About EDGAR Online | Login
 
Enter your Email for a Free Trial:
The following is an excerpt from a S-3 SEC Filing, filed by MICHIGAN BREWERY INC on 9/2/1997.
Next Section Next Section Previous Section Previous Section
BIG BUCK BREWERY & STEAKHOUSE INC - S-3 - 19970902 - FORWARD_LOOK

RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF.

LACK OF PROFITABILITY; LACK OF OPERATING HISTORY

The Company had a net loss of $613,148 during the six months ended June 29, 1997 and a net loss of $703,592 during the year ended December 29, 1996. The Company had working capital of $1,025,515 and $3,120,013 at June 29, 1997 and December 29, 1996, respectively. The Company opened a Big Buck Brewery & Steakhouse ("Brewery" or "Big Buck Brewery") in Gaylord, Michigan (the "Gaylord Brewery"), in May 1995 and a Big Buck Brewery in Grand Rapids, Michigan (the "Grand Rapids Brewery"), in March 1997. Prior to the opening of the Gaylord Brewery, the Company had no operations or revenues. Accordingly, the Company's operations are subject to all of the risks inherent in the establishment of a new business enterprise, including the lack of operating history. The likelihood of success of the Company must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the establishment of a business. There can be no assurance that future operations of any Big Buck Brewery will be profitable. Future revenues and profits, if any, will depend upon various factors, including the quality of restaurant operations, the acceptance of the Company's beer and general economic conditions. In general, restaurants experience a decline in revenue growth or of actual revenues following a period of excitement which accompanies their opening. There is no assurance that the Company can operate profitably or that it will successfully implement its plans to open additional Big Buck Breweries, in which case the Company will continue to be dependent on the revenues of the Gaylord and Grand Rapids Breweries.

DEVELOPMENT OF FUTURE BREWERIES; EXPANSION PLAN RISKS

The total cost of developing, constructing and opening the Gaylord Brewery was approximately $5.8 million, including approximately $3.1 million for design and construction, $1.3 million for equipment, furniture and fixtures relating to the restaurant, $1.0 million for brewing and bottling equipment, and $400,000 for land. The Company purchased an existing structure for the Grand Rapids Brewery. The total cost of the land, building, remodeling, equipment, furniture and fixtures for the Grand Rapids Brewery was approximately $3.1 million. Management believes that each new Brewery will be of a building style and size suitable to its location. Accordingly, the Company has not developed a standardized Brewery layout.

The Company anticipates it will develop and open two additional Big Buck Breweries, including one in Auburn Hills, a suburb of Detroit, during the remainder of 1997. The Company estimates that the cost of developing and opening the Auburn Hills Brewery will be approximately $8.8 million. The remaining Big Buck Brewery scheduled to be opened in 1997 is anticipated to be a leased facility with an approximate cost, before deducting landlord contributions for leasehold improvements, between $1.4 and $1.7 million. The Company has obtained real estate financing for $3.0 million to $4.0 million of the cost of developing and opening the new Breweries pursuant to a sale and leaseback of the Auburn Hills site. The Company believes that the remaining net proceeds of its initial public offering, together with such financing, will be sufficient to finance these expansion plans, depending on the definitive locations, site conditions, construction costs and size and type of Breweries built. There can be no assurances that additional 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.

6

Successful expansion of the Company's operations will be largely dependent upon a variety of factors, some of which are currently unknown or beyond the Company's control, including customer acceptance of Big Buck Brewery restaurants and Big Buck Beer-Registered Trademark-; the ability of the Company's management to identify suitable sites and to negotiate purchases and financing of such sites; timely and economic development and construction of Breweries; timely approval from local governmental authorities; the hiring of skilled management and other personnel; the ability of the Company's management to apply its policies and procedures to a larger number of Breweries; the availability of adequate financing; the general ability to successfully manage growth; and the general state of the economy. There can be no assurance that the Company will be able to open new Breweries.

The Company's strategy includes operating a brewhouse at each Big Buck Brewery. Successful operation of separate brewhouses will require the Company to overcome various organizational challenges such as increasing and maintaining production and establishing and maintaining quality control over numerous geographically separated Breweries. In attempting to expand beer distribution, the Company will be required to establish and manage relationships with wholesale distributors, retailers and consumers in new markets. The Company is the sole promoter of sales of its beer in new markets. Consumer tastes and preferences may vary from market to market. There can be no assurance that the Company will be successful in entering new markets.

NEED FOR FINANCING

The Company's ability to execute its business strategy is dependent on its ability to obtain substantial financing for the development of additional Breweries. The Company anticipates that future development and expansion will be financed through the public or private sale of additional equity or debt securities, capital leases and other credit facilities. There can be no assurance that any additional funds will be available or that such funds, if available, will be on terms acceptable to the Company or its shareholders. New investors may seek and obtain substantially better terms than those available to investors purchasing shares of Common Stock on the open market and the Company's issuance of securities in the future may result in substantial dilution.

MICHIGAN LAW MAY LIMIT GROWTH

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 provide the Company higher margins, but do not reach the same customer base. There can be no assurance that legislation raising the barrelage ceiling will pass, that any such legislation will pass in a form which would facilitate the Company's expansion plans, or that if such legislation is not passed, the Company will be able to become licensed to brew in excess of 30,000 barrels per year.

RISKS RELATED TO SALE/LEASEBACKS

In April 1997, the Company sold the Grand Rapids site, including all improvements thereto, to an unrelated third party pursuant to a real estate purchase and leaseback agreement for $1.4 million. Pursuant to a separate lease agreement, the Company leases the Grand Rapids site at a minimum annual base rent of $140,000 and a maximum annual base rent of $192,500 over a ten-year term. The lease may be extended at the option of the Company for two additional five-year terms. In addition to the annual base rent, the Company is obligated to pay an annual percentage rent in the amount of 5% on gross sales at the site in excess of $2.9 million per year. In the event that such annual gross sales do not exceed $2.9 million for any two consecutive years during the lease term, the Company is obligated to repurchase the Grand Rapids site for $1.4 million, plus $70,000 for each lease year on a pro rata basis. The Company has the option to purchase the property from the lessor after the seventh full lease year for $1.4 million, plus $70,000 for each lease year on a pro rata basis. The lessor has the option to require the Company to purchase the property after the seventh full lease year at the same price.

7

In August 1997, the Company entered into a real estate purchase and leaseback agreement providing for the sale of the Auburn Hills site, including all improvements thereto, to an unrelated third party, Michael G. Eyde. The agreement provides for financing at one of three possible levels ranging from $3.0 to $4.0 million. Such price (the "Purchase Price") will be determined when final construction of the Auburn Hills Brewery is completed. The Company plans to lease the Auburn Hills Brewery pursuant to a separate lease agreement which will provide for a minimum annual base rent ranging from $300,000 to $400,000, and a maximum annual base rent ranging from $412,500 to $550,000, depending upon the Purchase Price. The lease will have a 25-year term and the Company will be able to extend such term for two additional ten-year terms. In addition to the annual base rent, the Company will be obligated to pay an annual percentage rent ranging from 3.5% to 5.0% of gross sales at the site in excess of $8.0 million per year. In the event that such annual gross sales do not exceed $8.0 million for any two consecutive years during the lease term, the Company will be obligated to repurchase the Auburn Hills site at the Purchase Price, plus an amount ranging from $150,000 to $200,000 for each lease year on a pro rata basis. The lessor will have the ability to require that the Company issue Common Stock (valued at $5.00 per share) in payment of such repurchase price. The Company will have the option to purchase the property from the lessor after the seventh full lease year at the Purchase Price, plus an amount ranging from $150,000 to $200,000 for each lease year on a pro rata basis. Independent of annual gross sales, the lessor will have the option to require the Company to purchase the property before the third full lease year at the same price.

The lessor in each case may terminate in the event of a default which is not cured within the applicable grace period. A default is defined as (i) the Company's failure to make a rental payment within 30 days after receipt of written notice that a payment is past due or (ii) the Company's failure to perform its obligations under the lease (other than rent payments) within 30 days after written notice of a curable violation, provided, however that if such default cannot be cured within the 30-day period, a default will be deemed to have occurred only if the Company has failed to commence a cure within such 30-day period.

Annual percentage rent is required whether the Breweries are profitable or not. In the event that the Company is required to pay annual percentage rent, the funds available to the Company for working capital and development plans will be reduced. In the event that annual percentage rent is not required over two consecutive years, the Company may be forced to repurchase such sites at a premium over their respective sale prices. There can be no assurance that the Company will have sufficient funds to repurchase the Grand Rapids Brewery or the Auburn Hills Brewery. In the event of a default and termination of either lease, the Company would be unable to continue to operate the related Brewery, which could have a material adverse impact on the Company's operating results.

COMPETITION; CERTAIN FACTORS AFFECTING THE RESTAURANT AND BREWING INDUSTRIES

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 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 and with other microbrewery restaurants in a highly competitive and developing microbrewery and brewpub restaurant market. Other restaurants and companies could utilize the Big Buck Brewery format or a related format. There can be no assurance that the Company will be able to respond to various competitive factors affecting the restaurant industry.

8

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 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 beer market. Most of the Company's brewing competitors possess marketing, financial, personnel and other resources substantially greater than those of the Company, and there can be no assurance that the Company will be able to succeed against intensified competition in the craftbrewed and fuller-flavored beer markets.

BREWERY OPERATING HAZARDS

The Company's brewing operations are subject to certain hazards and liability risks faced by all brewers, such as potential contamination of ingredients or products by bacteria or other external agents that may be wrongfully or accidentally introduced into products or packaging. The Company's products are not pasteurized. While the Company has never experienced a contamination problem in its products, the occurrence of such a problem could result in a costly product recall and serious damage to the Company's reputation for product quality. The Company's operations are also subject to certain injury and liability risks normally associated with the operation and possible malfunction of brewing and other equipment. Although the Company maintains insurance against certain risks under various general liability and product liability insurance policies, there can be no assurance that the Company's insurance will be adequate.

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. Additionally, state liquor laws may prevent or impede the expansion of the Company's Breweries into certain markets. While the Company has not experienced and does not anticipate any significant problems in obtaining required licenses, permits or approvals, any difficulties, delays or failures in obtaining such required licenses, permits or approvals could delay or prevent the opening of a Brewery in a particular area. In addition, changes in legislation, regulations or administrative interpretation of liquor laws after the opening of a Brewery in a jurisdiction may prevent or hinder the Company's expansion or operations in that jurisdiction or increase operating costs. See "Michigan Law May Limit Growth."

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.

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

9

person. The Company carries liquor liability coverage as part of its existing comprehensive general liability insurance. However, a judgment against the Company under a dram-shop statute in excess of the Company's liability coverage could have a material adverse effect on the Company.

TAXES; SMALL BREWERS EXCISE TAX CREDIT

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. No assurance can be given that the federal government will not reduce or eliminate this credit. 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. 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 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. Other states and municipalities into which the Company may expand also impose excise or other taxes or special charges on alcoholic beverages in varying amounts, which amounts are subject to change. It is possible that in the future the rate of excise taxation could be increased by either the federal or state governments, or both. 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. Future increases in excise taxes on alcoholic beverages, if enacted, could adversely affect the Company.

DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL

The Company's future success will depend in large part upon the continued service of its key management personnel including William F. Rolinski, Gary J. Hewett and Anthony P. Dombrowski. Given the Company's limited operating history, the Company is dependent on its ability to identify, hire, train and motivate qualified personnel necessary to enable it to continue operations. The Company does not have key person life insurance policies on any of its employees. The departure of key employees could have a material adverse effect on the Company's business. The Company's success will also be dependent upon its ability to attract and retain qualified people, including additional management personnel. No assurance can be given that the Company's current employees will continue to work for the Company or that the Company will be able to obtain the services of additional personnel necessary for the Company's growth. To date, the Company has not entered into any employment agreements with its personnel.

NO ASSURANCE AS TO LIQUIDITY ON THE NASDAQ SMALLCAP MARKET

The Company's Common Stock, Class A Warrants and Units are currently listed on the Nasdaq SmallCap Market. There can be no assurance that an active public market will develop or be sustained for the Company's securities. In addition, if the Company's securities do not continue to trade on the Nasdaq SmallCap Market, the securities would become subject to certain rules of the Securities and Exchange Commission relating to "penny stocks." Such rules require broker-dealers to make a suitability determination for purchasers and to receive the purchaser's prior written consent for a purchase transaction, thus restricting the ability to purchase or sell the securities in the open market.

CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS; POSSIBLE REDEMPTION OF WARRANTS

Warrantholders will be able to exercise the Company's Class A Warrants, and the Company will be able to issue the shares of Common Stock underlying such Warrants, only if a current prospectus relating to the Common Stock underlying the Class A Warrants is then in effect and only if the Common Stock is qualified for sale or exempt from qualification under the applicable securities laws of the states in which the warrantholders reside. Although the Company will use its best efforts to (i) maintain the effectiveness of a current prospectus covering the shares of Common Stock underlying the Class A Warrants pursuant to the

10

Securities Act, and (ii) maintain the exemptions or qualifications of such Common Stock under the securities laws of the states in which the Company initially qualified its securities for sale in the initial public offering, there can be no assurance that the Company will be able to do so. The Company will not be able to issue shares of Common Stock to those persons desiring to exercise the Class A Warrants if a prospectus is not kept effective under the Securities Act or if the Common Stock underlying the Class A Warrants is not qualified or exempt from qualification in the state where the holders of the Class A Warrants reside. In such a case, the holders of the Class A Warrants could lose the benefit of owning the Class A Warrants unless they could resell the Class A Warrants. The Class A Warrants are subject to redemption at any time by the Company at $.01 per warrant, on 30 days prior written notice, if the high closing bid price of the Common Stock exceeds $9.00 per share (subject to adjustment) for 20 consecutive trading days. If the Class A Warrants are redeemed, warrantholders will lose their right to exercise the Class A Warrants except during such 30-day redemption period. Redemption of the Class A Warrants could force the holders to exercise the Class A Warrants at a time when it may be disadvantageous for the holders to do so or to sell the Class A Warrants at the then market price or accept the redemption price of $.01 per warrant.

BROKERAGE PARTNERS