<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
December 15, 1997
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(Date of earliest event reported)
Frederick Brewing Co.
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(Exact name of registrant as specified in its charter)
Maryland 0-27800 52-1769647
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(State or other (Commission File Number) (IRS Employer
of incorporation) Identification No.)
4607 Wedgewood Blvd., Frederick, Maryland 21703
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(Address of principal executive offices) (Zip Code)
(301) 694-7899
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed
since last report)
Page 1 of 3 Pages
Exhibit Index appears on Page 2
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ITEM 5. Other Events
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On December 15, 1997, Frederick Brewing Co. (the "Company")
issued a press release (the "Press Release") announcing that the
Company had entered into definitive agreements ("Agreements"), as
of December 15, 1997, to acquire Wild Goose Brewery, Inc. of
Cambridge, Maryland and to purchase certain assets of Brimstone
Brewing Company, Inc. of Baltimore, Maryland, both transactions
subject to certain conditions.
The Press Release is attached as an exhibit to this report and
is incorporated herein by reference.
Exhibits:
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Exhibit Number Description
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20 Press Release issued by the Company
on December 15, 1997 with respect to
the Agreements
99 Safe Harbor Under the Private
Securities Litigation Reform Act of
1995.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
FREDERICK BREWING CO.
Date: January 8, 1998 By: /s/ Kevin E. Brannon
------------------------
Kevin E. Brannon
Chief Executive Officer
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EXHIBIT 20
Frederick Brewing Co. Merges Operations With Two Area Microbreweries
December 15, 1997 6:00 PM EST
FREDERICK, Md., Dec. 15/PRNewswire/-- Frederick Brewing Co.
(Nasdaq: BLUE) announced today that it has signed definitive
agreements with Cambridge, MD-based Wild Goose Brewery, Inc.
and Brimstone Brewing Company, Inc. of Baltimore, MD to merge
operations. A press briefing will be held at 10:30 a.m. on Tuesday,
December 16 at Frederick Brewing, Co., 4607 Wedgewood Blvd. in
Frederick, Maryland.
Under the terms of the agreement, Frederick Brewing Co. (FBC) will
pay approximately $3 million for Wild Goose Brewery, by a combination
of the retirement of debt and the issuance of FBC common stock. FBC
will also issue 80,000 shares of stock for the brands and formulas of
Brimstone Brewing Company. These transactions create the Mid-Atlantic
region's largest craft brewery, with estimated combined 1997 revenues
of $5.9 million on sales of approximately 35,000 barrels.
FBC Chairman and CEO Kevin Brannon says he anticipates closing the
agreement with Brimstone by December 31, 1997 and with Wild Goose by
January 15, 1998. According to Brannon, FBC intends to raise
approximately $2.4 million in a private placement to fund the deals and
to provide working capital to grow all three brands. The closing of
the FBC-Wild Goose transaction is subject to approval by Wild Goose's
shareholders, FBC's lender and other conditions.
The mergers will create two wholly owned subsidiaries of Frederick
Brewing Co.: Wild Goose Brewery, Inc. and Brimstone Brewing Company, Inc.
"These mergers virtually double our production and sales," comments
Brannon, "which should greatly improve efficiency and capacity
utilization, and increase our margins."
Production at the Wild Goose brewing facility in Cambridge will be
phased out and moved to FBC in Frederick during the first quarter of
1998. The 22 employees of Wild Goose are being interviewed by FBC to
fill anticipated increases in production, sales and administrative
staff. Under the terms of the agreement, Brimstone Brewing Company
President Marc Tewey, who is joining FBC, will retain possession of
his brewing equipment and sell it off.
Jim Lutz, president of Wild Goose Brewery and Brimstone's Marc
Tewey will become presidents of their respective subsidiaries and
will have, according to FBC President Marjorie McGinnis,
"considerable autonomy in product development and marketing."
She adds, "We're dedicated to keeping these beers as distinctive as
they are today. We're in the process of making equipment changes
to accommodate the brewing ingredients and methods integral to their
character."
<PAGE>
Wild Goose, which has been operational since 1989, and is privately
held, produces eight styles of beer, including its flagship Wild Goose
IPA (India Pale Ale), all brewed in the classic English style.
Headquartered in Cambridge, MD, the company has estimated 1997 revenues
of $2.4 million and is expected to sell 15,500 barrels of beer by the
end of the year. In Lutz, says McGinnis, Frederick Brewing Co. gains
"a seasoned veteran of the business, with more than 20 years'
experience making and selling beer."
"This merger will allow Wild Goose to stay true to its British
brewing roots," says Lutz, "utilizing a modern, more efficient brewing
facility to improve quality control and extend shelf life."
Brimstone, known for its popular Stone Beer, was started by Marc
Tewey when he was a Sophomore at Loyola College in Maryland. The
company is family-owned. Brimstone currently produces six styles of
beer, including Honey Red Ale, Raspberry Porter and Brimstone Amber,
all brewed in its facility in the old National Bohemian Brewery in
Brewer's Hill in Baltimore. Tewey estimates that Brimstone will have
1997 revenues of $250,000 on sales of more than 1,100 barrels.
Comments McGinnis, "Marc is a creative force in the industry. The
energy and imagination he brings to the process of making beer takes
us back to our home-brewing roots."
"I started this business in college," says Tewey. "This merger is
the latest step in developing a great, consistent product -- utilizing
FBC's quality control measures, its successful distribution system, and
the talents of its innovative brewers."
Frederick Brewing Co.'s first kegs and bottles of beer rolled out
in November 1993. Today, the company, which continues to use all-
natural ingredients and neither additives, preservatives nor
pasteurization in its products, is Maryland's largest brewer.
In 1996, Frederick Brewing Co. completed a successful initial
public offering (IPO). In March 1997, the company moved from a
converted warehouse to a highly automated, 57,000 square foot facility,
which has an annual capacity of 80,000 barrels and is expandable
to 300,000. By the end of the year, the company expects to sell
18,000 barrels of Blue Ridge and Hempen beers -- up from 11,000 in
1996 -- with estimated revenues of $3.3 million (up from $1.9 last
year).
Except for historical information, this press release contains
forward-looking statements that involve risks and uncertainties
including, but not limited to, quarterly fluctuations in results,
the management of growth, competition and other risks detailed in
the company's SEC filings. Actual results may differ materially from
such information set forth herein.
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EXHIBIT 99
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about their companies, so
long as those statements are identified as forward-looking and are
accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from
those discussed in the statement. The Company desires to take advantage
of the "safe harbor" provisions of the Act. Certain information,
particularly information regarding future economic performance and
finances and plans and objectives of management, contained, or
incorporated by reference, in the Company's Current Report on Form
8-K dated as of December 15, 1997 ("Form 8-K") is forward-looking.
The following factors, in addition to other possible factors not listed,
could affect the Company's actual results and cause such results to
differ materially from those expressed in forward-looking statements.
Limited Operating History; Past and Possible Future Operating Losses.
The Company was founded in 1992 and has operated at a loss for each year
since such date. The Company's limited operating history makes the
prediction of future sales and operating results difficult. Accordingly,
although the Company has experienced sales growth, such growth should
not be considered indicative of future sales growth, if any, or of future
operating results. There can be no assurance that the Company's sales
will grow or be sustained in future periods or that the Company will
become or remain profitable in any future period.
Lack of Liquidity; Inadequate Working Capital. The Company has,
in the last twenty months, spent a significant amount of working capital
on machinery and equipment and on salaries and benefits and advertising,
all in connection with the completion of the Company's new brewery, the
expansion of its brewing capacity and its attempts to increase demand for
its products. In addition, growth in sales has not been sufficient to
fund such expenditures. As a consequence thereof, the Company currently
requires additional working capital for the retirement of certain debt
of Wild Goose Brewery, Inc. ("WGB"), the hiring and training of
administrative and sales personnel and the payment of certain
promotional, marketing and advertising expenses in anticipation of the
acquisition of WGB, the asset purchase from Brimstone Brewing Co.
("BBC") and the growth of the Company in general.
The Company intends to raise $2.4 million in a private placement to
fund the retirement of certain WGB debt, in connection with the WGB
acquisition, and to provide working capital for the Company. There
can be no assurance that such private placement or alternative capital
raising efforts will be successful. If the Company does not obtain the
required capital, one or both of the transactions described in the Form
8-K may not be consummated and the Company may be materially adversely
affected as a result.
<PAGE>
For the fourth quarter of 1997, ending December 31, 1997, the
Company's loan and financing agreements with Signet Bank for a $1.5
million equipment loan and a $3.0 million loan to Blue II, LLC for the
brewery land and building require that the Company's ratio of cash flow
to debt service for the quarter equal 1.5:1 or greater. There is
significant likelihood that the Company will be unable to demonstrate
compliance with this and, perhaps, other financial covenants, which
creates the risk that the Company will enter into technical default
of both loan financing agreements. If this occurs, the Company will
be required to renegotiate the terms of the loan and financing
agreements with Signet Bank or its successor (Signet Bank and First
Union Bank have announced that First Union will acquire Signet on or
about November 29, 1997), find alternate debt financing, raise
additional equity to repay the loans or otherwise replace the existing
plant and equipment financing. While management is confident that
one of these options will be achievable, no assurances can be given
as to such a result and a failure to renegotiate or refinance the
senior debt could make the Company unable to continue its business.
Ability to Successfully Integrate Operations of WGB, Assets of
BBC and Other Acquisition Candidates. The integration of the operations
of WGB and assets of BBC, provided that the transactions described in
the Form 8-K are consummated, will involve a number of risks, including,
but not limited to, diversion of management's attention, assimilation of
the operations and personnel of WGB and BBC and the potential loss of
key employees of WGB and BBC. The successful operation of an acquired
business will require communication and cooperation in product
development and marketing among management and other key personnel.
Given the inherent difficulties involved in completing a major business
combination, there can be no assurance that such cooperation will occur
or that integration of the respective businesses will be successful and
will not result in disruption of the Company's business. In addition,
there can be no assurance that the Company will realize any of the
anticipated benefits of the acquisition and asset purchase. To the
extent the Company is unsuccessful in integrating the to-be-acquired
operations and assets, or the operations or assets of any future
acquisition candidate, the Company would be materially adversely affected.
There are, as of the date of this Form 8-K, no agreements, arrangements
or understandings between the Company and any party relating to any
potential acquisition.
Possible Need for Additional Financing. The Company's planned
expansion of its operations with respect to its current and planned
products and those of WGB and BBC (including increased overhead,
depreciation, marketing and salaries) combined with the Company's lack
of liquidity may require that the Company obtain additional debt or
equity financing for these or other general corporate purposes. There
can be no assurance that the Company will be able to obtain additional
debt or equity financing on terms favorable to the Company, or at all,
or if obtained, there can be no assurance that such debt or equity
financing will be sufficient for the financing needs of the Company.
<PAGE>
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
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no assurance that the Company's wholesale distributors will devote the
resources necessary to provide effective sales and promotion support
to the Company.
Dependence on Major Customer. Sales to The Kronheim Co., Inc.,
Baltimore, Maryland ("Kronheim"), the Company's largest wholesale
distributor, represented 50.6%, 35.7% and 56.5% of the Company's beer
revenues in 1996, 1995 and 1994. Sales to all other wholesale
distributors represented 49.4%, 64.3% and 43.5% of the Company's beer
revenues in 1996, 1995 and 1994. (The 1994 percentages for sales to
other wholesale distributors include beer sold directly to retailers
by the Company.) The Company expects sales to its largest wholesale
distributor to continue to represent a significant portion of its sales
in the near term. The Company believes that its future growth and
success will continue to depend in large part upon this significant
wholesale distributor, but such dependence should decrease as the
Company expands its market area.
No Assurance of Continued Wholesale Distributor Support. If
Kronheim or any other significant wholesale distributor were to
discontinue selling, or decrease the level of orders for, the Company's
products, the Company's business would be adversely affected in the
areas serviced by such wholesale distributors until the Company retained
replacements. There can be no assurance however that the Company would
be able to replace a significant wholesale distributor in a timely
manner or at all in the event it were to discontinue selling the
Company's products. In addition, there is always a risk that the
Company's wholesale distributors will give higher priority to the
products of other beverage companies, including products directly
competitive to the Company's beers, thus reducing their efforts to
sell the Company's products. This risk is exacerbated by the fact that
many of the Company's wholesale distributors (not including Kronheim)
are reliant on the beers of one of the major domestic beer producers
for a large percentage of their revenues and, therefore, may be
influenced by such producer. The Company's distributors are not
contractually committed to make future purchases and therefore could
discontinue carrying the Company's products in favor of a competitor's
product or another beverage at any time or for any reason.
If any of the Company's significant wholesale distributors were to
experience financial difficulties, or otherwise become unable or
unwilling to promote or sell the Company's products, the Company's
results of operations would be adversely affected. Many of the
Company's distribution agreements (other than its agreement with
Kronheim which does not specify such a date) permit their termination
upon 90 days' prior notice. The Company's ability to terminate poorly
performing distributors may be hindered by laws that restrict the
Company's right to terminate the services of its wholesale distributors.
There can be no assurance that the Company will be able to attract
reliable, effective new distributors in markets it will enter as a
result of its planned geographic expansion or that the Company's business
will not be adversely affected by the loss or declining performance of
any of its current or future wholesale distributors.
<PAGE>
Intense and Increasing Competition. The Company competes in the
specialty or craft beer segment of the domestic beer market. The
principal competitive factors affecting the market for the Company's
beers include product quality and taste, advertising, distribution
capabilities, brand recognition, packaging and price. There can be
no assurance that the Company will be able to compete successfully
against current and future competitors based
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<PAGE>
on these and other factors. The Company competes with a variety of
domestic and international brewers, many of whom have substantially
greater financial, production, distribution and marketing resources
and have achieved a higher level of brand recognition than the Company.
The Company anticipates increased competition in the specialty beer
segment from the major domestic brewers such as Anheuser-Busch Companies,
Inc. ("Anheuser-Busch"), Miller Brewing Co. ("Miller") and Adolph Coors
Co. ("Coors"), each of whom has introduced and is marketing fuller
flavored beers designed to compete directly in the specialty beer segment.
These large domestic brewers dominate the overall domestic beer market
and the Company expects that certain of these companies, with their
superior financial resources and established distribution networks, will
continue to seek further participation in the specialty beer segment
through the acquisition of equity positions in, or the formation of
distribution alliances with, smaller craft brewers (such as Anheuser
- -Busch's equity position in, and distribution agreement with, Redhook
Ale Brewery, Incorporated).
The Company also faces and will face increasing competition from
import specialty beer companies such as Heineken N.V., Bass PLC and
Guinness PLC and existing domestic specialty and contract brewers such
as The Boston Beer Company, Inc., Pete's Brewing Co., Redhook Ale Brewery,
Incorporated, Sierra Nevada Brewing Co. and Anchor Brewing Co., as well
as the regional specialty brewers and local microbreweries in the markets
where the Company distributes its beers. Recent growth in the sales of
specialty beers is expected to result in increased competition in the
segment, including a continuing proliferation of microbrewers and
efforts by micro and regional brewers to expand their production
capacity, marketing expenditures and geographical distribution areas.
Increased competition could result in price reductions, reduced profit
margins and loss of market share, all of which would have a material
adverse effect on the Company's financial condition and results of
operations.
The Company's products also compete generally with other alcoholic
beverages, including products offered in other segments of the beer
industry and low- or no-alcohol products. The Company competes with
other beer and beverage companies not only for consumer acceptance and
loyalty but also for shelf and tap space in retail establishments and
for marketing focus by the Company's wholesale distributors and their
customers, all of which also distribute and sell other beers and
alcoholic beverage products. Finally, there can be no assurance that
the recent growth in consumer demand for craft beers will continue, or
even if such growth continues, that consumers will choose the Company's
beers.
<PAGE>
Potential Fluctuations in Quarterly Results. The Company's
quarterly operating results have in the past and may in the future
vary significantly depending on factors such as sales for the quarter,
fixed and semi-variable operating costs during periods when the Company's
brewery is producing below maximum designed production capacity,
professional fees and expenses relating to the Company's planned
expansion, increased competition, fluctuations in the price of
ingredients or packaging materials, seasonality of sales of the
Company's beers, general economic factors, trends in consumer
preferences, regulatory developments, including changes in excise and
other tax rates, changes in the sales mix between kegs and bottles,
changes in average selling prices or market acceptance of the Company's
beers,
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<PAGE>
increases in packaging and marketing costs associated with initial
production of new products and variations in shipping and transportation
costs.
The Company's operating results may be significantly impacted in
the future by, among other things, the costs attendant to the
commencement of production at the new brewery, the timing of new
product announcements by the Company or its competitors, the impact
of increasing average federal and state excise tax as sales volume
increases, the timing of new advertising and promotional campaigns by
the Company and other expansion activities engaged in by the Company.
The Company's expense levels are based, in part, on its expectations
of future sales levels. If sales levels are below expectations,
operating results are likely to be materially adversely affected. In
particular, because the Company operates its own production facility, a
significant portion of its overhead is fixed and cannot be reduced
for short-term adjustments such as sales below management's expectations,
and an excess of production capacity could therefore have a significant
negative impact on the Company's operating results. However, the Company
has historically operated with little or no backlog. The absence of
backlog increases the difficulty of predicting sales and operating
results. In addition, the Company's decision to undertake a significant
media advertising campaign after the commencement of construction of
the new brewery could substantially increase the Company's expenses in
a particular quarter, while any increase in sales from such advertising
may be realized in subsequent periods.
Based upon the risks of potential fluctuations in quarterly results
discussed above and seasonality and the unpredictability of demand,
discussed below, the Company believes that quarterly sales and operating
results are likely to vary significantly in the future and that period-to
- -period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future
performance. Further, it is possible that in some future quarter the
Company's revenue or operating results will be below the expectations
of public market analysts and investors. In such event, the price of
the Company's Common Stock could be materially adversely affected.
Sales Fluctuations Due to Seasonality. The Company's wholesale
distributors have historically experienced higher sales in the second
and fourth quarters of the calendar year due to increased consumption of
the Company's beers during periods of warmer weather and from Halloween
through New Year's Day. Although the Company has not yet experienced
sale fluctuations due to seasonality because the Company has continued
to expand its wholesale distribution network over the past three years,
fluctuations in the Company's sales due to seasonality may become
evident in the future as the Company's sales increase.
<PAGE>
No Assurance of Geographic Expansion. While the Company has
recently expanded its distribution network and now sells in approximately
25 states, sales in Maryland accounted for over 62.8% of the Company's
sales in 1996. The Company's continued growth depends upon its ability
to expand sales in these and other new regions. There can be no
assurance that the Company's efforts to expand sales in new regions
will be successful or that such expansion can be accomplished on a
profitable basis. The Company's timely and successful expansion of
sales will depend on a number of factors, including competition, the
continued promotion and sale of the Company's products by suitable
local wholesale
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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.
Limited Product Line. The sale of a limited number of styles of
beers has accounted for substantially all of the Company's revenues
since inception. The Company currently offers six styles of beer
year-around and at least one seasonal brew during any part of the year,
and believes that the sale of these beers will continue to account for
a significant portion of the Company's sales for the foreseeable future.
Therefore, the Company's future operating results, particularly in the
near term, are significantly dependent upon the continued market
acceptance of these products. There can be no assurance that the
Company's beers will continue to achieve market acceptance. A decline in
the demand for any of the Company's beers as a result of competition,
changes in consumer tastes and preferences, government regulation or
other factors would have a material adverse effect on the Company's
operating results and financial condition. In addition, there can be
no assurance that the Company will be successful in developing,
introducing and marketing additional new beers that will sustain sales
growth in the future.
No Assurance of Future Ability to Satisfy Changing Consumer
Preferences. The craft beer market is highly competitive and
characterized by changing consumer preferences and continuous
introduction of new products. The Company intends to introduce new
products from time to time to maintain wholesale distributor and retailer
interest and appeal to varying consumer preferences and to create
consumer demand. The Company believes that its future growth will depend,
in part, on its ability to anticipate changes in consumer preferences
or to create consumer demand and develop and introduce, in a timely
manner, new beers that adequately address such changes.
<PAGE>
There can be no assurance that the Company will be successful in
developing,introducing and marketing new products on a timely basis.
If the Company is unable to introduce new products or if the Company's
new products are not successful, the Company's sales may be adversely
affected as customers seek competitive products. In addition, the
introduction of new products by the Company could result in reduction
of sales of the Company's existing beers, requiring the Company to
manage carefully product introductions in order to minimize disruption
in sales of existing products. There can be no assurance that the
introduction of new product offerings by the Company will not cause
wholesale distributors, retailers and consumers to reduce purchases
or consumption of existing Company products. Such reduction of purchases
or 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
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believes that one factor in such growth has been consumer demand for
more flavorful beers offered in a wider variety of styles. No
assurance can be given, however, that consumer demand for craft beers
will continue in the future. The Company's success also depends upon
a number of factors related to the level of discretionary consumer
spending, including the general state of the economy, federal and state
tax laws and consumer confidence in future economic conditions. Changes
in consumer spending can affect both the quantity and the price of the
Company's products and may therefore affect the Company's operating
results. For example, reduced consumer confidence and spending may
result in reduced demand for the Company's products, limitations on
its ability to increase or maintain prices and increases in required
levels of selling, advertising and promotional expenses.
No Assurance of Future Satisfaction of Demand. The production
schedule for the Company's beers is based on forecasts of the Company's
sales in general and the rate of sales of each of the Company's styles
of beer. The Company currently has the flexibility to modify short-term
production schedules and is currently able, on a short-term basis, to
satisfy fully most changes in demand for its product. The ability of
the Company to estimate demand may be less precise during periods of
rapid growth or with respect to new products. The failure of the
Company to accurately forecast its sales could lead to inventory
shortages or surpluses that could adversely affect results of operations
and lead to further fluctuations in quarterly operating results.
Dependence on Certain Suppliers. The Company purchases from, and
is dependent upon, its suppliers for certain agricultural ingredients
and packaging materials used in the Company's products. Although to
date the Company has been able to obtain adequate supplies of these
ingredients and materials in a timely manner from existing sources and
has changed suppliers from time to time with minimal disruption, if the
Company were unable to obtain sufficient quantities of ingredients and
materials, delays or reductions in product shipments could occur which
would have a material adverse effect on the Company's financial condition
and results of operations. To date, the Company has not experienced
material difficulties in obtaining timely delivery from its suppliers.
Although the Company believes that there are alternative sources
available for its raw materials, there can be no assurance that the
Company will be able to acquire these products from other sources on
a timely or cost-effective basis if current suppliers are unable to
supply them. In 1996, the Company experienced a significant increase
in the price of its ingredients and packaging materials. Except for
suppliers who provide glass bottles and corrugated cardboard cartons,
the Company does not have long-term purchase contracts with its suppliers.
The loss of a material supplier could materially adversely affect the
Company's results of operations and financial condition if there were a
delay in shipments from the alternative suppliers.
<PAGE>
As with most agricultural products, the supply and price of raw
materials used to produce the Company's beers can be affected by a
number of factors beyond the control of the Company such as floods,
frosts, droughts, other weather conditions, economic factors affecting
growing decisions, various plant diseases and pests. To the extent
that any of the foregoing affects the ingredients used to produce
the Company's beers, the Company's results of operations would be
materially and adversely affected. In addition, the Company keeps
only approximately a 30 day supply of hops and a seven day supply of
malt on its premises. Moreover, its purchases are limited to
pre-packaged quantities, rather than in
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bulk. Therefore, the Company is highly dependent upon the ability of
its suppliers to deliver its ingredients in a timely fashion. Such
delivery, which is by truck, is dependent upon certain factors beyond
the control of the Company, including but not limited to weather and
labor relations. The Company's operations are dependent upon its
ability to accurately forecast its need for ingredients. Any failure
by the Company to accurately forecast its requirements of raw materials
could result in the Company either being unable to meet higher than
anticipated demand for its products or producing excess inventory,
either of which may adversely affect the Company's results of operations.
Ability to Manage Growth. The Company has experienced rapid growth
that has resulted in new and increased responsibilities for management
personnel which has challenged and continues to challenge the Company's
management, operating and financial systems and resources. To compete
effectively and manage future growth, if any, the Company will be
required to continue to implement and improve its operational, financial
and management information systems, procedures and controls on a timely
basis and to expand, train, motivate and manage its work force. There
can be no assurance that the Company's personnel, systems, procedures
and controls will be adequate to support the Company's existing and
future operations. Any failure to implement and improve the Company's
operational, financial and management systems or to expand, train,
motivate or manage employees could have a material adverse effect on
the Company's operating results and financial condition.
No Assurance of Ability to Protect Intellectual Property Rights.
The Company considers its trademarks and pending trademarks, particularly
the "Blue Ridge" brand names, proprietary beer recipes and the design of
product packaging, advertising and promotional design and art work (the
"Intellectual Property"), as well as the to-be-acquired Intellectual
Property of WGB and BBC, to be of considerable value and critical to
its business. The Company relies on a combination of trade secret,
copyright and trademark laws, non-disclosure, non-competition and other
arrangements to protect its proprietary rights. However, the Company
has discovered that the "Blue Ridge" name has been used by other
companies, some of whom directly or indirectly compete with the Company.
In January 1995, the Company entered into an agreement with a contract
brewer to stop that contract brewer from using the Blue Ridge name
and to acquire any federal trademark rights that such brewer had to
the name "Blue Ridge Lager" at a cost to the Company of approximately
$7,900 (excluding legal fees and expenses). The Company applied for
trademark protection on its "Blue Ridge" brands in 1994, 1995 and 1996
and there can be no assurance that trademarks will be issued by the U.S.
Patent and Trademark Office. Failure to obtain trademark protection
could have a material adverse effect upon the Company's results of
operations and financial condition. In addition, despite the Company's
efforts to protect its proprietary rights, unauthorized parties may
attempt to copy or obtain and use information that the Company regards as
proprietary. There can be no assurance that the steps taken by the
Company to protect its proprietary information will be adequate to obtain
the legal protection sought or will prevent misappropriation of such
information and such protection may not preclude competitors from
developing confusingly similar brand names or promotional materials or
developing products with taste and other qualities similar to the
Company's products.
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Risk of Third Party Claims of Patent Infringement. While the Company
believes that its Intellectual Property does not infringe upon the
proprietary rights of third parties, there can be no assurance that the
Company will not receive future communications from third parties
asserting that the Company's Intellectual Property infringes, or may
infringe, upon the proprietary rights of third parties. The potential
for such claims will increase as the Company increases distribution
in recently entered and new geographic areas. Any such claims, with
or without merit, could be time-consuming, result in costly litigation
and diversion of management's attention, cause product distribution
delays or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may
not be available on terms economical or acceptable to the Company or
at all. In the event of a successful claim of infringement against
the Company and failure or inability of the Company to license the
infringed or similar proprietary information, the Company's operating
results and financial condition could be materially adversely affected.
Dependence on Key Personnel. The Company's success depends to a
significant degree upon the continuing contributions of, and on its
ability to attract and retain, qualified management, sales, production
and marketing personnel, particularly Kevin E. Brannon, Chairman of
the Board and Chief Executive Officer, Marjorie A. McGinnis, President,
Steven T. Nordahl, Vice President - Brewing Operations and Patrick N.
Helsel, Vice President - Sales,(collectively, the "FBC officers") as
well as, James Lutz, President of WGB and Marc Tewey, President of BBC.
The Company entered into employment agreements with each of the FBC
officers in 1996, and, with the exception of the employment agreement
of Mr. O'Connor, all such agreements continue to be current and in
effect. Prior to their employment by the Company, none of FBC
officers had prior experience in the beer industry or significant
business experience. The competition for qualified personnel is
intense and the loss of any of such persons as well as the failure to
recruit additional key personnel in a timely manner, could adversely
affect the Company. There can be no assurance that the Company will
be able to continue to attract and retain qualified management and
sales personnel for the development of its business. Failure to attract
and retain key personnel could have a material adverse effect on the
Company's operating results and financial condition.
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.
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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
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general liability and product liability insurance policies, there can be
no assurance that the Company's insurance will be adequate.
Government Regulation. The Company's business is highly regulated
by federal, state and local laws and regulations. The Company must
comply with extensive laws and regulations regarding such matters as
state and regulatory approval and licensing requirements, trade and
pricing practices, permitted and required labeling, advertising,
promotion and marketing practices, relationships with distributors
and related matters. For example, federal and state regulators require
warning labels and signage on the Company's products. The Company
believes that it has obtained all regulatory permits and licenses
necessary to operate its business in the states where the Company's
products are currently being distributed. Failure on the part of
the Company to comply with federal, state or local regulations could
result in the loss or revocation or suspension of the Company's
licenses, permits or approvals and accordingly could have a material
adverse effect on the Company's business. In addition, changes to
federal and state excise taxes on beer production, federal, state and
local environmental regulations, including laws relating to packaging
and waste discharge, or any other laws or regulations which affect
the Company's products could have a material adverse effect on the
Company's results of operations. The federal government and each of
the states levy excise taxes on alcoholic beverages, including beers.
The federal government currently imposes an excise tax of $18.00 per
barrel on every barrel of beer produced for consumption in the United
States by each brewing company with annual production of over 2,000,000
barrels. The federal excise tax for brewing companies with annual
production under 2,000,000 barrels is $7.00 per barrel on all barrels
up to the first 60,000 barrels produced and $18.00 per barrel for each
barrel produced in excess of 60,000. Any increase in the excise tax
for small brewers could have a material adverse effect on the Company's
operating results and financial condition.
Public Attitudes Toward Alcohol Consumption. In recent years,
there 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.
<PAGE>
Concentration of Ownership of Management. As of the date of this
Form 8-K, the present executive officers and directors of the Company
beneficially own approximately 13.07% of the Common Stock. However,
such ownership will be diluted to approximately 10.26% upon the
consummation of the WGB acquisition and the asset purchase from BBC.
Notwithstanding such dilution, these stockholders will be able to
significantly influence all matters requiring stockholder approval,
including the election of directors and approval of significant
corporate transactions. Such concentration of ownership may have the
effect of delaying or preventing a change in control of the Company.
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Antitakeover Provisions in the Company's Corporate Documents. The
Company's Board of Directors has the authority to issue up to
1,000,000 shares of preferred stock, $.01 par value per share, of
the Company and to determine the price, rights, preferences,
privileges and restrictions thereof, including voting rights, without
any further vote or action by the Company's stockholders. The voting
and other rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The Company's Board
may similarly issue additional shares of Common Stock without any
further vote or action by stockholders. Such an issuance could occur
in the context of another public or private offering of shares of
Common Stock or preferred stock or in a situation where the Common or
preferred stock is used to acquire the assets or stock of another
company. The issuance of Common or preferred stock, while providing
desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of delaying, deferring
or preventing a change in control of the Company. The Company has no
current plans to issue any shares of Common or preferred stock other
than as described herein.
Moreover, the Restated and Amended Articles of Incorporation
("Articles") and Restated and Amended Bylaws ("Bylaws") of the Company
contain certain provisions which, among other things, maintain a
"staggered" Board of Directors, limit the personal liability of, and
provide indemnification for, the directors of the Company, require that
stockholders comply with certain requirements before they can nominate
someone for director or submit a proposal before a meeting of
stockholders, 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.
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Common Stock Equivalents. If the maximum number of shares of
Preferred Stock are sold in the private Preferred Stock offering, such
shares may be converted into approximately 4,165,060 shares of Common
Stock (assuming that the average closing price of the Company's Common
Stock for the prior thirty trading days is $2.00 per share). An
increase in the number of shares of Common Stock (or Common Stock
equivalents) outstanding will have a negative effect on the Company's
per share ratios, including earnings per share, which could
negatively impact the market for the Company's Common Stock and the
price of the Common Stock in the market.
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Dividends. The Company has never paid a dividend on its Common
Stock and currently expects to retain its future earnings, if any, for
use in the operation and expansion of its business and does not
anticipate paying any such cash dividends on its Common Stock in the
foreseeable future. In addition, the Preferred Stock offered hereby
has a priority on funds available for dividends and dividends on the
Preferred Stock must be paid in full before dividends may be paid on
the Common Stock. Dividends to be paid on the Preferred Stock must
be approved by the Bank prior to payment. The Bank has stated in the
Forbearance Agreement that it will not approve such dividend payments
in 1997. Any dividend not approved shall accumulate but will not be
paid by the Company until approval of such dividend is obtained from
the Bank. Future loan agreements may similarly restrict or limit the
payment of dividends on the Preferred Stock.
Certain Related-Party Transactions. The Company has borrowed money
from time to time to provide cash for operations and for other corporate
purposes from its directors, stockholders and persons having business
relationships with its directors. In addition, the Company has agreed
to lease the new brewery premises from a company which is owned, in part,
by one of the Company's directors and by other affiliated persons.
Limitations on Liability of Management. The Company has adopted
provisions in its Articles that eliminate to the fullest extent
permissible under Maryland law the liability of its directors for
monetary damages except to the extent that it is proved that the
director actually received an improper benefit or profit in money,
property or services or the director's action or failure to act was
the result of active and deliberate dishonesty and was material to
the cause of action adjudicated in the proceeding. While it may
limit stockholder actions against the directors of the Company for
various acts of misfeasance, the provision is designed to ensure that
the ability of the Company's directors to exercise their best business
judgment in managing the Company's affairs, subject to their continuing
fiduciary duties to the Company and its stockholders, is not
unreasonably impeded by exposure to potentially high personal costs or
other uncertainties of litigation.
Indemnification of Management. The Company's Articles consistent
with Maryland law, provide that the Company will indemnify and advance
expenses to any director, officer, employee or agent of the Company who
is, or is threatened to be made, a party to any action, suit or
proceeding. Such indemnification would cover the cost of attorneys'
fees as well as any judgment, fine or amounts paid in settlement of
such action provided that the indemnified party meets certain standards
of conduct necessary for indemnification under applicable law. Such
indemnity may or may not be covered by officer and director liability
insurance and could result in an expense to the Company even if such
person is not successful in the action. This provision is designed
to protect such persons against the costs of litigation which may
result from his or her actions on behalf of the Company. In addition,
the Company has purchased insurance to cover its directors and officers
under certain circumstances.
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