As filed with the Securities and Exchange Commission on May 29, 1998
Registration No. 333-______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
FREDERICK BREWING CO.
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(Name of Registrant as specified in its Charter)
Maryland 52-1769647
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(State or Jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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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 (Name, address, including zip code,
number, including area code, of and telephone number, including
Registrant's principal executive offices) area code, of agent for service)
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COPY TO:
Jeffrey A. Koeppel, Esq.
Sheryl Jones Alu, Esq.
Elias, Matz, Tiernan & Herrick LLP
734 Fifteenth Street, N.W.
Washington, D.C. 20005
(202) 347-0300
Facsimile (202) 347-2172
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable after the effective date of this registration
statement.
If the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 other than securities offered only in connection with dividend or interest
reinvestment plan, please check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
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CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class to be Offering Price Aggregate Registration
to be Registered Registered Per Share(1) Offering Price Fee(2)
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<S> <C> <C> <C> <C>
Common Stock, par value
$.00004 per share.......... 1,192,086 $ 1.50 $1,788,129 $ 528
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(1) Estimated solely for purposes of calculating the registration fee.
(2) Enclosed herewith.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION
PROSPECTUS
FREDERICK BREWING CO.
1,192,086 Shares of Common Stock
($.00004 par value)
The 1,192,086 shares (the "Shares") of Common Stock, par value $.00004 per
share (the "Common Stock") of Frederick Brewing Co., a Maryland corporation (the
"Company") are being offered by the selling stockholders identified herein (the
"Selling Stockholders") from time to time in the public market for their own
benefit (the "Offering"). The Company will not receive any proceeds from the
sale of Common Stock by the Stockholders. See "Selling Stockholders." The
expenses of the offering, estimated at $13,000, will be paid by the Company.
The Common Stock currently trades on the NASDAQ SmallCap Market under
the symbol "BLUE". On May 27, 1998, the last sale price of the Common Stock as
reported on NASDAQ was $1.50 per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
PURCHASE OF THESE SECURITIES INVOLVES RISKS. See "Risk Factors" on page 5.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
The date of this Prospectus is ___________, 1998
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No person has been authorized in connection with this offering to give
any information or to make any representation other than as contained in this
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any
securities covered by this Prospectus in any state or other jurisdiction to any
person to whom it is unlawful to make such offer or solicitation in such state
or jurisdiction. Neither the delivery of this Prospectus nor any sales made
hereunder shall, under any circumstances, create an implication that there has
been no change in the affairs of the Company since the date hereof.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, as well as proxy statements and
other information filed by the Company with the Commission, can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at its Regional
Offices located at 7 World Trade Center, New York, New York 10048, and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained at prescribed rates from the Public
Reference Section of the Commission, Washington, D.C. 20549, during regular
business hours. The Commission maintains a Web site that contains reports, proxy
and information statements and other information regarding issuers such as the
Company that file electronically with the Commission at http://www.sec.gov.
This Prospectus incorporates by reference the Company's Annual Report on
Form 10-KSB for the year ended December 31, 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 Current Reports on Form 8-K
dated February 12, 1998 and April 10, 1998, the Company's Proxy Statement for
its Annual Meeting of Stockholders held May 14, 1998, filed on April 13, 1998,
the description of securities included in the Company's Registration Statement
on Form 8-A, File No. 0-27800, and all other documents subsequently filed by the
Company pursuant to Section 13(a), 13(c) or 14 of the Exchange Act prior to the
termination of the offering made hereby. Statements contained in this Prospectus
as to the contents of any contract or other document are not necessarily
complete, and in each instance reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in its entirety by such reference. The Company will provide,
without charge upon oral or written request of any person, a copy of any
information incorporated by reference herein. Such request should be directed to
the Company at 4607 Wedgewood Boulevard, Frederick, Maryland 21703, telephone
(301) 694-7899.
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INDEMNIFICATION
Pursuant to the Company's Articles of Incorporation, as amended, the
Company may indemnify each of its directors and officers with respect to all
liability and loss suffered and reasonable expense incurred by such person in
any action, suit or proceeding in which such person was or is made or threatened
to be made a party or is otherwise involved by reason of the fact that such
person is or was a director of the Company. In addition, the Company may pay the
reasonable expenses of indemnified directors and officers incurred in defending
such proceedings if the indemnified party agrees to repay all amounts advanced
should it be ultimately determined that such person is not entitled to
indemnification.
In addition, as permitted by the Maryland General Corporation Law, the
Company's Articles of Incorporation provides that the Company's directors will
not be held personally liable to the Company or its stockholders for monetary
damages for a breach of fiduciary duty as a director except to the extent such
exemption from liability or limitation thereof is not permitted under the
Maryland General Corporation Law. This provision does not eliminate the duty of
care, and injunctive or other forms of non-monetary equitable relief will remain
available under Maryland law. In addition, each director continues to be liable
for monetary damages for (i) misappropriation of any corporate opportunity in
violation of the director's duties, (ii) acts or omissions in bad faith or
involving intentional dishonesty, (iii) knowing violations of law, and (iv) any
transaction from which a director derives an improper personal benefit. The
provision does not affect a director's responsibilities under any other law,
such as the federal securities laws of state or federal environmental laws.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the information
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. This Prospectus and the documents
incorporated herein by reference contain forward-looking statements that are
based on current expectations, estimates and projections about the Company's
industry, management's beliefs and assumptions made by management. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict.
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Accordingly, actual results may differ materially from those expressed or
forecasted in any such forward-looking statements. Such risks and uncertainties
include those risk factors and such other uncertainties noted herein and in the
documents incorporated herein by reference. The Company undertakes no obligation
to update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
The Company
The Company's principal executive offices are located at 4607 Wedgewood
Boulevard, Frederick, Maryland 21703. Its telephone number is (301) 694-7899 and
its fax number is (301) 694-2971.
The Offering
Common Stock Offered by Selling Stockholders ........ 1,192,086 shares
Common Stock to be offered by the Company ...........
Common Stock Outstanding(1) Before Offering ......... 7,411,031 shares
Common Stock Outstanding After Offering ............. 8,603,117 shares
Use of Proceeds ..................................... All of the Shares offered
hereby from time to time
are being offered by the
selling stockholders. The
Company will not receive
any proceeds therefrom.
NASDAQ symbol ....................................... BLUE
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(1) Based on shares outstanding as of May 27, 1998
Risk Factors
Investment in the Shares offered hereby involves a high degree of risk,
including the limited operating history of the Company and competition.
Investors should carefully consider the various risk factors before investing in
the Shares. This Prospectus contains forward looking statements which may
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors." See "Risk Factors."
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RISK FACTORS
The shares of Common Stock offered hereby are highly speculative and
involve a high degree of risk. The following risk factors should be considered
carefully in addition to the other information in this Prospectus before
purchasing the shares of Common Stock offered hereby. The discussion in this
Prospectus contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere herein.
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 March 31, 1998, the accumulated deficit was $11,827,822.
The Company's limited operating history makes the prediction of future sales and
operating results difficult. Accordingly, although the Company has experienced
sales growth, such growth should not be considered indicative of future sales
growth, if any, or of future operating results. There can be no assurance that
the Company's sales will grow or be sustained in future periods or that the
Company will become or remain profitable in any future period. Due to the
expenses involved in the expansion of the Company's operations in connection
with the completion of the new brewery (including increased overhead,
depreciation, marketing and salaries and its plan to increase production to
50,000 barrels per year), the Company does not expect to operate profitably
until at least calendar 1999.
Lack of Liquidity; Inadequate Working Capital; Default in Financial
Covenants. The Company has, in the last twenty months spent a significant amount
of working capital on machinery and equipment and on salaries and benefits and
advertising, all in connection with the completion of the Company's new brewery,
the expansion of its brewing capacity and its attempts to increase demand for
its products as well as the acquisition of the outstanding securities of Wild
Goose Brewery, Inc. and all of the brands, formulas, copyrights, trademarks, and
related intangible assets of Brimstone Brewing Company. In addition, growth in
sales has not been sufficient to fund such expenditures. As a consequence
thereof, the Company has been required to obtain, by the sale of its securities,
additional working capital for the hiring and training of administrative and
sales personnel and the payment of certain promotional, marketing and
advertising expenses in connection with the commencement of full production at
the new brewery which occurred in July 1997.
In connection with the construction of the new brewery and the purchase
of brewing and other equipment, the Maryland Economic Development Corporation
issued $4.5 million in taxable economic development bonds on July 19, 1996,
including $1.5 million borrowed by the Company to purchase brewery equipment for
the new brewery (the "FBC Facility")
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and $3.0 million loaned to a partnership controlled by affiliates of the Company
to construct the brewery (the "Blue II Facility"), and the Company borrowed an
additional $976,000 from Signet Bank, now First Union National Bank, its recent
successor ("Signet," "First Union" or the "Bank") in a Bridge Loan (which it
refinanced with an SBA loan in April 1997). The FBC facility contains certain
other restrictive covenants, one of which is a cash flow to debt service ratio.
A violation of this covenant represents an event of default on the note and also
a cross default on the Blue II Facility for the construction of the brewery for
which the Company is a guarantor. During the first quarter of 1998, for both the
FBC Facility and the Blue II Facility, First Union has waived compliance with
the cash flow to debt service covenant for the calendar quarters ending March
31, 1998, June 30, 1998, September 30, 1998 and December 31, 1998. The Bank has
also modified this covenant for the calendar quarter ending March 31, 1999 and
for each quarter thereafter whereby the Company must maintain a cash flow to
debt service ratio of 1.0 to 1. In addition, the Bank modified the current ratio
covenant whereby the Company must maintain a ratio of current assets to current
liabilities of 1.0 to 1 as of calendar quarter March 31, 1998 and each calendar
quarter thereafter. The Company was in compliance as of March 31, 1998 and
anticipates it will be able to comply with these modified covenants. In exchange
for these covenant modifications, the maturity date on the loans was revised to
April 1, 1999, the interest rate increased to the prime rate plus 1.25% for the
FBC Facility and the prime rate plus 1.5% for the Blue II Facility, the Company
is required to pay a loan modification fee of $25,000 payable in two
installments of $10,000 and $15,000 on June 30, 1998 and September 30, 1998,
respectively, and be responsible for all fees and expenses incurred by First
Union in connection with preparation of the modification and use it best efforts
to obtain replacement financing.
The Company and Blue II are currently negotiating with a local financial
institution and the current bondholder, the bond issuer and the guarantee agency
which may agree to purchase both MEDCO bonds, thereby refinancing the Company's
long-term debt. If such a refinancing occurs, it is likely that the interest
rates will rise, the Company's rent payment to Blue II will rise and the
Company's Chief Executive Officer and President will be required to provide
personal guarantees of the FBC Facility and the Blue II building lease. There
can be no assurance that the Company will not incur additional defaults under
the Bridge Loan, the Blue II Facility, or the FBC Facility. If such defaults
occur and are not waived by First Union, it would have a material adverse effect
upon the Company.
On April 24, 1997, the Company closed a $1.0 million loan with the
United States Small Business Administration ("SBA"). The proceeds of this loan
were used to pay the principal balance of the Company's bridge loan with Signet
Bank which was incurred for the purchase of brewing and packaging equipment for
the Company's new facility. The loan has a twenty year term and a fixed interest
rate of 7.368%. See the Company's Pre-effective Amendment No. 5 to the Form SB-2
filed with the SEC on March 5, 1996, incorporated herein by reference.
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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 31% of the Company's revenues in the first quarter ended March
31, 1998. Sales to all other wholesale distributors represented 53%, 49%, and
64% of the Company's revenues in 1997, 1996 and 1995, respectively, and 69% of
the Company revenues in the first quarter ended March 31, 1998. The Company
expects sales to its largest wholesale distributor to continue to represent a
significant portion of its sales in the near term. The Company believes that its
future growth and success will continue to depend in large part upon the
significant wholesale distributor, but such dependence should decrease as the
Company expands its market area.
No Assurance of Continued Wholesale Distributor Support. If Kronheim or
any other significant wholesale distributor were to discontinue selling, or
decrease the level of orders for, the Company's products, the Company's business
would be adversely affected in the areas serviced by such wholesale distributors
until the Company retained replacements. There can be no assurance however that
the Company would be able to replace a significant wholesale distributor in a
timely manner or at all in the event it were to discontinue selling the
Company's products. In addition, there is always a risk that the Company's
wholesale distributors will give higher priority to the products of other
beverage companies, including products directly competitive to the Company's
beers, thus reducing their efforts to sell the Company's products. The risk is
exacerbated by the fact that many of the Company's wholesale distributors (not
including Kronheim) are reliant on the beers of one of the major domestic beer
producers for a large percentage of their revenues
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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 include product quality and taste, distribution
capabilities, brand recognition, packaging and price. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors based on these and other factors. The Company competes with a
variety of domestic and international brewers, many of whom have substantially
greater financial, production, distribution and marketing resources and have
achieved a higher level of brand recognition than the Company.
The domestic specialty category has been created and expanded since the
early 1980's by innovative, entrepreneurial companies. The Company is in direct
competition in the specialty beer segment not only from the major domestic
brewers such as Anheuser-Busch Companies, Inc. ("Anheuser-Busch"), Miller
Brewing Co. ("Miller") and Adolph Coors Co. ("Coors"), each of whom has
introduced and is marketing fuller flavored beers designed to compete directly
in the specialty beer segment, but also from other domestic companies, each
producing several brands or styles of beer. The large domestic brewers dominate
the overall domestic beer market and the Company expects that certain of these
companies, with their superior financial resources and established distribution
networks, will continue to seek further participation in the specialty beer
segment through the acquisition of equity positions in, or the formation of
distribution alliances with, smaller craft brewers (such as Anheuser-Busch's
equity position in, and distribution agreement with, Redhook Ale Brewery,
Incorporated). During the past 15 years, the domestic specialty brewing category
has experienced extremely rapid growth; however growth in overall sales by
domestic specialty brewers slowed substantially, beginning in late 1996 and
continuing through 1997 in part, due to the fact that some large markets, such
as the Pacific Northwest, upper New England, Colorado and Northern California
have matured and are saturated to
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the point that further rapid growth appears unlikely. Management also believes
that other market forces have affected the growth of the domestic specialty
segment. Primary among those forces is the aggressive marketing of import beers
over the past two years from companies such as Heineken N.V., Bass PLC and
Guinness PLC and existing domestic specialty and contract brewers such as The
Boston Beer Company, Inc., Pete's Brewing Co., Redhook Ale Brewery,
Incorporated, Sierra Nevada Brewing Co. and Anchor Brewing Co., as well as the
regional specialty brewers and local microbreweries in the markets where the
Company distributes its beers. Many of these beers which share flavor profiles
and competitive price points with domestic specialty beers and appear to have
achieved substantial sales increases, perhaps at the expense of domestic
specialties. In addition, some wholesale distributors who had aggressively added
many new domestic specialty brands to their portfolios and devoted high levels
of effort to promoting those brands saw declining returns to their investments
in marketing and inventory due to increasing competition and began re-allocating
their resources to higher volume products (sometimes under pressure from the
suppliers of those products). Increased competition could result in price
reductions, reduced profit margins and loss of market share, all of which would
have a material adverse effect on the Company's financial condition and results
of operations.
The Company's products also compete generally with other alcoholic
beverages, including products offered in other segments of the beer industry and
low-or-no-alcohol products. The Company competes with other beer and beverage
companies not only for consumer acceptance and loyalty but also for shelf and
tap space in retail establishments and for marketing focus by the Company's
wholesale distributors and their customers, all of which also distribute and
sell other beers and alcoholic beverage products. Finally, there can be no
assurance that the recent growth in consumer demand for craft beers will
continue, or even if such growth continues, that consumers will choose the
Company's beers.
Potential Fluctuations in Quarterly Results. The Company's quarterly
operating results have in the past and may in the future vary significantly
depending on factors such as fixed and semi-variable operating costs during
periods when the Company's brewery is producing below maximum designed
production capacity, professional fees and expenses relating to the Company's
planned expansion, increased competition, fluctuations in the price of
ingredients or packaging materials, seasonality of sales of the Company's beers,
general economic factors, trends in consumer preferences, regulatory
developments, including changes in excise and other tax rates, changes in the
sales mix between kegs and bottles, changes in average selling prices or market
acceptance of the Company's beers, increases in 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
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volume increases, the timing of new advertising and promotional campaigns by the
Company and other expansion activities engaged in by the Company. The Company's
expense levels are based, in part, on its expectations of future sales levels.
If sales levels are below expectations, operating results are likely to be
materially adversely affected, In particular, because the Company operates its
own production facility, a significant portion of its overhead is fixed and
cannot be reduced for short-term adjustments such as sales below management's
expectations, and an excess of production capacity could therefore have a
significant negative impact on the Company's operating results. However, the
Company has historically operated with little or no backlog. The absence of
backlog increases the difficulty of predicting sales and operating results. In
addition, the Company's decision to undertake a limited media advertising
campaign in late 1997 through 1998 could substantially increase the Company's
expenses in a particular quarter, while any increase in sales from such
advertising may be realized in subsequent periods.
Based upon the risks of potential fluctuations in quarterly results
discussed above and seasonality and the unpredictability of demand, discussed
below, the Company believes that quarterly sales and operating results are
likely to vary significantly in the future and that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Further, it is possible that
in some future quarter the Company's revenues or operating results will be below
the expectations of public market analysts and investors. In such event, the
price of the Company's Common Stock could be materially adversely affected.
Sales Fluctuations Due to Seasonality. The Company's wholesale
distributors have historically experienced higher sales in the second and fourth
quarters of the calendar year due to increased consumption of the Company's
beers during periods of warmer weather and from Halloween through New Year's
Day. Although the Company has not yet experienced sales fluctuations due to
seasonality because the Company has continued to expand its wholesale
distribution network over the past three years, fluctuations in the Company's
sales due to seasonality may become evident in the future as the Company's sales
increase.
No Assurance of Geographic Expansion. While the Company has distribution
networks in all or parts of 31 states, sales in Maryland and Washington, D.C.
Metropolitan Area accounted for over 64% and 63% of the Company's sales in 1996
and 1997, respectively, and 38% in the three months ended March 31, 1998. The
Company's continued growth depends upon its ability to expand sales in these and
other new regions. During the first quarter of 1998, the Company added 49 new
wholesale distributors, including 46 new wholesalers who distribute the Wild
Goose and Brimstone brands, bringing the total number of wholesalers throughout
its current network to 139. 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
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distributors, the retention of skilled sales and other personnel, the ability to
adapt management and other operational systems to accommodate increased volume,
the success of advertising and promotion campaigns, and other factors, some of
which are beyond the control of the Company. Furthermore, consumer tastes vary
by region and there can be no assurance that consumers located in new geographic
regions will be receptive to the Company's beers. The Company believes that
consumer demand for its products is greater in certain areas than others due to
demographic, economic and other factors. The Company's efforts to increase sales
by further penetrating market areas may be limited by such factors. The
inability of the Company to expand sales in a timely manner would have a
material adverse effect on the Company's operating results and financial
condition.
Limited Product Line. The sale of a limited number of styles of beers
has accounted for substantially all of the Company's revenues since inception.
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 quarter ended March 31, 1998 of $1,014,837 included $43,000 of
Brimstone products and $272,000 of Wild Goose products. The Company believes
that the sale of these beers will continue to account for a significant portion
of the Company's sales for the foreseeable future. Therefore, the Company's
future operating results, particularly in the near term, are significantly
dependent upon the continued market acceptance of these products. There can be
no assurance that the Company's beers will continue to achieve market
acceptance. A decline in the demand for any of the Company's beers as a result
of competition, changes in consumer tastes and preferences, government
regulation or other factors would have a material adverse effect on the
Company's operating results and financial condition. In addition, there can be
no assurance that the Company will be successful in developing, introducing and
marketing additional new beers that will sustain sales growth in the future.
No Assurance of Future Ability to Satisfy Changing Consumer Preferences.
The craft beer market is highly competitive and characterized by changing
consumer preferences and continuous introduction of new products. The Company
intends to introduce new products from time to time to maintain wholesale
distributor and retailer interest and appeal to varying consumer preferences and
to create consumer demand. The Company believes that its future growth will
depend, in part, on its ability to anticipate changes in consumer preferences or
to create consumer demand and develop and introduce, in a timely manner, new
beers that adequately address such changes. There can be no assurance that the
Company will be successful in developing, introducing and marketing new products
on a timely basis. If the Company is unable to introduce new
11
<PAGE>
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 three months ended March 31, 1998 was 5,706 barrels,
an increase of 255%, compared to 1,606 barrels in the three months ended March
31, 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, including Blue Ridge Subliminator
Doppelbock, Wild Goose Springwheat, and Brimstone Irish Wake Stout, none of
which were sold by the Company in 1997. 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.
12
<PAGE>
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
13
<PAGE>
basis and to expand, train, motivate and manage its work force. There can be no
assurance that the Company's personnel, systems, procedures and controls will be
adequate to support the Company's existing and future operations. Any failure to
implement and improve the Company's operational, financial and management
systems or to expand, train, motivate or manage employees could have a material
adverse effect on the Company's operating results and financial condition.
No Assurance of Ability to Protect Intellectual Property Rights. The
Company considers its trademarks and pending trademarks, particularly the "Blue
Ridge" 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 Patent Infringement. While the Company
believes that its Intellectual Property does not infringe upon the proprietary
rights of third parties, there can be no assurance that the Company will not
receive future communications from third parties asserting that the Company's
Intellectual Property infringes, or may infringe, upon the proprietary rights of
third parties. The potential for such claims will increase as the Company
increases distribution in recently entered and new geographic areas. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation and diversion of management's attention, cause product distribution
delays or require the
14
<PAGE>
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, none of these
officers had prior experience in the brewing industry or significant business
experience. The competition for qualified personnel is intense and the loss of
any of such persons as well as the failure to recruit additional key personnel
in a timely manner, could adversely affect the Company. There can be no
assurance that the Company will be able to continue to attract and retain
qualified management and sales personnel for the development of its business.
Failure to attract and retain key personnel could have a material adverse effect
on the Company's operating results and financial condition.
Operating Hazards; No Assurance of Adequate Insurance. The Company's
operations are subject to certain hazards and liability risks faced by all
brewers, such as bottle flaws or potential contamination of ingredients or
products by bacteria or other external agents that may be accidentally or
wrongfully introduced into products or packaging. The Company's products are not
pasteurized and require careful product rotation to prevent spoilage. However,
neither spoiled beer nor the bacteria introduced in the brewing process is known
to be harmful to human health. The Company runs periodic diagnostic tests on all
of its products to assure that they meet Company quality control guidelines and
comply with federal and state regulatory requirements. While the Company has not
experienced a serious contamination problem in its products, the occurrence of
such a problem could result in a costly product recall and serious damage to the
Company's reputation for product quality. The Company's operations are also
subject to certain injury and liability risks normally associated with the
operation and possible malfunction of brewing and packaging equipment. Although
the Company maintains insurance against certain risks under various general
liability and product liability insurance policies, there can be no assurance
that the Company's insurance will be adequate.
Government Regulation. The Company's business is highly regulated by
federal, state and local laws and regulations. The Company must comply with
extensive laws and regulations regarding such matters as state and regulatory
approval and licensing requirements, trade and pricing practices, permitted and
required labeling, advertising,
15
<PAGE>
promotion and marketing practices, relationships with distributors and related
matters. For example, federal and state regulators require warning labels and
signage on the Company's products. The Company believes that it has obtained all
regulatory permits and licenses necessary to operate its business in the states
where the Company's products are currently being distributed. Failure on the
part of the Company to comply with federal, state or local regulations could
result in the loss or revocation or suspension of the Company's licenses,
permits or approvals and accordingly could have a material adverse effect on the
Company's business. In addition, changes to federal and state excise taxes on
beer production, federal, state and local environmental regulations, including
laws relating to packaging and waste discharge, or any other laws or regulations
which affect the Company's products could have a material adverse effect on the
Company's results of operations. The federal government and each of the states
levy excise tax of $18.00 per barrel on every barrel of beer produced for
consumption in the United States by each brewing company with annual production
of over 2,000,000 barrels. The federal excise tax for brewing companies with
annual production under 2,000,000 barrels is $7.00 per barrel on all barrels up
to the first 60,000 barrels produced and $18.00 per barrel for each barrel
produced in excess of 60,000. Any increase in the excise tax for small brewers
could have a material adverse effect on the Company's operating results and
financial condition.
Public Attitudes Toward Alcohol Consumption. In recent years, there has
been an increase in the level of health-consciousness in the United States and
considerable debate has occurred concerning alcohol-related social problems,
such as alcoholism and drunk driving. In addition, a number of anti-alcohol
groups are advocating increased governmental action on a variety of fronts
unfavorable to the beer industry, including the legislation of new labeling or
packaging requirements and restrictions on advertising and promotion that could
adversely affect the sale of the Company's products. Restrictions on the sale
and consumption of beer or increases in the retail cost of beer due to increased
governmental regulations, taxes or otherwise, could materially and adversely
affect the Company's financial condition and results of operations.
Antitakeover Provisions in the Company's Corporate Documents. The
Company's Board of Directors has the authority to issue to up 1,000,000 shares
of preferred stock, $.01 par value per share (the "Preferred Stock"), of the
Company including the 1,848 shares of Series A Preferred Stock, the 3,750 shares
of Series B Preferred and 2,100 shares of Series C Preferred, 1,045 shares of
Series D Preferred and 3,000 shares of Series E 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.
16
<PAGE>
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
17
<PAGE>
directors to exercise their best business judgment in managing the Company's
affairs, subject to their continuing fiduciary duties to the Company and its
stockholders, is not unreasonably impeded by exposure to potentially high
personal costs or other uncertainties of litigation.
Indemnification of Management. The Company's Articles, consistent with
Maryland law, provide that the Company will indemnify and advance expenses to
any director, officer, employee or agent of the Company who is, or is threatened
to be made, a party to any action, suit or proceeding. Such indemnification
would cover the cost of attorney's fees as well as any judgment, fine or amounts
paid in settlement of such action provided that the indemnified party meets
certain standards of conduct necessary for indemnification under applicable law.
Such indemnity may or may not be covered by officer and director liability
insurance and could result in an expense to the Company even if such person is
not successful in the action. This provision is designed to protect such persons
against the costs of litigation which may result from his or her actions on
behalf of the Company.
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial and operating data should be read in
conjunction with the Company's financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Annual Report and its Quarterly Report on
Form 10-QSB for the Three Months Ended March 31, 1998 incorporated by reference
herein. The balance sheet data and statement of operations data as of and for
the years ended December 31, 1997 and 1996 are derived from financial statements
of the Company, incorporated by reference herein, that have been audited by
Coopers & Lybrand L.L.P., independent accountants. The balance sheet data and
statement of operations data as of and for the years ended December 31, 1995,
1994 and 1993 are derived from financial statements of the Company that are not
included in the Annual Report. The balance sheet data as of March 31, 1998 and
the statement of operations data for the three months ended March 31, 1998 and
1997 are derived from unaudited financial statements included in the March 31,
1998 10-QSB. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Annual Report and the March 31, 1998 10-QSB.
18
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(In thousands, except per share and barrel data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Sales $1,015 $ 266 $3,287 $1,872 $1,832 $1,186 $ 106
Excise taxes 95 52 209 152 87 59 4
Cost of sales 805 397 2,838 1,743 1,253 847 89
Gross profit (loss) 115 (183) 240 (23) 492 280 13
Selling, general and administrative
expenses 747 496 4,622 2,631 831 485 259
Loss from operations (632) (679) (4,382) (2,655) (339) (206) (246)
Interest expense (income), net 106 28 140 (29) (79) (52) (11)
Other (income) expense (3) (61) (158) -- 42 5 (1)
(Loss) income before income taxes (736) (645) (4,363) (2,625) (376) (253) (258)
Provision for income taxes -- -- -- -- (17) (17) --
Net (loss) (736) (645) (4,363) (2,625) (359) (270) (258)
Preferred Stock Dividend Requirements (29) (1,326) (3,612) -- -- -- --
Net Loss attributable to Common (765) (1,971) (7,975) (2,625) (359) (270) (258)
Stockholders
Basic and Diluted Loss Per Share:
Net loss before Preferred Stock (0.12) (0.33) (1.59) (1.45) (0.30) (0.24) (0.29)
Dividend Requirements
Preferred Stock Dividend Requirements (0.01) (0.68) (1.32) -- -- -- --
Net loss per Common Share (0.13) (1.01) (2.91) (1.45) (0.30) (0.24) (0.29)
Shares used in per share calculation(1) 6,048 1,955 2,742 1,805 1,205 1,122 887
Operating Data (In Barrels)(2):
Barrels sold 5,706 1,606 17,300 10,910 10,031 6,436 660
Net sales per barrel sold 161.18 133.42 177.90 162.32 173.96 175.11 154.55
Gross profit per barrel sold 20.14 (114.07) 13.90 2.47 49.05 43.51 19.70
<CAPTION>
As of March 31, As of December 31,
--------------- ------------------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Balance sheet Data:
Working Capital (deficit) $744 $2,373 $ 2 $ (199) $ (53) $ (5)
Total assets 15,468 13,401 4,766 1,659 1,316 723
Long-term debt, net of current portion 4,640 4,726 1,683 373 481 315
Stockholders' equity 8,783 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 March 31,
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
19
<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 May 27, 1998, the last sale price as reported on NASDAQ was $1.50.
The following table sets forth the high and low bid prices for the
Common Stock as reported on NASDAQ for each quarter since March 11, 1996, the
closing date of the Company's initial public offering, for the periods
indicated. Such information reflects inter dealer prices without retail mark-up,
mark down or commissions and may not represent actual transactions.
Quarter Ended High Low
------------- ---- ---
March 31, 1996 7-1/4 5-1/4
June 30, 1996 5-3/4 4-7/8
September 30, 1996 5-1/4 4-1/4
December 31,1996 5-1/8 3-7/8
March 31, 1997 4-5/8 4-1/8
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
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 May 27, 1998, there were approximately 5,500 record holders of
Company Common Stock.
SELLING STOCKHOLDERS
The 1,192,086 shares of Common Stock of the Company offered by
the Selling Stockholders (the "Shares") will be offered at market prices, as
reflected on NASDAQ. These shares are currently outstanding. It is anticipated
that Selling Stockholders will sell their shares of Common Stock on NASDAQ in
which case registered broker-dealers will be allowed the commissions which are
usual and customary
20
<PAGE>
in open market transactions. Selling Stockholders may also sell their shares of
Common Stock in off-the-market transactions at market price in which case no
commissions would be paid.
Names Number of Shares Percent(1)
----- ---------------- ----------
Theodore J. Garrish 99,919 1.16
S. John Byington 53,722 *
S. Richard Klein 69,680 *
Nancy J. Davis 112,779 1.31
H. Richard Seibert, Jr. 42,042 *
James W. Lutz 116,632 1.36
Timothy A. Vanderver, Jr. 56,012 *
Alan Pugsley (formerly t/a
Peter Austin & Partners Ltd.) 66,190 *
Lynne Meyer 21,294 *
James M. Gidley 11,282 *
Virginia Knauer 3,514 *
Steven A. Levy and Shelly Reid 15,829 *
J. Gordon Arbuckle 10,255 *
Joseph Klein 41,297 *
Sanford and Harriet Goldberg 32,170 *
Marite Koch 32,135 *
L.W. and Sidney Arny 32,433 *
Avi and Susan Lewinson 21,150 *
David and Diane Tornberg 8,557 *
Steven and Judith Haveson 17,139 *
Michael A. Ruby 78,600 *
Maryann L. Urban 6,741 *
Stephen Budiansky and Martha Polkey 10,374 *
William and Ann Cook 10,374 *
Robert Klein 17,527 *
Randall I. Cole 10,637 *
21
<PAGE>
Michael Johnson 94,578 1.10
Samuel Ewing, Jr. 94,578 1.10
Barbara Whaley 3,643 *
TOTAL 1,192,086 13.86
- ----------
* Less than 1%.
(1) Based upon 8,603,117 shares outstanding.
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 7,411,031 shares were outstanding as of May 27, 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 and 3,000 shares
of Series E Preferred are outstanding. The Preferred Stock is convertible into
shares of common stock. The holders of Series A Preferred are senior to the
Common Stock with respect to dividend rights and are entitled to a liquidation
preference of $500 per share. The annual dividend rate for the Series A and
Series E Preferred is $40.00 per share per annum, and the annual dividend rate
for the Series C and Series D Preferred is $80.00 per share, when, as and if
declared by the Company's Board of Directors. If not declared, dividends will
accumulate and be payable in the future. Full dividends must be paid or set
aside on the Series A, Series C, Series D and Series E Preferred Stock before
dividends may be paid or set aside on the Company's Common Stock. All dividend
payments will be subordinated to the Company's
22
<PAGE>
debt obligations, and will be subject to the prior approval of First Union and
the Company's other future lenders. The Company has the option to pay dividends
on the Series C, Series D and Series E Preferred by the issuance of Common Stock
valued at the then effective conversion rate of the Series C and Series D
Preferred Stock. The holders of Series C and Series D Preferred have a
liquidation preference of $1,000 per share over the Common stock and Series A
Preferred. The holders of Series E Preferred have a liquidation preference of
$1,300 per share also. 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.
23
<PAGE>
LEGAL MATTERS
The legality of the Shares offered hereby will be passed upon for the
Company by Elias, Matz, Tiernan & Herrick LLP, Washington, DC.
EXPERTS
The financial statements of the Company as of December 31, 1997 and 1996
and for the years ended December 31, 1997 and 1996, incorporated by reference in
this Prospectus from the Annual Report, have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of said firm as experts in accounting and auditing.
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.
24
<PAGE>
TABLE OF CONTENTS
Page
----
Additional Information.......................................................2
Indemnification..............................................................3
Prospectus Summary...........................................................3
Risk Factors.................................................................5
Selected Financial and Operating Data.......................................18
Market Price of Common Stock................................................20
Selling Stockholders........................................................20
Description of Securities...................................................22
Legal Matters...............................................................24
Experts.....................................................................24
25
<PAGE>
FREDERICK BREWING CO.
PART II
Item 14. Other Expenses of Issuance and Distribution.
Filing fee under the Securities Act of 1933 $ 528
Blue Sky qualification fees and expenses(1) 1,000
Printing and engraving(1) 1,000
Legal Fees 7,000
Accounting Fees 3,000
Miscellaneous(1) 500
TOTAL $13,028
=======
- ---------------
(1) Estimates
Item 15. Indemnification of Directors and Officers.
Frederick Brewing 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,
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<PAGE>
while a director of a corporation, is or was
serving at the request of the corporation as a
director, officer, partner, trustee, employee, or
agent of another foreign or domestic corporation,
partnership, jointventure, trust, other
enterprise, or employee benefit plan.
(2) "Corporation" includes any domestic or
foreign predecessor entity of a corporation in a
merger, consolidation, or other transaction in
which the predecessor's existence ceased upon
consummation of the transaction.
(3) "Expenses" include attorney's fees.
(4) "Official capacity" means the
following:
(i) When used with respect to a
director, the office of director in the
corporation; and
(ii) When used with respect to a person
other than a director as contemplated in
subsection (j), the elective or appointive office
in the corporation held by the officer, or the
employment or agency relationship undertaken by
the employee or agent in behalf of the
corporation.
(iii) "Official capacity" does not
include service for any other foreign or domestic
corporation or any partnership, joint venture,
trust, other enterprise, or employee benefit plan.
(5) "Party" includes a person who was, is,
or is hreatened to be made a named defendant or
respondent in a proceeding.
(6) "Proceeding" means any threatened,
pending or completed action, suit or proceeding,
whether the civil, criminal, administrative, or
investigative.
(b)(1) A corporation may indemnify any
director made a party to any proceeding by reason
of service in that capacity unless it is
established that:
(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
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<PAGE>
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
probationprior to judgment, creates a rebuttable
presumption that the director did not meet that
standard of conduct.
(c) A director may not be indemnified under
subsection (B) of this section in respect of any
proceeding charging improper personal benefit to the
director, whether or not involving action in the
director's official capacity, in which the director was
adjudged to be liable on the basis that person benefit
was improperly received.
(d) Unless limited by the charter:
(1) A director who has been successful, on
the merits or otherwise, in the defense of any
proceeding referred to in subsection (B) of this
section shall be indemnified against reasonable
expenses incurred by the director in connection
with the proceeding.
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<PAGE>
(2) A court of appropriate jurisdiction
upon application of a director and such notice as
the court shall require, may order indemnification
in the following circumstances:
(i) If it determines a director is entitled
to reimbursement under paragraph (1) of this
subsection, the court shall order indemnification,
in which case the director shall be entitled to
recover the expenses of securing such
reimbursement; or
(ii) If it determines that the director is
fairly and reasonably entitled to indemnification
in view of all the relevant circumstances, whether
or not the director has met the standards of
conduct set forth in subsection (b) of this
section or has been adjudged liable under the
circumstances described in subsection (c) of this
section, the court may order such indemnification
as the court shall deem proper. However,
indemnification with respect to any proceeding by
or in the right of the corporation or in which
liability shall have been adjudged in the
circumstances described in subsection (c) shall be
limited to expenses.
(3) A court of appropriate jurisdiction may be the same
court in which the proceeding involving the director's
liability took place.
(e)(1) Indemnification under subsection (b) of this section
may not be made by the corporation unless authorized for a specific
proceeding after a determination has been made that indemnification
of the director is permissible in the circumstances because the
director has met the standard of conduct set forth in subsection (b)
of this section.
(2) Such determination shall be made:
(i) By the board of directors by a majority vote of a
quorum consisting of directors not, at the time, parties to
the proceeding, or, if such a quorum cannot be obtained, then
by a majority vote of a committee of the board consisting
solely of two or more directors not, at the time, parties to
such proceeding and who were duly designated to act in the
matter by a majority vote of the full board in which the
designated directors who are parties may participate;
(ii) By special legal counsel selected by the board of
directors or a committee of the board by vote as set forth in
subparagraph (i) of this paragraph, or, if the requisite
quorum of the full board cannot be obtained therefor and the
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<PAGE>
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.
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<PAGE>
(h) This section does not limit the corporation's power to
pay or reimburse expenses incurred by a director in connection with
an appearance as a witness in a proceeding at a time when the
director has not been made a named defendant or respondent in the
proceeding.
(i) For purposes of this section:
(1) The corporation shall be deemed to have requested a
director to serve an employee benefit plan where the
performance of the director's duties to the corporation also
imposes duties on, or otherwise involves services by, the
director to the plan or participants or beneficiaries of the
plan;
(2) Excises taxes assessed on a director with respect to
an employee benefit plan pursuant to applicable law shall be
deemed fines; and
(3) Action taken or omitted by the director with respect
to an employee benefit plan in the performance of the
director's duties for a purpose reasonably believed by the
director to be in the interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose
which is not opposed to the best interests of the
corporation.
(j) Unless limited by the charter:
(1) An officer of the corporation shall be indemnified
as and to the extent provided in subsection (d) of this
section for a director and shall be entitled, to the same
extent as a director, to seek indemnification pursuant to the
provisions of subsection (d);
(2) A corporation may indemnify and advance expenses to
an officer, employee, or agent of the corporation to the same
extent that it may indemnify directors under this section;
and
(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
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<PAGE>
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,
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<PAGE>
trust or other enterprise or employee benefit plan, against liability and
expenses (including court costs and attorney's fees), judgments, fines, excise
taxes and amounts paid in satisfaction, settlement or compromise actually and
reasonably incurred by such person in connection with such action, suit or
proceeding to the full extent authorized by Section 2-418 of the MGCL or any
successor provision thereto.
C. Advancement of Expenses. Reasonable expenses incurred by a
director, officer, employee or agent of the Corporation in defending a civil or
criminal action, suit or proceeding describe din Article VIII.B. shall be paid
by the Corporation in advance of the final disposition of such action, suit or
proceeding as authorized by the 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
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<PAGE>
this Article VIII shall be in the nature of a contract between the Corporation
and each such director, officer, employee or agent and no amendment or repeal of
any provision of this Article VIII shall alter, to the detriment of such
director, officer, employee or agent, the right of such person to the advance of
expenses or indemnification related to a claim based on an act or failure to act
which took place prior to such amendment or repeal.
G. Proceedings Initiated by Indemnified Persons. Notwithstanding any
other provision of this Article VIII, the Corporation shall not indemnify a
director, officer, employee or agent for any liability incurred in an action,
suit or proceeding initiated by (which shall not be deemed to include
counter-claims or affirmative defenses) or participated in as an intervenor or
amicus curiae by the person seeking indemnification unless such initiation of or
participation in the action, suit or proceeding is authorized, either before or
after its commencement, by the affirmative vote of a disinterested majority of
the directors then in office."
Article X of the Company's Bylaws states:
"(a) A director of the Corporation shall not be personally
liable for monetary damages for action taken, or any failure to take action, as
a director, to the extent set forth in the Corporation's Amended and Restated
Articles of Incorporation, which provisions are incorporated herein with the
same affect as if they were set forth herein.
(b) The Corporation shall indemnify any person who is a
director, officer, employee or agent of the Corporation to the extent set forth
in the Corporation's Amended and Restated Articles of Incorporation, which
provisions are incorporated herein with the same affect as if they were set
forth herein."
In addition, the Company intends to obtain a directors and officers
liability insurance policy relating to certain actions or omissions which may be
taken, or omitted to be taken, by the directors and officers of the Company, as
well as a policy which insures against error and omissions in the offering
documents relating to the offer and sale of the Common stock to the public.
Item 16. Exhibits
The exhibits attached hereto are as follows:
<TABLE>
<CAPTION>
No. Description
--- -----------
<S> <C>
Amended and Restated Articles of Incorporation(1),(10)
3(1)
(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)
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<PAGE>
(iv) Articles Supplementary with respect to Series D Convertible Preferred
Stock;(4)
(v) Articles Supplementary with respect to Series E Convertible Preferred
Stock.
3(2) Amended and Restated Bylaws(5)
4 Stock Certificate(5)
5 Opinion of Elias, Matz, Tiernan & Herrick LLP(10)
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)
(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)
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(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 ado pted 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)
(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)
<S> <C>
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)
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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 LLP is
contained in the legal opinion included in Exhibit 5.
(ii) Consent of Coopers & Lybrand L.L.P., independent accountants.(10)
24 Power of Attorney is contained in the signature page to this
Registration Statement.(10)
</TABLE>
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(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) Filed herewith.
*Management contract or compensatory plan or agreement.
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the
registration statement (or the most recent
post-effective amendment thereof) which
individually or in the aggregate, represent a
fundamental change in the information set forth in
the registration statement;
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<PAGE>
(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.
(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
II-13
<PAGE>
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-14
<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 May 27, 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 May 27, 1998.
By: /s/ Kevin E. Brannon
--------------------------------
Kevin E. Brannon
Chairman, and Chief Executive Officer
(principal executive officer) and Director
By: *
--------------------------------
Leslie Harper
Chief Financial Officer
(principal accounting and financial officer)
By: *
--------------------------------
Marjorie A. McGinnis
President and Director
<PAGE>
By: *
--------------------------------
Nicholas P. Foris, M.D.
Director
By: *
--------------------------------
Carl R. Hildebrand
Director
By: *
--------------------------------
James W. Lutz
Director
By: *
--------------------------------
Jerome M. Pool
Director
By: *
--------------------------------
Maribeth Visco
Secretary and Director
By: *
--------------------------------
Kevin E. Brannon as attorney-in-fact
Exhibit 1
ARTICLES OF AMENDMENT
OF THE
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
FREDERICK BREWING CO.
Frederick Brewing Co., a Maryland corporation, hereby certifies to the
State Department of Assessment and Taxation of Maryland (the "Department") that
the following Articles of Amendment hereby amend the Amended and Restated
Articles of Incorporation (the "Articles") of Frederick Brewing Co. (the
"Corporation"), as filed with the Department on March 24, 1992, as amended and
restated on June 2, 1995 and as further amended on December 27, 1995.
This amendment to the Articles of the Corporation was adopted by
resolution of the Board of Directors of the Corporation on January 29, 1998 (the
"Amendment"), which declared said Amendment advisable and directed it be
submitted for consideration by the stockholders at the Annual Meeting of the
Corporation. The Amendment was approved by the stockholders of the Corporation
by the affirmative vote of more than two-thirds of all votes entitled to be cast
thereon at such Annual Meeting of the Corporation duly called, noticed and held
on May 14, 1998.
As so approved, the second sentence of Article V of the Articles is
hereby amended to read as follows:
Pursuant to these Articles of Amendment, the total number of shares of
capital stock which the Corporation has authority to issue is
20,000,000, of which 19,000,000 shall be common stock, $0.00004 par
value per share (hereinafter the "Common Stock") and of which 1,000,000
shall be preferred stock, $0.01 par value per share (hereinafter the
"Preferred Stock").
WE, THE UNDERSIGNED, being the duly authorized President and Secretary
of Frederick Brewing Co. for the purpose of amending the Articles of the
Corporation pursuant to the Maryland General Corporation Law, do make these
Articles of Amendment of the Articles of the Corporation, hereby acknowledging
and certifying, under the penalties of perjury, that this is the act and deed of
the Corporation and that, to the best of our knowledge, information and belief,
the matters and the facts herein stated are true in all material respects, and
accordingly, we have hereunto set our hands this 14th day of May, 1998.
FREDERICK BREWING CO.
WITNESS:
/s/ Maribeth Visco /s/ Marjorie A. McGinnis
- --------------------------------- --------------------------------
Maribeth Visco, Secretary Marjorie A. McGinnis, President
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
[FORM OF OPINION]
_________________, 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, we have examined the Registration Statement on Form S-3
filed by Frederick Brewing Co. (the "Company) with the Securities and Exchange
Commission on May 29, 1998 (the "Registration Statement"), in connection with
the registration under the Securities Act of 1933, as amended, of up to
1,192,086 shares of your common stock (the "Shares"). As of the effective date
of the Registration Statement all of the Shares will be issued and outstanding
and 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. We have also examined the proceedings
taken by the Company in connection with the issuance of the Shares.
In so acting, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of 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.
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
<PAGE>
authenticity of the originals of such latter documents. As to all questions of
fact material to this opinion that have not been independently established, we
have relied upon certificates or comparable documents of officers of the Company
and of public officials.
Based on the foregoing, and subject to the qualification stated herein,
as of the date hereof, it is our opinion that the Shares are validly issued,
fully paid and non-assessable. This opinion is being provided solely to the
Company and should not be relied upon by any other persons, including the
Selling Stockholders.
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, and any amendments thereto.
Very truly yours,
Elias Matz Tiernan & Herrick L.L.P.
By:
-----------------------------
Jeffrey A. Koeppel, a Partner
JAK:mem
Exhibit 23
[CONSENT OF INDEPENDENT ACCOUNTANTS]
We consent to the incorporation by reference in this Registration
Statement on Form S-3 of our report dated March 30, 1998, on our audits of the
financial statements of Frederick Brewing Co. 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."
/s/ Coopers & Lybrand L.L.P.
McLean, Virginia
May 29, 1998
