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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 15, 1998
REGISTRATION NO. 333-65287
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
FREDERICK BREWING CO.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1769647
- ------------------------------------------ ---------------------------------
(STATE OR JURISDICTION OF INCORPORATION OR (IRS EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
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
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(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE (ADDRESS, INCLUDING ZIP CODE,
NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S AND TELEPHONE NUMBER, INCLUDING
PRINCIPAL EXECUTIVE OFFICES) AREA CODE, OF AGENT FOR SERVICE)
--------------------------------
Copy to:
HANK GRACIN, ESQ.
LEHMAN & EILEN
SUITE 505
50 CHARLES LINDBERGH BOULEVARD
UNIONDALE, NEW YORK 11553
(516) 222-0888
FACSIMILE (516) 222-0948
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this registration
statement.
If the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 other than securities offered only in connection with dividend or interest
reinvestment plan, please check the following box: /x/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
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<PAGE>
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE AMOUNT TO PRICE PER OFFERING REGISTRATION
REGISTERED BE REGISTERED SHARE (1) PRICE (1) FEE
- -------------------------------------------- ------------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Common Stock, par value $.00004 per share... 2,850,000 (3) $ .406 $1,157,100 $341.34
Common Stock, par value $.00004 per share... 200,000 (4) .406 $ 81,200 $ 23.95
Common Stock, par value $.00004 per share... 1,298,701 (5) .406 $ 527,273 $155.55
Common Stock, par value $.00004 per share... 100,000 (6) .406 $ 40,600 $ 11.98
Common Stock, par value $.00004 per share... 80,000 (7) .406 $ 32,480 $ 9.58
Total....................................... 4,528,701 $1,838,653 $542.40
</TABLE>
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(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 December 14,
1998.
(2) The registrant previously paid a registration fee of $562.35. No further
payment of the registration fee is required.
(3) Based upon the contractual obligation of the Company under the subscription
agreements for the Series F Cumulative Convertible Preferred Stock of the
Company (the "Series F Preferred Stock") to register 57,000 shares of
Common Stock for each $10,000 of stated value of the Series F Preferred
Stock sold to the purchasers thereof for cash (or $500,000 stated value in
the aggregate). The actual number of shares of Common Stock issued upon
conversion of the Series F Preferred Stock will be based upon the actual
conversion price at the time of conversion. The actual conversion price
will be 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 "Series F Closing 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
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"). 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 Series F Closing 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.
(5) Based upon the shares of Common Stock which would have been issued on
December 1, 1998 upon the conversion of the $500,000 aggregate stated value
of the Series G Convertible Preferred Stock of the Company (the "Series G
Preferred Stock") at a conversion price of $.385 per share. The actual
number of shares of Common Stock issued upon conversion of the Series G
Preferred Stock will be based upon the actual conversion price at the time
of conversion. The actual conversion price of the Series G Preferred Stock
will be the lesser of (i) seventy (70%) percent of the average closing bid
price of the Common Stock for the five trading days immediately prior to
the conversion date (the "Five Day Average Conversion Price") or (ii)
seventy-five (75%) percent of the closing bid price of the Common Stock on
November 20, 1998 as reported in the Nasdaq SmallCap Market System (or
$.46) (the "Series G Closing 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 Series G Closing Conversion Price or the Five 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 G Preferred Stock
will be converted.
(6) Issuable upon exercise of warrants evidencing the right to purchase
100,000 shares of Common Stock.
(7) Issued in connection with the purchase of certain assets from Brimstone
Brewing Company.
---------------------------
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 and the Series G 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>
PROSPECTUS
FREDERICK BREWING CO.
4,528,701 SHARES OF COMMON STOCK
The 4,528,701 shares of Common Stock of Frederick Brewing Co. are being
offered by the holders of shares of the Company's Series F Cumulative
Convertible Preferred Stock, the holders of shares of the Company's Series G
Convertible Preferred Stock, the holder of 80,000 shares of the Company's Common
Stock, and the holders of warrants to purchase 300,000 shares of the Company's
Common Stock. Other than such 80,000 shares of Common Stock, the shares shall be
issued upon the conversion of the Series F Preferred Stock, the conversion of
the Series G Preferred Stock and the exercise of the Warrants.
The Common Stock currently trades on the NASDAQ SmallCap Market under
the symbol "BLUE". On December 14, 1998, the last sale price of the Common Stock
as reported on NASDAQ was $.406 per share.
This prospectus relates to an aggregate of 4,528,701 shares of Common
Stock, which is based upon the contractual obligation of the Company under the
subscription agreements for the Series F Cumulative Convertible Preferred Stock
of the Company (the "Series F Preferred Stock") to register 57,000 shares of
Common Stock for each $10,000 of stated value of the Series F Preferred Stock
sold to the purchasers thereof for cash (or $500,000 stated value in the
aggregate), and also based upon the shares of Common Stock which would have been
issued on December 1, 1998 upon the conversion of the $500,000 aggregate stated
value of the Series G Convertible Preferred Stock of the Company (the "Series G
Preferred Stock") at a conversion price of $.385 per share.
The actual conversion price of the Series F Preferred Stock will be 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 "Series F Closing 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 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"). 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 Series F
Closing Conversion Price or the Three Day Average Conversion Price.
The actual conversion price of the Series G Preferred Stock will be the
lesser of (i) seventy (70%) percent of the average closing bid price of the
Common Stock for the five trading days immediately prior to the conversion date
(the "Five Day Average Conversion Price") or (ii) seventy-five (75%) percent of
the closing bid price of the Common Stock on November 20, 1998 as reported in
the Nasdaq SmallCap Market System (or $.46) (the "Series G Closing Conversion
Price"). The exact number of shares that will be issued on the conversion of the
Series G 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 Series G
Closing Conversion Price or the Five Day Average Conversion Price.
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
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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.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
This investment involves a high degree of risk. Consider carefully the
risk factors beginning on page 5 in this Prospectus including the risk that the
common stock may be delisted from the Nasdaq SmallCap Market.
THE DATE OF THIS PROSPECTUS IS DECEMBER 15, 1998
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<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.
WHERE YOU CAN GET MORE INFORMATION
At your request, we will provide you, without charge, a copy of any
exhibits to our registration statement incorporated by reference in this
prospectus. If you want more information, write or call us at:
Frederick Brewing Co.
4607 Wedgewood Blvd.
Frederick, Maryland 21703
(Telephone) 301-694-7899
(Toll Free) 1-888-258-7434
(Fax) 301-694-2971
Our fiscal year ends on December 31. We furnish our shareholders annual
reports containing audited financial statements and other appropriate reports.
In addition, we are a reporting company and file annual, quarterly and current
reports, proxy statements and other information with the SEC. You may read and
copy any reports, statements or other information we file at the SEC's public
reference room in Washington D.C. You can request copies of these documents,
upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings are also available to the public on the SEC Internet site
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 Quarterly Report on Form 10-QSB for the
quarter ended September 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.
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.
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<PAGE>
In addition, as permitted by the Maryland General Corporation Law, the
Company's Articles of Incorporation provides that the Company's directors will
not be held personally liable to the Company or its stockholders for monetary
damages for a breach of fiduciary duty as a director except to the extent such
exemption from liability or limitation thereof is not permitted under the
Maryland General Corporation Law. This provision does not eliminate the duty of
care, and injunctive or other forms of non-monetary equitable relief will remain
available under Maryland law. In addition, each director continues to be liable
for monetary damages for (I) misappropriation of any corporate opportunity in
violation of the director's duties, (ii) acts or omissions in bad faith or
involving intentional dishonesty, (iii) knowing violations of law, and (iv) any
transaction from which a director derives an improper personal benefit. The
provision does not affect a director's responsibilities under any other law,
such as the federal securities laws of state or federal environmental laws.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
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<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in
this Prospectus. It is not complete and may not contain all of the information
that is important to you. To understand this offering fully, you should read the
entire Prospectus carefully, including the risk factors and financial
statements.
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.
FREDERICK BREWING CO.
Offices: 4607 Wedgewood Boulevard,
Frederick, Maryland 21703,
telephone number (301) 694-7899,
facsimile number (301) 694-2971.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock Offered by Selling
Stockholders.................................... 4,528,701 shares, comprising 2,850,000 shares based upon the contractual
obligation of the Company under the subscription agreements for the
Series F Preferred Stock to register 57,000 shares of Common Stock for
each $10,000 of stated value of the Series F Preferred Stock sold to the
purchasers thereof for cash (or $500,000 stated value in the aggregate),
1,298,701 shares based upon the shares of Common Stock which would
have been issued on December 1, 1998 upon the conversion of the
$500,000 aggregate stated value of the Series G Preferred Stock at a
conversion price of $.385 per share, 80,000 shares issued in January 1998
in connection with the purchase of certain assets of Brimstone Brewing
Company and 300,000 shares issuable upon exercise of warrants.
Common Stock to be offered by the Company...... 0 shares
Common Stock Outstanding Before Offering (1).... 13,905,393 shares
Common Stock Outstanding After Offering......... 18,434,094 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>
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(1) Based on shares outstanding as of September 30, 1998
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<PAGE>
RISK FACTORS
Investing in the Company's shares in very risky. You should be able to
bear a complete loss of your investment. You should carefully consider the
following factors, among others.
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.
On December 3, 1998, the Board of Directors of the Company decided to
recommend that shareholders of the Company approve a plan to reverse split the
Company's shares of Common Stock by 5:1. Such action would reduce the Company's
current outstanding shares of Common Stock from approximately 14.2 million to
approximately 2.8 million. The Board of Directors recommended this action to the
shareholders of the Company to preserve the listing of the Company's shares of
Common Stock on The Nasdaq SmallCap Market. In addition, the Company has
requested a hearing with Nasdaq to discuss the Company's plans to comply with
the Nasdaq 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 at a 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),
6
<PAGE>
the Company does not expect to operate profitably until at least calendar 1999.
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
("MEDCO") issued $4.5 million in taxable economic development bonds on July 19,
1996, including $1.5 million borrowed by the Company to purchase brewery
equipment for the new brewery (the "FBC Facility") and $3.0 million loaned to a
partnership controlled by affiliates of the Company to construct the brewery
(the Blue II Facility"), and the Company borrowed an additional $976,000 from
Signet Bank, 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. Violation of this
or any other covenant would represent 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. 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 ended 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 has 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 ended March 31, 1998 and each calendar quarter
thereafter. As of September 30, 1998, the Company was in violation of the
current ratio covenant which represents an event of default on the Company's
loan and the Blue II loan. The Company is seeking a waiver from the Bank
relative to this violation.
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 was increased to the prime rate plus 1.25% for the
Company's loan and the prime rate was plus 1.5% for the Blue II loan, and the
Company paid a loan modification fee of $25,000 in two installments of $10,000
and $15,000 on June 30, 1998 and September 30, 1998, respectively. The Company
is responsible for all fees and expenses incurred by the Bank in connection with
preparation of the modification and will 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 fourth quarter of 1998, no
assurance can be given that this will occur. As of September 30, 1998, the
Company's current liabilities exceed its current assets. Management must obtain
an extension on the maturity date of these loans or an alternative financing
arrangement to continue funding its current operations and meet its current
obligations as they came due.
7
<PAGE>
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.
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 nine months ended September 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 nine months ended September 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.
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No Assurance Of Continued Wholesale Distributor Support Competition
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.
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 The include product quality and taste, distribution capabilities, brand
recognition, other 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
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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
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.
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Sales Fluctuations Due to Seasonality
The Company's wholesale distributors have historically experienced
higher sales in the second and fourth quarters of the calendar year due to
increased consumption of the Company's beers during periods of warmer weather
and from Halloween through New Year's Day. Although the Company has not yet
experienced 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.
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.
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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 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.
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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 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.
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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. The 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.
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Anti-takeover 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 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.
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Future Sales Of Common Stock
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.
17
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial and operating data should be read in
conjunction with the Company's financial statements and the notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Annual Report on Form 10-KSB for the
Twelve Months Ended December 31, 1997 (the "Annual Report") and its Quarterly
Reports on Form 10-QSB for the Three Months Ended March 31, 1998, for the Six
Months Ended June 30, 1998 and for the Nine Months Ended September 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 PricewaterhouseCoopers LLP, 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 September 30, 1998 and the statement of operations data
for the six months ended September 30, 1998 and 1997 are derived from unaudited
financial statements included in the September 30, 1998 10-QSB.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------ ----------- --------- -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(unaudited) (unaudited)
(IN THOUSANDS, EXCEPT PER SHARE AND BARREL DATA)
STATEMENT OF OPERATIONS DATA:
Sales................................. $ 4,213 $ 2,214 $ 3,287 $ 1,872 $ 1,832 $ 1,186 $ 106
Excise taxes.......................... 490 305 209 152 87 59 4
Cost of sales......................... 2,851 1,941 2,838 1,743 1,253 847 89
Gross profit (loss)................... 872 (32) 240 (23) 492 280 13
Selling, general and administrative
expenses........................... 2,666 2,664 4,622 2,631 831 485 259
Minority Interest..................... 5 -- -- -- -- -- --
Write-off of net deferred
public relations costs............. 1,089 -- -- -- -- -- --
Loss from operations.................. (2,888) (2,696) (4,382) (2,655) (339) (206) (246)
Interest expense (income), net........ 420 204 140 (29) (79) (52) (11)
Other (income) expense ............... 100 (136) (158) -- 42 5 (1)
(Loss) income before income taxes..... (3,407) (2,764) (4,363) (2,625) (376) (253) (258)
Provision for income taxes............ -- -- -- -- (17) (17) --
Net (loss)............................ (3,407) (2,764) (4,363) (2,625) (359) (270) (258)
Preferred stock dividend
requirements....................... (276) (2,283) (3,612) -- -- -- --
Net loss attributable to Common
Stockholders....................... (3,683) (5,047) (7,975) (2,625) (359) (270) (258)
BASIC AND DILUTED LOSS PER SHARE:
Net loss before Preferred Stock
Dividend Requirements.............. (0.36) (1.23) (1.59) (1.45) (0.30) (0.24) (0.29)
Preferred Stock Dividend
Requirements....................... (0.03) (1.02) (1.32) -- -- -- --
Net loss per Common Share............. (0.39) (2.25) (2.91) (1.45) (0.30) (0.24) (0.29)
Shares used in per share
calculation(1)..................... 9,347 2,239 2,742 1,805 1,205 1,122 887
OPERATING DATA (IN BARRELS)(2):
Barrels sold.......................... 23,800 12,277 17,300 10,910 10,031 6,436 660
Net sales per barrel sold............. $156.42 $155.50 $177.90 $162.32 $173.96 $175.11 $154.55
Gross profit per barrel sold.......... $ 36.63 $ (2.59) $ 13.90 $ 2.47 $ 49.05 $ 43.51 $ 19.70
BALANCE SHEET DATA:
Working Capital (deficit)............. 2,321 1,556 2,373 2 (199) (53) (5)
Total assets.......................... 13,738 11,336 13,401 4,766 1,659 1,316 723
Long-term debt, net of current
portion............................. 940 2,219 4,726 1,683 373 481 315
Stockholders' equity.................. 7,004 4,923 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
September 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.
18
<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 December 14, 1998, the last sale price as reported on NASDAQ was
$.406 per share.
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 14/32 1
September 30, 1998.......................................................... 1 3/32 21/32
</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.
19
<PAGE>
In connection with the Company's private placement of $500,000
aggregate stated value of Series G Preferred Stock and pursuant to the terms of
those certain subscription agreements by and between the Company and each of The
Augustine Fund L.P., Jimmy Dean Douda, Congregation Beth Moredechai and Berktek
Inc., in the event the shares of Common Stock issuable upon conversion of the
Series G Preferred Stock (the "Series G Conversion Shares") are not subject to
an effective registration statement on Form S-3 filed under the Securities Act,
the Company is obligated to file a registration statement on Form S-3 covering
the sale of the Series G Conversion Shares on or before January 19, 1999 and to
use its best efforts to cause such registration statement to become effective on
or before March 20, 1999. In the event (a) the Company does not file a
registration statement under the Securities Act covering the Common Stock
issuable upon conversion of the Series G Preferred Stock within 60 days of
November 20, 1998 (the "Closing Date"), (b) the registration statement is not
declared effective within 120 days of the Closing Date or (c) the Company does
not issue the Series G Conversion Shares in a timely fashion, the conversion
rate for the Series G Preferred Stock shall be adjusted to increase the number
of shares of Common Stock issuable by 5% in each case. The Series G Conversion
Shares are subject to this registration statement.
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 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.
In connection with the Company's private placement of Series G
Preferred Stock, the Company also issued to the placement agent Warrants to
purchase 100,000 shares of Common Stock, of which Warrants to purchase 50,000
shares of Common Stock are exercisable at a price of $.50 per share and Warrants
to purchase 50,000 shares of Common Stock are exercisable at a price of $1.00
per share. All of such Warrants are exercisable for a 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.
The Company is required to register the 80,000 shares of Common Stock
owned by Brimstone Brewing Company ("Brimstone") pursuant to the terms of the
Company's agreement with Brimstone.
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.
20
<PAGE>
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 G
Preferred Stock.
The Company intends to apply the net proceeds of the sale of the Series
F Preferred Stock and the sale of the Series G 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 "Series F 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 aggregate number of Series F 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 Series F Conversion Shares. See "Description of Securities". The conversion
price for a Series F 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 "Series F Closing 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").
The Selling Stockholders whose shares of Common Stock are issuable upon
conversion of the Series G Preferred Stock (the "Series G Conversion Shares")
are The Augustine Fund L.P. ("Augustine"), Mr. Dean Dowda ("Dowda"),
Congregation Beth Mordechai ("CMB") and Berktek, Inc. ("Berktek"). Augustine is
an Illinois limited partnership with a principal place of business at 141 W.
Jackson Boulevard, #2182, Chicago, Illinois 60604. Dowda is an individual with
an address at 1982 Shannon Lane, Apopka, Florida 32703. CMB is a religious
organization with an address at 1074 46th Street, Brooklyn, New York 11219.
Berktek is a New York corporation with a principal place of business at 1654
East 3rd Street, Brooklyn, New York 11230. Neither Augustine, Dowda, CMB nor
Berktek has any affiliation with the Company or its officers, directors,
promoters or principal shareholders.
21
<PAGE>
The aggregate number of Series G 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 G
Preferred Stock, which will be determined by the conversion price applicable to
the Series G Conversion Shares. See "Description of Securities". The conversion
price for a Series G Conversion Share will be the lesser of: (i) seventy (70%)
percent of the average closing bid price of the Common Stock for the five
trading days immediately prior to the conversion date (the "Five Day Average
Conversion Price") or (ii) seventy-five (75%) percent of the closing bid price
of the Common Stock on November 20, 1998 reported in the Nasdaq SmallCap Market
System (or $.46) (the "Series G Closing Conversion Price"). Using a Conversion
Price of $.385, the aggregate number of Series G Conversion Shares issued upon
conversion of the Series G Preferred Stock would be 1,298,701.
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.
This Prospectus also relates to the offer and sale of 100,000 shares of
Common Stock issuable upon exercise of warrants issued to World Capital Funding
Inc. Such warrants were issued on November 20, 1998, with 50,000 of such
warrants exercisable at a price of $.50 per share and 50,000 of such warrants
exercisable at a price of $1.00 per share. Such warrants are exercisable for a
period of three (3) years from the date of issuance.
This Prospectus also relates to the offer and sale of 80,000 shares of
Common Stock held by Brimstone Brewing Company ("Brimstone"). Such shares were
issued to Brimstone in January, 1998 in connection with the Company's purchase
of certain assets from Brimstone.
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 Series F Conversion Shares and Series G
Conversion Shares and the expenses of counsel.
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, (ii) the conversion of the
Series G Preferred Stock into shares of Common Stock, and (iii) 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 upon the contractual obligation of the Company under
the subscription agreements with the purchasers of the Series F Preferred Stock
to register 57,000 shares of Common Stock for each $10,000 of stated value of
the Series F Preferred Stock sold to such purchasers for cash (or $500,000
stated value in the aggregate). 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 Series F Closing Conversion Price and (ii) the Three
Day Average Conversion Price. 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 Series F Closing
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.
22
<PAGE>
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
G Preferred Stock is based upon the shares of Common Stock which would have been
issued on December 1, 1998 upon the conversion of the $500,000 aggregate stated
value of the Series G Preferred Stock at a conversion price of $.385 per share.
The Certificate of Designation for the Series G Preferred Stock provides however
that the actual conversion price to be utilized in connection with the
conversion of the Series G Preferred Stock shall be equal to the lesser of: (i)
the Series G Closing Conversion Price and (ii) the Five Day Average Conversion
Price. The calculation of the total number of shares of Common Stock to be
offered by the holders of the Series G Preferred Stock however is a hypothetical
estimate based upon the shares of Common Stock issuable upon conversion of the
full $500,000 aggregate stated value of the Series G Preferred Stock at a
conversion price of $.385. The actual number of shares issuable upon conversion
of the Series G Preferred Stock cannot be predicted at this time insofar as it
shall be based, among other things, on either the Series G Closing Conversion
Price or the Five 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 G 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
COMMON STOCK SHARES OF COMMON STOCK
BENEFICIALLY COMMON BENEFICIALLY
OWNED PRIOR TO STOCK BEING OWNED AFTER
NAME OFFERING (1) (2) OFFERED OFFERING (3) PERCENT (4)
- --------------------------------------- --------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Austost Anstalt Schaan (5)............. 0 1,425,000 0 0%
Balmore Funds S.A. (6)................. 0 1,425,000 0 0
The Augustine Fund L.P. (7)............ 519,481 519,481 0 0
Dean Dowda (8)......................... 259,740 259,740 0 0
Congregation Beth Mordechai (9)........ 259,740 259,740 0 0
Berktek, Inc. (10)..................... 259,740 259,740 0 0
AIBC Investment Services Corp. (11).... 12,000 12,000 0 0
Hunter Singer (12)..................... 12,000 12,000 0 0
Joseph Donohue (13).................... 10,000 10,000 0 0
Mark Angelo (14)....................... 10,000 10,000 0 0
Max Rockwell (15)...................... 10,000 10,000 0 0
May Davis Group (16)................... 6,000 6,000 0 0
Libra Finance S.A. (17)................ 140,000 140,000 0 0
World Capital Funding Inc. (18)........ 100,000 100,000 0 0
Brimstone Brewing Company.............. 80,000 80,000 0 0
------- ---------- - -
Total 1,678,701 4,528,701 0 0
</TABLE>
* Less than 1%.
(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
(Footnotes continued on next page)
23
<PAGE>
(Footnotes continued from previous page)
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 Series F Closing
Conversion Price or the Three Day Average Conversion Price in the case of the
Series F Preferred Stock, and whether the actual conversion price is based on
the Series G Closing Conversion Price or the Five Day Average Conversion Price,
in the case of the Series G Preferred Stock. See "Description of Securities".
(3) Assumes the sale of all shares offered hereby.
(4) Based upon 18,775,393 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 Series F Closing Conversion
Price or the Three Day Average Conversion Price. The number of shares shown
as being offered in the table is based upon the contractual obligation of
the Company under the subscription agreements with the purchasers of the
Series F Preferred Stock to register 57,000 shares of Common Stock for each
$10,000 of stated value of the Series F Preferred Stock sold to such
purchasers for cash (or $500,000 stated value in the aggregate). The actual
number of shares of Common Stock issued upon conversion of the Series F
Preferred Stock will be based upon the actual conversion price at the time
of conversion. 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 Series F Closing Conversion
Price or the Three Day Average Conversion Price. The number of shares shown
as being offered in the table is based upon the contractual obligation of
the Company under the subscription agreements with the purchasers of the
Series F Preferred Stock to register 57,000 shares of Common Stock for each
$10,000 of stated value of the Series F Preferred Stock sold to such
purchasers for cash (or $500,000 stated value in the aggregate). The actual
number of shares of Common Stock issued upon conversion of the Series F
Preferred Stock will be based upon the actual conversion price at the time
of conversion. 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 outstanding 200 shares of the Series G
Preferred Stock convertible into shares of Common Stock based upon a
conversion price equal to the lesser of the Series G Closing Conversion
Price or the Five Day Average Conversion Price. The number of shares shown
as being offered in the table is a hypothetical amount based upon the
shares of Common Stock issuable upon conversion of such 200 shares of the
Series G Preferred Stock at a conversion price of $.385.
(8) The listed Selling Stockholder holds outstanding 100 shares of the Series G
Preferred Stock convertible into shares of Common Stock based upon a
conversion price equal to the lesser of the Series G Closing Conversion
Price or the Five Day Average Conversion Price. The number of shares shown
as being offered in the table is a hypothetical amount based upon the
shares of Common Stock issuable upon conversion of such 100 shares of the
Series G Preferred Stock at a conversion price of $.385.
(9) The listed Selling Stockholder holds outstanding 100 shares of the Series G
Preferred Stock convertible into shares of Common Stock based upon a
conversion price equal to the lesser of the Series G Closing Conversion
Price or the Five Day Average Conversion Price. The number of shares shown
as being offered in the table is a hypothetical amount based upon the
shares of Common Stock issuable upon conversion of such 100 shares of the
Series G Preferred Stock at a conversion price of $.385.
(Footnotes continued on next page)
24
<PAGE>
(Footnotes continued from previous page)
(10) The listed Selling Stockholder holds outstanding 100 shares of the
Series G Preferred Stock convertible into shares of Common Stock based
upon a conversion price equal to the lesser of the Series G Closing
Conversion Price or the Five Day Average Conversion Price. The number
of shares shown as being offered in the table is a hypothetical amount
based upon the shares of Common Stock issuable upon conversion of such
100 shares of the Series G Preferred Stock at a conversion price of
$.385.
(11) 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.
(12) 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.
(13) 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.
(14) 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.
(Footnotes continued on next page)
25
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(Footnotes continued from previous page)
(15) 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.
(16) 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.
(17) 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.
(18) The listed Selling Stockholder holds Warrants to purchase 100,000
shares of Common Stock which were issued on November 20, 1998, with
50,000 of such warrants exercisable at a price of $.50 per share and
50,000 of such warrants exercisable at a price of $1.00 per share. Such
Warrants are exercisable 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.
26
<PAGE>
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 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, 1,000 shares of Series F Preferred and 500 shares of Series
G 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 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 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. 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. 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. 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 holders of the Series F Preferred have a liquidation preference of
$1,000 per share over the Common Stock. The Series F Preferred is not redeemable
except with the written consent of the holders thereof. The shares of the Series
F Preferred are not entitled to receive dividends unless declared by the
Company.
The holders of the Series G Preferred have a liquidation preference of
$1,000 per share over the Common Stock. The Company has the right to redeem all
of the then outstanding shares of the Series G Preferred at 110% of their
liquidation amount within sixty (60) days of November 20, 1998; provided,
however, that the Series G Preferred is not redeemable except with the written
consent of the holders thereof. The shares of the Series G Preferred are
entitled to receive a dividend of $40.00 per share per annum. Such dividend may
be paid in cash or in shares of Common Stock, at the option of the Company.
27
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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.
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 of Common Stock offered hereby will be
passed upon for the Company by Elias, Matz, Tiernan & Herrick, L.L.P.
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 PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
28
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===============================================================================
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.......................... 3
Indemnification................................. 3
Prospectus Summary.............................. 5
Risk Factors.................................... 6
Selected Financial and Operating Data........... 18
Market Price of Common Stock.................... 19
Registration Rights............................. 19
Use of Proceeds from Sale of Preferred Stock.... 20
Selling Stockholders and Plan of Distribution... 21
Description of Securities....................... 27
Dividend Policy................................. 28
Legal Matters................................... 28
Experts......................................... 28
===============================================================================
<PAGE>
FREDERICK BREWING CO.
PART II
<TABLE>
<CAPTION>
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<S> <C>
Filing fee under the Securities Act of 1933..................................... $ 542.40
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)................................................................ 4,457.60
--------
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, joint venture, trust, other
enterprise, or employee benefit plan.
(2) "Corporation" includes any domestic or foreign predecessor
entity of a corporation in a merger, consolidation, or other
transaction in which the predecessor's existence ceased upon
consummation of the transaction.
(3) "Expenses" include attorney's fees.
(4) "Official capacity" means the following:
(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.
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(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
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<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 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.
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<PAGE>
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> <C> <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)
(vii) -- Articles Supplementary with respect to Series G Convertible Preferred Stock (12)
3(2) -- Amended and Restated Bylaws.(5)
4 -- Stock Certificate.(5)
5 -- Opinion of Elias, Matz, Tiernan & Herrick L.L.P., Counsel (12)
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> <C> <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> <C> <C>
(liii) -- Loan Modification Agreement by and between First Union National Bank and 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)
(lvi) -- Form of Subscription Agreement by and between Purchaser of Series F Preferred Stock and
the Company dated September 3, 1998;(12)
(lvii) -- Contract Brewing Agreement by and between MOJO Highway Brewing Company, LLC and
Frederick Brewing Co. dated June 19, 1998.(11)
(lviii) -- Form of Common Stock Purchase Warrant issued to Warrantholder by the Company dated September 3, 1998 and
November 20, 1998;(12)
(lix) -- Operating Agreement by and between MOJO Highway Brewing Company and Frederick
Brewing Co. dated June 19, 1998.(11)
(1x) -- Form of Subscription Agreement by and between Purchaser of Series G Preferred Stock and
the Company dated November 20, 1998 (12)
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 Elias, Matz, Tiernan & Herrick L.L.P., Counsel (12)
-- (ii) Consent of PricewaterhouseCoopers L.L.P., independent accountants.(12)
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.
(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.
* Management contract or compensatory plan or agreement.
II-8
<PAGE>
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 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.
II-9
<PAGE>
(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 DECEMBER 15, 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 DECEMBER 15, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ Kevin E. Brannon Chairman, and Chief Executive Officer December 15, 1998
- -------------------------------------- (principal executive officer) and Director
Kevin E. Brannon
/s/ Leslie Harper Chief Financial Officer December 15, 1998
- -------------------------------------- (principal accounting and financial officer)
Leslie Harper
/s/ Marjorie A. McGinnis President and Director December 15, 1998
- --------------------------------------
Marjorie A. McGinnis
/s/ Nicholas P. Foris, M.D. Director December 15, 1998
- --------------------------------------
Nicholas P. Foris, M.D.
/s/ Carl R. Hildebrand Director December 15, 1998
- --------------------------------------
Carl R. Hildebrand
/s/ Jerome M. Pool Director December 15, 1998
- --------------------------------------
Jerome M. Pool
/s/ Maribeth Visco Secretary and Director December 15, 1998
- --------------------------------------
Maribeth Visco
</TABLE>
II-11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <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)
(vii) -- Articles Supplementary with respect to Series G Convertible Preferred Stock (12)
3(2) -- Amended and Restated Bylaws.(5)
4 -- Stock Certificate.(5)
5 -- Opinion of Elias, Matz, Tiernan & Herrick L.L.P., Counsel (12)
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-12
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <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-13
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(liii) -- Loan Modification Agreement by and between First Union National Bank and 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)
(lvi) -- Form of Subscription Agreement by and between Purchaser of Series F Preferred Stock and
the Company dated September 3, 1998;(12)
(lvii) -- Contract Brewing Agreement by and between MOJO Highway Brewing Company, LLC and Frederick Brewing Co.
dated June 19, 1998.(11)
(lviii) -- Form of Common Stock Purchase Warrant issued to Warrantholder by the Company dated September 3, 1998
and November 20, 1998;(12)
(lix) -- Operating Agreement by and between MOJO Highway Brewing Company and Frederick Brewing Co. dated June 19,
1998.(11)
(1x) -- Form of Subscription Agreement by and between Purchaser of Series G Preferred Stock and the Company
dated November 20, 1998 (12)
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 Elias, Matz, Tiernan & Herrick L.L.P., Counsel (12)
-- (ii) Consent of PricewaterhouseCoopers L.L.P., independent accountants.(12)
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.
(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.
II-14
EXHIBIT 3(1)(vi)
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 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
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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.
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
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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 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
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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:
(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.
(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
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<PAGE>
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:
(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.
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(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 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.
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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.
9
EXHIBIT 3(1)(vii)
ARTICLES SUPPLEMENTARY
Kevin E. Brannon and Marjorie McGinnis certify that they are the
Chairman and Assistant Secretary, respectively, of Frederick Brewing Co., a
Maryland corporation (hereinafter referred to as the "Corporation" or the
"Company"); that, pursuant to the Articles of Incorporation, as amended, and
Section 2-208 of the Maryland General Corporation Law, the Board of Directors of
the Corporation adopted the following resolutions on November 4, 1998; and that
none of the Series G Convertible Preferred Stock referred to in these Articles
Supplementary has been issued.
1. Creation of Series G Convertible Preferred Stock. There is hereby
created a series of preferred stock consisting of 750 shares and designated as
the Series G Convertible Preferred Stock, having the voting powers, preferences,
relative, participating, limitations, qualifications optional and other special
rights and the qualifications, limitations and restrictions thereof that are set
forth below.
2. Dividend Provisions. The holders of shares of Series G Convertible
Preferred Stock shall be entitled to receive, a 4% annual dividend, equal in
value to $40.00 per share, payable on each July 1 commencing on July 1, 1998 on
conversion pro rata based on a 360-day year. In the option of the Corporation,
such dividend may be paid in cash or in Common Stock valued at the Conversion
Rate in effect as of such July 1 or the Conversion Date. Each share of Series G
Convertible Preferred Stock shall rank in a parity with each other share of
Series G Convertible Preferred Stock with respect to dividends.
3. Redemption Provisions. The Company shall have the right to redeem
all of the then outstanding shares at 110% of their liquidation amount of Series
G Convertible Preferred Stock within 60 days of the Closing Date (as defined
below) (herein, the "Redemption Period"), upon five (5) days written notice to
the holders thereof. The Series G Convertible Preferred Stock is not redeemable
except with the written consent of the holders thereof.
4. Liquidations Provisions. In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the Series G Convertible Preferred Stock shall be entitled to receive an amount
equal to $1,000.00 per share. After the full preferential liquidation amount has
been paid to, or determined and set apart for the Series G Convertible Preferred
Stock and all other series of Preferred Stock hereafter authorized and issued,
if any, the remaining assets of the Corporation available for distribution to
shareholders shall be distributed ratably to the holders of the common stock. In
the event the assets of the Corporation available for distribution to its
shareholders are insufficient to pay the full preferential liquidation amount
per share required to be paid the Corporation's Series G Convertible Preferred
Stock, the entire amount of assets of the Corporation available for distribution
to shareholders shall be paid up to their respective full liquidation amounts
first to the Series G Convertible Preferred Stock, then to any other series of
Preferred Stock hereafter authorized and issued, all of which amounts shall be
distributed ratably among holders of each such series of Preferred Stock, and
common stock shall receive nothing. A reorganization or any other consolidation
or merger of the Corporation with or into any other corporation, or any other
sale of all or substantially all of the assets of the Corporation, shall not be
deemed to be a liquidation, dissolution or winding up of the Corporation within
the meaning of this Section 4, and the Series G Convertible Preferred Stock
shall be entitled only to (i) the right provided in any agreement or plan
governing the reorganization or other consolidation, merger or sale of assets
transaction, (ii) the rights contained in the Maryland General Corporation Law
and (iii) the rights contained in other Sections hereof.
<PAGE>
5. Conversion Provisions. The holders of shares of Series G Convertible
Preferred Stock shall have conversion rights as follows (the "Conversion
Rights"):
(a) Right to Convert.
(1) Each share of Series G Convertible Preferred
Stock (the "Preferred Shares") shall be convertible, at the option of its
holder, at any time following the expiration of the Redemption Period (as
defined above), into a number of shares of common stock of the Company (the
"Common Stock") at the initial conversion rate (the "Conversion Rate") defined
below. The initial Conversion Rate, subject to the adjustments described below,
shall be a number of shares of Common Stock equal to $1,000 divided by the lower
of (i) Seventy Percent (70%) of the average Market Price of the Common Stock for
the five trading days immediately prior to the Conversion Date (defined below)
or (ii) 75% on day of first closing, increased proportionally for any reverse
stock split and decreased proportionally for any forward stock split or stock
dividend. For purposes of this Section 5(a)(1), Market Price for any date shall
be the closing bid price of the Common Stock on such date, as reported by the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"), or the closing bid price in the over-the-counter market if other
than Nasdaq.
(2) No fractional shares of Common Stock shall be
issued upon conversion of the Preferred Shares, and in lieu thereof the number
of shares of Common Stock issuable for each Preferred Share converted shall be
rounded to the nearest whole number. Such number of whole shares of Common Stock
issuable upon the conversion of one Preferred Share shall be multiplied by the
number of Preferred Shares submitted for conversion pursuant to the Notice of
Conversion (defined below) to determine the total number of shares of Common
Stock issuable in connection with any conversion.
(3) In order to convert the Preferred Shares into
shares of Common Stock, the holder of the Preferred Shares shall: (i) complete,
execute and deliver to the Corporation the conversion certificate attached
hereto as Exhibit A (the "Notice of Conversion"); and (ii) surrender the
certificate or certificates representing the Preferred Shares being converted
(the "Converted Certificate") to the Corporation. The Notice of Conversion shall
be effective and in full force and effect if delivered to the Corporation by
facsimile transmission at (301) 694-2971. Provided that a copy of the Notice of
Conversion is delivered to the Corporation on such date by facsimile
transmission or otherwise, and provided that the original Notice of Conversion
and the Converted Certificate are delivered to the Corporation within three (3)
business days thereafter at 4607 Wedgewood Boulevard, Frederick, Maryland 21703,
the date on which notice of conversion is given (the "Conversion Date") shall be
deemed to be the date set forth therefor in the Notice of Conversion; and the
person or persons entitled to receive the shares of Common stock issuable upon
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock as of the Conversion Date. If the original Notice of
Conversion and the Converted Certificate are not delivered to the Corporation
within three (3) business days following the Conversion Date, the Notice of
Conversion shall become null and void as if it were never given and the
Corporation shall, within two (2) business days thereafter, return to the holder
by overnight courier any Converted Certificate that may have been submitted in
connection with any such conversion. In the event that any Converted Certificate
submitted represents a number of Preferred Shares that is greater than the
number of such shares that is being converted pursuant to the Notice of
Conversion delivered in connection therewith, the Corporation shall deliver,
together with the certificates for the shares of Common Stock issuable upon such
conversion as provided herein, a certificate representing the remaining number
of Preferred Shares not converted.
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(4) Upon receipt of a Notice of Conversion, the
Corporation shall absolutely and unconditionally be obligated to cause a
certificate of certificates representing the number of shares of Common Stock to
which a converting holder of Preferred Shares shall be entitled as provided
herein, which shares shall constitute fully paid and nonassessable shares of
Common Stock that are freely transferable on the books and records of the
Corporation and its transfer agents, to be issued to, delivered by overnight
courier to, and received by such holder by the fifth (5th) calendar day
following the Conversion Date. Such delivery shall be made at such address as
such holder may designate therefor in its Notice of Conversion or in its written
instructions submitted together therewith.
(5) No less than 25 shares of Series G Convertible
Preferred Stock may be converted at any one time, unless the holder then holds
less than 25 shares and converts all shares at that time.
(b) Adjustments to Conversion Rate.
(1) Reclassification, Exchange and Substitution. If
the Common Stock issuable on conversion of the Series G Convertible Preferred
Stock shall be changed into the same or a different number of shares of any
other class or classes of stock, whether by capital reorganization,
reclassification, reverse stock split or forward stock split or stock dividend
or otherwise (other than a subdivision or combination of shares provided for
above), the holders of the Series G Convertible Preferred Stock shall, upon its
conversion, be entitled to receive, in lieu of the Common Stock which the
holders would have become entitled to receive but for such change, a number of
shares of such other class or classes of stock that would have been subject to
receipt by the holders if they had exercised their rights of conversion of the
Series G Convertible Preferred Stock immediately before that change.
(2) Reorganizations, Mergers, Consolidations or Sale
of Assets. If at any time there shall be a capital reorganization of the
Corporation's common stock (other than a subdivision, combination,
reclassification or exchange of shares provided for elsewhere in this Section 5)
or merger of the Corporation into another corporation, or the sale of the
Corporation's properties and assets as, or substantially as, an entirety to any
other person, then, as a part of such reorganization, merger or sale, lawful
provision shall be made so that the holders of the Series G Convertible
Preferred Stock shall thereafter be entitled to receive upon conversion of the
Series G Convertible Preferred Stock, the number of shares of stock or other
securities or property of the Corporation, or of the successor corporation
resulting from such merger, to which holders of the Common Stock deliverable
upon conversion of the Series G Convertible Preferred Stock would have been
entitled on such capital reorganization, merger or sale if the Series G
Convertible Preferred Stock had been converted immediately before that capital
reorganization, merger or sale to the end that the provisions of this paragraph
(b)(2) (including adjustment of the Conversion Rate then in effect and number of
shares purchasable upon conversion of the Series G Convertible Preferred Stock)
shall be applicable after that event as nearly equivalently as may be
practicable.
(3) Additional Shares. In the event (a) the Company
does not file a registration statement under the Securities Act of 1933 covering
the Common Stock issuable upon conversion of the Series G Convertible Preferred
Stock within 60 days of November 20, 1998 (the "Closing Date"), (b) the
registration statement is not declared effective within 120 days of the Closing
Date or (c) the Company does not issue the Common Shares within the time limits
set forth in the penultimate sentence of Section 5(a)(1), the Conversion Rate
shall be adjusted to increase the number of shares of common stock assessable by
5%. The foregoing adjustments are cumulative and not exclusive of each other,
with the intent that the adjustments under this section 3(b)(3) may be a total
of 5%, 10% or 15%.
(c) No Impairment. The Corporation will not, by amendment
of its Articles of Incorporation or through any reorganization,
recapitalization, transfer of assets, merger, dissolution, or any
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<PAGE>
other voluntary action, avoid or seek to avoid the observance of performance of
any of the terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series G Convertible Preferred Stock against impairment.
(d) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Rate for any shares of Series G
Convertible Preferred Stock, the Corporation at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each holder of Series G Convertible Preferred Stock
effected thereby a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
Series G Convertible Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (i) such adjustments and readjustments,
(ii) the Conversion Rate at the time in effect, and (iii) the number of shares
of Common Stock and the amount, if any, of other property which at the time
would be received upon the conversion of such holder's shares of Series G
Convertible Preferred Stock.
(e) Notices of Record Date. In the event of the establishment
by the Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, the Corporation
shall mail to each holder of Series G Preferred Stock at least twenty (20) days
prior to the date specified therein, a notice specifying the date on which any
such record is to be taken for the purpose of such dividend or distribution and
the amount and character of such dividend or distribution.
(f) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of the Series G Convertible Preferred Stock such number
of its shares of Common Stock as shall from time to time be sufficient, based on
the Conversion Rate then in effect, to effect the conversion of all then
outstanding shares of the Series G Preferred Stock. If at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of the Preferred Stock, then, in
addition to all rights, claims and damages to which the holders of the Series G
Convertible Preferred Stock shall be entitled to receive at law or in equity as
a result of such failure by the Corporation to fulfill its obligation to the
holders hereunder, the Corporation will take any and all corporate or other
action as may, in the opinion of it counsel, be helpful, appropriate or
necessary to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purpose.
(g) Notices. Any notices required by the provisions hereof to
be given to the holders of shares of Series G Convertible Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid and
return receipt requested, and addressed to each holder of record at its address
appearing on the books of the Corporation or to such other address of such
holder or its representative as such holder may direct.
6. Voting Provisions. Except as otherwise expressly provided or
required by law, the Series G Convertible Preferred Stock shall have no voting
rights.
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IN WITNESS WHEREOF, the Company has caused this Articles Supplementary
of Series G Convertible Preferred Stock to be duly executed by its Chairman and
attested to by its Assistant Secretary this 11th day of November, 1998, who, by
signing their names hereto, acknowledge that these Articles Supplementary are
the act of the Company and state to the best of their knowledge information and
belief, under the penalties of perjury, that the above matters and facts are
true in all material respects.
FREDERICK BREWING CO.
---------------------------
Kevin E. Brannon, Chairman
---------------------------
Marjorie A. McGinnis
5
EXHIBIT 10 (1vi)
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 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
<PAGE>
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 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,
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<PAGE>
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 similar-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
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 be duly and validly issued, fully paid and
nonassessable, and if registered pursuant to the 1933 Act, free trading and
unrestricted;
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<PAGE>
(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 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
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<PAGE>
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 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
5
<PAGE>
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.
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 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
6
<PAGE>
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.
(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 Indemnifications.
(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.
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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 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 Preferred 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 canceled
and no longer outstanding, and if the 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
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<PAGE>
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.
(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.
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<PAGE>
(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-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 Seller's intended
method of disposition set forth in such registration statement for such period;
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<PAGE>
(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.
(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
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<PAGE>
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
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
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<PAGE>
case if and 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 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 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.
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(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 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 of modification, 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 other by notice duly made under this Section: (i) if to the Company, to
Frederick Brewing Co., 4607 Wedgewood Boulevard, Frederick, MD
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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 injunction or
injunctions to prevent or cure breaches of the provisions of this Agreement and
to enforce specifically the terms and provisions hereof or thereof, 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.
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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
By:_____________________________
Thomas Hackl
Director
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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
Fax: 011-411-201-6262
By:__________________________
Francois Morax
Director
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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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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 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.
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<PAGE>
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 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
2
<PAGE>
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 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 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
<PAGE>
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 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
4
<PAGE>
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.
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 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.
5
<PAGE>
IN WITNESS WHEREOF, the Company has executed this Warrant under seal as
of the date first written above.
FREDERICK BREWING CO.
By:___________________________________
Title:________________________________
Witness:
6
<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)
7
<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.
Percentage Number
Transferees 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: ________________________________
[TRANSFEREE] (address)
_______________________________
(Name)
8
EXHIBIT 10(lx)
U.S. SUBSCRIPTION AGREEMENT
THIS U.S. SUBSCRIPTION AGREEMENT IS EXECUTED IN RELIANCE UPON THE
EXEMPTION PROVIDED BY SECTION 4(2) ("SECTION 4(2)") FOR TRANSACTIONS NOT
INVOLVING ANY PUBLIC OFFERING UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(the "SECURITIES ACT").
--------------------------
THIS U.S. SUBSCRIPTION AGREEMENT (this "Agreement") has been executed
by the undersigned in connection with the private placement of up to a maximum
of 500 shares of Series G Convertible Preferred Stock, par value $.01
(hereinafter referred to as the "Preferred Stock"), of Frederick Brewing Co., a
corporation organized under the laws of the State of Maryland, Nasdaq SmallCap
Market symbol "BLUE") (hereinafter referred to as the "Company"). The Preferred
Stock being sold pursuant to this Agreement has not been registered under the
Securities Act. In addition to such other terms as are set forth in this
Agreement, the terms on which the Preferred Stock may be converted into shares
of Common Stock, $.00004 par value, of the Company (the "Common Stock") and the
other terms of the Preferred Stock are set forth in the Articles Supplementary
of the Preferred Stock attached hereto as Annex I (the "Articles
Supplementary"). The offer of the Preferred Stock and, if this Subscription
Agreement is accepted by the Company, the sale of Preferred Stock is being made
in reliance upon Section 4(2). (All dollar amounts in this Agreement are
expressed in U.S. Dollars.)
The undersigned Purchaser
NAME:________________________________________________________________
ADDRESS______________________________________________________________
- -----------------------------------------------------------------------------
if applicable, a [Corporate] [Partnership] [Trusts] organized under the laws of
______________, a non USA Jurisdiction] hereinafter referred to as "Purchaser")
hereby represents and warrants to, and agrees with the Company as follows:
1. Agreement to Subscribe
a. Subscription. The undersigned Purchaser hereby
subscribes to purchase_____________ shares of
Preferred Stock, having a purchase price of $1,000
per share of Preferred Stock, at an aggregate
purchase price of $_____________.
b. Form of Payment. Purchaser shall pay the purchase
price for the Preferred Stock by delivering good
funds in United States Dollars in accordance with
Paragraph 1(c) below, to the Company.
<PAGE>
c. Method of Payment. Payment of the purchase price for
the Preferred Stock shall be made by wire transfer of
funds directly to the Company, upon which the Company
shall deliver the certificates for the shares of
Preferred Stock to the Purchaser (the "Closing
Date"). Such delivery to the Purchaser shall be by
hand delivery or by overnight courier to such address
as the Purchaser may direct.
2. Purchaser Representations: Access to Information; Independent
Investigation
a. Purchaser Representations and Warranties. Purchaser
represents and warrants to the Company as follows:
(i) Purchaser is either an "accredited
investor" or a "sophisticated
purchaser" as such terms are defined
in Rule 501 promulgated under the
Securities Act.
(ii) Purchaser is sufficiently
experienced in financial and
business matters to be capable of
evaluating the merits and risks of
its investments, and to make an
informed decision relating thereto,
and to protect its own interests in
connection with the transaction.
(iii) Purchaser is purchasing the
Preferred Stock for its own account
or for the account of beneficiaries
for whom the Purchaser has full
investment discretion, each of which
beneficiaries is bound to all of the
terms and provisions hereof
including all representations and
warranties herein. Purchaser is
purchasing the Preferred Stock for
investment purposes only and not
with an intent towards further sale
or distribution thereof, and has not
pre-arranged any sale with any other
purchaser.
(iv) The Preferred Stock has not been
registered under the Securities Act
and may not be transferred, sold,
assigned, hypothecated or otherwise
disposed of, unless such transaction
is the subject of a registration
statement filed with and declared
effective by the Securities and
Exchange Commission (the "SEC") or
unless an exemption from the
registration requirements under the
Securities Act such as Rule 144 is
available. Purchaser represents and
warrants and hereby agrees that all
offers and sales of the Preferred
Stock and the Common Stock issuable
upon conversation thereof
(collectively, the "Securities")
shall be made only pursuant to such
registration or to such exemption
from registration.
2
<PAGE>
No later than 60 days after the
Closing Date, the Company shall file
a registration statement on Form S-3
under the Securities Act and under
all applicable Blue Sky laws
covering the Common Stock and to
cause such registration statement to
be declared effective, by
acceleration, within 120 days
thereafter, by the SEC, all at the
Company's sole cost and expense.
Such best efforts shall include
promptly responding to all comments
received by the staff of the SEC,
providing Purchaser or its counsel
with contemporaneous copies of all
written communications form the
staff of the SEC and promptly
preparing and filing amendments to
such registration statement which
are responsive to the comments
received from the staff of the SEC.
Such registration statement shall
name Purchaser as a selling
shareholder and shall provide for
the sale of the Common Stock by
Purchaser or in the-over-the-counter
market through or to securities
brokers or dealers that may receive
compensation in the form of
discounts, concessions, or
commissions. This obligation to
register the Common Stock is in
addition to the Company's
registration obligation described in
Section 10 hereunder. None of the
foregoing shall in any way limit
Purchaser's rights to sell the
Common Stock in reliance on an
exemption from the registration
requirements under the Securities
Act in connection with a particular
transaction.
In the event the Company either (a)
fails to file a registration
statement covering the Common Stock
issuable upon conversion of the
Preferred Stock, within 60 days of
the first Closing Date or (b) fails
to have such registration statement
declared effective by the Securities
and Exchange Commission within 120
days of the first Closing Date, the
Conversion Price shall be increased,
in each case as liquidated damages
and not as a penalty, to give the
Holder upon conversion additional
shares of common stock equal to 5%
of the shares that would otherwise
be issuable for each violation of
the foregoing covenants.
Regardless of whether the Company
registers the resale of the Common
Stock issuable upon conversion of
the Preferred Stock, the Company
will, upon the presentation of an
opinion of the Purchaser's counsel,
allow the Purchaser to offer and
sell the shares of Common Stock in
reliance on the provisions of Rule
144, at the option of Purchaser.
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<PAGE>
(v) Purchaser acknowledges that the
purchase of the Securities involves
a high degree of risk, is aware of
the risks and further acknowledges
that it can bear the economic risk
of the Securities, including the
total loss of its investment.
(vi) Purchaser understands that the
Securities are being offered and
sold to it reliance on an exemption
from the registration requirements
of the Securities Act, and that the
Company is relying upon the truth
and accuracy of the representations,
warranties, agreements,
acknowledgments and understandings
of Purchaser set forth herein in
order to determine the applicability
of such safe harbor and the
suitability of Purchaser to acquire
the Securities.
(vii) Purchaser is purchasing the
Securities for its own account or
for the account of beneficiaries for
whom Purchaser has full investment
discretion and not with a view to,
or for sale in connection with, any
"distribution" (as such term is used
in Section 2(11) of the Securities
Act) thereof.
(viii) In evaluating its investment,
Purchaser has consulted its own
investment and/or legal and/or tax
advisors.
(ix) Purchaser is not an underwriter or,
or dealer in, the Securities, and
Purchaser is not participation,
pursuant to a contractual agreement,
in the distribution of the
Securities.
b. Current Public Information. Purchaser
acknowledges that Purchaser has been
furnished with or has acquired copies of the
Company's most recent annual Report on the
Form 10-K or 10-KSB filed with the
Securities and Exchange Commission and the
Forms 10-Q or 10- QSB and 8-K filed
thereafter (collectively the "SEC Filings").
c. Independent Investigation; Access. Purchaser
acknowledges that Purchaser, in making the
decision to purchase the Preferred Stock
subscribed for, has relied upon independent
investigations made by it and its purchaser
representatives, if any, and Purchaser and
such representatives, if any, have prior to
any sale to it, been given access and the
opportunity to examine all material
contracts and documents relating to this
offering and an opportunity to ask questions
of, and to receive answers from, the Company
or any person acting on its behalf
concerning the terms and conditions of this
offering. Purchaser and its advisors, if
any, have been furnished with access to all
publicly available materials relating to the
business, finances and operation of the
Company and materials relating to the offer
and sale of the Securities which have been
requested. Purchaser and its advisors, if
any, have received complete and satisfactory
answers to any such inquiries.
F:\WP\FREDERIC\REGNOV98.WPD
4
<PAGE>
d. No Government Recommendation or Approval.
Purchaser understands that no federal or
state agency has passed on or made any
recommendation or endorsement of the
Preferred Stock.
e. Entity Purchasers. If Purchaser is a
partnership, corporation or trust, the
person executing this Agreement on its
behalf represents and warrants that:
(i) He or she has made due inquiry to
determine the truthfulness of the
representations and warranties made
pursuant to this Agreement.
(ii) He or she is duly authorized (if the
undersigned is a trust, by the trust
agreement) to make this investment
and to enter into and execute this
Agreement on behalf of such entity.
f. Non-Affiliate. Purchaser and any affiliate
of Purchaser represent, warrant and covenant
that they are not an affiliate of the
Company.
3. Issuer Representations
a. Reporting Company Status. The Company is a
"Reporting Issuer". The Company is in full
compliance, to the extent applicable, with
all reporting obligations under either
Section 12(b), 12(g), 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended
(the "Exchange Act"). The Company has
registered its Common Stock pursuant to
Section 12 of the Exchange Act, and the
Common Stock is listed on the Nasdaq
SmallCap Market, and the Company has
received no notice, either oral or written,
with respect to its continued eligibility
for such listing other than as disclosed to
Purchaser. The Company has taken all such
steps as may be necessary for the additional
listing of the Common Stock issuable upon
conversion of the Preferred Stock on the
Nasdaq SmallCap Market. The Company has
filed all material required to be filed by
it pursuant to all applicable reporting
obligations under Section 13(a) or 15(d) of
the Exchange Act.
5
<PAGE>
b. Terms of Preferred Stock. The Terms of the
Preferred Stock shall be as set forth in the
form of Articles Supplementary delivered to
Purchaser as Annex I.
c. Legality. The Company has the requisite
corporate power and authority to enter into
this Agreement and to issue, sell and
deliver the Securities; this Agreement and
the issuance, sale and delivery of the
Securities hereunder and the transactions
contemplated hereby have been duly and
validly authorized by all necessary
corporate action by the Company; this
Agreement and the Securities have been duly
and validly executed and delivered by and on
behalf of the Company, and are valid and
binding agreements of the Company,
enforceable in accordance with their
respective terms, except as enforceability
may be limited by general equitable
principles, bankruptcy, insolvency,
fraudulent conveyance, reorganization,
moratorium, or other laws affecting
creditors' rights generally. The Preferred
Stock and the Common Stock issuable upon
conversion of the Preferred Stock will not
subject the holders thereof to personal
liability by reason of being such holders.
d. Proper Organization. The Company is a
corporation duly organized, validly existing
and in good standing under the laws of its
jurisdiction of incorporation and is duly
qualified as a foreign corporation in all
jurisdictions where the failure to be so
qualified would have a materially adverse
effect on its business, taken as whole.
e. No Legal Proceedings. There is no action,
suit or proceeding before or by any court or
any governmental agency or body, domestic or
foreign, now pending or, to the knowledge of
the Company, threatened, against or
affecting the Company, or any of its
properties or assets, which might result in
any material adverse change in the condition
(financial or otherwise) or in the earnings,
business affairs of business prospects of
the Company, or which might materially and
adversely affect the properties or assets
thereof, except as described in the SEC
Filings.
f. Non-default. The Company, except as
described in the SEC Filings, is not in
default in the performance or observance of
any material obligation, agreement, covenant
or condition contained in any indenture,
mortgage, deed of trust or other material
instrument or agreement to which it is a
party or by which it or its property may be
bound.
6
<PAGE>
g. No Misleading Statements. None of the SEC
Filings, and as of their respective dates,
none of the Company's other filings with the
SEC, contain any untrue statement of a
material fact or omit to state any material
fact required to be stated therein or
necessary to make the statements therein, in
light of the circumstances under which they
were made, not misleading.
h. No Adverse Change. There has been no
material adverse change in the financial
condition, earnings, business affairs or
business prospects of the Company since the
date of the Company's most recent Form 10-Q
filed pursuant to the Exchange Act.
i. Absence of Non-Disclosed Facts. There is no
fact known to the Company (other than
general economic conditions known to the
public generally) that has not been
disclosed in writing to the Purchaser that:
(i) could reasonably be expected to have a
material adverse effect on the condition
(financial or otherwise) or in the earnings,
business affairs, business prospects,
properties or assets of the Company; or (ii)
could reasonably be expected to materially
and adversely affect the ability of the
Company to perform its obligations pursuant
to this Agreement and the Preferred Stock,
except as described in the SEC Filings.
j. Transfer Restrictions. The Company has
provided its Transfer Agent with irrevocable
instructions as attached hereto as Annex II
(the "Irrevocable Instructions"), to issue
one or more certificate(s) representing the
shares of Common Stock to the holders of the
Preferred Stock upon the conversion of the
Preferred Stock at any time after the
Closing Date without any restrictive legend
or stop transfer instructions and without
any further instruction or opinion from the
Company, provided that the Company is
presented with certificates representing
shares of the Preferred Stock to be
converted, together with an executed
Conversion Certificate in the form of
Exhibit A attached to the Articles
Supplementary, and provided further that the
Common Stock is being sold pursuant to the
registration statement on Form S-3 as set
forth in Paragraph 2(a) (iv) of this
Agreement. Upon compliance with the
foregoing, upon issuance, such Common Stock
shall be freely transferrable on the books
and records of the Company.
k. Non-Contravention. The execution and
delivery of this Agreement and the
consummation of the issuance of the
Securities and the transactions contemplated
by this Agreement do not and will not
conflict with or result in a breach by the
Company of any of the terms or provisions
of, or constitute a default under the
Articles of Incorporation or by-laws of the
Company, or any indenture, mortgage, deed of
trust, or other material agreement or
instrument to
7
<PAGE>
which the Company is a party or by which it
or any of its properties or assets are
bound, or any existing applicable Federal or
State law, rule, or regulation or any
applicable decrees, judgment or order of any
court, Federal or State regulatory body,
administrative agency or other domestic
governmental body having jurisdiction over
the Company or any of its properties or
assets.
l. Filings. The Company undertakes and agrees
pursuant to the sale hereunder of its
Securities hereunder to make all necessary
filings in connection with the sale of its
Securities as required by the laws and
regulations of all appropriate jurisdictions
and securities exchanges in the United
States, if any.
4. Covenants of the Company. For so long as any Preferred
Stock held by the Purchaser shall remain outstanding, the Company covenants and
agrees with the Purchaser that:
a. It will at all times fully reserve from its
authorized but unissued shares of Common
Stock such sufficient number of shares of
Common Stock to permit he conversion in full
of the outstanding Preferred Stock.
b. Upon receipt by the Company of the items set
forth in Paragraph 3(1) of this Agreement,
the Company will not issue stop transfer
instructions to its Transfer Agent with
respect to, and will not place a restrictive
legend on, the certificates representing
shares of Common Stock issued or issuable
upon conversion of the Preferred Stock.
5. Legend.
a. On or prior to the Closing Date, the Company
will prepare and issue on or more
certificates for the Preferred Stock
registered in such name or names as
specified by the Purchaser and cause the
same to be delivered to the Escrow Agent.
Such certificate(s) and the certificates
representing the Common Stock shall bear a
legend in substantially the following form:
These shares have been issued pursuant to
the Section 4(2) exemption to the
registration provisions under the Securities
Act of 1933, as amended. These shares cannot
be transferred, offered, or sold unless the
securities are registered under the
Securities Act or an exemption from the
registration requirements of the Securities
Act is available.
8
<PAGE>
The Company has provided its Transfer Agent
with the Irrevocable Instructions and
pursuant a thereto the Company shall issue
one or more certificates representing shares
of Common Stock upon the conversion of the
Preferred Stock in accordance with the
Articles Supplementary.
The Company warrants that no restriction or
instruction other than the foregoing
instructions and a corresponding "stop
transfer" restriction on the Company's stock
ledger will be imposed by the Company or
given by the Company to its Transfer Agent
with respect to the Securities, and that,
subject to the foregoing, the Preferred
Stock and the Common Stock issued and
issuable upon conversion of the Preferred
Stock shall otherwise be freely transferable
on the books and records of the Company.
Nothing in this Section shall affect in any
way the Purchaser's obligations and
agreement to comply with all applicable
securities laws upon resale of the
Securities.
b. The Purchaser acknowledges that the Company
is under no obligation to register the
Preferred Stock or the Common Stock issuable
upon the conversion thereof under the
Securities Act other than as set forth in
Section 10 or Paragraph 2(a)(iv) hereunder.
6. Exemption: Reliance on Section 4(2). Purchaser understands
that the offer and sale of the Preferred Stock is not being registered under the
Securities Act based on the exemption from registration provided by Section 4(2)
of the Securities Act. The Company is relying on such exemption.
7. Closing Date and Escrow Agent Closing shall be effected
through delivery of funds to the Company by the Escrow Agent, and delivery of
certificates evidencing the Preferred Stock to the Purchaser by the Escrow
Agent. Each of the Company and the Purchaser agrees that the Escrow Agent has no
liability as a result of any fraudulent or unlawful conduct of any other party,
and agrees to hold the Escrow Agent harmless.
8. Conditions to the Company's Obligation to Sell. Purchaser
understands that the Company's obligation to sell the Preferred Stock is
conditioned upon:
a. The receipt and acceptance by the Company of
this Agreement, as evidence by execution of
this Agreement by the President or any Vice
President or the Chief Financial Officer of
the Company;
b. Delivery to the Escrow Agent by Purchaser of
good funds as payment in full for the
purchase of the Preferred Stock; and
c. The accuracy as of the Closing Date of the
representations and warranties of the
Purchaser contained in this Agreement, and
performance by the Purchaser of all
covenants and agreements of the Purchaser
required to be performed on or before the
Closing Date.
9
<PAGE>
9. Conditions to Purchaser's Obligation to Purchase. The
Company understands that Purchaser's obligation to purchase the Preferred Stock
is conditioned upon:
a. Execution by Purchaser of this Agreement and
the receipt of the Company's acceptance of
this Agreement as provided in Paragraph 8(a)
above;
b. Delivery of certificates evidencing the
Preferred Stock to the Escrow Agent, as
heretofore set forth, and by the Escrow
Agent to Purchaser;
c. Acceptance by the Company of subscriptions
from the Purchaser and other subscribers and
the sale by the Company pursuant thereto of
a maximum of 500 shares of Preferred Stock;
d. The accuracy as of the Closing Date of the
representations and warranties of the
Company contained in this Agreement and the
performance by the Company on or before the
Closing Date of all covenants and agreements
of the Company required to be performed on
or before the Closing Date; and
e. The filing of the Articles Supplementary
attached hereto as Annex I with the
Secretary of State of the State of Maryland
on or before the Closing Date; and
10. Registration of the Securities. The Company hereby agrees
that in the event that the shares of Common Stock issuable upon conversion of
the Preferred Stock are not subject to an effective Registration Statement on
Form S-3 filed under the Securities Act, the Company shall promptly and
expeditiously file within 60 days of the Closing, and use its best efforts to
cause to become effective by acceleration, within 120 days of the acceptance of
this Agreement by the Company, a registration statement on Form S-3 under the
Securities Act and all applicable Blue Sky Laws covering the sale of the Common
Stock issuable upon conversion of the Preferred Stock. Such best efforts shall
include, but not be limited to, promptly responding to all comments received by
the staff of the SEC, providing Purchaser or its counsel with contemporaneous
copies of all written communications from the staff of the SEC and promptly
preparing and filing amendments to such registration statement which are
responsive to the comments received from the staff of the SEC. Any such
registration statement shall name Purchaser from time to time directly to
purchasers in the over-the-counter market through or to securities
broker-dealers that may receive compensation in the form of discounts,
concessions, or commissions. Any such registration statement shall remain
effective for up to 12 months or until all of the Securities are sold, whichever
is earlier. The Company shall provide the Purchaser with such number of copies
of the prospectus as shall be reasonably requested to facilitate the sale of the
Common Stock issuable upon conversion of the Preferred Stock. The Company shall
bear and pay all expenses incurred in connection with any such registration,
excluding discounts and commissions. The foregoing shall not in any way limit
Purchaser's rights in connection with the shares of Common Stock issuable upon
conversion of the Preferred Stock from selling such shares (i) pursuant to Rule
144 or (ii) pursuant to any other exemption from registration under the
Securities Act.
10
<PAGE>
11. Governing Law. This Agreement shall be governed by and
construed under the law of the State of Maryland without regard to its choice of
law provision. A facsimile transmission of this signed Agreement shall be legal
and binding on all parties hereto.
12. Survival of Representations, Warranties, and Covenant.
Each of the Company's and Purchaser's representations, warranties, and covenants
shall survive the execution and delivery of this Agreement and the delivery of
the certificates representing the Securities.
13. Successors and Assigns. This Agreement shall inure the
benefit of and be binding on the respective successors and assigns of the
parties hereto.
11
<PAGE>
SIGNATURE PAGE FOR INDIVIDUAL SUBSCRIBER
IN WITNESS WHEREOF, the undersigned represents that the
foregoing statements are true and that he, she, or they have executed this
Subscription Agreement on this ____day of _____________, 1998.
- ------------------------------------------- -------------------------------
Printed Name Signature
- ------------------------------------------- -------------------------------
Printed Name Signature
Accepted this ____ day of ___________, 1998:
FREDERICK BREWING CO.
- -------------------------------------
By:
- -------------------------------------
Title:
SIGNATURE PAGE FOR ENTITIES
12
<PAGE>
IN WITNESS WHEREOF, the undersigned represents that the
foregoing statements are true and that it has caused this Subscription Agreement
to be duly executed on its behalf on this____ day of __________, 1998.
------------------------------------
Printed Name of Subscriber
By: ________________________________
(Signature of Authorized Person)
------------------------------------
(Printed Name and Title)
Accepted this _____ day of _______, 1998:
FREDERICK BREWING CO.
By:________________________
Title:_____________________
13
EXHIBIT 23.(ii)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form
S-3/A of our report dated March 30, 1998, on our audits of the financial
statements of Frederick Brewing Company as of and for the years ended December
31, 1997 and 1996. We also consent to the references to our firm under the
captions "Experts" and "Selected Financial and Operating Data."
PricewaterhouseCoopers LLP
McLean, Virginia
December 14, 1998
Exhibit 5
Law Offices
ELIAS, MATZ, TIERNAN & HERRICK L.L.P.
12th Floor
734 15th Street, N.W.
Washington, D.C. 20005
Telephone (202) 347-0300
December 15, 1998
Board of Directors
Frederick Brewing Co.
4607 Wedgewood Boulevard
Frederick, Maryland 21703
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
At your request, this letter relates to the Registration Statement on
Form S-3 filed by Frederick Brewing Co. (the "Company") with the Securities and
Exchange Commission on October 2, 1998, as amended on December 16, 1998 (the
"Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended, of up to 4,528,701 shares of the common
stock, $0.00004 par value per share of Frederick Brewing Co. (the "Shares"). As
of the effective date of the Registration Statement, 80,000 of such Shares will
be issued and outstanding (the "Issued Shares"), up to 2,850,000 of such Shares
may be issued and outstanding upon the conversion of the Company's Series F
Cumulative Convertible Preferred Stock (the "Series F Preferred Stock"), up to
1,298,701 of such Shares may be issued and outstnading upon the conversion of
the Company's Series G Convertible Preferred Stock ("Series G Preferred Stock")
and up to 300,000 of such Shares may be issued and outstanding upon the exercise
of the Warrants. All of such Shares (including those upon issuance with respect
to the Shares subject to the exercise of the Warrants or the conversion of the
Series F Preferred Stock and Series G Preferred Stock) may be offered for sale
for the benefit of the selling stockholders named in the Registration Statement
("Selling Stockholders"). We understand that the Shares are to be sold from time
to time at prevailing prices or as otherwise described in the Registration
Statement.
In so acting, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of the proceedings taken by the
Company in connection with the issuance of the Shares, the Registration
Statement and such corporate records, agreements, documents and other
instruments, and such certificates or comparable documents of public officials
and of officers and representatives of the Company, and have made such inquiries
of such officers and representatives, as we have deemed relevant or necessary as
a basis for the opinions hereinafter set forth.
<PAGE>
Frederic Brewing Co.
December 15, 1998
Page 2
In such examination, we have assumed without independent verification,
the genuineness of all signatures, the authenticity of all documents submitted
to us as originals, the conformity to original documents of documents submitted
to us as certified or photostatic copies and the authenticity of the originals
of such latter documents. We also have assumed that the Series F Preferred Stock
and Series G Preferred Stock were duly authorized, validly issued, fully-paid
and non-assessable and that the Warrants were duly authorized and validly
issued. We further have assumed that the Company will not issue shares of Common
Stock in excess of the number of shares then authorized, upon the full or
partial conversion of the Series F Preferred Stock and/or the Series G Preferred
Stock and/or the full or partial exercise of the Warrants, until such time as
the appropriate corporate action is taken to amend the Company's Amended and
Restated Articles of Incorporation to increase the Company's authorized shares
to a number sufficient to cover any such conversion or exercise. As to all
questions of fact material to this opinion that have not been independently
established, we have relied solely upon representations of the Company in the
Registration Statement, certificates or comparable documents of officers of the
Company and of public officials. We have not had any involvement in the
preparation of the Registration Statement, any prospectus to be distributed in
connection therewith or with the authorization, offer or sale of the Series F
Preferred Stock or the Series G Preferred Stock. Our examination of matters of
law has been limited to the Maryland General Corporation Law.
Based on the foregoing, and subject to the qualifications stated
herein, as of the dare hereof, it is our opinion that when sold by the Selling
Stockholders with respect to the Issued Shares, such Shares will be validly
issued, fully paid and non-assessable; with respect to the Shares to be issued
upon the conversion of the Series F Preferred Stock and Series G Preferred
Stock, subject to due and proper conversion, issuance and delivery pursuant to
the terms of the Series F Preferred Stock and Series G Preferred Stock, such
Shares will be validly issued, fully paid and non-assessable; and with respect
to Shares to be issued upon the exercise of the Warrants, subject to the proper
exercise of the Warrants, the receipt by the Company of due consideration
therefor and upon the due and proper issuance and delivery of such Shares
pursuant to the terms and conditions of the Warrants, such Shares will be
validly issued, fully paid and non-assessable. This opinion is being provided
solely to the Company and may not be relied upon by an other person, including
the Selling Stockholders. This opinion relates only to the number of Shares set
forth above.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name under the caption "Legal
Matters" in the Prospectus included therein.
Very truly yours,
Elias, Matz, Tiernan & Herrick L.L.P.
By: /s/ Jeffrey A. Koeppel
----------------------------
Jeffrey A. Koeppel, a Partner
