Subscription Agreement

SUBSCRIPTION AGREEMENT


Dear Subscriber:


You (the "Subscriber") hereby agree to purchase, and Frederick Brewing Co., a Maryland corporation (the "Company") hereby agrees to issue and to sell to the Subscriber, the number of shares of Series F Convertible Preferred Stock $.01 Par Value (the "Preferred Stock") convertible in accordance with the terms thereof into shares of the Company's $.00004 par value common stock (the "Company Shares") as set forth on the signature page hereof for the aggregate consideration as set forth on the signature page hereof. The Certificate of Designation of the Rights of the Preferred Stock is annexed hereto as Exhibit A ("Certificate of Designation"). (The Company Shares are sometimes referred to herein as the "Shares" or "Common Stock"). (The Preferred Stock, the Company Shares, Warrants issuable to the Placement Agents, identified on Schedule B hereto, and the Company Shares issuable upon exercise of the Warrants are collectively referred to herein as, the "Securities"). Upon acceptance of this Agreement by the Subscriber, the Company shall issue and deliver to the Subscriber the Preferred Stock against payment, by federal funds (U.S.) wire transfer of the purchase price of the Preferred Stock. This Subscription Agreement relates to the offering of a maximum of 500 shares of Preferred Stock.


The following terms and conditions shall apply to this subscription.


1. Subscriber's Representations and Warranties. The Subscriber hereby represents and warrants to and agrees with the Company that:


(a) Information on Company. The Subscriber has been furnished with and has read the Company's Form 10-KSB for the year ended December 31, 1997 and subsequent Forms 10-QSB and 8-K, each as filed with the U.S. Securities and Exchange Commission (the "Commission") (collectively, with exhibits thereto, hereinafter referred to as the "Reports"). In addition, the Subscriber has received from the Company such other information concerning its operations, financial condition and other matters as the Subscriber has requested, and considered all factors the Subscriber deems material in deciding on the advisability of investing in the Securities (such information in writing is collectively, the "Other Written Information").


(b) Information on Subscriber. The Subscriber is an "accredited investor", as such term is defined in Regulation D promulgated by the Commission under the Securities Act of 1933, as amended, is experienced in investments and business matters, has made investments of a speculative nature and has purchased securities of United States publicly-owned companies in private placements in the past and, with its representatives, has such


knowledge and experience in financial, tax and other business matters as to enable the Subscriber to utilize the information made available by the Company to evaluate the merits and risks of and to make an informed investment decision with respect to the proposed purchase, which represents a speculative investment. The Subscriber has the authority and is duly and legally qualified to purchase and own the Securities. The Subscriber is able to bear the risk of such investment for an indefinite period and to afford a complete loss thereof.


(c) Purchase of Company Shares. On the Closing Date, the Subscriber will purchase the Preferred Stock for its own account and not with a view to any distribution thereof.


(d) Compliance with Securities Act. The Subscriber understands and agrees that the Securities have not been registered under the Securities Act of 1933, as amended (the "1933 Act") by reason of their issuance in a transaction that does not require registration under the 1933 Act, and that such Securities must be held unless a subsequent disposition is registered under the 1933 Act or is exempt from such registration. The Subscriber agrees that if, in the future, the Subscriber should decide to dispose of any of the Securities acquired by it pursuant to this Agreement, the Subscriber will do so only pursuant to a registration statement or by disposition exempt from registration requirements under the 1933 Act.


(e) Preferred Stock and Company Shares Legend. The Preferred Stock, Company Shares and the shares of Common Stock issuable upon the exercise of the Warrants shall bear the following legend:


"THE SHARES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. THESE SHARES MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO FREDERICK BREWING
CO. THAT SUCH REGISTRATION IS NOT REQUIRED."


(f) Warrants Legend. The Warrants which the Placement Agents are receiving pursuant to this Agreement shall bear the following legend:


"THIS WARRANT AND THE COMMON SHARES ISSUABLE
UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THIS WARRANT AND THE COMMON SHARES
ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT
BE SOLD, OFFERED FOR SALE, PLEDGED OR


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HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO FREDERICK BREWING
CO. THAT SUCH REGISTRATION IS NOT REQUIRED."


(g) Correctness of Representations. The Subscriber represents that the foregoing representations and warranties are true and correct as of the date hereof and, unless the Subscriber otherwise notifies the Company prior to the Closing Date (as hereinafter defined), shall be true and correct as of the Closing Date. The foregoing representations and warranties shall survive the Closing Date.


2. Company Representations and Warranties. The Company represents and warrants to and agrees with the Subscriber that:


(a) Due Incorporation. The Company and each of its wholly-owned subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company and each of its wholly-owned subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in each jurisdiction where the nature of the business conducted or property owned by it makes such qualification necessary, other than those jurisdictions in which the failure to so qualify would not have a material adverse effect on the business, operations or prospects or condition (financial or otherwise) of the Company.


(b) Outstanding Stock. All issued and outstanding shares of capital stock of the Company and each of its wholly-owned subsidiaries has been duly authorized and validly issued and are fully paid and non-assessable.


(c) Authority; Enforceability. This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity; and the Company has full corporate power and authority necessary to enter into this Agreement and to perform its obligations hereunder and all other agreements entered into by the Company relating hereto.


(d) Additional Issuances. There are no outstanding agreements or preemptive or simila-r rights affecting the Company's common stock and no outstanding rights, warrants or options to acquire, or instruments convertible into or exchangeable for, or agreements or understandings with respect to the sale or issuance of any shares of common stock or equity of the Company or other


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equity interest in any of the subsidiaries of the Company, except as described in the Reports or Other Written Information.


(e) Consents. No consent, approval, authorization or order of any court, governmental agency or body or arbitrator having jurisdiction over the Company, or any of its affiliates or NASDAQ or the Company's Shareholders is required for execution of this Agreement, including, without limitation issuance and sale of the Securities, or the performance of the Company's obligations hereunder.


(f) No Violation or Conflict. Assuming the representations and warranties of the Subscriber in Paragraph 1 are true and correct and the Subscriber complies with its obligations under this Agreement, neither the issuance and sale of the Securities nor the performance of its obligations under this Agreement by the Company will:


(i) violate, conflict with, result in a breach of, or constitute a default (or an event which with the giving of notice of the lapse of time or both would be reasonably likely to constitute a default) under (A) the articles of incorporation, charter or bylaws of the Company, or any of its affiliates, (B) to the Company's knowledge, any decree, judgment, order, law, treaty, rule, regulation or determination applicable to the Company, or any of its affiliates of any court, governmental agency or body, or arbitrator having jurisdiction over the Company, or any of its affiliates or over the properties or assets of the Company, or any of its affiliates, (C) the terms of any bond, debenture, note or any other evidence of indebtedness, or any agreement, stock option or other similar plan, indenture, lease, mortgage, deed of trust or other instrument to which the Company, or any of its affiliates is a party, by which the Company, or any of its affiliates is bound, or to which any of the properties of the Company, or any of its affiliates is subject, or (D) the terms of any "lock-up" or similar provision of any underwriting or similar agreement to which the Company, or any of its affiliates is a party; or


(ii) result in the creation or imposition of any lien, charge or encumbrance upon the Securities or any of the assets of the Company, or any of its affiliates.


(g) The Securities. The Securities upon issuance:


(i) are, or will be, free and clear of any security interests, liens, claims or other encumbrances, subject to restrictions upon transfer under the 1933 Act and State laws;


(ii) have been, or will be, duly and validly authorized and on the date of issuance and on the Closing Date, as hereinafter defined, and the date the Warrants are exercised according to their terms, as the case may be, the Securities will


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be duly and validly issued, fully paid and nonassessable, and if registered pursuant to the 1933 Act, free trading and unrestricted;


(iii) will not have been issued or sold in violation of any preemptive or other similar rights of the holders of any securities of the Company;


(iv) will not subject the holders thereof to personal liability by reason of being such holders; and


(h) Litigation. There is no pending or, to the best knowledge of the Company, threatened action, suit, proceeding or investigation before any court, governmental agency or body, or arbitrator having jurisdiction over the Company, or any of its affiliates that would affect the execution by the Company or the performance by the Company of its obligations under this Agreement, or which was not disclosed in the Reports and Other Written Information.


(i) Reporting Company. The Company is a publicly-held company whose common stock is (and has been for the past 90 days) registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act"). The Company's Common Stock is listed for trading on the NASDAQ SmallCap Market. Pursuant to the provisions of the 1934 Act, the Company has timely filed all reports and other materials required to be filed thereunder with the Securities and Exchange Commission during the preceding twelve months.


(j) No Market Manipulation. The Company has not taken, and will not take, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of the common stock of the Company to facilitate the sale or resale of the Company Shares or affect the price at which the Securities may be issued.


(k) Information Concerning Company. The Reports and Other Written Information contain all material information relating to the Company and its operations and financial condition as of their respective dates which information is required to be disclosed therein. Since the date of the financial statements set forth in the Reports, and except as modified in the Other Written Information, there has been no material adverse change in the Company's business, financial condition or affairs not disclosed in the Reports. The Reports and Other Written Information do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading.


(l) Dilution. The number of Shares issuable upon conversion (as hereinafter defined) may increase substantially in certain circumstances, including, but not necessarily limited to, the circumstance wherein the trading price of the Common Stock


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declines prior to conversion of the Preferred Stock. The Company's executive officers and directors have studied and fully understand the nature of the Securities being sold hereby and recognize that they have a potential dilutive effect. The board of directors of the Company has concluded, in its good faith business judgment, that such issuance is in the best interests of the Company. The Company specifically acknowledges that its obligation to issue the Shares upon conversion is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company.


(m) Stop Transfer. The Company will not issue any stop transfer order or other order impeding the sale and delivery of the Securities.


(n) Defaults. Neither the Company nor any of its wholly-owned subsidiaries is in violation of its Certificate of Incorporation or ByLaws. Except as described in the Reports and Other Written Information, neither the Company nor any of its subsidiaries is (i) in default under or in violation of any other material agreement or instrument to which it is a party or by which it or any of its properties are bound or affected, which default or violation would have a material adverse effect on the Company, (ii) in default with respect to any order of any court, arbitrator or governmental body or subject to or party to any order of any court or governmental authority arising out of any action, suit or proceeding under any statute or other law respecting antitrust, monopoly, restraint of trade, unfair competition or similar matters, or (iii) to its knowledge in violation of any statute, rule or regulation of any governmental authority material to its business.


(o) No Integrated Offering. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would cause the offering of the Securities pursuant to this Agreement to be integrated with prior offerings by the Company for purposes of the 1933 Act or any applicable stockholder approval provisions, including, without limitation, under the rules and regulations of The NASDAQ SmallCap Market ("NASDAQ SmallCap"), as applicable, nor will the Company or any of its subsidiaries take any action or steps that would cause the offering of the Securities to be integrated with other offerings. The Company has not conducted and will not conduct any offering other than the transactions contemplated hereby that will be integrated with the issuance of the Securities solely for purposes of Rule 4460(i) of the NASDAQ Stock Market, Inc.'s Marketplace Rules.


(p) Use of Proceeds. The proceeds of the Subscriber funds to be released to the Company will be used for


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working capital, general corporate purposes and for expenses of this offering.


(q) No General Solicitation. Neither the Company, nor any of its affiliates, nor to its knowledge, any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Act) in connection with the offer or sale of the Securities.


(r) Listing. The Company's common stock is quoted on, and listed for trading on NASDAQ SmallCap. The Company has received no notice, either oral or written, with respect to the continued eligibility of the common stock for such listing, and the Company has maintained all requirements for the continuation of such listing.


(s) S-3 Eligibility. The Company currently meets, and will take all necessary action to continue to meet, the "registrant eligibility" requirements set forth in the general instructions to Form S-3.


(t) Correctness of Representations. The Company represents that the foregoing representations and warranties are true and correct as of the date hereof in all material respects and, unless the Company otherwise notifies the Subscriber prior to the Closing Date, shall be true and correct in all material respects as of the Closing Date. The foregoing representations and warranties shall survive the Closing Date.


3. Regulation D Offering. This Offering is being made pursuant to the exemption from the registration provisions of the Securities Act of 1933, as amended, afforded by Rule 506 of Regulation D promulgated thereunder. On the Closing Date, the Company will provide an opinion acceptable to Subscriber from the Company's legal counsel opining on the availability of the Regulation D exemption as it relates to the offer and issuance of the Securities. A form of the legal opinion is annexed hereto as Exhibit C. The Company will provide such other legal opinions in the future as are reasonably necessary for the conversion of the Preferred Stock.


4. Reissuance of Securities. The Company agrees to reissue certificates representing the Securities without the legends set forth in Sections 1(e) and 1(f) above at such time as (a) the holder thereof is permitted to dispose of such Securities pursuant to Rule 144(k) under the Act, or (b) the Securities are registered under the Act. The Company agrees to cooperate with the Subscriber in connection with all resales pursuant to Rule 144(d) and provide legal opinions necessary to allow such resales.


5. Redemption. The Company may not redeem the Securities without the consent of the holder of the Securities.


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6. Legal Fees/Commissions. The Company shall pay to counsel to the Subscriber its fee of $9,000 for services rendered to the Subscriber in reviewing this Agreement and other subscription agreements for the aggregate subscription amounts of up to $500,000. The Company will pay a cash commission of ten percent (10%) of the Purchase Price designated on the signature page hereto to certain Placement Agents identified on Schedule A hereto. The commissions and legal fees will be payable out of funds held pursuant to a Funds Escrow Agreement to be entered into by the Company and Subscriber. The Company will also issue and deliver to the Placement Agents as additional compensation the Warrants designated on Schedule A hereto. All the representations, covenants, warranties and undertakings, including but not limited to registration rights made or granted to or for the benefit of the Subscriber are hereby also made and granted to the Placement Agents in respect of the Warrants and Common Stock issuable upon exercise of the Warrants.


7.1. Covenants of the Company. The Company covenants and agrees with the Subscriber as follows:


(a) The Company will advise the Subscriber, promptly after it receives notice of issuance by the Securities and Exchange Commission, any state securities commission or any other regulatory authority of any stop order or of any order preventing or suspending any offering of any securities of the Company, or of the suspension of the qualification of the common stock of the Company for offering or sale in any jurisdiction, or the initiation of any proceeding for any such purpose.


(b) The Company shall promptly secure the listing of the Company Shares and Common Stock issuable upon the exercise of the Warrants upon each national securities exchange, or automated quotation system, if any, upon which shares of Common Stock are then listed (subject to official notice of issuance) and shall maintain such listing so long as any other shares of Common Stock shall be so listed, Company will use its best efforts to maintain the listing and trading of its Common Stock on NASDAQ SmallCap, and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers ("NASD") and such exchanges, as applicable. The Company shall promptly provide to each Purchaser ...