PROSPECTUS
FREDERICK BREWING CO.
2,388,755 Shares of Common Stock
($.00004 par value)
The estimated 2,388,755 shares (the "Shares") of Common Stock, par value
$.00004 per share (the "Common Stock") of Frederick Brewing Co., a Maryland
corporation (the "Company") are being offered by the selling stockholders (the
"Selling Stockholders") and include 251,660 shares issuable upon conversion of
$924,000 in principal amount of 8% Cumulative Convertible Preferred Stock,
Series A (the "Series A Preferred"), an estimated 1,298,700 shares issuable upon
conversion of $3,750,000 in principal amount of Series B Convertible Preferred
Stock (the "Series B Preferred"), 782,145 shares issuable upon exercise of
warrants and options, and 56,250 shares currently outstanding. The Company will
not receive any proceeds from the sale of Common Stock by the Selling
Stockholders. See "Selling Stockholders." The expenses of the offering,
estimated at $20,000, will be paid by the Company.
The Common Stock currently trades on NASDAQ under the symbol "BLUE" On May
2, 1997, the last sale price of the Common Stock as reported on NASDAQ was
$4.125 per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PURCHASE OF THESE SECURITIES INVOLVES RISKS. See Risk Factors.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
The date of this Prospectus is May 2, 1997
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No person has been authorized in connection with this offering to give any
information or to make any representation other than as contained in this
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any
securities covered by this Prospectus in any state or other jurisdiction to any
person to whom it is unlawful to make such offer or solicitation in such state
or jurisdiction. Neither the delivery of this Prospectus nor any sales made
hereunder shall, under any circumstances, create an implication that there has
been no change in the affairs of the Company since the date hereof.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, as well as proxy statements and
other information filed by the Company with the Commission, can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at its Regional
Offices located at 7 World Trade Center, New York, New York 10048, and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained at prescribed rates from the Public
Reference Section of the Commission, Washington, D.C. 20549, during regular
business hours. The Commission maintains a Web site that contains reports, proxy
and information statements and other information regarding issuers such as the
Company that file electronically with the Commission at http.//www.sec.gov.
This Prospectus incorporates by reference the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996, and the description of
securities included in the Company's Registration Statement on Form 8-A, File
No. 0-27800, and all other documents subsequently filed by the Company pursuant
to Section 13(a), 13(c) or 14 of the Exchange Act prior to the termination of
the offering made hereby. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete, and in
each instance reference is made to the copy of such contract or document filed
as an exhibit to the Registration Statement, each such statement being qualified
in its entirety by such reference. The Company will provide, without charge upon
oral or written request of any person, a copy of any information incorporated by
reference herein. Such request should be directed to the Company at 4607
Wedgewood Boulevard, Frederick, Maryland 21703, telephone (301) 694-7899.
INDEMNIFICATION
Pursuant to the Company's Articles of Incorporation, as amended, the
Company may indemnify each of its directors and officers with respect to all
liability and loss suffered and reasonable expense incurred by such person in
any action, suit or proceeding in which such person was or is made or threatened
to be made a party or is otherwise involved by reason of the fact that such
person is or was a director of the Company. In addition, the Company may pay the
reasonable expenses of indemnified directors and officers incurred in defending
such proceedings if the indemnified party agrees to repay all amounts advanced
should it be ultimately determined that such person is not entitled to
indemnification.
In addition, as permitted by the Maryland General Corporation Law, the
Company's Articles of Incorporation provides that the Company's directors will
not be held personally liable to the Company or its stockholders for monetary
damages for a breach of fiduciary duty as a director except to the extent such
exemption from liability or limitation thereof is not permitted under the
Maryland General Corporation Law. This provision does not eliminate the duty of
care, and injunctive or other forms of non-monetary equitable relief will remain
available under Maryland law. In addition, each director continues to be liable
for monetary damages for (i) misappropriation of any corporate opportunity in
violation of the director's duties, (ii) acts or omissions in bad faith or
involving intentional dishonesty, (iii) knowing violations of law, and (iv) any
transaction from which a director derives an improper personal benefit. The
provision does not affect a director's responsibilities under any other law,
such as the federal securities laws of state or federal environmental laws.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the information
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety.
The Company
The Company's principal executive offices are located at 4607 Wedgewood
Boulevard, Frederick, Maryland 21703. Its telephone number is (301) 694-7899 and
its fax number is (301) 694-2971.
The Offering
Securities Offered:......................................
An estimated 2,388,755 shares of Common Stock,
$.00004 par value per share, including 251,660 shares
issuable upon conversion of 1,848 shares of Series A
Preferred, an estimated 1,298,700 shares issuable upon
conversion of 3,750 shares of Series B Preferred Stock
at a conversion price per share of Preferred Stock equal
to $1,000 divided by 70% of the average closing bid
price of the Common Stock on the five trading days
prior to conversion, 782,145 shares issuable upon
exercise of warrants and options, and 56,250 shares
currently outstanding.
Common Stock Outstanding(1) Before Offering:............. 1,954,876(1) shares
Common Stock Outstanding After Offering:................. 4,343,631(1) shares
NASDAQ symbol............................................ BLUE
(1) Based on shares outstanding as of March 31, 1997. The 56,250 shares
offered which are already outstanding were issued subsequent to March
31, 1997. The number of shares issuable on conversion of the Series B
Preferred Stock is based upon a conversion price of $2.8875, which is
70% of $4.125.
Risk Factors
Investment in the Shares offered hereby involves a high degree of risk,
including the limited operating history of the Company and competition.
Investors should carefully consider the various risk factors before investing in
the Shares. This Prospectus contains forward looking statements which may
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors." See "Risk Factors."
RISK FACTORS
The shares of Common Stock offered hereby are highly speculative and
involve a high degree of risk. The following risk factors should be considered
carefully in addition to the other information in this Prospectus before
purchasing the shares of Common Stock offered hereby. The discussion in this
Prospectus contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed here. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere herein.
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Limited Operating History; Past and Possible Future Operating Losses.
The Company was founded in March 1992 and has operated at a loss for each year
since such date. As of December 31, 1996 the cumulative loss since inception was
$3,088,109. The Company's limited operating history makes the prediction of
future sales and operating results difficult. Accordingly, although the Company
has experienced sales growth, such growth should not be considered indicative of
future sales growth, if any, or of future operating results. There can be no
assurance that the Company's sales will grow or be sustained in future periods
or that the Company will become or remain profitable in any future period. Due
to the expenses involved in the expansion of the Company's operations in
connection with the completion of the new brewery (including increased overhead,
depreciation, marketing and salaries and its plan to increase production to
50,000 barrels per year), the Company does not expect to operate profitably for
approximately 12 to 24 months after the closing of its initial public offering
of Common Stock which occurred in March 1996.
Lack of Liquidity; Inadequate Working Capital; Default in Financial
Covenants. The Company has, in the last twelve months spent a significant amount
of working capital on machinery and equipment and on salaries and benefits and
advertising, all in connection with the completion of the Company's new brewery,
the expansion of its brewing capacity and its attempts to increase demand for
its products. In addition, growth in sales has not been sufficient to fund such
expenditures. As a consequence thereof, the Company has been required to obtain,
by the sale of the Series A Preferred and Series B Preferred, additional working
capital for the hiring and training of administrative and sales personnel and
the payment of certain promotional, marketing and advertising expenses in
connection with the commencement of full production at the new brewery which
occurred in March 1997.
In connection with the construction of the new brewery and the purchase
of brewing and other equipment, MEDCO issued $4.5 million in taxable economic
development bonds on July 19, 1996, including $1.5 million borrowed by the
Company to purchase brewery equipment for the new brewery (the "FBC Facility")
and $3.0 million loaned to a partnership controlled by affiliates of the Company
to construct the brewery (the "Blue II Facility"), and the Company borrowed an
additional $976,000 from Signet Bank in a Bridge Loan (which it expects to
refinance with an SBA loan in April 1997). On January 22, 1997, Signet declared
the Bridge Loan in default and on February 3, 1997 advised the Company that it
was in default with respect to the FBC Facility. The primary causes of these
alleged defaults were (a) cost overruns of $340,000, in the construction of the
new brewery; and (b) a $250,000 deficiency between the amount of the FBC
Facility and the cost of the new equipment. On February 27, 1997 the Company
entered into two Forbearance Agreements with Signet. The terms of the
Forbearance Agreement with respect to the Blue II Facility were complied with
(including by the issuance of 630 shares of Series A Preferred to the general
contractor of the brewery building) and all defaults were cured by March 27,
1997; the Forbearance Agreement with respect to the FBC facility required that
the Company maintain Eligible Accounts Receivable (as defined) of not less than
$100,000 until March 31, 1997 and $200,000 thereafter, tested twice monthly; and
required the personal guaranty of the Chief Executive Officer and the President.
Furthermore, the FBC Facility and the Blue II Facility imposed additional
restrictive covenants which the Company did not comply with as of December 31,
1996 and for which it has obtained a waiver from Signet. There can be no
assurance that the Company will not incur additional defaults under the Bridge
Loan, the Blue II Facility, or the FBC Facility. If such defaults occur and are
not waived by Signet, it would have a material adverse effect upon the Company.
Possible Need for Additional Financing. The Company has received an
approval from an SBA development company for a $1,000,000 SBA loan, subject to
final SBA approval, to refinance the $969,000 Signet Bridge Loan. Although the
Company expects that the loan will close in April 1997, there can be no
assurance that such SBA loan will close, will close pursuant to the terms of the
approval, will close in a timely fashion, or that the terms of the approvals
will not be altered or revised. In addition, the Company intends to continue to
expend funds to increase its market share in the states where its products are
currently being sold and, possibly, in other states in the future. The failure
of the SBA loan to close as planned and/or the additional marketing costs may
require additional funds not currently available to the Company. Accordingly,
the Company may require additional debt or equity financing for these or other
general corporate purposes. There can be no assurance that the Company will be
able to obtain additional debt or equity financing on terms favorable to the
Company, or at all, or if obtained, there can be no assurance that such debt or
equity financing will be sufficient for the financing needs of the Company.
Heavy Dependence on Wholesale Distributors. The Company distributes
its products only through
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independent wholesale distributors for resale to retailers such as liquor and
wine and beer stores, restaurants, taverns, pubs, bars and sporting arenas.
Accordingly, the Company is dependent upon these wholesale distributors to sell
the Company's beers and to assist the Company in creating demand for, and
promoting market acceptance of, the Company's products and providing adequate
service to its retail customers. There can be no assurance that the Company's
wholesale distributors will devote the resources necessary to provide effective
sales and promotion support to the Company.
Dependence on Major Customers. Sales to The Kronheim Co., Inc.,
Baltimore, Maryland ("Kronheim"), the Company's largest wholesale distributor,
represented 50.6%, 35.7% and 56.5% of the Company's revenues in 1996, 1995 and
1994. Sales to all other wholesale distributors represented 49.4%, 64.3% and
43.5% of the Company's revenues in 1996, 1995 and 1994. (The 1994 percentages
for sales to other wholesale distributors include beer sold directly to
retailers by the Company.) The Company expects sales to its largest wholesale
distributor to continue to represent a significant portion of its sales in the
near term. The Company believes that its future growth and success will continue
to depend in large part upon the significant wholesale distributor, but such
dependence should decrease as the Company expands its market area.
No Assurance of Continued Wholesale Distributor Support. If Kronheim or
any other significant wholesale distributor were to discontinue selling, or
decrease the level of orders for, the Company's products, the Company's business
would be adversely affected in the areas serviced by such wholesale distributors
until the Company retained replacements. There can be no assurance however that
the Company would be able to replace a significant wholesale distributor in a
timely manner or at all in the event it were to discontinue selling the
Company's products. In addition, there is always a risk that the Company's
wholesale distributors will give higher priority to the products of other
beverage companies, including products directly competitive to the Company's
beers, thus reducing their efforts to sell the Company's products. The risk is
exacerbated by the fact that many of the Company's wholesale distributors (not
including Kronheim) are reliant on the beers of one of the major domestic beer
producers for a large percentage of their revenues and, therefore, may be
influenced by such producer. The Company's distributors are not contractually
committed to make future purchases and therefore could discontinue carrying the
Company's products in favor of a competitor's product or another beverage at any
time or for any reason.
If any of the Company's significant wholesale distributors were to
experience financial difficulties, or otherwise become unable or unwilling to
promote or sell the Company's products, the Company's results of operations
would be adversely affected. Many of the Company's distribution agreements
(other than its agreement with Kronheim which does not specify such a date)
permit their termination upon 90 days' prior notice. The Company's ability to
terminate poorly performing distributors may be hindered by laws that restrict
the Company's right to terminate the services of its wholesale distributors.
There can be no assurance that the Company will be able to attract reliable,
effective new distributors in markets it will enter as a result of its planned
geographic expansion or that the Company's business will not be adversely
affected by the loss or declining performance of any of its current or future
wholesale distributors.
Intense and Increasing Competition. The Company competes in the
specialty or craft beer segment of the domestic beer market. The principal
competitive factors affecting the market for the Company's beers include product
quality and taste, distribution capabilities, brand recognition, packaging and
price. There can be no assurance that the Company will be able to compete
successfully against current and future competitors based on these and other
factors. The Company competes with a variety of domestic and international
brewers, many of whom have substantially greater financial, production,
distribution and marketing resources and have achieved a higher level of brand
recognition than the Company.
The Company anticipates increased competition in the specialty beer
segment from the major domestic brewers such as Anheuser-Busch Companies, Inc.
("Anheuser-Busch"), Miller Brewing Co. ("Miller") and Adolph Coors Co.
("Coors"), each of whom has introduced and is marketing fuller flavored beers
designed to compete directly in the specialty beer segment. These large domestic
brewers dominate the overall domestic beer market and the Company expects that
certain of these companies, with their superior financial resources and
established distribution networks, will continue to seek further participation
in the specialty beer segment through the acquisition of equity positions in, or
the formation of distribution alliances with, smaller craft brewers (such as
Anheuser-Busch's
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equity position in, and distribution agreement with, Redhook Ale Brewery,
Incorporated).
The Company also faces and will face increasing competition from import
specialty beer companies such as Heineken N.V., Bass PLC and Guinness PLC and
existing domestic specialty and contract brewers such as The Boston Beer
Company, Inc., Pete's Brewing Co., Redhook Ale Brewery, Incorporated, Sierra
Nevada Brewing Co. and Anchor Brewing Co., as well as the regional specialty
brewers and local microbreweries in the markets where the Company distributes
its beers. Recent growth in the sales of specialty beers is expected to result
in increased competition in the segment, including a continuing proliferation of
microbrewers and efforts by micro and regional brewers to expand their
production capacity, marketing expenditures and geographical distribution areas.
Increased competition could result in price reductions, reduced profit margins
and loss of market share, all of which would have a material adverse effect on
the Company's financial condition and results of operations.
The Company's products also compete generally with other alcoholic
beverages, including products offered in other segments of the beer industry and
low-or-no-alcohol products. The Company competes with other beer and beverage
companies not only for consumer acceptance and loyalty but also for shelf and
tap space in retail establishments and for marketing focus by the Company's
wholesale distributors and their customers, all of which also distribute and
sell other beers and alcoholic beverage products. Finally, there can be no
assurance that the recent growth in consumer demand for craft beers will
continue, or even if such growth continues, that consumers will choose the
Company's beers.
Potential Fluctuations in Quarterly Results. The Company's quarterly
operating results have in the past and may in the future vary significantly
depending on factors such as fixed and semi-variable operating costs during
periods when the Company's brewery is producing below maximum designed
production capacity, professional fees and expenses relating to the Company's
planned expansion, increased competition, fluctuations in the price of
ingredients or packaging materials, seasonality of sales of the Company's beers,
general economic factors, trends in consumer preferences, regulatory
developments, including changes in excise and other tax rates, changes in the
sales mix between kegs and bottles, changes in average selling prices or market
acceptance of the Company's beers, increases in packaging and marketing costs
associated with initial production of new products and variations in shipping
and transportation costs.
The Company's operating results may be significantly impacted in the
future by, among other things, the timing of the construction of the new brewery
and the costs attendant to the commencement of production there, the timing of
new product announcements by the Company or its competitors, the impact of
increasing average federal and state excise tax as sales volume increases, the
timing of new advertising and promotional campaigns by the Company and other
expansion activities engaged in by the Company. The Company's expense levels are
based, in part, on its expectations of future sales levels. If sales levels are
below expectations, operating results are likely to be materially adversely
affected, In particular, because the Company operates its own production
facility, a significant portion of its overhead is fixed and cannot be reduced
for short-term adjustments such as sales below management's expectations, and an
excess of production capacity could therefore have a significant negative impact
on the Company's operating results. However, the Company has historically
operated with little or no backlog. The absence of backlog increases the
difficulty of predicting sales and operating results. In addition, the Company's
decision to undertake a significant media advertising campaign in 1997 could
substantially increase the Company's expenses in a particular quarter, while any
increase in sales from such advertising may be realized in subsequent periods.
Based upon the risks of potential fluctuations in quarterly results
discussed above and seasonality and the unpredictability of demand, discussed
below, the Company believes that quarterly sales and operating results are
likely to vary significantly in the future and that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. Further, it is possible that
in some future quarter the Company's revenues or operating results will be below
the expectations of public market analysts and investors. In such event, the
price of the Company's Common Stock could be materially adversely affected.
Sales Fluctuations Due to Seasonality. The Company's wholesale
distributors have historically experienced
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higher sales in the second and fourth quarters of the calendar year due to
increased consumption of the Company's beers during periods of warmer weather
and from Halloween through New Year's Day. Although the Company has not yet
experienced sale fluctuations due to seasonality because the Company has
continued to expand its wholesale distribution network over the past three
years, fluctuations in the Company's sales due to seasonality may become evident
in the future as the Company's sales increase.
No Assurance of Geographic Expansion. While the Company has recently
expanded in distribution network in Virginia, Pennsylvania, New Jersey and
Delaware, sales in Maryland accounted for over 62.8% of the Company's sales in
1996. The Company has only recently identified and appointed distributors and
established distribution in Virginia, Pennsylvania, New Jersey and Delaware. The
Company's continued growth depends upon its ability to expand sales in these and
other new regions. There can be no assurance that the Company's efforts to
expand sales in new regions will be successful or that such expansion can be
accomplished on a profitable basis. The Company's timely and successful
expansion of sales will depend on a number of factors, including competition,
the continue promotion and sale of the Company's products by suitable local
wholesale distributors, the retention of skilled sales and other personnel, the
ability to adapt management and other operational systems to accommodate
increased volume, the success of advertising and promotion campaigns, and other
factors, some of which are beyond the control of teh Company. Furthermore,
consumer tastes vary by region and there can be no assurance that consumers
located in new geographic regions will be receptive to the Company's beers. The
Company believes that consumer demand for its products is greater in certain
areas than others due to demographic, economic and other factors. The Company's
efforts to increase sales by further penetrating market areas may be limited by
such factors. The inability of the Company to expand sales in a timely manner
would have a material adverse effect on the Company's operating results and
financial condition.
Limited Product Line. The sale of a limited number of styles of beers
has accounted for substantially all of the Company's revenues since inception.
The Company currently offers five styles of beer year-around and usually one
seasonal brew during any part of the year, and believes that the sale of these
beers will continue to account for a significant portion of the Company's sales
for the foreseeable future. Therefore, the Company's future operating results,
particularly in the near term, are significantly dependent upon the continued
market acceptance of these products. There can be no assurance that the
Company's beers will continue to achieve market acceptance. A decline in the
demand for any of the Company's beers as a result of competition, changes in
consumer tastes and preferences, government regulation or other factors would
have a material adverse effect on the Company's operating results and financial
condition. In addition, there can be no assurance that the Company will be
successful in developing, introducing and marketing additional new beers that
will sustain sales growth in the future.
No Assurance of Future Ability to Satisfy Changing Consumer
Preferences. The craft beet market is highly competitive and characterized by
changing consumer preferences and continuous introduction of new products. The
Company intends to introduce new products from time to time to maintain
wholesale distributor and retailer interest and appeal to varying consumer
preferences and to create consumer demand. The Company believes that its future
growth will depend, in part, on its ability to anticipate changes in consumer
preferences or to create consumer demand and develop and introduce, in a timely
manner, new beers that adequately address such changes. There can be no
assurance that the Company will be successful in developing, introducing and
marketing new products on a timely basis. If the Company is unable to introduce
new products or if the Company's new products are not successful, the Company's
sales may be adversely affected as customers seek competitive products. In
addition, the introduction of new products by the Company could result in
reduction of sales of the Company's existing beers, requiring the Company to
manage carefully product introductions in order to minimize disruption in sales
of existing products. There can be no assurance that the introduction of new
product offering by the Company will not cause wholesale distributors, retailers
and consumers to reduce purchases or consumption of existing Company products.
Such reduction of purchases or consumption could have a material adverse effect
on the Company's operating results and financial condition.
No Assurance of Future Consumer Demand for Craft Beer. The craft beer
segment of the domestic beer market has grown dramatically over the past decade.
The Company believes that one factor in such growth has been consumer demand for
more flavorful beers offered in a wider variety of styles. No assurance can be
given, however, that consumer demand for craft beers will continue in the
future. The Company's success also depends upon a
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number of factors related to the level of discretionary consumer spending,
including the general state of the economy, federal and state tax laws and
consumer confidence in future economic conditions. Changes in consumer spending
can affect both the quantity and the price of the Company's products and may
therefore affect the Company's operating results. For example, reduced consumer
confidence and spending may result in reduced demand for the Company's products,
limitations on its ability to increase or maintain prices and increases in
required levels of selling, advertising and promotional expenses.
No Assurance of Future Satisfaction of Demand. The production schedule
for the Company's beers is based on forecasts of the Company's sales in general
and the rate of sales of each of the Company's styles of beer. The Company
currently has the flexibility to modify short-term production schedules and is
currently able, on a short-term basis, to satisfy fully most changes in demand
for its product. The ability of the Company to estimate demand may be less
precise during periods of rapid growth or with respect to new products. The
failure of the Company to accurately forecast its sales could lead to inventory
shortages or surpluses that could adversely affect results of operations and
lead to further fluctuations in quarterly operating results.
Dependence on Certain Suppliers. The Company purchases from, and is
dependent upon, its suppliers for certain agricultural ingredients and packaging
materials used in the Company's products. Although to date the Company has been
able to obtain adequate supplies of these ingredients and materials in a timely
manner from existing sources and has changed suppliers from time to time with
minimal disruption, if the Company were unable to obtain sufficient quantities
of ingredients and materials, delays or reductions in product shipments could
occur which would have a material adverse effect on the Company's financial
condition and results of operations. To date, the Company has not experienced
material difficulties in obtaining timely delivery from its suppliers. Although
the Company believes that there are alternative sources available for its raw
materials, there can be no assurance that the Company will be able to acquire
these products from other sources on a timely or cost-effective basis if current
suppliers are unable to supply them. In 1996, the Company experienced a
significant increase in the price of its ingredients and packaging materials.
Except for suppliers who provide glass bottles and corrugated cardboard cartons,
the Company does not have long-term purchase contracts with its suppliers. The
loss of a material supplier could materially adversely affect the Company's
results of operations and financial condition if there were a delay in shipments
from the alternative suppliers.
As with most agricultural products, the supply and price of raw
materials used to product the Company's beers can be affected by a number of
factors beyond the control of the Company such as frosts, droughts, other
weather conditions, economic factors affecting growing decisions, various plant
diseases and pests. To the extent that any of the foregoing affects the
ingredients used to produce the Company's beers, the Company's results of
operations would be materially and adversely affected. In addition, the Company
keeps only approximately a 30 day supply of hops and a seven day supply of malt
on its premises. Moreover, its purchases are limited to pre-packaged quantities,
rather than in bulk. Therefore, the Company is highly dependent upon the ability
of its suppliers to deliver its ingredients in a timely fashion. Such delivery,
which is by truck, is dependent upon certain factors beyond the control of the
Company, including but not limited to weather and labor relations. The Company's
operations are dependent upon its ability to accurately forecast its need for
ingredients. Any failure by the Company to accurately forecast its requirements
of raw materials could result in the Company either being unable to meet higher
than anticipated demand for its products or producing excess inventory, either
of which may adversely affect the Company's results of operations.
Ability to Manage Growth. The Company has experienced rapid growth that
has resulted in new and increased responsibilities for management personnel
which has challenged and continues to challenge the Company's management,
operating and financial systems and resources. To compete effectively and manage
future growth, if any, the Company will be required to continue to implement and
improve its operational, financial and management information systems,
procedures and controls on a timely basis and to expand, train, motivate and
manage its work force. There can be no assurance that the Company's personnel,
systems, procedures and controls will be adequate to support the Company's
existing and future operations. Any failure to implement and improve the
Company's operational, financial and management systems or to expand, train,
motivate or manage employees could have a material adverse effect on the
Company's operating results and financial condition.
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No Assurance of Ability to Protect Intellectual Property Rights. The
Company considers its trademarks and pending trademarks, particularly the "Blue
Ridge" brand names, proprietary beer recipes and the design of product
packaging, advertising and promotional design and art work (the "Intellectual
Property") to be of considerable value and critical to its business. The Company
relies on a combination of trade secret, copyright and trademark laws,
non-disclosure, non-competition and other arrangements to protect its
proprietary rights. However, the Company has discovered that the "Blue Ridge"
name has been used by other companies, some of whom directly or indirectly
compete with the Company. In January 1995, the Company entered into an agreement
with a contract brewer to stop that contract brewer from using the Blue Ridge
name and to acquire any federal trademark rights that such brewer had to the
name "Blue Ridge Lager" at a cost to the Company of approximately $7,900
(excluding legal fees and expenses). The Company applied for trademark
protection on its "Blue Ridge" brands in 1994, 1995 and 1996 and there can be no
assurance that trademarks will be issued by the U.S. Patent and Trademark
Office. Failure to obtain trademark protection could have a material adverse
effect upon the Company's results of operations and financial condition. In
addition, despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy or obtain and use information that the
Company regards as proprietary. There can be no assurance that the steps taken
by the Company to protect its proprietary information will be adequate to obtain
the legal protection sought or will prevent misappropriation of such information
and such protection may not preclude competitors from developing confusingly
similar brand names or promotional materials or developing products with taste
and other qualities similar to the Company's products.
Risk of Third Party Claims of Patent Infringement. While the Company
believes that its Intellectual Property does not infringe upon the proprietary
rights of third parties, there can be no assurance that the Company will not
receive future communications from third parties asserting that the Company's
Intellectual Property infringes, or may infringe, upon the proprietary rights of
third parties. The potential for such claims will increase as the Company
increases distribution in recently entered and new geographic areas. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation and diversion of management's attention, cause product distribution
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
economical or acceptable to the Company or at all. In the event of a successful
claim of infringement against the Company and failure or inability of the
Company to license the infringed or similar proprietary information, the
Company's operating results and financial condition could be materially
adversely affected.
Dependence on Key Personnel. The Company's success depends to a
significant degree upon the continuing contributions of, and on its ability to
attract and retain, qualified management, sales, production and marketing
personnel, particularly Kevin E. Brannon, Chairman of the Board and Chief
Executive Officer, Marjorie A. McGinnis, President, Steven T. Nordahl, Vice
President - Brewing Operations and Craig J. O'Connor, Vice President - Finance
and Administration. The Company entered into employment agreements with each of
these officers in 1996. Prior to their employment by the Company, none of these
officers had prior experience in the brewing industry or significant business
experience. The competition for qualified personnel is intense and the loss of
any of such persons as well as the failure to recruit additional key personnel
in a timely manner, could adversely affect the Company. There can be no
assurance that the Company will be able to continue to attract and retain
qualified management and sales personnel for the development of its business.
Failure to attract and retain key personnel could have a material adverse effect
on the Company's operating results and financial condition.
Operating Hazards; No Assurance of Adequate Insurance. The Company's
operations are subject to certain hazards and liability risks faced by all
brewers, such as bottle flaws or potential contamination of ingredients or
products by bacteria or other external agents that may be accidentally or
wrongfully introduced into products or packaging. The Company's products are not
pasteurized and require careful product rotation to prevent spoilage. However,
neither spoiled beer nor the bacteria introduced in the brewing process is known
to be harmful to human health. The Company runs periodic diagnostic tests on all
of its products to assure that they meet Company quality control guidelines and
comply with federal and state regulatory requirements. While the Company has not
experienced a serious contamination problem in its products, the occurrence of
such a problem could result in a costly product recall and serious damage to the
Company's reputation for product quality. The Company's operations are also
subject to certain injury and liability risks normally associated with the
operation and possible malfunction of brewing and packaging equipment. Although
the Company maintains insurance against certain risks under various
9
<PAGE>
general liability and product liability insurance policies, there can be no
assurance that the Company's insurance will be adequate.
Government Regulation. The Company's business is highly regulated by
federal, state and local laws and regulations. The Company must comply with
extensive laws and regulations regarding such matters as state and regulatory
approval and licensing requirements, trade and pricing practices, permitted and
required labeling, advertising, promotion and marketing practices, relationships
with distributors and related matters. For example, federal and state regulators
require warning labels and signage on the Company's products. The Company
believes that it has obtained all regulatory permits and licenses necessary to
operate its business in teh states where the Company's products are currently
being distributed. Failure on the part of the Company to comply with federal,
state or local regulations could result in the loss or revocation or suspension
of the Company's licenses, permits or approvals and accordingly could have a
material adverse effect on the Company's business. In addition, changes to
federal and state excise taxes on beer production, federal, state and local
environmental regulations, including laws relating to packaging and waste
discharge, or any other laws or regulations which affect the Company's products
could have a material adverse effect on the Company's results of operations. The
federal government and each of the states levy excise tax of $18.00 per barrel
on every barrel of beer produced for consumption in the United States by each
brewing companies with annual production of over 2,000,000 barrels. The federal
excise tax for brewing companies with annual production under 2,000,000 barrels
is $7.00 per barrel on all barrels up to the first 60,000 barrels produced and
$18.00 per barrel for each barrel produced in excess of 60,000. Any increase in
the excise tax for small brewers could have a material adverse effect on the
Company's operating results and financial condition.
Public Attitudes Toward Alcohol Consumption. In recent years, there has
been an increase in the level of health-consciousness in the United States and
considerable debate has occurred concerning alcohol-related social problems,
such as alcoholism and drunk driving. In addition, a number of anti-alcohol
groups are advocating increased governmental action on a variety of fronts
unfavorable to the beer industry, including the legislation of new labeling or
packaging requirements and restrictions on advertising and promotion that could
adversely affect the sale of the Company's products. Restrictions on the sale
and consumption of beer or increases in the retail cost of beer due to increased
governmental regulations, taxes or otherwise, could materially and adversely
affect the Company's financial condition and results of operations.
Antitakeover Provisions in the Company's Corporate Documents. The
Company's Board of Directors has the authority to issue to up 1,000,000 shares
of preferred stock, $.01 par value per share (the "Preferred Stock"), of the
Company including the 1,848 shares of Series A Preferred and the 3,500 shares of
Series B Preferred which are already outstanding and to determine the price,
rights, preferences, privileges and restrictions thereof, including voting
rights, without any further vote or action by the Company's stockholders. The
voting and other rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The Company's Board may similarly issue
additional shares of Common Stock without any further vote or action by
stockholders. Such an issuance could occur in the context of another public or
private offering of shares of Common stock or Preferred Stock or in a situation
where the Common or Preferred Stock is used to acquire the assets or stock of
another company. The issuance of Common or Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no current plans to issue any
additional shares of Common or Preferred Stock other than as described herein.
See "Description of Securities."
Moreover, the Restated and Amended Articles of Incorporation
("Articles") and Restated and Amended Bylaws ("Bylaws") of the Company contain
certain provisions which, among other things, maintain a "staggered" Board of
Directors, limit the personal liability of, and provide indemnification for, the
directors of the Company, require that stockholders comply with certain
requirements before they can nominate someone for director or submit a proposal
before a meeting of stockholders, prohibit the ability of stockholders to call
special meetings of stockholders, limit the ability of stockholders to act by
written consent and require a supermajority vote of stockholders in the event
that a "related person" (as defined) attempts to engage in a business
combination with the Company.
10
<PAGE>
Potential Volatility of Stock Price. Stock prices of many growing
consumer-product companies fluctuate widely, often for reasons that are
unrelated to their actual operating performance. Announcement of new facilities
or products by the Company or its competitors, regulatory developments, and
economic or other external factors, as well as period-to-period fluctuations in
financial results, may have a significant impact on the market price and
marketability of the Common Stock. In the past, following periods of volatility
in the market price of a company's securities, securities class action
litigation has often been initiated against such company. Such litigation could
result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect upon the Company's
operating results and financial condition.
Certain Related-Party Transactions. The Company has borrowed money from
time to time to provide cash for operations and for other corporate purposes
from its directors, stockholders and persons having business relationships with
its directors. In addition, the Company leases its brewery from a company which
is owned, in part, by one of the Company's directors and by other affiliated
persons.
Limitations on Liability of Management. The Company has adopted
provisions in its Articles that eliminate to the fullest extent permissible
under Maryland law the liability of its directors for monetary damages except to
the extent that it is proved that the director actually received an improper
benefit or profit in money, property or services or the director's action or
failure to act was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. While it may
limit stockholder actions against the directors of the Company for various acts
of misfeasance, the provision is designed to ensure that the ability of the
Company's directors to exercise their best business judgment in managing the
Company's affairs, subject to their continuing fiduciary duties to the Company
and its stockholders, is not unreasonably impeded by exposure to potentially
high personal costs or other uncertainties of litigation.
Indemnification of Management. The Company's Articles consistent with
Maryland law, provide that the Company will indemnify and advance expenses to
any director, officer, employee or agent of the Company who is, or is threatened
to be made, a party to any action, suit or proceeding. Such indemnification
would cover the cost of attorney's fees as well as any judgment, fine or amounts
paid in settlement of such action provided that the indemnified party meets
certain standards of conduct necessary for indemnification under applicable law.
Such indemnity may or may not be covered by officer and director liability
insurance and could result in an expense to the Company even if such person is
not successful in the action. This provision is designed to protect such persons
against the costs of litigation which may result from his or her actions on
behalf of the Company.
11
<PAGE>
Selected Financial and Operating Data
The following selected financial and operating data should be read in
conjunction with the Company's financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Annual Report on Form 10-KSB delivered
concurrently with this Prospectus (the "Annual Report"). The balance sheet data
and statement of operations data as of and for the years ended December 31, 1996
and 1995 are derived from financial statements of the Company that have been
audited by Coopers & Lybrand L.L.P., independent accountants. The balance sheet
data and statement of operations data as of and for the years ended December 31,
1994, 1993 and 1992 are derived from financial statements of the Company that
are not included in the Annual Report. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in the Annual Report.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992(1)
(In thousands, except per share and barrel data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Sales $ 1,872 $ 1,832 $ 1,186 $ 106 $ --
Excise taxes 101 87 59 4 --
Cost of sales 1,744 1,253 847 89 --
Gross profit 27 492 280 13 --
Selling, general and
administrative expenses 2,041 831 470 259 22
Loss from operations (2,655) (339) (206) (246) (22)
Interest (expense), net (29) (79) (52) (11) --
Other income (expense) 42 5 (1) --
Loss before income taxes 2,625 (376) (253) (258) (22)
Provision for income taxes (17) (17) -- --
Net loss $ 2,625 $ (359) $ (270) $ (258) $ (22)
Net loss per share $ (1.45) $ (.30) $ (.24) $ (.29) $ (.04)
Shares used in per share
calculation(2) 1,805 1,205 1,122 887 596
Operating Data (In Barrels)(3):
Barrels sold 10,910 10,031 6,436 660 --
Net sales per barrel sold $ 162.32 $ 173.96 $ 175.11 $ 154.55 $ --
Gross profit per barrel sold 2.47 49.05 43.51 19.70 --
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
1996 1995 1994 1993 1992
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working Capital (deficit) $ 2 $ (199) $ (53) $ 5 $ 2
Total assets 4,766 1,659 1,316 723 32
Long-term debt, net of
current portion 1,723 303 481 315 --
Stockholders' equity 1,823 581 394 323 26
</TABLE>
(1) The Company was incorporated on March 4, 1992.
(2) See Note 2 of the Notes to the Financial Statements in the Annual
Report for an explanation of shares used in computing net loss per share.
(3) A barrel is equivalent to 31 gallons, two domestic kegs or 13.8 cases
of twenty-four 12 ounce bottles of beer. All barrels sold data is as of the
end of period.
12
<PAGE>
MARKET PRICE OF COMMON STOCK
The Company's Common Stock has been listed on the Automated Quotation
System of the National Association of Securities Dealers, Inc. (NASDAQ)
Small-Cap Market under the symbol "BLUE" since March 11, 1996. As of May 2, 1997
the last sale price as reported on NASDAQ was $4.125.
The following table sets forth the high and low bid prices for the
Common Stock as reported on NASDAQ for each quarter since March 11, 1996, the
closing date of the Company's initial public offering, for the periods
indicated. Such information reflects inter dealer prices without retail mark-up,
mark down or commissions and may not represent actual transactions.
Quarter Ended High Low
------------- ---- ---
March 31, 1996 7-1/4 5-1/4
June 30, 1996 5-3/4 4-7/8
September 30, 1996 5-1/4 4-1/4
December 31, 1996 5-1/8 3-7/8
March 31, 1997 4-5/8 4-1/8
(through March 20, 1997)
The Company has not paid any dividends on its Common Stock.
The Company currently intends to retain any earnings for use in its business,
and therefore does not anticipate paying cash dividends in the foreseeable
future.
As of March 20, 1997, there were approximately 1,500 record
holders of Company Common Stock.
13
<PAGE>
SELLING STOCKHOLDERS
The shares of Common Stock of the Company offered by the Selling
Stockholders (the "Shares") will be offered at market prices, as reflected on
NASDAQ. The shares include 56,250 shares currently outstanding as well as shares
being offered by the holders upon conversion of the Series A Preferred and the
Series B Preferred and shares being issued upon exercise of warrants and
options. The aggregate number of shares offered for resale upon conversion of
the Series B Preferred will be based on the conversion rate in effect at the
time of conversion. It is anticipated that registered broker-dealers will be
allowed the commissions which are usual and customary in open market
transactions.
The number of shares of Common Stock issuable upon conversion of each
of the 3,750 shares of Series B Preferred, and the consequent number of shares
of Common Stock available for resale under this Prospectus, is based upon a
conversion ratio which is $1,000 divided by 70% of the closing bid price of the
Common Stock on NASDAQ averaged over the five trading days immediately prior to
the date of conversion. The number of shares in the table below is based upon
the bid price on the date of this Prospectus, or $4.125, or approximately 346.3
shares of Common Stock per share of Series B Preferred. The Selling Stockholders
do not own any Common Stock except as registered hereby and will own no shares
after the completion of the offering. The relationship, if any, between the
Company and any Selling Stockholder is set forth below.
<TABLE>
<CAPTION>
Percent of
Number of Number of Common Stock
Series A Series B Number of Before
Name Preferred Shares Preferred Shares Common Shares Offering
<S> <C> <C> <C>
Arsden Financial SA 625 216,450 10.0%
Talb Bank E.C. 250 86,580 4.2
Joseph Havas 100 34,642 1.7
Colbo Kft 200 69,264 3.4
Matthew P.T. Holstein 25 8,658 *
Philip M. Holstein Jr. 50 17,316 *
Barry Seidman 750 259,740 11.7
Castle Creek Valley Ranch
Defined Benefit Pension Plan 50 17,316 *
Willorn Company Limited 500 173,160 8.1
Bruce R. Knox 100 34,642 1.7
Frederick A. Lenz 50 17,316 *
Jon Lane 50 17,316 *
Lee & Rich's Oyster Bar #2 Inc. 100 34,642 1.7
John T. Mitchell 50 17,316 *
Nostradamus, S.A. 500 173,160 8.1
Pegasus Investment Holdings Limited 100 34,642 1.7
Albert Yanni 100 34,642 1.7
Lampton, Inc. 150 51,948 2.6
Earl L. Bennet 20 2,605 1.4
David & Janelle K. Schmedt, JTROS 20 2,605 *
Thomas A. Luse 40 5,210 *
David A. & Toni A. McGill, JTROS 40 5,210 *
R. Dale Wiege 60 7,815 *
Evelyn Taghon, Trustee 20 2,605 *
Farmington Valley C/F D and
L. Helmreich IRA 88 11,462 *
James Zwicker 20 2,677 *
Frances Zarndt 20 2,835 *
Marvin Zwicker 20 2,754 *
14
<PAGE>
David Helmreich 100 13,769 *
James Schuyler 50 6,787 *
Robert Drehman 20 2,921 *
Steven Saunders 30 4,381 *
Robert A. Strausse 100 14,604 *
Farmington Valley C/F Dennis E. Kopp 40 5,842 *
Ryan Blentlinger 40 5,430 *
Daniel R. and Julie K. Roling, JTROS 20 2,715 *
William and Cynthia Mosier JTROS 20 2,715 *
Mark R. and Sharon I. Schlueter, JTROS 20 2,715 *
David A. Marrone 20 2,754 *
Marvin W. Solomonson 20 2,754 *
David and Janelle Schmedt, JTROS 20 2,754 *
Randy J. and Debbie Edmund, JTROS 20 2,715 *
Farmington Valley C/F
Michael M. Blentlinger 50 6,787 *
Michael M. Blentlinger 40 5,430
L.H. Granke 40 5,430 *
Ted Wurschmidt 20 2,715 *
Brian J. and Julie P. Berhorst, Trustee 20 2,715 *
Nancy B. Marshall 50 6,787 *
Farmington Valley C/F
Clayton W. Varner 20 2,715 *
Lewis, Blickham, Longlett & Timmerwilke
401K PS FBO John Longlett 20 2,715 *
Arley R. Whitsell 30 4,072 *
Rowlan L. Miller 60 8,144 *
Morgan Keller
General contractor for
company facilities 630 85,516 4.2
World Capital Funding, Inc.(1) 256,250 11.6
Corporate Relations Group, Inc.(2)
Financial Public
Relations Consultant 500,000 20.4
John Pfeiffer(3)
Consultant 25,000 1.3
Marvin W. Solomonson(4)
Placement Agent 28,785 1.5
Compass Capital, Inc.(5)
Consultant 28,360 1.4
-------- --------- ------------ ------
TOTALS 1,848 3,750 2,388,755 55.0%
*less than 1%
</TABLE>
(1) Includes 100,000 shares issuable upon exercise of options at $4.375 and
100,000 shares issuable upon
exercise of options at $4.875 per share.
(2) Represents shares exercisable at each of the following prices and
terms: 100,000 shares at $4.00 until March 27, 1998; 100,000 shares at
$4.80 until March 27, 1999; 100,000 shares at $5.60 until March 27,
2000; 100,000 shares at $6.40 until March 27, 2001; and 100,000 shares
at $7.20 until March 27, 2002.
(3) Represents 25,000 shares issuable upon exercise of warrants at $5.00
per share expiring December 31, 2001.
(4) Represents 28,785 shares issuable upon exercise of warrants at $3.21
per share until February 28, 2000.
(5) Represents 28,360 shares issuable upon exercise of warrants at $5.29
per share until November 19, 1999.
15
<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
The Company's Articles of Incorporation authorizes the issuance of
9,000,000 shares of Common Stock, $.00004 par value per share, of which
1,954,876 shares were outstanding as of March 31, 1997. Holders of shares of
Common Stock are entitled to one vote for each share on all matters to be voted
on by the shareholders. Holders of Common Stock have no cumulative voting
rights. Holders of shares of Common Stock are entitled to share ratably in
dividends, if any, as may be declared, from time to time by the Board of
Directors in its discretion, from funds legally available therefor. In the event
of a liquidation, dissolution or winding up of the Company, the holders of
shares of Common Stock are entitled to share pro rata all assets remaining after
payment in full of all liabilities. Holders of Common Stock have no preemptive
rights to purchase the Company's Common Stock. There are no conversion rights or
redemption or sinking fund provisions with respect to the Common Stock. All of
the outstanding shares of Common Stock are validly issued, fully paid and
non-assessable.
The transfer agent for the Common Stock is Registrar & Transfer
Company, 10 Commerce Drive, Cranford, New Jersey 07016.
Preferred Stock
The Company's Articles of Incorporation authorize the issuance of
1,000,000 shares of preferred stock, $.01 par value, of which 1,848 shares of
Series A Preferred and 3,750 shares of Series B Preferred are outstanding. The
Series A and Series B Preferred Stock is convertible into shares of common stock
(see "Selling Stockholders"). The holders of Series A Preferred are senior to
the Common Stock with respect to dividend rights and are entitled to a
liquidation preference of $500 per share. The annual dividend rate is $40.00 per
share per annum, when, as and if declared by the Company's Board of Directors.
If not declared, dividends will accumulate and be payable in the future. Full
dividends must be paid or set aside on the Series A Preferred Stock before
dividends may be paid or set aside on the Company's Common Stock. All dividend
payments will be subordinated to the Company's debt obligations, and will be
subject to the prior approval of Signet and the Company's other future lenders.
Signet has stated that it will not permit dividends to be paid on the Series A
Preferred Stock in 1997. The holders of Series B Preferred have a liquidation
preference of $1,000 per share over the Common Stock and the Series A Preferred.
Dividends on the Series B Preferred may be declared and paid if, when and to the
extent determined from time to time by the Company's Board of Directors,
provided that such dividends shall be declared with respect to the Series B
Preferred Stock on par with dividends declared with respect to the Company's
Common Stock. The Company does not expect to declare or pay such dividends in
the foreseeable future. The Company may issue additional preferred stock in the
future. The Company's Board of Directors has authority, without action by the
shareholders, to issue all or any portion of the authorized but unissued
preferred stock in one or more series and to determine the voting rights,
preferences as to dividends and liquidation, conversion rights, and other rights
of such series.
The Company considers it desirable to have preferred stock available to
provide increased flexibility in structuring possible future acquisitions and
financings and in meeting corporate needs which may arise. If opportunities
arise that would make desirable the issuance of preferred stock through either
public offering or private placements, the provisions for preferred stock in the
Company's Articles of Incorporation would avoid the possible delay and expense
of a shareholder's meeting, except as may be required by law or regulatory
authorities. Issuance of the preferred stock could result, however, in a series
of securities outstanding that will have certain preferences with respect to
dividends and liquidation over the Common Stock which would result in dilution
of the income per share and net book value of the Common Stock. Issuance of
additional Common Stock pursuant to any conversion right which may be attached
to the terms of any series of preferred stock may also result in dilution of the
net income per share and the net book value of the Common Stock. The specific
terms of any series of preferred stock will depend primarily on market
conditions, terms of a proposed acquisition or financing, and other factors
existing at the time of issuance. Therefore, it is not possible at this time to
determine in what respect a particular series of preferred stock will be
superior to the Company's Common Stock or any other series of preferred stock
which the Company may issue. The Board of Directors may issue additional
preferred stock in future financings.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. Further, certain provisions of Maryland law could delay
16
<PAGE>
or make more difficult a merger, tender offer or proxy contest involving the
Company. While such provisions are intended to enable the Board of Directors to
maximize stockholder value, they may have the effect of discouraging takeovers
which could be in the best interest of certain stockholders. There is no
assurance that such provisions will not have an adverse effect on the market
value of the Company's stock in the future.
LEGAL MATTERS
The legality of the Shares offered hereby will be passed upon for the
Company by Hand & Hand, a law corporation, Dana Point, California.
EXPERTS
The financial statements of the Company as of December 31, 1996 and
1995 and for the years ended December 31, 1996 and 1995, incorporated by
reference in this Prospectus from the Annual Report on Form 10-KSB, have been
incorporated herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
17
<PAGE>
No dealer, salesman or other person is authorized to give any
information or to make any representations not contained in this Prospectus in
connection with the offer made hereby, and, if given or made, such information
or representations must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer to sell or a solicitation
to an offer to buy the securities offered hereby to any person in any state or
other jurisdiction in which such offer or solicitation would be unlawful.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that the information contained herein
is correct as of any time subsequent to the date hereof.
TABLE OF CONTENTS
Page
Additional Information...................... 2
Prospectus Summary.......................... 3
Risk Factors................................ 6
Market Price of Common Stock................ 8
Selling Stockholders........................ 10
Description of Securities................... 10
Legal Matters............................... 11
Experts..................................... 11
<PAGE>
