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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 29, 1996
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
COMMISSION FILE NUMBER 0-20845
MICHIGAN BREWERY, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
MICHIGAN 38-3196031
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
550 SOUTH WISCONSIN STREET, GAYLORD, MICHIGAN 49735
(Address of Principal Executive Offices, including Zip Code)
(517) 731-0401
(Issuer's Telephone Number, including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK ($.01 PAR VALUE)
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. / /
The issuer's revenues for its most recent fiscal year were $4,338,832.
The aggregate market value of the voting stock held by non-affiliates of
the issuer as of March 3, 1997 was approximately $7,484,973.
The number of shares of the common stock of the issuer outstanding as of
March 3, 1997 was 5,275,000.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
Page
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PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 1. DESCRIPTION OF BUSINESS . . . . . . . . . . . . . . . . . . . 1
ITEM 2. DESCRIPTION OF PROPERTY . . . . . . . . . . . . . . . . . . . 7
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . 8
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . 9
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . 13
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE. . . . . . . . . . . . . . . . . . . 24
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. . 24
ITEM 10. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . 26
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 28
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . . 28
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . 29
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
The business of Michigan Brewery, Inc. (the "Company") is to develop,
own and operate microbrewery/restaurants known as Big Buck Brewery &
Steakhouses ("Big Buck Breweries" or "Breweries"). In May 1995, the Company
opened its first Big Buck Brewery in Gaylord, Michigan adjoining I-75
approximately 200 miles north of Detroit (the "Gaylord Brewery"). On March
17, 1997, the Company opened its second Big Buck Brewery in Grand Rapids,
Michigan (the "Grand Rapids Brewery"). The approximately 29,000 square-foot
Gaylord Brewery served as a model for the Grand Rapids Brewery and will serve
as a model for the two Big Buck Breweries which the Company intends to
develop over the next nine months using the proceeds of its June 1996 initial
public offering (the "Offering") and real estate financing.
A Big Buck Brewery offers casual dining featuring moderately priced
steaks, ribs, chicken and other food and a distinctive selection of beers
which are microbrewed on-site. The Company also sells its microbrewed beer
off-site through wholesale distributors in order to promote customer interest
in the Breweries. The Company's selection of beers ranges from a light
golden ale to a dark full-bodied stout and is designed to satisfy the tastes
of a broad spectrum of consumers. A key element of the Company's strategy is
to capitalize on the growing interest of consumers in high quality, more
flavorful microbrewed beer. The Company believes it will generate customer
loyalty to its beers and its restaurant operations through customer
identification with each local Big Buck Brewery.
The Company believes the appearance of the Breweries has contributed to
their popularity as eating and drinking establishments. The Gaylord Brewery
features a large, open and visually stimulating dining area which highlights
the array of stainless steel and copper brewing equipment used to brew the
Company's craftbrewed beer. The Gaylord Brewery features a 4,000 square foot
dining area and a 1,600 square foot bar area, with combined seating capacity
of approximately 420. The interior is decorated with rustic wood-finished
interiors, mounted deer racks, 36-foot high vaulted ceilings and warm
lighting. The restaurant's specially commissioned Amish hand-carved wooden
furniture and overhead genuine Tennessee whisky barrel lighting fixtures add
character to the building's decor. The friendly and attentive staff, on-site
brewing and summertime outdoor seating and live music are designed to create
an appealing atmosphere for lunch, dinner and bar customers. Seating
capacity at the Grand Rapids Brewery is approximately 250 for the restaurant
and bar combined. The Grand Rapids Brewery's interior follows the Gaylord
Brewery's motif with a warm, cozy atmosphere utilizing soft lighting and
Amish furniture. The brewing and fermenting tanks front directly on 28th
Street, a street with an average daily vehicle count ("ADVC") of
approximately 52,000. The menu and beer styles are the same at both the
Gaylord and Grand Rapids Breweries.
Consumer interest in more flavorful beer has resulted in significant growth
in the craftbrewed beer market during the last several years, despite a decline
in per capita beer consumption. The number of microbreweries in the United
States has grown from 21 in 1985 to approximately 399 as of February 1997. From
1985 to 1995, the annual production of craftbrewed beer in the United States
grew from 75,000 barrels to approximately 3.7 million barrels. Despite these
high levels of growth, sales of craftbrewed beers represented approximately 2%
of total beer sales in the United States in 1996.
The Company has purchased a site in Auburn Hills, Michigan, a suburb of
Detroit, which is accessible to the over 3.2 million Detroit metro area
residents. Under an oral agreement, the Company has an option until July 1,
1997, to purchase a site in Sault St. Marie, Michigan adjacent to the
international bridge connecting the upper peninsula of Michigan with Ontario,
Canada.
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THE CRAFTBREWED AND SPECIALTY BEER MARKET
The Company's brewing operations are in the relatively small but rapidly
growing craftbrewing segment of the United States brewing industry, which
includes microbreweries such as the Company, contract brewers, regional
specialty brewers and brewpubs. Craftbrewed beers are distinguishable from
other domestically produced beers by their flavor and brewing styles.
Consumer interest in higher quality, more flavorful beer has resulted in
significant growth in the craftbrewed beer market during the last several
years. According to industry sources, the United States craftbrewed beer
segment increased at an annual growth rate of approximately 51% while the
United States beer industry experienced no meaningful growth from 1994 to
1995.
BUSINESS STRATEGY -- EXPANSION PLANS
Upon completion of the two additional Big Buck Breweries which the
Company intends to develop and open with the proceeds of the Offering and
other financing, the Company intends to develop and open other Big Buck
Breweries throughout the upper midwest and eventually across the United
States.
The Company believes that one of the primary factors for the popularity
to date of the Gaylord Brewery is the development of customer loyalty to its
craftbrewed beers. The Company believes patrons of the Gaylord Brewery, who
may order a Big Buck beer with a meal or merely sample a Big Buck beer at the
bar, have developed a loyalty to one of the distinctive Big Buck beers for a
variety of reasons including (i) the opportunity to identify their favorite
Big Buck beer with the Brewery, (ii) the opportunity to sample any of the
nine handcrafted beers available at the Brewery and to select a favorite
beer, (iii) the quality of Big Buck beer and (iv) the desire to support the
local Brewery. Increased customer loyalty to Big Buck beers results in repeat
business at Big Buck Brewery, thereby increasing revenues from restaurant
operations and off-site retail sales.
While craftbrewed beers currently represent approximately 2% of the
national beer market, there are numerous cities wherein craftbrewed beers
have a significantly higher share of the local market including San Francisco
(17%), Boston (9%) and Denver (10%), based on 1995 statistics. The Company
believes that these higher market shares for craftbrewed beer result from the
same customer preferences that it has experienced at its Gaylord Brewery.
The Company will seek to develop customer loyalty to its Big Buck beers at
each new Brewery.
Future Big Buck Brewery sites will be selected by management after
consideration of various strategic, regulatory, physical and demographic
attributes. Management believes that locations like that of the Gaylord
Brewery, adjacent to a major expressway, and the Grand Rapids Brewery,
located on a street with an ADVC of approximately 52,000, significantly
increase restaurant patronage. Management also reviews the demographic
attributes of potential communities in which it may expand. These attributes
include traffic counts, population, sales tax revenues, alcohol consumption
and hotel capacity and occupancy rates. In addition, management will
consider the laws of each state applicable to the Company before expanding
into any new state. It is expected that Big Buck Breweries located in
metropolitan areas will be larger than those located outside of metropolitan
areas and are expected to achieve higher revenues. Beyond Auburn Hills, the
Company is currently analyzing possible locations in Michigan for the
additional Big Buck Brewery it intends to develop and open during the
remainder of 1997.
RESTAURANT OPERATIONS
GENERAL. A Big Buck Brewery restaurant offers craftbrewed beer brewed
on-site along with a menu featuring steaks, ribs and chicken in a unique,
architecturally spacious setting. The Brewery offers nine different types of
beers ranging from a light golden ale to a full-bodied stout. The Company
attempts to create an exciting yet casual restaurant where patrons can have
fun and feel comfortable.
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DESIGN AND LAYOUT. The Gaylord Brewery features a restaurant with a
4,000 square-foot dining area which is designed to create a dramatic visual
impact on customers. The Gaylord Brewery restaurant features warm lighting,
36-foot high vaulted ceilings, mounted deer racks and a rustic wood-finished
interior which highlights the array of stainless steel and copper brewing
tanks and equipment. The on-site brewing equipment, which consists of
strategically placed rows of stainless steel and copper tanks and pipes, is
an integral aspect of the design and enhances the visual impact of the
restaurant. The restaurant's dining and bar areas seat approximately 420 and
the layout is flexible, permitting tables to be rearranged to accommodate
customer demand. A wall of television sets, including a ten-foot screen
television set, adjacent to the bar area provides customers the opportunity
to watch sporting and other special events. During summer months, the
Gaylord Brewery makes available for rent to private parties an adjacent
approximately 7,000 square-foot tent covered area with live music and outdoor
seating. The Gaylord Brewery served as a model for the Grand Rapids Brewery
and will serve as a model for future Breweries.
MENU AND PRICING. The menu at a Big Buck Brewery restaurant consists of
appetizers, soups, meal-sized salads, and entrees, including steaks, ribs,
hamburgers, chicken, fish, pastas as well as a variety of desserts.
Management analyzes menu items for popularity, profitability and ease of
preparation. The menu items are selected to complement the Company's
craftbrewed beers. The restaurant menu is designed to offer a broad range of
prices that convey value to the customer. Entrees range in price from $4.95
to $28.00 with most entrees priced around $12.00. During the fiscal year
ended December 29, 1996, the sale of beer accounted for 20.5% of the Gaylord
Brewery's restaurant sales.
CUSTOMERS. The Company believes its Big Buck Brewery restaurants appeal
to a wide range of customers and will draw its clientele from throughout the
region in which they are located. The Gaylord Brewery is located
approximately 200 miles north of Detroit at exit 282 on I-75, allowing
passersby to conveniently visit the Brewery. The Gaylord Brewery opens at
11:30 a.m. daily (noon on Sundays). The Grand Rapids Brewery, located on
28th Street in Grand Rapids, opens at 11:00 a.m. daily (noon on Sundays).
BREWING OPERATIONS
GENERAL. The brewhouse at the Gaylord Brewery presently has the
capacity to brew 10,000 barrels of beer per year, and is designed to produce
20,000 barrels per year with the installation of additional fermentation
tanks. The Grand Rapids Brewery features a 7.5-barrel brewing system which
can produce 7,000 barrels per year with the installation of additional
fermentation tanks. Future Breweries will be built with initial brewing
capacities of 2,000 to 5,000 barrels per year and are expected to have
production capacities of 7,000 to 15,000 barrels per year with the
installation of additional fermentation tanks. The Company intends to
purchase and install additional fermentation tanks as demand for its beers
requires increased production. Each brewhouse will be custom designed to be
integrated into the restaurant layout in the most efficient and aesthetic
manner.
OFF-SITE DISTRIBUTION. The Company sells its microbrewed beer off-site
through wholesale distributors in order to promote customer interest in the
Brewery. The Company transports its beer to each distributor for
redistribution to retailers which include bars, pubs, restaurants and
supermarkets. The beer is available by the keg to be served on draft at
restaurants, bars and pubs and is available in bottles for retail sales.
Presently, off-site sales of the Company's beer are generally limited to
within 120 miles of the Gaylord Brewery. Off-site sales of beer accounted for
approximately 3.6% of revenues during the fiscal year ended December 29,
1996. The Gaylord Brewery presently has the capacity to meet additional
demand for off-site sales of beer.
PROMOTION OF PRODUCTS WITHIN LOCAL MARKETS. The Company markets its
beer locally with the use of point of sale materials as well as several forms
of other promotional materials including coasters, tap handles and color
brochures. These items are, for the most part, used by retailers to promote
Big Buck beers within their establishment. In addition, the Company offers
guided tours of both the Gaylord and Grand Rapids Breweries to further
increase consumer awareness of Big Buck beers. The Company believes that its
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educational and promotional methods are more effective in communicating with
consumers than broad-based, less flexible national beer advertising campaigns.
BREWING EQUIPMENT. The Company's brewing equipment was designed and
built by J.V. Northwest, Inc. of Wilsonville, Oregon and is automated
wherever possible. The Gaylord Brewery's system begins with a 47 foot tall,
stainless steel grain silo fabricated to replicate a giant beer bottle. The
silo is painted "beer bottle brown" and the label was hand painted by a
commissioned artist. The Gaylord Brewery houses a 20-barrel mash tun; lauter
tun; a brew kettle; 50-barrel hot liquor tank; 50-barrel cold liquor tank;
six 40-barrel fermenters; three 80-barrel fermenters; two 40-barrel
conditioning tanks and seven 10-barrel bright beer serving tanks. Filtering
is done through a diatomaceous earth filtering system which removes yeast and
other naturally occurring material resulting in a clear final product. The
brewhouse permits the production of a wide range of beer styles which can be
adapted to market demand for various beer styles today and into the future.
The Grand Rapids Brewery features a 7.5-barrel brewing system with four
15-barrel fermenters and four 15-barrel conditioning tanks which also serve
as bright beer serving tanks. It is contemplated that the Company will use
similar equipment at all brewhouses built in future Big Buck Breweries.
BOTTLING, KEGGING AND PACKAGING. The Company uses a technologically
advanced bottling line to bottle its beer for off-site retail sales. The
bottle filler utilizes a carbon dioxide environment during the bottling
process to extend shelf life. Kegs are filled by a keg rack system and the
kegs are stored pending shipment to wholesale distributors in a specially
designed cooler. The Company's kegs have the Big Buck Brewery & Steakhouse
name and logo stamped into the top rail for easy identification and a
handsome appearance. The Company also sells its beer in a container called a
"party pig," a plastic pressurized unit holding 2.25 gallons (one case) of
beer. The pressurization allows beer to be served from the customer's
refrigerator, boat or golf cart. Party pigs are sold through the Breweries'
gift shops.
QUALITY CONTROL. As the Company opens future Breweries, quality control
of each brewhouse will be under the supervision of the Company's Brewmaster.
As with the current Breweries, each future brewhouse will contain a
laboratory to monitor and maintain quality assurance in the brewing and
packaging processes.
INGREDIENTS AND RAW MATERIALS. The Company currently purchases its
malted barley from market sources on a competitive bid basis. Raw materials
such as hops are available from multiple sources at competitive prices. The
Company also uses competitive sources for its supply of packaging materials
such as bottles, labels, six pack carriers and shipping cases.
BREWING PROCESS
Beer is made primarily from four natural ingredients: malted barley,
hops, yeast and water. The Company uses only the finest barley, primarily
two row, in its production. The universal spice of beer is hops. Hops, like
the grapes used in wine, are varietal. Brewers select hops based on specific
varieties grown in select areas around the world. Some hop varieties are
selected for their bittering qualities, while others are chosen for their
ability to impart distinctive aromas to the beer. Yeast is a uni-cellular
organism whose metabolism converts sugar into alcohol and carbon dioxide.
The Company uses only specially selected yeast. The entire brewing process
from mashing through filtration typically is completed in 14 to 21 days,
depending on the formulation and style of the beer being brewed.
BEER VARIETIES
The Company believes that its diverse and high quality beer varieties
encourage the trial of new beer and, over time, help to create more
knowledgeable and sophisticated beer drinkers. The Company's beers cover a
full range of flavors from very light, to medium, to very dark and heavy.
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BIG BUCK BEER-Registered Trademark-: Big Buck is the Company's flagship
brand and its top seller. This is a standard American-style beer with a
small amount of corn added to the grist to give the brew a smooth,
easy-drinking character that most American consumers have come to expect in a
beer. Big Buck Beer has a rich golden color and a light malt character
balanced with a mild dose of hops.
BUCK NAKED: American-style low calorie or "light" beer. This beer is
formulated to appeal to those who prefer a low-calorie brew. Buck Naked is
an all malt brew with a touch of Czechoslovakian Saaz hops.
WOLVERINE WHEAT: This American wheat beer is made from a blend of
malted barley and malted wheat. The wheat imparts a unique, refreshing
flavor to the beer. Wolverine Wheat is straw in color, lightly hopped, crisp
and refreshing.
RASPBERRY WHEAT: A version of Wolverine Wheat, this beer is flavored
with pure fruit to impart a subtle raspberry nose, a delicate fruit flavor
and a slight pink hue.
ANTLER ALE: An amber ale formulated as a transitional flavor between
lighter and darker beers. Antler Ale has a light amber color while
maintaining a mild, clean flavor and a low hopping rate.
REDBIRD ALE: Similar to a traditional pale ale, Redbird Ale has a
reddish copper appearance and medium body and is well hopped. This is a
heartier beer with a medium body and a pleasant hop bitterness.
DOC'S ESB: A full-bodied bock beer which gets its distinctive character
from a blend of four different grains and three hop varieties. Doc's ESB has
a deep reddish brown color and is generously hopped to balance the full body
and complex character.
BLACK RIVER STOUT: A cream stout which is slightly sweet with a
moderate hop bitterness. The rich flavor and black color of this brew comes
from six different grains. Deep flavors of coffee and caramel are present in
this brew.
BLACK'N BERRY: A Black'n Tan is generally a stout mixed with pale or
amber ale. Black'n Berry is a new twist, Black River Stout and Raspberry
Wheat. The delicate fruit qualities are accented by the heavy stout flavor.
SALES AND MARKETING
The Company's primary sources of advertising include television, outdoor
billboards, radio and newspapers, which generally cover the local market,
with the exception of billboards in more distant geographical areas of
Michigan. In addition to these sources, the Company uses local travel
publications including golf and vacation planners which are distributed at no
additional fee to visitors to the area as well as inquiries via the local
travel information center and tourism bureau. The Company also distributes
four-color brochures promoting the Gaylord Brewery to major corporations and
various travel welcome centers throughout Michigan as well as local hotels
and resorts. During the year ended December 29, 1996, the Company incurred
approximately $175,000 in advertising expenses.
The Company strives to provide its customers with a dining experience
that will encourage repeat business and promote "word-of-mouth" advertising.
To supplement its service-oriented marketing efforts, the Company sells
merchandise including hats, t-shirts, sweatshirts and other items bearing the
Big Buck Brewery name and logo.
COMPETITION
The restaurant and brewing industries are highly competitive. The
restaurant industry is highly competitive with respect to price, service,
food quality (including taste, freshness and nutritional value) and location.
New restaurants have a high failure rate. The restaurant industry is also
generally affected by
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changes in consumer preferences, national, regional and local economic
conditions, and demographic trends. The performance of individual
restaurants may also be affected by factors such as traffic patterns,
demographic considerations, and the type, number and location of competing
restaurants. In addition, factors such as inflation, increased food, labor
and employee benefit costs, and the lack of availability of experienced
management and hourly employees may also adversely affect the restaurant
industry in general and the Company's restaurants in particular. Restaurant
operating costs are further affected by increases in the minimum hourly wage,
unemployment tax rates and similar matters over which the Company has no
control. There are numerous well-established competitors, including
national, regional and local restaurant chains, possessing substantially
greater financial, marketing, personnel and other resources than the Company.
The Company also competes with a large variety of locally owned restaurants,
diners, and other establishments that offer moderately priced food to the
public. Further, the Company competes with other microbrewery restaurants in
a highly competitive and developing microbrewery and brewpub restaurant
market.
The domestic beer market is highly competitive due to: the enormous
advertising and marketing expenditures by national and major regional
brewers; the continuing proliferation of microbreweries, regional craft
breweries, brewpubs, and other small craftbrewers; the more recent
introduction of fuller-flavored products by certain major national brewers
and a general surplus of domestic brewing capacity, which facilitates
existing contract brewer expansion and the entry of new contract brewers.
Although domestic demand for craftbrewed beers has increased dramatically
over the past decade, there can be no assurance that this demand will
continue. The Company anticipates intensifying competition in the
craftbrewed and fuller-flavored beer markets.
GOVERNMENT REGULATION
BEER AND LIQUOR REGULATION. A significant percentage of the Company's
revenue is derived from beer sales. On-site sales of beer accounted for 21%
of revenues and off-site sales of beer accounted for an additional 3.6% of
revenues during the fiscal year ended December 29, 1996. These percentages
are expected to increase over the next few years in relation to food sales.
The Company must comply with federal licensing requirements imposed by the
Bureau of Alcohol, Tobacco and Firearms of the United States Department of
Treasury, as well as the licensing requirements of states and municipalities
where its Breweries are or will be located. Failure to comply with federal,
state or local regulations could cause the Company's licenses to be revoked
and force it to cease the brewing and/or sale of its beer. Typically,
licenses must be renewed annually and may be revoked or suspended for cause
at any time. Management believes the Company is operating in substantial
compliance with applicable laws and regulations governing its operations.
RESTAURANT REGULATION. The restaurant industry is subject to numerous
federal, state and local government regulations, including those relating to
the preparation and sale of food and to building and zoning requirements.
The Company is subject to regulation by air and water pollution control
divisions of the Environmental Protection Agency of the United States and by
various states and municipalities in which its Breweries are or will be
located. The Company is also subject to laws governing its relationship with
employees, including minimum wage requirements, overtime, working and safety
conditions and citizenship requirements. Restaurant operating costs are
affected by increases in the minimum hourly wage, unemployment tax rates,
sales taxes and similar matters, such as any government mandated health
insurance, over which the Company has no control. Management believes the
Company is operating in substantial compliance with applicable laws and
regulations governing its operations.
The federal government currently imposes an excise tax of $18 on each
barrel of beer produced for domestic consumption in the United States.
However, each brewer with production under 2,000,000 barrels per year is
granted a small brewer's excise tax credit in the amount of $11 per barrel on
its first 60,000 barrels produced annually. To the extent Company-wide
production increases to amounts over 60,000 barrels per year, there will be
an increase in the average federal excise tax rate of the Company. The
Company is not aware of any plans by the federal government to reduce or
eliminate the small brewer's credit. Michigan currently imposes an excise tax
of $6.30 per barrel on each barrel of beer sold in Michigan. However, each
brewer which is a "microbrewery" under Michigan law (presently with
production under 30,000 barrels per year) is
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granted a microbrewer's excise tax credit in the amount of $2 per barrel on
its first 20,000 barrels produced annually. To the extent Company-wide
production increases to amounts over 20,000 barrels per year, there will be
an increase in the average Michigan excise tax rate of the Company.
Increased excise taxes on alcoholic beverages have been considered by the
United States Congress as an additional source of tax revenue in connection
with various proposals and could be included in future legislation.
The Company is licensed under Michigan law as a "microbrewery." A
microbrewery in Michigan is limited to the production of not more than 30,000
barrels of beer per year by all breweries owned or controlled by the same
person, whether within or outside Michigan. Without a change in current law,
the Company will limit its sales of beer off-site so as to reserve its
brewing capacity for sales of beer on-site which provides the Company higher
margins but do not reach the same customer base. Based on production at the
Gaylord Brewery during the fiscal year ended December 29, 1996, the Company
believes it could operate up to 11 Big Buck Breweries with similar production
levels without exceeding the 30,000 barrel production ceiling.
The Company is subject to "dram-shop" laws in Michigan and will be
subject to such statutes in certain other states into which it expands.
These laws generally provide someone injured by an intoxicated person the
right to recover damages from an establishment which wrongfully served
alcoholic beverages to such person. The Company carries liquor liability
coverage as part of its existing comprehensive general liability insurance.
EMPLOYEES
At December 29, 1996, the Company employed 127 persons at its Gaylord
Brewery, ten of whom served in executive and administrative capacities, nine
of whom served as restaurant management personnel, and the remainder of whom
were hourly personnel. As of March 21, 1997, the Company employed 110
persons at its Grand Rapids Brewery. No employee is covered by a collective
bargaining agreement, and the Company has never experienced an organized work
stoppage, strike or labor dispute. The Company considers relations with its
employees to be satisfactory.
TRADEMARKS AND SERVICE MARKS
The Company applied for registration of a number of trademarks and
service marks with the United States Patent and Trademark Office on February
1, 1996, including BIG BUCK BREWERY & STEAKHOUSE and BIG BUCK BEER. The
Company received a certificate of registration for BIG BUCK BEER on March 11,
1997. The United States Patent and Trademark Office has yet to grant a
certificate of registration for BIG BUCK BREWERY & STEAKHOUSE. In the event
the Company is denied registration, the Company may incur significant expense
in creating and developing new marks or in operating under its existing
marks, and may be restricted in where it can locate future Breweries using
the Company's marks. There is no assurance that the Company's marks will be
granted trademark registration for all or any of the uses proposed in the
Company's application. In the event that the Company's marks are granted
registration, there is no assurance that such marks will be enforceable
against prior users in areas where the Company conducts operations. The
Company regards its marks as having substantial value and as being an
important factor in the marketing of its Big Buck Brewery restaurants and
beer. The Company's policy is to pursue registration of its marks whenever
possible and to oppose vigorously any infringement of its marks.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns the Gaylord Brewery, including the real property on
which it is located. See "Description of Business -- Restaurant Operations"
for a description of the Gaylord Brewery. In the opinion of management, the
Company's properties are adequately covered by insurance.
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The Company closed on the purchase of the Grand Rapids Brewery site on
December 2, 1996. The site included an existing structure of approximately
8,200 square feet and is located on 28th Street in Grand Rapids. Seating
capacity is approximately 250 for restaurant and bar combined. The Grand
Rapids Brewery opened on March 17, 1997.
The Company has purchased an undeveloped 6.1 acre site on Opdyke Road in
Auburn Hills, Michigan. The site is just off of Interstate 75 at exit 79.
The new facility will encompass 26,372 square feet including brewery, bar and
restaurant. Seating capacity in the restaurant and bar is expected to be just
under 650. Construction began in late December 1996 after receiving final
approval from the city of Auburn Hills. The Company anticipates opening this
Big Buck Brewery during the third quarter of 1997.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of its
business. Although the outcomes of any such legal actions cannot be predicted,
in the opinion of management there is no legal proceeding pending against or
involving the Company for which the outcome is likely to have a material adverse
effect upon the financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the fourth quarter of the
Company's most recently completed fiscal year.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company has been included in the Nasdaq SmallCap
Market under the symbol "BBUC" since the completion of the Offering in June
1996. The following table sets forth the approximate high and low closing
prices for the Common Stock for the periods indicated as reported by the
Nasdaq SmallCap Market. Share prices have been adjusted to reflect the
Company's one-for-two reverse stock split (share combination) effected on
January 23, 1996.
Period High Low
------ ---- ---
1996
First Quarter . . . . . . . . . . . . . . N/A N/A
Second Quarter . . . . . . . . . . . . . . $ 5 $ 3-5/8
Third Quarter . . . . . . . . . . . . . . $ 4-5/8 $ 2-1/2
Fourth Quarter . . . . . . . . . . . . . . $ 4-3/8 $ 2-3/4
As of March 3, 1997, the Company had 178 shareholders of record.
The above quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
The Company has never paid or declared any cash dividends on its Common
Stock and does not intend to pay dividends on its Common Stock in the
foreseeable future. The Company presently expects to retain its earnings to
finance the development and expansion of its business. The payment by the
Company of dividends, if any, on its Common Stock in the future is subject to
the discretion of the Board of Directors and will depend on the Company's
earnings, financial condition, capital requirements and other relevant
factors. In addition, the Company's ability to pay dividends is prohibited by
the terms of its credit facility with its bank.
8
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING
TERMINOLOGY SUCH AS "BELIEVES," "ANTICIPATES," "EXPECTS," AND "INTENDS," OR
COMPARABLE TERMINOLOGY. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED. POTENTIAL PURCHASERS OF THE COMPANY'S SECURITIES ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS WHICH ARE
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONS AND RISKS DESCRIBED HEREIN.
OVERVIEW
The Company was capitalized in 1994 to develop, own and operate
microbrewery/restaurants with the name Big Buck Brewery & Steakhouse. Until
May 1995 when the Gaylord Brewery opened, the Company had no operations or
revenues and its activities were devoted solely to development.
Future revenues and profits will depend upon various factors, including
market acceptance of Big Buck Breweries and general economic conditions. The
Company's present sources of revenue are the Gaylord and Grand Rapids
Breweries. There can be no assurances that the Company will successfully
implement its expansion plans, in which case the Company will continue to be
dependent on the revenues from the Gaylord and Grand Rapids Breweries. The
Company also faces all of the risks, expenses and difficulties frequently
encountered in connection with the expansion and development of a new
business. Furthermore, to the extent that the Company's expansion strategy
is successful, it must manage the transition to multiple site, higher volume
operations, control increased overhead expenses and hire additional personnel.
The Company's sales and earnings are expected to fluctuate based on
seasonal patterns. The Company anticipates that its highest earnings will
occur in the second and third quarters. Quarterly results in the future are
likely to be substantially affected by the timing of new Big Buck Brewery
openings. Because of the seasonality of the Company's business and the impact
of new Big Buck Brewery openings, results for any quarter are not necessarily
indicative of the results that may be achieved for a full fiscal year and
cannot be used to indicate financial performance for the entire year.
The Company closed on the purchase of the Grand Rapids Brewery site on
December 2, 1996. The site includes an existing structure of approximately
8,200 square feet and is located on 28th Street in Grand Rapids. Seating
capacity is approximately 250 for restaurant and bar combined. The Grand
Rapids Brewery opened on March 17, 1997.
The Company has purchased a 6.1 acre site on Opdyke Road in Auburn
Hills, Michigan. The site is just off of Interstate 75 at exit 79. The new
facility will encompass 26,372 square feet including brewery, bar and
restaurant. Seating capacity in the restaurant and bar will be just under
650. Construction began in late December 1996 after receiving final approval
from the city of Auburn Hills. The Company anticipates opening this Brewery
during the third quarter of 1997.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 29, 1996 AND DECEMBER 31,
1995
The Company had no revenues for the period from January 1, 1994 through
May 25, 1995. During that period, the Company developed the Big Buck Brewery
format and completed construction of the Gaylord Brewery. The Company
charged to operations all costs associated with pre-opening expenses during
the two year period ended December 31, 1995. For future Breweries, the
Company anticipates that such expenses will be capitalized and charged to
operations over the period from when the Brewery opens until substantially
all of the initial workforce is no longer employed (not to exceed 12 months)
if it is determined that such costs are recoverable.
9
<PAGE>
Although there is no assurance that cost and expense percentages will
show improvement, management believes that costs incurred during the year
ended December 31, 1995, reflect certain inefficiencies and expenses
associated with opening the Gaylord Brewery on May 26, 1995 and that the loss
for this period is primarily attributable to the Company's corporate overhead
structure and costs and expenses incurred in the completion of the
development and start-up of operations at the Gaylord Brewery.
REVENUES
The Company achieved an increase in total revenues of 61.7% to
$4,338,832 in 1996 compared with $2,683,600 in 1995. The increase is due to
the Gaylord Brewery being open the entire year during 1996 as compared to 220
days in 1995.
COSTS OF SALES
Costs of sales which consists of food merchandise and brewery supplies
increased 22.0% to $1,584,483 in 1996 compared to 1995. The increase is
due to the Gaylord Brewery being open the entire year during 1996 as compared
to 220 days in 1995. Costs of sales as a percentage of revenues decreased
from 48.4% in 1995 to 36.5% in 1996. The decrease is the result of menu
pricing, operating efficiencies, effective purchasing and improved kitchen
management.
RESTAURANT SALARIES AND BENEFITS
Restaurant salaries and benefits, which consist of restaurant management
and hourly employee wages and benefits, payroll taxes and workers'
compensation insurance increased 53.2% to $1,215,822 in 1996 compared to
1995. The increase is due to the Gaylord Brewery being open the entire year
in 1996. Restaurant salaries and benefits as a percentage of revenues
decreased to 28.0% in 1996 compared to 29.6% in 1995. The decrease is due to
improvements in management, training and scheduling.
OPERATING EXPENSES
Operating expenses, which include supplies, utilities, repairs and
maintenance, advertising and occupancy costs increased 10.3% to $1,099,503 in
1996 compared to 1995. Operating expenses as a percentage of revenues
decreased to 25.3% as compared to 37.1% in 1995. This decrease is due in
part to improved management and operating controls. The decrease is also due
to 1995 being the first year of operations, resulting in additional opening
and development expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 178.8% to $436,403 in 1996
compared to 1995. Depreciation and amortization as a percentage of
revenues increased to 10.1% in 1996 as compared to 5.8% in 1995. The
increase resulted from the amortization of costs related to the bridge
financing which took place in February 1996 and higher depreciation expense
due to the fact the Gaylord Brewery was in operation all of 1996 as opposed
to only 220 days in 1995.
GENERAL AND ADMINISTRATIVE EXPENSES
Administrative and development expenses increased 244.7% to $874,498 in
1996 compared to 1995. These expenses as a percentage of revenue increased
to 20.1% in 1996 as compared to 9.4% in 1995. The increases in these
expenses are the result of hiring additional senior corporate management,
additional professional fees associated with the initial public offering and
being a publicly traded company. As the Company opens additional Breweries,
these expenses as a percentage of revenues are expected to decrease.
10
<PAGE>
INTEREST EXPENSES/INTEREST INCOME
Interest expense increased 18.3% to $341,863 during 1996 as the result
of the additional borrowings from the Pre-Offering Financings (as defined
herein).
Interest income was $215,569 for 1996 compared to none in 1995. The
increase in interest income is due to the investing of the proceeds from the
Bridge Financing and the Offering.
GAIN ON SALE OF FIXED ASSETS
The gain on sale of fixed assets of $294,579 resulted from the sale of
approximately 2.2 acres of the Gaylord property for $400,000 to a national
hotel chain for the construction of a 100 room hotel adjacent to the Gaylord
Brewery.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $243,285 in cash for the year ended December 31, 1995
and used $1,144,831 in cash for the year ended December 29, 1996 for
operating activities. At December 29, 1996, the Company had working capital
of $4.6 million. The Company expects that it will use a significant portion
of its capital resources to fund new Brewery development and construction.
Since inception, the Company's principal capital requirements have been the
funding of (i) the Company and the Big Buck Brewery format and (ii) the
construction of the Gaylord and Grand Rapids Breweries and the acquisition of
furniture, fixtures and equipment for such Breweries. Total capital
expenditures for the Gaylord Brewery and the Grand Rapids Breweries were
approximately $5.8 million and $3.1 million, respectively.
The Company generated $10,036,252 in cash from financing activities
during the year ended December 29, 1996. On June 13, 1996, the Company's
initial public offering of 2,450,000 units at $5.00 per unit, each unit
consisting of one share of common stock and one redeemable Class A warrant,
was declared effective by the Securities and Exchange Commission. The
Company received net proceeds of approximately $10.6 million on June 18,
1996. On July 25, 1996, the underwriters exercised a portion of their
overallotment option for 100,000 additional units at $5.00 per unit. The
Company received net proceeds of $447,500 on July 30, 1996. Total net
proceeds have been reflected in the financial statements net of transaction
related costs.
Prior to the Offering, the Company met its capital requirements through
cash flow generated by capital contributions, loans from its principal
shareholders and officers, bank borrowings and certain private placement
offerings. During the years ended December 31, 1994 and 1995, the Company
sold an aggregate of 2,500,000 shares of common stock which generated $2.4
million in net proceeds.
In July 1995, the Company secured a $1.9 million mortgage on the Gaylord
Brewery's land and building and a $800,000 equipment loan. These notes are
subject to monthly payments of principal and interest at 10.2% per annum and
are payable in full by October 1, 2000. These notes are collateralized by
all assets of the Company and are guaranteed by certain shareholders.
In August 1995, the Company obtained a line of credit with a bank with a
maximum borrowing limit of $325,000, with monthly interest payable at the
bank's prime rate plus 1%. The line was collateralized by all of the assets
of the Company, guaranteed by certain shareholders and was due on demand.
The Company had borrowed up to the maximum limit of $325,000 as of December
31, 1995, and the line of credit was repaid and closed on August 1, 1996.
In December 1995, the Company entered into a financing agreement with
Pyramid Partners, L.P. ("Pyramid") for the issuance of (i) a $250,000
non-interest bearing promissory note (the "Pre-Bridge Convertible Note")
which was converted into 75,000 shares of Common Stock in June 1996 (the
"Pre-Bridge Shares"), (ii) a $250,000 non-convertible promissory note bearing
interest at 10% per annum which was repaid
11
<PAGE>
in June 1996 (the "Pre-Bridge Non-Convertible Note") and (iii) warrants (the
"Pre-Bridge Warrants") to purchase 62,500 shares of Common Stock
(collectively the "Pre-Bridge Financing").
In February 1996, the Company sold, for $25,000 each, 60 bridge units
(the "Bridge Units"), each Bridge Unit consisting of (i) 2,500 shares of
Common Stock (the "Bridge Common Stock"), (ii) a $12,500 principal amount
promissory note bearing interest at 10% per annum (the "Bridge Notes") and
(iii) warrants to purchase 2,500 shares of Common Stock at $5.00 per share
expiring in February 2001 (the "Bridge Warrants"), (collectively the "Bridge
Financing"). The Bridge Notes were repaid in July 1996. The Pre-Bridge
Financing and the Bridge Financing are collectively referred to as the
"Pre-Offering Financings."
The proceeds of the Pre-Offering Financings were used to retire certain
debt, purchase additional brewing and bottling equipment, purchase an option
to acquire a site in Sault St. Marie, Michigan for a future Brewery and for
working capital.
Beyond the Gaylord and Grand Rapids Breweries, the Company anticipates
it will develop and open two additional Big Buck Breweries during 1997. The
Company intends to obtain real estate financing for up to 55% of the costs of
developing and opening the two new Big Buck Breweries. The net proceeds of
the Offering together with such financing are expected to be sufficient to
finance these expansion plans depending on the definitive locations, site
conditions, construction costs and sizes and types of Big Buck Breweries
built. There are no assurances that such financing will be available on
terms acceptable or favorable to the Company, or at all. Without such
additional financing, the Company's development plans will be slower than
planned or even unachievable.
12
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
MICHIGAN BREWERY, INC.
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . 14
Financial Statements
Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Statements of Operations. . . . . . . . . . . . . . . . . . . . . . . . 16
Statements of Shareholders' Equity. . . . . . . . . . . . . . . . . . . 17
Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . 18
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . 19
13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Michigan Brewery, Inc.:
We have audited the accompanying balance sheets of Michigan Brewery, Inc. (a
Michigan corporation) as of December 29, 1996 and December 31, 1995, and the
related statements of operations, shareholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Michigan Brewery, Inc. as of
December 29, 1996 and December 31, 1995, and the results of its operations
and its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
January 24, 1997
14
<PAGE>
MICHIGAN BREWERY, INC.
Balance Sheets
<TABLE>
<CAPTION>
December 29, December 31,
ASSETS 1996 1995
-------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 28,468 $ 339,062
Short-term investments 4,910,000 -
Inventories 155,785 140,195
Prepaids and other 150,151 36,236
-------------- --------------
Total current assets 5,244,404 515,493
PROPERTY AND EQUIPMENT, at cost 10,012,881 5,751,313
OTHER ASSETS 74,408 85,785
-------------- --------------
$ 15,331,693 $ 6,352,591
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable--trade $ 255,899 $ 246,246
Accounts payable--related party 30,972 480,986
Accrued expenses 132,299 145,496
Current maturities of long-term debt 250,780 731,068
Notes payable to shareholders - 300,000
Line of credit - 325,000
-------------- --------------
Total current liabilities 669,950 2,228,796
LONG-TERM DEBT, less current maturities 2,124,391 2,714,141
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 10,000,000 shares
authorized; 5,275,000 shares in 1996 and
2,500,000 shares in 1995 issued and outstanding 52,750 25,000
Warrants 153,650 18,600
Additional paid-in capital 13,034,544 2,482,470
Accumulated deficit (703,592) (1,116,416)
-------------- --------------
Total shareholders' equity 12,537,352 1,409,654
-------------- --------------
$ 15,331,693 $ 6,352,591
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
15
<PAGE>
MICHIGAN BREWERY, INC.
Statements of Operations
For the Years Ended
December 29, December 31,
1996 1995
------------ ------------
REVENUE:
Restaurant sales $ 3,830,748 $ 2,380,641
Wholesale and retail sales 508,084 302,959
------------ ------------
Total revenue 4,338,832 2,683,600
------------ ------------
COSTS AND EXPENSES:
Cost of sales 1,584,483 1,298,735
Restaurant salaries and benefits 1,215,822 793,276
Operating expenses 1,099,503 996,823
Depreciation and amortization 436,403 156,496
------------ ------------
Total costs and expenses 4,336,211 3,245,330
------------ ------------
RESTAURANT OPERATING INCOME (LOSS) 2,621 (561,730)
GENERAL AND ADMINISTRATIVE EXPENSES 874,498 253,558
------------ ------------
LOSS FROM OPERATIONS (871,877) (815,288)
OTHER INCOME (EXPENSE):
Interest expense (341,863) (288,790)
Interest income 215,569 -
Gain on sale of property 294,579 -
------------ ------------
Other income (expense), net 168,285 (288,790)
------------ ------------
NET LOSS $ (703,592) $ (1,104,078)
------------ ------------
------------ ------------
NET LOSS PER COMMON SHARE $ (0.17) $ (0.45)
------------ ------------
------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING (Note 1) 4,066,071 2,481,676
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
MICHIGAN BREWERY, INC.
Statements of Shareholders' Equity
For the Years Ended
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT WARRANTS CAPITAL DEFICIT TOTAL
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 . . . . . . . . . 2,025,000 $ 20,250 $ -- $ 282,750 $ (12,338) $ 290,662
Sale of common stock . . . . . . . . . . 350,000 3,500 -- 1,950,970 -- 1,954,470
Issuance of common stock for property
and services . . . . . . . . . . . . . 125,000 1,250 -- 248,750 -- 250,000
Issuance of warrants . . . . . . . . . . -- -- 18,600 -- -- 18,600
Net loss . . . . . . . . . . . . . . . . -- -- -- -- (1,104,078) (1,104,078)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1995 . . . . . . . . . 2,500,000 25,000 18,600 2,482,470 (1,116,416) 1,409,654
Effects of conversion to C Corporation. . -- -- -- (1,116,416) 1,116,416 --
Sale of units for $5.00 per unit. . . . . 150,000 1,500 7,500 606,037 615,037
Initial public offering of units for
$5.00 per unit. . . . . . . . . . . . . 2,550,000 25,500 127,550 10,831,803 10,984,853
Issuance of common stock upon conversion
of debt (Note 2). . . . . . . . . . . . 75,000 750 -- 230,650 -- 231,400
Net loss. . . . . . . . . . . . . . . . . -- -- -- -- (703,592) (703,592)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 29, 1996 . . . . . . . . . 5,275,000 $ 52,750 $ 153,650 $13,034,544 $ (703,592) $12,537,352
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
17
<PAGE>
MICHIGAN BREWERY, INC.
Statements of Cash Flows
For the Years Ended
<TABLE>
<CAPTION>
December 29, December 31,
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (703,592) $(1,104,078)
Adjustments to reconcile net loss to cash flows used in
operating activities--
Depreciation and amortization 436,403 156,496
Gain on sale of property (294,579) --
Change in operating assets and liabilities:
Inventories (15,590) (140,195)
Prepaids and other (113,915) (28,236)
Accounts payable (440,361) 727,232
Accrued expenses (13,197) 145,496
------------ ------------
Net cash used in operating activities (1,144,831) (243,285)
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (4,692,015) (5,080,395)
Proceeds from sale of property 400,000 --
Purchase of short-term investments, net (4,910,000) --
------------ ------------
Net cash used in investing activities (9,202,025) (5,080,395)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from (payments on) line-of-credit borrowings, net (325,000) 325,000
Proceeds from issuance of debt to shareholders -- 300,000
Payments on debt to shareholders (300,000) (500,000)
Proceeds from long-term debt 750,000 3,484,437
Payments on long-term debt (1,588,638) (39,228)
Net proceeds from initial public offering of units 10,984,853 --
Net proceeds from sale of units 615,037 --
Net proceeds from sale of common stock -- 1,954,470
Payment of deferred financing costs (100,000) (70,322)
------------ ------------
Net cash provided by financing activities 10,036,252 5,454,357
------------ ------------
INCREASE (DECREASE) IN CASH (310,594) 157,877
CASH, beginning of year 339,062 181,185
------------ ------------
CASH, end of year $ 28,468 $ 339,062
------------ ------------
------------ ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 369,799 $ 114,510
Income taxes paid -- --
NONCASH TRANSACTION:
Conversion of debt to common stock 250,000 --
Issuance of common stock for property and services -- 250,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
MICHIGAN BREWERY, INC.
Notes to Financial Statements
December 29, 1996 and December 31, 1995
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
Michigan Brewery, Inc. (the Company) was organized to develop, own and
operate microbrewery/restaurants known as Big Buck Brewery & Steakhouse. The
Company operates in Gaylord, Michigan (the Brewery) and is currently
constructing two new locations in Grand Rapids and Auburn Hills, Michigan
scheduled to open in March 1997 and the third quarter of 1997, respectively.
The Company also intends to utilize each brewery for bottling and wholesale
distribution of its private label beer.
The Company began construction on the Brewery after the purchase of the land
in May 1994, and it opened to the general public on May 26, 1995. Prior to
the opening of the Brewery, the Company was in the development stage. Prior
to June 1996, the Company met its capital requirements primarily through
initial shareholder contributions, loans from its principal shareholders and
officers, bank borrowings and certain private placement offerings. During
June 1996, the Company received net proceeds of $10,984,853 through an
initial public offering (IPO) of units (see Note 4).
The Company incurred a net loss of $703,592 in 1996 and $1,104,078 in 1995.
The losses for these periods are primarily attributable to costs and expenses
incurred in the completion of the development and start-up of operations at
the Brewery and the costs associated with the hiring of senior corporate
management to position the Company for its future expansion plans. The
Company has limited operating history, and future revenues and results from
operations will depend upon various factors, including market acceptance of
the Big Buck Brewery & Steakhouse concept and general economic conditions.
The Company's ability to meet its expansion plan and achieve profitability
depends on its ability to obtain substantial financing for the development of
additional breweries including the Grand Rapids and Auburn Hills, Michigan
locations currently under construction. There are no assurances that such
financing will be available on terms acceptable or favorable to the Company.
FISCAL YEAR
Effective in 1996, the Company changed to a 52-/53-week fiscal year ending on
the Sunday nearest December 31 of each year. All references herein to "1996"
represent the 52-week year ended December 29, 1996 and to "1995" represent
the year ended December 31, 1995.
INVENTORIES
Inventories consist principally of restaurant food items, raw materials used
in the brewing process, finished goods, including beer in kegs and beer held
in fermentation prior to the filtration and packaging process, and retail
goods for resale. Inventories are stated at the lower of cost (first-in,
first-out) or market and consisted of the following at:
December 29, December 31,
1996 1995
------------ ------------
Food . . . . . . . . . . . . . . . . . . . . . . . $ 29,533 $ 52,369
Brewery. . . . . . . . . . . . . . . . . . . . . . 63,204 53,345
Retail goods . . . . . . . . . . . . . . . . . . . 3,048 34,481
------------ ------------
$ 155,785 $ 140,195
------------ ------------
------------ ------------
19
<PAGE>
PREOPENING EXPENSES
It is the Company's policy to charge preopening costs (substantially all of
which are the direct and incremental costs of hiring and training the initial
workforce) to operations as incurred until a basis for capitalization exists,
at which time costs are capitalized and amortized over the period from when
the Brewery opens until substantially all of the initial workforce is no
longer employed (not to exceed 12 months). Accordingly, preopening costs for
the Brewery have been charged to operations as incurred; preopening costs for
subsequent breweries will be capitalized and amortized as described above.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Improvements are capitalized,
while repair and maintenance costs are charged to operations when incurred.
Property and equipment are depreciated using the straight-line method for
financial reporting purposes and accelerated methods for income tax reporting
purposes over their estimated useful lives of 5 to 40 years.
Property and equipment consisted of the following at:
<TABLE>
<CAPTION>
December 29, December 31, Estimated
1996 1995 Useful Lives
------------ ------------ ------------
<S> <C> <C> <C>
Land and improvements. . . . . . . . . . . $ 4,132,941 $ 546,296 20 years for
improvements
Building and improvements. . . . . . . . . 3,131,108 3,094,159 40 years
Brewery equipment. . . . . . . . . . . . . 1,127,125 941,564 12-30 years
Restaurant equipment . . . . . . . . . . . 855,902 807,717 10 years
Furniture, fixtures and equipment. . . . . 524,298 453,894 5-7 years
Construction in progress . . . . . . . . . 555,249 --
Deposits on brewing equipment. . . . . . . 131,278 60,672
------------ ------------
10,457,901 5,904,302
Accumulated depreciation . . . . . . . . . (445,020) (152,989)
------------ ------------
$ 10,012,881 $ 5,751,313
------------ ------------
------------ ------------
</TABLE>
INCOME TAXES
Deferred tax assets and liabilities are computed based on the difference
between the financial statement and tax bases of assets and liabilities using
currently enacted tax rates.
NET LOSS PER SHARE
Net loss per share was computed by dividing net loss by the weighted average
number of shares of common stock and common stock equivalents outstanding
during each period. Common stock equivalents include the effects of options
and warrants which are assumed to be exercised or converted into common stock
at the beginning of the year. Pursuant to Securities and Exchange Commission
rules, shares of stock sold and stock options and warrants granted within one
year of the date of the initial public offering have been included in the
calculation of common share equivalents, using the treasury stock method, as
if they were outstanding for all periods presented, even if the effect is
antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
The ultimate outcomes could differ from those estimates.
20
<PAGE>
2. DEBT:
NOTES PAYABLE TO SHAREHOLDERS
The aggregate amount of promissory notes to shareholders was $300,000 at
December 31, 1995 and was repaid during 1996 with the proceeds from the IPO.
There is no outstanding debt to shareholders at December 29, 1996.
LONG-TERM DEBT
Long-term debt consisted of the following as of:
<TABLE>
<CAPTION>
December 29, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Mortgage note payable to bank, monthly principal payments of
$5,760 plus interest at 10.2%, remaining balance due on
October 1, 2000, collateralized by all assets of the Company
and guaranteed by certain shareholders $ 1,704,359 $ 1,863,480
Note payable to bank, monthly principal payments of $13,333
plus interest at 10.2%, remaining balance due on October 1,
2000, collateralized by all assets of the Company and
guaranteed by certain shareholders 613,333 773,333
Bridge loan (see below) - 500,000
Revolving credit note payable to a partnership with a $750,000
limit, repaid and cancelled during 1996 - 250,000
Notes payable to bank, due in monthly installments through
1998 and 1999, interest at 10.95% to 13%, collateralized
by certain equipment 57,479 76,996
------------ ------------
Total 2,375,171 3,463,809
Less-Original discount - 18,600
Less-Current maturities 250,780 731,068
------------ ------------
Long-term debt $ 2,124,391 $ 2,714,141
------------ ------------
------------ ------------
</TABLE>
In December 1995, the Company entered into a bridge loan with a limited
partnership which consisted of a $250,000 convertible promissory note
(Convertible Note), a $250,000 nonconvertible promissory note (Nonconvertible
Note) and warrants to purchase an aggregate of 62,500 shares of common stock
at $3.33 per share expiring in December 2000. During 1996, upon completion
of the IPO, the Convertible Note was converted into 75,000 shares common
stock, and the Nonconvertible Note was repaid in full.
21
<PAGE>
Maturities of long-term debt as of December 29, 1996 were as follows:
1997 $ 250,780
1998 249,834
1999 244,228
2000 1,630,329
-------------
$ 2,375,171
-------------
-------------
3. INCOME TAXES:
Effective January 1, 1996, the Company converted from S Corporation status to
a C Corporation. As of December 29, 1996, the Company's deferred taxes
consisted primarily of net operating loss carryforwards, preopening costs not
currently deductible and accelerated methods of depreciation. The Company
has recorded a full valuation allowance against the net deferred tax asset
due to the uncertainty of realizing the related benefits. As of December 29,
1996, the Company had net operating loss carryforwards of approximately
$700,000.
4. SHAREHOLDERS' EQUITY:
ORIGINAL ISSUANCES
At the inception and during the development of the Company, 2,500,000 shares
of common stock were issued for consideration ranging from $.01 to $2.04 per
share.
STOCK SPLIT
On January 19, 1996, the Company declared a 112.50-for-1 stock split which
has been retroactively reflected in the accompanying financial statements.
PRIVATE PLACEMENT
During February 1996, the Company sold 60 units in a private placement
offering at an offering price of $25,000 per unit. Each unit consisted of
(i) 2,500 shares of common stock at $4.95 per share, (ii) a $12,500 principal
amount promissory note bearing interest at 10%, unsecured, repaid upon the
completion of the IPO, and (iii) warrants to purchase 2,500 shares of common
stock at an exercise price of $5.00 per share expiring in February 2001. The
Company received net proceeds of $1,265,000 after the payment of $235,000 in
related offering costs. The net proceeds were used to pay off certain debt
and purchase brewery equipment and was used for working capital purposes.
INITIAL PUBLIC OFFERING
During June 1996, the Securities and Exchange Commission declared effective a
Registration Statement relating to the IPO of 2,550,000 units at an offering
price of $5.00 per unit, including 100,000 units from the exercise of the
underwriters' overallotment option. Each unit consisted of one share of
common stock and one Redeemable Class A Warrant. The Company received net
proceeds of $10,984,853, after the payment of $426,717 in related offering
costs. The net proceeds were used to repay the Nonconvertible Note (see Note
2), and the private placement debt and the remaining proceeds are being used
to fund operating losses and to finance a portion of the construction on two
new locations in Grand Rapids and Auburn Hills, Michigan.
22
<PAGE>
UNDERWRITERS WARRANT
In connection with its IPO in June 1996, the Company issued a warrant to the
underwriters to purchase 245,000 shares of common stock at $6.00 per share.
The warrant becomes exercisable in June 1997 and is exercisable until June
2000.
5. STOCK OPTION PLANS
During January 1996, the Company adopted the 1996 Stock Option Plan (the
Plan), pursuant to which options to acquire an aggregate of 300,000 shares of
the Company's common stock may be granted. Under the Plan, the board of
directors may grant options to purchase shares of the Company's stock to
eligible employees, nonemployees and contractors at a price not less than
100% of the fair market value at the time of the grant for both incentive and
nonstatutory stock options. Options granted under the Plan vest annually
over four years from date of grant and are exercisable for ten years, except
that the term may not exceed five years for incentive stock options granted
to persons who own more than 10% of the Company's outstanding voting stock.
During January 1996, the Company adopted the 1996 Director Stock Option Plan
(the Director's Plan) pursuant to which options to acquire an aggregate of
100,000 shares of the Company's common stock may be granted to outside
directors. Under the Director's Plan, 5,000 options will automatically be
granted to each outside director upon an IPO, and thereafter 5,000 options
will be granted annually for each year of continued service by the outside
director. Each option is granted at fair market value on the date of grant
and is exercisable for a period of ten years commencing one year after the
date of grant.
A summary of the status of the Company's two stock option plans at December
29, 1996 and changes during the year then ended is presented in the table and
narrative below:
Weighted
Average
Extended
Shares Price
-------- --------
Granted 200,000 4.41
Exercised, forfeited and expired - -
--------
Outstanding, end of year 200,000 4.41
--------
--------
Exercisable, end of year 35,000 4.13
--------
--------
Weighted average fair value of options granted $ 2.63
--------
--------
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and loss per share would have been
increased to the following pro forma amounts for the year ended December 29,
1996:
Net Loss As Reported $(703,592)
Pro Forma (788,602)
Primary EPS As Reported (0.17)
Pro Forma (0.19)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996: risk-free interest rate of 6.39 to
7.06%; no expected dividend yields; expected lives of 5 years; and expected
volatility of 60.73%.
23
<PAGE>
6. LEGAL PROCEEDINGS:
The Company is involved in legal actions in the ordinary course of its
business. Although the outcomes of any such legal actions cannot be
predicted, in the opinion of management there is no legal proceeding pending
against or involving the Company for which the outcome is likely to have a
material adverse effect upon the financial position or results of operations
of the Company.
7. RELATED-PARTY TRANSACTIONS:
PURCHASES OF PROPERTY AND SERVICES
The general contractor hired to construct the Brewery building was a company
owned by a director/shareholder. During 1995, this director/shareholder
received shares of common stock in exchange for a $250,000 reduction of the
payable due by the Company. The total amount of property and services
purchased from this company during 1996 was $75,172, of which $30,972
remained unpaid as of December 29, 1996.
SHAREHOLDER GUARANTEES
Certain director/shareholders have guaranteed a substantial portion of the
Company's long-term debt (see Note 2).
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The directors and executive officers of the Company are as follows:
NAME AGE POSITION(S)
- ---- --- -----------
William F. Rolinski 49 Chief Executive Officer, President and
Director
Gary J. Hewett 35 Executive Vice President and Chief
Operating Officer
Anthony P. Dombrowski 36 Chief Financial Officer and Treasurer
Blair A. Murphy, M.D. 43 Director
Henry T. Siwecki 53 Director
Casimer I. Zaremba 76 Director
William F. Rolinski is a founder of the Company and has been the Chief
Executive Officer, President and a director since its formation in 1993.
From 1987 to 1994, Mr. Rolinski was the founder, secretary and Corporate
Counsel of Ward Lake Energy, Inc. ("Ward Lake"), an independent producer of
natural gas in Michigan. While Mr. Rolinski was at Ward Lake, the company
drilled and produced over 500 natural gas wells with combined reserves of
over $200 million.
24
<PAGE>
Gary J. Hewett became the Chief Operating Officer and Executive Vice
President of the Company in April 1996. From 1989 to March 1996, he served
in various capacities at Hooters of America, Inc., a national restaurant
chain, including Vice President of Franchise Operations in which Mr. Hewett
was responsible for the operational support of 84 franchised restaurants and
Vice President of Company Operations where he was responsible for the
operation of 28 company-owned restaurants. Mr. Hewett's responsibilities at
Hooters included supervision of site selection, restaurant design and layout,
training and new restaurant openings. From 1986 to 1989, Mr. Hewett was
employed by the Marriott Corporation as a restaurant general manager.
Anthony P. Dombrowski became the Chief Financial Officer of the Company
in May 1996. He acted as a consultant to the Company, in the capacity of
Chief Financial Officer, from January 1996 to May 1996. For the past two
years, Mr. Dombrowski has operated his own financial and consulting business.
Mr. Dombrowski began his career with Price Waterhouse LLP in 1982. From 1989
to 1995, Mr. Dombrowski was the Chief Financial Officer of Ward Lake.
Blair A. Murphy, M.D. is a founder of the Company and has been a
director since its formation in 1993. Dr. Murphy has been a urological
surgeon since 1990 and is presently a self-employed physician.
Henry T. Siwecki has been a director since August 1995. For more than
the last five years, Mr. Siwecki has been the sole owner and president of
Siwecki Construction, Inc., a commercial and residential contractor.
Casimer I. Zaremba is a founder of the Company and has been a director
since its formation in 1993. Mr. Zaremba has been a private investor for
more than the past five years.
Messrs. Murphy, Siwecki and Zaremba (the Company's non-employee
directors) receive options pursuant to the 1996 Director Stock Option Plan.
Management members of the Board receive no compensation as Board members.
Board members are paid their expenses, if any, which are incurred solely to
participate in meetings of the Board or Board committees.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors and persons who own more than 10% of a
registered class of the Company's equity securities to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission (the "Commission"). Such officers, directors and shareholders are
required by the Commission to furnish the Company with copies of all such
reports.
To the Company's knowledge, based solely on a review of copies of
reports filed with the Commission during 1996, all applicable Section 16(a)
filing requirements were complied with, except that one report on Form 5
setting forth the automatic grant of a stock option for 5,000 shares to
Casimer I. Zaremba pursuant to the Company's 1996 Director Stock Option Plan
was not filed on a timely basis.
25
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid to
or accrued by each of the Company's executive officers receiving in excess of
$100,000, and for all executive officers as a group, for services rendered to
the Company during the fiscal years ended December 29, 1996, December 31,
1995 and December 31, 1994. The Company has no formalized employment
agreements with its executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
--------------------- -------------------------------
SHARES OF COMMON STOCK
NAME AND PRINCIPAL POSITION YEAR SALARY UNDERLYING OPTIONS
- ------------------------------- ---- -------- -------------------------------
<S> <C> <C> <C>
William F. Rolinski 1996 $134,038 --
Chief Executive Officer 1995(1) 34,000 --
1994 -- --
Gary J. Hewett 1996(2) $101,445 55,000
Executive Vice President and 1995 -- --
Chief Operating Officer 1994 -- --
Anthony P. Dombrowski(3) 1996(3) $112,516 33,000
Chief Financial Officer and 1995 15,300 --
Treasurer 1994 -- --
</TABLE>
- ---------------
(1) Prior to May 26, 1995, Mr. Rolinski was not paid for his services.
(2) Mr. Hewett's employment with the Company began on April 1, 1996.
(3) Mr. Dombrowski's employment with the Company began on May 1, 1996.
The following tables summarize stock option grants and option exercises
during the fiscal year ended December 29, 1996 to or by the executive officers
set forth below and certain other information relative to such options.
<TABLE>
<CAPTION>
Number of
Securities Percent of Total
Underlying Options Granted Exercise or
Options to Employees in Base Price Expiration
Name Granted Fiscal Year ($/share)(1) Date
- --------------------- ----------- --------------- ------------ ----------
<S> <C> <C> <C> <C>
Gary J. Hewett 55,000(2) 31.4% (3) (4)
Anthony P. Dombrowski 33,000(5) 18.9% (6) (7)
</TABLE>
- ---------------
(1) Fair market value per share on the date of grant, in accordance with the
Company's 1996 Stock Option Plan.
(2) The options reported consist of one option for 50,000 shares and one option
for 5,000 shares. Subject to approval by the shareholders at the Annual
Meeting, the option for 50,000 shares becomes cumulatively exercisable with
respect to 25% of the shares on each of the first four anniversaries of the
grant date and the option for 5,000 shares became exercisable upon grant.
(3) The option for 50,000 shares has an exercise price of $4.50 per share and
the option for 5,000 shares has an exercise price of $3.00 per share.
26
<PAGE>
(4) The option for 50,000 shares expires on June 13, 2006 and the option for
5,000 shares expires on December 16, 2006.
(5) The options reported consist of one option for 30,000 shares and one option
for 3,000 shares. Subject to approval by the shareholders at the Annual
Meeting, the option for 30,000 shares becomes cumulatively exercisable with
respect to 25% of the shares on each of the first four anniversaries of the
grant date and the option for 3,000 shares became exercisable upon grant.
(6) The option for 30,000 shares has an exercise price of $4.50 per share and
the option for 3,000 shares has an exercise price of $3.00 per share.
(7) The option for 30,000 shares expires on June 13, 2006 and the option for
3,000 shares expires on December 16, 2006.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1996 AND FISCAL YEAR END OPTION
VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at Fiscal Year End at Fiscal Year End(1)
Acquired on Value ----------------------------- --------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- --------------------- ------------- ----------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gary J. Hewett -- -- 5,000 50,000 -- --
Anthony P. Dombrowski -- -- 3,000 30,000 -- --
</TABLE>
- -----------------------
(1) Market value of underlying securities at fiscal year end minus the exercise
price.
27
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains certain information as of March 3, 1997,
regarding the beneficial ownership of the Company's Common Stock by (i) each
person known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) each director, nominee for director, and executive officer
named in the "Summary Compensation Table" above and (iii) the directors and
executive officers as a group, and as to the percentage of the outstanding
shares held by them on such date. Any shares which are subject to an option
or a warrant exercisable within 60 days are reflected in the following table
and are deemed to be outstanding for the purpose of computing the percentage
of Common Stock owned by the option or warrant holder but are not deemed to
be outstanding for the purpose of computing the percentage of Common Stock
owned by any other person. Unless otherwise noted, each person identified
below possesses sole voting and investment power with respect to such shares.
Shares Percent
Beneficially of
Owned(1) Class
------------ -------
Perkins Capital Management, Inc.(2)(3) . . . . . . . 737,400 13.4
William F. Rolinski(4) . . . . . . . . . . . . . . . 840,008 15.9
Casimer I. Zaremba(4)(5)(6). . . . . . . . . . . . . 680,007 12.9
Dr. Blair A. Murphy(4)(5). . . . . . . . . . . . . . 640,007 12.1
The Perkins Opportunity Fund(2)(7) . . . . . . . . . 600,000 10.8
Henry T. Siwecki(4)(5)(8). . . . . . . . . . . . . . 141,989 2.7
Gary J. Hewett(9). . . . . . . . . . . . . . . . . . 5,000 *
Anthony P. Dombrowski(9) . . . . . . . . . . . . . . 3,000 *
All Directors and Executive Officers as a
Group (6 persons)(8)(10). . . . . . . . . . . . . 2,310,011 43.6
- ---------------
* Represents less than one percent.
(1) Securities "beneficially owned" by a person are determined in accordance
with the definition of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission and, accordingly,
may include securities owned by or for, among others, the spouse,
children or certain other relatives of such person as well as other
securities as to which the person has or shares voting or investment
power or has the option or right to acquire Common Stock within 60 days.
(2) The address of Perkins Capital Management, Inc. ("PCM") and The Perkins
Opportunity Fund ("POF") is 730 East Lake Street, Wayzata, Minnesota
55391. PCM has (i) the sole power to vote and the sole power to
dispose of 300,000 shares of Common Stock owned by POF and (ii) sole
power to dispose of 300,000 shares of Common Stock subject to
currently exercisable warrants owned by POF. PCM disclaims beneficial
ownership of the securities listed as beneficially owned by POF.
(3) Includes (i) 492,400 shares of Common Stock owned by the clients of PCM,
and (ii) 245,000 shares of Common Stock subject to currently exercisable
warrants owned by the clients of PCM. Excludes: (i) 300,000 shares of
Common Stock owned by POF, and (ii) 300,000 shares of Common Stock
subject to currently exercisable warrants owned by POF.
(4) Substantially all of the shares beneficially owned by Messrs. Rolinski,
Zaremba, Murphy and Siwecki are subject to a three-year escrow agreement
with Norwest Bank Minnesota, National Association, the Company and the
Commissioner of Commerce for the State of Minnesota dated June 7, 1996.
(5) Includes 5,000 shares of Common Stock subject to currently exercisable
options.
(6) Beneficial ownership of 450,005 of these shares is shared with Walter
Zaremba, Casimer Zaremba's brother.
(7) Includes 300,000 shares of Common Stock subject to currently exercisable
warrants. Ownership of ten percent or more of the outstanding stock of
the Comapny requires the prior approval of the Michigan Liquor Control
Commission. As a result, the warrants held by POF cannot be exercised in
their entirety without such approval.
(8) Includes 6,000 shares of Common Stock subject to currently exercisable
warrants.
(9) Represents shares of Common Stock subject to currently exercisable
options.
(10) Includes 23,000 shares of Common Stock subject to currently exercisable
options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Siwecki Construction, Inc. served as the general contractor of the
Company's first microbrewery/restaurant known as Big Buck Brewery &
Steakhouse in Gaylord, Michigan, adjoining I-75 approximately 200 miles north
of Detroit. Siwecki Construction, Inc. is wholly-owned by Henry T. Siwecki.
The Company purchased $3.4 million of general contractor services from
Siwecki Construction, Inc. for the Gaylord Brewery. Upon completion of the
construction of the Gaylord Brewery, the Company and Siwecki Construction,
Inc. agreed that $250,000 of the amounts which the Company owed Siwecki
Construction, Inc. would be satisfied by the issuance of 125,000 shares of
Common Stock. This reflected a valuation of $2.00 per share which was
greater than two times the book value of the Common Stock at that time.
Subsequent to both the completion of the construction of the Gaylord Brewery
and the negotiation and issuance of the 125,000 shares of Common Stock, Mr.
Siwecki became a director of the Company. The Company may employ Siwecki
Construction, Inc. as general contractor for construction of future Big Buck
Brewery & Steakhouses. The Company believes the terms of its transactions
with Siwecki Construction, Inc. with respect to the Gaylord Brewery
were no less favorable to the Company than those that could be
obtained from unaffiliated third parties.
28
<PAGE>
Zaremba Equipment, Inc. provided certain equipment to the Company for
use at the Gaylord Brewery. Zaremba Equipment, Inc. is owned by Walter
Zaremba, a founding shareholder and former director of the Company. The
Company purchased an aggregate of $71,780 of equipment, including a dump
truck, five trailers, and maintenance equipment, from Zaremba Equipment, Inc.
for the Gaylord Brewery between August and September 1995. The Company
believes the terms of its transactions with Zaremba Equipment, Inc. with
respect to the Gaylord Brewery were no less favorable to the Company than
those that could be obtained from unaffiliated third parties.
The Company issued a promissory note for $250,000, with annual interest
thereon at nine percent, to Casimer I. Zaremba on March 17, 1995 which was
due and payable on May 17, 1995. A portion of the proceeds of the Pre-Bridge
Financing was used to repay $50,000 borrowed thereunder. On April 10, 1996,
the Company and Casimer I. Zaremba agreed to replace such promissory note
with a new promissory note for $175,000, with annual interest thereon at nine
percent (9%), to Casimer I. Zaremba. A portion of the proceeds of the Bridge
Financing was used to repay $50,000 borrowed thereunder. The Company also
used a portion of the proceeds of the Offering to fully retire this
promissory note. The Company believes the terms of its transactions with
Casimer I. Zaremba with respect to the Gaylord Brewery were no less favorable
to the Company than those that could be obtained from unaffiliated third
parties.
The Company entered into a $750,000 revolving credit facility with
Gornick Holdings Ltd. Partnership. Prior to the Pre-Offering Financings, the
Company had borrowed $250,000 under this credit facility. Messrs. Rolinski,
Murphy, Zaremba and Siwecki, shareholders of the Company, guaranteed
repayment of this facility. A portion of the proceeds of the Pre-Offering
Financings was used to repay the $250,000 borrowed thereunder. The revolving
credit facility was terminated by the Company on April 1, 1996.
The Company has entered into a loan agreement with NBD Bank for three
separate loan facilities which aggregate $3.0 million. Messrs. Rolinski,
Murphy and Zaremba, each a director of the Company, have personally
guaranteed repayment of all amounts under this loan agreement. Messrs.
Rolinski, Murphy and Zaremba do not intend to personally guarantee future
obligations of the Company.
The Company and its affiliates will only engage in other material
transactions with promoters if the transactions are (i) on terms no less
favorable to the Company or its affiliates than those that are generally
available from unaffiliated third parties and (ii) ratified by a majority of
independent outside members of the Company's Board who do not have an
interest in the transactions.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Restated Articles of Incorporation+
3.2 Amended and Restated Bylaws+
4.1 Specimen Form of the Company's Common Stock Certificate+
4.2 Form of Warrant Agreement (including Form of Redeemable Class A
Warrant)+
4.3 Form of Subscription and Investment Representation Agreement,
dated December 1995, between the Company and Pyramid Partners, LP
(including Form of Convertible Secured Promissory Note, Form of
Non-Convertible Secured Promissory Note and Form of Warrant)+
29
<PAGE>
10.1 1996 Stock Option Plan+
10.2 1996 Director Stock Option Plan+
10.3 Loan Agreement dated July 28, 1995, by and among the Company,
William F. Rolinski, Dr. Blair A. Murphy, Walter Zaremba, Casimer
I. Zaremba and NBD Bank+
10.4 Escrow Agreement dated June 7, 1996, by and among the Company,
William F. Rolinski, Dr. Blair A. Murphy, Casimer I. Zaremba,
Henry T. Siwecki, Norwest Bank Minnesota, National Association,
and the Commissioner of Commerce for the State of Minnesota
11 Computation of Net Loss Per Share
24 Power of Attorney (included on signature page to Form 10-KSB)
27 Financial Data Schedule
-------------------
+ Incorporated by reference to the Company's Registration Statement
on Form SB-2 filed on April 15, 1996, Registration No. 333-3548.
(b) Reports on Form 8-K
None.
30
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Gaylord, State of
Michigan on March 28, 1997.
MICHIGAN BREWERY, INC.
By /s/ William F. Rolinski
---------------------------------
William F. Rolinski
President and Chief Executive Officer
(principal executive officer)
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints William F. Rolinski and Anthony P. Dombrowski
as his or her true and lawful attorney-in-fact and agent, with full powers of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any or all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or her substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
In accordance with the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant, and in the
capacities and on the date indicated.
SIGNATURE TITLE DATE
/s/ William F. Rolinski
- ---------------------------- President, Chief Executive Officer March 28, 1997
William F. Rolinski and Director (Principal Executive
Officer)
/s/ Anthony P. Dombrowksi
- ---------------------------- Chief Financial Officer (Principal March 28, 1997
Anthony P. Dombrowski Accounting Officer and Principal
Financial Officer)
/s/ Blair A. Murphy
- ---------------------------- Director March 28, 1997
Blair A. Murphy
/s/ Henry T. Siwecki
- ---------------------------- Director March 28, 1997
Henry T. Siwecki
- ---------------------------- Director
Casimer I. Zaremba
31
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1 Restated Articles of Incorporation+
3.2 Amended and Restated Bylaws+
4.1 Specimen Form of the Company's Common Stock Certificate+
4.2 Form of Warrant Agreement (including Form of Redeemable Class A
Warrant)+
4.3 Form of Subscription and Investment Representation Agreement,
dated December 1995, between the Company and Pyramid Partners,
LP (including Form of Convertible Secured Promissory Note, Form
of Non-Convertible Secured Promissory Note and Form of
Warrant)+
10.1 1996 Stock Option Plan+
10.2 1996 Director Stock Option Plan+
10.3 Loan Agreement dated July 28, 1995, by and among the Company,
William F. Rolinski, Dr. Blair A. Murphy, Walter Zaremba,
Casimer I. Zaremba and NBD Bank+
10.4 Escrow Agreement dated June 7, 1996, by and among the Company,
William F. Rolinski, Dr. Blair A. Murphy, Casimer I. Zaremba,
Henry T. Siwecki, Norwest Bank Minnesota, National Association,
and the Commissioner of Commerce for the State of Minnesota
11 Computation of Net Loss Per Share
24 Power of Attorney (included on signature page to Form 10-KSB)
27 Financial Data Schedule
- -------------------------
+ Incorporated by reference to the Company's Registration
Statement on Form SB-2 filed on April 15, 1996, Registration
No. 333-3548.
32
<PAGE>
EXHIBIT 10.4
ESCROW AGREEMENT
THIS ESCROW AGREEMENT made and entered into this 7th day of June, 1996, by
and between William F. Rolinski, Blair A. Murphy, Casimer I. Zaremba, and
Henry T. Siwecki (herein collectively referred to as the "Depositors");
Norwest Bank Minnesota, National Association, a corporate fiduciary with
principal offices in South St. Paul, Minnesota (hereinafter called the
"Escrow Agent"); Michigan Brewery, Inc., a corporation with principal offices
in Gaylord, Michigan (hereinafter called the "Issuer") and the commissioner
of commerce for the State of Minnesota (hereinafter called the
"commissioner");
WITNESSETH THAT:
Each of the Depositors is the owner of Common Stock of the Issuer and each
owns the number of shares of such security listed opposite his name on Annex
A, attached hereto and made a part hereof.
The Issuer has applied to the commissioner for registration of its
securities for sale to residents of Minnesota, and as a condition of
registration, the Depositors, the Escrow Agent and the Issuer agree to be
bound by this Agreement and the applicable rules and regulations of the
commissioner.
Each of the Depositors has deposited the securities listed opposite his name
on Annex A with the Escrow Agent, and the Escrow Agent hereby acknowledges
receipt thereof. These securities are herein collectively referred to as
"escrowed securities."
THEREFORE, the parties agree as follows:
1. The Escrow Agent agrees to hold the escrowed securities until such time
as Escrow Agent shall receive a written release issued by the commissioner
permitting the release from escrow of all or a part of the escrowed
securities held under this Agreement. Upon receipt of such release, the
Escrow Agent may release to each Depositor all or a part of the escrowed
securities in accordance with the order of the commissioner.
Subject to the above provisions, the term of escrow under this Agreement
shall run for a period of two years from the date of the Order of
Registration. The Issuer and each of the Depositors shall furnish the
commissioner a written statement that none of the escrowed securities nor any
interests therein have been sold, transferred or otherwise disposed of
(except as permitted by paragraph 4) as a condition of the release from
escrow.
2. Notwithstanding any provision of paragraph 1, the commissioner may, in
his discretion, terminate the term of escrow with respect to all or any part
of the escrowed securities of any Depositor before the expiration of the
period of occurrence of the event specified in paragraph 1 and release such
securities if the commissioner determines that the release of such securities
to the Depositor(s) will not be detrimental to the Issuer, the public
investors or any other party concerned. At the time of release by the
commissioner of any securities from escrow, the application of this Agreement
shall terminate with respect to the securities so released.
3. While it is held in escrow pursuant to this Agreement, no escrowed
security nor any interest therein, nor any right or title thereto, may be
sold or transferred, by means of transfer of the security separate from the
certificate representing it or otherwise, without prior written release of
the commissioner, except that the release of the commissioner need not be
obtained to transfer escrowed shares by will or the laws of descent and
distribution or otherwise by order or process of any Court.
4. Upon receipt of such written release from the commissioner directing
that some or all of the escrowed securities of the Depositor held under this
Agreement be released for the purpose of transfer to another person against
concurrent deposit of the securities so transferred, the Escrow Agent may
release such securities but only against such deposit under this Agreement of
all of the transferred securities. The commissioner shall authorize such
transfer of the escrowed securities only upon receipt of a signed statement
33
<PAGE>
by the proposed transferee that he or she has full knowledge of the terms of
this Agreement and that the proposed transferee accepts such securities
subject to the conditions of this Agreement.
5. The Depositors agree that they shall be entitled to receive cash and
property dividends with respect to the escrowed securities while such
securities are held in escrow pursuant to this Agreement to the same extent
as other security holders of the same class of security and that said cash or
property dividends shall be placed under the terms of this Agreement.
6. Upon declaration of any dividend in shares of the Issuer to which the
escrowed securities are entitled pursuant to a share dividend or split
authorized by a vote of the shareholders, the Depositors and the Escrow Agent
shall forthwith enter into a Supplemental Escrow Agreement, covering such
share dividend, which Supplemental Escrow Agreement shall incorporate all the
conditions of escrow contained in this Agreement. The shares received as
dividends shall be forthwith deposited in escrow with the Escrow Agent
pursuant to such Supplemental Escrow Agreement, and the Escrow Agent shall
deliver to the commissioner a receipt for the shares thus escrowed.
7. During the term of escrow, the Depositors shall not be entitled to and
hereby waive all rights to participate in any distribution of assets of the
Issuer in the event of liquidation, dissolution, or winding up, until the
public investors shall have received cash or property in an amount or value
equal to the price paid by public investors for securities purchased by such
public investors; and thereafter the Depositors shall participate without the
public investors until they shall have received cash or other property in an
amount or value equal to the price paid by the Depositors for the escrowed
securities; and thereafter the public investors and the Depositors shall
participate equally according to the terms of their securities. Any
Depositor(s) seeking release of all or any part of the escrowed securities
pursuant to this paragraph 7 shall furnish the commissioner a written
statement that none of the escrowed securities nor any interests therein have
been sold, transferred (except as provided in paragraph 4) or otherwise
disposed of, without the consent of the commissioner, as a condition of the
release from escrow.
8. This Agreement shall not be construed to prohibit any Depositor from
participating in any distribution of securities of any corporation other than
the Issuer resulting from the sale of assets of the Issuer or a merger or
consolidation of the Issuer with or into any other corporation or
corporations. In the event of such a transaction, the Escrow Agent should
obtain written authorization from the commissioner prior to the release of
the escrowed securities, and, any such distribution payable in securities of
any corporation other than the Issuer paid with respect to the escrowed
securities shall be delivered to the Escrow Agent and held pursuant to a
Supplemental Escrow Agreement prepared and executed as described in paragraph
7. In the event of the merger or consolidation of the Issuer with or into
any other corporation or corporations, any securities shall be delivered to
the Escrow Agent and held pursuant to a Supplemental Escrow Agreement
prepared and executed as described in paragraph 6.
9. The Escrow Agent may conclusively rely upon and shall be protected in
acting upon any statement, certificate, notice, request, consent, order, or
other document believed by it to be genuine and to have been signed or
presented by the proper party or parties. The Escrow Agent shall have no
duty or liability to verify any such statement, certificate, notice, request,
consent, order, or other document and its sole responsibility shall be to act
only as expressly set forth in this Agreement. The Escrow Agent shall be
under no obligation to institute or defend any action, suit, or proceeding in
connection with this Agreement unless first indemnified to its satisfaction.
The Escrow Agent may consult counsel in respect of any question arising under
this Agreement and the Escrow Agent shall not be liable for any action taken
or omitted in good faith upon advice of such counsel. All securities held by
Escrow Agent pursuant to this Agreement shall constitute trust property for
the purposes for which they are held and the Escrow Agent shall not be liable
for any interest thereon.
10. The Escrow Agent shall be entitled to receive from the Company
reasonable compensation as set forth in Annex B, attached hereto and made a
part hereof, for its services as contemplated herein. In the event that the
Escrow Agent shall render any additional services not provided for herein or
that any controversy shall arise hereunder or that the Escrow Agent shall be
made a party or shall intervene in any
34
<PAGE>
action, suit or proceeding pertaining to this Agreement, it shall be entitled
to receive reasonable compensation from the Company for such additional
services.
11. This Agreement shall be binding upon and inure to the benefit of the
parties hereto, their heirs, successors, and assigns.
12. This Agreement shall terminate in its entirety when all escrowed
securities covered hereby and by any Agreements supplemental hereto have been
released as provided in paragraph 1.
35
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
Escrow Agent: Depositors:
NORWEST BANK MINNESOTA, /s/William F. Rolinski
NATIONAL ASSOCIATION -----------------------
William F. Rolinski
By: /s/Curt Schwegman /s/ Blair A. Murphy
-------------------------- -----------------------
Curt Schwegman Blair A. Murphy
Its: Corporate Trust Officer
/s/Casimer I. Zaremba
-----------------------
and Casimer I. Zaremba
By: Not applicable
-------------------------
Michelle Healy /s/Henry T. Siwecki
-----------------------
Henry T. Siwecki
Its: Administrative Assistant
Issuer:
MICHIGAN BREWERY, INC.
By: /s/ William F. Rolinski
----------------------------
William F. Rolinski
Accepted for filing: Its: President and Chief Executive
Officer
and
/s/David B. Gruenes By: /s/Anthony P. Dombrowski
---------------------------- ----------------------------
David B. Gruenes Anthony P. Dombrowski
Commissioner of Commerce Its: Chief Financial Officer
36
<PAGE>
ANNEX A
NAME COMMON STOCK (#)
- -------------------------------------------------------------------------------
William F. Rolinski 840,008
- -------------------------------------------------------------------------------
Casimer I. Zaremba 675,007
- -------------------------------------------------------------------------------
Dr. Blair A. Murphy 635,007
- -------------------------------------------------------------------------------
Henry T. Siwecki 136,989(1)
- -------------------------------------------------------------------------------
Total 2,287,011
- -------------------------------------------------------------------------------
(1) Includes 6,000 shares of Common Stock subject to currently exercisable
warrants.
37
<PAGE>
ANNEX B
ESCROW FEE SCHEDULE
ACCEPTANCE FEE: $1,000.00
For initial services including examination of the Escrow Agreement and all
supporting documents this is a one-time fee payable upon the OPENING of the
account.
ADMINISTRATION FEE: $1,000.00*
An annual charge OR ANY PORTION of a 12-month period thereof. This fee is
payable upon the OPENING of the account and annually thereafter. This charge
is not prorated for the first year.
*Assumes use of Norwest Funds for funds on deposit.
TRANSACTION FEE:
Wire transfer of funds $25.00
Asset transactions (purchases/sales/calls/etc) $20.00
No charge for Norwest Funds transactions other than those disclosed in the
Fund Prospectus.
EXTRAORDINARY SERVICES:
For any services other than those covered by the aforementioned, a special
per hour charge will be made to commensurate with the character of the
service, time required and responsibility involved. Such services include
but are not limited to excessive administrative time, attendance at closings,
specialized reports and record-keeping, unusual certifications, etc.
FEE SCHEDULE IS SUBJECT TO ANNUAL REVIEW AND ADJUSTMENT.
38
<PAGE>
EXHIBIT 11
COMPUTATION OF NET LOSS PER SHARE
Year Ended Year Ended
December 31, December 29,
1995 1996
------------- -------------
Weighted average number of issued
shares outstanding 2,079,029 4,027,517
Effect of:
Dilutive effect of cheap stock after
application of treasury
stock method(1) 418,383 38,554
------------- -------------
Shares outstanding used to compute
net income (loss) per share 2,481,676 4,066,071
------------- -------------
Net income (loss) $ (1,104,078) $ (703,592)
------------- -------------
Net income (loss) per common share $ (0.45) $ (0.17)
------------- -------------
- --------------
(1) Cheap stock and common shares issued during 1996 are included in the
computation for all periods presented in accordance with Staff
Accounting Bulletin Topic 4(D).
39
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-29-1996
<CASH> 28,468
<SECURITIES> 4,910,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 115,785
<CURRENT-ASSETS> 5,244,404
<PP&E> 10,457,901
<DEPRECIATION> 445,020
<TOTAL-ASSETS> 15,331,693
<CURRENT-LIABILITIES> 669,950
<BONDS> 0
0
0
<COMMON> 52,750
<OTHER-SE> 12,484,602
<TOTAL-LIABILITY-AND-EQUITY> 15,331,693
<SALES> 4,338,832
<TOTAL-REVENUES> 4,338,832
<CGS> 1,584,483
<TOTAL-COSTS> 4,336,211
<OTHER-EXPENSES> 874,498
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 341,863
<INCOME-PRETAX> (703,592)
<INCOME-TAX> 0
<INCOME-CONTINUING> (703,592)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (703,592)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
