel.(13)
-- (ii) Consent of Coopers & Lybrand L.L.P., independent accountants.(13)
24 -- Power of Attorney is contained in the signature page to this Registration Statement.(12)
</TABLE>
- ------------------
(1) Incorporated by reference from Pre-effective Amendment No. 5 to the
Form SB-2 filed with the SEC on March 5, 1996.
(Footnotes continued on next page)
<PAGE>
(Footnotes continued from previous page)
(2) Incorporated by reference to such exhibit as filed with the Company's
Registration Statement on Form S-3, file number 333-25743.
(3) Incorporated by reference to exhibit 10(I) to the Company's Quarterly
Report on Form 10-QSB for the Quarter Ended June 30, 1997.
(4) Incorporated by reference to such exhibit as filed with the Company's
Registration Statement on Form S-3, file number 333-35655.
(5) Incorporated by reference to such exhibit as filed with the Company's
Form SB-2 filed with the SEC on December 12, 1995.
(6) Incorporated by reference to such exhibit as filed with the Company's
Form 10-QSB, Quarterly Report, filed with the SEC on June 30, 1996.
(7) Incorporated by reference from Form 8-K, Current Report, filed with the SEC
on February 27, 1997.
(8) Incorporated by reference to such exhibit as filed with the Company's
Form 10-KSB for the year ended December 31, 1997.
(9) Incorporated by reference from the Company's Form 10-QSB for the quarter
ended March 31, 1998.
(10) Incorporated by reference to such exhibit as filed with the Company's
Registration Statement on Form S-3, file number 333-54013.
(11) Incorporated by reference to such exhibit as filed with the Company's
10-QSB for the quarter ended June 30, 1998.
(12) Filed herewith.
(13) To be filed by amendment.
<PAGE>
CERTIFICATE TO SET FORTH DESIGNATIONS, VOTING POWERS,
PREFERENCES, LIMITATIONS, RESTRICTIONS, AND RELATIVE
RIGHTS OF SERIES F CUMULATIVE CONVERTIBLE
PREFERRED STOCK, $0.01 PAR VALUE PER SHARE
It is hereby certified that:
I. The name of the corporation is Frederick Brewing Co. (the
"Corporation"), a Maryland corporation.
II. Set forth hereinafter is a statement of the voting powers,
preferences, limitations, restrictions, and relative rights of shares of Series
F Cumulative Convertible Preferred Stock hereinafter designated as contained in
a resolution of the Board of Directors of the Corporation pursuant to a
provision of the Certificate of Incorporation of the Corporation permitting the
issuance of said Series F Cumulative Convertible Preferred Stock by resolution
of the Board of Directors:
Series F Cumulative Convertible Preferred Stock, $0.01 par value.
1. Designation: Number of Shares. The Corporation shall have 1,500
shares designated as Series F Cumulative Convertible Preferred Stock, $0.01 par
value, as part of the authorized class of preferred shares (the "Series F
Preferred Stock"). Each share of Series F Preferred Stock shall have a stated
value equal to $1,000 (as adjusted for any stock dividends combinations or
splits with respect to such shares) (the "Stated Value").
2. Dividends. The holders of outstanding shares of Series F Preferred
Stock shall not be entitled to receive dividends on the Series F Preferred Stock
unless declared by the Corporation.
3. Liquidation Rights.
(a) Upon the dissolution, liquidation or winding-up of the
Corporation, whether voluntary or involuntary, the holders of the Series F
Preferred Stock shall be entitled to receive before any payment or distribution
shall be made on the Junior Stock, out of the assets of the Corporation
available for distribution to stockholders, the Stated Value per share of Series
F Preferred Stock and all accrued and unpaid dividends to and including the date
of payment thereof. Upon the payment in full of all amounts due to holders of
the Series F Preferred Stock then the holders of the Junior Stock of the
Corporation shall receive, ratably, all remaining assets of the Corporation
legally available for distribution. If the assets of the Corporation available
for distribution to the holders of the Series F Preferred Stock shall be
insufficient to permit payment in full of the amounts payable as aforesaid to
the holders of Series F Preferred Stock upon such liquidation, dissolution or
winding-up, whether voluntary or involuntary, then all such assets of the
Corporation shall be distributed to the exclusion of the holders of shares of
Junior Stock ratably among the holders of Series F Preferred Stock.
(b) Neither purchase nor the redemption by the Corporation of shares
of any class
1
<PAGE>
of stock nor the merger nor consolidation of the Corporation with or into any
other corporation or corporations nor the sale or transfer by the Corporation of
all or any part of its assets shall be deemed to be a liquidation, dissolution
or winding-up of the Corporation for the purposes of this paragraph 3.
4. Conversion into Common Stock. Shares of Series F Preferred Stock
shall have the following conversion rights and obligations:
(a) The Holder may convert, at the Holder's option, the
Preferred Stock into Common Stock from and after the sooner of (i) 180 days
after the issue date of the Preferred Stock, or (ii) the effective date of a
registration statement relating to the Common Stock issuable upon conversion of
the Preferred Stock ("Registration Statement"), at the Conversion Price defined
in Paragraph 4(b) below. The Holder will convert an aggregate amount between 15%
and 30% of the aggregate amount of Preferred Stock initially purchased by the
Holder (or Holder's predecessor) pursuant to a Subscription Agreement during the
thirty day period commencing on the effective date of the Registration
Statement. The Holder will convert an aggregate amount between 15% and 30% of
the aggregate amount of Preferred Stock initially purchased by the Holder (or
Holder's predecessor) during each succeeding thirty day period. In no event will
the Holder be required to convert any Preferred Stock unless the Common Stock to
be delivered will be the subject of an effective Registration Statement and no
Event of Default, as herein defined, will have occurred or be continuing, or if
the Corporation is in default under any other agreement with the Holder of the
Preferred Stock.
(b) The number of shares of Common Stock issuable upon conversion of
each share of Series F Preferred Stock shall equal (i) the sum of (A) the Stated
Value per share and (B) accrued and unpaid dividends on such share, divided by
(ii) the Conversion Price. The Conversion Price shall be equal to the lesser of:
(i) 90% of the closing bid price of Common Stock for the trading day prior to
the payment by the Holder for the Preferred Stock, or (ii) 80% of the average of
the three lowest closing bid prices of the Common Stock for the seven trading
days prior to, but not including the first calendar day of the month during
which a Notice of Conversion is given to the Company. The date a Notice of
Conversion is given to the Company is a "Conversion Date." The Closing Bid Price
shall mean the closing bid price of the Corporation's Common Stock as reported
from the NASDAQ SmallCap Market (or if not reported by NASDAQ as reported by
such other exchange or market where traded).
(c) The holder of any certificate for shares of Series F
Preferred Stock desiring to convert any of such shares may give notice of its
decision to convert the shares into common stock by telecopying an executed and
completed notice of conversion to the Corporation and delivering within three
business days thereafter, the original notice of conversion and the certificate
for the Preferred Stock properly endorsed for or accompanied by duly executed
instruments of transfer (and such other transfer papers as said Transfer Agent
may reasonably require) to the Corporation. Each date on which a notice of
conversion is telecopied to and received by the Corporation in accordance with
the provisions hereof shall be deemed a Conversion Date. The Corporation will
transmit the certificates representing the shares of common stock issuable upon
conversion of any Preferred Stock (together with the Preferred Stock
representing the shares not converted) to the Holder via
2
<PAGE>
express courier, or otherwise, for receipt by the holder within three business
days after receipt by the Corporation of the original notice of conversion and
the Preferred Stock representing the shares to be converted. The holder of the
shares so surrendered for conversion shall be entitled to receive (except as
otherwise provided herein) a certificate or certificates which shall be
expressed to be fully paid and non-assessable for the number of shares of Common
Stock to which such stockholder shall be entitled upon such conversion
registered in the name of such holder or in such other name or names as such
stockholder in writing may specify. In the case of any Series F Preferred Stock
which is converted in part only the holder of shares of Series F Preferred Stock
shall upon delivery of the certificate or certificates representing Common Stock
also receive a new share certificate representing the unconverted portion of the
shares of Series F Preferred Stock. Nothing herein shall be construed to give
any holder of Series F Preferred Stock surrendering the same for conversion the
right to receive any additional shares of Common Stock or other property which
results from an adjustment in conversion rights under the provision of paragraph
(d) or (e) of this paragraph 4 until holders of Common Stock are entitled to
receive the shares or other property giving rise to the adjustment.
In the case of the exercise of the conversion rights set forth in
paragraph 4(a) the conversion privilege shall be deemed to have been exercised
and the shares of Common Stock issuable upon such conversion shall be deemed to
have been issued upon the date of receipt by such Transfer Agent or Corporation
for conversion of the certificate for such shares of Series F Preferred Stock.
The person or entity entitled to receive Common Stock issuable upon such
conversion shall, on the date such conversion privilege is deemed to have been
exercised and thereafter, be treated for all purposes as the record holder of
such Common Stock and shall on the same date cease to be treated for any purpose
as the record holder of such shares of Series F Preferred Stock to be converted.
Notwithstanding the foregoing, if the stock transfer books are closed
on the date such shares are received by the Transfer Agent, the conversion
privilege shall be deemed to have been exercised and the person or entity shall
be treated as a record holder of shares of Common Stock on the next succeeding
date on which the transfer books are open, but the Conversion Rate shall be that
in effect on the date such conversion privilege was exercised. The Corporation
shall not be required to deliver certificates for shares of its Common Stock or
new certificates for unconverted shares of its Series F Preferred Stock while
the stock transfer books for such respective classes of stock are duly closed
for any purpose; but the right of surrendering shares of Series F Preferred
Stock for conversion shall not be suspended during any period that the stock
transfer books of either of such classes of stock are closed.
Upon the conversion of any shares of Series F Preferred Stock no
adjustment or payment shall be made with respect to such converted shares on
account of any dividend on shares of such stock or on account of any dividend on
the Common Stock, except that the holder of such converted shares shall be
entitled to be paid any dividends declared on shares of Common Stock after
conversion thereof.
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The Corporation shall be required in connection with any conversion of
Series F Preferred Stock to issue a fraction of a share of its Common Stock and
to deliver a stock certificate representing a fraction thereof.
The Corporation and Holder may not convert that amount of the Preferred
Stock on a Conversion Date in connection with that number of shares of Common
Stock which would be in excess of the sum of (i) the number of shares of Common
Stock owned by the Subscriber and its affiliates on such Conversion Date, and
(ii) the number of shares of Common Stock issuable upon the conversion of the
Preferred Stock with respect to which the determination of this proviso is being
made on such Conversion Date, which would result in ownership by the Holder and
its affiliates of more than 4.99% of the outstanding shares of Common Stock of
the Corporation. For the purposes of the proviso to the immediately preceding
sentence, ownership shall be determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder,
except as otherwise provided in clause (i) of such proviso.
(d) The Conversion Rate shall be subject to adjustment from time to
time as follows:
(i) In case the Corporation shall at any time (A) declare any
dividend or distribution on its Common Stock or other securities of the
Corporation other than the Series F Preferred Stock, (B) split or subdivide the
outstanding Common Stock, (C) combine the outstanding Common Stock into a
smaller number of shares, or (D) issue by reclassification of its Common Stock
any shares or other securities of the Corporation, then in each such event the
Conversion Rate shall be adjusted proportionately so that the holders of Series
F Preferred Stock shall be entitled to receive the kind and number of shares or
other securities of the Corporation which such holders would have owned or have
been entitled to receive after the happening of any of the events described
above had such shares of Series F Preferred Stock been converted immediately
prior to the happening of such event (or any record date with respect thereto).
Such adjustment shall be made whenever any of the events listed above shall
occur. An adjustment made to the Conversion pursuant to this paragraph 4(d)(i)
shall become effective immediately after the effective date of the event
retroactive to the record date, if any, for the event.
(e) The Conversion Rate shall also be subject to adjustment from
time to time as follows:
(i) In case of any merger of the Corporation with or into any
other corporation (other than a merger in which the Corporation is the surviving
or continuing corporation and which does not result in any reclassification,
conversion, or change of the outstanding shares of Common Stock) then as part of
such merger lawful provision shall be made so that holders of Series F Preferred
Stock shall thereafter have the right to convert each share of Series F
Preferred Stock into the kind and amount of shares of stock and/or other
securities or property receivable upon such merger by a holder of the number of
shares of Common Stock into which such shares of Series F Preferred Stock might
have been converted immediately prior to such consolidation or merger. Such
provision shall also provide for adjustments which shall be as nearly equivalent
as may be practicable to the adjustments provided for in paragraph (d) of this
paragraph 4. The foregoing
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provisions of this paragraph 4(e) shall similarly apply to successive mergers.
(ii) In case of any sale or conveyance to another person or
entity of the property of the Corporation as an entirety, or substantially as an
entirety, in connection with which shares or other securities or cash or other
property shall be issuable, distributable, payable, or deliverable for
outstanding shares of Common Stock, then, unless the right to convert such
shares shall have terminated, lawful provision shall be made so that the holders
of Series F Preferred Stock shall thereafter have the right to convert each
share of the Series F Preferred Stock into the kind and amount of shares of
stock or other securities or property that shall be issuable, distributable,
payable, or deliverable upon such sale or conveyance with respect to each share
of Common Stock immediately prior to such conveyance.
(f) Subject to the provisions of this section, if the Corporation
at any time shall issue any shares of Common Stock prior to the conversion of
the entire Stated Value of the Series F Preferred Stock (otherwise than as: (i)
provided in paragraphs (d) and (e) of this paragraph 4; or (ii) pursuant to
options, warrants, or other obligations to issue shares, outstanding on the date
hereof as described in public filings made by the Corporation prior to the date
hereof with the Securities and Exchange Commission including all shares reserved
for issuance pursuant to the Corporation's existing option and stock plans [(i)
and (ii) above, are hereinafter referred to as the "Existing Option
Obligations"] for a consideration less than the Conversion Price that would be
in effect at the time of such issue, then, and thereafter successively upon each
such issue, the Conversion Price shall be reduced as follows: (i) the number of
shares of Common Stock outstanding immediately prior to such issue shall be
multiplied by the Conversion Price in effect at the time of such issue and the
product shall be added to the aggregate consideration, if any, received by the
Corporation upon such issue of additional shares of Common Stock; and (ii) the
sum so obtained shall be divided by the number of shares of Common Stock
outstanding immediately after such issue. Except for the Existing Option
Obligations and options that may be issued under any employee incentive stock
option and/or any qualified stock option plan adopted by the Company, for
purposes of this adjustment, the issuance of any security of the Corporation
carrying the right to convert such security into shares of Common Stock or of
any warrant, right or option to purchase Common Stock shall result in an
adjustment to the Conversion Price upon the issuance of shares of Common Stock
upon exercise of such conversion or purchase rights.
(g) Whenever the number of shares to be issued upon conversion of
the Series F Preferred Stock is required to be adjusted as provided in this
paragraph 4, the Corporation shall forthwith compute the adjusted number of
shares to be so issued and prepare a certificate setting forth such adjusted
conversion amount and the facts upon which such adjustment is based, and such
certificate shall forthwith be filed with the Transfer Agent for the Series F
Preferred Stock and the Common Stock; and the Corporation shall mail to each
holder of record of Series F Preferred Stock notice of such adjusted conversion
price.
(h) In case at any time the Corporation shall propose:
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(i) To pay any dividend or distribution payable in shares upon
its Common Stock or make any distribution (other than cash dividends) to the
holders of its Common Stock; or
(ii) To offer for subscription to the holders of its Common
Stock any additional shares of any class or any other rights; or
(iii) Any capital reorganization or reclassification of its
shares or the merger of the Corporation with another corporation (other than a
merger in which the Corporation is the surviving or continuing corporation and
which does not result in any reclassification, conversion, or change of the
outstanding shares of Common Stock); or
(iv) The voluntary dissolution, liquidation or winding-up of
the Corporation;
then, and in any one of more of said cases, the Corporation shall cause at least
fifteen (15) days prior notice of the date on which (A) the books of the
Corporation shall close for such stock dividend, distribution, or subscription
rights, or (B) such capital reorganization, reclassification, merger,
dissolution, liquidation or winding-up shall take place, as the case may be, to
be mailed to the Transfer Agent for the Series F Preferred Stock and for the
Common Stock and to the holders of record of the Series F Preferred Stock.
(i) So long as any shares of Series F Preferred Stock shall remain
outstanding and the holders thereof shall have the right to convert the same in
accordance with provisions of this paragraph 4 the Corporation shall at all
times reserve from the authorized and unissued shares of its Common Stock a
sufficient number of shares to provide for such conversions.
(j) The term Common Stock as used in this paragraph 4 shall mean
Common Stock of the Corporation as such stock is constituted at the date of
issuance thereof or as it may from time to time be changed or shares of stock of
any class of other securities and/or property into which the shares of Series F
Preferred Stock shall at any time become convertible pursuant to the provisions
of this paragraph 4.
(k) The Corporation shall pay the amount of any and all issue taxes
(but not income taxes) which may be imposed in respect of any issue or delivery
of stock upon the conversion of any shares of Series F Preferred Stock, but all
transfer taxes and income taxes that may be payable in respect of any change or
ownership of Series F Preferred Stock or any rights represented thereby or of
stock receivable upon conversion thereof shall be paid by the person or persons
surrendering such stock for conversion.
5. Mandatory Conversion/Redemption.
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(a) Subject to the provisions of paragraph 5(e) below, the shares
of Series F Preferred Stock not previously converted into shares of Common Stock
shall be converted into shares of Common Stock without further action of the
Holder on the date that is two years from the date of issuance thereof, at the
Conversion Price and on the conversion terms specified in paragraph 4(b).
(b) Notice of conversion of Series F Preferred Stock by the
Corporation pursuant to this paragraph 5 shall be given by mail or in such other
manner as may be prescribed by resolution of the Board not less than thirty (30)
days prior to the applicable date of mandatory conversion (the "Mandatory
Conversion Date"). As applicable, the notice shall specify the number of shares
to be converted, the date fixed for conversion, and the conversion price per
share.
(c) The holder of any certificate for shares of Series F Preferred
Stock that is converted pursuant to this Section 5 shall surrender such
certificate at the principal office of any transfer agent for said stock (the
"Transfer Agent") properly endorsed for or accompanied by duly executed
instruments of transfer (and such other transfer papers as said Transfer Agent
may reasonably require). The holder of the shares so surrendered for conversion
shall be entitled to receive (except as otherwise provided herein) a certificate
or certificates which shall be expressed to be fully paid and non-assessable for
the number of shares of Common Stock to which such stockholder shall be entitled
upon such conversion registered in the name of such holder or in such other name
or names as such stockholder in writing may specify.
(d) On and after the applicable Mandatory Conversion Date (subject
to paragraph 5(e) below), and notwithstanding that any certificate for shares of
Series F Preferred Stock so called for conversion shall not have been
surrendered for cancellation, all dividends on the Series F Preferred Stock
called for conversion shall cease to accrue and the shares represented thereby
shall no longer be deemed outstanding and all rights of the holders thereof as
stockholders of the Corporation shall cease and terminate, except the right to
receive the shares of Common Stock upon conversion as provided herein.
(e) In no event shall a Mandatory Conversion occur at any time
unless the Common Stock to be delivered upon conversion will be on the Mandatory
Conversion Date and immediately upon delivery and thereafter, issued without
restrictive legend, freely tradable, and freely transferable on the transfer
books of the Corporation.
(f) The Corporation may not redeem the Series F Preferred Stock
without the consent of the Holder of Series F Preferred.
6. Event of Default. Upon the occurrence of any of the following events
of default ("Event of Default") the Holder shall have the option to require the
Corporation to redeem the Series F Preferred Stock held by such Holder by the
immediate payment to the Holder by the Corporation of a sum of money equal to
the number of shares that would be issuable upon conversion of an amount of
Stated Valued and accrued dividends designated by the Holder at the Conversion
Rate in effect as of the trading day prior to the date notice is given to the
Corporation multiplied by the average closing ask price of the Corporation's
Common Stock on such date:
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(a) The Corporation fails to pay any dividend payment required to
be paid pursuant to the terms of paragraph 2 hereof and such failure continues
for a period of ten (10) days.
(b) The Corporation breaches any covenant or other term or
condition of the Subscription Agreement entered into between the Corporation and
holder relating to Series F Preferred Stock (the "Subscription Agreement") or in
this Certificate to Set Forth Designations, Voting Powers, Preferences,
Limitations, Restrictions, and Relative Rights of Series F Cumulative
Convertible Preferred Stock, $0.01 Par Value Per Share, and such breach
continues for a period of seven (7) days after written notice to the Corporation
from the holder.
(c) Any representation or warranty of the Corporation made in the
Subscription Agreement, or in any agreement, statement or certificate given in
writing pursuant thereto shall be false or misleading.
(d) The Corporation shall make an assignment for the benefit of
creditors, or apply for or consent to the appointment of a receiver or trustee
for it or for a substantial part of its property or business; or such a receiver
or trustee shall otherwise be appointed.
(e) Any money judgment, writ or similar process shall be entered or
filed against the Corporation or any of its property or other assets for more
than $100,000, and shall remain unvacated, unbonded or unstayed for a period of
forty-five (45) days.
(f) Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings or relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Corporation.
(g) The delisting of the Common Stock from the NASDAQ SmallCap
Market or such other principal exchange on which the Common Stock is listed for
trading, or the failure of the Corporation to be in compliance with the listing
requirements of such market or exchange.
(h) A concession by the Company of a default under any one or more
obligations in an aggregate monetary amount in excess of $100,000.
(i) An SEC stop trade order or NASDAQ trading suspension.
(j) The Corporation's failure to timely deliver Common Stock to the
holder pursuant to paragraph 4 hereof and section 9 of the Subscription
Agreement.
(k) The occurrence of a Registration Default as described in
Section 10.2(j) of the Subscription Agreement.
(l) The failure to obtain shareholder approval, if required under
NASDAQ
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Marketplace Rules, for the issuance of Common Stock upon the conversion of the
Series F Preferred Stock, but such Event of Default shall apply only to Series F
Preferred that cannot be converted into Common Stock.
7. Voting Rights. The shares of Series F Preferred Stock shall not have
voting rights.
8. Status of Converted Stock. In case any shares of Series F Preferred
Stock shall be converted pursuant to paragraph 4 hereof or otherwise repurchased
or reacquired, the shares so converted, or reacquired shall resume the status of
authorized but unissued shares of Preferred Stock and shall no longer be
designated as Series F Preferred Stock.
9. Additional Restrictions. For as long as any shares of the Series F
Preferred Stock are outstanding, the Corporation will not issue any preferred
stock that is senior to the Series F Preferred Stock, and will not amend the
terms of the Series F Preferred Stock without the consent of the holder of the
Series F Preferred Stock.
Signed on this _____ day of August, 1998.
FREDERICK BREWING CO.
By:
------------------------------
ATTEST:
- --------------------------------
Assistant Secretary
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EXHIBIT A
NOTICE OF CONVERSION
(To Be Executed By the Registered Holder in order to Convert the Series F
Convertible Preferred Stock of Frederick Brewing Co.)
The undersigned hereby irrevocably elects to convert $______________ of
the Stated Value of the above Series F Convertible Preferred Stock into shares
of Common Stock of Frederick Brewing Co. (the "Corporation") according to the
conditions hereof, as of the date written below.
The undersigned represents that it is not a U.S. Person as defined in
Regulation S promulgated under the Securities Act of 1933 and is not converting
the Debenture on behalf of any U.S. Person; is not and was not engaged in plan
or scheme to evade the registration provision of the Securities Act of 1933, as
amended (the "Act"); and is not an "affiliate" of the Corporation or an
"Underwriter" as those terms are defined in the Act. The undersigned further
represents that all applicable warranties and representations made by the
Subscriber in the Subscription Agreement entered into by the Subscriber and the
Corporation prior to the issuance of the Series F Preferred Stock are true and
accurate as of the Date of Conversion.
Date of Conversion*____________________________________________________________
Applicable Conversion Price____________________________________________________
Number of Common Shares Issuable Upon this Conversion__________________________
Signature______________________________________________________________________
Print Name_____________________________________________________________________
Address:_______________________________________________________________________
_______________________________________________________________________________
* This original Series F Preferred Stock Certificate and Notice of Conversion
must be received by the Company prior to the issuance of Common Stock.
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SUBSCRIPTION AGREEMENT
Dear Subscriber:
You (the "Subscriber") hereby agree to purchase, and Frederick Brewing
Co., a Maryland corporation (the "Company") hereby agrees to issue and to sell
to the Subscriber, the number of shares of Series F Convertible Preferred Stock
$.01 Par Value (the "Preferred Stock") convertible in accordance with the terms
thereof into shares of the Company's $.00004 par value common stock (the
"Company Shares") as set forth on the signature page hereof for the aggregate
consideration as set forth on the signature page hereof. The Certificate of
Designation of the Rights of the Preferred Stock is annexed hereto as Exhibit A
("Certificate of Designation"). (The Company Shares are sometimes referred to
herein as the "Shares" or "Common Stock"). (The Preferred Stock, the Company
Shares, Warrants issuable to the Placement Agents, identified on Schedule B
hereto, and the Company Shares issuable upon exercise of the Warrants are
collectively referred to herein as, the "Securities"). Upon acceptance of this
Agreement by the Subscriber, the Company shall issue and deliver to the
Subscriber the Preferred Stock against payment, by federal funds (U.S.) wire
transfer of the purchase price of the Preferred Stock. This Subscription
Agreement relates to the offering of a maximum of 500 shares of Preferred Stock.
The following terms and conditions shall apply to this
subscription.
1. Subscriber's Representations and Warranties. The Subscriber
hereby represents and warrants to and agrees with the Company that:
(a) Information on Company. The Subscriber has been furnished
with and has read the Company's Form 10-KSB for the year ended December 31, 1997
and subsequent Forms 10-QSB and 8-K, each as filed with the U.S. Securities and
Exchange Commission (the "Commission") (collectively, with exhibits thereto,
hereinafter referred to as the "Reports"). In addition, the Subscriber has
received from the Company such other information concerning its operations,
financial condition and other matters as the Subscriber has requested, and
considered all factors the Subscriber deems material in deciding on the
advisability of investing in the Securities (such information in writing is
collectively, the "Other Written Information").
(b) Information on Subscriber. The Subscriber is an
"accredited investor", as such term is defined in Regulation D promulgated by
the Commission under the Securities Act of 1933, as amended, is experienced in
investments and business matters, has made investments of a speculative nature
and has purchased securities of United States publicly-owned companies in
private placements in the past and, with its representatives, has such
<PAGE>
knowledge and experience in financial, tax and other business matters as to
enable the Subscriber to utilize the information made available by the Company
to evaluate the merits and risks of and to make an informed investment decision
with respect to the proposed purchase, which represents a speculative
investment. The Subscriber has the authority and is duly and legally qualified
to purchase and own the Securities. The Subscriber is able to bear the risk of
such investment for an indefinite period and to afford a complete loss thereof.
(c) Purchase of Company Shares. On the Closing Date, the
Subscriber will purchase the Preferred Stock for its own account and not with a
view to any distribution thereof.
(d) Compliance with Securities Act. The Subscriber
understands and agrees that the Securities have not been registered under the
Securities Act of 1933, as amended (the "1933 Act") by reason of their issuance
in a transaction that does not require registration under the 1933 Act, and that
such Securities must be held unless a subsequent disposition is registered under
the 1933 Act or is exempt from such registration. The Subscriber agrees that if,
in the future, the Subscriber should decide to dispose of any of the Securities
acquired by it pursuant to this Agreement, the Subscriber will do so only
pursuant to a registration statement or by disposition exempt from registration
requirements under the 1933 Act.
(e) Preferred Stock and Company Shares Legend. The Preferred
Stock, Company Shares and the shares of Common Stock issuable upon the exercise
of the Warrants shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. THESE SHARES MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO FREDERICK BREWING
CO. THAT SUCH REGISTRATION IS NOT REQUIRED."
(f) Warrants Legend. The Warrants which the Placement Agents
are receiving pursuant to this Agreement shall bear the following legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE
UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THIS WARRANT AND THE COMMON SHARES
ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR
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HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO FREDERICK BREWING
CO. THAT SUCH REGISTRATION IS NOT REQUIRED."
(g) Correctness of Representations. The Subscriber represents
that the foregoing representations and warranties are true and correct as of the
date hereof and, unless the Subscriber otherwise notifies the Company prior to
the Closing Date (as hereinafter defined), shall be true and correct as of the
Closing Date. The foregoing representations and warranties shall survive the
Closing Date.
2. Company Representations and Warranties. The Company
represents and warrants to and agrees with the Subscriber that:
(a) Due Incorporation. The Company and each of its
wholly-owned subsidiaries is a corporation duly organized, validly existing and
in good standing under the laws of the state of its incorporation and has the
requisite corporate power to own its properties and to carry on its business as
now being conducted. The Company and each of its wholly-owned subsidiaries is
duly qualified as a foreign corporation to do business and is in good standing
in each jurisdiction where the nature of the business conducted or property
owned by it makes such qualification necessary, other than those jurisdictions
in which the failure to so qualify would not have a material adverse effect on
the business, operations or prospects or condition (financial or otherwise) of
the Company.
(b) Outstanding Stock. All issued and outstanding shares of
capital stock of the Company and each of its wholly-owned subsidiaries has been
duly authorized and validly issued and are fully paid and non-assessable.
(c) Authority; Enforceability. This Agreement has been duly
authorized, executed and delivered by the Company and is a valid and binding
agreement enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights generally and
to general principles of equity; and the Company has full corporate power and
authority necessary to enter into this Agreement and to perform its obligations
hereunder and all other agreements entered into by the Company relating hereto.
(d) Additional Issuances. There are no outstanding agreements
or preemptive or simila-r rights affecting the Company's common stock and no
outstanding rights, warrants or options to acquire, or instruments convertible
into or exchangeable for, or agreements or understandings with respect to the
sale or issuance of any shares of common stock or equity of the Company or other
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<PAGE>
equity interest in any of the subsidiaries of the Company, except as described
in the Reports or Other Written Information.
(e) Consents. No consent, approval, authorization or order of
any court, governmental agency or body or arbitrator having jurisdiction over
the Company, or any of its affiliates or NASDAQ or the Company's Shareholders is
required for execution of this Agreement, including, without limitation issuance
and sale of the Securities, or the performance of the Company's obligations
hereunder.
(f) No Violation or Conflict. Assuming the representations
and warranties of the Subscriber in Paragraph 1 are true and correct and the
Subscriber complies with its obligations under this Agreement, neither the
issuance and sale of the Securities nor the performance of its obligations under
this Agreement by the Company will:
(i) violate, conflict with, result in a breach of, or
constitute a default (or an event which with the giving of notice of the lapse
of time or both would be reasonably likely to constitute a default) under (A)
the articles of incorporation, charter or bylaws of the Company, or any of its
affiliates, (B) to the Company's knowledge, any decree, judgment, order, law,
treaty, rule, regulation or determination applicable to the Company, or any of
its affiliates of any court, governmental agency or body, or arbitrator having
jurisdiction over the Company, or any of its affiliates or over the properties
or assets of the Company, or any of its affiliates, (C) the terms of any bond,
debenture, note or any other evidence of indebtedness, or any agreement, stock
option or other similar plan, indenture, lease, mortgage, deed of trust or other
instrument to which the Company, or any of its affiliates is a party, by which
the Company, or any of its affiliates is bound, or to which any of the
properties of the Company, or any of its affiliates is subject, or (D) the terms
of any "lock-up" or similar provision of any underwriting or similar agreement
to which the Company, or any of its affiliates is a party; or
(ii) result in the creation or imposition of any lien,
charge or encumbrance upon the Securities or any of the assets of the Company,
or any of its affiliates.
(g) The Securities. The Securities upon issuance:
(i) are, or will be, free and clear of any security
interests, liens, claims or other encumbrances, subject to restrictions
upon transfer under the 1933 Act and State laws;
(ii) have been, or will be, duly and validly authorized
and on the date of issuance and on the Closing Date, as hereinafter defined, and
the date the Warrants are exercised according to their terms, as the case may
be, the Securities will
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<PAGE>
be duly and validly issued, fully paid and nonassessable, and if
registered pursuant to the 1933 Act, free trading and unrestricted;
(iii) will not have been issued or sold in violation of
any preemptive or other similar rights of the holders of any securities of the
Company;
(iv) will not subject the holders thereof to personal
liability by reason of being such holders; and
(h) Litigation. There is no pending or, to the best knowledge
of the Company, threatened action, suit, proceeding or investigation before any
court, governmental agency or body, or arbitrator having jurisdiction over the
Company, or any of its affiliates that would affect the execution by the Company
or the performance by the Company of its obligations under this Agreement, or
which was not disclosed in the Reports and Other Written Information.
(i) Reporting Company. The Company is a publicly-held
company whose common stock is (and has been for the past 90 days) registered
pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended
(the "1934 Act"). The Company's Common Stock is listed for trading on the NASDAQ
SmallCap Market. Pursuant to the provisions of the 1934 Act, the Company has
timely filed all reports and other materials required to be filed thereunder
with the Securities and Exchange Commission during the preceding twelve months.
(j) No Market Manipulation. The Company has not taken, and
will not take, directly or indirectly, any action designed to, or that might
reasonably be expected to, cause or result in stabilization or manipulation of
the price of the common stock of the Company to facilitate the sale or resale of
the Company Shares or affect the price at which the Securities may be issued.
(k) Information Concerning Company. The Reports and Other
Written Information contain all material information relating to the Company and
its operations and financial condition as of their respective dates which
information is required to be disclosed therein. Since the date of the financial
statements set forth in the Reports, and except as modified in the Other Written
Information, there has been no material adverse change in the Company's
business, financial condition or affairs not disclosed in the Reports. The
Reports and Other Written Information do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
(l) Dilution. The number of Shares issuable upon conversion
(as hereinafter defined) may increase substantially in certain circumstances,
including, but not necessarily limited to, the circumstance wherein the trading
price of the Common Stock
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<PAGE>
declines prior to conversion of the Preferred Stock. The Company's executive
officers and directors have studied and fully understand the nature of the
Securities being sold hereby and recognize that they have a potential dilutive
effect. The board of directors of the Company has concluded, in its good faith
business judgment, that such issuance is in the best interests of the Company.
The Company specifically acknowledges that its obligation to issue the Shares
upon conversion is binding upon the Company and enforceable regardless of the
dilution such issuance may have on the ownership interests of other shareholders
of the Company.
(m) Stop Transfer. The Company will not issue any stop
transfer order or other order impeding the sale and delivery of the Securities.
(n) Defaults. Neither the Company nor any of its wholly-owned
subsidiaries is in violation of its Certificate of Incorporation or ByLaws.
Except as described in the Reports and Other Written Information, neither the
Company nor any of its subsidiaries is (i) in default under or in violation of
any other material agreement or instrument to which it is a party or by which it
or any of its properties are bound or affected, which default or violation would
have a material adverse effect on the Company, (ii) in default with respect to
any order of any court, arbitrator or governmental body or subject to or party
to any order of any court or governmental authority arising out of any action,
suit or proceeding under any statute or other law respecting antitrust,
monopoly, restraint of trade, unfair competition or similar matters, or (iii) to
its knowledge in violation of any statute, rule or regulation of any
governmental authority material to its business.
(o) No Integrated Offering. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would cause the offering of the
Securities pursuant to this Agreement to be integrated with prior offerings by
the Company for purposes of the 1933 Act or any applicable stockholder approval
provisions, including, without limitation, under the rules and regulations of
The NASDAQ SmallCap Market ("NASDAQ SmallCap"), as applicable, nor will the
Company or any of its subsidiaries take any action or steps that would cause the
offering of the Securities to be integrated with other offerings. The Company
has not conducted and will not conduct any offering other than the transactions
contemplated hereby that will be integrated with the issuance of the Securities
solely for purposes of Rule 4460(i) of the NASDAQ Stock Market, Inc.'s
Marketplace Rules.
(p) Use of Proceeds. The proceeds of the Subscriber funds to
be released to the Company will be used for
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working capital, general corporate purposes and for expenses of this offering.
(q) No General Solicitation. Neither the Company, nor any of
its affiliates, nor to its knowledge, any person acting on its or their behalf,
has engaged in any form of general solicitation or general advertising (within
the meaning of Regulation D under the Act) in connection with the offer or sale
of the Securities.
(r) Listing. The Company's common stock is quoted on, and
listed for trading on NASDAQ SmallCap. The Company has received no notice,
either oral or written, with respect to the continued eligibility of the common
stock for such listing, and the Company has maintained all requirements for the
continuation of such listing.
(s) S-3 Eligibility. The Company currently meets, and will
take all necessary action to continue to meet, the "registrant eligibility"
requirements set forth in the general instructions to Form S-3.
(t) Correctness of Representations. The Company represents
that the foregoing representations and warranties are true and correct as of the
date hereof in all material respects and, unless the Company otherwise notifies
the Subscriber prior to the Closing Date, shall be true and correct in all
material respects as of the Closing Date. The foregoing representations and
warranties shall survive the Closing Date.
3. Regulation D Offering. This Offering is being made pursuant to
the exemption from the registration provisions of the Securities Act of 1933, as
amended, afforded by Rule 506 of Regulation D promulgated thereunder. On the
Closing Date, the Company will provide an opinion acceptable to Subscriber from
the Company's legal counsel opining on the availability of the Regulation D
exemption as it relates to the offer and issuance of the Securities. A form of
the legal opinion is annexed hereto as Exhibit C. The Company will provide such
other legal opinions in the future as are reasonably necessary for the
conversion of the Preferred Stock.
4. Reissuance of Securities. The Company agrees to reissue
certificates representing the Securities without the legends set forth in
Sections 1(e) and 1(f) above at such time as (a) the holder thereof is permitted
to dispose of such Securities pursuant to Rule 144(k) under the Act, or (b) the
Securities are registered under the Act. The Company agrees to cooperate with
the Subscriber in connection with all resales pursuant to Rule 144(d) and
provide legal opinions necessary to allow such resales.
5. Redemption. The Company may not redeem the Securities without
the consent of the holder of the Securities.
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6. Legal Fees/Commissions. The Company shall pay to counsel to the
Subscriber its fee of $9,000 for services rendered to the Subscriber in
reviewing this Agreement and other subscription agreements for the aggregate
subscription amounts of up to $500,000. The Company will pay a cash commission
of ten percent (10%) of the Purchase Price designated on the signature page
hereto to certain Placement Agents identified on Schedule A hereto. The
commissions and legal fees will be payable out of funds held pursuant to a Funds
Escrow Agreement to be entered into by the Company and Subscriber. The Company
will also issue and deliver to the Placement Agents as additional compensation
the Warrants designated on Schedule A hereto. All the representations,
covenants, warranties and undertakings, including but not limited to
registration rights made or granted to or for the benefit of the Subscriber are
hereby also made and granted to the Placement Agents in respect of the Warrants
and Common Stock issuable upon exercise of the Warrants.
7.1. Covenants of the Company. The Company covenants and agrees
with the Subscriber as follows:
(a) The Company will advise the Subscriber, promptly after it
receives notice of issuance by the Securities and Exchange Commission, any state
securities commission or any other regulatory authority of any stop order or of
any order preventing or suspending any offering of any securities of the
Company, or of the suspension of the qualification of the common stock of the
Company for offering or sale in any jurisdiction, or the initiation of any
proceeding for any such purpose.
(b) The Company shall promptly secure the listing of the
Company Shares and Common Stock issuable upon the exercise of the Warrants upon
each national securities exchange, or automated quotation system, if any, upon
which shares of Common Stock are then listed (subject to official notice of
issuance) and shall maintain such listing so long as any other shares of Common
Stock shall be so listed, Company will use its best efforts to maintain the
listing and trading of its Common Stock on NASDAQ SmallCap, and will comply in
all respects with the Company's reporting, filing and other obligations under
the bylaws or rules of the National Association of Securities Dealers ("NASD")
and such exchanges, as applicable. The Company shall promptly provide to each
Purchaser copies of any notices it receives regarding the continued eligibility
of the Common Stock for listing on such exchanges or quotation systems, or any
other exchange or quotation system on which the Common Stock is then listed.
(c) The Company shall notify the SEC, NASD and applicable
state authorities, in accordance with their requirements, of the transactions
contemplated by this Agreement, and shall take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for
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the legal and valid issuance of the Securities to the Subscriber and promptly
provide copies thereof to Subscriber.
(d) Until at least three (3) years after the effectiveness of
the Registration Statement on Form S-3 or such other Registration Statement
described in Section 10.1(iv) hereof, the Company will use its reasonable
efforts (i) to cause its Common Stock to continue to be registered under
Sections 12(b) or 12(g) of the Exchange Act, (ii) to comply in all respects with
its reporting and filing obligations under such Exchange Act, and (iii) to
comply with all requirements related to any registration statement filed
pursuant to this Agreement. The Company will not take any action or file any
document (whether or not permitted by the Act or the Exchange Act or the rules
thereunder) to terminate or suspend such registration or to terminate or suspend
its reporting and filing obligations under said Acts, except as permitted
herein, until the earlier of (i) three (3) years after the effective date of the
Registration Statement on Form S-3 or such other Registration Statement
described in Section 10.1(iv) hereof, or (ii) the sale by the Subscribers of all
the shares of common stock issuable by the Company pursuant to this Agreement.
Until at least three (3) years after the Warrants have been converted into
Common Stock, the Company will take all action within its power to continue the
listing or trading of its Common Stock on NASDAQ SmallCap and will comply in all
respects with the Company's reporting, filing and other obligations under the
bylaws or rules of the NASD and NASDAQ.
(e) The Company and Subscriber agree that until the Company
either obtains shareholder approval of the issuance of the Shares, or an
exemption from NASDAQ's corporate governance rules as they may apply to the
Shares (the "Approval"), the Subscriber may not receive upon conversion of the
Preferred Stock more than the number of Shares designated on the signature page
hereof ("Section 7.1(e) Shares"). The Company represents that this number
together with the aggregate of such amounts designated for all investors in the
$500,000 offering to which this Subscription Agreement relates, and the Exchange
Preferred Stock described in Section 12 hereof, is not greater than 19.99% of
the shares of Company's common stock outstanding on the Closing Date. The
Company undertakes to obtain the approval of its shareholders, if necessary,
required pursuant to the NASDAQ's corporate governance rules to allow conversion
of all the Preferred Stock and dividends and exercise of all the Warrants. The
Company covenants to obtain the shareholder approval, if necessary, no later
than 60 days from the effective date of the Registration Statement described in
Section 10.1(iv) hereof. Failure to obtain shareholder approval, if required, on
or before such date shall, at the Subscriber's or then holder's election, be
deemed an Event of Default pursuant to Section 7 of the Certificate of
Designation, but only to the extent of the Preferred Stock and Exchange
Preferred Stock that may not be converted or Warrants that may not be exercised
due to the Company's failure to obtain such shareholder approval.
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(f) The Company undertakes to use the proceeds of the
Subscribers funds to implement its acquisition strategy, working capital and
expenses of this offering.
7.2. Covenants of Subscriber. The Subscriber covenants and agrees
with the Company that the Subscriber will provide for itself and any beneficial
holder of the Securities, information and documents reasonably required by the
Company for the Company to comply with its governmental and regulatory
obligations including but not limited to the Securities and Exchange Commission,
blue sky and NASDAQ requirements.
8. Covenants of the Company and Subscriber Regarding
Idemnifications.
(a) The Company agrees to indemnify, hold harmless, reimburse
and defend Subscriber against any claim, cost, expense, liability, obligation,
loss or damage (including reasonable legal fees) of any nature, incurred by or
imposed upon Subscriber which results, arises out of or is based upon (i) any
misrepresentation by Company or breach of any warranty by Company in this
Agreement or in any Exhibits or Schedules attached hereto, or Reports or other
Written Information; or (ii) any breach or default in performance by Company of
any covenant or undertaking to be performed by Company hereunder.
(b) Subscriber agrees to indemnify, hold harmless, reimburse
and defend the Company at all times against any claim, cost, expense, liability,
obligation, loss or damage (including reasonable legal fees) of any nature,
incurred by or imposed upon the Company which results, arises out of or is based
upon (a) any misrepresentation by Subscriber in this Agreement or in any
Exhibits or Schedules attached hereto; or (b) any breach or default in
performance by Subscriber of any covenant or undertaking to be performed by
Subscriber hereunder.
9.1. Conversion.
(a) The Preferred Stock will be convertible according to the
procedure set forth in the Certificate of Designation.
(b) Anything to the contrary herein or in the Certificate of
Designation notwithstanding, the initial conversion date shall commence on the
later of the effective date of the registration statement described in Section
10.1(iv) or upon the date the Subscriber has put in a notice of conversion
relating to not less than all the Class E Preferred Stock of the Company
previously purchased by the Subscriber from the Company.
(c) The Company understands that a delay in the delivery of
the Shares and Preferred Stock certificates
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representing the unconverted balance of a Preferred Stock certificate tendered
for conversion beyond the date described for such delivery set forth in the
Certificate of Designation ("Delivery Date") or Mandatory Conversion Date (as
that term is employed in the Certificate of Designation), or late delivery of a
Mandatory Redemption Payment (as defined herein), as the case may be, could
result in economic loss to the Subscriber or holder of Preferred Stock. As
compensation to the Subscriber or holder of Proferred Stock for such loss, the
Company agrees to pay late payments to the Subscriber for late delivery of
Shares upon Conversion and late delivery of a Preferred Stock certificate for
the unconverted portion of a Preferred Stock certificate or late delivery of a
Mandatory Redemption Payment in the amount of $100 per business day after the
Delivery Date for each $10,000 of Stated Value of Preferred Stock being
converted and Preferred Stock certificate remaining undelivered or Mandatory
Redemption Payment not paid. The Company shall pay any payments incurred under
this Section in immediately available funds upon demand. Furthermore, in
addition to any other remedies which may be available to the Subscriber, in the
event that the Company fails for any reason to effect delivery of the Shares
within three business days after the Delivery Date, the Subscriber will be
entitled to revoke the relevant Notice of Conversion by delivery in a notice to
such effect to the Company whereupon the Company and the Subscriber shall each
be restored to their respective positions immediately prior to the delivery of
such notice of revocation, except that late payment charges described above
shall be payable through the date notice of revocation is given to the Company.
(d) Nothing contained herein or in any document referred to
herein shall be deemed to establish or require the payment of a rate of interest
or other charges in excess of the maximum permitted by applicable law. In the
event that the rate of interest required to be paid or other charges hereunder
exceed the maximum permitted by such law, any payments in excess of such maximum
shall be credited against amounts owed by the Company to the Subscriber and thus
refunded to the Company.
9.2. Mandatory Redemption. In the event the Company may not issue
Shares on a Delivery Date because such issuance and delivery would be contrary
to NASDAQ's Corporate Governance Rules, or for any other reason including the
limitation described in Section 9.3 hereof, then the Company must pay to the
Subscriber on the Delivery Date a sum of money determined by multiplying the
number of Shares otherwise deliverable, by the average closing ask prices of the
Shares on the NASDAQ SmallCap Market or such other securities exchange or other
securities market on which the Common Stock is then being traded for the most
recent trading day preceding the Conversion Date ("Mandatory Redemption
Payment"). The Mandatory Redemption Payment must be received by the Subscriber
on the same date as the Shares otherwise deliverable. Upon receipt of the
Mandatory Redemption Payment, the corresponding Preferred Stock will be
cancelled and no longer outstanding, and if the
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<PAGE>
Holder is in possession of the corresponding Preferred Stock, it will be
returned to the Company.
9.3. Maximum Conversion. The Company and Subscriber may not
convert that amount of the Preferred Stock on a Conversion Date in connection
with that number of shares of Common Stock which would be in excess of the sum
of (i) the number of shares of Common Stock beneficially owned by the Subscriber
and its affiliates on such Conversion Date, and (ii) the number of shares of
Common Stock issuable upon the conversion of the Preferred Stock with respect to
which the determination of this proviso is being made on such Conversion Date,
which would result in beneficial ownership by the Subscriber and its affiliates
of more than 4.99% of the outstanding shares of Common Stock of the Company. For
the purposes of the proviso to the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder, except as
otherwise provided in clause (i) of such proviso.
10. Registration Rights; Procedure; Indemnification.
10.1. Registration Rights. The Company hereby grants the following
registration rights to holders of the Company Shares and the Warrants.
(i) On one occasion, for a period commencing 31 days after
the Closing Date, but not later than three years from the date hereof, the
Company, upon a written request therefor from any record holder or holders of
more than 50% of the aggregate of the Company's Shares issuable upon conversion
of the Preferred Stock and Exchange Preferred Stock at the then applicable
Conversion Price (the Securities and securities issued or issuable by virtue of
ownership of the Securities being, the "Registrable Securities"), shall prepare
and file with the SEC a registration statement under the Act covering the
Registrable Securities which are the subject of such request, unless such
Registrable Securities are the subject of an effective registration statement.
In addition, upon the receipt of such request, the Company shall promptly give
written notice to all other record holders of the Registrable Securities that
such registration statement is to be filed and shall include in such
registration statement Registrable Securities for which it has received written
requests within 10 days after the Company gives such written notice. Such other
requesting record holders shall be deemed to have exercised their demand
registration right under this Section 10.1. As a condition precedent to the
inclusion of Registrable Securities, the holder thereof shall provide the
Company with such information as the Company reasonably requests. The obligation
of the Company under this Section 10.1(i) shall be limited to one registration
statement.
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(ii) If the Company at any time proposes to register
any of its securities under the Act for sale to the public, whether for its own
account or for the account of other security holders or both, except with
respect to registration statements on Forms S-4, S-8 or another form not
available for registering the Registrable Securities for sale to the public,
provided the Registrable Securities are not otherwise registered for resale by
the Subscriber pursuant to an effective registration statement, each such time
it will give at least 10 days' prior written notice to the record holder of the
Registrable Securities of its intention so to do. Upon the written request of
the holder, received by the Company within 10 days after the giving of any such
notice by the Company, to register any of the Registrable Securities, the
Company will cause such Registrable Securities as to which registration shall
have been so requested to be included with the securities to be covered by the
registration statement proposed to be filed by the Company, all to the extent
required to permit the sale or other disposition of the Registrable Securities
so registered by the holder of such Registrable Securities (the "Seller"). In
the event that any registration pursuant to this Section 10.1(ii) shall be, in
whole or in part, an underwritten public offering of common stock of the
Company, the number of shares of Registrable Securities to be included in such
an underwriting may be reduced by the managing underwriter if and to the extent
that the Company and the underwriter shall reasonably be of the opinion that
such inclusion would adversely affect the marketing of the securities to be sold
by the Company therein; provided, however, that the Company shall notify the
Seller in writing of any such reduction. Notwithstanding the forgoing
provisions, the Company may withdraw any registration statement referred to in
this Section 10.1(ii) without thereby incurring any liability to the Seller.
(iii) If, at the time any written request for
registration is received by the Company pursuant to Section 10.1(i), the Company
has determined to proceed with the actual preparation and filing of a
registration statement under the 1933 Act in connection with the proposed offer
and sale for cash of any of its securities for the Company's own account, such
written request shall be deemed to have been given pursuant to Section 10.1(ii)
rather than Section 10.1(i), and the rights of the holders of Registrable
Securities covered by such written request shall be governed by Section 10.1(ii)
except that the Company or underwriter, if any, may not withdraw such
registration or limit the amount of Registrable Securities included in such
registration.
(iv) The Company shall file with the Commission,
within thirty (30) days after the Closing Date, and use its reasonable
commercial efforts to cause to be declared effective a Form S-3 registration
statement (or such other form that it is eligible to use) in order to register
the Registrable Securities for resale and distribution under the Act. The
registration statement described in this paragraph must be declared effective by
the Commission within 90 days of the Closing Date. The Company will register not
less than 57,000 shares of Common Stock in the S-
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3 registration statement for each $10,000 of Purchase Price as set forth on the
signature page hereto and one share of Common Stock for each share of Common
Stock issuable upon exercise of the Warrants. These shares to be registered
shall be reserved and set aside exclusively for the benefit of the Subscriber
and Placement Agents, as the case may be, and not issued, employed or reserved
for anyone other than the Subscriber and Placement Agents, as the case may be.
Such registration statement will be promptly amended or additional registration
statements will be promptly filed by the Company as necessary to register
additional shares of Common Stock issuable upon Reset. The Company may not be
include any securities other than the Registrable Securities in the Registration
Statement on Form S-3 required pursuant to this Section 10.1(iv) unless such
other securities are being registered on behalf of the Subscriber. In the event
the Company does not comply with the schedule for registration set forth above,
the Company shall not be released from any of its obligations under this
Subscription Agreement or any agreement delivered in connection herewith
including the Company's obligations pursuant to this Section 10 of the
Subscription Agreement except that the Company shall no longer be required to
file a registration statement in connection with only those Securities
corresponding to that portion of the Purchase Price released to the Subscriber
and damages shall not accrue to the Subscriber in relation to funds released to
the Subscriber from and after the date that portion of the Purchase Price is
returned to the Subscriber. To the extent any part of the Purchase Price portion
of the Registration Escrow is released to a Subscriber, then that portion of the
Registration Escrow may, at the Subscriber's election, first be applied in
satisfaction of payment by the Company of sums payable to such Subscriber
pursuant to Section 10.2(j) and Section 7.1(e) hereof.
10.2. Registration Procedures. If and whenever the Company is
required by the provisions hereof to effect the registration of any shares of
Registrable Securities under the Act, the Company will, as expeditiously as
possible:
(a) prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for the period of the
distribution contemplated thereby (determined as hereinafter provided), and
promptly provide to the holders of Registrable Securities copies of all filings
and Commission comment letters;
(b) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration statement
effective for the period specified in paragraph (a) above and comply with the
provisions of the Act with respect to the disposition of all of the Registrable
Securities covered by such registration statement in accordance with the
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Seller's intended method of disposition set forth in such registration statement
for such period;
(c) furnish to the Seller, and to each underwriter if any,
such number of copies of the registration statement and the prospectus included
therein (including each preliminary prospectus) as such persons reasonably may
request in order to facilitate the public sale or their disposition of the
securities covered by such registration statement;
(d) use its best efforts to register or qualify the Seller's
Registrable Securities covered by such registration statement under the
securities or "blue sky" laws of such jurisdictions as the Seller or, in the
case of an underwritten public offering, the managing underwriter shall
reasonably request, provided, however, that the Company shall not for any such
purpose be required to qualify generally to transact business as a foreign
corporation in any jurisdiction where it is not so qualified or to consent to
general service of process in any such jurisdiction;
(e) list the Registrable Securities covered by such
registration statement with any securities exchange on which the Common Stock of
the Company is then listed;
(f) immediately notify the Seller and each underwriter under
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act, of the happening of any event of which
the Company has knowledge as a result of which the prospectus contained in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances then existing;
(g) make available for inspection by the Seller, any
underwriter participating in any distribution pursuant to such registration
statement, and any attorney, accountant or other agent retained by the Seller or
underwriter, all financial and other records, pertinent corporate documents and
properties of the Company, and cause the Company's officers, directors and
employees to supply all information reasonably requested by the seller,
underwriter, attorney, accountant or agent in connection with such registration
statement.
(h) at the request of the Seller, provided a demand for
registration has been made pursuant to Section 10.1(i) or a request for
registration has been made pursuant to Section 10.1(ii), the Registrable
Securities will be included in a registration statement filed pursuant to this
Section 10. In the event of a firm commitment underwritten public offering in
which the Registrable Securities are so included, the lockup, if any, requested
by the managing underwriter may not exceed ninety (90) days after the effective
date thereof.
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(i) In connection with each registration hereunder, the
Seller will furnish to the Company in writing such information with respect to
itself and the proposed distribution by it as reasonably shall be necessary in
order to assure compliance with federal and applicable state securities laws. In
connection with each registration pursuant to Section 10.1(i) or 10.1(ii)
covering an underwritten public offering, the Company and the Seller agree to
enter into a written agreement with the managing underwriter in such form and
containing such provisions as are customary in the securities business for such
an arrangement between such underwriter and companies of the Company's size and
investment stature.
(j) The Company and the Subscriber agree that the Seller will
suffer damages if any registration statement required under Section 10.1(i) or
10.1(ii) above is not filed within 45 days after request by the Holder and not
declared effective by the Commission within 130 days after such request [or 30
days and 90 days, respectively, after the Closing Date in reference to the
Registration Statement on Form S-3 or such other form described in Section
10.1(iv)], and maintained in the manner and within the time periods contemplated
by Section 10 hereof, and it would not be feasible to ascertain the extent of
such damages with precision. Accordingly, if (i) the Registration Statement
described in Sections 10.1(i) or 10.1(ii) is not filed within 45 days of such
request, or is not declared effective by the Commission on or prior to the date
that is 130 days after such request, or (ii) the registration statement on Form
S-3 or such other form described in Section 10.1(iv) is not filed within 30 days
after the Closing Date or not declared effective within 90 days of the Closing
Date, or (iii) any registration statement described in Sections 10.1(i),
10.1(ii) or 10.1(iv) is filed and declared effective but shall thereafter cease
to be effective (without being succeeded immediately by an additional
registration statement filed and declared effective) for a period of time which
shall exceed 30 days in the aggregate per year but not more than 20 consecutive
calendar days (defined as a period of 365 days commencing on the date the
Registration Statement is declared effective) (each such event referred to in
clauses (i), (ii) and (iii) of this Section 10.2(j) is referred to herein as a
"Non-Registration Event"), then, for so long as such Non-Registration Event
shall continue, the Company shall pay in cash as Liquidated Damages to each
holder of any Securities an amount equal to three (3%) percent per month, or
part thereof, of the Purchase Price of the Preferred Stock and Company Shares
and purchase price of the Exchange Preferred Stock and Company Shares, if any,
issued on conversion thereof, then owned of record by such holder as of
immediately following the occurrence of such Non-Registration Event. Payments to
be made pursuant to this Section 10.2(j) shall be due and payable immediately
upon demand in immediately available funds. In the event a mandatory redemption
of Preferred Stock is demanded by the holder of Preferred Stock pursuant to
Section 8 of the Certificate of Designation, then the
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Liquidated Damages described in this Section 10.2(j) shall no longer accrue from
and after the date the holder receives the payment described in Section 8 of the
Certificate of Designation.
10.3. Expenses. All expenses incurred by the Company in
complying with Section 10, including, without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel and
independent public accountants for the Company, fees and expenses (including
counsel fees) incurred in connection with complying with state securities or
"blue sky" laws, fees of the National Association of Securities Dealers, Inc.,
transfer taxes, fees of transfer agents and registrars, fee of one counsel, if
any, to represent all the Sellers, and costs of insurance are called
"Registration Expenses". All underwriting discounts and selling commissions
applicable to the sale of Registrable Securities, including any fees and
disbursements of any special counsel to the Seller, are called "Selling
Expenses". The Seller shall pay the fees of its own additional counsel, if any.
The Company will pay all Registration Expenses in
connection with the registration statement under Section 10. All Selling
Expenses in connection with each registration statement under Section 10 shall
be borne by the Seller in proportion to the number of shares sold by the Seller
relative to the number of shares sold under such registration statement or as
all Sellers thereunder may agree.
10.4. Indemnification and Contribution.
(a) In the event of a registration of any Registrable
Securities under the Act pursuant to Section 10, the Company will indemnify and
hold harmless the Seller, each officer of the Seller, each director of the
Seller, each underwriter of such Registrable Securities thereunder and each
other person, if any, who controls such Seller or underwriter within the meaning
of the 1933 Act, against any losses, claims, damages or liabilities, joint or
several, to which the Seller, or such underwriter or controlling person may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any registration statement under which such Registrable Securities
was registered under the Act pursuant to Section 10, any preliminary prospectus
or final prospectus contained therein, or any amendment or supplement thereof,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Seller, each such
underwriter and each such controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case if and to the extent that any such
loss, claim, damage or liability arises out of or is based
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upon an untrue statement or alleged untrue statement or omission or alleged
omission so made in conformity with information furnished by any such Seller,
the underwriter or any such controlling person in writing specifically for use
in such registration statement or prospectus.
(b) In the event of a registration of any of the
Registrable Securities under the Act pursuant to Section 10, the Seller will
indemnify and hold harmless the Company, and each person, if any, who controls
the Company within the meaning of the Act, each officer of the Company who signs
the registration statement, each director of the Company, each underwriter and
each person who controls any underwriter within the meaning of the Act, against
all losses, claims, damages or liabilities, joint or several, to which the
Company or such officer, director, underwriter or controlling person may become
subject under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the registration statement under which such Registrable Securities were
registered under the Act pursuant to Section 10, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement thereof, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company and each such
officer, director, underwriter and controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action, provided, however,
that the Seller will be liable hereunder in any such case if and only to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with information pertaining to
such Seller, as such, furnished in writing to the Company by such Seller
specifically for use in such registration statement or prospectus, and provided,
further, however, that the liability of the Seller hereunder shall be limited to
the proportion of any such loss, claim, damage, liability or expense which is
equal to the proportion that the public offering price of the Registrable
Securities sold by the Seller under such registration statement bears to the
total public offering price of all securities sold thereunder, but not in any
event to exceed the gross proceeds received by the Seller from the sale of
Registrable Securities covered by such registration statement.
(c) Promptly after receipt by an indemnified party
hereunder of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party hereunder, notify the indemnifying party in writing thereof, but the
omission so to
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notify the indemnifying party shall not relieve it from any liability which it
may have to such indemnified party other than under this Section 10.4(c) and
shall only relieve it from any liability which it may have to such indemnified
party under this Section 10.4(c) if and to the extent the indemnifying party is
prejudiced by such omission. In case any such action shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate in
and, to the extent it shall wish, to assume and undertake the defense thereof
with counsel satisfactory to such indemnified party, and, after notice from the
indemnifying party to such indemnified party of its election so to assume and
undertake the defense thereof, the indemnifying party shall not be liable to
such indemnified party under this Section 10.4(c) for any legal expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation and of liaison with counsel
so selected, provided, however, that, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be reasonable
defenses available to it which are different from or additional to those
available to the indemnifying party or if the interests of the indemnified party
reasonably may be deemed to conflict with the interests of the indemnifying
party, the indemnified parties shall have the right to select one separate
counsel and to assume such legal defenses and otherwise to participate in the
defense of such action, with the reasonable expenses and fees of such separate
counsel and other expenses related to such participation to be reimbursed by the
indemnifying party as incurred.
(d) In order to provide for just and equitable
contribution in the event of joint liability under the Act in any case in which
either (i) the Seller, or any controlling person of the Seller, makes a claim
for indemnification pursuant to this Section 10.4 but it is judicially
determined (by the entry of a final judgment or decree by a court of competent
jurisdiction and the expiration of time to appeal or the denial of the last
right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 10.4 provides for indemnification in
such case, or (ii) contribution under the Act may be required on the part of the
Seller or controlling person of the Seller in circumstances for which
indemnification is provided under this Section 10.4; then, and in each such
case, the Company and the Seller will contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion so that the Seller is responsible only for the
portion represented by the percentage that the public offering price of its
securities offered by the registration statement bears to the public offering
price of all securities offered by such registration statement, provided,
however, that, in any such case, (A) the Seller will not be required to
contribute any amount in excess of the public offering price of all such
securities offered by it pursuant to such
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registration statement; and (B) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 10(f) of the Act) will be
entitled to contribution from any person or entity who was not guilty of such
fraudulent misrepresentation.
11. Right of First Refusal. Until 120 days of continued
effectiveness of the Registration Statement on Form S-3 described in Section
10.1(iv) hereof, the Subscriber shall be given not less than seven (7) business
days prior written notice of any proposed sale by the Company of its common
stock or other securities or debt obligations. The Subscriber shall have the
right during the seven (7) business days following the notice to agree to
purchase an amount of Company Shares in the same proportion as the Preferred
Stock being purchased in the aggregate offering to which this Subscription
Agreement relates (i.e. $500,000 in the aggregate), of those securities proposed
to be issued and sold, in accordance with the terms and conditions set forth in
the notice of sale. In the event such terms and conditions are modified during
the notice period, the Subscriber shall be given prompt notice of such
modification and shall have the right during the original notice period or for a
period of five (5) business days following the notice ofmodification, whichever
is longer, to exercise such right. In the event the right of first refusal
described in this Section is exercised by the Subscriber and the Company thereby
receives net proceeds from such exercise, then commissions and fees will be paid
by the Company to the Placement Agents in the same proportions as described in
Section 6 hereof.
12. Exchange Preferred Stock. The Subscriber is the holder of
286,738 Common Shares of the Company. On the Closing Date, the Subscriber shall
exchange 286,738 Common Shares for 250 shares of Series F Preferred Stock
("Exchange Preferred Stock"). The Exchange Preferred Stock shall be deemed
Preferred Stock and is granted all the rights and privileges of the Preferred
Stock described herein including the registration rights described herein except
that the issue date and Closing Date for the Exchange Preferred Stock shall be
July 30, 1998, which is the closing date under the Subscription Agreement
relating to the purchase of the 286,738 shares of Common Stock. All the
representations, covenants and undertakings relating to the Preferred Stock
shall be deemed made in connection with the Exchange Preferred Stock. The legal
opinion described in Section 3 hereof shall also be provided in connection with
the Exchange Preferred Stock.
13. Miscellaneous.
(a) Notices. All notices or other communications
given or made hereunder shall be in writing and shall be personally delivered or
deemed delivered the first business day after being telecopied (provided that a
copy is delivered by first class mail) to the party to receive the same at its
address set forth below or to such other address as either party shall hereafter
give to the
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other by notice duly made under this Section: (i) if to the Company, to
Frederick Brewing Co., 4607 Wedgewood Boulevard, Frederick, MD 21703, telecopier
number: (301) 694-2971, and (ii) if to the Subscriber, to the name, address and
telecopy number set forth on the signature page hereto.
(b) Closing. The consummation of the transactions
contemplated herein shall take place at the offices of Grushko & Mittman, 277
Broadway, Suite 801, New York, New York 10007, upon the satisfaction of all
conditions to Closing set forth in this Agreement. The closing date shall be the
date that subscriber funds representing the net amount due the Company from the
Purchase Price are transmitted by wire transfer to the Company (the "Closing
Date").
(c) Entire Agreement; Assignment. This Agreement
represents the entire agreement between the parties hereto with respect to the
subject matter hereof and may be amended only by a writing executed by both
parties. No right or obligation of either party shall be assigned by that party
without prior notice to and the written consent of the other party.
(d) Execution. This Agreement may be executed by
facsimile transmission, and in counterparts, each of which will be
deemed an original.
(e) Law Governing this Agreement. This Agreement
shall be governed by and construed in accordance with the laws of the State of
New York without regard to principles of conflicts of laws. Any action brought
by either party against the other concerning the transactions contemplated by
this Agreement shall be brought only in the state courts of New York or in the
federal courts located in the state of New York. Both parties and the
individuals executing this Agreement and other agreements on behalf of the
Company agree to submit to the jurisdiction of such courts and waive trial by
jury. The prevailing party shall be entitled to recover from the other party its
reasonable attorney's fees and costs. In the event that any provision of this
Agreement or any other agreement delivered in connection herewith is invalid or
unenforceable under any applicable statute or rule of law, then such provision
shall be deemed inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule of law. Any such
provision which may prove invalid or unenforceable under any law shall not
affect the validity or enforceability of any other provision of any agreement.
(f) Specific Enforcement, Consent to Jurisdiction.
The Company and Subscriber acknowledge and agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injuction or
injunctions to prevent or cure breaches of the provisions of this Agreement and
to enforce specifically the terms and provisions hereof or thereof,
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this being in addition to any other remedy to which any of them may be entitled
by law or equity. Subject to Section 11(e) hereof, each of the Company and
Subscriber hereby waives, and agrees not to assert in any such suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
such court, that the suit, action or proceeding is brought in an inconvenient
forum or that the venue of the suit, action or proceeding is improper. Nothing
in this Section shall affect or limit any right to serve process in any other
manner permitted by law.
(g) Automatic Termination. This Agreement shall
automatically terminate without any further action of either party hereto if the
Closing shall not have occurred by the tenth (10th) business day following the
date this Agreement is accepted by the Subscriber.
Please acknowledge your acceptance of the foregoing
Subscription Agreement by signing and returning a copy to the undersigned
whereupon it shall become a binding agreement between us.
FREDERICK BREWING CO.
By:
--------------------------------
Dated: August ____, 1998
Purchase Price: $250,000
Preferred Shares Purchased: 250 (at $1,000 per share)
Exchange Preferred Shares: 250
Section 7.1(e) Shares:
--------
ACCEPTED: Dated as of August ____, 1998
AUSTOST ANSTALT SCHAAN
(a Lichenstein corporation)
7440 Fuerstentum
Lichenstein
Landstrasse 163
Fax: 011-431-534532895
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<PAGE>
By:
--------------------------
Thomas Hackl
Director
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it shall
become a binding agreement between us.
FREDERICK BREWING CO.
By:
---------------------------------------
Dated: August ____, 1998
Purchase Price: $250,000
Preferred Shares Purchased: 250 (at $1,000 per share)
Exchange Preferred Shares: 250
Section 7.1(e) Shares:
--------
ACCEPTED: Dated as of August ____, 1998
BALMORE FUNDS S.A.
(a B.V.I. corporation)
P.O. Box 4603
Zurich, Switzerland
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<PAGE>
Fax: 011-411-201-6262
By:
--------------------------
Francois Morax
Director
SCHEDULE B
----------
PLACEMENT AGENT WARRANTS COMMISSION
- --------------- -------- -----------
LIBRA FINANCE S.A. 14,000 Warrants 4% of Purchase
P.O. Box 4603 for each $100,000 Price
Zurich, Switzerland of Purchase Price
Fax: 011-411-201-6262
MAY-DAVIS GROUP 6,000 Warrants for 6% of Purchase
1 World Trade Center each $100,000 of Price
87th Floor Purchase Price
New York, NY 10048
Fax: 212-775-8166
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<PAGE>
THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE
OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID
ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO FREDERICK BREWING CO. THAT SUCH REGISTRATION IS NOT REQUIRED.
Right to Purchase _____ Shares of Common Stock of Frederick
Brewing Co. (subject to adjustment as provided herein)
COMMON STOCK PURCHASE WARRANT
No. 1 _______, 1998
Frederick Brewing Co., a corporation organized under the laws of the
State of Maryland (the "Company"), hereby certifies that, for value received,
_____________________________., or assigns, is entitled, subject to the terms
set forth below, to purchase from the Company after _______, 1998 at any time or
from time to time before 5:00 p.m., New York time, on _______, 2001 (the
"Expiration Date"), up to _____ fully paid and nonassessable shares of Common
Stock (as hereinafter defined), $.00004 par value per share, of the Company, at
a purchase price of $._____ per share (such purchase price per share as adjusted
from time to time as herein provided is referred to herein as the "Purchase
Price"). The number and character of such shares of Common Stock and the
Purchase Price are subject to adjustment as provided herein.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
(a) The term Company shall include Frederick Brewing Co. and
any corporation which shall succeed or assume the obligations of
Frederick Brewing Co. hereunder.
(b) The term "Common Stock" includes (a) the Company's Common Stock,
$.00004 par value per share, as authorized on the date of the Agreement, (b) any
other capital stock of any class or classes (however designated) of the Company,
authorized on or after such date, the holders of which shall have the right,
without limitation as to amount, either to all or to a share of the balance of
current dividends and liquidating dividends after the payment of dividends and
distributions on any shares entitled to preference, and the holders of which
shall ordinarily, in the absence of contingencies, be entitled to vote for the
election of a majority of directors of the Company (even if the right so to vote
has been suspended by the happening of such a contingency) and (c) any other
securities into
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which or for which any of the securities described in (a) or (b) may be
converted or exchanged pursuant to a plan of recapitalization, reorganization,
merger, sale of assets or otherwise.
(c) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the holder of the Warrant at any time shall be entitled to
receive, or shall have received, on the exercise of the Warrant, in lieu of or
in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities pursuant to Section 5 or otherwise.
1. Exercise of Warrant.
1.1. Number of Shares Issuable upon Exercise. From and after the
date hereof through and including the Expiration Date, the holder hereof shall
be entitled to receive, upon exercise of this Warrant in whole in accordance
with the terms of subsection 1.2 or upon exercise of this Warrant in part in
accordance with subsection 1.3, the number of shares of Common Stock of the
Company identified on Page 1 hereof, subject to adjustment pursuant to Section
4. The Warrant may not be exercised unless the Company has obtained approval of
its shareholders of the issuance of the Common Stock upon exercise of this
Warrant or an exemption from NASDAQ's corporate governance rules as they may
apply.
1.2. Full Exercise. This Warrant may be exercised in full by the
holder hereof by surrender of this Warrant, with the form of subscription
attached as Exhibit A hereto (the Subscription Form") duly executed by such
holder, to the Company at its principal office or at the office of its Warrant
agent (as provided in Section 11), accompanied by payment, in cash or by
certified or official bank check payable to the order of the Company, in the
amount obtained by multiplying the number of shares of Common Stock for which
this Warrant is then exercisable by the Purchase Price (as hereinafter defined)
then in effect.
1.3. Partial Exercise. This Warrant may be exercised in part (but
not for a fractional share) by surrender of this Warrant in the manner and at
the place provided in subsection 1.2 except that the amount payable by the
holder on such partial exercise shall be the amount obtained by multiplying (a)
the number of shares of Common Stock designated by the holder in the
Subscription Form by (b) the Purchase Price then in effect. On any such partial
exercise, the Company, at its expense, will forthwith issue and deliver to or
upon the order of the holder hereof a new Warrant of like tenor, in the name of
the holder hereof or as such holder (upon payment by such holder of any
applicable transfer taxes), may
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<PAGE>
request, the number of shares of Common Stock for which such Warrant may still
be exercised.
1.4. Fair Market Value. Fair Market Value of a share of Common
Stock as of a particular date (the "Determination Date") shall mean the Fair
Market Value of a share of the Company's Common Stock. Fair Market Value of a
share of Common Stock as of a Determination Date shall mean:
(a) If the Company's Common Stock is traded on an exchange or
is quoted on the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") National Market System or the NASDAQ SmallCap Market, then
the closing or last sale price, respectively, reported for the last business day
immediately preceding the Determination Date.
(b) If the Company's Common Stock is not traded on an
exchange or on the NASDAQ National Market System or the NASDAQ SmallCap Market
but is traded in the over-the-counter market, then the mean of the closing bid
and asked prices reported for the last business day immediately preceding the
Determination Date.
(c) Except as provided in clause (d) below, if the Company's
Common Stock is not publicly traded, then as the Holder and the Company agree or
in the absence of agreement by arbitration in accordance with the rules then
standing of the American Arbitration Association, before a single arbitrator to
be chosen from a panel of persons qualified by education and training to pass on
the matter to be decided.
(d) If the Determination Date is the date of a liquidation,
dissolution or winding up, or any event deemed to be a liquidation, dissolution
or winding up pursuant to the Company's charter, then all amounts to be payable
per share to holders of the Common Stock pursuant to the charter in the event of
such liquidation, dissolution or winding up, plus all other amounts to be
payable per share in respect of the Common Stock in liquidation under the
charter, assuming for the purposes of this clause (d) that all of the shares of
Common Stock then issuable upon exercise of all of the Warrants are outstanding
at the Determination Date.
1.5. Company Acknowledgment. The Company will, at the time of
the exercise of the Warrant, upon the request of the holder hereof acknowledge
in writing its continuing obligation to afford to such holder any rights to
which such holder shall continue to be entitled after such exercise in
accordance with the provisions of this Warrant. If the holder shall fail to make
any such request, such failure shall not affect the continuing obligation of the
Company to afford to such holder any such rights.
1.6. Trustee for Warrant Holders. In the event that a
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<PAGE>
bank or trust company shall have been appointed as trustee for the holders of
the Warrants pursuant to Subsection 3.1, such bank or trust company shall have
all the powers and duties of a warrant agent appointed pursuant to Section 10
and shall accept, in its own name for the account of the Company or such
successor person as may be entitled thereto, all amounts otherwise payable to
the Company or such successor, as the case may be, on exercise of this Warrant
pursuant to this Section 1.
2. Delivery of Stock Certificates, etc. on Exercise. The Company
agrees that the shares of Common Stock purchased upon exercise of this Warrant
shall be deemed to be issued to the holder hereof as the record owner of such
shares as of the close of business on the date on which this Warrant shall have
been surrendered and payment made for such shares as aforesaid. As soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within 10 days thereafter, the Company at its expense (including the
payment by it of any applicable issue taxes) will cause to be issued in the name
of and delivered to the holder hereof, or as such holder (upon payment by such
holder of any applicable transfer taxes) may direct, a certificate or
certificates for the number of duly and validly issued, fully paid and
nonassessable shares of Common Stock (or Other Securities) to which such holder
shall be entitled on such exercise, plus, in lieu of any fractional share to
which such holder would otherwise be entitled, cash equal to such fraction
multiplied by the then Fair Market Value of one full share, together with any
other stock or other securities and property (including cash, where applicable)
to which such holder is entitled upon such exercise pursuant to Section 1 or
otherwise.
3. Adjustment for Reorganization, Consolidation, Merger, etc.
3.1. Reorganization, Consolidation, Merger, etc. In case at any
time or from time to time, the Company shall (a) effect a reorganization, (b)
consolidate with or merge into any other person, or (c) transfer all or
substantially all of its properties or assets to any other person under any plan
or arrangement contemplating the dissolution of the Company, then, in each such
case, as a condition to the consummation of such a transaction, proper and
adequate provision shall be made by the Company whereby the holder of this
Warrant, on the exercise hereof as provided in Section 1 at any time after the
consummation of such reorganization, consolidation or merger or the effective
date of such dissolution, as the case may be, shall receive, in lieu of the
Common Stock (or Other Securities) issuable on such exercise prior to such
consummation or such effective date, the stock and other securities and property
(including cash) to which such holder would have been entitled upon such
consummation or in connection with such dissolution, as the case may be, if such
holder had so
4
<PAGE>
exercised this Warrant, immediately prior thereto, all subject to further
adjustment thereafter as provided in Section 5.
3.2. Dissolution. In the event of any dissolution of the
Company following the transfer of all or substantially all of its properties or
assets, the Company, prior to such dissolution, shall at its expense deliver or
cause to be delivered the stock and other securities and property (including
cash, where applicable) receivable by the holders of the Warrants, if exercised,
after the effective date of such dissolution pursuant to this Section 3 to a
bank or trust company having its principal office in New York, NY, as trustee
for the holder or holders of the Warrants.
3.3. Continuation of Terms. Upon any reorganization,
consolidation, merger or transfer (and any dissolution following any transfer)
referred to in this Section 3, this Warrant shall continue in full force and
effect and the terms hereof shall be applicable to the shares of stock and other
securities and property receivable on the exercise of this Warrant after the
consummation of such reorganization, consolidation or merger or the effective
date of dissolution following any such transfer, as the case may be, and shall
be binding upon the issuer of any such stock or other securities, including, in
the case of any such transfer, the person acquiring all or substantially all of
the properties or assets of the Company, whether or not such person shall have
expressly assumed the terms of this Warrant as provided in Section 5.
4. Extraordinary Events Regarding Common Stock. In the event
that the Company shall (a) issue additional shares of the Common Stock as a
dividend or other distribution on outstanding Common Stock, (b) subdivide its
outstanding shares of Common Stock, or (c) combine its outstanding shares of the
Common Stock into a smaller number of shares of the Common Stock, then, in each
such event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the then Purchase Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such event and the denominator of which shall be the number
of shares of Common Stock outstanding immediately after such event, and the
product so obtained shall thereafter be the Purchase Price then in effect. The
Purchase Price, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive event or events described herein in this Section 4.
The number of shares of Common Stock that the holder of this Warrant shall
thereafter, on the exercise hereof as provided in Section 1, be entitled to
receive shall be increased to a number determined by multiplying the number of
shares of Common Stock that would otherwise (but for the provisions of this
Section 4) be issuable on such exercise by a fraction of which (a) the numerator
is the Purchase Price that
5
<PAGE>
would otherwise (but for the provisions of this Section 4) be in
effect, and (b) the denominator is the Purchase Price in effect on
the date of such exercise.
5. Chief Financial Officer's Certificate as to Adjustments. In each
case of any adjustment or readjustment in the shares of Common Stock (or Other
Securities) issuable on the exercise of the Warrants, the Company at its expense
will promptly cause its Chief Financial Officer to compute such adjustment or
readjustment in accordance with the terms of the Warrant and prepare a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (a) the consideration received or receivable by the Company for any
additional shares of Common Stock (or Other Securities) issued or sold or deemed
to have been issued or sold, (b) the number of shares of Common Stock (or Other
Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price
and the number of shares of Common Stock to be received upon exercise of this
Warrant, in effect immediately prior to such adjustment or readjustment and as
adjusted or readjusted as provided in this Warrant. The Company will forthwith
mail a copy of each such certificate to the holder of the Warrant and any
Warrant agent of the Company (appointed pursuant to Section 10 hereof).
6. Reservation of Stock, etc. Issuable on Exercise of Warrant;
Financial Statements. The Company will at all times reserve and keep available,
solely for issuance and delivery on the exercise of the Warrants, all shares of
Common Stock (or Other Securities) from time to time issuable on the exercise of
the Warrant. This Warrant entitles the holder hereof to receive copies of all
financial and other information distributed or required to be distributed to the
holders of the Company's Common Stock.
7. Assignment; Exchange of Warrant. Subject to compliance with
applicable Securities laws, and delivery of such representations and warranties
as shall reasonably be requested by the Company, this Warrant, and the rights
evidenced hereby, may be transferred by any registered holder hereof (a
"Transferor") with respect to any or all of the Shares. On the surrender for
exchange of this Warrant, with the Transferor's endorsement in the form of
Exhibit B attached hereto (the Transferor Endorsement Form"), to the Company,
the Company at its expense but with payment by the Transferor of any applicable
transfer taxes) will issue and deliver to or on the order of the Transferor
thereof a new Warrant or Warrants of like tenor, in the name of the Transferor
and/or the transferee(s) specified in such Transferor Endorsement Form (each a
"Transferee"), calling in the aggregate on the face or faces thereof for the
number of shares of Common Stock called for on the face or faces of the Warrant
so surrendered by the Transferor.
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8. Replacement of Warrant. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of any such loss, theft or destruction of this
Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
9. Registration Rights and Exercise Limitations.
9.1. Registration Rights. The holder of this Warrant has been
granted certain registration rights by the Company. These registration rights
are set forth in a Subscription Agreement entered into by the Company and
purchasers of the Company's Series F Preferred Stock ("Subscription Agreement"),
at or about the issue date of this Warrant. The terms of the Subscription
Agreement are incorporated herein by this reference.
9.2. Exercise Limitations. In the event the Company is unable
to issue Common Stock upon exercise of this Warrant, then upon receipt by the
Company of notice that the Holder of this Warrant would exercise this Warrant
but for the Company's inability to issue Common Stock upon exercise of this
Warrant, then the Company will pay to the Holder of this Warrant, in lieu of
delivering Common Stock, a sum equal to the closing ask price of the Company's
Common Stock on NASDAQ SmallCap or such other principal trading market for the
Company's Common Stock on the trading date immediately preceding the date notice
is given by the Holder, less the exercise price of this Warrant for each shares
of Common Stock designated in such notice from the Holder.
10. Warrant Agent. The Company may, by written notice to the each
holder of the Warrant, appoint an agent having an office in New York, NY for the
purpose of issuing Common Stock (or Other Securities) on the exercise of this
Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7,
and replacing this Warrant pursuant to Section 8, or any of the foregoing, and
thereafter any such issuance, exchange or replacement, as the case may be, shall
be made at such office by such agent.
11. Transfer on the Company's Books. Until this Warrant is transferred
on the books of the Company, the Company may treat the registered holder hereof
as the absolute owner hereof for all purposes, notwithstanding any notice to the
contrary.
12. Notices, etc. All notices and other communications from the Company
to the holder of this Warrant shall be mailed by first class registered or
certified mail, postage prepaid, at such address as may have been furnished to
the Company in writing by such holder or, until any such holder furnishes to the
Company an
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<PAGE>
address, then to, and at the address of, the last holder of this Warrant who has
so furnished an address to the Company.
13. Miscellaneous. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. This Warrant shall be construed and enforced in accordance with and
governed by the laws of New York. Any dispute relating to this Warrant shall be
adjudicated in New York State. The headings in this Warrant are for purposes of
reference only, and shall not limit or otherwise affect any of the terms hereof.
The invalidity or unenforceability of any provision hereof shall in no way
affect the validity or enforceability of any other provision.
IN WITNESS WHEREOF, the Company has executed this Warrant under seal as
of the date first written above.
FREDERICK BREWING CO.
By:
--------------------------------
Title:
-----------------------------
Witness:
- ------------------------------
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<PAGE>
Exhibit A
FORM OF SUBSCRIPTION
(To be signed only on exercise of Warrant)
TO: Frederick Brewing Co.
The undersigned, the holder of the within Warrant, hereby irrevocably elects to
exercise this Warrant for, and to purchase thereunder, ______________________
shares of Common Stock of Frederick Brewing Co. and herewith makes payment of
$________________________ therefor, and requests that the certificates for such
shares be issued in the name of, and delivered to _____________________________
whose address is ______________________________________________________________
______________________.
Dated:___________________
__________________________________________
(Signature must conform to name of
holder as specified on the face of
the Warrant)
__________________________________
(Address)
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<PAGE>
Exhibit B
FORM OF TRANSFEROR ENDORSEMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and
transfers unto the person(s) named below under the heading "Transferees" the
right represented by the within Warrant to purchase the percentage and number of
shares of Common Stock of Frederick Brewing Co. to which the within Warrant
relates specified under the headings "Percentage Transferred" and "Number
Transferred," respectively, opposite the name(s) of such person(s) and appoints
each such person Attorney to transfer its respective right on the books of
Frederick Brewing Co. with full power of substitution in the premises.
Transferees Percentage Number
----------- Transferred Transferred
----------- -----------
Dated:__________________, 19___ _______________________________
(Signature must conform to name
of holder as specified on the
face of the warrant)
Signed in the presence of:
_______________________________ ________________________________
(Name) (address)
________________________________
ACCEPTED AND AGREED: (address)
[TRANSFEREE]
_______________________________
(Name)
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