PROSPECTUS
FREDERICK BREWING CO.
1,985,671 Shares of Common Stock
($.00004 par value)
The estimated 1,985,671 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 an estimated 1,296,289 shares issuable upon
conversion of $2,100,000 in principal amount of Series C Convertible Preferred
Stock (the "Series C Preferred"), an estimated 645,057 shares issuable upon
conversion of $1,045,000 in principal amount of Series D Convertible Preferred
Stock (the "Series D Preferred") and 44,325 shares already outstanding. The
Company will not receive any proceeds from the sale of Common Stock by the
Stockholders. See "Selling Stockholders." The expenses of the offering,
estimated at $20,000, will be paid by the Company.
The Common Stock currently trades on NASDAQ under the symbol "BLUE" On
January 26, 1998, the last sale price of the Common Stock as reported on NASDAQ
was $1.87 per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PURCHASE OF THESE SECURITIES INVOLVES RISKS. See "Risk Factors" on page 3.
The date of this Prospectus is January 30, 1998
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No person has been authorized in connection with this offering to give any
information or to make any representation other than as contained in this
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any
securities covered by this Prospectus in any state or other jurisdiction to any
person to whom it is unlawful to make such offer or solicitation in such state
or jurisdiction. Neither the delivery of this Prospectus nor any sales made
hereunder shall, under any circumstances, create an implication that there has
been no change in the affairs of the Company since the date hereof.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, as well as proxy statements and
other information filed by the Company with the Commission, can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at its Regional
Offices located at 7 World Trade Center, New York, New York 10048, and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained at prescribed rates from the Public
Reference Section of the Commission, Washington, D.C. 20549, during regular
business hours. The Commission maintains a Web site that contains reports, proxy
and information statements and other information regarding issuers such as the
Company that file electronically with the Commission at http://www.sec.gov.
This Prospectus incorporates by reference the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996, its Quarterly Reports on Form
10-QSB for the quarters ended March 31, 1997 and June 30, 1997 (as both such
reports are amended by Form 10-QSB/A) and September 30, 1997, its Current
Reports on Form 8-K dated February 27, 1997, April 15, 1997 and December 15,
1997, 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
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<CAPTION>
<S> <C>
Securities Offered:...................................... An estimated 1,985,671 shares of Common Stock,
$.00004 par value per share, including an estimated
1,296,289 shares issuable upon conversion of 2,100
shares of Series C Preferred and 1,045 shares of Series
D Preferred Stock at a conversion price per share of
Preferred Stock equal to the lower of $1,000 divided by
70% of the average closing bid price of the Common
Stock on the five trading days prior to conversion or
$1.62 ($1.453125 for the Series D Preferred), and
44,325 shares currently outstanding.
Common Stock Outstanding(1) Before Offering:............. 2,984,961(1) shares as per transfer agent
Common Stock Outstanding After Offering:................. 4,926,307(1) shares
NASDAQ symbol............................................ BLUE
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(1) Based on shares outstanding as of October 31, 1997.
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 September 30, 1997, the cumulative loss since inception
was $8,135,523. The Company's limited operating history makes the prediction of
future sales and operating results difficult. Accordingly, although the Company
has experienced sales growth, such growth should not be considered indicative of
future sales growth, if any, or of future operating results. There can be no
assurance that the Company's sales will grow or be sustained in future periods
or that the Company will become or remain profitable in any future period. Due
to the expenses involved in the expansion of the Company's operations in
connection with the completion of the new brewery (including increased overhead,
depreciation, marketing and salaries and its plan to increase production to
50,000 barrels per year), the Company does not expect to operate profitably
until at least calendar 1998.
Lack of Liquidity; Inadequate Working Capital; Default in Financial
Covenants. The Company has, in the last eighteen 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 its securities, additional working capital for the
hiring and training of administrative and sales personnel and the payment of
certain promotional, marketing and advertising expenses in connection with the
commencement of full production at the new brewery which occurred in March 1997.
In connection with the construction of the new brewery and the purchase
of brewing and other equipment, the Maryland Economic Development Corporation
issued $4.5 million in taxable economic development bonds on July 19, 1996,
including $1.5 million borrowed by the Company to purchase brewery equipment for
the new brewery (the "FBC Facility") 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 refinanced 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 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 and September 30, 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 (for which it obtained a waiver from Signet)
but were complied with as of June 30, 1997. 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. On April 24,
1997, the Company closed a $1.0 million loan with the United States Small
Business Administration ("SBA"). The proceeds of this loan were used to pay the
principal balance of the Company's bridge loan with Signet Bank which was
incurred for the purchase of brewing and packaging equipment for the Company's
new facility. The loan has a twenty year term and a fixed interest rate of
7.368%. See the Company's Pre-effective Amendment No. 5 to the Form SB-2 filed
with the SEC on March 5, 1996, attached hereto by reference.
Possible Need for Additional Financing. The Company intends to continue
to expend funds to increase its market share in the states where its products
are currently being sold and, possibly, in other states in the future. Such
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.
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Heavy Dependence on Wholesale Distributors. The Company distributes its
products only through independent wholesale distributors for resale to retailers
such as liquor and wine and beer stores, restaurants, taverns, pubs, bars and
sporting arenas. Accordingly, the Company is dependent upon these wholesale
distributors to sell the Company's beers and to assist the Company in creating
demand for, and promoting market acceptance of, the Company's products and
providing adequate service to its retail customers. There can be no assurance
that the Company's wholesale distributors will devote the resources necessary to
provide effective sales and promotion support to the Company.
Dependence on Major Customers. Sales to The Kronheim Co., Inc.,
Baltimore, Maryland ("Kronheim"), the Company's largest wholesale distributor,
represented 50.6%, 35.7% and 56.5% of the Company's revenues in 1996, 1995 and
1994, respectively and 50.1% of the Company's revenues in the six months ended
June 30, 1997. Sales to all other wholesale distributors represented 49.4%,
64.3% and 43.5% of the Company's revenues in 1996, 1995 and 1994, respectively.
(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
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distribution networks, will continue to seek further participation in the
specialty beer segment through the acquisition of equity positions in, or the
formation of distribution alliances with, smaller craft brewers (such as
Anheuser-Busch's equity position in, and distribution agreement with, Redhook
Ale Brewery, Incorporated).
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 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 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.
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Sales Fluctuations Due to Seasonality. The Company's wholesale
distributors have historically experienced higher sales in the second and fourth
quarters of the calendar year due to increased consumption of the Company's
beers during periods of warmer weather and from Halloween through New Year's
Day. Although the Company has not yet experienced sales fluctuations due to
seasonality because the Company has continued to expand its wholesale
distribution network over the past three years, fluctuations in the Company's
sales due to seasonality may become evident in the future as the Company's sales
increase.
No Assurance of Geographic Expansion. While Frederick Brewing 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 and 41.9% in the nine months ended September 30, 1997. The Company has
only recently identified and appointed distributors and established distribution
in Virginia, Pennsylvania, New Jersey, Delaware, Florida and Washington. 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 continued promotion and sale of the Company's products by suitable local
wholesale distributors, the retention of skilled sales and other personnel, the
ability to adapt management and other operational systems to accommodate
increased volume, the success of advertising and promotion campaigns, and other
factors, some of which are beyond the control of the Company. Furthermore,
consumer tastes vary by region and there can be no assurance that consumers
located in new geographic regions will be receptive to the Company's beers. The
Company believes that consumer demand for its products is greater in certain
areas than others due to demographic, economic and other factors. The Company's
efforts to increase sales by further penetrating market areas may be limited by
such factors. The inability of the Company to expand sales in a timely manner
would have a material adverse effect on the Company's operating results and
financial condition.
Limited Product Line. The sale of a limited number of styles of beers
has accounted for substantially all of the Company's revenues since inception.
The Company currently offers five styles of beer year-around and usually one
seasonal brew during any part 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
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 such as Hempen Ale 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.
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No Assurance of Future Consumer Demand for Craft Beer. The craft beer
segment of the domestic beer market has grown dramatically over the past decade.
The Company believes that one factor in such growth has been consumer demand for
more flavorful beers offered in a wider variety of styles. No assurance can be
given, however, that consumer demand for craft beers will continue in the
future. The Company's success also depends upon a number of factors related to
the level of discretionary consumer spending, including the general state of the
economy, federal and state tax laws and consumer confidence in future economic
conditions. Changes in consumer spending can affect both the quantity and the
price of the Company's products and may therefore affect the Company's operating
results. For example, reduced consumer confidence and spending may result in
reduced demand for the Company's products, limitations on its ability to
increase or maintain prices and increases in required levels of selling,
advertising and promotional expenses.
No Assurance of Future Satisfaction of Demand. The production schedule
for the Company's beers is based on forecasts of the Company's sales in general
and the rate of sales of each of the Company's styles of beer. The Company
currently has the flexibility to modify short-term production schedules and is
currently able, on a short-term basis, to satisfy fully most changes in demand
for its product. The ability of the Company to estimate demand may be less
precise during periods of rapid growth or with respect to new products. The
failure of the Company to accurately forecast its sales could lead to inventory
shortages or surpluses that could adversely affect results of operations and
lead to further fluctuations in quarterly operating results. The Company's
production volume for the nine months ended September 30, 1997 was 12,277
barrels, an increase of 54%, compared to 7,975 barrels in the nine months ended
September 30, 1996. This increase occurred despite a halt in production in March
1997 necessitated by the Company's move to its new brewery plant. The increased
demand for the Company's product, coupled with a delay in receiving new
packaging equipment and packaging equipment malfunctions in the three months
ended June 30, 1997, resulted in the Company's inability to need demand for its
products in June 1997, when it operated at close to its capacity of 3,300
barrels per month. Although the Company has ordered additional production
equipment which will increase its capacity to 5,800 barrels per month, by
October 1997, there can be no assurance that the Company will be able to meet
demand for its products, that sales will not be adversely affected nor that
demand will continue to increase. A prolonged inability to meet demand for its
products could lead to a loss of customers, impair the Company's expansion plans
and invite increased competition.
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 produce the Company's beers can be affected by a number of
factors beyond the control of the Company such as frosts, droughts, other
weather conditions, economic factors affecting growing decisions, various plant
diseases and pests. To the extent that any of the foregoing affects the
ingredients used to produce the Company's beers, the Company's results of
operations would be materially and adversely affected. 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
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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.
No Assurance of Ability to Protect Intellectual Property Rights. The
Company considers its trademarks and pending trademarks, particularly the "Blue
Ridge" and "Hempen Ale" brand names, 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 applied for
trademark protections on its "Hempen Ale" brand in 1997 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 -
Marketing. 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
9
<PAGE>
be no assurance that the Company will be able to continue to attract and retain
qualified management and sales personnel for the development of its business.
Failure to attract and retain key personnel could have a material adverse effect
on the Company's operating results and financial condition.
Operating Hazards; No Assurance of Adequate Insurance. The Company's
operations are subject to certain hazards and liability risks faced by all
brewers, such as bottle flaws or potential contamination of ingredients or
products by bacteria or other external agents that may be accidentally or
wrongfully introduced into products or packaging. The Company's products are not
pasteurized and require careful product rotation to prevent spoilage. However,
neither spoiled beer nor the bacteria introduced in the brewing process is known
to be harmful to human health. The Company runs periodic diagnostic tests on all
of its products to assure that they meet Company quality control guidelines and
comply with federal and state regulatory requirements. While the Company has not
experienced a serious contamination problem in its products, the occurrence of
such a problem could result in a costly product recall and serious damage to the
Company's reputation for product quality. The Company's operations are also
subject to certain injury and liability risks normally associated with the
operation and possible malfunction of brewing and packaging equipment. Although
the Company maintains insurance against certain risks under various general
liability and product liability insurance policies, there can be no assurance
that the Company's insurance will be adequate.
Government Regulation. The Company's business is highly regulated by
federal, state and local laws and regulations. The Company must comply with
extensive laws and regulations regarding such matters as state and regulatory
approval and licensing requirements, trade and pricing practices, permitted and
required labeling, advertising, promotion and marketing practices, relationships
with distributors and related matters. For example, federal and state regulators
require warning labels and signage on the Company's products. The Company
believes that it has obtained all regulatory permits and licenses necessary to
operate its business in the states where the Company's products are currently
being distributed. Failure on the part of the Company to comply with federal,
state or local regulations could result in the loss or revocation or suspension
of the Company's licenses, permits or approvals and accordingly could have a
material adverse effect on the Company's business. In addition, changes to
federal and state excise taxes on beer production, federal, state and local
environmental regulations, including laws relating to packaging and waste
discharge, or any other laws or regulations which affect the Company's products
could have a material adverse effect on the Company's results of operations. The
federal government and each of the states levy excise tax of $18.00 per barrel
on every barrel of beer produced for consumption in the United States by each
brewing company with annual production of over 2,000,000 barrels. The federal
excise tax for brewing companies with annual production under 2,000,000 barrels
is $7.00 per barrel on all barrels up to the first 60,000 barrels produced and
$18.00 per barrel for each barrel produced in excess of 60,000. Any increase in
the excise tax for small brewers could have a material adverse effect on the
Company's operating results and financial condition.
Public Attitudes Toward Alcohol Consumption. In recent years, there has
been an increase in the level of health-consciousness in the United States and
considerable debate has occurred concerning alcohol-related social problems,
such as alcoholism and drunk driving. In addition, a number of anti-alcohol
groups are advocating increased governmental action on a variety of fronts
unfavorable to the beer industry, including the legislation of new labeling or
packaging requirements and restrictions on advertising and promotion that could
adversely affect the sale of the Company's products. Restrictions on the sale
and consumption of beer or increases in the retail cost of beer due to increased
governmental regulations, taxes or otherwise, could materially and adversely
affect the Company's financial condition and results of operations.
Antitakeover Provisions in the Company's Corporate Documents. The
Company's Board of Directors has the authority to issue to up 1,000,000 shares
of preferred stock, $.01 par value per share (the "Preferred Stock"), of the
Company including the 1,848 shares of Series A Preferred Stock, the 3,750 shares
of Series B Preferred and 2,100 shares of Series C Preferred and 1,045 shares of
Series D Preferred which have been issued to date and to determine the price,
rights, preferences, privileges and restrictions thereof, including voting
rights, without any further vote or action by the Company's stockholders. The
voting and other rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The Company's Board may similarly issue
additional shares of Common Stock without any further vote or action by
stockholders. Such an issuance could occur in the context of another public or
private offering
10
<PAGE>
of shares of Common stock or Preferred Stock or in a situation where the Common
or Preferred Stock is used to acquire the assets or stock of another company.
The issuance of Common or Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no current plans to issue any additional shares of
Common or Preferred Stock other than as described herein. See "Description of
Securities."
Moreover, the Restated and Amended Articles of Incorporation
("Articles") and Restated and Amended Bylaws ("Bylaws") of the Company contain
certain provisions which, among other things, maintain a "staggered" Board of
Directors, limit the personal liability of, and provide indemnification for, the
directors of the Company, require that stockholders comply with certain
requirements before they can nominate someone for director or submit a proposal
before a meeting of stockholders, prohibit the ability of stockholders to call
special meetings of stockholders, limit the ability of stockholders to act by
written consent and require a supermajority vote of stockholders in the event
that a "related person" (as defined) attempts to engage in a business
combination with the Company.
Potential Volatility of Stock Price. Stock prices of many growing
consumer-product companies fluctuate widely, often for reasons that are
unrelated to their actual operating performance. Announcement of new facilities
or products by the Company or its competitors, regulatory developments, and
economic or other external factors, as well as period-to-period fluctuations in
financial results, may have a significant impact on the market price and
marketability of the Common Stock. In the past, following periods of volatility
in the market price of a company's securities, securities class action
litigation has often been initiated against such company. Such litigation could
result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect upon the Company's
operating results and financial condition.
Certain Related-Party Transactions. The Company has borrowed money from
time to time to provide cash for operations and for other corporate purposes
from its directors, stockholders and persons having business relationships with
its directors. In addition, the Company leases its brewery from a company which
is owned, in part, by one of the Company's directors and by other affiliated
persons.
Limitations on Liability of Management. The Company has adopted
provisions in its Articles that eliminate to the fullest extent permissible
under Maryland law the liability of its directors for monetary damages except to
the extent that it is proved that the director actually received an improper
benefit or profit in money, property or services or the director's action or
failure to act was the result of active and deliberate dishonesty and was
material to the cause of action adjudicated in the proceeding. While it may
limit stockholder actions against the directors of the Company for various acts
of misfeasance, the provision is designed to ensure that the ability of the
Company's directors to exercise their best business judgment in managing the
Company's affairs, subject to their continuing fiduciary duties to the Company
and its stockholders, is not unreasonably impeded by exposure to potentially
high personal costs or other uncertainties of litigation.
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 (the "Annual
Report") and its Quarterly Report on Form 10-QSB for the Quarter Ended September
30, 1997, (the "September 1997 10-QSB"), incorporated by reference herein. The
balance sheet data and statement of operations data as of and for the years
ended December 31, 1996 and 1995, incorporated by reference herein, 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. The balance sheet data as of September 30, 1997 and the
statement of operations data for the nine months ended September 30, 1997 and
1996 are derived from unaudited financial statements included in the September
1997 10-QSB. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in the Annual Report and the September 1997 10-QSB.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended December 31,
1997 1996 1996 1995 1994 1993 1992(1)
(In thousands, except per share and barrel data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $ 2,214 $ 1,390 $ 1,872 $ 1,832 $ 1,186 $ 106 $ --
Excise taxes 112 74 101 87 59 4 --
Cost of sales 2,078 1,354 1,743 1,253 847 89 --
Gross profit (loss) (14) (122) 27 492 280 13 --
Selling, general and
administrative expenses 2,681 996 2,682 831 485 259 22
Loss from operations (2,696) (1,118) (2,655) (339) (206) (246) (22)
Interest (expense), net (204) 1 29 (79) (52) (11) --
Other income (expense) 136 -- 42 5 (1) --
(Loss) before income taxes (2,764) (1,117) 2,625 (376) (253) (258) (22)
Provision for income taxes (17) (17) -- --
Net (loss) $ (2,764) $ (1,117) $ (2,625) $ (359) $ (270) $ (258) $ (22)
Preferred Stock
Dividend Requirements (2,283) -- -- -- -- -- --
Net Loss attributable
to Common Stockholders (5,047) (1,117) -- -- -- -- --
Net loss per share $(1.01) $(.64) $(1.45) $(.30) $(.24) $(.29) $(.04)
Preferred Stock
Dividend Requirements (.83) -- -- -- -- -- --
Net loss per share (1.84) (.64) (1.45) (.30) (.24) (.29) (.04)
Shares used in per share
calculation(2) 2,239 1,754 1,805 1,205 1,122 887 596
Operating Data (In Barrels)(3):
Barrels sold $ 12,277 $ 7,975 10,910 10,031 6,436 660 --
Net sales per barrel sold $187 $174 $162.32 $173.96 $175.11 $154.55 $--
Gross profit per barrel sold (1.17) (.00) 2.47 49.05 43.51 19.70 --
As of
September 30, As of December 31,
1997 1996 1995 1994 1993 1992
Balance Sheet Data:
Working Capital (deficit) $311 $ 2 $ (199) $ (53) $ 5 $ 2
Total assets 1,336 4,766 1,659 1,316 723 32
Long-term debt, net of
current portion 5,168 1,723 373 481 315 --
Stockholders' equity 4,923 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 and Note 4 of the Notes to the Financial Statements in the
September 1997 10-QSB
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 January 26,
1998 the last sale price as reported on NASDAQ was $1.875.
The following table sets forth the high and low bid prices for the
Common Stock as reported on NASDAQ for each quarter since March 11, 1996, the
closing date of the Company's initial public offering, for the periods
indicated. Such information reflects inter dealer prices without retail mark-up,
mark down or commissions and may not represent actual transactions.
Quarter Ended High Low
------------- ---- ---
March 31, 1996 7-1/4 5-1/4
June 30, 1996 5-3/4 4-7/8
September 30, 1996 5-1/4 4-1/4
December 31, 1996 5-1/8 3-7/8
March 31, 1997 4-5/8 4-1/8
June 30, 1997 4-5/8 2-3/4
September 30, 1997 2-11/16 2
December 31, 1997 2-7/16 1-15/16
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 November 28, 1997, there were approximately 1,300 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 44,325 shares currently outstanding as well as shares
being offered by the holders upon conversion of the Series C and Series D
Preferred. The aggregate number of shares offered for resale upon conversion of
the Series C and Series D Preferred will be based on the conversion rate in
effect at the time of conversion. It is anticipated that Selling Stockholders
will sell their shares of Common Stock on NASDAQ in which case registered
broker-dealers will be allowed the commissions which are usual and customary in
open market transactions. Selling Stockholders may also sell their shares of
Common Stock in off-the-market transactions at market price in which case no
commissions would be paid.
The number of shares of Common Stock estimated to be issuable upon
conversion of each of the 2,100 shares of Series C Preferred and 1,045 shares of
Series D Preferred, and the consequent number of shares of Common Stock
available for resale under this Prospectus, is based upon a conversion ratio
which is the lower of (a) $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, or (b) $1.62. The number of shares in the table below is
based upon a rate of $1.62, or approximately 617.28 shares of Common Stock per
share of Series C Preferred and Series D 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 C Series D Number of Before
Name Preferred Shares Preferred Shares Common Shares Offering
<S> <C> <C> <C> <C>
Arcadia Mutual Fund, Inc. 550 339,504 10.5%
Barry Seidman 750 462,960 13.8%
Olympus Capital, Inc.(1) 75 46,296 1.6%
Lee & Rick's Oyster Bar #2 115 70,987 2.4%
Karen R. Haber 10 6,173 *
Steven H. Kerr 5 3,086 *
Bruce R. Knox 35 21,605 *
James Lumberry 10 6,173 *
Mary Park Properties 120 74,074 2.5%
Indenture of Trust of James F. Cool 150 155 188,270 6.2%
Fondo de Adquisiciones E Inversiones
Internacionales XL S.A. 100 61,728 2.1%
Dominick C. Vicari 10 6,173 *
Frederick A. Lenz 60 37,037 1.3%
Fred K. Zaytoun 10 6,173 *
Michael M. Louis, Jr. 10 6,173 *
David Lain and Delane Frazier 10 6,173 *
Jehu Hand(2) 80 49,382 1.7%
Betz Family Revocable Living Trust 25 15,432 *
Indenture of Trust of Dennis McDaniel 100 61,728 2.1%
Anthony D. Cupini IRA 25 15,432 *
Congregation Beth Mardecai 190 117,283 3.9%
Thomas C. Hullverson 200 123,456 4.1%
Tactical Capital Placement, LLC 250 154,320 5.1%
World Capital Funding, Inc.(3) 100 106,053 3.5%
TOTALS 2,100 1,045 1,985,671 40.7%
</TABLE>
*less than 1%
(1) James W. Spratt III is the controlling shareholder of Olympus Capital, Inc.
(2) Includes shares held as custodian for his minor children.
(3) Includes 44,325 shares already outstanding.
14
<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
2,984,961 shares were outstanding as of October 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 1,828 shares of
Series A Preferred, 2,051 shares of Series B Preferred, 2,100 shares of Series C
Preferred, 1045 shares of Series D and Series E Preferred are outstanding. The
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 for the Series A Preferred is $40.00
per share per annum, and the annual dividend rate for the Series C, Series D and
Series E Preferred is $80.00 per share, when, as and if declared by the
Company's Board of Directors. If not declared, dividends will accumulate and be
payable in the future. Full dividends must be paid or set aside on the Series A,
Series C, Series D and Series E Preferred Stock before dividends may be paid or
set aside on the Company's Common Stock. All dividend payments will be
subordinated to the Company's 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 Company has the option to pay dividends on the Series C, Series D and
Series E Preferred by the issuance of Common Stock valued at the then effective
conversion rate of the Series C, Series D and Series E Preferred Stock. The
holders of Series B, Series C, Series D and Series E 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
15
<PAGE>
preferred stock will be superior to the Company's Common Stock or any other
series of preferred stock which the Company may issue. The Board of Directors
may issue additional preferred stock in future financings.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. Further, certain provisions of Maryland law could delay or
make more difficult a merger, tender offer or proxy contest involving the
Company. While such provisions are intended to enable the Board of Directors to
maximize stockholder value, they may have the effect of discouraging takeovers
which could be in the best interest of certain stockholders. There is no
assurance that such provisions will not have an adverse effect on the market
value of the Company's stock in the future.
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.
16
<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................................ 3
Market Price of Common Stock................ 13
Selling Stockholders........................ 14
Description of Securities................... 15
Legal Matters............................... 16
Experts..................................... 16
