AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 10, 1997
AMENDMENT NO. 3
TO
FORM SB-2
INDEPENDENCE BREWING COMPANY
(Exact name of Registrant as specified in its charter)
Pennsylvania 2082 23-2763840
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
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1000 East Comly Street
Philadelphia, Pennsylvania 19149
(215) 537-2337
(Address and Telephone Number of Principal Executive Offices)
Robert W. Connor, Jr.
President and Chief Executive Officer
Independence Brewing Company
1000 East Comly Street
Philadelphia, Pennsylvania 19149
(215) 537-2337
(Name, Address, and Telephone Number of Agent For Service)
Copies to:
Barry M. Abelson, Esquire Lawrence B. Fisher, Esquire
Brian M. Katz, Esquire Orrick, Herrington & Sutcliffe LLP
Pepper, Hamilton & Scheetz LLP 666 Fifth Avenue
3000 Two Logan Square New York, New York 10103-0001
Eighteenth and Arch Streets (212) 506-5000
Philadelphia, PA 19103-2799
(215) 981-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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. / /
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 THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
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.
SUBJECT TO COMPLETION, DATED FEBRUARY 10, 1997
PROSPECTUS
INDEPENDENCE BREWING COMPANY [LOGO]
900,000 SHARES OF COMMON STOCK AND
4,000,000 REDEEMABLE WARRANTS
Independence Brewing Company (the 'Company') hereby offers 900,000 shares (the 'Shares') of common stock, no par value per share (the 'Common Stock') and 4,000,000 redeemable Common Stock purchase warrants (the 'Redeemable Warrants'). The Shares and the Redeemable Warrants (collectively, the 'Securities') may be purchased separately and will be separately tradeable immediately upon issuance. It is currently anticipated that the initial public offering prices of the Shares and the Redeemable Warrants will be $5.00 and $0.50, respectively. Each Redeemable Warrant entitles the registered holder thereof to purchase one share of Common Stock at an exercise price of $6.00, subject to adjustment, commencing on the date of this Prospectus until _______, 2002 [60 months from the date of the Prospectus] at which time the Redeemable Warrants shall expire. The Redeemable Warrants are redeemable by the Company, with the consent of A.S. Goldmen & Co., Inc. (the 'Underwriter'), at any time commencing on ________, 1998 [12 months from the date of this Prospectus], at a redemption price of $0.10 per Redeemable Warrant, provided that the average closing bid price of the Common Stock equals or exceeds $8.00 per share for any 20 trading days within a period of 30 consecutive trading days ending on the fifth trading day prior to the date of the notice of redemption. See 'Description of Securities -- Redeemable Warrants.'
Prior to this offering (the 'Offering'), there has been no public market for the Securities, and no assurance can be given that such a market will develop upon completion of this Offering, or if developed, that it will be sustained. The initial public offering price of the Securities and the exercise price and other terms and conditions of the Redeemable Warrants have been arbitrarily determined by negotiations between the Company and the Underwriter and do not necessarily bear any relationship to the Company's assets, book value, results of operations or other generally accepted criteria of value. See 'Underwriting.' The Common Stock and the Redeemable Warrants have been approved for quotation on the Nasdaq SmallCap Market ('Nasdaq SmallCap') upon notice of issuance under the symbols IBCO and IBCOW, respectively. See 'Risk Factors' and 'Underwriting.'
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 UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. AND REPRE- SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE UNDERWRITING PROCEEDS TO
TO PUBLIC DISCOUNTS (1) COMPANY (2)
- --------------------------------------------------------------------------------------------------------------------
Per Share.................................... $ $ $
- --------------------------------------------------------------------------------------------------------------------
Per Redeemable Warrant....................... $ $ $
- --------------------------------------------------------------------------------------------------------------------
Total........................................ $ $ $
====================================================================================================================
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(1) Does not include additional compensation to the Underwriter in the form of a non-accountable expense allowance equal to 3% of the gross proceeds of this Offering. For indemnification arrangements with, and additional compensation payable to, the Underwriter, see 'Underwriting.'
(2) Before deducting expenses estimated at $550,000 in the aggregate, payable by the Company, including the non-accountable expense allowance payable to the Underwriter.
(3) The Company has granted to the Underwriter a 45 day option to purchase up to an additional 135,000 shares of Common Stock and/or 600,000 Redeemable Warrants on the same terms and conditions as set forth above solely to cover over-allotments, if any. If such over-allotment option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $_______, $_______ and $________, respectively. See 'Underwriting.'
The Securities are being offered by the Underwriter, subject to prior sale, when, as and if delivered to and accepted by the Underwriter, and subject to the approval of certain legal matters by its counsel and certain other conditions. The Underwriter reserves the right to withdraw, cancel or modify the Offering and to reject any order in whole or in part. It is expected that delivery of the certificates representing the Securities and payment therefor will be made at the offices of A.S. Goldmen & Co., Inc. at 99 Wood Avenue South, Iselin, New Jersey 08830, or its counsel, on or about ________, 1997.
A.S. GOLDMEN & CO., INC.
The date of this Prospectus is _______________, 1997
[Photographs]
[A photograph depicting the Company's Brewmaster, William Moore, standing in the brewery.]
William Moore, The Company's Brewmaster
[A photograph depicting the Company's award-winning products at the 1996 Great American Beer Festival.]
1996 Great American Beer Festival
[A photograph depicting the Company's bottled products.]
The Company's Bottled Products
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AND THE REDEEMABLE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company intends to furnish the holders of the Common Stock with annual reports containing audited financial statements after the close of each fiscal year and make available such periodic reports as the Company may deem appropriate or as may be required by law.
This Prospectus contains trademarks of other companies.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and must be read in conjunction with, the more detailed information and financial data appearing elsewhere in this Prospectus. Unless otherwise indicated herein, all share and per share information does not give effect to (i) the exercise of the Underwriter's over-allotment option to purchase up to an additional 135,000 shares of Common Stock and/or 600,000 Redeemable Warrants and the issuance of up to 600,000 shares of Common Stock upon exercise of the Redeemable Warrants included in the Underwriter's over-allotment option; (ii) the issuance of 4,000,000 shares of Common Stock issuable upon exercise of the Redeemable Warrants; (iii) the issuance upon exercise of warrants granted to the Underwriter (the 'Underwriter Warrants') of up to 90,000 shares of Common Stock, 400,000 Redeemable Warrants and the underlying 400,000 shares of Common Stock issuable upon exercise of the Redeemable Warrants contained in the Underwriter's Warrants; (iv) 300,000 shares of Common Stock reserved for issuance upon the exercise of stock options that may be granted pursuant to the Company's stock option plan; (v) the issuance of 3,500,000 shares of Common Stock issuable upon exercise of the Company's Series B Warrant; and (vi) the redemption of fractional shares aggregating approximately four shares of Common Stock at $5.00 per share upon consummation of the Offering. See 'Management -- Stock Plan,' 'Certain Transactions -- Private Placements' and 'Underwriting.' This Prospectus contains forward-looking statements that involve certain risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under 'Risk Factors' and elsewhere in this Prospectus.
THE COMPANY
Independence Brewing Company (the 'Company') is a regional producer of fresh, high-quality, preservative-free craft-brewed ales, lagers, porters and seasonal beers. The Company's products are marketed under the 'Independence' label. The Company produces seven products: four styles of beer which are offered year-round, Independence Ale, Independence Lager, Independence Gold and Independence Porter; and three which are seasonal beers, Independence Franklinfest (Fall), Winter Warmer (Winter) and Quaker City Wheat (Summer). The Company brews, kegs and bottles its products at its brewery in Philadelphia, Pennsylvania for distribution generally by 17 independent wholesale distributors in seven states and the District of Columbia. The Company's brewing equipment currently has the capacity to brew approximately 12,000 - 14,000 barrels per year, which is in part dependent on the style of beer produced. However, currently the Company can only package a limited portion of its brewing capacity due primarily to its current bottling line deficiencies. For the nine months ended September 30, 1996, the Company produced approximately 3,000 barrels. In addition to brewing its own products, the Company has entered into contract brewing arrangements under which the Company produces beers for third parties which market and sell such products under their own label. The Company may also in the future develop and operate brewpubs, independently or with third parties, that offer for sale, in addition to food, the Company's beer brewed on the premises.
The market for beer in the United States consists of essentially three
segments: (i) economy beers, which are generally brewed by the largest domestic
brewers, such as Anheuser-Busch, Inc. ('Anheuser-Busch'), Miller Brewing Co.
('Miller'), Adolph Coors Co. ('Coors') and The Stroh Brewing Co. ('Stroh'); (ii)
imported beers, including widely promoted brands such as Heineken, Amstel,
Corona, Bass and Guinness; and (iii) craft-brewed beers. The Company operates in
the growing craft-brewing segment of the domestic brewing industry which
generally consists of small, independent brewers whose predominant product is
brewed with high-quality ingredients. Craft-brewing refers to beers produced by
microbreweries, regional specialty breweries, brewpubs and contract brewers. The
Company believes that the growing demand for craft-brewed beers in the United
States is part of a broader shift in preferences on the part of a certain
segment of consumers from mass-produced products toward high-quality distinctive
foods and beverages. According to industry data, the craft-brewing segment of
the domestic beer market has had an average annual growth rate of approximately
46% from 1986 through 1995 and, in 1995, the total combined sales for this
segment
reached approximately 3.8 million barrels, with its total share of the domestic beer market increasing to 2% from 1.3% in 1994.
The Company believes that the quality of its products is enhanced by its Brewmaster, Mr. William Moore. The Company recently received a gold medal for its Independence Franklinfest in the Marzen/Oktoberfest category at the 1996 Great American Beer Festival(Registered) and a bronze medal in the Golden Ale/Canadian-Style Ale Category for its Independence Gold at both the 1996 Great American Beer Festival and the Association of Brewers' 1996 World Beer Cup International Competition. Prior to joining the Company, Mr. Moore served as the head brewer at Stoudt Brewery, a craft-brewer in Adamstown, Pennsylvania. During Mr. Moore's tenure, Stoudt received fourteen medals at the Great American Beer Festival.
The Company's goal is to be one of the leading brewers of craft-brewed beers in the United States. The Company intends to pursue this goal by (i) expanding its product offerings, (ii) increasing the Company's distribution network both within existing markets and in new markets, (iii) developing consumer awareness through increased marketing and special events that showcase the Company's products and (iv) developing consumer loyalty through the production of high-quality products.
The Company was incorporated in Pennsylvania in May 1994. The Company's executive offices are located at 1000 East Comly Street, Philadelphia, Pennsylvania 19149, and its telephone number is (215) 537-2337.
THE OFFERING
SECURITIES OFFERED............................. 900,000 shares of Common Stock and 4,000,000 Redeemable Warrants.
Each Redeemable Warrant entitles the holder thereof to purchase
one share of Common Stock at an initial exercise price of $6.00
per share, from the date of this Prospectus until ______, 2002
[60 months from the date of this Prospectus]. The Redeemable
Warrants are redeemable by the Company, with the consent of the
Underwriter, at any time commencing ______ ___, 1998 [12 months
from the date of this Prospectus], at a redemption price of $0.10
per Redeemable Warrant, provided that the average closing bid
price of the Common Stock, as reported by Nasdaq SmallCap, or if
not quoted on Nasdaq SmallCap, as reported by any other
recognized quotation system on which the price of the Common
Stock is quoted, equals or exceeds $8.00 per share for any 20
trading days within a period of 30 consecutive trading days
ending on the fifth trading day prior to the date of notice of
redemption to the holders of the Redeemable Warrants. See
'Description of Securities.'
COMMON STOCK OUTSTANDING:
Prior to the Offering........................ 2,307,078 shares
After the Offering........................... 3,207,078 shares
USE OF PROCEEDS................................ Repayment of the Company's Debentures, repayment of certain other
outstanding indebtedness, mandatory redemption of the Company's
Series B Preferred Stock, marketing and sales, capital
expenditures and working capital. See 'Use of Proceeds,' 'Certain
Transactions -- Private Placements' and 'Description of
Securities -- Preferred Stock.'
RISK FACTORS................................... The Securities offered hereby involve a high degree of risk and
immediate and substantial dilution. See 'Risk Factors' and
'Dilution.'
NASDAQ SMALLCAP SYMBOLS:
Common Stock................................. IBCO
Redeemable Warrants.......................... IBCOW
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RISK FACTORS
In addition to the other information in this Prospectus, the following matters should be considered carefully in evaluating an investment in the shares of Common Stock and the Redeemable Warrants offered by this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus.
Limited Operating History; Past and Possible Future Operating Losses. The Company was founded in May 1994 and commenced distribution of its Independence Ale in kegs and bottles in May 1995 and June 1995, respectively. The Company has had significant losses since inception, including net losses of $36,111 for the period May 17, 1994 (inception) through December 31, 1994 and $648,302 for the year ended December 31, 1995. In addition, the Company had net losses of $576,862 and $687,999 for the nine months ended September 30, 1995 and 1996, respectively. As of September 30, 1996, the Company had an accumulated deficit of $799,228 and working capital of $195,048. For the period from May 1994 through February 1995, the Company's principal activities were raising capital, securing third party financing and completing construction of its manufacturing facility. In March 1995, the Company commenced brewing. The Company's limited operating history makes any 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. The considerable resources expended by the Company's management in connection with this Offering may have had and may have a material adverse effect on the Company's operating results in the last quarter of 1996 and the first half of 1997. Furthermore, 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. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and the Company's Financial Statements and Notes related thereto.
Unanticipated Manufacturing Limitations. The Company is currently operating a refurbished bottling line which does not include all originally manufactured parts. Incompatibility in re-manufactured parts has resulted in unanticipated machine down-time, decreased bottling capacity and problems with the adhesion of product labels to bottles. Under normal circumstances, using originally manufactured parts, the Company's current bottling line would have the capacity to fill 300 bottles per minute. However, due to the aforementioned problems, the bottling line only has been able to fill 35 bottles per minute. In addition, the Company has experienced problems with product labels falling off bottles during production. The Company anticipates purchasing a new bottling line soon after the completion of this Offering with approximately $500,000 of the net proceeds of this Offering. See 'Use of Proceeds.' The new bottling line, which the Company anticipates will be operational in the first quarter of 1997, will be designed to increase the Company's bottling capacity and alleviate its labeling problems. The Company recently utilized $55,000 of the net proceeds from the sale of the Debentures to pay a deposit on this new bottling line. See 'Certain Transactions -- Private Placements.' However, in the absence of this new bottling line, the Company's business, financial condition and results of operations will continue to be materially adversely affected by the performance of its current bottling line. In addition, there can be no assurance that the new bottling line will not have unanticipated operating problems. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and 'Certain Transactions -- Private Placements.'
Capacity Utilization. Although the Company's current brewing equipment has the capacity to brew approximately 12,000 - 14,000 barrels per year, problems with the Company's existing bottling line have limited the Company's packaging capacity. For the nine months ended September 30, 1996, the Company produced 3,000 barrels, approximately 560 barrels of which were produced for third parties pursuant to contract brewing arrangements. The Company has incurred substantial capital costs associated with building its facility and commencing its brewing operations. As a result, production levels below capacity have negatively impacted gross margins. There can be no assurance that the Company will reach full capacity based on the current bottling line or the new bottling line or that the
loss of a contract brewing client will not negatively impact capacity utilization. Unutilized capacity could have a material adverse effect on the Company's business, financial condition and results of operations. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations,' 'Business -- Brewing Facility' and 'Business -- Contract Brewing Arrangements.'
Conflict of Interest and Trademark Conflict. The Company is subject to risk associated with a potential conflict of interest that may arise out of the relationship between the Company and a third party. Robert W. Connor, Jr., President and Chief Executive Officer of the Company, was a director, officer and a shareholder of Independence Brewing Company of Florida, Inc. ('Independence Florida'), a corporation that is currently operating a brewpub in Ft. Lauderdale, Florida, utilizing the 'Independence' name and logo and the name 'Independence Brewery and Restaurant' (the 'Independence Marks'). In addition, Independence Florida has filed federal trademark and service mark applications for 'Independence Brewery and Restaurant' (the 'Applications'). The Company has entered into an agreement with Independence Florida (the 'Florida Agreement') whereby (i) Independence Florida transferred and assigned all of its rights, title and interest in the Independence Marks and the Applications to the Company, (ii) Independence Florida was granted a perpetual royalty free license to use the Independence Marks for its one location only, subject to termination upon certain conditions, and (iii) the Company agreed not to operate a bar or restaurant in Broward County, Florida, Independence Florida's geographic region, without the consent of Independence Florida. In addition, pursuant to Mr. Connor's employment agreement with the Company, Mr. Connor will offer to transfer his shares of common stock of Independence Florida to the Company if such transfer is permitted pursuant to an existing agreement among Independence Florida and its shareholders. If such shares are not transferred, the Company and Mr. Connor have agreed that the Company will receive any economic benefit from Mr. Connor's shares of common stock of Independence Florida, including dividends and sale proceeds in excess of Mr. Connor's original purchase price of such shares. See 'Certain Transactions -- Florida Agreement.'
Risk of Third Party Claims of Infringement of Intellectual Property; Uncertainty of Trademark Protection. The trademark application for the Company's logo has been refused registration by the United States Patent and Trademark Office based on a prior registration by Moosehead Breweries Limited ('Moosehead') for 'The Taste of Independence' (the 'Registration'). The Company has abandoned its federal trademark application for its logo. In addition, Moosehead has a pending U.S. trademark application for the mark 'Independence' for brewed alcoholic beverages (together with the Registration, the 'Moosehead Marks'). The Company has entered into an exclusive license and purchase agreement with Moosehead that allows the Company to use the Moosehead Marks in the United States and to purchase the Moosehead Marks at the end of a two year period (the 'Moosehead License'). If the Moosehead License is terminated in the future, the Company may find it necessary to change the brand name of its products, thereby losing any existing brand recognition in its markets. Such change may involve considerable expense, including costs involved with building goodwill in a new brand, and may have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Moosehead License will not prevent the Company from entering into the Florida Agreement and licensing the Independence Marks and the Applications to Independence Florida. The Company relies and will continue to rely on a combination of trade secret, copyright and trademark laws, non-disclosure and other arrangements to protect its proprietary rights, including its beer recipes, product packaging, advertising, promotional designs and artwork. 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 prevent the misappropriation and the unauthorized use of the Company's proprietary information and such protections 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. See 'Business -- Trademarks.'
Possible Need For Additional Financing. The Company anticipates that the net proceeds of the Offering will be sufficient to finance its activities for at least the 12 months following the date of this
Prospectus. However, there can be no assurance that the Company will not require additional financing or, if required, that such additional financing will be available to the Company on acceptable terms or at all. In addition, substantially all of the Company's assets are currently pledged as collateral securing certain indebtedness that will remain outstanding after this Offering. This may materially adversely affect the Company's ability to obtain additional financing in the future. Furthermore, the exercise of the outstanding Redeemable Warrants, the Series B Warrant and the Underwriter's Warrants at a time when the Company would in all likelihood be able to obtain equity capital on terms more favorable than those provided in such instruments may materially adversely affect the Company's business, financial condition and results of operations. See 'Certain Transactions -- Private Placements.' Factors that may lead to a need for additional financing include delays in market acceptance of the Company's products, the need for the Company to expand production to meet market demand and the acquisition and the development of brewpubs. There can be no assurance that the Company will not experience any of these or any other problems, which may materially adversely affect the Company's financial condition and results of operations. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations,' 'Business -- Property' and 'Certain Transactions -- Private Placements.'
Ability to Manage Growth; Expansion into New Markets. The Company's future success depends in part on its ability to manage growth as it increases its production capacity, replace its current bottling line, broaden the distribution of its products to both existing and new markets, expand its product offerings and, possibly, enter the brewpub business. In attempting to broaden the distribution of products, the Company will be required to establish and manage relationships with third party wholesale distributors, retailers and consumers in numerous markets. Consumer tastes may vary from market to market and, therefore, there can be no assurance that the Company will be successful in entering new markets or in maintaining its existing markets. Continued expansion of the Company's present business and possible entrance into the brewpub business will require hiring several additional key employees, such as sales managers and individuals experienced in the restaurant business. There can be no assurance that the Company will be able to hire such persons when needed or on favorable terms or that any such new employees will be successfully integrated into the Company's management.
Competition. The Company competes primarily with other participants in the craft-brewing segment of the domestic beer market in its region such as Dock Street Brewing Company, Red Bell Brewing Company, Stoudt's Brewing Company, Lancaster Malt Brewing Company, Weyerbacher Brewing Company and Victory Brewing Company, and with producers of imported beers, such as Heineken, Amstel, Corona, Bass and Guinness brands, and mass-market national brewers such as Miller, Anheuser-Busch, Coors and Stroh. The craft-brewing segment is highly competitive due to the increased number of new craft-brewers, the recent emergence of products developed by large domestic brewers designed to compete in the craft-brewing segment, the efforts by other craft-brewers to expand their production capacities and distribution and a general surplus of underutilized domestic brewing capacity, which facilitates existing contract brewer expansion and the entry of new contract brewers. Although domestic demand for craft-brewed beers has increased over the past ten years, there can be no assurance that this demand will continue. The Company anticipates intensifying competition in the craft-brewing segment, and believes that, as a result, prices may fluctuate and could decline. In addition, the Company's products also compete generally with other beverages, including other segments of the domestic beer market and soft-drinks. 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 third party wholesale distributors and their customers, many of which also distribute and sell other beverage products. See 'Business -- Competition.' Many of the Company's competitors possess marketing, financial and other resources substantially greater than those of the Company, and there can be no assurance that the Company will be able to achieve continued success in the face of intensified competition from within the craft-brewing segment, from other segments of the beer market and from beverages in general.
Entrance into the Brewpub Business. The growth of the Company may involve acquiring existing brewpubs and/or developing new brewpubs, some or all of which may include third party
investors and/or third party financing. In addition, pursuant to the provision in Mr. Connor's employment agreement with the Company concerning the possible transfer of his ownership interest in Independence Florida to the Company, the Company may obtain an approximately 10% ownership interest in Independence Florida. See ' -- Conflict of Interest and Trademark Conflict.' The Company is currently in the process of evaluating acquisition targets and/or sites to develop brewpubs. As of the date of this Prospectus, the Company has not entered into any agreements to either acquire or develop brewpubs. The Company's ability to enter into the brewpub business will depend upon a variety of factors, including the availability and cost of suitable acquisition candidates and/or building sites, the employment and training of management, brewpub staff and other personnel, regulatory limitations regarding common ownership of breweries and restaurants in certain states, acceptable leasing or financing terms of equipment, cost effective and timely construction of new brewpubs (which construction can be delayed due to, among other reasons, labor disputes, local zoning and licensing matters and weather conditions) and securing required governmental permits and approvals. There can be no assurance that the Company will be successful in acquiring or opening new brewpubs, that those brewpubs will be opened in a timely manner, or that, if opened, those brewpubs will be operated profitably. New brewpubs typically operate with below normal profitability and incur certain additional costs in the process of achieving operational efficiencies during the first several months of operation. Consequently, future financial condition and results of operations may be materially adversely affected by costs associated with entering the brewpub business.
Dependence on Key Personnel; Inexperience of Management. The Company's success substantially depends upon the efforts of the Company's President and Chief Executive Officer, Robert W. Connor, Jr., and the Company's Brewmaster and Secretary, William Moore. The loss of Mr. Connor or Mr. Moore could have a material adverse effect on the Company's financial condition and results of operations. The Company has recently entered into employment agreements with each of these officers. The Company has a key-man insurance policy for its benefit on the life of Mr. Connor in the amount of $1,500,000. The Company's only two executive officers are Mr. Connor and Mr. Moore. The Company does not have any other full-time executives, including one with financial or accounting experience. Mr. Connor, who does not have significant accounting or financial experience, is currently functioning as the Company's principal financial officer. In addition, although Mr. Connor has five years of experience in various aspects of brewing operations, Mr. Connor has overseen the operations of a brewery only since forming the Company. The success of the Company is dependent upon its ability to hire and retain qualified financial, operational, technical, marketing and other personnel. However, there can be no assurance that the Company will be able to hire or retain such necessary personnel. See 'Use of Proceeds' and 'Management.'
Dependence on Distributors. Except for two counties in Pennsylvania where the Company distributes its own products, the Company relies on third party wholesale distributors, 17 as of the date of this Prospectus, for the distribution of its products to retailers. Two wholesale distributors accounted for approximately 21% and 22% of the Company's sales for the year ended December 31, 1995, the same two wholesale distributors accounted for approximately 25% and 24% of the Company's sales for the nine month period ended September 30, 1995 and three wholesale distributors accounted for approximately 11%, 11% and 10% of the Company's sales for the nine month period ended September 30, 1996. The Company's largest and third largest distributors in 1995 merged and the aggregate entity was for the nine months ended September 30, 1996 the Company's largest distributor. The Company's second largest distributor for the year ended December 31, 1995 is no longer among the Company's largest distributors due to the Company's decision to distribute products itself in the Philadelphia region. The Company has chosen to directly distribute products in the Philadelphia region primarily in order to reduce its advertising, promotional and selling expenses in connection with the sale of such products. The loss of any wholesale distributor, if not immediately replaced, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company generally depends upon its distributors to sell and create demand for the Company's products among the distributors' retail customers. Such distributors do not exclusively distribute the Company's products. The Company's distributors often represent competing craft-brewed brands, as well as economy and import brands. There can be no assurance that the Company's distributors will devote
sufficient resources to provide effective sales and promotion support to the Company or continue to distribute the Company's products. The Company generally sells to its distributors on a purchase order/invoice basis. To the extent the Company has executed a written contract with a distributor, such contract may be terminated by such distributor without notice. See 'Business -- Product Distribution.'
Dependence on Suppliers. The Company purchases from its suppliers certain ingredients, such as hops, malt and brewer's yeast, 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, 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. 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. The Company purchases its supplies on a purchase order basis and does not have long-term purchase contracts with its suppliers. The loss of a material supplier could materially adversely affect the Company's business, financial condition and results of operations if there were a delay in shipments from alternative suppliers. See 'Business -- Brewing Operations -- Ingredients and Raw Materials.'
Shortages of Supply. The supply, quality and price of raw materials used
to produce the Company's products can be affected by factors beyond the control
of the Company, such as drought, frost, other weather conditions, economic
factors affecting growing decisions, various plant diseases and pests. If any of
the foregoing were to occur, the Company's business, financial condition and
results of operations would be materially adversely affected. In addition, the
Company's results of operations are dependent upon its ability to accurately
forecast its requirements of raw materials. Any failure by the Company to
accurately forecast its demand for 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 materially adversely affect the
Company's business, financial condition and results of operations. See 'Business
- -- Brewing Operations -- Ingredients and Raw Materials.'
Limited Product Line. The sale of a limited number of styles of beer has accounted for substantially all revenue of the Company since the Company's inception. The Company currently produces seven products consisting of four styles of beer which are offered year-round and three which are seasonal beers offered during certain times of the year. 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 market acceptance of these limited products. Two of the Company's customers accounted for 21% and 22% of the Company's sales during the year ended December 31, 1995, the same two wholesale distributors accounted for approximately 25% and 24% of the Company's sales for the nine month period ended September 30, 1995 and three customers accounted for 11%, 11% and 10% of the Company's sales during the nine months ended September 30, 1996. The loss of any such customer, if not immediately replaced, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company may offer an old fashioned root beer soft-drink in the future. There can be no assurance that the Company's current management can develop the expertise necessary to enter the soft-drink business or that the Company can recruit, hire and retain individuals experienced in the soft-drink business. There can be no assurance that the Company will be successful in developing, introducing and marketing new products on a timely and regular basis. If the Company is unable to introduce new products or if the Company's new products are not successful, the Company's sales may be materially adversely affected as customers seek competitive products. The Company may also experience increased costs in connection with developing new products in the period prior to the distribution of such new products. In addition, the introduction or announcement of new products by the Company could result in reduction of sales of the Company's existing products, requiring the Company to manage carefully product introductions in
order to minimize disruption in sales of existing products. There can be no assurance that the introduction of new product offerings by the Company will not cause 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 business, financial condition and results of operations. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and 'Business -- Products.'
Single-Site Manufacturing Facility. All of the Company's brewing and bottling operations are performed at its facility in Philadelphia, Pennsylvania. In the event this facility were damaged by fire or other casualty, which damage could not be repaired in a short period of time, the Company's production would be substantially interrupted and such casualty would have a material adverse effect on the Company's business, financial condition and results of operations. The Company has obtained general commercial liability insurance in the amount of $2,000,000 and an additional $1,000,000 of commercial catastrophe insurance. See 'Business -- Brewing Facility' and ' -- Property.'
Portions of Offering Proceeds Benefiting President and Chief Executive Officer. A portion of the net proceeds of the Offering will be used to repay the amount outstanding pursuant to the Company's promissory note in favor of CoreStates Bank, N.A. in connection with a Small Business Administration Loan (the 'SBA Loan'), which totaled $408,496 at September 30, 1996. Robert W. Connor, Jr., President and Chief Executive Officer of the Company, personally guaranteed the SBA Loan. The application of a portion of the net proceeds of this Offering to the repayment of such obligation will result in the termination of such guarantee. See 'Use of Proceeds,' 'Certain Transactions -- Guaranties' and the Company's Financial Statements and Notes related thereto.
Sales Fluctuations Due to Seasonality. The Company believes that its third party distributors have historically experienced decreased sales in the first calendar quarter due to decreased consumption of beer after the holiday season. Although the Company has not yet experienced sales fluctuations due to seasonality because the Company has continued to expand its wholesale distributors network, fluctuations in the Company's sales due to seasonality may become evident in the future if and as the Company's sales increase.
Control By Existing Shareholders. Upon completion of this Offering, Mr. Connor and Winfield Capital Corp., a Small Business Investment Company ('SBIC') licensed by the Small Business Administration ('Winfield'), will own an aggregate of approximately 47% of the outstanding Common Stock. Consequently, Mr. Connor and Winfield will likely continue to be able to elect the Company's directors, to determine the outcome of corporate actions requiring shareholder approval and otherwise to control the business affairs of the Company. Mr. Connor has agreed to vote in favor of the election of one nominee for the Board of Directors of the Company selected by Winfield, as long as Winfield owns greater than 10% of the outstanding Common Stock. Upon exercise of the Series B Warrant (as further described in 'Management's Discussion and Analysis of Financial Results and Operations -- Liquidity and Capital Resources'), Winfield would own an aggregate of 66.3% of the outstanding Common Stock (assuming no exercise of the Redeemable Warrants). However, Winfield has indicated to the Company that, due to restrictions imposed by regulations governing SBICs, it does not intend to exercise the Series B Warrant to the extent that such exercise would result in Winfield owning 50% or more of the outstanding Common Stock. See 'Principal Shareholders.'
Operating Hazards. The Company's operations are subject to certain hazards and liability risks faced by all brewers, such as potential contamination of ingredients or products by bacteria or other external agents that may be wrongfully or accidentally introduced into products or packaging. There can be no assurance that any such contamination will not occur. The occurrence of such a problem could result in a costly product recall and serious damage to the Company's reputation for product quality, as well as claims for product liability. In addition, the Company's products are not pasteurized and have a limited shelf-life. Upon expiration of shelf-life, the Company's products are returned to the Company by the distributors or retailers for disposal by the Company. The Company may incur cost in connection with such returns, including shipping expenses. The Company's operations are also subject to certain injury and liability risks normally associated with the operation and possible malfunction of
brewing and other equipment. Although the Company maintains insurance against certain risks under a general liability and product liability insurance policy, there can be no assurance that the Company's insurance will be adequate. See 'Business -- Brewing Operations.'
Government Regulation. The manufacture and sale of alcoholic beverages is a business that is highly regulated and taxed at the federal, state and local levels. The Company's operations may be subject to more restrictive regulations and increased taxation by federal, state and local governmental agencies than are those of non-alcohol related businesses. For instance, brewery and wholesale operations require various federal, state and local licenses, permits and approvals. In addition, some states prohibit wholesalers and/or retailers from holding an interest in any supplier such as the Company. Furthermore, some state regulations may restrict the ability of the Company to change prices for its products. Violation of such regulations can result in the loss, revocation or suspension of existing licenses by the wholesaler, retailer and/or supplier. The loss, revocation or suspension of any existing licenses, permits or approvals could have a material adverse effect on the Company's business. Because of the many and various state and federal licensing and permitting requirements, there is a risk that one or more regulatory authorities could determine that the Company has not complied with applicable licensing or permitting regulations or does not maintain the approvals necessary for it to conduct business within their jurisdictions. There can be no assurance that any such regulatory action would not have a material adverse effect upon the Company's business. The federal government and each of the states levy excise taxes on alcoholic beverages, including beers. The federal government currently imposes an excise tax of $18.00 per barrel on every barrel of beer produced for consumption in the United States by each brewing company with annual production of over 2,000,000 barrels. The federal excise tax for brewing companies with annual production under 2,000,000 barrels is $7.00 per barrel on all barrels up to the first 60,000 barrels produced and $18.00 per barrel for each barrel produced in excess of 60,000. In addition, sale of alcoholic beverages is subject to state excise and other taxes which vary with each state. While the Company believes that it is in compliance with its federal, state and local tax obligations, any determination that the Company has additional federal, state or local tax liability could have a material adverse effect on the Company's financial condition and results of operations. See 'Business -- Government Regulation.'
Dram Shop Laws. The serving of alcoholic beverages to a person known to be intoxicated may, under certain circumstances, result in the server's being held liable to third parties for injuries caused by the intoxicated customer. If the Company opens brewpubs, the Company will attempt to address this concern by implementing employee training and designated-driver programs. The Company has obtained host liquor and legal liquor liability insurance coverage for such liability in connection with the Company hosting special events where liquor is served. If the Company opens brewpubs, this coverage may be required to be increased. There can be no assurance that increased coverage will be available or, if available, will not be cost prohibitive. Future increases in premiums could make it prohibitive for the Company to obtain adequate insurance coverage, and large uninsured damage awards against the Company could have a material adverse effect on the Company's financial condition and results of operations. See 'Business -- Government Regulations.'
Public Attitudes. The alcoholic beverage industry has become the subject of considerable societal and political attention in recent years due to increasing public concern over alcohol-related social problems including drunk driving, underage drinking and health consequences from the misuse of alcohol, including alcoholism. As an outgrowth of these concerns, the possibility exists that advertising by beer producers could be restricted, that additional cautionary labeling or packaging requirements might be imposed or that there may be renewed efforts to impose increased excise or other taxes on beer sold in the United States. If beer consumption in general were to come into disfavor among domestic consumers, or if the domestic beer industry were subjected to significant additional governmental regulations, the Company's business could be materially adversely affected. See 'Business -- Government Regulation.' In addition, consumer tastes may change over time or may vary in the markets which the Company currently operates and new markets in which the Company intends to enter and there is no assurance that the same level of sales and operating margins can be maintained in the Company's existing market or achieved in new markets. Similarly, there can be no
assurance that the Company's products will be successful in its existing market or will penetrate new markets.
Demand in Domestic Beer Market; No Assurance of Future Consumer Demand for Craft-brewed Beer. Per capita beer consumption in the United States has declined in all but two of the last 10 years and consecutively for the last five years. In the last 10 years, industry reports indicate that per capita annual U.S. beer consumption has dropped to 21.1 gallons from 22.7 gallons in 1985. However, during the same period, the craft-brewed beer segment of the domestic beer market has grown. 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-brewed 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 price of and demand for the Company's products and may, therefore, affect the Company's business, financial condition and results of operations. See 'Business -- Industry Background.'
Arbitrary Determination of Public Offering Prices; Potential Volatility of Common Stock and Redeemable Warrants. The initial public offering prices of the Securities and the terms of the Redeemable Warrants were arbitrarily determined by negotiations between the Company and the Underwriter and, as a result, the prices of the Securities offered herein may bear no relationship to the Company's asset value, net worth or any other recognized criteria of value. See 'Underwriting' for a discussion of the factors to be considered in determining the initial public offering prices. The trading price of the Common Stock or Redeemable Warrants may be volatile and may be significantly affected by factors such as actual or anticipated fluctuations in the Company's operating results, announcements of new products by the Company or its competitors, developments with respect to conditions and trends in the craft beer segment of the domestic beer market, government regulation, general market conditions and other factors, many of which are beyond the Company's control. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have materially adversely affected the market prices of securities of companies' irrespective of such companies' operating performances.
No Dividends. The Company has never paid and does not anticipate paying cash dividends on the Common Stock in the foreseeable future. See 'Dividend Policy.'
Dilution. Purchasers of shares of Common Stock in the Offering will experience immediate and substantial dilution of $3.43 (or approximately 69%) in the net tangible book value of their shares (assuming an initial public offering price of $5.00 per share for the Common Stock). See 'Dilution.'
Impact of Private Placements. In connection with the sale of $800,000 of Debentures and the issuance of $700,000 of Series B Preferred Stock in the Private Placements (as such terms are defined in 'Management's Discussion and Analysis of Financial Condition and Results of Operations'), the Company issued common stock warrants at a per share exercise price below the assumed initial public offering price such warrants which have been fully exercised. The Company intends to utilize a portion of the net proceeds from this Offering to repay the Debentures and redeem the Series B Preferred Stock. See 'Use of Proceeds.' As a result, the Company will write off (i) unamortized original issue discount of $1,223,764 and deferred financing costs of $31,200 in connection with the Debentures and (ii) unamortized original issue discount of $1,851,090 and deferred financing costs of $27,736 in connection with the Series B Preferred Stock. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations.'
Broad Discretion in Application of Proceeds. The Company intends to use approximately $941,000, or 18% of the net proceeds to the Company from the Offering (approximately $1,740,000 million, or 29%, of the net proceeds to the Company from the Offering if the Underwriters' over-allotment option is exercised in full), for working capital and general corporate purposes, and the Company has not yet identified more specific uses for such net proceeds. Accordingly, the specific uses for the net proceeds will be at the complete discretion of management of the Company and the
Board of Directors and may be allocated based upon circumstances arising from time to time in the future. See 'Use of Proceeds.'
No Assurance of Public Trading Market or Continued Nasdaq SmallCap Inclusion; Risk of Low-Priced Securities. Prior to the Offering, there has been no public market for the Securities, and there can be no assurance that an active public market will develop or, if developed, be sustained. In order to qualify for continued quotation on Nasdaq SmallCap, a company, among other things, must have $2 million in total assets, $1 million in capital and surplus and a minimum bid price of $1.00 per share. Nasdaq SmallCap has proposed modifying such requirements so that a company must have, among other things, (i) $2,000,000 in net tangible assets or a $35 million market capitalization or $500,000 in net income in two of the last three years, (ii) a market value of its publicly held shares equal to $1 million and (iii) a minimum bid price of $1 per share. However, there is no assurance that these proposed listing requirements will be adopted. Quotation of the Securities on Nasdaq SmallCap provides no assurance that an active or liquid market will develop or, if such market develops, that it will be sustained. If the Company were unable to satisfy the maintenance requirements for quotation on Nasdaq SmallCap, of which there can be no assurance, it is anticipated that the Securities would be quoted in the over-the-counter market National Quotation Bureau 'pink sheets' or on the NASD OTC Electronic Bulletin Board. As a result, an investor may find it more difficult to dispose of, or obtain, accurate quotations as to the market price of the Securities, which may materially adversely affect the liquidity of the market for the Securities. In addition, if the Securities are delisted from Nasdaq SmallCap, they might become subject to the low-priced security or so-called 'penny stock' rules that impose additional sales practice requirements on broker-dealers who sell such securities. For any transaction involving a penny stock, the rules require, among other things, the delivery, prior to the transaction, of a disclosure schedule required by the Securities and Exchange Commission (the 'Commission') relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information for the penny stocks held in the customer's account.
Although the Company believes that the Securities will not be defined as a penny stock due to their anticipated inclusion on Nasdaq SmallCap, in the event the Securities subsequently become characterized as a penny stock, the market liquidity for the Securities could be severely affected. In such an event, the regulations relating to penny stocks could limit the ability of broker-dealers to sell the Securities and, thus, the ability of purchasers in this Offering to sell their Securities in the secondary market.
Current Prospectus and State Registration Required to Exercise Redeemable Warrants. The Redeemable Warrants are not exercisable unless, at the time of exercise, the Company has a current prospectus covering the shares of Common Stock issuable upon exercise of the Redeemable Warrant and such shares have been registered, qualified or deemed to be exempt under the securities or 'blue sky' laws of the state of residence of the exercising holder of the Redeemable Warrants. In addition, in the event that any holder of the Redeemable Warrants attempts to exercise any Redeemable Warrants at any time after nine months from the date of this Prospectus, the Company will be required to file a post-effective amendment to the Registration Statement of which this Prospectus is a part and deliver a current prospectus before the Redeemable Warrants may be exercised. Although the Company has undertaken to use its best efforts to have all of the shares of Common Stock issuable upon exercise of the Redeemable Warrants registered or qualified on or before the exercise date and to maintain a current prospectus relating thereto until the expiration of the Redeemable Warrants, there is no assurance that it will be able to do so, and it may be required to incur significant costs in connection therewith. The value of the Redeemable Warrants may be greatly reduced if a current prospectus covering the Common Stock issuable upon the exercise of the Redeemable Warrants is not kept effective or if such Common Stock is not qualified or exempt from qualification in the states in which the holders of the Redeemable Warrants then reside. The Redeemable Warrants will be separately tradeable immediately upon issuance and may be purchased separately from the Common Stock. Although the Securities will not knowingly be sold to purchasers in jurisdictions in which the
Securities are not registered or otherwise qualified for sale, investors may purchase the Redeemable Warrants in the secondary market or may move to jurisdictions in which the shares underlying the Redeemable Warrants are not registered or qualified during the period that the Redeemable Warrants are exercisable. In such event, the Company will be unable to issue shares to those persons desiring to exercise their Redeemable Warrants unless and until the shares are qualified for sale in jurisdictions in which such purchasers reside, or an exemption from such qualification exists in such jurisdictions, and holders of the Redeemable Warrants would have no choice but to attempt to sell the Redeemable Warrants in a jurisdiction where such sale is permissible or allow them to expire unexercised. See 'Description of Securities -- Redeemable Warrants.'
Speculative Nature of Redeemable Warrants; Adverse Effect of Possible Redemption of Redeemable Warrants. The Redeemable Warrants do not confer any rights of Common Stock ownership on the holders thereof, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire shares of Common Stock at a fixed price for a limited period of time. Specifically, holders of the Redeemable Warrants may, immediately upon issuance, exercise their right to acquire Common Stock and pay an exercise price of $6.00 per share, subject to adjustment in the event of certain dilutive events, prior to five years from the date of this Prospectus, after which date any unexercised Redeemable Warrants will expire and have no further value. There can be no assurance that the market price of the Common Stock will ever equal or exceed the exercise price of the Redeemable Warrants, and consequently, whether it will ever be profitable for holders of the Redeemable Warrants to exercise the Redeemable Warrants.
The Redeemable Warrants are subject to redemption by the Company, with the consent of the Underwriter, at any time, commencing 12 months following the date of this Prospectus, on 30 days prior written notice, at a price of $0.10 per Redeemable Warrant, provided that the average closing bid price for the Common Stock equals or exceeds $8.00 per share for any 20 trading days within a period of 30 consecutive trading days ending on the fifth trading day prior to the date of the notice of redemption. Redemption of the Redeemable Warrants could force the holders thereof to exercise the Redeemable Warrants and pay the exercise price at a time when it may be disadvantageous for such holders to do so, to sell the Redeemable Warrants at the current market price when they might otherwise wish to hold the Redeemable Warrants or to accept the redemption price, which may be substantially less than the market value of the Redeemable Warrants at the time of redemption. The holders of the Redeemable Warrants will automatically forfeit their rights to purchase shares of Common Stock issuable upon exercise of the Redeemable Warrants unless the Redeemable Warrants are exercised before they are redeemed. See 'Description of Securities -- Redeemable Warrants.'
Shares Eligible For Future Sale. Upon completion of this Offering, the
Shares and Redeemable Warrants will be freely tradeable unless acquired by
affiliates of the Company. The remaining 2,307,078 shares of Common Stock and
the Series B Warrant to purchase 3,500,000 shares of Common Stock which will be
outstanding upon consummation of the Offering were issued by the Company in
private transactions in reliance upon the 'private placement' exception under
Section 4(2) of the Securities Act of 1933, as amended (the 'Securities Act') at
various times between February 1994 and September 1996, and are therefore
'restricted securities' within the meaning of Rule 144 promulgated under the
Securities Act ('Restricted Securities'). Accordingly, such Restricted
Securities may not be sold unless they are registered under the Securities Act
or unless an exemption from registration, such as the exemption provided by Rule
144, is available. The market price of the Shares and/or Redeemable Warrants of
the Company could be materially adversely affected by the availability for sale
of substantial amounts of Common Stock in the public market following the
Offering. No prediction can be made as to the effect that future sales of Common
Stock and of the availability of the shares of Common Stock for future sale will
have on the market prices of the Shares and the Redeemable Warrants prevailing
from time to time. The Redeemable Warrants being offered by the Company entitle
the holders of such Redeemable Warrants to purchase up to an aggregate of
4,000,000 shares of Common Stock at any time during the period commencing on the
date of this Prospectus and expiring five years from the date of this
Prospectus. Sales of either the Redeemable Warrants or the underlying shares of
Common Stock, the exercise of the Series B Warrant
or even the existence of the Redeemable Warrants or the Series B Warrant may depress the price of the Common Stock or the Redeemable Warrants in any market which may develop for such securities. See 'Description of Securities -- Redeemable Warrants.' All of the current holders of the Common Stock (including shares issuable upon the exercise of outstanding options) have agreed that they will not sell, offer to sell, pledge, contract to sell or otherwise attempt to transfer or dispose of any beneficial interest in any shares of Common Stock for a period of 13 months from the date of this Prospectus (the 'Initial Lock-up Period') without the prior written consent of the Underwriter. Winfield has further agreed unconditionally that it will not sell, offer to sell, pledge, contract to sell or otherwise attempt to transfer or dispose of any beneficial interest in any equity or derivative securities it received in connection with the Private Placements for so long as requested by Nasdaq, not to exceed a period of thirty-six (36) months from the date of purchase. The officers and directors of the Company and Winfield also have agreed not to transfer any securities of the Company owned prior to the offering for 12 months from the date of the Prospectus and, for the subsequent 12 month period, will not transfer any of such securities for a price below the initial public offering price of such securities. In addition, certain shareholders have the right to have their shares of Common Stock and the Series B Warrant registered at the expense of the Company under the Securities Act for public sale. See 'Shares Eligible for Future Sale' and 'Description of Securities -- Registration Rights.'
Authorization of Preferred Stock; Anti-Takeover Protections. The Company's Articles of Incorporation, as amended (the 'Articles'), authorize the issuance of 'blank check' preferred stock with such designations, rights and preferences as may be determined from time to time by the Company's Board of Directors (the 'Board'). Accordingly, the Board is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could materially adversely affect the voting power or other rights of the holders of the Common Stock (including those of the purchasers in the Offering). Holders of the Common Stock will have no preemptive rights to subscribe for a pro rata portion of any capital stock which may be issued by the Company. In the event of issuance, such preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although the Company has no present intention to issue any shares of preferred stock, there can be no assurance that the Company will not do so in the future. See 'Description of Securities.' Furthermore, the Company is subject to certain anti-takeover provisions of the Pennsylvania Business Corporation Law of 1988, as amended (the 'BCL'). The existence of these provisions would be expected to have an anti-takeover effect, including possibly discouraging takeover attempts that might result in a premium over the market price for the Common Stock. See 'Description of Securities -- Pennsylvania Anti-Takeover Laws.'
Administrative Proceeding Involving Underwriter. On December 19, 1996, the National Association of Securities Dealers, Inc. ('NASD') District Business Conduct Committee filed a complaint against the Underwriter and certain employees of the Underwriter. The complaint alleges that during the period between July 26 and July 29, 1994, the Underwriter violated certain NASD rules in connection with the distribution and sale of certain securities underwritten by the Underwriter. The Underwriter has advised the Company that it intends to vigorously defend against such claims. In the event that the NASD succeeds in finding a rule violation against the Underwriter, sanctions may be imposed on the Underwriter which could materially adversely affect the Underwriter's ability to act as a market maker for the Securities, which in turn could have an adverse effect on the market price and liquidity of the Securities. See 'Underwriting.'
New Jersey Securities Registration. The Securities offered hereby are not registered or qualified for offer and sale to residents of certain states, including the State of New Jersey. The New Jersey Bureau of Securities (the 'New Jersey Bureau') has recently taken the position that the Underwriter may not offer or sell any securities 'from' its New Jersey office which are not registered in New Jersey, including offers and sales to residents of states in which the securities are registered and/or qualified for offer and sale. On November 20, 1996, in a case entitled A.S. Goldmen & Co., Inc. v. New Jersey Bureau of Securities, No. 96-5280 (DRD), the United States District Court for the District of New Jersey (the 'District Court') issued a preliminary injunction holding that the state statute upon which the New Jersey Bureau's position is based is unconstitutional as applied to offers or sales of securities to non-New Jersey residents. The New Jersey Bureau has contested that ruling. If the New Jersey Bureau succeeds in overturning or vacating the ruling of the District Court's decision, the Underwriter could be prohibited from offering or selling these Securities from its offices in New Jersey. Such a prohibition could, in turn, have a negative effect upon the market price of the Securities.
USE OF PROCEEDS
The net proceeds from the sale of the Securities offered by the Company hereby, after deducting the underwriting discount and estimated offering expenses, will be approximately $5,300,000 (or approximately $6,100,000 if the Underwriter exercises its over-allotment option in full), assuming an initial public offering price of $5.00 per share of Common Stock and $0.50 per Redeemable Warrant. The Company intends to use the net proceeds as follows:
APPROXIMATE APPROXIMATE
AMOUNT PERCENT
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Repayment of Debentures(1)........................................................... $ 812,020 15%
Repayment of Certain Other Outstanding Indebtedness(2)............................... 408,496 8
Redemption of Preferred Stock(3)..................................................... 738,111 14
Marketing and Sales(4)............................................................... 1,500,000 28
Capital Expenditures(5).............................................................. 900,000 17
Working capital and general corporate purposes(6).................................... 941,373 18
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Total.............................................................................. $ 5,300,000 100%
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(1) Reflects repayment of the Company's Debentures, including all accrued and unpaid interest outstanding on an assumed repayment date of January 31, 1997. The Debentures accrue interest at a rate of 12.75% per annum (which increases to 14% upon the completion of a public offering) and absent certain conditions, including a public offering, mature in August, 2001. Accordingly, the Company must repay the Debentures upon the closing of the Offering. See 'Certain Transactions -- Private Placements.'
(2) Consists of the principal amount outstanding at September 30, 1996 pursuant to the SBA Loan, which was issued on January 17, 1995, accrues interest at a rate equal to the prime rate plus 2% (effective rate of 10.25% at September 30, 1996) and matures on January 17, 2002.
(3) Payment of principal and all accrued and unpaid dividends at an assumed repayment date of January 31, 1997 in connection with the mandatory redemption of the Company's Series B Preferred Stock upon the consummation of the Offering. See 'Description of Securities -- Preferred Stock.'
(4) Consists of anticipated expenditures in connection with advertising, attendance at trade shows, public relations activities and merchandising activities. Also includes anticipated expenses in connection with the potential acquisition by the Company of existing brewpubs and/or the development of new brewpubs.
(5) Consists of anticipated expenditures in connection with the purchase of additional fermenting equipment, a new bottling line, kegs and laboratory equipment for testing facilities.
(6) To the extent that the Company's cash flow from operations is not sufficient to pay Mr. Connor's and Mr. Moore's salaries pursuant to their employment agreements, the Company may utilize net proceeds from the Offering that are otherwise allocated to working capital and general corporate purposes to pay such salaries. See 'Risk Factors -- Broad Discretion in Application of Proceeds' and 'Management -- Employment Arrangements.'
The initial application of the net proceeds of the Offering represents management's estimate based upon current business and economic conditions. Although the Company does not contemplate material changes in the proposed allocation of the use of proceeds, to the extent the Company finds that an adjustment is required by reason of existing business conditions, the amounts shown may be adjusted among the uses indicated above.
Although the Company believes that the net proceeds of the Offering will be
sufficient to finance its activities for at least 12 months following the date
of this Prospectus, there can be no assurance in that regard. See 'Risk Factors
- -- Possible Need For Additional Financing' and 'Management's Discussion and
Analysis of Financial Condition and Results of Operations.'
To the extent that the Company's application of the net proceeds set forth above are less than is initially estimated or if the net proceeds of the Offering increase as a result of the exercise by the Underwriter of its over-allotment option, or as a result of the exercise of the Redeemable Warrants, the resulting balances will be used either for the purposes set forth above or for general working capital purposes. The net proceeds of the Offering that are not expended immediately will be deposited in interest-bearing accounts, or invested in government obligations, certificates of deposit or similar short-term, low risk investments.
DIVIDEND POLICY
The Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future with respect to its Common Stock. The Company's future dividend policy will depend upon the Company's earnings, capital requirements, financial condition and other factors considered relevant by the Board. The Company presently intends to retain any earnings which the Company may realize in the foreseeable future to finance the growth of the Company.
DILUTION
The Company had a negative net tangible book value of $(472,676) or $(0.20) per share as of September 30, 1996. Net tangible book value per share is equal to the total tangible assets of the Company less total liabilities, divided by the number of shares of Common Stock outstanding. After giving effect to the receipt of the net proceeds from the sale of the Securities offered hereby (after deducting the underwriting discount and estimated offering expenses) and the initial application of the net proceeds therefrom, the as adjusted net tangible book value of the Company at September 30, 1996 would have been $5,034,110 or $1.57 per share, representing an immediate dilution of $3.43 (or approximately 69%) per share to the public investors as illustrated by the following table:
Assumed initial public offering price per share of Common Stock............................. $5.00
Negative net tangible book value per share of Common Stock before the Offering(1)......... $(0.20)
Increase in net tangible book value per share of Common Stock attributable to public
investors.............................................................................. $1.77
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As adjusted net tangible book value per share of Common Stock after the Offering.......... $1.57
---------
Dilution per share of Common Stock to public investors(1)................................... $3.43
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(1) In the event that the Underwriter exercises its over-allotment option in full, the as adjusted net tangible book value after this Offering would be approximately $1.76 per share, which would result in immediate dilution to public investors of approximately $3.24 per share.
The following table sets forth, as of the date of this Prospectus, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by existing shareholders and by new investors purchasing shares of Common Stock from the Company in this Offering.
NUMBER OF PERCENT PERCENT OF TOTAL TOTAL
SHARES OF TOTAL CONSIDERATION CONSIDERATION AVERAGE PRICE
PURCHASED SHARES PAID PAID PER SHARE
----------- -------- ---------------- ------------- -------------
Present Shareholders............... 2,307,078 72% 19% $1,072,155 $0.46
Public Investors................... 900,000 28% 81% 4,500,000(1) $5.00
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Total.............................. 3,207,078 100% 100% $5,572,155
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(1) Allocates no value to the Redeemable Warrants offered hereby.
The foregoing table assumes no exercise of the Redeemable Warrants or the Series B Warrant. To the extent that any options issued by the Company in the future or the Redeemable Warrants or the Series B Warrant are exercised, there may be further dilution to the new investors in this Offering.
CAPITALIZATION
The following table sets forth the capitalization of the Company at September 30, 1996. This information should be read in conjunction with the financial statements and the notes thereto which are included elsewhere in this Prospectus.
SEPTEMBER 30, 1996
-----------------------------
ACTUAL AS ADJUSTED(1)
------------- --------------
Short-term debt, including current portion of long-term debt................. $ 75,600 $ 32,400
------------- --------------
------------- --------------
Long-term debt............................................................... $ 1,353,764 $ 188,468
Series A Preferred Stock, $10.00 par value,
500,000 shares authorized; no shares issued and
outstanding, and no shares issued and outstanding,
pro forma, as adjusted..................................................... -- --
Series B Preferred Stock, $10.00 par value,
500,000 shares authorized; 70,000 shares issued and
outstanding, actual; 70,000 shares issued
and outstanding, and no shares issued and outstanding,
as adjusted................................................................ 700,000 --
Shareholders' equity:
Common Stock, no par value, 19,000,000
shares authorized, 2,307,078 shares issued and
outstanding, actual; 3,207,078 shares issued and
outstanding, as adjusted................................................ 3,691,428 8,991,428
Accumulated deficit........................................................ (799,228) (3,946,982)
------------- --------------
Total shareholders' equity................................................... 2,892,200 5,044,446
------------- --------------
Total capitalization......................................................... $ 4,945,964 $ 5,232,914
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(1) Gives effect on an as adjusted basis to (i) the sale of 900,000 shares of Common Stock and 4,000,000 Redeemable Warrants in connection with this Offering at the assumed initial public offering prices of $5.00 and $.50, respectively, (ii) the repayment of the SBA Loan of $408,496, (iii) the repayment of the $800,000 of Debentures and accrued and unpaid interest of $9,336, plus the write off of unamortized original issue discount of $1,223,764 and write off of deferred financing costs of $31,200 and (iv) the redemption of $700,000 of Series B Preferred Stock and accrued and unpaid dividends of $4,628, plus the write off of unamortized original issue discount of $1,851,090 and write off of deferred financing costs of approximately $27,736. See 'Use of Proceeds.'
SELECTED FINANCIAL DATA
The selected financial data set forth below for the Company's statement of operations data for the period from March 17, 1994 (inception) through December 31, 1994 and for the year ended December 31, 1995 and the balance sheet data at December 31, 1995 are derived from the audited financial statements of the Company which appear elsewhere in this Prospectus. The statement of operations data for the nine months ended September 30, 1996 and September 30, 1995 and the balance sheet data at September 30, 1996 are derived from unaudited financial statements which appear elsewhere in this Prospectus. In the opinion of the Company's management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the information set forth therein have been made. The results of operations for the most recent interim period are not necessarily indicative of the Company's financial results for the entire current fiscal year. The selected financial data should be read in conjunction with the financial statements and the notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations, which are included elsewhere in this Prospectus.
MAY 17, 1994
(INCEPTION) NINE MONTHS ENDED
TO YEAR ENDED --------------------------
DECEMBER 31, DECEMBER 31, SEPT. 30, SEPT. 30,
1994 1995 1995 1996
------------ ------------ ----------- -----------
STATEMENT OF OPERATIONS DATA:
Sales................................................ -- $ 237,644 $ 120,549 $ 428,835
Excise taxes......................................... -- 13,338 6,760 24,213
----------- ----------- -----------
Net sales........................................ -- 224,306 113,789 404,622
Cost of goods sold................................... -- 486,229 374,781 582,098
----------- ----------- -----------
Gross loss....................................... -- (261,923) (260,992) (177,476)
----------- ----------- -----------
Advertising, promotional and selling expenses........ -- 93,039 59,985 101,468
General and administrative expenses.................. $ 38,538 278,565 246,936 277,010
----------- ----------- ----------- -----------
Operating loss................................... (38,538) (633,527) (567,913) (555,954)
Interest expense..................................... -- (51,729) (36,710) (151,918)
Other income, (expense) net.......................... 2,427 38,450 28,654 19,873
----------- ----------- ----------- -----------
Loss before income taxes......................... (36,111) $ (646,806) $ (575,969) $ (687,999)
Income taxes(1)...................................... 1,496 893 --
----------- ----------- ----------- -----------
Net loss......................................... $ (36,111) $ (648,302) $ (576,862) $ (687,999)
----------- ----------- ----------- -----------
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Net loss per share of Common Stock................... $ (0.02) $ (0.30) $ (0.28) $ (0.31)
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Weighted average shares outstanding(2)............... 1,867,595 2,201,662 2,049,941 2,229,773
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SEPTEMBER 30, 1996
DECEMBER 31, ---------------------------
1995 ACTUAL AS ADJUSTED(3)
------------- ----------- --------------
BALANCE SHEET DATA:
Working capital (deficit)............................................ $ (237,543) $ 195,048 $ 3,836,538
Total assets......................................................... 1,104,126 5,601,815 5,845,565
Total liabilities.................................................... 948,587 2,009,615 801,119
Shareholders' equity................................................. 155,539 2,892,200 5,044,446
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(1) The Company had elected to be taxed pursuant to Subchapter S of the Internal Revenue Code of 1986, as amended, for the year ended December 31, 1995, but on December 1, 1995, the Company exceeded the maximum number of shareholders as permitted under Subchapter S. Accordingly, all taxable income or loss and tax credits are the responsibility of the Company's shareholders for the period from January 1, 1995 through November 30, 1995. The Company terminated its Subchapter S election and is now taxed as a C corporation, effective December 1, 1995. Effective with the change to a C corporation, the Company accounts for its income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Income taxes reported for the year ended December 31, 1995 represent federal and state income taxes prior to 1995 when the Company was taxed as a C corporation.
(2) Loss per share of Common Stock was computed based on the weighted average number of common shares and common share equivalents outstanding during the year, as restated for the 100% stock dividend, effected in the form of a stock split, payable on February 10, 1996 to shareholders of record on December 6, 1995. In August and September 1996, 1,038,188 shares issued have been treated as outstanding for all periods in calculating loss per common share because such shares were issued for consideration below the proposed public offering price of $5.00 per share.
(3) Gives effect on an as adjusted basis to (i) the sale of 900,000 shares of
Common Stock and 4,000,000 Redeemable Warrants in connection with this
Offering at the assumed initial public offering prices of $5.00 and $.50,
respectively, (ii) the repayment of the Company's SBA Loan of $408,496,
(iii) the repayment of the $800,000 of Debentures and accrued and unpaid
interest of $9,336, plus the write off of unamortized original issue
discount of $1,223,764 and write off of deferred financing costs of
approximately $31,200 and (iv) the redemption of $700,000 of Series B
Preferred Stock and accrued and unpaid dividends of $4,628, plus the write
off of unamortized original issue discount of $1,851,090 and write off of
deferred financing costs of approximately $27,736. See 'Use of Proceeds.'
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the financial statements and accompanying notes thereto and the other sections contained in this Prospectus. Management's Discussion and Analysis of Financial Condition and Results of Operations, contains certain forward-looking statements that involve substantial risks and uncertainties. When used in this section, the words 'anticipate,' 'believe,' 'estimate,' and 'expect' and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. The Company's actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences include those discussed in 'Risk Factors.'
OVERVIEW
Independence Brewing Company was incorporated in May 1994 and began distribution of its Independence Ale in kegs and bottles in May 1995 and June 1995, respectively. The Company's brewery, located in Philadelphia, Pennsylvania, was completed and became operational in late February 1995 and commenced brewing in March 1995. For the period from June 1994 through February 1995, the Company's principal activities were raising capital, securing third party financing and completing construction of its brewing facility. The Company produces seven products: four styles of beer which are offered year-round, Independence Ale, Independence Lager, Independence Gold and Independence Porter; and three which are seasonal beers, Independence Franklinfest (Fall), Winter Warmer (Winter) and Quaker City Wheat (Summer). The Company's current brewing equipment has the capacity to brew approximately 12,000 - 14,000 barrels per year, which is in part dependent on the style of beer produced. However, currently the Company can only package a limited portion of its brewing capacity due primarily to its current bottling line deficiencies. For the nine months ended September 30, 1996, gross sales totaled $428,835 on approximately 3,000 barrels of production, as compared to gross sales of $120,549 for the comparable period in 1995 on 806 barrels of production. For the year ended December 31, 1995, sales totaled $237,644 on 1,414 barrels of production. The Company had no sales for the period from May 17, 1994 (inception) through December 31, 1994. The Company believes that period-to-period comparisons of its financial results should not be relied upon as an accurate indicator of future performance. The considerable resources expended by the Company's management in connection with this Offering may have a material adverse effect on the Company's operating results in the last quarter of 1996 and the first half of 1997. The Company's revenues are generated predominantly from sales of beer to independent third party wholesale distributors. In addition, the Company derives revenues from the sale of its products directly to retailers and from contract brewing arrangements in which the Company utilizes a portion of its excess capacity to produce beers for third parties which market and sell such products under their own label. To the extent that the Company is not able to utilize this excess capacity, the Company believes that operating margins may be negatively impacted. For the nine month period ended September 30, 1996, approximately 18% of the Company's revenues resulted from its contract brewing operations. Although margins for contract brewing are lower compared to the sale of the Company's own products to wholesale distributors, the Company expects this business to continue until such time as the Company's own products fully utilize production capacity.
The Company is currently operating a refurbished bottling line which does not include all originally manufactured parts. Incompatibility in re-manufactured parts has resulted in unanticipated machine down-time, decreased bottling capacity and problems with the adhesion of product labels to bottles. Under normal circumstances, using originally manufactured parts, the Company's current bottling line would have the capacity to fill 300 bottles per minute. However, due to the unanticipated problems, the bottling line has been able to fill only 35 bottles per minute. In addition, the Company has experienced problems with product labels falling off during production. As the Company has grown, demand for the Company's products has at times exceeded its bottling capacity. In addition, this decreased capacity has resulted in spreading smaller revenue over existing fixed and semi-variable costs, which has negatively impacted the Company's operating margins. The Company anticipates
purchasing a new bottling line shortly after completion of this Offering with approximately $500,000 of the net proceeds from this Offering. This new bottling line, which the Company anticipates will be operational in the first quarter of 1997, will be designed to increase the Company's bottling capacity and alleviate its labeling problems. The Company recently paid a $55,000 deposit on this new bottling line. The Company also anticipates purchasing additional kegs, laboratory equipment and fermenting equipment, for which it anticipates expending approximately $90,000, $10,000 and up to $300,000, respectively, of the net proceeds from this Offering. See 'Risk Factors -- Unanticipated Manufacturing Limitations,' 'Use of Proceeds,' and 'Certain Transactions -- Private Placements.'
In addition to the level of consumer demand and the availability of bottling capacity, the Company's sales are also affected by other factors such as new product introductions, a limited marketing budget, third party wholesaler promotions and competitive considerations. Sales in the beer industry generally reflect a degree of seasonality, with lower sales in the first quarter of the calendar year generally due to decreased consumption of beer after the holiday season. The Company operates with little or no backlog of orders because of distributor demand for immediate inventory and because its ability to predict sales in future periods has, to date, been limited.
The Company's capacity utilization has a significant impact on gross profits. Most capital costs associated with building a brewery and fixed and semi-variable costs related to operating a brewery are incurred prior to or beginning upon commencement of production at the brewery. Although the Company's brewing equipment has the capacity to brew approximately 12,000 - 14,000 barrels per year, for the nine months ended September 30, 1996 the Company produced approximately 3,000 barrels due primarily to its current bottling line deficiencies. Because the initial production level has been substantially below the brewery's maximum designed brewing capacity, operating margins have been negatively impacted. The Company expects this impact to be reduced if and as the brewery's actual production increases. In addition, the Company expects the incremental costs of shipping beer from the Company's existing brewery to continue to increase as the volume of beer supplied to more distant markets increases.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1995 Compared to Nine Months Ended September 30, 1996
Sales. Gross sales increased from $120,549 in the first nine months of 1995 to $428,835 for the same period in 1996. The substantial increase in gross sales was due in part to the Company's commencing distribution of its beer products in May of 1995 and, to a greater extent, to the expansion of the Company's third party wholesale distribution network from four distributors at September 30, 1995 to 17 distributors at September 30, 1996. This revenue increase reflected an increase in sales volume from 806 barrels in the first nine months of 1995 to 3,003 barrels for the same period in 1996, with relatively stable sales prices.
Excise taxes. Excise taxes increased from $6,760 in the first nine months of 1995 to $24,213 for the same period in 1996, reflecting the increased level of sales volume on which federal and certain local excise taxes are paid. Excise taxes as a percentage of sales remained constant at approximately 6% in the first nine months of 1996 as compared to the same period in 1995. The Company pays federal and certain local excise taxes on sales volume. Accordingly as sales increase, excise taxes paid by the Company will increase unless the Company increases shipments to jurisdictions where local excise taxes are paid by the third party wholesale distributor rather than the brewer, as is the case in Maryland and the District of Columbia.
Cost of goods sold. Cost of goods sold increased from $374,781 in the first nine months of 1995 to $582,098 for the same period in 1996, primarily due to the increase in sales volume in 1996. Cost of goods sold as a percentage of sales declined from approximately 311% in the first nine months of 1995 to approximately 136% as compared to the same period in 1996, primarily due to increased sales which reduced per barrel fixed and semi-variable costs associated with operating the brewery. Increases in raw materials costs and utility costs from $153,718 in the first nine months of 1995 compared to $278,642 in the same period in 1996 are associated with increased sales and the utilization of the production facility from the time the Company commenced brewing in March 1995. Repairs and
maintenance increased from $16,582 for the nine months ended September 30, 1995 to $44,924 for the same period in 1996 due primarily to repairs and maintenance related to the Company's bottling line.
Advertising, promotional and selling expenses. Advertising, promotional and selling expenses increased from $59,985 in the first nine months of 1995 to $101,468 for the same period in 1996. Advertising, promotional and selling expenses as a percentage of sales declined from approximately 50% in the first nine months of 1995 to approximately 24% as compared to the same period in 1996, primarily due to initial purchases of promotional items, such as apparel and other retail items used by third party wholesale distributors, in the first nine months of 1995 which were not made in the comparable 1996 period.
General and administrative expenses. General and administrative expenses increased from $246,936 in the first nine months of 1995 to $277,010 for the same period in 1996. General and administrative expenses as a percentage of sales declined from approximately 205% in the first nine months of 1995 to approximately 65% in the same period in 1996. Increases in professional fees from $14,633 for the first nine months ended September 30, 1995 to $50,352 for the nine months ended September 30, 1996 in connection with financing activities and other relatively small increases in general and administrative expenses as compared to the increased level of sales represented the primary increases.
Interest expense. Interest expense increased from $36,710 in the first nine months of 1995 to $151,918 for the same period in 1996, due to the increase in the outstanding principal of subordinated convertible notes from $25,000 at September 30, 1995 to $263,300 at September 30, 1996 and the amortization of deferred financing costs associated with these obligations, as well as the write off of unamortized deferred financing costs when these obligations were converted into Common Stock in August 1996 and the write off of original issue discount for the nine months ended September 30, 1996. Interest expense as a percentage of sales increased from approximately 30% in the first nine months of 1995 compared to approximately 35% in the same period in 1996.
Other income (expense), net. Other income (expense), net decreased from $28,654 in the first nine months of 1995 to $19,873 for the same period in 1996, due primarily to reduced event income received from Company sponsored events held in 1996. Other income (expense), net as a percentage of sales, decreased from approximately 24% in the first nine months of 1995 compared to approximately 5% in the same period in 1996.
YEAR ENDED DECEMBER 31, 1995
The Company was incorporated in May 1994 and commenced brewing beer in March 1995. The Company began distributing its Independence Ale in kegs and bottles in May 1995 and June 1995, respectively. Therefore, the comparison of the year ended December 31, 1994 to the year ended December 31, 1995 is not meaningful and has not been presented.
Sales. Gross sales totaled approximately $237,644 for the year ended December 31, 1995 on 1,415 barrels of production.
Excise taxes. Excise taxes totaled approximately $13,338 for the year ended December 31, 1995. Excise taxes as a percentage of sales was approximately 6% for the year ended December 31, 1995.
Cost of goods sold. Cost of goods sold totaled approximately $486,229 for the year ended December 31, 1995. Cost of goods sold as a percentage of sales was approximately 205% for the year ended December 31, 1995. Raw materials costs and utility costs totaled $183,250 for the year ended December 31, 1995. Repairs and maintenance totaled $19,312 for the year ended December 31, 1995 reflecting repairs and maintenance relating to the Company's bottling line.
Advertising, promotional and selling expenses. Advertising, promotional and selling expenses totaled $93,039 for the year ended December 31, 1995. Advertising, promotional and selling expenses as a percentage of sales were approximately 39% for the year ended December 31, 1995. During 1995, the Company made initial purchases of promotional items, such as apparel and other retail items used by wholesale distributors.
General and administrative expenses. General and administrative expenses totaled $278,565 for the year ended December 31, 1995. General and administrative expenses as a percentage of sales were approximately 117% for the year ended December 31, 1995. Professional fees totaled $24,816 for the year ended December 31, 1995. Also included in general and administrative expenses for the year ended December 31, 1995 is $15,000 of non-cash compensation paid to certain individuals who received Common Stock valued at $3.00 per share in lieu of services rendered to the Company.
Interest expense. Interest expense totaled $51,729 for the year ended December 31, 1995. Interest expense as a percentage of sales was approximately 22% for the year ended December 31, 1995. This interest is associated with the Company's SBA Loan and Philadelphia Industrial Development Corporation ('PIDC') notes and to a lesser extent with the Company's subordinated convertible notes of $75,000, which were issued in late December 1995.
Other income (expense), net. Other income (expense), net totaled $38,450 for the year ended December 31, 1995. Other income (expense), net as a percentage of sales was approximately 16% for the year ended December 31, 1995. Other income (expense), net primarily represents income received from two Company sponsored events held in 1995.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded its operations and capital requirements through the issuance of Common Stock, the SBA Loan and PIDC debt and the issuance of certain subordinated convertible notes in 1995 and during the nine months ended September 30, 1996. Net cash used in operating activities in 1994 and 1995 and for the nine months ended September 30, 1996 was $61,155, $444,663 and $216,283, respectively. Net cash used in operating activities was primarily generated by net losses for the respective periods and increases in accounts receivable and inventories, offset in part by increases in accounts payable and accrued expenses.
Net cash used in investing activities in 1994 and 1995 and for the nine months ended September 30, 1996 was $610,003, $413,709 and $561,139, respectively. Cash used in investing activities was primarily for the purchase of fixed assets relating to brewery equipment and other equipment. The Company expects to incur approximately $900,000 of additional capital expenditures in the first half of 1997 for the purchase of additional kegs, laboratory equipment and fermenting equipment and the replacement of the Company's bottling line. The Company has paid a deposit of $55,000 toward this new bottling line. See 'Use of Proceeds' and 'Certain Transactions -- Private Placements.' Net cash provided by financing activities in 1994 and 1995 and for the nine months ended September 30, 1996 was $598,994, $933,318, and $1,435,826, respectively.
In anticipation of the closing of the financing transactions described below (the 'Private Placements'), the Company was advanced an aggregate of $200,000 on May 6, 1996 and July 16, 1996 by Winfield to fund short term operations. This advance was repaid in connection with the closing of the Private Placements.
To fund operations, on August 12, 1996, September 13, 1996 and September 20, 1996, the Company sold an aggregate of $800,000 of debentures convertible into shares of Series A Preferred Stock of the Company (the 'Debentures') to Winfield and certain shareholders of the Company (collectively referred to as the 'Purchasers'). To the extent that such shareholders did not so participate, Winfield agreed to act as 'standby' purchaser for the entire $800,000 in Debentures being offered.
In consideration of the purchase by the Purchasers of the Debentures, the
Purchasers received warrants which entitled them to purchase 415,275 shares of
Common Stock for the aggregate exercise price of $2,081 (the 'Series A
Warrants'). All of the Series A Warrants were exercised by the Purchasers on
September 13, 1996 and September 20, 1996. The Company assigned a deferred
interest charge of $3.00 per share, totaling $1,245,825, to these shares and is
amortizing it over the term of the Debentures. In addition, in consideration of
the purchase by Winfield of the Debentures, Winfield received (i) a warrant (the
'Preferred Warrant') that entitled Winfield to purchase 70,000 shares of Series
B Preferred Stock of the Company, par value $10.00 (the 'Series B Preferred
Stock'), exercisable immediately for an aggregate exercise price of $700,000 and
(ii) a warrant (the 'Series C Warrant') that entitles Winfield to purchase
622,913 shares of Common Stock for the aggregate