1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 1996
REGISTRATION NO. -
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
BEVERAGE WORKS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
CALIFORNIA 2000 95-4550937
(STATE OF JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
9800 SOUTH SEPULVEDA BLVD., SUITE 720 2431 WEST COAST HIGHWAY, SUITE 204
LOS ANGELES, CALIFORNIA 90045 NEWPORT BEACH, CALIFORNIA 92663
(310) 642-5643 (ADDRESS OF PRINCIPAL PLACE
(ADDRESS AND TELEPHONE NUMBER OF BUSINESS OR INTENDED
OF PRINCIPAL EXECUTIVE OFFICES) PRINCIPAL PLACE OF BUSINESS)
LYLE MAUL
9800 SOUTH SEPULVEDA BLVD., SUITE 720
LOS ANGELES, CALIFORNIA 90045
(310) 642-5643
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
CHARLES J. HECHT, ESQ. MITCHELL LAMPERT, ESQ.
HECHT & STECKMAN, P.C. LAMPERT & LAMPERT
60 EAST 42ND STREET, SUITE 5101 10 EAST 40TH STREET, 44TH FLOOR
NEW YORK, NEW YORK 10165-5101 NEW YORK, NEW YORK 10016
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SECURITY(2) OFFERING PRICE FEE
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Units(3)................................................... 1,150,000 $ 8.00 $ 9,200,000 $ 3,172.41
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Common Stock, no par value(4).............................. 1,150,000 -- -- $ 0.00
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Class A Warrants to purchase Common Stock(5)............... 1,150,000 -- -- $ 0.00
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Common Stock, no par value, underlying Class A Warrants
included in the Units.................................... 1,150,000 $ 8.25 $ 9,487,500 $ 3,271.55
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Common Stock, no par value, offered by Selling
Securityholders.......................................... 520,745 $ 8.00 $ 4,165,960 $ 1,436.54
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Class A Warrants to purchase Common Stock offered by
Selling Securityholders.................................. 3,000,000 $ 8.25 $ 24,750,000 $ 8,534.48
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Common Stock, no par value, underlying Class A Warrants
offered by Selling Securityholders(6).................... 3,000,000 -- -- $ 0.00
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Class B Warrants to purchase Common Stock offered by
Selling Securityholders.................................. 35,000 $ 4.50 $ 157,500 $ 54.31
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Common Stock, no par value, underlying Class B Warrants
offered by Selling Securityholders....................... 35,000 $ 4.75 $ 166,250 $ 57.33
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Representative's Unit Purchase Option...................... 100,000 $12.80 $ 1,280,000 $ 441.38
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Common Stock, no par value, in Representative's Unit
Purchase Option.......................................... 100,000 -- -- $ 0.00
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Representative's Warrants in Representative's Unit Purchase
Option................................................... 100,000 -- -- $ 0.00
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Common Stock, no par value, underlying Class G Warrants in
Representative's Unit Purchase Option.................... 100,000 $ 8.25 $ 825,000 $ 284.48
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Total....................................................................................... $ 50,032,210 $ 17,252.48
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(Continued on following page)
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(1) Pursuant to Rule 416 under the Securities Act of 1933, this Registration
Statement covers such additional indeterminate number of shares of Common
Stock as may be issued by reason of adjustments in the number of shares of
Common Stock pursuant to anti-dilution provisions contained in the
Representative's Unit Purchase Option and the Class A Warrant, Class B
Warrant and Representative's Warrant Agreements.
(2) Estimated for purposes of computing the registration fee in accordance with
Rule 457(c) and Rule 457(g) under the Securities Act of 1933.
(3) Each Unit consists of one share of Common Stock and one Class A Warrant
immediately separable upon commencement of trading. Includes 150,000 Units
pursuant to the Representative's over-allotment option.
(4) Includes 150,000 shares of Common Stock issuable pursuant to the
Representative's over-allotment option. These shares are included in the
Units. No additional registration fee is required.
(5) Includes 150,000 Class A Warrants issuable pursuant to the Representative's
over-allotment option. These Class A Warrants are included in the Units. No
additional registration fee is required.
(6) Fee for Class A Warrants offered by Selling Securityholders determined under
Rule 457(g)(1). No additional fee required.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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CROSS REFERENCE TABLE
ITEM INFORMATION REQUIRED IN PROSPECTUS LOCATION OR CAPTION
NO. UNDER FORM SB-2 IN PROSPECTUS
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1 Front of Registration Statement and Outside
Front Cover Page of Prospectus........... Outside Front Cover Page
2 Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front Cover Page; Outside Back Cover
Page
3 Summary Information and Risk Factors....... "Prospectus Summary"; "Risk Factors"
4 Use of Proceeds............................ "Use of Proceeds"
5 Determination of Offering Price............ "Underwriting -- Offering Price"
6 Dilution................................... "Dilution"
7 Selling Security Holders................... Not Applicable
8 Plan of Distribution....................... "Underwriting"
9 Legal Proceedings.......................... "Business -- Legal Proceedings"
10 Directors, Executive Officers, Promoters
and Control Persons...................... "Management"
11 Security Ownership of Certain Beneficial
Owners and Management.................... "Principal Stockholders"
12 Description of Securities.................. "Description of Securities"
13 Interest of Named Experts and Counsel...... "Experts"
14 Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. "Undertakings" (Part II)
15 Organization within Last Five Years........ "Management -- Certain Transactions"
16 Description of Business.................... "Business"
17 Management's Discussion and Analysis or
Plan of Operations....................... "Business -- Management's Discussion and
Analysis of Financial Condition and
Results of Operations"; "Business -- Plan
of Operation/Business Strategy"
18 Description of Property.................... "Business -- Properties"
19 Certain Relationships and Related
Transactions............................. "Management -- Certain Transactions"
20 Market for Common Equity and Related
Stockholder Matters...................... "Risk Factors -- Shares and Class A
Warrants Available for Future
Sale; -- Dividend Policy"; "Description
of Securities"
21 Executive Compensation..................... "Management -- Executive Compensation"
22 Financial Statements....................... "Selected Financial Data"; "Financial
Statements"
23 Changes In and Disagreements with
Accountants on Accounting and Financial
Disclosure............................... Not Applicable
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EXPLANATORY NOTE
This Registration Statement covers the registration of (i) 1,000,000 shares
of Common Stock and 1,000,000 Class A Warrants ("Class A Warrants") to be
offered by the Company, plus 150,000 shares of Common Stock and 150,000 Class A
Warrants available from the Company pursuant to the Underwriters' over-allotment
option (the "Offering"); (ii) 1,000,000 shares of Common Stock, plus 150,000
shares of Common Stock pursuant to the Underwriters' over-allotment option,
issuable upon exercise of the Class A Warrants ("Class A Warrant Shares"); (iii)
3,000,000 Class A Warrants issued by the Company in December 1995 ("Issued Class
A Warrants"); (iv) 3,000,000 shares of Common Stock issuable upon exercise of
the Issued Class A Warrants (the "Issued Class A Warrant Shares"); (v) 520,745
shares of Common Stock previously issued by the Company ("Issued Shares"); (vi)
35,000 Class B Warrants issued by the Company in April 1996 ("Class B
Warrants"); (vii) and 35,000 shares of Common Stock issuable upon exercise of
the Class B Warrants (the "Class B Warrant Shares"). The Issued Shares (the
"Selling Shareholders"), the Issued Class A Warrants and Issued Class A Warrant
Shares (the "Class A Warrantholders"), the Class B Warrants and Class B Warrants
Shares (the "Class B Warrantholders") are being offered by certain holders of
such securities (collectively the "Selling Securityholders") and not for the
account of the Company. See "Certain Transactions" and "Underwriting." Following
the Prospectus included in this Registration Statement are certain pages of the
Prospectus relating to the Issued Shares, the Issued Class A Warrants and Issued
Class A Warrant Shares, the Class B Warrants and Class B Warrant Shares,
including alternate front and back cover pages, an alternate "The Offering"
section of the "Prospectus Summary," and sections entitled "Selling
Securityholders." All other sections of the Prospectus for this Offering, other
than "Underwriting," are used in the Prospectus relating to the Issued Shares,
the Issued Class A Warrants, Issued Class A Warrant Shares, Class B Warrants and
Class B Warrant Shares. All references in this Prospectus to the "Offering" will
be changed to the "Company Offering" in the Prospectus relating to the Issued
Shares, the Issued Class A Warrants and Issued Class A Warrant Shares, and the
Class B Warrants and Class B Warrant Shares. In addition, cross-references in
this Prospectus shall be adjusted to refer to the appropriate alternate
Prospectus pages.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED , 1996
1,000,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND
ONE REDEEMABLE CLASS A WARRANT TO PURCHASE COMMON STOCK
BEVERAGE WORKS, INC.
Beverage Works, Inc., a California corporation (the "Company"), is offering
("Offering") 1,000,000 Units, each Unit consisting of one share ("Shares") of
its common stock, no par value ("Common Stock") and one Class A Warrant to
purchase one share of its Common Stock. Each Unit is immediately separable. See
"Description of Securities." Each Class A Warrant entitles the holder to
purchase one share of the Company's Common Stock at an exercise price of $8.25,
subject to adjustment during the five-year period commencing from the date of
this Prospectus. At any time that the Class A Warrants are exercisable, the
Class A Warrants are also subject to redemption by the Company on not less than
30 days notice at $0.10 per Class A Warrant, provided the closing bid price of
the Common Stock exceeds $15.00 per share for thirty consecutive trading days
ending within fifteen days prior to the date on which notice is sent. This
Prospectus also relates to the shares of Common Stock issuable upon exercise of
the Class A Warrants. See "Description of Securities." Prior to the Offering,
there has been no public market for the Common Stock or the Class A Warrants of
the Company. The price and other terms of the Offering have been determined by
negotiation between the Company and State Capital Markets Corp., as
Representative of the Underwriters. See "Underwriting."
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK
FACTORS" AND
"DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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ESTIMATED UNDERWRITING
MAXIMUM DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(2) COMPANY(3)
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Per Unit.................................. $8.00 $0.80 $7.20
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Total(1).................................. $8,000,000.00 $800,000.00 $7,200,000.00
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(1) The Company has granted to the Representative a 30-day option to purchase up
to 150,000 additional Units solely to cover over-allotments, if any. If the
Representative exercises its option in full, the Price to Public will total
$9,200,000, Underwriting Discounts and Commissions will be $920,000 and
Proceeds to Company will be $8,280,000. See "Underwriting."
(2) The Company has agreed to pay the Representative a non-accountable expense
allowance equal to 3% of the gross proceeds of the Offering to the Company.
The Company will also sell to the Representative 100,000 units, each unit
consisting of one share of Common Stock and one Representative's Warrant at
a price per unit equal to 160% of the initial public offering price. The
Company also has agreed to indemnify the Underwriters for certain
liabilities, including liabilities under the Securities Act of 1933, as
amended ("1933 Act"). See "Underwriting."
(3) Before deduction of expenses payable by the Company estimated at $569,752.
The Units are offered by the several Underwriters named herein when, as and
if delivered to and accepted by the Underwriters and subject to their right to
reject any order in whole or in part. It is expected that delivery of
certificates representing the Units will be made against payment therefor on or
about , 1996.
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STATE CAPITAL MARKETS CORP.
The date of this Prospectus is , 1996
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The Company is not a reporting company under the Securities Exchange Act of
1934. The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent certified public
accountants and such other reports as the Company deems appropriate.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety and should be read in
conjunction with the more detailed information and Financial Statements,
including the Notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, all share and financial information in this Prospectus
assumes no exercise of the Representative's over-allotment option to purchase up
to 150,000 shares of Common Stock, no exercise of any warrants previously issued
by the Company or the Class A Warrants made in this Offering, no exercise of the
Representative's Unit Purchase Option to purchase up to 100,000 shares of Common
Stock and 100,000 Representative's Warrants, no issuance of Shares to Orange
Empire Brewing Company shareholders under certain agreements to issue shares
based on specific contingencies and no exercise of stock options by employees
and others to purchase up to 2,433,500 shares of Common Stock. See "The Company"
"Management -- Executive Compensation," "Description of Securities,"
"Management -- Incentive Stock Option Plan," "Management -- Nonqualified Stock
Option Plan" and "Underwriting."
THE COMPANY
Beverage Works, Inc. ("the Company") was formed on August 2, 1995 as a
California corporation, for the purpose of acquiring and operating craft
breweries. Craft breweries are mostly small to medium sized independent brewing
companies that generally use only traditional brewing process and ingredients.
These include regional specialty brewers, micro-brewers and brewpub restaurants.
The Company's strategy is to purchase craft breweries and to transform them into
a professionally managed, integrated producer & marketer of high quality craft
beers. Craft beers are enjoying a substantial increase in popularity in the
United States. Where appropriate to its strategy, the Company will acquire and
operate other specialty beverage companies.
As soon as practicable after the date of this Prospectus, the Company will
have acquired Heritage Brewing Co. of Lake Elsinore, California, and Orange
Empire Brewing Company, the parent of Riverside Brewing Co. of Riverside,
California and has become a majority partner with Prost Partners L.P. in
BWI-Prost Partners, doing business as St. Stan's Brewing Company of Modesto,
California (collectively the "Breweries"). The Company has entered into a
reciprocal production and marketing agreement with Chicago Brewing Company of
Chicago, Illinois. The Company will market a total of 26 different beers, a
number of which have won awards, utilizing a combined brewing capacity of
approximately 62,000 barrels per year. Where an acquisition is not appropriate
or available, the Company will enter into mutual marketing and production
agreements with other craft breweries.
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THE OFFERING
Securities Offered............... 1,000,000 Units, each Unit consisting of
one share of Common Stock, no par value
(the "Shares") and one Class A Warrant to
purchase one share of Common Stock at an
exercise price of $8.25 subject to
adjustment. Each Unit is immediately
separable.
Price per Unit................... $8.00
Common Stock and Class A Warrants
Outstanding Prior to the
Offering(1).................... 2,767,085 shares and 3,000,000 Class A
Warrants
Common Stock to be Outstanding
Upon Completion of the
Offering(1)(2)................. 3,767,085 shares and 4,000,000 Class A
Warrants
Use of Proceeds.................. Acquisition of Orange Empire Brewing
Company, Formation of St. Stan's
Partnership; Expansion of product lines;
Marketing and sales; Repayment of notes and
other indebtedness; Acquisition of capital
equipment; and Working capital. See "Use of
Proceeds."
Proposed Nasdaq Common Stock
Symbol...........................
Proposed Nasdaq Class A
Warrant Symbol.................
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(1) Includes 309,222 shares of Common Stock issuable to shareholders and
debtholders of Orange Empire pursuant to the Share Purchase Agreement and
other agreements.
(2) Excludes 150,000 shares and 150,000 Class A Warrants issuable pursuant to
the Underwriter's overallotment option.
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SUMMARY OF HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following summary of financial data is derived from and should be read
in conjunction with the historical and pro forma financial statements of the
Company, Orange Empire Brewing Company and the St. Stan's Brewery and Brewpub
Operations, as listed on the "Index to Financial Statements" included elsewhere
in this Prospectus. See also "Selected Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
HISTORICAL PRO FORMA
---------------------------------- -----------------------------
FOUR FOUR
MONTHS ENDED AUGUST 2, 1995 TO MONTHS ENDED YEAR ENDED
APRIL 30, DECEMBER 31, APRIL 30, DECEMBER 31,
1996 1995 1996 1995
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(UNAUDITED) (UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS
DATA:
Net sales................ $ 100,076 $ 44,810 $1,822,611 $ 4,975,962
========== ========== ========== ==========
Net loss................. $ (641,484) $ (490,984) $ (925,690) $(1,806,144)
========== ========== ========== ==========
Net loss per share....... $ ( 0.21) $ (0.16) $ (0.21) $ (0.41)
========== ========== ========== ==========
Common Shares and
equivalents
outstanding......... 3,094,874 3,094,874 4,434,096 4,434,096
========== ========== ========== ==========
HISTORICAL
------------------------------- PRO FORMA
DECEMBER 31, --------------
1995 APRIL 30, 1996
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APRIL 30, 1996 (UNAUDITED)
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(UNAUDITED)
Working Capital............................ $ 326,525 $ 822,381 $ 4,160,507
Total Assets............................... 2,307,565 2,455,131 15,081,186
Total Liabilities.......................... 1,128,332 1,003,244 6,292,598
Stockholders' equity....................... 1,179,233 1,451,887 8,788,588
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RISK FACTORS
INVESTMENT IN THE COMPANY IS HIGHLY SPECULATIVE AND INVOLVES A HIGH DEGREE
OF RISK. PRIOR TO THE PURCHASE OF ANY UNITS, A PROSPECTIVE INVESTOR SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS, INCLUDING THE FINANCIAL STATEMENTS AND NOTES
THERETO CONTAINED ELSEWHERE HEREIN:
Absence of Combined Operating History and Future Combined Operating
Results. Simultaneously with the completion of the Offering, the Company will
consummate and finalize the transactions with the Breweries. Although each of
the Breweries has been in business for some time, the Company has no operating
history and there can be no assurance that the Company will be able to
successfully integrate the Breweries, operations or assets of the Breweries or
of any other businesses it may subsequently acquire. See "Business --
Breweries." Furthermore, results of operations of the Breweries for the year
ended December 31, 1995 and four months ended April 30, 1996, which are
reflected in the historical and pro forma financial statements included
elsewhere herein, will likely significantly change as the Breweries are
integrated into the Company's strategy. There can be no assurance that the
actual results of operations will not reflect adverse developments in revenues,
expenses or net loss of any of the Breweries. There can be no assurance that,
following any transaction, the Company will be able to operate the Breweries on
a profitable basis.
Determination of Offering Price. The public Offering price of the Units
has been determined by negotiation between the Company and the Representative
and is not necessarily related to the Company's asset value, net worth or other
established criteria of value. See "Underwriting."
No Prior Trading Market. Prior to this Offering, there has been no public
market for the Company's Common Stock or Class A Warrants and there can be no
assurance that an active market will develop or be sustained. The Company
believes factors such as announcements of financial condition, liquidity,
results of operations and new products by the Company and its competitors may
cause the market price of the Common Stock and Class A Warrants to fluctuate,
perhaps substantially. In addition, in recent years the stock market in general,
and the securities of first time public issuers in particular, have experienced
extreme price fluctuations. These broad market and industry fluctuations may
adversely affect the market price of the Company's Common Stock and Class A
Warrants.
Ability to Manage Growth; Expansion Into New Markets. The Company's future
success will depend in part on its ability to manage potentially rapid growth as
it attempts to increase its production capacity and broaden distribution of its
products to new markets. In attempting to expand distribution, the Company will
be required to establish and manage relationships with distributors, retailers
and consumers in numerous new markets. Consumer tastes may vary from market to
market and, therefore, there can be no assurance that the Company will be
successful in entering new markets or in maintaining its share of existing
markets. Continued expansion of the Company's business will require recruiting
and hiring several additional key employees, such as sales and brewery managers,
and will require further upgrading of the Company's information systems. There
can be no assurance that the Company will be able to hire such persons when
needed or on favorable terms, that any such new employees will be successfully
assimilated into the Company's management, or that any such information systems
upgrade would be successfully accomplished.
Increased Competition for Specialty Beers. The beer industry is highly
competitive. Although there is an overall trend of declining beer sales in the
United States, domestic sales of craft beers have increased at an average annual
rate of 39% from 1990 through 1994, and in 1995 sales for the U.S. craft-brewing
industry grew by 50% (The New Brewer, May-June, 1996). The Company expects
competition in the craft segment of the beer industry to increase as new craft
brewers emerge and existing craft brewers expand their capacity. In addition,
the large national domestic brewers are expected to increase efforts to position
products in the craft brew category. Although the sale and consumption of craft
brewed beer has increased dramatically in recent years, there can be no
assurance that the demand for craft brewed beer will continue to grow at present
rates or at all. Many of the Company's competitors, including national and
regional domestic brewers, foreign brewers and more established craft and
microbrewers, have greater financial, production, distribution and marketing
resources than the Company.
6
11
Acquisitions; Need for Capital; Construction of New Regional
Breweries. The Company's expansion strategy involves both acquisitions and
internal growth. There can be no assurance that suitable acquisition candidates
will be found, that acquisitions will be consummated on favorable terms or that
any such acquisitions will be successfully integrated into the Company's
operations. The Company intends to finance future acquisitions, if any, by using
cash and debt or equity securities, including shares of its Common Stock. The
Company will need additional debt or equity financing to implement its
acquisition strategy. There can be no assurance that the Company will be able to
obtain financing for such purposes on terms acceptable to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Acquisitions."
Successful expansion of the Company's production capacity will require careful
management of various factors associated with the construction of new, or the
expansion of existing, facilities, including site selection, local land use
requirements, adequacy of municipal infrastructure, environmental uncertainties,
possible cost estimation errors or overruns, construction delays, the
availability or cost of financing and other factors, many of which are beyond
the Company's control. The Company believes it will also be faced with various
organizational challenges typically associated with commissioning new brewing
facilities and increasing production to maximum designed capacity levels, as
well as the challenges of establishing and maintaining management control over
numerous geographically separated facilities.
St. Stan's Brewing Company Partnership. BWI-St. Stan's, Inc. ("BWISS"), a
wholly-owned subsidiary of the Company has entered into a partnership agreement
with Prost Partners, L.P. ("Prost") doing business as St. Stan's Brewing
Company. The partnership is named BWI-Prost Partners ("Partnership"). In
addition to the initial capital contribution to the Partnership, which includes
assumption of approximately $1,136,000 of Prost's debt, BWISS is required to
contribute to the Partnership approximately $1,159,000 within the next 36
months. In the event BWISS fails to make such payments, Prost may acquire
BWISS's interest in the Partnership which would likely be for a sum
substantially less than the amount contributed by BWISS. BWISS may buy-out
Prost's interest in the Partnership by paying $2,205,000 within three years,
plus any of the approximately $1,159,000 required additional capital
contribution not made at the date of the buy-out (the "Option"). By making such
payment, BWISS will acquire all of Prost's interest in the Partnership. If BWISS
does not exercise the Option within three years, Prost has the first right to
acquire BWISS's interest in the Partnership based on the appraised value of the
Partnership's tangible assets plus a predetermined formula of the Partnership's
earnings. If Prost does not exercise its right of first refusal, BWISS shall
have the right to buy-out Prost on the same terms. If neither Prost or BWISS
exercises its right to buy-out the other party, the Partnership shall be
dissolved. There can be no assurance that the Company or BWISS will be able to
make the Option payment or otherwise acquire Prost's interest in the
Partnership. In such case, the assets of the Partnership will be sold and the
return to BWISS will likely be substantially less than its contribution. In
addition, the Partnership will obtain nearly all of its future working capital
from BWISS, unless generated from other sales. The Partnership Agreement
provides for either partner to loan money to the Partnership. However, repayment
of such loans shall be made only from the assets of the Partnership and the
lending partner may not seek repayment from the other partner. As such,
repayment of any advance made by BWISS to the Partnership, which will likely be
substantial, is subject to the Partnership's assets exceeding its other
liabilities.
Product Liability Risk. The Company's 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 occurrence of such a problem could result in a costly product recall and
serious damage to the Company's reputation for product quality. There is no
assurance that any such contamination will not occur and, if it does, the
Company's business will likely be materially and adversely affected. Although
the breweries have product liability insurance, such insurance may not fully
cover losses that may be incurred from such contamination and may have a
material adverse effect on the Company because of the potential impact on market
share and other factors. 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.
7
12
Government Regulation; Taxation. The manufacture and sale of alcoholic
beverages is regulated by both federal and state authorities. Brewery, wholesale
and retail operations require various federal, state and local licenses, permits
and approvals. Violation of such regulations can result in the loss or
revocation of existing licenses. The loss or revocation of any existing
licenses, permits or approvals, failure to obtain any additional or new
licenses, permits or approvals or the failure to obtain approval for the
transfer of any existing permits or licenses could have a material adverse
effect on the ability of the Company to conduct its business. Because of the
many and various state and federal licensing and permitting requirements, there
is a risk that one or more regulatory authorities could determine that the
Company has not complied with applicable licensing or permitting regulations or
does not maintain the approvals necessary for it to conduct business within
their jurisdictions. There can be no assurance that any such regulatory action
would not have a material adverse effect upon the Company or its operating
results. Congress and many state legislatures are considering various proposals
to impose additional excise taxes on the production and sale of alcoholic
beverages including beer. Any increase in the taxes imposed on beer can be
expected to have an adverse impact on overall sales of such products. Each of
the Breweries enjoy the benefit of the small brewers exemption from the $18 per
barrel federal excise tax. See "Business -- Taxation." There is no assurance
that federal regulators will not consider the Company as a single brewer and
that it will not lose the small brewers exemption.
Public Attitudes. The alcoholic beverage industry has become the subject
of considerable societal and political attention in recent years due to
increasing public concern over alcohol-related social problems, including drunk
driving, underage drinking, and health consequences from the misuse of alcohol,
including alcoholism. As an outgrowth of these concerns, the possibility exists
that advertising by beer producers could be restricted, that additional
cautionary labeling or packaging requirements might be imposed, or that there
may be renewed efforts to impose increased excise or other taxes on beer sold in
the United States. If beer consumption in general were to come into disfavor
among domestic consumers, or if the domestic beer industry were subjected to
significant additional governmental regulations, the Company's business could be
materially adversely affected.
Dependence on Management. The Company is dependent on the efforts of its
management. See "Management." As of the date of this Prospectus, the Company has
obtained key person life insurance, in an amount of $1 million each, covering
its chief executive officer and chief financial officer. However, the Company
cannot determine if the coverage is sufficient to offset the financial loss to
the Company in the event of the loss of such officers.
History of Losses, Going Concern Considerations. The Company, since its
inception, and its acquisition target, Orange Empire Brewing Company and its
proposed joint venture partner, Prost Partners, L.P., doing business as St.
Stan's Brewing Company, have, and continue to incur, substantial losses from
operations. The report of the Company's certified public accountants includes an
explanatory paragraph which expresses substantial doubt concerning the Company's
and Orange Empire Brewing Company's ability to continue as a going concern.
Management's plans are described elsewhere in this prospectus. See "Managements
Discussion and Analysis of Financial Condition and Results of Operations." There
are no assurances that Management's plans can be effected within a reasonable
period of time.
Dependence on Distributors. The Company sells its products to independent
distributors for distribution to retailers and ultimately consumers. Sustained
growth will require it to maintain such relationships and possibly enter into
agreements with additional distributors. See "Business -- Distribution." No
assurance can be given that the Company will be able to maintain or secure
additional distributors on terms favorable to the Company. The Company's
distribution agreements are generally terminable by the distributor on short
notice. While these distribution agreements contain provisions regarding the
Company's enforcement and termination rights, some state laws prohibit the
Company from exercising these contractual rights. The Company's ability to
maintain existing distribution agreements or enter new distribution agreements
may be adversely affected by the fact that many distributors are reliant on one
of the major beer producers for a large percentage of their revenue and,
therefore, they may be influenced by such producers.
Principal Shareholder in a Position to Control the Company. After the
consummation of this Offering, Adam B. Wachtel will own more than thirty-five
percent (35%) of the Company's outstanding Common Stock (thirty-four percent
(34%) if the over-allotment is exercised in full). (See "Dilution" and "Manage-
8
13
ment"). As a result of this ownership of Common Stock, Mr. Wachtel will be able
to effectively control the Company. The Company has sold warrants to Imafina,
S.A., a Swiss investment management company, of which Mr. Wachtel is a
consultant/director, to purchase 2,810,000 shares of Common Stock at $8.25 per
share. Imafina, S.A. currently owns 2,710,000 warrants and, if it were to
exercise its rights to purchase 2,710,000 shares of Common Stock, it would, as a
result of its ownership interest, be in a position to elect a majority of the
Company's directors. To the Company's knowledge, neither Mr. Wachtel nor any of
the officers, directors or principals of Imafina, S.A. has experience in owning,
operating or marketing the products of specialty craft breweries.
Shares and Class A Warrants Eligible For Future Sale. The 1,000,000 Shares
and Class A Warrants being sold in the Offering (without giving effect to any
exercise of the over-allotment option) will be freely tradeable unless acquired
by affiliates of the Company. The market price of the Common Stock and Class A
Warrants could be adversely affected by the sale of substantial amounts of
Common Stock and Class A Warrants in the public market following this Offering.
Of the Company's 3,767,085 shares of Common Stock that will be outstanding upon
completion of this Offering, 2,246,340 shares are "restricted securities" under
Rule 144 promulgated under the Securities Act of 1933, as amended (the
"Securities Act"). Ordinarily, under Rule 144, a person who has held restricted
securities for a period of two years may, every three months, sell in ordinary
brokerage transactions or in transactions directly with a market maker an amount
equal to the greater of one percent of the Company's then-outstanding Common
Stock or the average weekly trading volume during the four calendar weeks prior
to such sale. Rule 144 also permits the sale of shares without any quantity
limitations by a person who is not an affiliate of the Company and has satisfied
a three-year holding period. Of the 2,246,340 restricted shares, executive
officers and directors hold an aggregate of 1,642,370 shares. Of the remaining
restricted securities, shares will be eligible for sale under Rule 144
within days from the date of this Prospectus. Sale of Common Stock pursuant
to Rule 144 may have a depressive effect on the market price of the Common
Stock.
The Company has reserved 2,433,500 shares of Common Stock for issuance to
key employees and officers, pursuant to the Company's Nonqualified Stock Option
Plan and Incentive Stock Option Plan, and options for 933,500 and 955,000,
respectively of such shares are outstanding as of the date of this Prospectus.
See "Management -- Nonqualified Stock Option Plan" and " -- Incentive Stock
Option Plan." The Company has further reserved 3,000,000 shares of Common Stock
issuable upon exercise of the Issued Class A Warrants, 35,000 shares of Common
Stock for issuable upon exercise of the Class B Warrants, 200,000 shares of
Common Stock issuable upon the Representatives exercise of the Unit Purchase
Option and Representative's Warrants, 80,583 shares of Common Stock issuable
upon exercise of other outstanding options and warrants, and 130,000 shares for
issuance to certain former stockholders of Orange Empire Brewing Company,
subject to Riverside Brewing Company's achievement of certain financial goals.
Other than the Company's $8.25 warrants, substantially all of these options and
warrants have an exercise price that is substantially less than the offering
price of the Common Stock in this Offering. The existence of such options and
warrants may hinder future equity financing by the Company. Further, the holders
of such warrants and options may exercise them at a time when the Company would
otherwise be able to obtain additional equity capital on terms more favorable to
the Company. See "Description of Securities" and "Underwriting."
Holders of approximately 13% of the shares of Common Stock to be
outstanding immediately following completion of this Offering (or just under 13%
if the over-allotment option is exercised in full) which are registered along
with the Common Stock have agreed with the Company and the Underwriters not to
sell or otherwise dispose of any such shares of Common Stock or securities
convertible into or exercisable for shares of Common Stock for a period of 13
months after the date of this Prospectus without the prior written consent of
the Representative of the managing Underwriter. Upon expiration of this period
or if consent is given, all such shares shall be freely transferable and may be
sold. 30,000 shares of Common Stock (less than 1% of outstanding shares after
the Offering) previously issued will be tradeable 120 days after the date of
this Prospectus. See "Description of Securities -- Registration Rights." The
Company expects that it will issue shares of Common Stock in connection with
future acquisitions. Additional shares of Common Stock, including shares
issuable upon exercise of warrants, will also become eligible for sale in the
public market from time to time in the future. See "Business-Plan of
Operation/Business Strategy -- Acquisitions."
9
14
Dividend Policy. The Company has never paid dividends and does not
anticipate paying dividends in the foreseeable future. See "Dividend Policy."
The Company intends to retain all of its earnings in the business and does not
anticipate paying any dividends in the foreseeable future.
Preferred Stock Authorized. The Company's Articles of Incorporation
authorizes the issuance of 5,000,000 shares or preferred stock which rights,
preferences and privileges are to be determined by the Company's Board of
Directors. Although the Company has no intention at the present to issue any
preferred shares, the Company may issue and sell preferred shares which will
likely have dividend, distribution and liquidation preferences senior to common
shareholders and voting rights which may dilute the common shareholder voting
rights. See "Description of Securities -- Preferred Stock."
Effect of Anti-Takeover Provisions. Certain provisions of the Company's
Articles of Incorporation, By-Laws and certain executive employment agreements
could, together or separately, discourage potential acquisition proposals, delay
or prevent a change in control of the Company, and limit the price that certain
investors might be willing to pay in the future for the Company's Common Stock.
In addition, the provisions of certain executive employment agreements and stock
option agreements may result in economic benefits to the holders thereof upon
the occurrence of a change in control. See "Management -- Employment
Agreements," " -- Nonqualified Stock Option Plan," and " -- Incentive Stock
Option Plan."
Part of Net Proceeds From This Offering Not Specifically
Allocated. Approximately 24% of the net proceeds which are to be derived from
this offering are allocated to working capital reserves, and their uses have not
been specifically identified by management. These proceeds will be applied to
cover negative cash flow from operations, and as business exigencies arise, none
of which management may presently anticipate. Decisions as to the application of
these funds will be made without shareholder input; thus, investors in this
offering will be entrusting this portion of their funds to management without
any commitment as to their use. See "Use of Proceeds."
Business and Revenues of Company are Seasonal in Nature. The Company's
business is seasonal in nature and is subject to economic fluctuations. As a
result of this seasonality, the Breweries have historically reported lower sales
and larger losses in the first and second quarters and higher sales and smaller
losses in the third and fourth quarters. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Inability to Exercise Warrants May Result In Loss of Value In
Warrants. The Company must have an effective registration statement on file
with the Commission before any Warrant may be exercised or redeemed. It is
possible that the Company may be unable to cause a registration statement
covering the Common Stock underlying the Warrants to be effective. It is also
possible that the Warrants could be acquired by persons residing in states where
the Company is unable to qualify the Common Stock underlying the Warrants for
sale. In either event the Warrants may expire unexercised, which would result in
the holders losing all of the value of the Warrants. See "Description of
Securities -- Class A Warrants."
Immediate and Substantial Dilution Will Be Suffered By Investors In This
Offering. Purchasers of Units will suffer an immediate, substantial dilution of
approximately 85% in the net tangible book value of their shares of Common Stock
since the purchase price of the Units substantially exceeds the current tangible
book value per share of Common Stock. See "Dilution."
Disclosure Relating to Penny Stocks. The Securities may be subject to the
"penny stock rules" adopted pursuant to Section 15 (g) of the Securities
Exchange Act of 1934. The "penny stock rules" apply to companies whose common
stock trades at less than $5.00 per share or which have a tangible net worth of
less than $5,000,000 ($2,000,000 if the Company has been operating for three or
more years). Such rules require, among other things, that brokers who trade
"penny stock" to persons other than "established customers" complete certain
documentation, make suitability inquiries of investors and provide investors
with certain information concerning trading in the security, including a risk
disclosure document and quote information under certain circumstances. Many
brokers have decided not to trade "penny stocks" because of the requirements of
the penny stock rules and, as a result, the number of broker-dealers willing to
act as market makers in such securities is limited.
10
15
Limited Protection For Intangible Assets; Realization of Goodwill. The
Company has limited protection for its intangible assets, such as tradename or
trademark protection. Thus, the Company is relying upon common law protection
for these assets, including the trademarks for many of the Breweries' products.
There is no assurance the Company would be successful in any suit to protect its
intangible assets. Any loss of the exclusive right to the use of these assets
would result in increased competition to the Company and have a negative effect
on cash flows and revenues. See "Business -- Trademarks." In addition, the
Company will have Substantial goodwill relating to its acquisition of Orange
Empire Brewing Company and future acquisitions. There can be no assurances that
the Company will be able to realize such goodwill through future operations.
11
16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
April 30, 1996, (i) on a historical basis (unaudited) and (ii) on a pro forma
condensed consolidated basis (unaudited) to reflect: (A) the Offering (based on
an initial Offering price of $8.00 per unit), (B) the issuance of 247,479 shares
of Common Stock to acquire Orange Empire Brewing Company (which includes the
assumption of certain indebtedness) valued at $1,286,890, the payment of
$301,000 in cash and the issuance of 51,743 shares of Common Stock in
satisfaction of $824,466 of indebtedness and the issuance of 10,000 shares
pursuant to a management agreement in connection with the related agreements,
(C) the assumption of $676,836 and the related partial repayment of $176,836 of
certain notes payable, the assumption and full repayment of notes payable to
related parties totaling $459,153, and to establish minority interest of
$346,819 and distribution payable of $1,159,011 in connection with the
consummation of the BWI-Prost Partners', (D) the establishment and repayment of
$500,000 of Bridge Notes used for working capital purposes, (E) the
establishment and repayment of $175,000 of a note payable to related party used
for working capital purposes, (F) the establishment and repayment of advances up
to $150,000 from a related party used for working capital purposes, and (G) the
issuance of 30,000 shares of Common Stock under purchase units for $150,000 used
for working capital purposes. The information with the consummation of the
BWI-Prost Partners'. The information set forth in the following table should be
read in conjunction with the financial statements and notes thereto, listed on
the "Index to Financial Statements" elsewhere in this Prospectus and the
discussion set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
APRIL 30, 1996
------------------------
ACTUAL AS ADJUSTED
---------- -----------
Short-term debt...................................................... $ 131,524 $ 467,302
========= ==========
Long-term obligations................................................ $ 385,086 $ 3,194,428
---------- -----------
Minority interest.................................................... -- 346,819
---------- -----------
Stockholders' equity:
Preferred Stock, no par value;
5,000,000 shares authorized; no
shares issued or outstanding.................................... -- --
Common Stock, no par value;
20,000,000 shares authorized;
2,427,863 shares issued and outstanding
(and 3,767,085 shares as adjusted)(1)........................... 2,311,701 10,796,586
Accumulated deficit................................................ (1,132,468) (2,007,998)
---------- -----------
Net stockholders' equity................................... 1,179,233 8,788,588
---------- -----------
Total capitalization....................................... $1,564,319 $12,329,835
========= ==========
- ---------------
(1) Excludes 1,500,000 shares of Common Stock reserved for future issuance under
the Company's Incentive Stock Option Plan. See "Management -- Incentive
Stock Option Plan." Excludes 933,500 shares of Common Stock reserved for
future issuance under the Company's Non-Qualified Stock Option Plan. See
"Management -- Nonqualified Stock Option Plan." Excludes 130,000 shares of
Common Stock reserved for future issuance under the earnout provisions and
50,000 shares of Common Stock reserved for issuance in the debt repayment
provisions in the acquisition of Orange Empire Brewing Company. See
"Business -- Breweries -- Riverside Brewing Company." Excludes 3,000,000
shares of Common Stock reserved for issuance under certain warrant
agreements, 15,583 shares of Common Stock reserved for issuance under
options to legal counsel, 35,000 shares of Common Stock reserved for
issuance under the Bridge Units, 15,000 shares of Common Stock reserved for
issuance under the warrants pursuant to the purchase units sold in the
private placement, and 1,000,000 shares of Common Stock reserved for
issuance under the warrants included in this Offering. Also excludes up to
150,000 units reserved for issuance under the Underwriter overallotment and
200,000 Shares for issuance under the Representative Unit Purchase Option.
See "Underwriting."
12
17
DILUTION
The net tangible book value of the Company on a historical cost basis as of
April 30, 1996 was approximately $1,060,551, or $0.44 per share of Common Stock.
Net tangible book value per share represents the amount of total tangible assets
less total liabilities, divided by the number of shares of Common Stock then
outstanding. After giving effect to (A) the sale by the Company of the 1,000,000
Units offered by the Company herein (after deduction of underwriting discounts
and commissions, and estimated offering expenses payable by the Company), (B)
the issuance of 247,479 shares of Common Stock to acquire Orange Empire Brewing
Company, the issuance of 51,743 shares of Common Stock in satisfaction of
$486,612 of indebtedness and the issuance of 10,000 shares pursuant to a
management agreement in connection with the related agreements, and (C) the
issuance of 30,000 shares of Common Stock under purchase units for $150,000. The
Company's pro forma tangible book value at April 30, 1996 would have been
$4,458,647 (which consists of pro forma stockholders' equity of $8,788,588 less
goodwill and other intangible assets of $4,233,543 and less other assets of
$96,398), or $1.18 per share of Common Stock. This represents an immediate
increase in net tangible book value of $0.74 per share to existing stockholders
and an immediate dilution of $6.82 per share to new public investors. The
following table illustrates the per share dilution:
Initial public offering price per share.................................... $ 8.00
Net tangible book value per share before offering........................ $ 0.44
Increase in net tangible book value per share attributable to new
investors............................................................. 0.74
-----
Pro forma net tangible book value per share after offering................. 1.18
-----
Dilution per share to new public investors................................. $ 6.82
=====
The following table summarizes, on a pro forma basis as of April 30, 1996,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the existing and other stockholders and by new public investors purchasing
shares in this Offering (before deduction of underwriting discounts and
commissions and estimated offering expense payable by the Company):
SHARES PURCHASED TOTAL CONSIDERATIONS AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
Existing stockholders......................... 2,427,863 64.4% $ 2,523,000 20.5% $1.04
New public investors.......................... 1,000,000 26.6 8,000,000 65.2 8.00
Stockholders as a result of acquisition....... 309,222 8.2 1,608,000 13.1 5.20
Stockholders in second private placement...... 30,000 0.8 150,000 1.2 5.00
--------- ----- ----------- -----
Total....................................... 3,767,085 100.0% $12,281,000 100.0%
========= ===== =========== =====
The foregoing computations assume no exercise of stock options or warrants
after April 30, 1996. Accordingly it excludes 1,500,000 shares of Common Stock
reserved for future issuance under the Company's Incentive Stock Option Plan.
See "Management -- Incentive Stock Option Plan." Excludes 933,500 shares of
Common Stock reserved for future issuance under the Company's Non-Qualified
Stock Option Plan. See "Management -- Nonqualified Stock Option Plan." Excludes
130,000 shares of Common Stock reserved for future issuance under the earnout
provisions, and 50,000 shares of Common Stock reserved for issuance under the
debt repayment provisions under the acquisition of Orange Empire Brewing
Company. See "Business -- Breweries." Excludes 3,000,000 shares of Common Stock
reserved for issuance upon exercise of previously issued warrants, 15,583 shares
of Common Stock reserved for issuance under options to legal counsel, 35,000
shares of Common Stock reserved for issuance under the Class B Warrants, 200,000
shares reserved for issuance under the Representative's Unit Purchase Option,
15,000 shares of Common Stock reserved for issuance under the warrants pursuant
to the purchase units sold in the Private Placement, and 1,000,000 shares of
common stock reserved for issuance under the warrants included in this Offering.
Also excludes up to 150,000 units reserved for issuance under the
Representative's overallotment. See "Underwriting."
13
18
USE OF PROCEEDS
The net proceeds of this offering, after deduction of underwriting
commissions and offering expenses, will be approximately $6,630,248. The Company
expects to apply the net proceeds of the offering as follows:
AMOUNT PERCENT
---------- -------
BWI-Prost Partners Partnership(1)........................... $ 636,000 10%
Riverside Acquisition(2).................................... 451,000 7
Sales and Marketing(3)...................................... 1,000,000 15
Notes Payable(4............................................. 500,000 7
Short-Term Line of Credit(5)................................ 175,000 3
Accounts Payable............................................ 500,000 7
Property and Equipment(6)................................... 800,000 12
Expansion of Product Line(7)................................ 1,000,000 15
Working Capital............................................. 1,568,248 24
---------- ----
Total............................................. $6,630,248 100%
========== ====
The Company anticipates that the proceeds of this offering will be
sufficient to finance its working capital requirements for at least 12 months
following this offering. Pending application, the net proceeds will be invested
in deposits with banks, investment grade securities and short-term income
producing investments, including U.S. Treasury securities and other money market
instruments. In the event of the exercise of the Representative's over-allotment
option, the net proceeds from such exercise will also be applied to working
capital.
- ---------------
(1) See "Business -- Breweries-St. Stan's Brewing Company." Approximately
$176,000 will be used to pay a portion of the Owens Financial Note down to a
principal balance of $500,000 in accordance with the agreement with Owens
Financial to refinance such note. Approximately $460,000 will be paid to
Romy Angle as repayment of advances made by her to Prost Partners. At the
consummation of the BWI-Prost Partners Partnership, Ms. Angle will become
the Company's Purchasing and Restaurant Manager.
(2) See "Business -- Breweries -- Riverside Brewing Company." Up to $150,000 of
non-interest bearing advances will be paid to Michael Hagerman, a former
shareholder of RBC, for working capital provided to RBC and $301,000 will be
paid to Orange Empire Brewing Company debtholders as part of refinancing
approximately $644,000 of Orange Empire debts. The advances were used for
the Company's working capital needs.
(3) The net proceeds allocated to marketing and sales are expected to be applied
towards the promotion of the Breweries' main brands in their respective key
markets over the next 18 months. The proceeds are intended to be applied to
product development, market research, point of sale materials, event
participation and sponsorships, paid media advertising, post-offs,
distributor incentive programs and sales person incentive programs.
(4) This is a secured promissory note in the aggregate principal amount of
$500,000. The note accrues interest on the principal amount at the rate of
eighteen percent (18%) per annum and matures on December 31, 1996. The
proceeds of the note was used for working capital purposes.
(5) Up to $175,000 will be paid to Brewery Leasing Company, a company controlled
by Michael Hagerman, under a line of credit with the Company. The line of
credit, the proceeds of which were used for the Company's working capital
needs, provides for interest at 11% with a maturity date of June 30, 1997.
(6) The net proceeds allocated to property and equipment in the next 18 months
are expected to be applied towards the expansion and improvement of the
Company's brewing capacity.
(7) Expansion of the Company's product lines may be by one or more means,
including internal development, joint ventures, strategic alliances, and
acquisition of product lines or complementary businesses. See
"Business -- Plan of Operations/Business Strategy."
14
19
SELECTED FINANCIAL DATA
The following selected financial data is derived from and should be read in
conjunction with the historical and pro forma financial statements of the
Company, Orange Empire Brewing Company and the St. Stan's Brewery and Brewpub
Operations, as listed on the "Index to Financial Statements" included elsewhere
in this Prospectus. The historical statement of operations data for the period
August 2, 1995 to December 31, 1995, and the balance sheet data as of December
31, 1995, are derived from the consolidated financial statements of the Company
which have been audited by Corbin & Wertz, independent certified public
accountants, whose report thereon is included elsewhere herein. The historical
statements of operations data for the four months ended April 30, 1996, and the
historical balance sheet data as of April 30, 1996 are unaudited, and have been
derived from the Company's books and records. Such unaudited data has been
prepared on the same basis as the audited financial data and, in the opinion of
management, reflects all adjustments (consisting only of normally recurring
adjustments) which are necessary for a fair presentation in accordance with
Generally Accepted Accounting Principles. The operating data is derived from
unaudited information maintained by the Company. The results of operations for
the four months ended April 30, 1996 are not necessarily indicative of results
to be expected for any future periods.
The pro forma statements of operations data for the year ended December 31,
1995 and the four months ended April 30, 1996, and the pro forma balance sheet
data as of April 30, 1996 is presented, giving effect to the following:
(1) The consummation of the Beverage Works, Inc. Initial Public Offering
and the application of the proceeds therefrom as described in "Use of
Proceeds."
(2) The consummation of the Beverage Works, Inc. and Orange Empire Brewing
Company Share Purchase Agreement and related agreements.
(3) The consummation of the BWI-Prost Partners Contribution and Partnership
Agreements and related agreements.
The unaudited pro forma balance sheet data has been prepared as though the
transactions and arrangements described above had taken effect on April 30,
1996, and the unaudited pro forma statements of operations data have been
prepared as though the transactions and arrangements had taken effect at the
beginning of each period presented. In management's opinion, all adjustments
have been made necessary to reflect the effects of the consummation of the
Initial Public Offering and the application of the proceeds therefrom, the
consummation of the Orange Empire Brewing Company Share Purchase Agreement, and
the consummation of the BWI-Prost Partners Contribution and Partnership
Agreements.
The unaudited pro forma financial data does not purport to be indicative of
the financial condition or results of operations of the Company that would have
been obtained for the periods presented had the transactions and arrangements
taken effect on the assumed dates, nor does it purport to represent the
financial condition or results of operations of the Company for any future
period.
15
20
HISTORICAL PRO FORMA
------------------------------------ -------------------------------
FOUR MONTHS AUGUST 2, 1995 TO FOUR MONTHS YEAR ENDED
ENDED DECEMBER 31, ENDED DECEMBER 31,
APRIL 30, 1996 1995(1) APRIL 30, 1996 1995
-------------- -------------------- --------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Net sales........................... $ 100,076 $ 44,810 $1,822,611 $ 4,975,962
Cost of sales....................... 169,029 81,627 1,429,736 3,860,276
---------- ---------- ---------- ----------
Gross profit...................... (68,953) (36,817) 392,875 1,115,686
Selling, general and administrative
expenses.......................... 566,548 433,553 1,335,306 2,999,285
---------- ---------- ---------- ----------
Operating loss.................... (635,501) (470,370) (942,431) (1,883,599)
Interest and other expenses
(income), net..................... 23,398 28,320 64,834 118,714
Minority interest in loss of
consolidated partnership.......... -- -- (27,195) (34,631)
---------- ---------- ---------- ----------
Loss before income tax benefit...... (658,899) (498,690) (980,070) (1,967,682)
Income tax benefit.................. 17,415 7,706 54,380 161,538
---------- ---------- ---------- ----------
Net loss............................ $ (641,484) $ (490,984) $ (925,690) $ (1,806,144)
========== ========== ========== ==========
Net loss per common share........... $ (0.21) $ (0.14) $ (0.21) $ (0.41)
========== ========== ========== ==========
Common shares and equivalents
outstanding....................... 3,094,874 3,094,874 4,434,096 4,434,096
========== ========== ========== ==========
OPERATING DATA (IN BARRELS):
Barrels shipped(2).................. 879 154 6,380 12,684
========== ========== ========== ==========
Production capacity, end of
period(3)......................... 12,000 6,500 62,000 59,500
========== ========== ========== ==========
HISTORICAL
------------------------------- PRO FORMA
DECEMBER 31, --------------
1995 APRIL 30, 1996
------------ --------------
APRIL 30, 1996 (UNAUDITED)
--------------
(UNAUDITED)
BALANCE SHEET DATA (END OF PERIOD):
Current assets......................... $ 781,178 $1,121,377 $ 5,070,742
Working Capital........................ 326,525 822,381 4,160,507
Property and equipment................. 1,407,705 1,296,434 5,680,503
Total assets........................... 2,307,565 2,455,131 15,081,186
Current liabilities.................... 454,653 298,996 910,235
Total liabilities...................... 1,128,332 1,003,244 6,292,598
Stockholders' equity................... 1,179,233 1,451,887 8,788,588
- ---------------
(1) The Company was incorporated August 2, 1995 and acquired Heritage on
November 8, 1995. The historical statement of operations for 1995 reflects
the operations of the Company and Heritage for the periods beginning August
2, 1995 and November 8, 1995, respectively.
(2) A barrel is equivalent to 31 gallons, two American kegs of 13.8 cases of
twenty-four 12-ounce bottles of beer.
(3) Based on the Company's estimate of the Breweries' production capacity, as of
the end of such period. The Company's estimate of production capacity should
not be considered indicative of actual production levels for any period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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The Breweries' capacity or output is derived from a combination of
equipment, in particular the breweries' brewhouse, fermentation tanks and
packaging line. The capacity also depends on the type of brews produced,
some of which require a longer fermentation period than others. All
breweries operate a brewhouse that can potentially support an output of
approximately 40,000 barrels per year, but their fermentation capacity
varies.
Heritage's capacity has increased from approximately 6,500 barrels per year
to approximately 12,000 barrels per year by adding additional fermentation
tanks and other support equipment to the existing equipment. See also
"Business -- Brewing Facilities."
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22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company was founded August 2, 1995, for the purpose of acquiring and
operating craft breweries. According to the Institute for Brewing Studies, The
New Brewer, May-June 1995 issue, the craft brewing industry has grown 30% to 50%
annually since 1988, and is expected to grow in excess of 30% annually. The
craft beer market is very fragmented, and distribution channels are getting
crowded from the proliferation of brands. The large craft brewers are becoming
increasingly dominant and Budweiser, Miller and Coors have all recently
introduced product entries, and are focussing their main brand advertising
campaigns to appeal to craft brew consumers. The Company believes that craft
brewing is entering a phase of development, characterized increasingly by
consolidation, requiring marketing and sales skills, operating efficiencies,
integrated production and appropriate distribution capabilities and access to
capital to enable the craft brewers to effectively compete with the dominant
companies in this industry.
The Company saw an opportunity in acquiring craft brewers with promising
brands and strategically located craft breweries. This could enable the Company
to obtain distribution strength and production efficiencies necessary to compete
in the craft brew industry.
Beverage Works, Inc. has been funded, to date, with two private placements
and a bridge financing. The Company has insufficient capital and inadequate cash
flows from operations to continue as an operating entity without additional
working capital in the immediate future and will not be able to implement its
plan without completing the planned Offering.
The Company's profitability will be adversely affected at least initially
as the result of its acquisition and financing strategies. The Company has
incurred, and will continue to incur, substantial legal and accounting fees
pursuant to its acquisition strategy. Until such time that a certain number of
craft breweries are acquired or joint ventured, and functioning according to the
Company's operating performance standards, the Company's profitability will be
adversely affected.
The Company's initial acquisitions and operating agreements are primarily
with smaller breweries that have not been operating profitably and in all
likelihood could not operate profitably without financial and marketing
assistance from an entity like the Company. Furthermore, the Company will need
to spend heavily on sales and marketing in order to increase sales volume and
upgrade the distribution channels. It will also need to expend substantial funds
on brewing facilities, equipment and improvements in order to increase
production capacity, reduce operating costs and improve operating efficiencies.
Pro forma financial information is presented for the year ended December
31, 1995 and the four months ended April 30, 1996, both of which are unaudited.
Consolidated information for the Company is presented only on a historical basis
and cannot be compared for the period August 2, 1995 to December 31, 1995 and
for the four months ended April 30, 1996, as BWI was only established as a
California corporation in August, 1995. The financial data and analysis
pertaining to its proposed acquisition of Orange Empire Brewing Co. (Riverside
Brewing Company) and St. Stan's Brewing Company are presented, comparing
December 31, 1994 with December 31, 1995, and the four months ending April 30,
1995 with April 30, 1996.
PROFORMA RESULTS OF OPERATIONS
The following tables set forth the unaudited proforma condensed
consolidated results of operations for the periods indicated as a percentage of
net sales. Such information includes the accounts of the Company, Orange Empire
Brewing Company and the St. Stan's Brewery as if the acquisition, the joint
venture and Offering were consummated during the beginning of the respective
periods. Such information is not
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necessarily indicative of the results which may have been achieved had the
transactions been consummated at the beginning of such periods. Such information
is as follows:
PERCENTAGE OF SALES
FOUR MONTHS ENDED APRIL 30, 1996
(UNAUDITED)
ORANGE
BEVERAGE EMPIRE ST. STAN'S PROFORMA
WORKS BREWERY BREWERY ADJUSTMENTS(1) PROFORMA TOTAL
-------- ------- ---------- -------------- --------------
Net Sales................................. 100.0% 100.0% 100.0% 100.0%
Cost of Sales............................. 168.9 73.9 69.0 78.4
Gross Profit.............................. (68.9) 26.1 31.0 21.6
Selling, General and Administrative....... 566.1 38.7 34.8 73.3
Interest.................................. 23.4 7.8 4.9 3.6
Other (Income) Expense.................... -- -- -- --
Minor Interest in loss of consolidated
Partnership............................. -- -- -- -- (1.5)
Tax Provision (Benefit)................... (17.4) -- -- (3.0)
------ ----- ----- -----
Net Income (Loss)......................... (641.0)% (20.4)% (8.7)% (50.8)%
====== ===== ===== =====
- ---------------
(1) Refer to Unaudited Proforma Condensed Consolidated Statement of Operations.
PERCENTAGE OF SALES
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
ORANGE
BEVERAGE EMPIRE ST. STAN'S PROFORMA
WORKS BREWERY BREWERY ADJUSTMENTS(1) PROFORMA TOTAL
-------- ------- ---------- -------------- --------------
Net Sales................................ 100.0% 100.0% 100.0% 100.0%
Cost of Sales............................ 182.2 71.4 68.8 77.6
Gross Profit............................. (82.2) 28.6 31.2 22.4
Selling, General and Administrative...... 967.5 38.8 28.8 60.3
Interest................................. 63.2 6.77 4.8 2.4
Other (Income) Expense................... -- -- -- --
Minor Interest in Loss of Consolidated
Partnership............................ -- -- -- (.1)
Tax Provision (Benefit).................. (17.2) .1 -- (3.2)
-------- ----- ----- -----
Net Income (Loss)........................ (1,095.7)% (16.7)% (2.4)% (36.3)%
======== ===== ===== =====
- ---------------
(1) Refer to Unaudited Proforma Condensed Consolidated Statement of Operations.
Sales: Consolidated pro forma sales for the first four months of 1996
totaled $1,822,611, which is typically the slow sales period, when annualized
are substantially higher than sales in 1995; however, there are no assurances
that the companies will actually have higher sales in 1996 as management does
not believe that the companies have sufficient working capital to sustain the
growth without financial assistance from the Company.
Cost of Sales: The consolidated pro forma cost of sales of 77.6% and 78.4%
of net sales for the year ending December 31, 1995 and the four months ended
April 30, 1996, respectively, is substantially above industry levels for
breweries of this size. The Company estimates that it must lower cost of sales
to approximately 67% in order to be competitive. Lowering cost of sales ten
percentage points to 66.3% equates to a reduction on cost of sales of
approximately $600,000 based on $6 million annual sales level. The Company
believes that it can substantially reduce cost of sales through consolidation of
operations, centralized purchasing, improved quality control, increased plant
utilization and greater automation. The Company has
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24
already initiated this process by combining certain operations of Heritage and
Riverside Brewing Company. Even if the Company is successful in lowering cost of
sales, it can not accurately forecast the potential effect of competitive
pressures on pricing which could have the effect of lowering the gross profit
and possibly offsetting all or a portion of the cost savings realized, if any.
There are no assurances that management's plans to reduce their cost of sales
will be successful.
Selling, General and Administrative Expenses: Pro forma consolidated
selling, general and administrative expenses for the year ended December 31,
1995 was 60.3% of net sales and for the four months ended April 30, 1996 was
73.3% of net sales which is high in comparison to the industry leaders that
range from 16% to 45%. The Company's SG&A for the four months ended April 30,
1996 included substantial costs associated with the administration of these
companies on a decentralized basis. In addition, these expenses included
$302,000 for goodwill amortization and certain noncash transactions. The Company
expects to increase selling expense from historical levels, but, such expenses
through consolidation of management salaries and administrative overhead as a
percent of net sales.
Net Income(Loss): The pro forma net loss of $1,806,144 and $925,690 for
the year ending December 31, 1995 and the four months ended April 30, 1996,
respectively, is attributable to a number of important factors as described
above. A significant portion of the loss can be attributed to acquisition and
financing related activities; however, the Company still incurred a substantial
loss and has negative cash flow.
RESULTS OF OPERATIONS -- BEVERAGE WORKS, INC. AND SUBSIDIARY
The following tables set forth for the periods indicated certain items
included in the Company's historical consolidated statements of operations as a
percentage of net sales. (The Company's consolidated statements of operations on
a historical basis include financial data for Beverage Works, Inc., excluding
proposed acquisitions, but, including operations for Heritage for the period
November 8, 1995 (acquisition date) and thereafter.)
PERCENTAGE OF NET SALES
---------------------------------------
AUGUST 2, 1995
FOUR MONTHS ENDED TO
APRIL 30, 1996 DECEMBER 31, 1995
----------------- -----------------
(UNAUDITED)
Net Sales.......................................... 100.0% 100.0%
Cost of Sales...................................... 168.9 182.2
------ --------
Gross Profit....................................... (68.9) (82.2)
Selling, General and Administrative................ 566.1 967.5
Interest........................................... 23.4 63.2
Benefit for Income Taxes........................... (17.4) (17.2)
------ --------
Net Loss........................................... (641.0%) (1,095.7%)
====== ========
Sales: Net sales of $44,800 for the period August 2, 1995 to December 31,
1995 only reflect sales for Heritage beginning from the November 8, 1995
acquisition date; Beverage Works, the parent company, had no sales. Net sales of
$100,076 for the four month period ending April 30, 1996 were adversely affected
as a result of quality control problems and construction interruptions
associated with improving and expanding the brewery. Sales for Heritage suffered
because of these factors during January through April 1996. Heritage has
completed the brewery expansion, and upon consummating the Offering and the
commencement of product sales under the Hussongs license agreement, management
believes that sales will increase significantly. There are no assurances that
such sales will improve in a reasonable period of time.
Cost of Sales: Cost of sales was adversely affected as a result of
production inefficiencies caused by construction and reduced sales volume.
Accordingly, the Company was unable to absorb fixed costs of its manufacturing
facility.
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Selling, General Administrative Expenses: Selling, general and
administrative costs were high in both periods as the result of costs associated
with the establishment of the infrastructure necessary to operate a public
company and expand its operations.
PERIOD TO PERIOD COMPARISON OF RESULTS -- ORANGE EMPIRE BREWING COMPANY
(RIVERSIDE BREWING COMPANY)
The following table sets forth certain items included in the Company's
statements of operations as a percentage of net sales:
PERCENTAGE OF NET SALES
-----------------------------------------
FOUR MONTHS ENDED YEARS ENDED
APRIL 30, DECEMBER 31,
----------------- -----------------
1995 1996 1994 1995
----- ----- ----- -----
(UNAUDITED)
Net sales............................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales......................................... 65.3 73.9 74.4 71.4
----- ----- ----- -----
Gross profit.......................................... 34.7 26.1 25.6 28.6
Selling, general and administrative................... 55.1 38.7 45.2 38.8
Interest.............................................. 7.6 7.8 6.9 6.8
Other (income) expense................................ (.3) .0 .3 (.4)
Income Taxes provision................................ .0 .0 .1 .1
----- ----- ----- -----
Net Loss.............................................. (27.7%) (20.4%) (26.9%) (16.7%)
===== ===== ===== =====
FOUR MONTHS ENDED APRIL 30, 1995 AND FOUR MONTHS ENDED APRIL 30, 1996 -- ORANGE
EMPIRE BREWING COMPANY (RIVERSIDE BREWING COMPANY)
Sales: Sales, net of excise taxes, increased 67.2% from $634,607 for the
four months ended April 30, 1995 to $1,061,072for the four months ended April
30, 1996. Excise taxes for the four months ended April 30, 1995 were $10,407
compared to $33,912 for the comparable period in 1996. The increase in sales can
be primarily attributed to increased shipments of bottled product from the
brewery division and to a lesser extent from increased sales at the brewpub.
Gross Profit: Gross profit increased by $369,298 from $414,558 for the
four-month period ending April 30, 1995 to $783,856 for the four-month period
ending April 30, 1996. However, as a percentage of sales gross profit decreased
8.6% from 34.7% for the four-month period ending April 30, 1995 to 26.1% for the
four-month period ending April 30, 1996. The decrease in gross profit as a
percentage of sales is primarily attributable to production inefficiencies,
distributor discounts, and increases in freight associated with shipping product
to other states. In addition, competition caused management to lower the per
unit sale prices in order to increase its market share.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased in actual dollars, but decreased as a
percentage of net sales for the comparable periods. Selling, general and
administrative expenses increased by $61,597 from $349,507 for the four-month
period ending April 30, 1995 to $411,104 for the four-month period ending April
30, 1996. However, selling, general and administrative expenses decreased 16.4%
as a percentage of sales from 55.1% for the four-month period ending April 30,
1995 to 38.7% for the four-month period ending April 30, 1996. Selling, general
and administrative expenses increased primarily as a result of supporting the
67.2% increase in sales. Certain selling costs were variable in nature and
increased proportionately with sales while general and administrative expenses
were more fixed in nature and grew more slowly. The decrease in selling, general
and administrative expense as a percentage of sales is primarily the result of
those expenses being relatively fixed in nature and the 67.2% increase in sales.
Interest: Interest expense increased by 70.5% from $48,227 for the
four-month period ending April 30, 1995 to $82,240 for the four-month period
ending April 30, 1996. Interest expense increased primarily as the result of
interest charges associated with increased equipment leases and notes payable to
related parties.
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26
Net Loss: The net loss increased in actual dollars, but decreased as a
percentage of net sales for the comparable periods. The net loss increased
$40,503 from $176,037 for the four-month period ending April 30, 1995 to
$216,540 for the four-month period ending April 30, 1996. The net loss decreased
as a percentage of sales by 7.3% from 27.7% for the four-month period ending
April 30, 1995 to 20.4% for the four-month period ending April 30, 1996.
YEARS ENDED DECEMBER 31, 1995 AND 1994 -- ORANGE EMPIRE BREWING COMPANY
(RIVERSIDE BREWING COMPANY)
Sales: Net sales increased by $1,175,507 or 85.3% from $1,378,470 (net of
$21,045 in excise taxes) for 1994 to $2,553,997 (net of $52,596 in excise taxes)
for 1995. The increase in sales can be primarily attributed to increased
shipments of bottled product from the brewery division and to a lesser extent
from increased sales at the brewpub. Distribution was expanded not only in
California with the appointment of Wine Warehouse as distributor for California,
but distribution was also expanded into approximately 27 other states.
Gross Profits: Gross Profit increased in terms of dollars and as a
percentage of net sales for the comparable periods. Gross profit increased
106.6% from $353,279 in 1994 to $729,912 in 1995. Gross profit increased 3% as a
percentage of sales from 25.6% in 1994 to 28.6% in 1995. Gross profit improved
as a result of the Company's ability to cover fixed overhead through increased
sales.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased, but decreased as a percentage of sales for
the comparable periods. Selling, general and administrative expenses increased
46.2% from $624,209 in 1994 to $990,701 in 1995. However, as a percentage of
sales decreased 6.4% from 45.2% in 1994 to 38.8% in 1995. The increase is
primarily attributable to the 85.3% increase in sales. The decrease and a
percentage of sales is primarily attributable to the fact that some selling,
general and administrative expenses are relatively fixed and did not increase
proportionately with increase in sales.
Interest Expense: Interest expense increased 83% or $78,408 from $94,516
in 1994 to $172,924 in 1995. The increase is primarily the result of leasing (at
approximately 14% per annum) additional brewing equipment for the brewery which
commenced operation in its expanded facility in October 1995.
Income Tax Provision: The Company has a $1,600 provision for income taxes
in both 1994 and 1995 related to California minimum state taxes. The Orange
Empire Brewing Company has substantial net operating loss carryforwards, and it
does not expect to pay taxes for the foreseeable future. A valuation allowance
for such net operating losses has been recorded, therefore, no benefit for
income taxes has been reflected in operations.
Net Loss: The net loss increased 14.6% or $54,363, from 1994 to 1995, but
decreased as a percentage of sales by 10.2% from 26.9% in 1994 to 16.7% in 1995.
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PERIOD TO PERIOD COMPARISON OF RESULTS -- ST. STAN'S BREWERY AND BREWPUB
OPERATIONS
The following table sets forth certain items included in the Company's
statements of operations as a percentage of net sales:
PERCENTAGE OF NET SALES
FOUR MONTHS ENDED YEAR ENDED
APRIL 30, DECEMBER 31,
----------------- -----------------
1995 1996 1994 1995
----- ----- ----- -----
(UNAUDITED)
Net sales............................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales......................................... 65.4 69.0 72.7 68.8
----- ----- ----- -----
Gross profit.......................................... 34.6 31.0 27.3 31.2
Selling, general and administrative................... 28.6 34.8 27.4 28.8
Income (loss) from operations......................... 6.0 (3.8) (.1) 2.4
Interest.............................................. 4.6 4.9 5.5 4.8
----- ----- ----- -----
Net income (loss)..................................... 1.4% (8.7%) (5.6%) (2.4%)
===== ===== ===== =====
FOUR MONTHS ENDED APRIL 30, 1995 AND FOUR MONTHS ENDED APRIL 30, 1996 -- ST.
STAN'S BREWERY AND BREWPUB OPERATIONS
Sales: Net sales increased by 2.3% from $646,276 for the four-month period
ending April 30, 1995 to $661,463 for the fourmonth period ending April 30,
1996. Sales growth was slowed as the result of competitive pressures and
insufficient working capital to fund marketing and selling programs.
Gross Profit: Gross profits decreased by 8.3% from $223,623 for the four
months ended April 30, 1995 to $205,067 for the four months ended April 30,
1996. Gross profit decreased in terms of actual dollars and as a percentage of
sales primarily as the result of competitive pressures that required the Company
to lower prices to distributors faster than the Company could lower production
costs and increase sales.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased 24.6% from $185,021 or 28.6% of sales for the
four months ended April 30, 1995 to $230,490 or 34.8% of sales for the four
months ended April 30, 1996. The increase can be attributed primarily to the
increased cost for distributor marketing and selling programs that were required
to maintain good working relationships with distributors and remain competitive
in the market.
Interest: Interest expense increased 9.3% from $29,412 for the four months
ended April 30, 1995 to $32,137 for the four months ended April 30, 1996. Such
increase is due to an increase in related party notes payable.
Net Income (Loss): Net income was $9,190 for the four months ended April
30, 1995 versus a net loss of $57,560 for the period ended April 30, 1996.
Overall competition has significantly affected margins, and coupled with
increased selling and interest costs, caused the Company to incur a loss in
early 1996.
YEARS ENDED DECEMBER 31, 1995 AND 1994 -- ST. STAN'S BREWERY AND BREWPUB
OPERATIONS
Sales: Volume increased by 7.3% from $1,891,554 in 1994 to $2,029,424 in
1995. The increase in sales was primarily attributable to the introduction of
new products.
Gross Profit: Gross profit increased by 22.4% from $517,236 or 27.3% in
1994 to $633,207 or 31.2% in 1995. The improvement in gross profit is primarily
attributable to price increases in 1995, improved operating efficiencies and
lower costs of raw materials.
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28
Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased by 12.5% from $518,763 or 27.4% in 1994 to
$583,568 or 28.8% in 1995. In general, this increase can be attributed primarily
to an increase in sales, marketing and promotional activities.
Interest: Interest expense decreased by 5.7% from $104,351 in 1994 to
$98,398 in 1995.
Net Income (Loss): The net loss decreased by 53.9% from $105,878 or 5.6%
of sales in 1994 to $48,759 or 2.4% of sales.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded operations primarily from the
private sale of stock netting approximately $1.57 million after costs of the
offerings, and $500,000 in debt financings. The Company's operations provided
minimal cash in the November 8 to December 31, 1995, post acquisition period and
for the four month period ending April 30, 1996. The Company has insufficient
capital and inadequate cash flow from operations to continue as an operating
entity without additional working capital in the immediate future and cannot
implement its acquisition plan without completing the planned Offering.
The Company's profitability will be adversely affected at least initially
as the result of its acquisition and financing strategies. The Company has
incurred, and will continue to incur, substantial legal and accounting fees
pursuant to its acquisition strategy. Until such time that an adequate
infrastructure of craft breweries are acquired and functioning according to the
Company's operating performance standards, the Company's profitability will be
adversely affected.
The Company's initial acquisitions and operating agreements are primarily
with smaller breweries that have not been operating profitably, and in all
likelihood, could not operate profitably without financial and marketing
assistance from an entity like the Company. Furthermore, the Company will need
to invest substantial funds on sales and marketing in order to increase sales
volume and upgrade the distribution channel. It will also need to invest in
brewing facilities, equipment and improvements in order to increase production
capacity and reduce production costs and improve operating efficiencies. These
factors raise substantial doubt about the Company's ability to continue as a
going concern.
The Company currently has approximately $300,000 cash on hand a credit
facility for $175,000 with approximately $163,000 credit available, and it
recently closed its second private placement issuing Common Stock for net
proceeds of $130,000 in September 1996 which the Company believes will enable it
to sustain operations until completion of the initial public offering. However,
the Company has insufficient cash flow to remain current with certain trade
vendors for a prolonged period of time as a result of launching its Hussong's
brands in September, 1996, and costs incurred with its acquisition and
arrangements and its Offering.
The Company expects to net approximately $4.4 million from the Offering net
of closing cost, commissions, paying bridge and short-term debt obligations and
cash outlays associated with completing the acquisition and joint venture. Even
though the Company has plans to improve cash flow through increased sales and
reduction in cost of sales through improved operating efficiencies, it does not
expect to have positive cash flow until at least 1998. The craft brew industry
is seasonal with sales lower in the first and second calendar quarters and
higher in the third and fourth calendar quarters. The timing of the Offering
will dictate that the Company initiate consolidated operations in the slowest
sales period.
The Company also anticipates spending heavily on sales and marketing, with
planned expenditures for the first 18 months after the offering totaling
approximately $1 million. The Company will also invest approximately $800,000 to
increase capacity, quality control and consolidate and standardize brewing
operations. The Company will also seek additional acquisition candidates to
expand its product lines, through cash proceeds from the Offering or the
issuance of its Common Stock. General and administrative costs will increase as
a result of new expenses associated with operating as a public company, and
legal and accounting costs involved with subsequent acquisitions. The Company
will try to utilize debt and equipment financing as may be available to the
Company to extend working capital.
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Since the Company cannot forecast with certainty the cost associated with
implementing its growth strategy, management intends to maintain as much
flexibility as reasonably possible in regards to managing capital expenditures
and operations, so as to more effectively manage cash.
The Company believes that the net proceeds from this Offering, together
with cash flow from operations will be sufficient to support the Company's
capital expenditures and working capital requirements for the next 12 months.
However, the craft brew industry is undergoing significant changes and
management can make no assurance that they will be able to implement marketing
and sales changes fast enough or consolidate operations and improve operating
efficiencies fast enough in the face of increased competitive pressures in order
to stabilize operations and improve cash flow adequately to be a viable entity.
Furthermore, the Company cannot make any assurance that it will be able to
acquire additional breweries or brands at reasonable prices or terms. If the
Company cannot implement its growth strategy in a timely manner, then there can
be no assurance that additional capital will be available, or it available that
such financing will be available on terms favorable to the Company or its
shareholders. To the extent the Company raises additional capital by issuing
equity convertible debt securities, ownership dilutions to the Company's
shareholders will result. In the event that adequate funds are not available,
the Company's business may be adversely affected.
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BUSINESS
The Company was formed on August 2, 1995 as a California corporation, for
the purpose of acquiring and operating craft breweries. Upon the closing of this
offering, the Company will have acquired Heritage Brewing Company of Lake
Elsinore, California, Riverside Brewing Company of Riverside, California, have
become a majority partner with St. Stan's Brewing Company of Modesto,
California, and have entered into a reciprocal production and marketing
agreement with Chicago Brewing Company of Chicago, Illinois.
BREWERIES
Heritage Brewing Company
On November 8, 1995, The Company acquired approximately 95% of all of the
issued and outstanding shares of common stock of Heritage in exchange for
142,276 shares of the Company's Common Stock. Heritage shareholders are
permitted to call their Heritage stock in the event the Company does not
complete a public offering of securities raising gross proceeds of at least
$5,000,000 prior to December 31, 1996. The exercise of the call option requires
Heritage to repay all monies advanced by the Company for payments of its SBA
loan and Liberty National loan, and advances for brewery capital equipment and
leasehold improvements. Repayment shall be made in a note which is payable
without interest over 36 months. Heritage shall return all shares of the
Company's common stock initially issued to its former shareholders. The
completion of this Offering terminates Heritage's shareholders' call option. At
least 50% of the former Heritage stockholders have agreed to extend the call
option until March 31, 1997.
Heritage was established in 1989 as one of the first microbrewers in
California. Heritage markets Mulligan Lager and Red Fox Ale, its own craft
brewed brands. Catalina Red Ale and Catalina Golden Ale are produced under
license. Heritage also currently acts as a contract brewer for other craft
brands.
Heritage has a brewery in Lake Elsinore, California in a building
containing approximately 5,400 square feet with a warehouse of 4,000 square feet
located across the street. The brewery's production capacity was recently
expanded to 12,000 barrels per year, which was financed by the Company with the
proceeds of its November 1995 private placement. The annual rent for the brewery
facility, which expires in March, 1998, is currently $39,600, and the warehouse
is leased month to month at $1,200 per month. After the consummation of the
offering or the expiration of its lease, the Company intends to consolidate the
Heritage production facility into the Riverside Brewing Company facility.
Riverside Brewing Company
The Orange Empire Brewing Company ("Orange Empire") is the parent of
Riverside Brewing Company. The Company has agreed to acquire at least 90% of the
outstanding shares of Orange Empire in exchange for (i) 247,479 shares of the
Company's common stock and (ii) up to an additional 130,000 shares based on a
specified number of barrels of beer produced and sold over two years. A $644,000
note due Riverside Brewing Company's noteholders will be repaid with $301,000 in
cash and 24,125 shares of Common Stock and 50,000 Class A Warrants to purchase
the Company's Common Stock at $5.00 per share. In addition, these noteholders
have agreed to assume approximately $220,000 of Riverside Brewing Company's debt
for 27,618 shares of Common Stock, and guarantee brewpub cashflow to at least
break even for two years. The Company has entered into a Brewpub Management
Agreement with Mike Hagerman and Norm Kretschmar, former principals of Orange
Empire Brewing Company, whereby the Company will issue 10,000 shares of its
Common Stock to these individuals.
RBC, which started in 1993 as a brewpub and restaurant with a production
capacity of 1,500 barrels a year, is located in the historic Mission Inn
district of Riverside, California. Riverside Brewing Company then began to sell
a full line of specialty craft beers outside its brewpub. In October 1995,
Riverside Brewing Company began additional production in a new 18,000 square
feet leased facility, independent of its brewing facilities at the pub, which
has an initial production capacity of 30,000 barrels per year and can be
expanded to 80,000 barrels per year. Riverside Brewing Company currently brews
five styles of craft beer. Riverside Brewing Company's beers have won numerous
awards in local, state, national and international competitions.
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The brewery sells its products in draught and bottled package (both 12-oz. and
22-oz. bottles). The majority of Riverside Brewing Company's beers are sold in
California. To a limited extent, Riverside Brewing Company's beers are sold in
27 other states and Japan. In addition, the brewery produces a number of private
label brands under contract brewing agreements with various distributors and
companies, including the Claim Jumper restaurant chain in California.
St. Stan's Brewing Company
BWI-St. Stan's, Inc. ("BWISS"), a wholly-owned subsidiary of the Company,
has entered into a partnership agreement to Form BWI-Prost Partners
("Partnership") with Prost Partners, L.P. ("Prost") doing business as St. Stan's
Brewing Company, which closes upon the consummation of this Offering. BWISS,
through a wholly-owned subsidiary, and Prost will shares profits, losses,
distributions, and capital 51% and 49% respectively, except that Prost will
receive priority distributions of $2,500 quarterly to meet certain minimum
financial obligations. The Partnership will be managed by a five member
committee, three of whom are appointed by BWISS.
Prost is contributing to the partnership all of its assets, which is the
St. Stan's Brewing Company operations, and the Partnership will assume the St.
Stan's operating obligations. In addition, the Partnership will assume two
demand notes executed by Prost totaling approximately $460,000 owed to Romy
Angle, who is an officer and a controlling shareholder of Stanislaus Brewing
Company, Inc. ("Stanislaus"), Prost's general partner, and, as of the close of
this Offering, the Purchasing Manager of the Company. As part of BWISS' initial
capital contribution, BWISS will pay these notes owed to Ms. Angle upon the
consummation of this Offering. The Partnership will also assume the note owed to
Owens Financial Group in the principal amount of $676,000. The note is secured
by the Partnership's fixed assets and ground lease for the Partnership's
building. As part of BWISS' initial capital contribution, BWISS will assume the
Owens' Note. The Company has obtained written assurance from Owens Financial to
amend, after a principal reduction payment of $176,000, the terms of the note to
allow for principal and interest payable to be based on a 15 year amortization
period and the extension of the maturity date to five years, at a variable
interest rate ranging from 11% to 16% per annum and for prepayment without
penalty.
The Partnership is not assuming Prost's obligations to Stanislaus. In
addition to the initial capital contribution to the Partnership, BWISS is
required to contribute to the Partnership approximately $1,150,000 payable
quarterly over 18 months commencing 18 months after the consummation of this
Offering. In the event BWISS fails to make such payments, Prost may acquire
BWISS's interest in the Partnership based on the appraised value of the
Partnership which will likely be substantially less than the amount paid by
BWISS. Furthermore, BWISS may buy-out Prost's interest in the Partnership by
paying $2,205,000 within three years, plus that portion of the required capital
contribution not made as of the date of the buy-out (the "Option"). By making
such payment, BWISS will acquire all of Prost's interest in the Partnership. If
BWISS fails to make such payment within three years, Prost has the initial right
to acquire BWISS's interest in the Partnership based on the appraised value of
the Partnership's tangible assets plus a predetermined formula of modified
earnings. If Prost does not exercise its right, BWISS has the right to buy-out
Prost on the same terms. If neither Prost or BWISS exercises its right to
buy-out the other party, the Partnership shall be dissolved. See "Risk
Factors -- St. Stan's Brewing Company Partnership."
St. Stan's Brewing Company was the first "altbier" brewery in the United
States. Altbiers are made in the old German pre-1700's tradition, before lager
beers. Thus the name "alt" (old/old fashioned) beer. The difference between
altbier and lager beer is that altbier has a cold storage period in the
fermentation tanks, and unlike a lager, uses a top fermenting yeast, rather than
a bottom fermenting yeast. Since this style of beer was not found in the United
States, St. Stan's was developed to fill this niche.
The brewery will be owned by the Partnership, is subject to a ground lease
and is located in a custom-built facility in the downtown area of Modesto,
California. The brewery was completed in October 1990 and is part of a 14,500
sq. ft. facility which includes a brewpub and gift shop. The two-story pub
facility has a contemporary European appearance with classic European touches.
Seating is more than 300, including the biergarten and pub. The brewery
currently has an annual capacity of approximately 20,000 barrels per year.
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St. Stan's currently sells its products in kegs and in twelve ounce bottles. It
produces four beer types on a regular basis and produces several seasonal and
specialty brews from time to time.
INDUSTRY BACKGROUND
The terms micro brew, craft brew and specialty brew are used
interchangeably by consumers and within the industry to describe the products
made by small, independent brewers, who generally use only traditional brewing
processes and ingredients. Craft brewers include contract brewers which use
third party's brewing facilities), regional specialty brewers, microbrewers and
brewpub/restaurants. Craft beers are full-flavored beers brewed with quality
hops, malted barley, yeast and water, without adjuncts such as rice, corn,
stabilizers or water dilution.
The craft beer market is still very small in the context of the overall
U.S. beer industry. In 1995, this segment accounted for approximately 2% of
domestic beer sales. However, the category has become one of the fastest growing
niche markets in the U.S. beverage industry. According to a recent publication
of the Institute for Brewing Studies (May-June 1996 issue of The New Brewer),
since 1988, craft beer shipments have grown 30%-50% annually, while total
domestic beer industry shipments have basically remained flat. The rapid growth
of the craft brewing industry is related to an increased consumer awareness of
and demand for high quality, high end and high priced consumer food products in
general, and consumers' discovery and continued education of more traditional,
fresh brewed, full flavored and premium priced beers. Prior to prohibition, the
U.S. beer industry consisted of hundreds of small breweries that brewed
distinctive, full flavored beers, delivered fresh to local markets. Following
prohibition, U.S. brewers have narrowed production to lighter, milder beers, to
appeal to the broadest market segment. These beers use lower cost ingredients
and can be mass produced, while taking advantage of economies of scale in
production and marketing. Competition among the industrial brewers has been
primarily through costly mass advertising and pricing, rather than through
flavor and quality. Mass production has coincided with industry consolidation.
At present, more than 75% of domestic beer shipments are controlled by three
major brewers.
Since the early eighties, domestic per capita beer consumption has
declined. At the same time, consumers increasingly focussed their consumption on
more flavorful beer. Initially this demand was met by beers imported from
Europe, Canada and Mexico. However, in the late 1980's, as state laws began to
allow pubs and restaurants to brew and sell beer on premise, a number of
domestic specialty brewers began to offer a variety of more flavorful,
traditionally brewed beers. In response to consumer demand, the number of craft
brewed beers has increased in the last five years. Certain craft brewers have
quickly grown from microbreweries into regional craft breweries, some with
operations in multiple locations. Contract brewers, such as Samuel Adams and
Pete's Wicked Ale, have taken advantage of this growing demand by retaining
industrial brewers to perform contract brewing at otherwise under-utilized
brewing facilities. At present, there are more than 800 craft breweries in the
U.S. In addition, the major brewers have introduced their own fuller flavored
specialty beers, and have acquired or established partnerships with existing
craft brewers.
PLAN OF OPERATION/BUSINESS STRATEGY
Industry forecasts (according to the Institute for Brewing Studies, The New
Brewer, May-June 1996 issue) report continuing rapid growth of the craft brewing
industry in excess of 30% annually. The craft beer market is very fragmented,
and distribution channels are getting crowded from the proliferation of brands.
The large craft brewers are becoming increasingly dominant and Budweiser, Miller
and Coors have all recently introduced product entries, and are focussing their
main brand advertising campaigns to appeal to craft brew consumers. The Company
believes that craft brewing is entering a phase of development, characterized
increasingly by consolidation requiring marketing and sales skills, operating
efficiencies, integrated production and appropriate distribution capabilities
and access to capital to enable the craft brewers to effectively compete with
the dominant companies in this industry.
The Company is looking to position itself as an industry leader in the
craft brewing industry with regional strongholds and nationwide access to the
major markets, through a combination of acquisitions, brand strategies,
highprofile introduction of new products and strategic alliances. Although the
Company plans to
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utilize the proceeds from this Offering, current brands, distributor
relationships, strategically located brewing operations, and experience in the
brewing, marketing, and finance field, to expand the Company's brewing capacity,
revenue and income base, these is no assurance that its strategy will be
successful.
Acquisitions
The Company's initial acquisition strategy focussed on smaller,
undercapitalized craft breweries located in or close to craft brew growth
markets, with proven, award winning products and a potential to expand their
market share and gain strong regional and/or national distribution.
A second phase of the Company's acquisition & joint venture strategy will
focus on acquiring medium sized regional craft breweries (25,000 to 50,000
barrels annually). The Company believes that it will become increasingly
difficult for these breweries to successfully compete independently in an
increasingly consolidating, competitive market. The Company's strategy is
designed to acquire and provide such companies with the resources and tools
needed to professionally and rapidly expand their businesses. Factors critical
to implement the Company's acquisition strategy are discussed below:
Capital: The craft brew industry has always been capital intensive in
terms of equipment and has now become capital intensive for marketing and
sales as well. The dual strain of these capital requirements prevents many
of the craft breweries from achieving their true growth potential in an
increasingly competitive industry. The ability of the Company to
successfully implement its business strategy is dependent on the Company
obtaining the necessary capital to increase production, improve quality,
lower production cost, implement the necessary management and operating
systems and provide the professional marketing programs that are essential
to gaining and maintaining strong sales and distribution networks. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Operating Efficiencies: An essential element of competing
successfully in a high growth, consolidating industry is the ability to
constantly improve operating efficiencies at a faster rate than competitive
pressures lower margins. A fundamental aspect of the Company's strategy is
to realize these operating efficiencies, while preserving the traditional
aspects of craft brewing.
STANDARDIZED PRODUCTION AND CENTRALIZED PURCHASING. The Company plans
to aggressively standardize production methods and equipment throughout its
breweries while setting the highest quality assurance standards,
implementing cost efficient production techniques, optimizing production
utilization and gaining savings through centralized purchasing and
centralized production planning.
CENTRALIZED ACCOUNTING & ADMINISTRATION. The Company expects to
realize significant manpower savings and efficiencies by centralizing all
accounting, order processing, inventory management, scheduling, legal,
compliance, licensing and M.I.S. functions and activities. The Company is
centralizing its accounting department in charge of all its functions and
its customer service department in charge of order processing, inventory
management, scheduling and shipping.
CENTRALIZED MARKETING PLANNING AND SUPPORT. The Company expects to
benefit from available resources, efficiencies and cost savings in the
field of marketing planning, advertising & promotion. The Company's
marketing department coordinates all marketing planning, product
development and ATF and ABC compliance activities for all brands. It
manages point of sale materials development, purchasing and inventory,
events planning, promotion and advertising campaign development and
scheduling.
Distribution Network: Combined, the Breweries utilize more than 100
distributors in 35 states. With some of these distributors, the Breweries
have a multi-faceted relationship which may include several of the
Company's brands, private label and contract brewing. The Company also
maintains a sales support organization to properly support and service
these distributors, make joint retail account calls and be involved in
events and promotions in the distributors' territories.
Management: The Company has assembled a management team skilled in
managing entrepreneurial growth companies and consumer food products
marketing. The Breweries provide additional
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brewing expertise and sales manpower. The Company has started the process
of coordinating sales & marketing, production and administrative activities
of the Breweries in anticipation of the closing of the transactions.
Brewing Capacity Expansion
The Company plans to substantially increase combined brewing and bottling
capacity within the first 18 months after the close of this Offering, up to
approximately 150,000 barrels per year. In the twelve month period following
thereafter, the Company plans to increase its production capacity up to 240,000
barrels per year. The increases in capacity assume the acquisition of additional
breweries and the availability of capital, of which no assurances can be
provided.
Key to the Company's short to medium term strategy is to be the first to
expand its regional brewing operations in Southern California, and to expand its
brewing operations in the South-East United States. As a first step to improving
its Southern California operating efficiency, the Company is considering plans
to integrate Heritage Brewing Company's brewing operation and Riverside Brewing
Company. brewery into a single facility.
The Company plans to become a low cost operator through the implementation
of uniform, state-of-the-art operating systems, economies of scale, and creating
a truly integrated nationwide multi-location operation. The Company plans to
aggressively standardize and increase overall production capacity while setting
the highest possible quality assurance standards, implementing cost efficient
production techniques, and optimizing production utilization. Implementing these
plans depend on the availability of capital.
Both flash and tunnel pasteurization are planned for all the Breweries. The
Company plans to utilize pasteurization on selected products to provide
additional assurances for product stability and extended shelf life. Two of the
Company's products lines, "Hussong's Cerveza" and "Red Pig" are presently
pasteurized.
Marketing Strategies
The Company's marketing and marketing communication strategies focus on
developing strong local brand awareness and following of the Company's brands,
in particular in those markets in which the Breweries currently are located. The
Company wants to emphasize the advantage of consuming fresh locally produced
beer over beer imported from out-of-state. At the same time it plans to utilize
its multi-location brewing capacity and comprehensive distribution network to
establish a nationwide presence for some of its brands. The Company plans to
grow its contract brew business from medium sized contract brewers, to optimize
the Company's competitive position and use of brewing capacity.
Products/New Products
The Company is involved in the ongoing development of unique quality brews
aimed at high growth niche market segments. It utilizes the combined experience
of eight experienced and acclaimed brewmasters whose brews have won numerous
awards.
PRODUCTS
The Company, upon the closing of the Offering, will market a total of 26
different beers on a regular basis. Although most of these brews are sold
year-round, some are seasonal. All of the Company's beers are hand-crafted in
100 to 200 barrel batches using traditional European brewing methods. The
Breweries brew their beers using only high quality hops, malted barley, wheat,
rye and other natural ingredients, and do not use any corn, rice, syrups or
other adjuncts.
In addition to its own brands, the Breweries operate as contract breweries
for various contract brew brands, and produce private label contract brews for
several well-known restaurant chains such as Claim Jumper and Elephant Bars,
both of which are in California. Some of the Company's beer products are
pasteurized (Hussong's, Red Pig) to provide for additional assurance of product
stability and freshness under extreme distribution and storage conditions. All
brews are marketed on the basis of quality, freshness and unique, distinctive
flavor profiles.
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Riverside Brewing Company
Golden Spike Pilsner: A European style pilsner, with a hoppy aroma and a
dry crisp Czech hop flavor and long dry hop aftertaste (Bronze Certificate-1996
California State Fair, World Champion-1995 World Beer Championships, Gold
Medal-1995 Colorado State Fair, Silver Medal-1995 California State Fair, Silver-
1995 California State Fair, Silver-1995 Karnival of Beers, Bronze Medal-1993
Great American Beer Festival).
Pullman Pale Ale: A deep gold, pleasantly hopped ale with a malty aroma
and unique flavor (Silver Medal-1996 World Beer Championships, Silver Medal-1996
World Beer Cup, Silver Certificate-1996 California State Fair, Gold Medal-1995
California Beer Festival, Gold Medal-1995 Karnival of Beers, Silver Medal-1995
World Beer Championships, Silver Medal-1995 Great American Beer Festival).
Victoria Avenue Amber Ale: Deep amber colored (Scottish) ale with a malt
aroma and a medium dry malt aftertaste, made with English Goldings hops (Bronze
Medal-1996 World Beer Championships, Gold Medal-1995 California State Fair,
Silver Medal-1995 Karnival of Beers, Silver Medal-1995 Colorado State fair,
Bronze Medal-1995 California Beer festival, Bronze Medal-1995 World Beer
Championships, Gold Medal-1994 Great American Beer Festival).
Raincross Cream Ale: A beautiful gold-colored brew with a well-hopped
aroma and flavor (World Champion-1995 World Beer Championships, Silver
Medal-1996 World Beer Championships, Bronze Certificate-1996 California State
Fair, Silver Medal-1995 California Beer Festival, Gold Medal-1995 California
State Fair, Bronze Medal-1995 Colorado State Fair).
7th Street Stout: A sophisticated, deep brown stout with a very pleasant
aftertaste (Silver Medal-1996 World Beer Championships, Gold Medal-1995 Karnival
of Beers, Bronze Medal-1994 Great American Beer Festival).
#119 Maybock: A traditional, malty maybock with slightly more hop flavor
(Bronze Medal-1996 World Beer Championships, Silver Certificate-1996 California
State Fair, Bronze-1996 BTI).
#119 Seasonal: (Silver Medal-1996 World Beer Championships).
St. Stan's Brewing Co.
St. Stan's Red Sky Ale: This red-hued pale ale with a medium body is St.
Stan's top selling brew (Silver Medal-1996 World Beer Championships, Gold
Medal-1994 Malt Advocate, Silver Medal-1994 Wine Enthusiast).
St. Stan's Amber Alt: An amber colored, smooth beer made in the "Altbier"
style of Dusseldorf, Germany (Silver Medal-1996 World Beer Championships, Silver
Medal-1995 World Beer Championships, Bronze Medal-1987 Great American Beer
Festival).
St. Stan's Dark Alt: A dark colored brew with a chocolate roasted malt
flavor, made in the "Altbier" style of Dusseldorf, Germany (Gold Medal-1995
World Beer Championships, Bronze Medal-1993 Karnival of Beers).
St. Stan's Whistlestop Ale: A light and clean traditional British Pale Ale
with a golden straw color.
St. Stan's Fest Beer: A copper colored winter brew (Silver Medal-1994
Karnival of Beers, Gold Medal-1991 Beer Connoisseur Guide).
St.Stan's Graffiti Wheat: A light and slightly hazy, refreshing and fruity
summer wheat brew, with a unique "American Graffiti" marketing theme.
Heritage Brewing Company
Hussong's Cerveza Extra: Hussong's (produced under license of Hussong's
Cantina in Ensenada, Mexico) is a uniquely positioned lifestyle type of
specialty beer. The Hussong's product line include two beer types: Hussong's
Extra, a high-end, light, crisp Mexican Style beer, and
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Hussong's Cerveza Negra: A very smooth, deep amber ale. Hussong's beers
are pasteurized to guarantee product stability and extended shelf life under all
circumstances.
Mulligan: An easy to drink, light colored brew with a crisp, well-hopped
aroma and flavor.
Red Fox: A robust, flavorful, classic American pale ale, generously dry
hopped (Bronze Medal-1993 Great American Beer Festival).
Chicago Brewing Company
The following brands are marketed by the Company under the reciprocal
production and marketing agreement with Chicago Brewing Company.
Legacy Lager: A bright amber brew with a smooth malt taste and subtle hop
aroma, formulated to recreate the rich, full flavored beer brewed in Chicago
prior to the Prohibition (Gold Medal-1996 World Beer Championships, Silver
Medal-1995 World Beer Championships, Bronze Medal-1995 Colorado State Fair, Gold
Medal-1994 Denver International Beer Tasting, Silver Medal-1994 World Beer
Championships, Gold Medal-1992 Great American Beer Festival, Gold Medal-1991
Great American Festival).
Legacy Red Ale: Brewed after the Celtic brewers of Ireland. Has a deep red
hue, fresh aroma and a rich malt body (Silver Medal-1996 World Beer
Championships, Silver Medal-1995 Colorado State Fair, Bronze Medal-1995 World
Beer Championships, Best Irish Ale-1993).
Heartland Weiss: Made after a traditional German wheat beer. Is a
refreshing brew with a light body, and is available seasonally from April to
October (Gold Medal-1994 World beer Championships, Bronze Medal-1992 Great
American Beer Festival).
Big Shoulders Porter: An authentic English style Porter with a smooth body
and a creamy chocolate & caramel malt taste (Silver Medal-1995 World Beer
Championships, Bronze Medal-1995 Colorado State Fair, Best Porter-1995 USA
Today, Silver Medal-1994 Denver International Beer Tasting, Silver Medal-1994
World Beer Championships).
Big Shoulders Bock: A true German style bock beer with a rich and smooth
malty flavor (Gold Medal-1996 World Beer Championships, Bronze Medal-1995
Colorado State Fair).
Contract Brews/Private Label Brands/Other
Claimjumper Honey Blond Ale: Private label brew for Claimjumper
restaurants, brewed at Riverside Brewing Co.
Claimjumper Original Red Ale: Private label brew for Claimjumper
restaurants, brewed at Riverside Brewing Co. (Silver Medal-1996 World Beer
Championships).
Red Pig Ale: Contract brew for Cabo Distributing, California, brewed at
Heritage Brewing Co., Riverside Brewing Co. and Chicago Brewing Co.
BREWING FACILITIES
Heritage Brewing Company, Lake Elsinore, California
Heritage operates a 12,000 barrels per year brewery in a 5,400 square feet
brewing facility and 4,000 square feet warehouse in Lake Elsinore, California.
The brewery has a 50 barrel brewhouse and twelve 50 barrel fermentation tanks.
The brewery has a 120 bottles per minute bottling line for 12 ounce and 22 ounce
bottles and a kegging line that can clean and fill 15 kegs per hour.
Riverside Brewing Company, Riverside, California
The brewpub is located in a leased, 75 year old brick building in the
historic Mission Inn district of Riverside, California. The production capacity
of the brewpub facility is 4,500 barrels per year. The brewpub has a 14 barrel
brewhouse, four 14-barrel fermentation tanks, twelve 7 barrel bright beer tanks
and other
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brewing equipment. It has no bottling line. The brewpub consists of a bar area
that seats 175, a restaurant that seats 148, and outside seating locations that
seat 220. The brewpub mainly serves its own brews and features a variety of food
items on its menu. From time to time the brewpub features live music or other
events such as cigar and beer tasting nights. The brewpub employs 30 full time
and 40 part time staff, including a full-time brewmaster.
The brewery is located in an industrial park in Riverside in a 18,000
square feet leased facility which has an initial production capacity of up to
30,000 barrels per year which can be expanded to 80,000 barrels per year. The
brewery has a 50-barrel capacity brewhouse and ten 100-barrel fermentation
tanks. The brewery has a bottling line with a throughput of approximately 160
bottles per minute, with the ability to produce both 22-fluid oz. and 12-fluid
oz. bottles. The brewery's kegging line can clean and fill approximately 30 kegs
per hour.
The Company had purchased tunnel pasteurization equipment, which was
initially planned for installation at Heritage, but which can be put to use more
effectively at Riverside Brewing Company's operation. The pasteurizer has an
initial capacity of 60 bottlers per minute at a rate of 12 pasteurization units,
and can be upgraded to 120 or 180 bottles per minute.
St. Stan's Brewing Company, Modesto, California
St. Stan's Brewing Company is located in a custom-built facility in the
downtown area of Modesto, California. The facility was completed in October 1990
and is part of a 14,500 sq. ft. which includes the brewery, a brewpub and gift
shop. The brewery currently has an annual capacity of approximately 20,000
barrels per year. The brewery has a 60-barrel capacity brewhouse and eight
120-barrel fermentation tanks and certain other equipment. The divisions's
kegging machine is staff built and has a production capacity of approximately 30
kegs per hour. Its bottling line has throughput of approximately 180 bottles per
minute. The brewery can be expanded to an annual capacity of approximately
50,000 barrels through the addition of fermentation tanks. The two-story brewpub
has a contemporary European appearance, and has a combined seating of
approximately 300 in its restaurant and bar area. The brewpub mainly serves
beers brewed in the brewery and features a variety of food items on its menu.
From time to time the brewpub features live music. The brewpub employs 28 full
time and part time staff. The brewpub and brewery share management,
administrative and office resources.
Chicago Brewing Company, Chicago, Illinois
The Company has entered into a reciprocal production and marketing
agreement with Chicago Brewing Company. The brewery was completed in 1990 and
occupies 21,000 sq. ft. in a 110,000 sq. ft. facility. The brewery currently has
an annual capacity of approximately 24,000 barrels per year; assuming the
company maintains its current product mix-production capacity increases to
30,000 barrels by producing all ale products. The brewery has a 50-barrel
capacity brewhouse and twelve 130 barrel tanks and three 110 barrel tanks. The
brewery's kegging machine is staff built, manually operated with a throughput of
approximately 65 kegs per hour. The brewery recently installed a new bottling
line which has a throughput of approximately 125 bottles per minute. The brewery
has flash pasteurization capability.
BREWING OPERATIONS
Brewing Ingredients
The Company's beers, which follow the German food purity law, are made only
from four natural ingredients: malted barley, hops, yeast, and water. The most
commonly used source of sugars for beer fermentation is provided by barley
grain. The grain contains complex sugars which, after processed in the malting
plant, provide the simple sugars for fermentation. The barley variety used by
the Company is two-row which provides fewer undesirable components than the
six-row varieties used by many large US breweries. Selected world class hops,
including many European varieties, provide bitterness, aromatics and flavor.
Yeast is a single-celled organism whose metabolism converts sugar into alcohol
and carbon dioxide. The yeast ferments the sugar water, known as "wort," which
is derived from the malted barley.
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Malting
The maltster steeps the barley grain in water to induce a controlled
germination followed by air drying and in some cases roasting via kilning. This
process, known as "malting", prepares the malt, through the creation of enzymes,
so that upon mashing, simple sugars are easily obtained from the complex sugars.
The malting process also imparts color and flavor characteristics to the grain.
The malted barley, referred to as "malt" is then sold to the brewery.
Mash/Lautering
The purpose of the mashing process is to create food for the yeast. Various
roasted and non-roasted malts are milled, and mixed with hot water in the mash
tun. Mashing is performed at either a constant temperature, or a series of
rising temperatures, depending on the brewing equipment, the raw materials being
used and the type of beer being brewed. During the mash, the complex
carbohydrates are converted into fermentable sugars. Enzymes, created in the
malting process, facilitate this conversion. The mash is then rinsed either in
the lauter tun or the mash tun to produce the wort which is high in fermentable
sugars. The mash system variables are controlled to determine the composition of
the wort and, ultimately, the taste and type of beer being brewed.
Brew Kettle Boiling
Before entering fermentation, the wort flows into a brew kettle to be
boiled, concentrated and clarified. Hops are added during the boil to impart
bitterness, aroma and flavor balance. The specific mixture of hops and the
timing of their addition is critical to produce the desired type beer. The
Company selects its hops from specific growing areas around the world and from
among a number of specific varieties cultivated within those growing areas.
Fermentation
After the boil, the wort is strained, cooled, aerated and then transferred
to the fermentation cellar. Here a controlled amount of a proprietary yeast
strain, at a selected temperature, is added ("pitched") to create fermentation.
Some of the carbon dioxide is recaptured and absorbed back into the beer,
providing a natural source of carbonation. The yeast may be either saccharomyces
carlsbergensis (used in lager beers) or saccharomyces cervisiae (used in alts,
ales, porters and stouts). Primary fermentation can take up to five days during
which time the yeast multiplies a number of time by "budding". At the end of
fermentation, a quantity of yeast is removed and stored for re-pitching. At the
conclusion of the fermentation, the beer is usually transferred to another tank.
The selection of krausening and/or lagering storage processes is an
important choice of the brewer as it determines the length of time required to
produce each batch of beer and therefore, the capacity of a brewery as well as
the cost of producing the beer. Krausening is a process which adds about one
week to the normal brewing cycle and is an important step in producing quality
beers. Many of the Company's beers undergo the kruasening process. During
Krausening, a small portion of young, still actively fermenting beer and yeast
is added to a tank of beer at the end of primary fermentation to produce a
second fermentation. Krausening produces a smoother, balanced beer flavor and
body. The carbon dioxide is produced is allowed to naturally carbonate the beer.
Lagering is a process, used with beers fermented with bottom yeasts, during
which the temperature of the beer is slowly reduced. This helps reduce harsh
flavor products resulting from this type of yeast, as well as clarifying and
mellowing the beer. Lagering may take from one week to several months.
Maturation/Finishing
After fermentation, the beer is cooled for several days while the beer is
clarified and full flavor develops. Depending on the style of product, the fully
conditioned beer may be filtered for clarity and/or carbonated for bottling or
keg racking. Filtration removes unwanted protein, yeast and bacteria. At this
point, the beer is in its
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peak condition and ready for bottling or keg racking. The entire brewing process
of ales, from mashing through filtration, is typically completed in 10 to 17
days, depending on the formulation and style of the product being brewed. For
lager beers the period ranges from one to six months.
Quality Control
The Company currently monitors its beer production with in-house analytical
and micro biological tests. These tests monitor product quality, retail shelf
stability, CO(2), color and bitterness, oxidation, yeast condition and unwanted
bacteria. The Company also utilizes independent laboratories for further product
analysis.
Kegging and Bottling
The Company packages its craft beers in both bottles and kegs. The
packaging of beer is mechanically complex requiring the beer be handled under
pressure, with minimal loss of its carbonation, while being sanitary packaged
into a variety of packages, some with specific labeling for various states. The
Company has a variety of options for packaging its bottle and keg
configurations.
SUPPLIERS
The Company deals with a variety of suppliers for the sourcing and
purchasing of raw materials for the Breweries. No one supplier accounts for more
than 10% or more of total purchases for the four month period ended April 30,
1996 (unaudited). St. Stan's Brewing Company purchased certain products from two
companies which accounted for approximately 27.3% and 12.0% of total purchases
in 1995, and 26.0% and 11.3% of total purchases in 1994. Two companies accounted
for approximately 26.8% and 17.9% of total purchases for the four months ending
April 30, 1996 (unaudited). Riverside Brewing Company purchased certain products
from three companies which accounted for approximately 13% (unaudited) and two
companies which accounted for approximately 69% (unaudited) of total purchases
for the four months ended April 30, 1996 and 1995, respectively. One company
accounted for approximately 40% and 38% of product purchases for the years ended
December 31, 1995 and 1994, respectively. Accounts payable to one company
accounted for 30% (unaudited) and 26% as of April 30, 1996 and December 31,
1995, respectively.
DISTRIBUTION
The Breweries' products are currently distributed through a network of
independent beer and liquor wholesale distributors. These products are generally
sold in bottles and kegs to restaurants, brewpubs, bars and taverns, as well as
in bottles to supermarkets, warehouse clubs, convenience stores and liquor
stores. The Company's distribution strategy is to select its distributors on the
basis of who it believes is best able to promote a variety if not all of the
Company's products in a given market. In each of its targeted markets, the
Company selects its distributors based on certain criteria, including: (i)
market strength measured in terms of financial resources and number and size of
accounts served, (ii) commitment to expend resources to educate consumers and
retailers about the high quality and unique tastes of craft beer, (iii) ability
to properly execute marketing and promotions programs, and (iv) reputation for
customer service, including the ability to frequently service retail accounts,
rotate stock to maintain freshness, monitor tap lines and beer storage.
Distributors selected to date include distributors whose primary products are
produced by Anheuser-Busch, Miller and Coors and wine and spirits makers. The
Company spends considerable time and effort to establish, maintain and support
its relationship with distributors. The Company also offers its products
directly to consumers at the Company's brewpub-restaurants in Modesto and
Riverside, California. Chicago Brewing Company, with which the Company has
entered a reciprocal production and marketing agreement, self-distributes in the
city of Chicago.
The Company demonstrates its commitment to the Breweries' independent
distributors in many ways, including its refusal to sell directly to retail
accounts within the appointed distributors' territories and, where permitted by
law, involving distributors' sales representatives in the Company's distributor
incentive programs.
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Each of the Breweries' distribution agreements appoints the distributor as
the exclusive distributor for one or more of the Breweries' products in a
specific geographic area, subject in certain cases to the Breweries' rights to
engage in certain limited retailing activities. The distribution agreements
provide that payment shall be made in full not less than 30 days after the date
of delivery. The distribution agreements also provide for general cooperation
among the distributors and the Breweries' in marketing, merchandising and
promotional efforts. These distribution agreements may be terminated by either
party 30 or 60 days after written notice of dissatisfaction with performance
specifying the grounds for such dissatisfaction if the specified deficiencies
have not been cured by the end of the 30 or 60-day period. In some states, the
terms of the Breweries' contracts with its distributors may be affected by laws
that restrict enforceability of some contract terms, especially those related to
the Breweries' right to terminate the services of its distributors.
At the time of this offering, the Breweries' products are not necessarily
distributed through the same wholesale distributors in certain markets.
Riverside Brewing Company has appointed 40 distributors in 28 states. St. Stan's
Brewing Co. has appointed 35 distributors in 19 states. Chicago Brewing Company
has appointed 52 primary distributors in 21 states. The Company may consolidate
distribution of the Breweries' brands through the same distributors in certain
markets if efficiencies and marketing advantages can be obtained. Such plans may
be subjected to or constrained by state regulations.
Three distributors accounted for 37%, 23% and 17% of Heritage net sales
(unaudited), respectively, for the four-month period ended April 30, 1996. For
St. Stan's Brewing Co. five distributors accounted for 35.4% and 28.9% of sales,
of which one distributor accounted for 10.1% of 1995 sales, during the years
ended December 31, 1995 and 1994, respectively. For the four months ended April
30, 1996 (unaudited), five distributors accounted for 26.5% of sales. Five
distributors accounted for 69.5% and 42.5%, of which one distributor accounted
for 33.6% of the accounts receivable balance at December 31, 1995, of the
accounts receivable balance at December 31, 1995 and April 30, 1996 (unaudited),
respectively.
For Riverside Brewing Company one distributor accounted for approximately
23% (unaudited) of consolidated net sales for the four months ended April 30,
1996. No one distributor made up 10% or more of net sales for the four months
ended April 30, 1995 (unaudited). Two distributors accounted for approximately
18% of consolidated net sales for the year ended December 31, 1995 and one
distributor accounted for approximately 18% of consolidated net sales for the
year ended December 31, 1994.
SALES AND MARKETING
Marketing Strategies
The Company's marketing and marketing communication strategies focus on
developing strong local brand awareness and consumer following for the Company's
brands, in particular in those markets in which the Breweries are currently
located, while assisting further volume throughput, broader account penetration
and encouraging an increased level of trial purchases. The Company wants to
emphasize the advantage of consuming fresh locally produced beer over beer
imported from out-of-state. At the same time it plans to utilize its
multi-location brewing capacity and comprehensive distribution network to
establish a nationwide presence for some of its brands. At the same time the
Company plans to grow its contract brew business from medium sized contract
brewers to optimize Company's competitive position and utilization of brewing
capacity and resources. This will be achieved through effective regional
communications campaigns, retail and distributor incentive programs.
Advertising & Promotion
The Company has allocated approximately $1 million from the proceeds of the
Offering towards product development, market research, point of sale materials,
and promotion and paid advertising to be spent over the next 18 months. See "Use
of Proceeds."
The Company has retained the creative services of Paragon Design, a well
respected creative agency known for its marketing communication programs for
clients that include Disney Consumer Products, MCA/Universal Entertainment
(Jurassic Park, Apollo 13), Mattel Toys, Baskin Robbins, L.A. gear,
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AirTouch and others. Paragon has been assigned with formulating brand
strategies, creative campaigns, new packaging designs, and creating a corporate
identity program for Beverage Works and the Breweries.
Pricing
Craft beers generally sell at a price premium relative to domestic
industrial beers, with retail prices for craft beers typically ranging from
$4.99 to $7.99 per six pack of 12 ounce bottles versus approximately $2.99 to
$3.99 for industrial beers. This price premium provides generally higher profit
margins for the distributors and retailers that offer craft beers. The Company
believes that distributors and retailers are eager to increase their sales of
higher margin craft beers as industrial brewers continue to wage price wars to
gain market share in this flat growth segment thereby decreasing distributor's
margins. To further increase retail product sales, the Company periodically
offers "post-offs," or price discounts to its distributors. Distributors and
retailers often participate in these price discounts.
New Products
Key to the Company's success is the ongoing development of unique quality
brews for high growth market segments. It utilizes the combined experience of
its brewmasters whose brews have won numerous awards. Among other market
segments, the Company plans to focus on small batch, high margin brews.
Contract Brews
The Breweries close proximity to key markets positions the Company to
improve utilization of its current and future brewing capacity and generate
additional income by expanding its already strong contract brewing and private
label business. The Company is currently having discussions with several
potential contract brew customers.
International Operations
The Company is negotiating a reciprocal production and marketing agreement
with "US Micro Brewing Ltd." U.S. Micro Brewing, Ltd. currently owns and
operates the South China Brewing Company in Hong Kong, and is in the process of
opening several micro breweries in key growth markets in the Pacific Rim, Europe
and Mexico. The planned cooperation may include domestic distribution,
imports/export, exchange of brewing knowledge and marketing techniques, product
formulas, and utilization of brewing capacity. The Company is also having
discussions with N.V. Pauwels, owned by one of the Company's overseas investors,
a Belgian corporation, operating in the field of consumer food products
manufacturing, marketing and distribution, regarding the possible manufacture
and distribution of the Company's products in Europe.
COMPETITION
The craft-brewed and high-end segments in the U.S. beer market are highly
competitive due to continuing proliferation of micro-brewers and contract
brewers, the recent introduction of fuller flavored beers by national brewers,
efforts by other micro-brewers to expand their production capacities and a
general surplus of under-utilized domestic brewing capacity, which facilitates
existing contract brewer expansion and the entry of new contract brewers. Recent
growth in the sales of craft-brewed beers are expected to increase competition
and, as a result, prices and market share of the Company's products may
fluctuate and possibly decline.
Direct competitors of the Company include all large contract brewers,
regional brewers and local micro brewers. Indirect competitors include the major
national mass producers such as Anheuser Busch, Inc. and Adolph Coors Brewing.
The national brewers, recognizing the significant growth potential and the
slight but growing shift in market share from national mass-produced beers to
craft brews, have made significant investment in the craft brew industry. The
Company expects that certain of the major national brewers, with their greater
financial resources and established national distribution networks, will seek
further participation in the continuing growth of the craft beer segment through
investments in, or formation of distribution alliances with, craft brewers. The
increasing participation of the major national brewers will likely increase
competition for market share and increase price competition within the craft
beer segment. Many of the
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Company's competitors in the craft beer segment have greater financial and other
resources than the than the Company. See "Risk Factors -- Increased Competition
for Specialty Beers."
The Company's products also compete generally with other alcoholic
beverages including other segments of the beer industry and low alcohol
products. The Company competes with other beer and beverage companies not only
for consumer acceptance and loyalty but also for shelf and tap space in retail
establishments and for marketing focus by the Company's distributors and their
accounts, all of which also distribute and sell other craft brews, beers and
alcoholic beverage products. The Company also competes against producers of
imported beers. Although imported beers currently account for a much greater
share of the U.S. beer market than craft beers, the Company believes that local
craft brewers possess some competitive advantages over certain importers,
including lower shipping and no importation costs, proximity to and familiarity
with local consumers, a higher degree of product freshness, eligibility for
lower federal excise taxes and freedom from currency fluctuations.
The principal methods of competition in the craft-brewed segment of the
beer industry include product quality and taste, brand advertising, trade and
consumer promotions, pricing, packaging and the development of new products. The
Company believes that its competitive position is enhanced by its dedication to
product quality and its ability to deliver fresh product brewed locally in
multiple markets, lower production and transportation costs resulting from
operating efficiencies, innovative marketing and advertising methods, a broad
and diverse product/brand lineup, new product launches and award winning quality
brews.
REGULATION
The manufacture and sale of alcoholic beverages is a highly regulated and
taxed business. The Company's operations may be subject to more restrictive
regulations and increased taxation by federal, state and local governmental
entities than are those of non-alcohol related businesses. Federal, state and
local laws and regulations govern the production and distribution of beer. These
laws and regulations govern permitting, licensing, trade practices, labeling,
advertising, marketing, distributor relationships and related matters. Federal,
state and local governmental entities also levy various taxes, license fees and
other similar charges and may require bonds to ensure compliance with applicable
laws and regulations. Failure by the Company to comply with applicable federal,
state or local laws and regulations could result in penalties, fees, suspension
or revocation of permits, licenses or approvals. There can be no assurances that
other or more restrictive laws or regulations will not be enacted in the future.
See "Risk Factors -- Government Regulation; Taxation."
Licenses and Permits
The Breweries produce beer and sell it to distributors or retailers.
Brewery and wholesale operations require various federal, state and local
licenses, permits and approvals. In addition, some states prohibit wholesalers
and/or retailers from holding an interest in any supplier such as the Company
and the Breweries. Violation of such regulations can result in the loss or
revocation of existing licenses by the wholesaler, retailer and/or the supplier.
The loss or revocation of any existing licenses, permits or approvals, failure
to obtain any additional or new licenses, permits or approvals or the failure to
obtain approval for the transfer of any existing permits or licenses could have
a material adverse effect on the ability of the Company to conduct its business.
On the federal level, brewers are required to file with the Bureau of Alcohol,
Tobacco and Firearms ("ATF") an amended Brewer's Notice every time there is a
material change in the brewing process or brewing equipment, change in the
brewery's location, change in the brewery's management or a material change in
the brewery's ownership. Brewers must seek ATF approval of an amended Brewer's
Notice prior to the change taking place. The Company's operations are subject to
audit and inspection by ATF at any time.
On the state and local level, some jurisdictions merely require notice of
any material change in the operations, management or ownership of a permittee or
licensee. Some jurisdictions require advance approvals and require that new
licenses, permits or approvals must be applied for and obtained in the event of
a change in the management or ownership of the permittee or licensee. State and
local laws and regulations governing the sale of beer within a particular state
by an out-of-state brewer or wholesaler vary from locale to locale.
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ATF permits and brewer's registrations can be suspended, revoked or
otherwise adversely affected for failure to pay tax, to keep proper accounts, to
pay fees, to bond premises, to abide by federal alcoholic beverage production
and distribution regulations and to notify ATF of any change (as described
above), or if holders of 10% or more of the Company's equity securities are
found to be of questionable character. Permits, licenses and approvals from
state regulatory agencies can be revoked for many of the same reasons.
Because of the many and various state and federal licensing and permitting
requirements, there is a risk that one or more regulatory authorities could
determine that the Company has not complied with applicable licensing or
permitting regulations or does not maintain the approvals necessary for it to
conduct business within their jurisdictions. There can be no assurance that any
such regulatory action would not have a material adverse effect upon the Company
or its operating results.
TAXATION
The federal government and each of the states levy excise taxes on
alcoholic beverages, including beer. For brewers producing no more than
2,000,000 barrels of beer per calendar year, the federal excise tax in $7.00 per
barrel on the first 60,000 barrels of beer removed for consumption or sale
during a calendar year, and $18.00 per barrel for each barrel in excess of
60,000. For brewers producing more than 2,000,000 barrels of beer in a calendar
year, the federal excise tax is $18.00 per barrel. None of the breweries
currently produces more than 60,000 barrels per year. Individual states also
impose excise taxes on alcoholic beverages in varying amounts, which have also
been subject to change. The state excise taxes are usually paid by the Company's
distributors.
Congress and state legislatures routinely consider various proposals to
impose additional excise taxes on the production and distribution of alcoholic
beverages, including beer, in connection with various governmental
budgetbalancing or funding proposals. Further increases in excise taxes on beer,
if enacted, could result in a general reduction of malt beverage sales and
adversely effect the Company's performance.
TRADEMARKS
The Company and the Breweries have obtained or applied for U.S. Trademark
Registrations for the marks of its products, and in some cases for most of its
logo designs. The Company regards its trademarks as having substantial value and
as being an important factor in the marketing of its products. The Company is
not aware of any infringing uses that could materially affect its current
business of any prior claim to the trademarks that would prevent the Company
from using such trademarks in its business. The Company's policy is to pursue
registration of its marks whenever possible and to oppose vigorously any
infringements of its marks.
EMPLOYEES
The Company and its subsidiaries will employ 135 employees after the
closing of the Offering, including 26 in brewery operations, 98 in the
brewpubrestaurants, 4 in administration and 8 in sales and marketing. These
include all employees of St. Stan's Brewing Company, of which the Company owns
51% in a joint-venture. None of the Company's employees is represented by a
labor union. The Company has experienced no work stoppages and believes that its
employee relations are good.
PROPERTIES
The St. Stan's Brewery and Brewpub is located at 821 L Street in Modesto,
California. The 14,500 square foot building was constructed in 1991. The
building is subject to a 50-year ground lease which expires in 2038, at which
time the building and ground lease revert back to the lessor. The ground lease,
which was originally entered into between the lessor and Stanislaus Brewing
Company, Inc., was subleased to Prost Partners. The sublease includes base rent
increases over the term of the lease at the lesser of (1) the percentage change
that occurs in the Consumer Price Index or (b) five percent (5%). In addition to
base rent increases, appraisals are required at scheduled dates. The minimum
annual rental payments, after a land appraisal, shall be based on no less than
12% of the appraisal amount. In addition to the base rental payments, the
sublease agreement requires the payment of the real property taxes and insurance
costs. The monthly rental under the ground lease and sublease is $4,250.
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The Riverside Brewing Company brewery is located in an industrial park, in
Riverside, California. The brewery occupies five suites of approximately 26,000
square feet. The total monthly rent is $9,889.00. The Riverside Brewing Company
pays an additional 18% of the common area operating expenses. The leases expire
March 31, 1998. The brewery leases are in the name of John Barnicoat, the former
president of Orange Empire Brewing Company, who has assigned these leases to the
Riverside Brewing Company. The Riverside Brewing Company brewpub is located in
Riverside, California's Mission Inn District. The brewpub occupies approximately
5,000 square feet. The total monthly rent is $6,365.40. This lease expires
August 2003. In addition, the Riverside Brewing Company leases substantially all
of its equipment and other personal property under a capital lease with a
related party expiring through August 2003).
Heritage's Brewery is located in Lake Elsinore, California. Total monthly
rent is $2,170. The lease expires in 1998. The Company does not intend to renew
the lease.
The Company's principal executive offices are located at 9800 South
Sepulveda Boulevard, Los Angeles, California. The monthly rent is $500 and the
term is month to month. The company's other executive office is located in
Newport Beach at 2431 West Coast Highway, Newport Beach, California. The monthly
rent payment is $1,800 and the term of the lease is month to month.
ENVIRONMENTAL REGULATIONS AND OPERATING CONSIDERATIONS
The Company's brewing operations are subject to a variety of extensive and
changing federal, state and local environmental laws, regulations and ordinances
that govern activities or operations that may have adverse effects on human
health or the environment. Such laws, regulations ordinances may impose
liability for the cost of remediating, and for certain damages resulting from,
sites of past releases of hazardous materials. The Company believes that it
currently conducts, and in the past has conducted, its activities and operations
in substantial compliance with applicable environmental laws, and believes that
costs arising from existing environmental laws will not have a material adverse
effect on the Company's financial condition or results of operations. There can
be no assurance, however, that environmental laws will not become more stringent
in the future or that the Company will not incur costs in the future in order to
comply with such laws.
The Company's 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. See "Business -- Brewing Operations." The
occurrence of such a problem could result in a costly product recall and serious
damage to the Company's reputation for product quality, as well as claims for
product liability which may negatively impact the Company. The Company maintains
insurance which the Company believes is sufficient to cover any liability claims
which might result from a contamination problem in its products, but which may
not cover any damage to the Company's reputation. See "Risk Factors -- Operating
Hazards."
LEGAL PROCEEDINGS
The Company and its subsidiaries are not currently involved in any material
pending legal proceedings other than discussed below. Other than as described
below, the Company is not aware of any material legal proceedings threatened
against it. Tamkin Investments has asserted that it has been damaged by the
Company negotiating and entering the acquisition agreement with Riverside
Brewing Co. and the partnership agreement with St. Stan's Brewing Co. in
violation of a confidentiality agreement and letter agreement dated January 18,
1996 and January 16, 1996, respectively. The confidentiality agreement provided
that the Company would not negotiate with these companies while these companies
were under letters of intent with Tamkin. The Company does not believe that
Tamkin Investments' claim has merit; however if Tamkin should prevail, the
Company cannot determine the amount of damages. The letters of intent with those
companies expired prior to the Company commencing negotiations with any of these
companies. The Company's consolidated financial statements do not reflect any
provision for loss, if any, that may result from the outcome of this matter.
Riverside Brewing Company ("RBC") is presently in litigation where the
plaintiff is claiming damages against Riverside in the amount of $60,000.
Controlling principals of RBC's parent corporation have agreed to indemnify the
Company for any loss, if any, incurred by RBC arising out of this litigation.
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MANAGEMENT
DIRECTORS AND OFFICERS
The directors and officers of the Company are:
NAME AGE POSITION
- ----------------------------------------------------- ---- ---------------------------------
Frederik G.M. Rodenhuis.............................. 41 President, Chief Executive
Officer and Chairman of the Board
of Directors
Lyle R. Maul......................................... 44 Chief Financial Officer, Vice
President of Finance, Chief
Operating Officer, and Secretary
Garith Helm.......................................... 53 Vice President of Brewing
Operations
John Stoner.......................................... 38 Vice President of New Breweries
and Director
Kathleen Burke....................................... 43 Vice President -- Sales
Adam Wachtel......................................... 35 Director
Lord Charles Spencer-Churchill....................... 55 Director
Steven Scarano....................................... 35 Director
MANAGEMENT BIOGRAPHIES
Frederik G.M. Rodenhuis, Chairman, President and Chief Executive
Officer. Mr. Rodenhuis has been the Chief Executive Officer and a director of
the Company since November 1995. From June 1993 to October 1995, Mr. Rodenhuis
was the chief executive officer of Seaborn Beverages Company. From April 1991 to
September 1992, he was Director International Marketing Development for Original
New York Seltzer, and was responsible for international and domestic marketing
policies. From June 1989 to April 1991, Mr. Rodenhuis was President of Interex
Corp., a United States subsidiary of KLM Royal Dutch Airlines, engaged in the
specialty freight business. From 1987 to 1989, he was Director of Corporate
Marketing of Burlington Air Express. Mr. Rodenhuis has a law degree and a
masters degree in business administration from Erasmus University, The
Netherlands. In March 1995, Mr. Rodenhuis filed for Chapter 13 bankruptcy
protection. He has advised the Company that this was due primarily to the use of
his personal resources over the last two years to guarantee and pay obligations
of Seaborn Beverages Company. Mr. Rodenhuis brings a wealth of domestic and
international experience in strategic product development, marketing and sales
management and corporate administration. Mr. Rodenhuis has conducted business in
key markets worldwide, speaks several foreign languages and has made numerous
media appearances nationwide.
Lyle R. Maul, Chief Financial Officer, Chief Operating Officer and
Secretary. Mr. Maul has been the Company's Chief Financial Officer since
November, 1995. From April 1995 he has been the President of Deretin
Enterprises, a financial consulting company. From October 1990 to April 1995,
Mr. Maul was the President of Deretin Enterprises, Inc. a business consulting
firm with clients in the following industries, among others: consumer products,
publishing, computer software, and real estate development. Mr. Maul is a co-
founder of Government Technology Services, Inc., which was listed as the fifth
fastest growing private company in the U.S. until it went public. It is now the
leading reseller of microcomputer equipment to the federal government. Prior to
this, Mr. Maul was a principal and Chief Financial Officer of Softeam, Inc., a
leading distributor of microcomputer products. Mr. Maul has been directly
involved with over ten entrepreneurial ventures and has extensive experience
with equity and debt financings for small businesses. Mr. Maul has a bachelors
degree in business administration and a masters degree in entrepreneurship and
venture management from the University of Southern California. Mr. Maul is also
a co-author of The Entrepreneur's Road Map to Success -- a winner of the
Benjamin Franklin Award as the Best Business/Career Book.
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Garith Helm, Vice President of Brewing Operations. Mr. Helm will oversee
all brewing production and quality control. Mr. Helm co-founded St. Stan's
Brewing Company along with Romy Angle in 1984. He designed and constructed the
company's first 3,000 barrel brewery and designed and coordinated the
construction of the current 50,000 barrel capacity brewery and pub. He currently
teaches Practical Brewing and Applications, a certified 180 hour course, at
California State University, Turlock. Since 1984, Mr. Helm has been the Chief
Executive Officer and brewmaster for Stanislaus Brewing Company, has designed
the brewery, the St. Stan's products and has provided the direction for the
growth of the Company. His brewing education was acquired at the University of
California Davis, in brewing science and as a practical home brewer from 1975 to
1984. From 1979 to 1989, Mr. Helm was employed by Lawrence Livermore National
Laboratory, first as an Engineer then as Engineering Manager responsible for
thirty-one research support engineers. From 1982 to 1988, he was resource
Manager in the Engineering Department with direct responsibility for developing
and managing a $51 million budget funding 600 full-time employees. Additional
responsibilities were supervising all engineering facilities, and manpower
allocations for 3,000 mechanical and electronic engineering employees. As one of
six members of the Engineering Executive Committee, he developed policy on broad
issues affecting the laboratory and was Chief of Staff to the Associate Director
for Engineering. From 1969 to 1979, Mr. Helm was a lecturer at California State
University Stanislaus in the Physics Department and was also the Electronics
Design Department Manager. From 1969 to 1972, he was a part-time lecturer in the
Electronics Department at Modesto Junior College. Mr. Helm received his bachelor
degree in physics in 1975.
Kathleen Burke, Vice President of Sales. Ms. Burke has been the Vice
President -- Sales for the Company since December 1995. From 1993 to the
present, Ms. Burke has been Vice-President of Sales of Seaborn Beverages Co.
From 1987 to 1993 she was Vice President of Sales for Southern California for
Original New York Seltzer.
John Stoner, Vice President of New Breweries. Mr. Stoner, the Company's
Chief Operations Officer from October 1995 to June 1996, is the chief executive
officer of Heritage Brewing Company, which he co-founded in September 1989. From
1981 to 1989, he was employed with Rockwell International being appointed
Manager of Operations. Mr. Stoner has a bachelor's degree in finance management
and operations and a masters degree in business administration from California
State University Long Beach.
Steven Scarano, Director. Mr. Scarano has been a partner in Scarano &
Lipton, P.C., a certified public accounting firm, since 1990. Since June 1995,
Mr. Scarano has also been the Chairman of the Board and President of American
Gladiators Dinner Theatre in Orlando, Florida. Since December 1994 Mr. Scarano
has also been a Director and Vice President of Colorstone International, Inc. He
is a member of the American Society of Certified Public Accountants and the New
York State Society of Certified Public Accountants.
Lord Charles Spencer-Churchill, Director. Lord Spencer-Churchill has been
employed by Forte PLC, a hotel chain. He is Vice President -- Guest Relations.
He is also executive Director of Venwin Systems, Inc.
Adam B. Wachtel, Director. Mr. Wachtel, the Company's initial controlling
shareholder, is a director and consultant of Imafina, Inc., a money management
firm with its principal offices in Fribourg, Switzerland since August 1994. Mr.
Wachtel is not a shareholder of Imafina, but does provide financial consulting
services on a per-transaction basis. Since March 1994, Mr. Wachtel has also been
the President of A.W. Meridian Group, Inc., a financial consulting firm which
sometimes invests its own funds. For the two years prior thereto, he was a
Managing Director of Whale Securities L.P., performing investment banking
duties. For the two years prior thereto, he was an Associate Director of First
Hanover, performing investment banking duties.
SIGNIFICANT EMPLOYEES
Mark Mericle, Operations Manager. Mr. Mericle is the other co-founder of
Heritage Brewing Company and is responsible for the brewing operations of
Heritage. From 1981 to 1989, he was employed with Rockwell International. Mr.
Mericle has a bachelor's degree in communications from California State
University Fullerton and has studied at the Institute for Brewing Studies.
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EXECUTIVE COMPENSATION
Compensation of Executive Officers. The following table sets forth the
cash compensation paid by the Company to its executive officers for services
rendered during the fiscal year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
---------------------------------
AWARDS
-----------------------
ANNUAL COMPENSATION SECURITIES PAYOUTS
---------------------------------- RESTRICTED UNDERLYING ------- ALL
OTHER ANNUAL STOCK OPTIONS/ LTIP OTHER
NAME AND POSITION YEAR SALARY(1) BONUS COMPENSATION(2) AWARDS(3) SARS PAYOUTS COMPENSATION(4)
- --------------------------- ---- -------- ----- --------------- ---------- ---------- ------- ---------------
Frederik G.M. Rodenhuis.... 1995 $120,000 $ 0 $13,200 -- -- -- --
CEO and President
Lyle R. Maul............... 1995 $ 75,000 $ 0 $ 6,000 -- -- -- --
Chief Financial Officer,
Chief Operations Officer
and Secretary
John Stoner................ 1995 $ 75,000 $ 0 $ 6,000 -- -- -- $73,524
Vice President of New
Breweries
Mark Mericle............... 1995 $ 75,000 $ 0 $ 6,000 -- -- -- $73,521
Operations Manager
- ---------------
(1) Assumes salary for a full year. See "Employment Agreements." Actual
compensation paid for the period August 2, 1995 (date of incorporation) to
December 31, 1995 to Messers. Rodenhuis and Maul was $20,000 and $12,000,
respectively. Actual salary paid for the period from November 8, 1995 to
December 31, 1995 by Heritage Brewing Company to Messrs. Stoner and Mericle
was $12,000. Actual salary paid for the period August 2, 1995 (date of
incorporation) through December 31, 1995 to Messrs Stoner and Merical was
$ and $ , respectively. See "Management -- Employment
Agreements."
(2) Assumes annual car allowance and nonaccountable expense allowance for Mr.
Rodenhuis. Assumes annual car allowance for Messrs. Maul, Stoner and
Mericle.
(3) On November 19, 1995, the Company authorized the grant of two plans whereby
officers of the Company would receive warrants to purchase shares of the
Company's Common Stock provided certain earnings criteria were achieved. The
first plan, the Management Warrant Plan, provided that a total of 333,500
warrants to purchase Common Stock at $4.50 per share have been granted to
certain executive officers or their designees based on the Company's
earnings. The second plan, the Supplemental Warrant Plan, provided that
Messrs. Rodenhuis, Maul and Stoner will be granted warrants to purchase a
total of 600,000 shares of Common Stock at $4.50 per share based on the
Company's earnings. The Company had not achieved any of the earnings
criteria to allow for the grant of any warrants under the Management Warrant
Plan or Supplemental Warrant Plan and, as part of receiving options under
the Incentive Stock Option Plan and Nonqualifed Stock Option Plan, agreed to
release the Company of any obligations under the Management Warrant Plan or
Supplemental Warrant Plan. See "Options Grant Table."
(4) Messrs. Stoner and Mericle received 24,508 and 24,507 shares of Common Stock
valued at $3.00 per share as consideration for consulting services provided
to the Company.
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OPTIONS GRANT TABLE
COMMON STOCK OPTIONS GRANTED IN FISCAL YEAR 1995(1)
% OF TOTAL OPTIONS
NUMBER OF SHARES OF GRANTED TO
COMMON STOCK EMPLOYEES AND EXERCISE
UNDERLYING OTHERS IN FISCAL PRICE EXPIRATION
NAME OPTIONS GRANTED YEAR 1995 PER SHARE DATE
- ------------------------------------------ ------------------- ------------------ --------- ----------
Frederik G. M. Rodenhuis.................. 632,491 33.4% $5.20 9/3/06
Chief Executive Officer and President
Lyle R. Maul.............................. 632,491 33.4% $5.20 9/3/06
Chief Financial Officer, Chief
Operations Officer and Secretary
John Stoner............................... 113,584 6.0% $5.20 9/3/06
Vice President of New Breweries
Mark Mericle.............................. 113,584 6.0% $5.20 9/3/06
Operations Manager
- ---------------
(1) The figures in this table describe the total number of options granted under
the Company's Nonqualified Stock Option Plan and Incentive Stock Option
Plan. See "Management -- Nonqualified Stock Option Plan" and "Incentive
Stock Option Plan." Messrs. Rodenhuis and Maul were each granted 382,491
options (or 41% each of the total granted) under the Nonqualified Stock
Option Plan and 250,000 options (or 26% each of the total granted) under the
Incentive Stock Option Plan. Messrs. Stoner and Mericle were each granted
63,584 options (or 7% each of the total granted) under the Nonqualified
Stock Option Plan and 50,000 options (or 5% each of the total granted) under
the Incentive Stock Option Plan.
EMPLOYMENT AGREEMENTS
The Company has a four-year employment agreement with Frederik G.M.
Rodenhuis, pursuant to which Mr. Rodenhuis is to serve as Chairman of the Board,
Chief Executive Officer and President of the Company through November 18, 1998.
The employment agreement provides for a minimum base salary of $120,000 per
annum, a $500 monthly car allowance, which increases $50 annually, health
insurance premiums for family members, personal professional fees in 1997 of
$2,500 increasing to $5,000 annually, life insurance premiums for the benefit of
Mr. Rodenhuis' beneficiaries increasing to $5,000 annually, $600 nonaccountable
monthly expense allowance, and such other benefits available to other Company
employees. Although Mr. Rodenhuis presently devotes his full business time to
the Company, his employment agreement permits him to engage in other business
activities that are not competitive with the business of the Company and that do
not materially interfere with his performance of his duties and responsibilities
to the Company.
The Company has a four-year employment agreement with Lyle R. Maul,
pursuant to which Mr. Maul is to serve as Chief Financial Officer, Chief
Operations Officer and Secretary. The employment agreement, which becomes
effective on the close of the Offering, provides for a minimum base salary of
$108,000 per annum, a $500 monthly car allowance, which increases $50 annually,
health insurance premiums for family members, personal professional fees in 1997
of $2,500 increasing to $5,000 annually, life insurance premiums for the benefit
of Mr. Maul's beneficiaries premiums increasing to $5,000 annually, $500
nonaccountable monthly expense allowance, and such other benefits available to
other Company employees. Although Mr. Maul presently devotes his full business
time to the Company, his employment agreement permits him to engage in other
business activities that are not competitive with the business of the Company
and that do not materially interfere with his performance of his duties and
responsibilities to the Company.
Each of Mr. Rodenhuis' and Mr. Maul's employment agreements grant to the
subject employee the right to receive his salary and benefits through the
scheduled expiration date of such employment agreement in the event that the
Company terminates such individual's employment other than "for cause."
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The Company also has employment agreements with other officers and
significant employees of the Company. Mr. Stoner's employment agreement provides
for a base salary of $75,000 per annum. Ms. Burke's employment agreement
provides for a base salary of $75,000 per annum. Mr. Mericle's employment
agreement provides for a base salary of $75,000 per annum. Mr. Helm's employment
agreement is for three years at a base salary of $75,000 per annum. Ms. Angle's
employment agreement is for three years and provides for a base salary of
$70,000 per annum. Mr. Kahn's employment agreement is for two years and provides
for a base salary of $60,000 per annum. Each of these employment agreements
provides for benefits comparable to those provided to other Company employees,
and, except for Mr. Kahn, $500 monthly car allowance.
Mr. Maul will receive a cash bonus of $10,000 upon the close of this
Offering if it closes prior to January 1, 1997. Mr. Maul will also be entitled
to a $10,000 bonus, up to a maximum of $20,000, for each acquisition completed
or approved by the Company's Board of Directors prior to January 1, 1997.
INCENTIVE STOCK OPTION PLAN
Effective August 26, 1996, the Incentive Stock Option Plan (the "Incentive
Stock Option Plan") was adopted by the Company. A total of 1,500,000 authorized
but unissued shares of Common Stock are reserved for issuance under the
Incentive Stock Option Plan. As of August 26, 1996, options to purchase 955,000
shares of Common Stock have been granted to certain employees of the Company.
The purpose of the Incentive Stock Option Plan is to attract and retain
employees (including officers) of the Company (including its subsidiaries) and
other affiliates (if any) of the Company and provide such people with additional
incentives by increasing their equity ownership in the Company. Options granted
under the Incentive Stock Option Plan are intended to qualify as incentive
options under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or by non-qualified. The Incentive Stock Option Plan is intended to
satisfy the conditions of Section 16 of the Exchange Act pursuant to Rule 16b-3
promulgated thereunder ("Rule 16b-3"). The Incentive Stock Option Plan is
administered by a committee of the Company's Board of Directors comprised of
directors who are disinterested within the meaning of Rule 16b-3. Subject to the
terms of the Incentive Stock Option Plan, the committee administering the plan
has the sole authority and discretion to grant options, construe the terms of
the plan and make all other determinations and take all other action with
respect to the Incentive Stock Option Plan.
Options are exercisable during the period specified by the committee
administering the Incentive Stock Option Plan, except that options become
immediately exercisable in the event of a change in control of the Company. See
"Risk Factors -- Effect of Anti-Takeover Provisions." The grants made as of the
date of this Prospectus provide that options will become exercisable over a
four-year period, 25% each year at $5.20 per share. No option is exercisable
more than 10 years from the date of grant (or such other period as may be
required by the Code) or after the option holder leaves the Company's employ
(other than by reason of death). Options are non-transferable, except by will or
the laws of intestate succession or pursuant to a qualified domestic relations
order. Shares underlying options that terminate unexercised are available for
reissuance under the Incentive Stock Option Plan. The per share exercise price
of options granted under the Incentive Stock Option Plan will be determined by
the committee of the Board of Directors administering the Incentive Stock Option
Plan, except that incentive stock options may not be exercised for less than
100% of the Fair Market Value of a share of the Company's Common Stock on the
date of grant.
NONQUALIFIED STOCK OPTION PLAN
Effective August 26, 1996, the 1996 Nonqualified Stock Option Plan (the
"Nonqualified Plan") was adopted by the Company. A total of 933,500 authorized
but unissued shares of Common Stock are reserved for issuance under the
Nonqualified Plan. As of August 26, 1996, the options to purchase 933,500 shares
of Common Stock have been granted to certain employees of the Company. The
purpose of the Nonqualified Plan is to retain certain key employees (including
officers) of the Company and provide such people with additional incentives by
increasing their equity ownership in the Company. Options granted under the
Nonqualified Plan are not intended to qualify as incentive options under Section
422 of the Code. The Plan is intended to satisfy the conditions of Section 16 of
the Exchange Act pursuant to Rule 16b-3 promulgated
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thereunder ("Rule 16b-3"). The Nonqualified Plan is administered by a committee
of the Company's Board of Directors comprised of directors who are disinterested
within the meaning of Rule 16b-3. Subject to the terms of the Nonqualified Plan,
the committee administering the plan has the sole authority and discretion to
grant options, construe the terms of the plan and make all other determinations
and take all other action with respect to the Stock Option Plan.
Options are exercisable during the period specified by the committee
administering the Nonqualified Plan, except that options become immediately
exercisable in the event of a change in control of the Company. See "Risk
Factors -- Effect of Anti-Takeover Provisions." Generally, options will vest
after the grantee has been employed with the Company for four years. However,
options may be exercisable at $5.20 per share an earlier date provided the
Company achieves certain earnings criteria. No option is exercisable more than
10 years from the date of grant (or such other period as may be required by the
Code) or after the option holder leaves the Company's employ (other than by
reason of death). Options are non-transferable, except by will or the laws of
intestate succession or pursuant to a qualified domestic relations order. Shares
underlying options that terminate unexercised are available for reissuance under
the Nonqualified Plan. The per share exercise price of options granted under the
Nonqualified Plan will be determined by the committee of the Board of Directors
administering the Stock Option Plan, except that incentive stock options may not
be exercised for less than 100% of the Fair Market Value (as defined in the
Stock Option Plan) of a share of the Company's Common Stock on the date of
grant.
INCENTIVE COMPENSATION PLAN
The Company adopted a cash incentive bonus compensation plan, the 1996
Incentive Compensation Plan, (the "Incentive Plan"). The Incentive Plan is
intended to promote the interests of the Corporation and its shareholders by
providing eligible employees with the opportunity to earn incentive compensation
that is linked to the financial performance of the Corporation. The Incentive
Plan is intended to qualify as performance based compensation under Section
162(m) of the Code. The Incentive Plan is administered by the regularly
appointed compensation committee of the Board, which shall have at least two (2)
members and no member of the Board may serve on the Committee unless such person
is an "outside director" within the meaning of Section 162(m)(4)(C)(i) of the
Code.
The Incentive Plan provides that qualifying employees may receive as a cash
bonus an amount equal to the Company's modified earnings, calculated before
interest, taxes, depreciation and amortization ("Modified EBITDA"), for a
particular fiscal year. The total cash bonus that the Incentive Plan provides is
8.45% of Modified EBITDA up to $4,000,000 for such fiscal year and 12.45% of
Modified EBITDA if Modified EBITDA exceeds $4,000,000 for such fiscal year.
DIRECTOR COMPENSATION
The Company's Board of Directors compensation plan previously provided that
each director would receive $25,000 a year for his or her services to the
Company as a director. Each of the directors, except Lord Spencer-Churchill,
waived his $25,000 annual board member compensation in lieu of adopting the new
Director's Compensation Plan for 1996 and 1997, which was adopted by the Board
of Directors in September, 1996. Under the new "Director's Plan," each outside
director is to receive cash compensation in the amount of $500 and $2,000 for
each telephone and personal attendance board meeting, respectively. Each outside
director also receives $2,000 per year for each committee in which such member
serves. In addition, each outside director will receive 5,000 options to acquire
the Company's Common Stock at $5.20 per share. Each outside director who serves
on a committee will receive an additional 1,250 options. The Directors Plan also
provides $6,000 for Steven Scarano for services provided to the Company. In
addition, each outside director will be reimbursed for travel expenses related
to board meetings and other pre-approved Company business experiences.
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CERTAIN TRANSACTIONS
The Company has agreed to pay Lyle Maul, the Company's Chief Financial
Officer and Chief Operations Officer, the amount of $82,745 to reimburse Mr.
Maul for various expenses incurred on behalf of the Company, including travel,
delivery services and telephone costs, and $3,000 for furniture and computer
equipment contributed to the Company. The cost of such furniture and computer
equipment to Mr. Maul was approximately $7,500. Mr. Maul is repaid the principal
amount in monthly installments equal to three percent ($3%) of the Company's net
monthly sales. Mr. Maul to date has been paid approximately $2,500. The Company
was considering acquiring certain assets of Seaborn Beverages Company
("Seaborn"). Frederik Rodenhuis resigned as president of Seaborn prior to
becoming the Company's Chief Executive Officer and Chairman. Mr. Rodenhuis is
also a significant shareholder of Seaborn. Seaborn has since filed for
bankruptcy and the Company has decided not to pursue the acquisition of these
assets at this time. The Company has been advised that Mr. Rodenhuis' interest
in Seaborn as a result of the bankruptcy is de minimis.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the shares of Common Stock as of the date of this Prospectus by (i)
each person who is known by the Company to be the beneficial owner of more than
five percent (5%) of the issued and outstanding shares of Common Stock, (ii)
each of the Company's directors and executive officers and (iii) all directors
and executive officers as a group.
PERCENTAGE OWNED
---------------------------------
BEFORE
NAME AND ADDRESS(1) NUMBER OF SHARES(2) OFFERING(6) AFTER OFFERING(7)
- ----------------------------------------------- ------------------- ----------- -----------------
Adam B. Wachtel................................ 1,342,700 48.52% 35.64%
Frederik G.M. Rodenhuis(3)..................... 112,479 4.06% 2.99%
Lyle R. Maul(3)................................ 68,406 2.47% 1.82%
Stefdan, Ltd.(4)............................... 33,000 1.19% 1%
Lord Charles Spencer-Churchill(5).............. 5,000 1% 1%
John Stoner.................................... 63,583 2.27% 1.67%
All executive officers and directors as a 1,642,370 59.35% 43.60%
group........................................
- ---------------
(1) The address for each beneficial owner is in care of the Company, 9800 S.
Sepulveda Boulevard, Suite 720, Los Angeles, California 90045.
(2) Except as indicated in the footnotes to this table, to the knowledge of the
Company, the persons named in the table have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially
owned by them, except to the extent authority is shared by spouses under
applicable law.
(3) This figure includes the proportional number of shares held by Manhattan
Enterprises, Inc., which is the beneficial owner of 55,369 shares. Mr.
Rodenhuis and Mr. Maul are the beneficial owners of 89.8% and 10.2% of
Manhattan Enterprises, Inc., respectively.
(4) Stefdan, Ltd. is an entity wholly-owned by Steven M. Scarano. These shares
have registration rights and these shares were included in the registration
statement along with the Offering.
(5) Spencer-Churchill also owns 10,000 issued Class A Warrants.
(6) Includes 309,222 shares of Common Stock associated with Riverside Brewing
Company acquisition. See "Business -- Breweries -- Riverside Brewing
Company."
(7) Assumes no exercise of the Representative's overallotment.
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DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 20,000,000 shares of Common Stock, no
par value, of which, as of the date of this Prospectus, 2,767,085 shares were
issued and outstanding, which includes shares issued under the Riverside Brewing
Company acquisition. Holders of shares of Common Stock are entitled to one vote
per share on all matters to be voted upon by the stockholders generally. The
approval of proposals submitted to stockholders at a meeting other than for the
election of directors requires the favorable vote of a majority of the shares
voting, except in the case of certain fundamental matters (such as certain
amendments to the Articles of Incorporation, and certain mergers and
reorganizations), in which cases California law and the Company's By-laws
require the favorable vote of at least two-thirds of all outstanding shares.
Stockholders are entitled to receive such dividends as may be declared form time
to time by the Board of Directors out of funds legally available therefor, and
in the event of liquidation, dissolution or winding up of the Company to share
ratably in all assets remaining after payment of liabilities. The holders of
shares of Common Stock have no preemptive, conversion, subscription or
cumulative voting rights. All shares of Common Stock sold in this offering will
be, when issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors of the Company is authorized, subject to certain
limitations prescribed by applicable law, from time to time to issue up to an
aggregate of 5,000,000 shares of Preferred Stock in one or more series and to
fix or alter the designations, the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, in each case without further vote or action by the stockholders.
The issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders and may adversely affect the voting and other rights of the holders
of Common Stock. The issuance of Preferred Stock with voting and conversion
rights may adversely affect the voting power of the holders of Common Stock,
including the loss of voting control to others. At present, the Company has no
plans to issue any of the Preferred Stock.
REGISTRATION RIGHTS
The Company has issued 520,745 shares of common stock with certain
registration rights, and has issued 3,000,000 Issued Class A Warrants, and the
shares of the Company's common stock issuable upon exercise of the Issued Class
A Warrants at $8.25 per share, 35,000 Class B Warrants, and the shares of the
Company's common stock issuable upon exercise of the Class B Warrants at $4.75
per share, with registration rights. Pursuant to the terms of the registration
rights, these shares and warrants are registered along with the securities in
this Offering. However, 490,745 shares, and all of the warrants and shares
issuable upon exercise of the warrants referred to above may not be sold for a
period of thirteen (13) months after the closing date of the initial public
offering without the prior written consent of the Representative. 30,000 shares
of the Company's Common Stock registered along with this offering are subject to
a shorter lock up. 10,000 shares will be freely tradeable 60 days after the date
of this Prospectus, another 10,000 shares 90 days, and the final 10,000 shares
120 days. Such shares can become freely tradeable earlier upon consent of the
Representative. Of the 490,745 shares being registered subject to the 13 month
lockup, 33,000 shares are owned by Stefdan, Ltd., a company controlled by Steven
Scarano, a director of the Company and 4,000 of the shares are owned by Kathleen
Burke, the Company's Vice President of Sales.
WARRANTS
Class A Warrants and Issued Class A Warrants. There are currently issued
and outstanding warrants issued in connection with the Company's initial
financing in 1995 (the "Issued Class A Warrants"), entitling the holders to
purchase an aggregate of 3,000,000 shares of Common Stock, subject to adjustment
in certain circumstances. The following is a brief summary of certain provisions
of the Issued Class A Warrants.
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Each Issued Class A Warrant entitles the holder thereof to purchase, at any
time through the period ending five years after the closing of this Offering,
one share of Common Stock at a price of $8.25 per share, subject to adjustment
in accordance with the anti-dilution and other provisions referred to below. The
Issued Class A Warrants may be exercised at any time in whole or in part at the
applicable exercise price until the date of expiration. No fractional shares
will be issued upon the exercise of the Issued Class A Warrants. At any time
that the Issued Class A Warrants are exercisable, the Issued Class A Warrants
are also subject to redemption by the Company on not less than 30 days notice at
$0.10 per Issued Class A Warrant, provided the closing bid price of the Common
Stock exceeds $15.00 per share for thirty consecutive trading days ending within
fifteen days prior to the date on which notice is sent.
The exercise price and the number of shares of Common Stock purchasable
upon the exercise of the Issued Class A Warrants are subject to adjustment upon
the occurrence of certain events, including stock dividends, stock splits,
combinations or reclassification of the Common Stock. Additionally, an
adjustment would be made in the case of a reclassification or exchange of Common
Stock, consolidation or merger of the Company with or into another corporation,
or sale of all or substantially all of the assets of the Company, in order to
enable Warrant holders to acquire the kind and number of shares of stock or
other securities or property receivable in such event by a holder of that number
of shares of Common Stock that would have been issued upon exercise of the
Issued Class A Warrant immediately prior to such event. No adjustment to the
exercise price of the shares subject to the Issued Class A Warrants will be made
for dividends (other than stock dividends), if any, paid on the Common Stock or
for securities issued pursuant to the Company's stock option plans or other
employee benefit plans of the Company, or upon exercise of the Issued Class A
Warrants or any other options or warrants.
The 1,000,000 Class A Warrants which are part of the Offering are identical
to the Issued Class A Warrants except that the Company has agreed to pay the
Representative a fee of seven (7%) percent of the aggregate exercise price of
each Class A Warrant, but not Issued Class A Warrants, exercised commencing one
year after the date of the Prospectus. See "Underwriting."
Class B Warrants. As part of the Company's May 1996 bridge loan (See
"Bridge Note") the Company issued Class B Warrants entitling the holder thereof
to purchase, at any time through April 20, 1999, up to 35,000 shares of Common
Stock at an exercise price of $4.75 per share, subject to adjustment upon the
occurrence of any stock dividends, stock splits, combinations of shares or
reclassification of the Common Stock, or upon any consolidation or merger of the
Company with or into another corporation. The Class B Warrants were registered
in this Offering, subject to a 13-month lockup similar to the Issued Class A
Warrants.
Class C Warrants. The Company issued to Hecht & Steckman, P.C., legal
counsel to the Company, warrants to purchase up to 15,583 shares of the
Company's Common Stock at any time through October 31, 2002 at the exercise
price of $4.50 per share. The exercise price and the number of shares of Common
Stock purchasable upon exercise of the Class C Warrants are subject to
adjustment upon the occurrence of certain events, including stock dividends,
stock splits, combinations or reclassification of the Common Stock or sale by
the Company of shares of Common Stock (or other securities convertible into or
exercisable for Common Stock) at a price per share or share equivalent below the
greater of the then-applicable exercise price of the Class C Warrants or the
then-current market price of the Common Stock. These warrants and the common
stock issuable upon exercise of the warrants are "restricted securities" under
Rule 144.
Class D Warrants. As part of the Company's acquisition of Riverside
Brewing Company warrants to purchase up to 50,000 shares of the Company's Common
Stock were issued to debtholders of Orange Empire Brewing Company. The Class D
warrants may be exercised at any time at $5.00 per share through the period
ending three (3) year after the close of this Offering. The exercise price and
the number of shares of Common Stock purchasable upon exercise of the Class D
Warrants are subject to adjustment upon the occurrence of certain events,
including stock dividends, stock splits, combinations or reclassification of the
Common Stock. These warrants and the common stock issuable upon exercise of the
warrants are "restricted securities" under Rule 144.
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Representative's Warrants. For nominal consideration, the Company has
granted to the Representative of the Representative's the Unit purchase option
which allows the Representative to acquire 100,000 units, each unit consisting
of one share of Common Stock and one Representative's Warrants at 160% of the
initial public offering price or $12,80 per unit. See "Underwriting." The
Representative's Warrants issued in connection with this Unit Purchase Option
Offering ("Representative's Warrants"), entitle the holders to purchase an
aggregate of 100,000 shares of Common Stock, subject to adjustment in certain
circumstances. Each Representative's Warrant entitles the holder thereof to
purchase, at any time after exercise of the Unit Purchase option through the
date five years from the date of the Prospectus, one share of Common Stock at a
price of $8.25 per share, subject to adjustment in accordance with the
anti-dilution and other provisions referred to below. The Representative's
Warrants may be exercised at any time in whole or in part at the applicable
exercise price until the date of expiration. No fractional shares will be issued
upon the exercise of the Representative's Warrants. The exercise price and the
number of shares of Common Stock purchasable upon exercise of the
Representative's Warrants are subject to adjustment upon the occurrence of
certain events, including stock dividends, stock splits, combinations or
reclassification of the Common Stock. The Representative's Warrants are
identical to the Class A Warrants, excluding the redemption provision.
Class H Warrants. The Company issued warrants to purchase 15,000 shares of
the Company's Common Stock in a private placement to accredited investors. The
Class H Warrants may be exercised at any time at $7.00 per share through the
period ending September 10, 2001. The exercise price and the number of shares of
Common Stock purchasable upon exercise of the Class H Warrants are subject to
adjustment upon the occurrence of certain events, including stock dividends,
stock splits, combinations or reclassification of the Common Stock. The
adjustment provisions of the Class H Warrants are otherwise substantially
equivalent to the adjustment provisions for the Class A Warrants, as described
immediately above. These warrants and the Common Stock issuable upon exercise of
the warrants are "restricted securities" under Rule 144.
BRIDGE NOTE
In May 1996, the Company issued a $500,000 principal amount note secured by
the Company's assets ("Bridge Note") due on the earlier of the completion of any
equity public offering which results in the Company receiving gross proceeds of
$6 million or more, on December 31, 1996. Under the terms of the Bridge Note,
the investor received 35,000 Class B Warrants which are registered along with
this Offering. The Bridge Note also provides that the investor will receive an
additional 35,000 Class B Warrants if the Offering does not close by December
31, 1996. The Bridge Note bears interest at the rate of 18.0% per annum. The
Bridge Note will be repaid in full out of the net proceeds of this Offering. See
"Use of Proceeds."
DIVIDENDS
The Company has never paid and does not anticipate the payment of cash
dividends on its Common Stock in the foreseeable future.
TRANSFER AGENT
The Transfer Agent and Class A Warrant Agent for the Company's Common Stock
and Warrants is Continental Stock Transfer & Trust Company.
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UNDERWRITING
The Underwriters named below, acting through their representative, State
Capital Markets Corp. (the "Representative"), have severally agreed, subject to
the terms and conditions of an Underwriting Agreement (the form of which is
filed as an exhibit to the Company's registration statement, of which this
Prospectus is a part), to purchase form the Company the number of Shares set
opposite their respective names below. The Underwriters are committed to
purchase and pay for all such Shares if any are purchased.
NUMBER OF
UNDERWRITER UNITS
-------------------------------------------------------- ---------
State Capital markets Corp.............................. 1,000,000
UNDERWRITER'S COMPENSATION
The Representative has advised the Company that it proposes to offer the
Shares directly to the public at the offering price set forth on the cover page
of this Prospectus. The gross offering discount from the initial offering price
at which the Underwriters shall be entitled to purchase the Units and Units in
the over-allotment option is equal to ten percent of the initial offering price.
The Underwriters may allow a concession to selected dealers who are members of
the National Association of Securities Dealers, Inc. ("NASD") not in excess of
$ per share, and the Underwriters may allow, and such dealers may
re-allow, to members of the NASD a concession not in excess of $ per
share. No such allowances or reallowances shall change the amount of proceeds to
be received by the Company as set fort on the cover page of this Prospectus.
The Company has agreed to sell to the Representative an option to purchase
100,000 units, each unit consisting of one share of Common Stock and one
Representative's Warrant ("Representative's Unit Purchase Option"). The
Representative's Unit Purchase Option will be exercisable at a price equal to
160% of the initial public offering price during the period beginning one year
from the date of this Prospectus and continuing until five years from the date
of this Prospectus. The Representative's Warrants are identical to the Class A
Warrants, which are part of the Company's offering except that such
Representative's Warrants are not subject to redemption. The Representative's
Unit Purchase Option will contain certain demand and piggyback registration
rights under the 1933 Act. The exercise price of the Representative's Unit
Purchase Option and the number of shares covered thereby are subject to
adjustment in certain events to prevent dilution. For the life of the
Representative's Unit Purchase Option, the holders thereof are given, at a
nominal cost, the opportunity to profit from a rise in the market price of the
Company's securities with a resulting dilution in the interest of other
stockholders. The Company may find it more difficult to raise capital for its
business if the need should arise while the Representative's Unit Purchase
Option is outstanding. At any time when the holders of the Representative's Unit
Purchase Option might be expected to exercise it, the Company would probably be
able to obtain additional capital on more favorable terms.
The Representative will be paid a cash or "in-kind" finder's fee of (i)
five percent (5%) of the first $1,000,000; (ii) four percent (4%) of the second
$1,000,000; (iii) three percent (3%) of the third $1,000,000; and (iv) two
percent (2%) of any consideration over $4,000,000 involved in any transaction
(including mergers, acquisitions, joint ventures, and any other business for the
Company introduced by the Representative) consummated by the Company, in which
the Representative introduced the other party to the Company for such purpose
during a period ending three years from the closing of the Offering.
The Representative shall have a preferential right for a period of four
years from this Offering to purchase for the Representative's account or to sell
for the account of the Company or any principal shareholder any securities of
the Company offered with or without registration under the 1933 Act, or
otherwise, on terms not less favorable to the Company than it can secure
elsewhere. This preferential right shall not apply to shares issued in the
acquisitions or joint ventures.
The Company shall, for a period of two (2) years from the completion of the
Offering, employ the Representative as its investment banker and financial
consultant, at an annual fee of $50,000, with the aggregate of $100,000 payable
on the closing of the Offering.
51
56
The Company will pay the Representative a fee of seven (7%) percent of the
aggregate exercise price of each Class A Warrant (exclusive of any Class A
Warrants issued or outstanding prior to the Offering) exercised commencing one
year after the Effective Date, of which three (3%) percent may be allocated to
the dealer who solicited the exercise of the Class A Warrant (who may also be
the Representative), provided: (i) the market price of the common stock on the
date of exercise was greater than the exercise price on that date, (ii) exercise
of the Class A Warrant was solicited by a member of the NASD, (iii) the Class A
Warrant was not held in a discretionary account, (iv) disclosure of compensation
was made both at the time of the Offering and the exercise of the Class A
Warrant, and (v) the solicitation and the exercise of the Warrant was not in
violation of Rule 10b-6 of the Securities Exchange Act.
Prior to the date of this Prospectus, Company's management have agreed in
writing not to sell, assign or transfer any of their shares of the Company's
securities without the Underwriter's prior written consent for a period of
twenty four (24) months from the Effective Date.
The Underwriter may designate a non-director observer to attend meetings of
the Company's Board of Directors for three (3) years after the Effective Date at
the Company's discretion.
The Company has agreed to pay the Representative a non-accountable expense
allowance equal to 3% of the gross proceeds of the offering to the Company. The
Company and the Underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the 1933 Act.
OFFERING PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock or the Class A Warrants and there can be no assurance that an
active trading market will develop following the offering. Consequently, the
initial public offering price has been determined through negotiation between
the Representative and the Company. Among the factors considered in such
negotiations were the history of and the prospects for the Company, the market
for the Company's products, assessment of the Company's management, the number
of Shares offered, and the general condition of the securities markets at the
time of the offering. Accordingly, the offering price set forth on the cover
page of this Prospectus should not be considered a conclusive indication of the
actual value of the Company, Shares or the Class A Warrants.
OVER-ALLOTMENT
The Company has granted to the Representative an option, exercisable within
30 days from the date of this Prospectus, to purchase up to 150,000 additional
Units at the initial public offering price less the underwriting discount set
forth on the cover page of this Prospectus. The option may be exercised only for
the purpose of covering any over-allotments in the sale of the Units offered
hereby.
PRIOR TRANSACTIONS WITH THE COMPANY
On November 20, 1995, the Company commenced a private placement of up to
400,000 shares of common stock. The offering was conducted on behalf of the
Company by the Representative. The Company paid the Representative a commission
on sales of the shares in the amount of nine percent (9%), plus three percent
(3%) nonaccountable expense allowance, of the gross offering price.
LEGAL MATTERS
The law firm of Hecht & Steckman, P.C., New York, New York, has acted as
counsel for the Company in connection with this offering and has rendered its
opinion to the Company on the legality of the securities covered in this
Prospectus. The firm of Lampert & Lampert, New York, New York, has acted as
counsel for the Underwriters in connection with certain legal matters relating
to this offering.
52
57
EXPERTS
The Historical Financial Statements of the Company, Orange Empire Brewing
Company and the St. Stan's Brewing & Brewpub Operations as of December 31, 1995
and for each of the two years in the period ended December 31, 1995 as listed on
"Index to Financial Statements" and as included elsewhere in this Prospectus,
have been audited by Corbin & Wertz, independent public accountants, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports. Reference is made to said reports for the Company and Orange
Empire Brewing Company which include an explanatory paragraph which states that
there is substantial doubt about the Company's and Orange Empire Brewing
Company's ability to continue as a going concern. Furthermore, reference is made
to said report for the St. Stan's Brewery and Brewpub Operations which includes
an explanatory paragraph which identifies a substantial need for ongoing
financial support.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, a
registration statement on Form SB-2 under the 1933 Act with respect to the
Shares being offered hereby. This Prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Shares being offered hereby, reference is hereby made to such registration
statement and the exhibits and schedules thereto, which may be inspected without
charge at the Commission's offices and copies of all or any part of which may be
obtained from such offices upon payment of prescribed fees. Statements contained
in the Prospectus regarding the provisions of documents filed with such
registration statement as exhibits are necessarily summaries of such documents,
and each such statement is qualified in all respects by reference to the copy of
the applicable document filed with the Commission.
53
58
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
------------
BEVERAGE WORKS, INC. AND SUBSIDIARY, PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
Introduction To Unaudited Pro Forma Condensed Consolidated Financial
Statements................................................................ F-3
Pro Forma Condensed Consolidated Balance Sheet As Of April 30, 1996
(Unaudited)............................................................... F-4
Pro Forma Condensed Consolidated Balance Sheet, Summary of Pro Forma
Adjustments (Unaudited)................................................... F-5 to F-6
Pro Forma Condensed Consolidated Statement Of Operations For The Four Months
Ended April 30, 1996 (Unaudited).......................................... F-7
Pro Forma Condensed Consolidated Statement Of Operations For The Year Ended
December 31, 1995 (Unaudited)............................................. F-8
Pro Forma Condensed Consolidated Statement Of Operations, Summary Of Pro
Forma Adjustments (Unaudited)............................................. F-9
Notes to Pro Forma Condensed Consolidated Financial Statements (Unaudited)... F-10 to F-20
BEVERAGE WORKS, INC. AND SUBSIDIARY, HISTORICAL CONSOLIDATED FINANCIAL
STATEMENTS
Independent Auditor's Report................................................. F-21
Consolidated Balance Sheets As Of April 30, 1996 (Unaudited) and
December 31, 1995......................................................... F-22
Consolidated Statements Of Operations For The Four Months Ended April 30,
1996 (Unaudited) and For The Period From Incorporation (August 2, 1995) To
December 31, 1995......................................................... F-23
Consolidated Statements Of Stockholders' Equity For The Four Months Ended
April 30, 1996 (Unaudited) and For The Period From Incorporation (August
2, 1995) To December 31, 1995............................................. F-24
Consolidated Statements Of Cash Flows For The Four Months Ended April 30,
1996 (Unaudited) and For The Period From Incorporation (August 2, 1995) To
December 31, 1995......................................................... F-25 to F-26
Notes to Consolidated Financial Statements................................... F-27 to F-45
ST. STAN'S BREWERY AND BREWPUB OPERATIONS
Independent Auditors' Report................................................. F-46
Historical Statements of Assets and Liabilities To Be Contributed to
BWI -- Prost Partners General Partnership As Of April 30, 1996 (Unaudited)
and
December 31, 1995......................................................... F-47
Historical Statements Of Historical Operations Of Assets and Liabilities To
Be Contributed to BWI -- Prost Partners General Partnership For The Four
Months Ended April 30, 1996 (Unaudited) and 1995 (Unaudited), and For The
Years Ended December 31, 1995 and 1994.................................... F-48
Historical Statements Of Changes In Equity Of Assets and Liabilities To Be
Contributed to BWI -- Prost Partners General Partnership For The Four
Months Ended April 30, 1996 (Unaudited), and For The Years Ended December
31, 1995 and 1994......................................................... F-49
Historical Statements Of Cash Flows Of Assets and Liabilities To Be
Contributed to BWI -- Prost Partners General Partnership For The Four
Months Ended April 30, 1996 (Unaudited) and 1995 (Unaudited), and For The
Years Ended December 31, 1995 and 1994.................................... F-50
Notes To Historical Financial Statements Of Assets and Liabilities To Be
Contributed To BWI -- Prost Partners General Partnership.................. F-51 to F-60
F-1
59
PAGE
------------
ORANGE EMPIRE BREWING COMPANY AND SUBSIDIARY
Independent Auditors' Report................................................. F-61
Consolidated Balance Sheets As Of April 30, 1996 (Unaudited) and
December 31, 1995......................................................... F-62
Consolidated Statements Of Operations For The Four Months Ended April 30,
1996 (Unaudited) and 1995 (Unaudited), and For The Years Ended December
31, 1995 and 1994......................................................... F-63
Consolidated Statements Of Stockholders' Equity (Capital Deficiency) For The
Four Months Ended April 30, 1996 (Unaudited) and For The Years Ended
December 31, 1995 and 1994................................................ F-64
Consolidated Statements of Cash Flows For The Four Months Ended April 30,
1996 (Unaudited) and 1995 (Unaudited), and For The Years Ended December
31, 1995 and 1994......................................................... F-65
Notes To Consolidated Financial Statements................................... F-66 to F-77
F-2
60
BEVERAGE WORKS, INC.
INTRODUCTION TO
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated information as of
and for the four months ended April 30, 1996, and for the year ended December
31, 1995, is based on the historical financial statements of Beverage Works,
Inc., and Subsidiary, Orange Empire Brewing Company and Subsidiary, and the St.
Stan's Brewery and Brewpub Operations. The unaudited pro forma condensed
consolidated financial information has given effect to the following:
(1) The consummation of the Beverage Works, Inc. Initial Public
Offering and the application of the proceeds therefrom as described in "Use
of Proceeds."
(2) The consummation of the Beverage Works, Inc. and Orange Empire
Brewing Company Share Purchase Agreement and related agreements.
(3) The consummation of the BWI-Prost Partners Contribution and
Partnership Agreements and related agreements.
The unaudited pro forma condensed consolidated balance sheet has been
prepared as though the transactions and arrangements described above had taken
effect on April 30, 1996, and the unaudited pro forma condensed consolidated
statements of operations have been prepared as though the transactions and
arrangements had taken effect at the beginning of each period presented. The
unaudited pro forma information should be read in conjunction with the notes
related thereto and the historical financial statements of the Beverage Works,
Inc. and Subsidiary, Orange Empire Brewing Company and Subsidiary, and the St.
Stan's Brewery and Brewpub Operations, which are included elsewhere in this
Registration Statement. In management's opinion, all adjustments have been made
necessary to reflect the effects of the consummation of the initial public
offering and the application of the proceeds therefrom, the consummation of the
Orange Empire Brewing Company Share Purchase Agreement, and the consummation of
the BWI-Prost Partners Contribution and Partnership Agreements.
The unaudited pro forma condensed consolidated financial information does
not purport to be indicative of the financial condition or results of operations
of the Company that would have been obtained for the periods presented had the
transactions and arrangements taken effect on the assumed dates, nor does it
purport to represent the financial position or results of operations of the
Company for any future period.
F-3
61
BEVERAGE WORKS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
APRIL 30, 1996
(UNAUDITED)
ASSETS
ST. STAN'S
BEVERAGE ORANGE BREWERY AND
WORKS, EMPIRE BREW PUB PRO FORMA PRO FORMA
INC. BREWING CO. OPERATIONS SUBTOTAL ADJUSTMENTS REF APRIL 30, 1996
---------- ----------- ----------- ---------- ----------- --- --------------
Cash and cash equivalents (Notes 1, 2,
3, 4, 5 and 9)....................... $ 308,079 $ 14,634 $ 15,863 $ 338,576 $3,548,276 (a) $ 3,886,852
Common stock subscription receivable... 260,000 -- -- 260,000 -- 260,000
Accounts receivable, net............... 30,177 171,493 143,548 345,218 -- 345,218
Inventories............................ 53,405 234,526 150,283 438,214 -- 438,214
Other current assets (Note 2).......... 129,517 17,222 44,249 190,988 (50,530 ) (b) 140,458
---------- ---------- ---------- ---------- -----------
Total current assets........... 781,178 437,875 353,943 1,572,996 3,497,746 5,070,742
Property and equipment, net (Notes 2
and 3)............................... 1,407,705 1,407,495 2,435,738 5,250,938 429,565 (c) 5,680,503
Goodwill and other intangible assets
(Notes 1, 2, 4
and 8)............................... -- -- -- -- 4,233,543 (d) 4,233,543
Other assets (Note 2).................. 118,682 21,409 11,189 151,280 (54,882 ) (e) 96,398
---------- ---------- ---------- ---------- -----------
$2,307,565 $1,866,779 $2,800,870 $6,975,214 $8,105,972 $ 15,081,186
========== ========== ========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Accounts payable and accrued expenses
(Notes 2, 5
and 8)............................... $ 270,843 $ 509,800 $ 159,051 $ 939,694 $ (659,941 ) (f) $ 279,753
Notes payable (Notes 4 and 9).......... 41,286 142,548 21,658 205,492 43,108 (g) 248,600
Capital lease due to related party
(Note 8)............................. -- 86,410 -- 86,410 42,054 (h) 128,464
Notes payable to related parties (Notes
4, 5 and 9).......................... 90,238 897,863 459,153 1,447,254 (1,357,016 ) (i) 90,238
Deferred income taxes (Note 2)......... 52,286 -- -- 52,286 110,894 (j) 163,180
---------- ---------- ---------- ---------- -----------
Total current liabilities...... 454,653 1,636,621 639,862 2,731,136 (1,820,901 ) 910,235
Notes payable, net of current portion
(Note 4)............................. 385,086 191,735 655,178 1,231,999 (146,547 ) (k) 1,085,452
Capital lease due to related party, net
of current portion (Note 8).......... -- 949,965 -- 949,965 -- 949,965
Deferred income taxes, net of current
portion (Note 2)..................... 288,593 -- -- 288,593 1,552,523 (l) 1,841,116
Distribution payable (Notes 6 and 7)... -- -- -- -- 1,159,011 (m) 1,159,011
Minority Interest (Note 7)............. -- -- -- -- 346,819 (n) 346,819
---------- ---------- ---------- ---------- -----------
Total liabilities.............. 1,128,332 2,778,321 1,295,040 5,201,693 1,090,905 6,292,598
---------- ---------- ---------- ---------- -----------
Total stockholders' equity
(capital deficiency) (Notes
1, 2, 4, 5, 7 and 9)......... 1,179,233 (911,542 ) 1,505,830 1,773,521 7,015,067 (o) 8,788,588
---------- ---------- ---------- ---------- -----------
$2,307,565 $1,866,779 $2,800,870 $6,975,214 $8,105,972 $ 15,081,186
========== ========== ========== ========== ===========
See Accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
F-4
62
BEVERAGE WORKS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SUMMARY OF PRO FORMA ADJUSTMENTS
(UNAUDITED)
ASSETS
AS OF
REF ADJUSTMENT APRIL 30, 1996
---- ----------------------------------------------------------- --------------
Cash and cash equivalents (a) Net proceeds from BWI initial public offering, net of
deferred offering costs (see Notes 1 and 2).............. $ 6,685,265
Paydown of accounts payable from IPO proceeds (see Note
2)....................................................... (500,000)
Payment for costs related to formation of BWI-Prost
Partnership (see Note 2)................................. (75,000)
Purchases of property and equipment from IPO proceeds (see
Note 3).................................................. (800,000)
Paydown of St. Stan's notes payable by BWISS (see Note
4)....................................................... (176,836)
Repayment of St. Stan's notes payable to related parties
(see Note 5)............................................. (459,153)
Paydown of OEBC notes payable to related parties, plus
accrued interest (see Note 5)............................ (301,000)
Repayment of bridge note payable from IPO proceeds (see
Note 9).................................................. (500,000)
Repayment of note payable from IPO proceeds (see Note 9)... (175,000)
Repayment of advances from related party from IPO proceeds
(see Note 9)............................................. (150,000)
-----------
3,548,276
-----------
Other current assets (b) Write-off of deferred financing costs (see Note 2)......... (50,530)
-----------
Increase in current assets................................................................................... 3,497,746
-----------
Property and equipment, net (c) Adjustment to machinery and equipment to fair value in
connection with the acquisition of OEBC (see Note 2)..... (370,435)
Purchases of property and equipment from IPO proceeds (see
Note 3).................................................. 800,000
-----------
429,565
-----------
Goodwill and other intangible assets (d) Goodwill from acquisition of OEBC (see Note 1)............. 4,158,543
Costs related to the formation of BWI-Prost Partnership
(see Note 2)............................................. 75,000
-----------
4,233,543
-----------
Other assets (e) Reclassification of deferred offering costs to equity (see
Note 2).................................................. (54,882)
-----------
Increase in total assets..................................................................................... $ 8,105,972
===========
Continued
F-5
63
BEVERAGE WORKS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SUMMARY OF PRO FORMA ADJUSTMENTS, CONTINUED
(UNAUDITED)
LIABILITIES AND EQUITY
AS OF
REF ADJUSTMENT APRIL 30, 1996
---- --------------------------------------------------------------- --------------
Accounts payable and accrued expenses (f) Paydown of accounts payable with IPO proceeds (see Note 2)..... $ (500,000)
Repayment of OEBC accrued interest on notes payable to related
parties (see Note 5)......................................... (40,475)
Effect of forgiveness of past due capital lease payments due to
related party (see Note 8)................................... (77,412)
Effect of extension of capital lease due to related party (see
Note 8)...................................................... (42,054)
--------------
(659,941)
--------------
Notes payable (g) Paydown of BWISS note payable (see Note 4)..................... (7,777)
Reclassification of OEBC notes payable due related parties due
to refinancing with bank (see Note 4)........................ 50,885
Establishment and repayment of BWI bridge note payable (see
Note 9)...................................................... --
--------------
43,108
--------------
Capital lease due to related party (h) Effect of extension of capital lease due to related party (see
Note 8)...................................................... 42,054
--------------
Notes payable to related parties (i) OEBC debt exchange for common stock (see Note 4)............... (220,941)
Reclassification of OEBC notes payable due related parties in
connection with refinance (see Note 4)....................... (73,397)
Repayment of OEBC notes payable to related parties (see Note
5)........................................................... (603,525)
Repayment of St. Stan's note payable to related party (see Note
5)........................................................... (459,153)
Establishment and repayment of BWI note payable to related
party (see Note 9)........................................... --
Establishment and repayment of BWI related party advances (see
Note 9)...................................................... --
--------------
(1,357,016)
--------------
Deferred income taxes (j) Establish current portion of deferred tax liability from
tax-free acquisition of OEBC (see Note 2).................... 110,894
--------------
Decrease in total current liabilities............................................................................ (1,820,901)
--------------
Notes payable, net of current portion (k) Repayment of BWISS note payable (see Note 4)................... (169,059)
Reclassification of OEBC notes payable due related parties due
to refinancing with bank (see Note 4)........................ 22,512
--------------
(146,547)
--------------
Deferred income taxes, net of current (l) Establish deferred tax liability, net of current portion, from
portion tax-free acquisition of OEBC (see Note 2).................... 1,552,523
--------------
Distribution payable (m) Establish distribution payable to minority interest partners
(see Notes 6 and 7).......................................... 1,159,011
--------------
Minority Interest (n) Establish historical minority interest in BWI-Prost Partners
(see Note 7)................................................. 1,505,830
Establish distribution payable to minority interest partners
(see Notes 6 and 7).......................................... (1,159,011)
--------------
346,819
--------------
Increase in total liabilities.................................................................................... 1,090,905
--------------
Stockholders' equity (capital deficiency) (o) Net proceeds from BWI initial public offering, net of deferred
offering costs of $54,882 (see Notes 1 and 2)................ 6,630,383
Issuance of common stock in connection with OEBC Exchange
Agreement (see Note 1)....................................... 1,286,890
Reversal of historical OEBC capital deficiency (see Note 1).... 911,542
Costs incurred in connection with the OEBC Exchange Agreement
(see Note 1)................................................. 81,000
Write-off of deferred financing costs (see Note 2)............. (50,530)
Issuance of common stock in connection with OEBC debt exchange
agreement (see Note 4)....................................... 143,612
Issuance of common stock in connection with repayment of OEBC
notes payable to related parties (see Note 5)................ 343,000
Establish historical minority interest in BWI-Prost Partners
(see Note 7)................................................. (1,505,830)
Establish BWI bridge note payable used for working capital (see
Note 9)...................................................... (500,000)
Establish BWI note payable to related party used for working
capital (see Note 9)......................................... (175,000)
Establish BWI related party advances used for working capital
(see Note 9)................................................. (150,000)
Issuance of common stock in connection with private placement
and related use for working capital (see Note 9) --
--------------
7,015,067
--------------
Increase in stockholders' equity (capital deficiency)............................................................ $ 8,105,972
============
See Accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
F-6
64
BEVERAGE WORKS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FOUR MONTHS ENDED APRIL 30, 1996
(UNAUDITED)
ST. STAN'S
BEVERAGE ORANGE BREWERY AND PRO FORMA
WORKS, EMPIRE BREW PUB PRO FORMA APRIL 30,
INC. BREWING CO. OPERATIONS SUBTOTAL ADJUSTMENTS REF 1996
--------- ----------- ----------- ---------- ----------- --- ----------
Net sales (Note 2)...................... $ 100,076 $ 1,061,072 $ 661,463 $1,822,611 $ -- (a) $1,822,611
Cost of sales (Notes 2 and 3)........... 169,029 783,856 456,396 1,409,281 20,455 (b) 1,429,736
-------- ---------- -------- ---------- --------- ----------
Gross profit.......................... (68,953) 277,216 205,067 413,330 (20,455) 392,875
Selling, general and administrative
expenses (Notes 2 and 8).............. 566,548 411,104 230,490 1,208,142 127,164 (c) 1,335,306
-------- ---------- -------- ---------- --------- ----------
Operating loss........................ (635,501) (133,888) (25,423) (794,812) (147,619) (942,431)
Interest and other expenses (income),
net
(Notes 2, 4, 5 and 8)................. 23,398 82,652 32,137 138,187 (73,353) (d) 64,834
Minority interest in loss of partnership
(Note 7).............................. -- -- -- -- (27,195) (e) (27,195)
-------- ---------- -------- ---------- --------- ----------
Loss before income tax benefit........ (658,899) (216,540) (57,560) (932,999) (47,071) (980,070)
Income tax benefit (Note 2)............. (17,415) -- -- (17,415) (36,965) (f) (54,380)
-------- ---------- -------- ---------- --------- ----------
Net loss................................ $(641,484) $ (216,540) $ (57,560) $ (915,584) $ (10,106) $ (925,690)
======== ========== ======== ========== ========= ==========
Net loss per share...................... $ (0.21)
==========
Common shares and equivalents
outstanding (Note 2).................. 4,434,096
==========
See Accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
F-7
65
BEVERAGE WORKS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
ST. STAN'S
BEVERAGE ORANGE BREWERY AND PRO FORMA
WORKS, EMPIRE BREW PUB PRO FORMA DECEMBER 31,
INC. BREWING CO. OPERATIONS SUBTOTAL ADJUSTMENTS REF 1995
--------- ----------- ----------- ---------- ----------- --- ------------
Net sales (Note 2)................... $ 44,810 $ 2,553,977 $ 2,029,424 $4,628,211 $ 347,751 (a) $ 4,975,962
Cost of sales (Notes 2 and 3)........ 81,627 1,824,065 1,396,217 3,301,909 558,367 (b) 3,860,276
--------- ---------- ---------- ---------- --------- ----------
Gross profit....................... (36,817) 729,912 633,207 1,326,302 (210,616) 1,115,686
Selling, general and administrative
expenses (Notes 2 and 8)........... 433,553 990,701 583,568 2,007,822 991,463 (c) 2,999,285
--------- ---------- ---------- ---------- --------- ----------
Operating profit (loss).............. (470,370) (260,789) 49,639 (681,520) (1,202,079) (1,883,599)
Interest and other expenses (income),
net (Notes 2, 4, 5 and 8).......... 28,320 163,169 98,398 289,887 (171,173) (d) 118,714
Minority interest in loss of
partnership (Note 7)............... -- -- -- -- (34,631) (e) (34,631)
--------- ---------- ---------- ---------- --------- ----------
Loss before income tax benefit....... (498,690) (423,958) (48,759) (971,407) (996,275) (1,967,682)
Income tax benefit (Note 2).......... (7,706) 1,600 -- (6,106) (155,432) (f) (161,538)
--------- ---------- ---------- ---------- --------- ----------
Net loss............................. $(490,984) $ (425,558) $ (48,759) $ (965,301) $ (840,843) $ (1,806,144)
========= ========== ========== ========== ========= ==========
Net loss per share................... $ (0.41)
==========
Common shares and equivalents
outstanding (Note 2)............... 4,434,096
==========
See Accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
F-8
66
BEVERAGE WORKS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SUMMARY OF PRO FORMA ADJUSTMENTS
(UNAUDITED)
FOUR MONTHS YEAR ENDED
ENDED DECEMBER 31,
REFERENCE ADJUSTMENT APRIL 30, 1996 1995
--------- --------------------------------------------------------- -------------- ------------
Net sales (a) Revenues of Heritage prior to November 8, 1995 (date of
acquisition) (see Note 2).............................. $ -- $ 347,751
--------- -----------
Cost of sales (b) Cost of sales of Heritage prior to November 8, 1995 (date
of acquisition) (see Note 2)........................... -- 426,900
Reduction to depreciation for adjustment to fair value of
OEBC property and equipment, net (see Note 2).......... (17,640) (52,919 )
Additional depreciation related to capital expenditures
from IPO proceeds (see Note 3)......................... 38,095 114,286
Additional depreciation related to assets under capital
lease (see Note 2)..................................... -- 70,100
--------- -----------
20,455 558,367
--------- -----------
Decrease in gross profit........................................................................ (20,455) (210,616 )
--------- -----------
Selling, general and (c) Estimated BWI selling, general and administrative
administrative expenses expenses prior to August 2, 1995 (date of
incorporation) and actual Heritage selling, general and
administrative expenses prior to November 8, 1995 (date
of acquisition) (see Note 2)........................... 19,919 663,227
Amortization of OEBC goodwill (see Note 2)............... 92,412 277,236
Amortization of St. Stan's acquisition costs (see Note
2)..................................................... 8,333 25,000
Issuance of stock for management services (see Note 8)... 6,500 26,000
--------- -----------
127,164 991,463
--------- -----------
Increase to operating loss...................................................................... (147,619) (1,202,079 )
--------- -----------
Interest and other (d) Interest income on investment of net IPO proceeds
expenses (income), net (see Note 2)........................................... (57,745) (173,236 )
Reduction of historical interest expense due to OEBC debt
exchange agreement (see Note 4)........................ (7,733) (23,199 )
Reduction of historical interest expense due to repayment
of St. Stan's notes payable (see Note 4)............... (10,110) (17,426 )
Reduction of historical interest expense due to repayment
of OEBC notes payable to related parties (see Note
5)..................................................... (12,839) (30,199 )
Reduction of historical interest expense due to repayment
of St. Stan's notes payable to related party (see Note
4)..................................................... (8,449) (26,658 )
Interest expense on Distribution Payable (Note 6)........ 28,975 115,901
Reduction to interest expense due to OEBC related party
lease amendment (see Note 8)........................... (5,452) (16,356 )
--------- -----------
(73,353) (171,173 )
--------- -----------
Minority interest in loss (e) Reflect minority interest in net loss of St. Stan's (see
of Note 7)................................................ (28,204) (23,892 )
partnership Reflect minority interest in pro forma adjustments
related to St. Stan's (see Note 7)..................... 1,009 (10,739 )
--------- -----------
(27,195) (34,631 )
--------- -----------
Decrease in (increase to)
net loss before income tax benefit............................................................ (47,071) (996,275 )
--------- -----------
Income tax benefit (f) Income tax benefit attributable to nondeductible
amortization of OEBC goodwill (see Note 2)............. (36,965) (110,894 )
Income tax benefit attributable to nondeductible
depreciation of the fixed asset step-up recorded in
connection with the Heritage acquisition (see Note
2)..................................................... -- (44,538 )
--------- -----------
(36,965) (155,432 )
--------- -----------
Decrease in (increase to) net loss.............................................................. $ (10,106) $ (840,843 )
========= ===========
See Accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
F-9
67
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- PROPOSED INITIAL PUBLIC OFFERING, ACQUISITION AND JOINT VENTURE
Proposed Initial Public Offering
Beverage Works, Inc. ("BWI" or the "Company") intends to file a
registration statement on Form SB-2 with the Securities and Exchange Commission
(the "Commission") of 1,000,000 units, each unit consisting of one share of
common stock and one common stock purchase warrant exercisable at $8.25 per
share, at an estimated offering price of $8.00 per unit. The letter of intent
(see below) provides for an overallotment of units to be offered not to exceed
15% of the proposed offering.
In connection with the initial public offering (the "IPO"), the Company
received a letter of intent with an underwriter whereby for services rendered in
connection with the IPO, the underwriter will receive a commission of 10% of the
gross proceeds, and assuming the underwriter does not exercise its overallotment
option, such fees and costs will be $800,000, plus an additional 3% for
non-accountable expenses, amounting to $240,000. As of April 30, 1996, BWI had
incurred $54,882 of costs related to the IPO. Such costs are reflected as
deferred offering costs on the historical BWI condensed consolidated balance
sheet (see Note 2). BWI estimates that it will incur an additional $274,735 of
costs related to this offering, excluding the underwriters fees and expenses.
The Underwriter will be paid a cash or "in-kind" finder's fee of (i) five
percent (5%) of the first $1,000,000; (ii) four percent (4%) of the second
$1,000,000; (iii) three percent (3%) of the third $1,000,000; and (iv) two
percent (2%) of any consideration over $4,000,000 involved in any transaction
(including mergers, acquisitions, joint ventures, and any other business for the
Company introduced by the underwriter) consummated by the Company, in which the
Underwriter introduced the other party to the Company for such purpose during a
period ending three years from the closing of the Offering.
The Company shall, for a period of two (2) years from the completion of the
Offering, employ the underwriter as its investment banker and financial
consultant, at an annual fee of $50,000, with the aggregate of $100,000 payable
on the closing of the Offering.
Assumed net cash proceeds, excluding the underwriters overallotment
provision, included in the accompanying unaudited pro forma condensed
consolidated balance sheet related to the IPO totals $6,685,265, and $6,630,383
(after giving effect to the $54,882 of deferred offering costs at April 30,
1996).
Orange Empire Brewing Company Exchange Agreement
On September , 1996, the Company entered into a stock-for-stock exchange
(the "Exchange Agreement") with Orange Empire Brewing Company ("OEBC"). Pursuant
to the Exchange Agreement, BWI is to issue 247,479 shares of its common stock in
exchange for all of the outstanding shares of OEBC. Such shares have been valued
at $1,286,891, based on 65% of the estimated IPO price per share of $8.00 (see
Note 2). Due to certain transferability restrictions under Rule 144 of the
Securities Act of 1933, the valuation reflects a discount of 35%. The shares to
be issued in the exchange are subject to adjustment (based on the change in net
assets of the OEBC, as defined). Assuming the Exchange Agreement was consummated
on April 30, 1996, the excess of the purchase price over the fair value of the
net assets acquired is estimated at $4,158,543.
In addition, up to 130,000 additional shares of the Company's common stock
may be issued, if OEBC reaches certain production levels, as defined. Pursuant
to the Exchange Agreement, the exchange is to occur concurrently with the
consummation (the "Closing Date") of the Company's IPO. If for any reason the
IPO does not occur on or before March 31, 1997 or the IPO does not raise
aggregate proceeds of $6,000,000, either party may unilaterally terminate the
Exchange Agreement. Should such additional shares of the Company's common stock
be issued, the value of such shares will be deemed additional purchase
consideration.
F-10
68
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Accordingly, such will be deemed additional goodwill at the time the contingency
is achieved. The effects of this contingent consideration are not reflected in
the accompanying unaudited pro forma condensed consolidated financial
statements.
BWI -- Prost Partner's Agreement
On September , 1996, the Company's wholly-owned subsidiary, BWI -- St.
Stan's Inc. ("BWISS") entered into a joint venture with Prost Partners Limited
Partnership (dba St. Stan's Brewing Company -- "St. Stan's") named BWI-Prost
Partners (the "Partnership"). Pursuant to the terms of the BWI-Prost Partners
partnership agreement (the "Partnership Agreement"), St. Stan's has agreed to
contribute substantially all of its assets, net of certain liabilities, to the
Partnership for a 49% minority interest in the Partnership. BWISS has agreed to
contribute $2,295,000 to the Partnership for a 51% controlling interest in the
Partnership. The BWISS consideration is to be tendered in cash commencing 18
months from the IPO and the assumption and partial repayment of certain debt
(see Notes 4 and 5) at the date of contribution, the "Contribution Date", the
date of the successful consummation of an IPO of BWI's common stock, occurring
on or before March 31, 1997, realizing minimum gross proceeds of at least
$8,000,000.
NOTE 2 -- PRINCIPLES OF ACCOUNTING FOR CONDENSED CONSOLIDATED PRO FORMA
FINANCIAL STATEMENTS
Basis of Presentation
The accompanying unaudited pro forma condensed consolidated financial
statements include the effects of the intended IPO, and the accounts of the
Company and the accounts of the entities which, in management's opinion, are
probable of being acquired by or joint ventured with the Company (see Note 1).
The accompanying unaudited pro forma condensed consolidated balance sheet is
presented as if the transactions had been effected as of April 30, 1996, and the
accompanying unaudited pro forma condensed consolidated statements of operations
are presented as if the transactions had been effected at the beginning of each
period presented. The unaudited pro forma condensed consolidated financial
statements have been prepared for analysis purposes only, and do not purport to
be indicative of what the actual consolidated financial condition of the Company
would have been at April 30, 1996 and the actual results of operations of the
Company would have been for the four months ended April 30, 1996 and the year
ended December 31, 1995, nor does it purport to represent the future
consolidated financial position or results of operations of the Company.
Principles of Consolidation
The historical consolidated financial statements include the accounts of
BWI and its substantially-owned subsidiary, Heritage Brewing Company
("Heritage"). The accounts of BWI have been included in the historical
consolidated financial statements beginning August 2, 1995 (date of
incorporation). The accounts of Heritage have been included in the historical
consolidated financial statements beginning November 8, 1995 (date of
acquisition). The historical consolidated operations of BWI and of Heritage do
not include a full year of activity for 1995. Accordingly, management estimated
certain expenses for BWI on an ongoing basis, and adjusted the historical
accounts for Heritage based on the actual results of operations of Heritage for
the year ended December 31, 1995.
For the four months ended April 30, 1996, an increase totaling $19,919 was
made to selling, general and administrative expense in the accompanying
unaudited pro forma condensed consolidated statement of operations to effect
expected incremental salaries and certain expected ongoing expenses.
F-11
69
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
For the year ended December 31, 1995, the accompanying unaudited pro forma
condensed consolidated statements of operations have been adjusted to reflect
management's estimates of certain general and administrative expenses for BWI
and the actual results of operations for Heritage as follows:
BWI HERITAGE COMBINED
-------- --------- ---------
Net sales.......................................... $ -- $(347,751) $(347,751)
Cost of sales...................................... -- 426,900 426,900
Selling, general and administrative expenses....... 561,597 101,630 663,227
Interest........................................... -- -- --
Income tax benefit................................. -- (44,538) (44,538)
-------- --------- ---------
Increase to net loss............................... $561,597 $ 136,241 $ 697,838
======== ========= =========
The historical consolidated financial statements also include the accounts
of OEBC and its wholly-owned subsidiary, Riverside Brewing Company, and the
assets and liabilities expected to be contributed to the Partnership by St.
Stan's, and the operations related thereto. All significant intercompany
accounts have been eliminated in the pro forma consolidation.
Cash and Cash Equivalents
Management intends to invest the proceeds from the IPO in highly liquid
instruments with maturities of 90 days or less. Interest income in the
accompanying unaudited pro forma condensed consolidated statements of operations
was increased by $57,745 and $173,236 for the four months ended April 30, 1996
and the year ended December 31, 1995, respectively, to reflect earnings at a
rate of 5% per annum on the increased cash balances which are expected to arise
from the IPO (see Note 1).
Property and Equipment
In connection with the OEBC Exchange Agreement (see Note 1), certain
machinery and equipment (see Note 3) was reduced by $370,435 to reflect its fair
market value. In connection with this property adjustment, depreciation and
amortization expense was reduced $17,640 and $52,919 for the four months ended
April 30, 1996 and the year ended December 31, 1995, respectively. Such
reduction is reflected in cost of sales in the accompanying unaudited pro forma
condensed consolidated statements of operations.
A substantial portion of the assets of OEBC under capital leases (see Note
3) were placed into service in late 1995. As a result, cost of sales in the
accompanying unaudited pro forma condensed consolidated statement of operations
for the year ended December 31, 1995 has been increased by $70,100 to reflect
amortization of such assets for a full 12 month period.
Goodwill and Other Intangible Assets
Goodwill of $4,158,543 has been estimated in connection with the OEBC
Exchange Agreement (see Notes 1, 4 and 8), assuming the exchange was consummated
on April 30, 1996, and is expected to be amortized on a straight-line basis over
a period of 15 years. Amortization of goodwill has been included in the
accompanying unaudited pro forma condensed consolidated statements of operations
amounting to $92,412 and $277,236 for the four months ended April 30, 1996 and
the year ended December 31, 1995, respectively. Such is reflected as an increase
to selling, general and administrative expenses.
Unaudited pro forma amortization expense relating to goodwill and other
intangible assets for the four months ended April 30, 1996 and the year ended
December 31, 1995 is $100,745 and $302,236, respectively.
F-12
70
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The Company will assess the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through projected undiscounted cash flows. The amount of
goodwill impairment, if any, will be measured based on projected undiscounted
cash flows and will be charged to operations in the period in which goodwill
impairment is determined by management. The methodology that management is
expected to use to project results of operations will be based on a five-year
trend line of expected cash flows.
In connection with the structuring of the BWI-Prost Limited Partnership,
BWI expects to incur costs totaling $75,000. Such costs have been reflected as
an increase to intangible assets and a decrease to cash in the accompanying
unaudited pro forma condensed consolidated balance sheet. In connection
therewith, selling, general and administrative expenses have been increased by
$8,333 and $25,000, based on a three-year amortization period, in the unaudited
pro forma condensed consolidated statements of operations for the four months
ended April 30, 1996 and the year ended December 31, 1995, respectively.
Deferred Financing Costs
Deferred financing costs, included in other current assets, arose from the
issuance by BWI of warrants which represent interest costs associated with a
bridge financing which was funded in May 1996. Such costs, totaling $50,530 at
April 30, 1996, have been written-off and reflected as a reduction to other
current assets and stockholders' equity in the accompanying unaudited pro forma
condensed consolidated balance sheet.
An increase to interest expense has not been made in the accompanying
unaudited pro forma condensed consolidated statements of operations for the four
months ended April 30, 1996 and the year ended December 31, 1995, to reflect the
amortization of such costs as the bridge financing is intended to be temporary,
with any balance outstanding thereunder to be repaid from the proceeds from the
IPO.
Deferred Offering Costs
Deferred offering costs, included in other assets, represent costs
associated with BWI's intended IPO (see Note 1). Such costs, totaling $54,882 at
April 30, 1996, have been written-off and reflected as a reduction to equity on
the accompanying unaudited pro forma condensed consolidated balance sheet.
Accounts Payable
Accounts payable generally represent amounts due vendors in the normal
course of business. Management is expected to use $500,000 from proceeds of the
IPO (see Note 1) to reduce past due accounts and contractual commitments for
services related to the IPO. Accordingly, accounts payable and cash have been
reduced in the accompanying unaudited pro forma condensed consolidated balance
sheet.
Per Share Information
Pro forma net loss per share is computed by dividing the pro forma net loss
by the sum of the historical number of shares of common stock and common stock
equivalents outstanding during the respective periods, common stock expected to
be issued in the proposed IPO (excluding the underwriters' overallotment),
common stock expected to be issued in connection with the proposed OEBC
acquisition and BWI-Prost Partners joint venture (see Note 1) and common stock
issued in connection with the private placement (see Note 9). Common stock
equivalents include common shares issuable upon the exercise of the Company's
stock options and warrants. Pursuant to the Securities and Exchange Commission
(the "Commission"), Staff Accounting Bulletin No. 83, common shares issued for
consideration below an assumed IPO price (estimated at $8.00 per share as
discussed in Note 1) have been considered outstanding for all periods presented,
and common stock purchase options and warrants granted with exercise prices
below the IPO price during the
F-13
71
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
twelve-month period preceding the date of the initial filing of the registration
statement have been included in the calculation of the common shares
outstanding, using the treasury stock method, as if they were outstanding for
all periods presented, including loss years where the impact is anti-dilutive.
Income Taxes
In connection with the OEBC Exchange Agreement (see Note 1), a deferred tax
liability totaling $1,663,417 associated with non-deductible goodwill has been
established in the accompanying unaudited pro forma condensed consolidated
balance sheet. Management believes the acquisition of OEBC will qualify as a
statutory tax-free exchange under the Internal Revenue Code.
In connection with the nondeductible amortization of goodwill, as discussed
in Notes 1 and 2, and the depreciation related to the acquisition of Heritage
(please refer to the historical financial statement of BWI), an adjustment to
record the related deferred tax benefit amounting to $36,965 and $155,432 for
the four months ended April 30, 1996 and the year ended December 31, 1995,
respectively, has been reflected in the accompanying unaudited pro forma
condensed consolidated statements of operations.
NOTE 3 -- PROPERTY AND EQUIPMENT, NET
Property and equipment in the accompanying unaudited pro forma condensed
consolidated balance sheet consists of the following:
Machinery and equipment.................................................. $3,374,926
Building and leasehold improvements...................................... 2,307,379
Equipment under capital lease............................................ 941,500
Furniture and equipment.................................................. 35,332
-----------
6,659,137
Less accumulated depreciation and amortization......................... (978,634)
-----------
$5,680,503
===========
Management expects to expand its brewing capacity in excess of current
capacity and that of its proposed acquisition and joint venture. Accordingly,
management expects to use approximately $800,000 of its IPO proceeds for
purchases of equipment. The Company reflected a reduction to cash and a
corresponding increase to property and equipment in the accompanying unaudited
pro forma condensed consolidated balance sheet.
In connection therewith, depreciation expense in the accompanying unaudited
pro forma condensed statements of operations was increased by $38,095 and
$114,286 for the four months ended April 30, 1996 and the year ended December
31, 1995, respectively.
Unaudited pro forma depreciation and amortization expense relating to
property and equipment for the four months ended April 30, 1996 and the years
ended December 31, 1995 is $259,480 and $679,203, respectively.
NOTE 4 -- NOTES PAYABLE
OEBC Note Payable to Bank
In connection with the OEBC Exchange Agreement and concurrent with the
Closing Date, notes payable to related parties, which aggregated approximately
$545,000, refinanced with a bank on May 10, 1996, will be divided into two
notes. The predecessor stockholders will assume a note totaling $220,941 without
further obligation to OEBC, and the remaining principal balance of the note
totaling $324,128 will be paid to the bank
F-14
72
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
by OEBC. In consideration for assuming a portion of the OEBC's debt obligations,
the stockholders will be issued 27,618 shares of BWI common stock valued at
$143,612, using 65% of the estimated IPO price per share of $8.00 (see Note 2).
Due to transferability restrictions under Commission Rule 144 of the 1933 Act,
the valuation reflects a discount of 35%. If on January 1, 1999, the per share
market value of BWI common stock is less than $6.00, the Company will issue to
such stockholders an additional 9,227 shares of its common stock.
Included in the accompanying unaudited pro forma condensed consolidated
balance sheet is a reduction to notes payable of $220,941, and an increase in
stockholders' equity of $143,612. The difference of $77,329 has been reflected
as a reduction to goodwill (see Notes 1 and 2). Furthermore, a reclassification
of $73,397 has been made from notes payable to related parties and to notes
payable to reflect the refinancing on May 10, 1996.
In connection therewith, interest expense in the accompanying unaudited pro
forma condensed consolidated statements of operations was reduced by $7,733 and
$23,199 for the four months ended April 30, 1996 and the year ended December 31,
1995, respectively.
BWISS New Note Payable
BWISS has obtained a commitment letter from the lender to refinance the
$676,836 note payable that BWISS is to assume from the Partnership on the
Contribution Date. The lender requires a principal reduction payment be made
such that the outstanding balance of the note will be $500,000. Accordingly, the
accompanying unaudited pro forma condensed consolidated balance sheet reflects a
reduction of $176,836 to cash and a corresponding reduction to notes payable. In
consideration therewith, interest expense in the accompanying unaudited pro
forma condensed consolidated statements of operations was reduced by $10,110 and
$17,426 for the four months ended April 30, 1996 and the year ended December 31,
1995, respectively.
F-15
73
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
Notes payable, as adjusted, in the accompanying unaudited pro forma
condensed consolidated balance sheet consist of the following:
BWI note payable to bank, bearing interest at prime, plus 2.75% per annum
(11.50% at April 30, 1996), payable in monthly principal and interest
installments of $6,286, due May 4, 2004, secured by substantially all
assets of Heritage and personal guarantees of certain officers and
former stockholders of Heritage........................................ $ 398,323
BWI note payable to bank, bearing interest at prime, plus 2.529% per
annum (11.279% at April 30, 1996), payable in monthly principal and
interest installments of $1,148, due August 1, 1998, secured by
substantially all assets of Heritage, and personal guarantees of
certain officers and former stockholders of Heritage................... 28,049
OEBC note payable to bank, expected to bear interest at prime plus 1.75%
per annum (10.50% at April 30, 1996), expected to be payable in monthly
installments of principal and interest of approximately $11,576, due
December 31, 1998 (assuming a closing date of the IPO of December 31,
1996).................................................................. 324,128
BWISS note payable to a lending institution, bearing interest at a
variable rate, ranging from 11.00% to 16.00% per annum, payable in
monthly installments of principal and interest of $5,683 due December
31, 2001 (assuming a closing date of the IPO of
December 31, 1996)..................................................... 500,000
Unsecured demand notes with vendors, generally bearing interest at 11%
per annum, payable in monthly payments of principal and interest
through May 1997....................................................... 83,552
----------
1,334,052
Less current portion..................................................... (248,600)
----------
$1,085,452
==========
Future annual principal installments of notes payable, as adjusted, as of
April 30, 1996 are expected to be as follows:
YEARS ENDING
APRIL 30,
-------------------------------------------------
1997............................................. $ 248,600
1998............................................. 185,235
1999............................................. 155,172
2000............................................. 62,322
2001............................................. 69,770
Thereafter....................................... 612,953
----------
$1,334,052
==========
NOTE 5 -- NOTES PAYABLE TO RELATED PARTIES
OEBC Note Payable to Stockholder
In connection with the OEBC Exchange Agreement, BWI entered into an
agreement whereby BWI is obligated to repay $644,000 of indebtedness due to
certain related parties, consisting of $603,525 of principal and $40,475 of
accrued interest as of April 30, 1996. Upon the consummation of the IPO (see
Note 1), such indebtedness is to be satisfied as follows: (1) $301,000 is to be
paid in cash, and (2) $343,000 is to be refinanced with a new non-interest
bearing promissory note which matures in 90 days, payable in 24,125 shares
F-16
74
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
of the Company's common stock and 50,000 warrants to purchase shares of the
Company's common stock at an exercise price of $5.00 per share, subject to
adjustment, as defined.
Included in the accompanying unaudited pro forma condensed consolidated
balance sheet is a decrease of $301,000 to cash, a decrease of $260,525 to notes
payable to related parties and a decrease of $40,475 to accounts payable and
accrued expenses, which have been made to reflect the cash paydown of the notes
payable to the OEBC stockholders. Also included in the accompanying unaudited
pro forma condensed consolidated balance sheet is a decrease of $343,000 to
notes payable to related parties and a corresponding increase in stockholders'
equity, which have been made to reflect the repayment of the remainder of the
notes payable to the OEBC stockholders. Although such repayment is scheduled to
occur 90 days after the close of the IPO, it has been reflected herein as it is
management's intent to promptly effect such repayment.
In connection therewith, interest expense in the accompanying unaudited pro
forma condensed consolidated statements of operations has been reduced by
$12,839 and $30,199 for the four months ended April 30, 1996 and the year ended
December 31, 1995, respectively, to reflect the principal reductions described
above.
BWISS Notes Payable to Related Party
As part of BWISS's capital contribution, as more thoroughly discussed at
Note 1, BWISS is obligated to assume and repay these notes payable to related
party. The balances of such notes payable total $459,153 as of April 30, 1996.
Accordingly, the pro forma condensed consolidated balance sheet reflects a
reduction to cash and a corresponding reduction to notes payable to related
party.
In connection therewith, interest expense on the accompanying pro forma
condensed consolidated statements of operations was reduced $8,449 and $26,658
for the four months ended April 30, 1996 and the year ended December 31, 1995,
respectively. Notes payable to related parties, as adjusted, in the accompanying
unaudited condensed consolidated pro forma balance sheet consist of the
following as of April 30, 1996:
BWI unsecured demand notes payable to officers, noninterest bearing........ $11,283
BWI unsecured note payable to an officer, noninterest bearing, payable
monthly at 3% of monthly sales, as defined............................... 78,955
-------
$90,238
=======
NOTE 6 -- DISTRIBUTION PAYABLE
Pursuant to the BWI-Prost Partners Partnership Agreement, the Partnership
is required to record a distribution payable to Prost Partners limited
Partnership in an amount equal to the remaining amount of the BWISS capital
contribution due the Partnership. It is estimated that $1,135,989 of the
$2,295,000 capital contribution (see Note 1) will be satisfied through BWISS's
assumption and repayment of $459,153 of notes payable to related parties (see
Note 5) and full assumption and partial repayment of $676,836 of notes payable
(see Note 4). Accordingly, the remaining required capital contribution of BWISS,
which is estimated to be $1,159,011 at April 30, 1996, has been reflected as a
decrease to minority interest and a corresponding increase to distribution
payable. Please refer to the notes to the financial statements of the St. Stan's
Brewery and Brewpub Operations for the payment terms related thereto.
BWISS is required to pay interest to the Partnership on its unpaid capital
contribution at a rate of 10% per annum, and the Partnership is required to pay
Prost Partners Limited Partnership interest on the distribution payable under
similar terms. In connection therewith, interest expense in the accompanying
unaudited pro forma condensed consolidated statements of operations has been
increased by $28,975 and $115,901 for the four months ended April 30, 1996 and
the year ended December 31, 1995, respectively.
F-17
75
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE 7 -- MINORITY INTEREST
The accompanying pro forma condensed consolidated balance sheet has been
adjusted to reflect the establishment of the minority interest liability
totaling $1,505,830 which corresponds with the historical book value of the net
assets of the St. Stan's Brewery and Brewpub Operations, and the recordation of
the $1,159,011 distribution payable (see Note 6 above).
The accompanying unaudited pro forma condensed consolidated statements of
operations for the four months ended April 30, 1996 and the year ended December
31, 1995 have been adjusted to reflect the minority interest's 49% share of the
historical net loss of the St. Stan's Brewery and Brewpub Operations and the pro
forma adjustments related thereto.
NOTE 8 -- COMMITMENTS
Capital Lease Agreement Amendment
In connection with the OEBC Exchange Agreement (see Note 1) and concurrent
with the Closing Date, a capital lease with a related party of OEBC is required
to be modified for the benefit of the Company. The modifications to the capital
lease obligation include a reduction in the effective interest rate to 12%, a
provision that all such leased equipment may be purchased by the Company for $1
upon expiration of the lease, the extension of such lease by that number of
months which is equal to the number of months the lease is in arrears through
December 31, 1995, the forgiveness of any lease payment that the lessor was to
receive for the period January 1, 1996 through September 30, 1996, and the
repayment of deferred lease payments, if any, for the period October 1, 1996 to
December 31, 1996 from net proceeds expected to be received from the IPO (see
Note 1). As of April 30, 1996, such past due payments which are expected to be
forgiven totaled $77,412. The Company reduced accounts payable by $77,412 to
reflect the forgiveness of such lease payments. Such has also been reflected as
a reduction to goodwill (see Notes 1 and 2). Also included in the accompanying
unaudited pro forma condensed consolidated balance sheet is a reclassification
from accounts payable to capital lease due to related party totaling $42,054, to
reflect the extension of lease payments in arrears through December 31, 1995.
Future annual aggregate minimum lease payments under the capital lease due
to related party, as modified in the accompanying pro forma condensed
consolidated balance sheet as follows:
YEARS
ENDING
APRIL 30,
- -----------
1997............................................... $ 239,288
1998............................................... 250,564
1999............................................... 249,456
2000............................................... 249,486
2001............................................... 216,611
Thereafter......................................... 252,438
1,457,843
Less amounts representing interest................. (379,414)
Present value of minimum lease payments............ 1,078,429
Less current portion............................... (128,464)
$ 949,965
F-18
76
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
In connection therewith, interest expense in the accompanying unaudited pro
forma condensed consolidated statements of operations has been reduced by $5,452
and $16,356 for the four months ended April 30, 1996 and the year ended December
31, 1995, respectively.
Management Agreements
In connection with the OEBC Exchange Agreement, the Company entered into a
management agreement (the "Management Agreement") with certain stockholders of
OEBC whereby they are to manage and operate the brewpub operations of OEBC from
the Closing Date through December 31, 1998. As compensation for such services,
they are to receive 10,000 shares of the Company's common stock. Such shares are
to be issued on a pro rata basis over the term of the Management Agreement,
estimated at two years for the pro forma condensed consolidated financial
statements. In addition, the brewpub managers are obligated to the Company for
quarterly cash flow deficits, if any, as defined, during the term of the
Management Agreement. The Management Agreement can be terminated by mutual
written consent or in the event of a breach, as defined.
Selling, general and administrative expenses in the accompanying unaudited
pro forma condensed consolidated statements of operations have been increased by
$6,500 and $26,000 for the four months ended April 30, 1996 and the year ended
December 31, 1995, respectively, to reflect the estimated expense for such
Management Agreement.
NOTE 9 -- SUBSEQUENT EVENTS
Bridge Note
In April 1996, the Company entered into an agreement whereby the Company
issued a $500,000 promissory note (the "Bridge Note"), bearing interest at 18%
per annum. Interest is payable monthly and the Bridge Note matures the earlier
of the closing of the intended IPO (see discussion below) or December 31, 1996.
The Bridge Note is secured by all equipment, inventory and accounts receivable
of the Company. As of April 30, 1996, no amounts were outstanding under the
terms of this financing as the proceeds were received by the Company in May
1996.
The accompanying pro forma condensed consolidated balance sheet reflects
the establishment of the Bridge Note and the related use of such proceeds for
working capital purposes (a reduction to stockholders' equity), and the
repayment of such amount from the proceeds of the IPO.
Related Party Financing
On June 24, 1996, the Company entered into an agreement with a significant
stockholder of a company to be acquired (OEBC -- see discussion below), whereby
the Company can borrow up to $175,000. Borrowings bear interest at a maximum
rate of 11%, as defined, payable monthly. The principal balance, together with
any unpaid interest, is due the earlier of the closing of an IPO with aggregate
proceeds of no less than $10,000,000, or before June 30, 1997.
The accompanying unaudited pro forma condensed consolidated balance sheet
reflects the establishment of the note and the related use of such proceeds for
working capital purposes (a reduction to stockholders' equity), and the
repayment of such amount from the proceeds of the IPO.
During the period May 1, 1996 and through the Closing Date of the OEBC
Exchange Agreement, OEBC is expected to receive advances from a stockholder of
OEBC totaling up to $150,000 to be used for working capital purposes. Such
advances, up to $150,000, are expected to be paid from proceeds to be received
upon the consummation of the IPO.
F-19
77
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
The accompanying unaudited pro forma condensed consolidated balance sheet
reflects the establishment of the Note and the related use of such proceeds for
working capital purposes (a reduction to stockholders' equity), and the
repayment of such amount from the proceeds of the IPO.
Private Placement
On September 9, 1996, the Company closed a private placement of 15,000
common stock purchase units for $150,000, net of offering costs of $20,000. Each
unit consists of two shares of common stock and one common stock purchase
warrant exercisable at $7.00 per share. Such securities are restricted under
Commission Rule 144 of the 1933 Act. The accompanying unaudited pro forma
condensed consolidated balance sheet reflects this transaction as a net funds
from this private placement all to be used for working capital purposes prior to
the IPO.
F-20
78
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Beverage Works, Inc.
We have audited the accompanying consolidated balance sheet of Beverage
Works, Inc. and subsidiary (the "Company") as of December 31, 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the period from incorporation (August 2, 1995) to December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Beverage Works, Inc. and subsidiary as of December 31, 1995, and the
consolidated results of their operations and their cash flows for the period
from incorporation (August 2, 1995) to December 31, 1995, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company was formed on August 2, 1995,
and since such date, has incurred substantial losses from operations. The
Company will require additional financing to fund operations, consummate its
proposed acquisitions and to ultimately enable it to achieve revenues to support
its cost structure. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management is currently funding
operations from a private placement of its common stock and a bridge loan, and
management is seeking additional capital through the issuance of its common
stock in an initial public offering as more fully described in Notes 2 and 11.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
CORBIN & WERTZ
Irvine, California
August 1, 1996, except
for Notes 2 and 11 as to which
the date is September , 1996
The foregoing auditors' report is in the form which will be signed upon
consummation of the transaction described in Note 11 to the financial
statements.
F-21
79
BEVERAGE WORKS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Note 2)
DECEMBER 31,
1995
APRIL 30, ------------
1996
-----------
(UNAUDITED)
Current assets:
Cash and cash equivalents.......................................... $ 308,079 $1,041,723
Common stock subscription receivable (Note 8)...................... 260,000 --
Accounts receivable, net of allowance for doubtful accounts of
$20,000 (1996) (unaudited) and $0 (1995) (Notes 5 and 11)....... 30,177 1,311
Inventories (Notes 3, 5 and 11).................................... 53,405 45,135
Deferred financing costs, net (Note 11)............................ 50,530 --
Prepaid expenses and other......................................... 78,987 33,208
---------- ----------
Total current assets....................................... 781,178 1,121,377
Property and equipment, net (Notes 4, 5 and 11)...................... 1,407,705 1,296,434
Deferred licensing fees (Note 7)..................................... 63,800 --
Deferred offering costs (Note 11).................................... 54,882 37,320
---------- ----------
$ 2,307,565 $2,455,131
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.............................. $ 270,843 $ 96,352
Notes payable (Note 5)............................................. 41,286 41,286
Notes payable to related parties (Note 6).......................... 90,238 109,072
Deferred income taxes (Note 10).................................... 52,286 52,286
---------- ----------
Total current liabilities.................................. 454,653 298,996
Notes payable, net of current portion (Note 5)....................... 385,086 398,240
Deferred income taxes, net of current portion (Note 10).............. 288,593 306,008
---------- ----------
Total liabilities.......................................... 1,128,332 1,003,244
---------- ----------
Commitments and contingencies (Note 7)
Stockholders' equity (Notes 8 and 11):
Preferred stock, no par value; 5,000,000 shares authorized, no
shares issued and outstanding; liquidation value of $.001 per
share........................................................... -- --
Common stock, no par value; 20,000,000 shares authorized; 2,427,863
(1996) (unaudited) and 2,341,363 (1995) shares issued and
outstanding..................................................... 2,311,701 1,942,871
Accumulated deficit................................................ (1,132,468) (490,984)
---------- ----------
Total stockholders' equity................................. 1,179,233 1,451,887
---------- ----------
$ 2,307,565 $2,455,131
========== ==========
See independent auditors' report and accompanying notes
to consolidated financial statements
F-22
80
BEVERAGE WORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THE PERIOD FROM
INCORPORATION
(AUGUST 2, 1995) TO
DECEMBER 31, 1995
THE FOUR -------------------
MONTHS ENDED
APRIL 30,
1996
------------
(UNAUDITED)
Sales (Note 2)............................................... $ 109,543 $ 48,395
Less excise taxes............................................ (9,467) (3,585)
--------- ---------
Net sales.......................................... 100,076 44,810
Cost of sales................................................ 169,029 81,627
--------- ---------
Gross profit (loss)................................ (68,953) (36,817)
--------- ---------
Operating expenses:
Salaries and wages (Note 8)................................ 188,745 237,559
Professional fees (Note 8)................................. 91,103 78,516
Other general and administrative (Notes 7 and 8)........... 190,757 108,445
Marketing and selling...................................... 95,943 9,033
--------- ---------
Total operating expenses........................... 566,548 433,553
--------- ---------
Loss from operations......................................... (635,501) (470,370)
Interest expense (Notes 5, 6 and 8).......................... 23,398 28,320
--------- ---------
Loss before benefit for income taxes......................... (658,899) (498,690)
Benefit for income taxes (Note 10)........................... 17,415 7,706
--------- ---------
Net loss..................................................... $ (641,484) $(490,984)
========= =========
Net loss per common share.................................... $ (0.21) $ (0.16)
========= =========
Common shares and equivalents outstanding (Notes 2 and 11)... 3,094,874 3,094,874
========= =========
See independent auditors' report and accompanying notes
to consolidated financial statements
F-23
81
BEVERAGE WORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FOUR MONTHS ENDED APRIL 30, 1996 (UNAUDITED) AND FOR THE
PERIOD FROM INCORPORATION (AUGUST 2, 1995)
TO DECEMBER 31, 1995
COMMON STOCK
----------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
--------- ---------- ----------- ----------
Issuance of common stock for cash at $0.01
per share in connection with incorporation
(August 2, 1995) (Note 8).................. 245,310 $ 2,453 $ -- $ 2,453
Issuance of common stock for cash at $0.05
per share in October 1995 (Note 8)......... 1,549,100 77,455 -- 77,455
Issuance of warrants to purchase common
stock, at an exercise price of $8.25 per
share, for cash in October 1995 (Note 8)... -- 28,100 -- 28,100
Issuance of common stock valued at $3.11 per
share in connection with the
stock-for-stock exchange on November 8,
1995 (Notes 1
and 8)..................................... 142,276 442,828 -- 442,828
Issuance of common stock valued at $3.00 per
share for services rendered (Note 8)....... 49,015 147,045 -- 147,045
Issuance of common stock valued at $4.00 per
share for interest (Note 8)................ 5,333 21,332 -- 21,332
Issuance of common stock valued at $3.47 per
share for services rendered (Note 8)....... 16,583 57,570 -- 57,570
Issuance of common stock for cash at $4.00
per share, net of offering costs of
$168,896
(Note 8)................................... 333,746 1,166,088 -- 1,166,088
Net loss..................................... -- -- (490,984) (490,984)
--------- ---------- ----------- ----------
Balances, December 31, 1995.................. 2,341,363 1,942,871 (490,984) 1,451,887
Issuance of common stock for subscription
receivable at $4.00 per share, net of
offering costs of $42,720 (Note 8)......... 80,000 277,280 -- 277,280
Issuance of common stock valued at $5.20 per
share pursuant to a license agreement
(Notes 7 and 8)............................ 6,500 33,800 -- 33,800
Issuance of Bridge Warrants to purchase
35,000 shares of common stock, at an
exercise price of $4.75 per share, valued
at $1.65 per share, representing interest
(Notes 8 and 11)........................... -- 57,750 -- 57,750
Net loss..................................... -- -- (641,484) (641,484)
--------- ---------- ----------- ----------
Balances, April 30, 1996 (unaudited)......... 2,427,863 $2,311,701 $(1,132,468) $1,179,233
========= ========== =========== ==========
See independent auditors' report and accompanying notes
to consolidated financial statements
F-24
82
BEVERAGE WORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE PERIOD
FROM INCORPORATION
(AUGUST 2, 1995) TO
DECEMBER 31, 1995
THE FOUR -------------------
MONTHS ENDED
APRIL 30,
1996
------------
(UNAUDITED)
Cash flows from operating activities
Net loss.................................................... $ (641,484) $ (490,984)
Adjustments to reconcile net loss to net cash used in
operating activities (Note 8):
Depreciation and amortization............................ 80,647 30,282
Provision for loss on accounts receivable................ 20,000 --
Common stock issued for services rendered................ -- 204,615
Common stock issued to related parties for interest...... -- 21,332
Changes in operating assets and liabilities, net of acquired
company:
Accounts receivable...................................... (48,866) --
Inventories.............................................. (8,270) --
Prepaid expenses and other............................... (45,779) (18,715)
Accounts payable and accrued expenses.................... 174,491 37,216
Deferred income taxes.................................... (17,415) (7,706)
------------ -------------------
Net cash used in operating activities............... (486,676) (223,960)
------------ -------------------
Cash flows from investing activities:
Cash of acquired company received in connection with
stock-for-stock exchange (Note 1)........................ -- 5,952
License acquisition fee (Note 7)............................ (30,000) --
Purchases of property and equipment......................... (184,698) (86,117)
------------ -------------------
Net cash used by investing activities............... (214,698) (80,165)
------------ -------------------
Cash flows from financing activities:
Proceeds from issuance of common stock (Note 8)............. 54,600 1,245,996
Proceeds from issuance of common stock purchase warrants
(Note 8)................................................. -- 28,100
Deferred offering costs (Note 8)............................ (54,882) (37,320)
Proceeds from issuance of notes payable to related parties
(Note 6)................................................. -- 109,072
Payments on notes payable................................... (13,154) --
Payments on notes payable to related parties (Note 6)....... (18,834) --
------------ -------------------
Net cash provided by (used in) financing
activities........................................ (32,270) 1,345,848
------------ -------------------
Net change in cash and cash equivalents....................... (733,644) 1,041,723
Cash and cash equivalents, beginning of period................ 1,041,723 --
------------ -------------------
Cash and cash equivalents, end of period...................... $ 308,079 $ 1,041,723
=========== ===============
Supplemental disclosure of cash flow information --
Cash paid during the period for:
Interest................................................. $ 7,833 $ 2,771
=========== ===============
Income taxes............................................. $ -- $ 800
=========== ===============
See independent auditors' report and accompanying notes
to consolidated financial statements
F-25
83
BEVERAGE WORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Supplemental disclosure of noncash investing and financing activities:
April 30, 1996 (unaudited)
The Company issued 6,500 shares of common stock valued at $33,800 pursuant
to license agreement (see Notes 7 and 8).
The Company issued Bridge Warrants to acquire 35,000 shares of the
Company's common stock valued at $57,750 for deferred financing costs (see Notes
8 and 11).
December 31, 1995
The Company issued 5,333 shares of common stock valued at $21,332 for
interest to related parties (see Note 8).
The Company issued 65,598 shares of common stock valued at $204,615 for
services rendered (see Note 8).
As discussed in Note 1, on November 8, 1995, the Company entered into a
stock-for-stock exchange. Pursuant to the terms of the stock-for-stock exchange,
liabilities were assumed as follows:
Fair value of assets acquired............................................ $1,307,490
Value of stock given as consideration.................................... (442,828)
----------
Liabilities assumed.................................................... $ 864,662
=========
See independent auditors' report and accompanying notes
to consolidated financial statements
F-26
84
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
Beverage Works, Inc. ("BWI"), a California corporation incorporated on
August 2, 1995, was formed to acquire interests in various craft brewing and
beverage operations.
On November 8, 1995, BWI entered into a stock-for-stock exchange with
Heritage Brewing Company, Inc. ("Heritage") intended to qualify as a statutory
tax-free exchange under the Internal Revenue Code. Heritage is a microbrewery in
the business of manufacturing and distributing various distinctive beers
throughout the Western United States. Pursuant to the acquisition, BWI issued
142,276 shares of its common stock in exchange for approximately 95% of the
outstanding shares of Heritage. BWI has offered 7,724 shares to the minority
interest stockholders of Heritage. To date, such minority stockholders have not
tendered their shares. The arrangement allows for the former stockholders of
Heritage to effect a "Call" provision. The Call provision allows the
stockholders to rescind the acquisition should BWI not consummate an initial
public offering (the "IPO") by December 31, 1996. In the event the IPO is not
consummated by December 31, 1996, and the Call holders effect to exchange their
BWI shares for their shares of Heritage, amounts advanced to Heritage for
working capital and capital improvements will be payable to BWI in 36 equal
monthly noninterest bearing installments. The acquisition has been accounted for
under the purchase method of accounting as management believes the IPO is
probable of being consummated. The purchase price was $442,828, plus acquisition
costs of $18,480. The minority interest relating to the remaining stockholders
of Heritage was not recorded as the amount was not considered significant. There
was no excess of purchase price over the fair value of the net assets acquired
as a result of this transaction. Unaudited proforma revenues, net loss and net
loss per share of BWI, assuming the acquisition was consummated January 1, 1995,
for the year ended December 31, 1995, are as follows:
Revenues............................................... $ 392,561
=========
Net loss............................................... $(566,149)
=========
Net loss per share..................................... $ (0.18)
=========
The proforma information above is not necessarily indicative of the actual
results which may have occurred had the acquisition been consummated on January
1, 1995.
As discussed in Note 11, on September , 1996, BWI entered into a
stock-for-stock exchange (the "Exchange Agreement") with Orange Empire Brewing
Company ("OEBC"), a California corporation. Additional agreements were entered
into concurrently with the execution of the Exchange Agreement, including an
agreement with BWI to actively manage OEBC's operations (Note 11).
On June 25, 1996, BWI formed a wholly-owned subsidiary, BWI -- St. Stan's,
Inc. ("BWISS"). On September , 1996, Prost Partners Limited Partnership (a
California limited partnership) ("St. Stan's"), a craft brewing company located
in Modesto, California, formed a California general partnership with BWISS,
BWI-Prost Partners (the "Partnership"). Pursuant to the terms of the BWI-Prost
Partners partnership agreement (the "Partnership Agreement"), St. Stan's has
agreed to contribute substantially all of its assets, net of certain
liabilities, to the Partnership for a 49% minority interest in the Partnership.
BWISS has agreed to contribute $2,295,000 to the Partnership for a 51%
controlling interest in the Partnership. The BWISS consideration is to be
tendered in cash commencing 18 months from the IPO, and the assumption of
certain debt on the contribution date, the "Contribution Date", the date of the
successful consummation of the IPO of BWI's common stock, occurring on or before
March 31, 1997, realizing minimum proceeds of at least $8,000,000 (before any
deductions, including, but not limited to, underwriters' compensation and
expenses). See Note 11 for further discussion of the terms of the Partnership
Agreement which have a significant effect on the accompanying historical
financial statements.
F-27
85
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates, among other things, the realization of
assets and the satisfaction of liabilities in the normal course of business. As
reflected in the accompanying consolidated financial statements, BWI incurred
net losses of $641,484 (unaudited) and $490,984, for the four months ended April
30, 1996 and for the period from incorporation (August 2, 1995) to December 31,
1995, respectively. BWI will require significant capital to fund operations, to
consummate its proposed acquisitions (Note 11) and to enable it to achieve
revenues to support its cost structure. These factors raise substantial doubt
about BWI's ability to continue as a going concern.
BWI has funded operations from a private placement (see Note 8) and the
1996 Bridge Financing and a second Private Placement (see Note 11). BWI plans to
effect the IPO to raise additional capital, certain of which, if the IPO is
successful and the proposed acquisitions are consummated, the proceeds will be
used to close the proposed acquisitions (Note 11), to reduce BWI's indebtedness
and to fund working capital requirements. Management also plans to reduce BWI's
costs on a per unit basis through increased plant utilization and through
combined purchases with the brewing facilities acquired, or to be acquired, by
BWI. Management also plans to implement a marketing plan which is expected to
substantially increase BWI's revenues sufficient to meets BWI's proposed cost
structure. There are no assurances that management's plans can be effected,
which includes the consummation of the IPO in a timely manner. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
BWI and its substantially-owned subsidiary, Heritage Brewing Company
(collectively the "Company"). The accounts of Heritage have been included in the
accompanying consolidated financial statements beginning November 8, 1995. All
significant intercompany transactions and balances have been eliminated in
consolidation.
F-28
86
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Parent Only Financial Information
Beverage Works, Inc., parent only condensed financial information consists
of the following:
FINANCIAL POSITION
ASSETS
DECEMBER 31,
1995
APRIL 30, ------------
1996
------------
(UNAUDITED)
Current assets:
Cash............................................................ $ 299,100 $1,035,771
Common stock subscription receivable............................ 260,000 --
Other current assets............................................ 98,224 2,715
----------- -----------
Total current assets.................................... 657,324 1,038,486
Property and equipment, net....................................... 11,547 5,312
Investment in subsidiary.......................................... 182,725 351,626
Due from subsidiary............................................... 528,586 193,573
Other............................................................. 118,682 37,320
----------- -----------
$1,498,864 $1,626,317
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses........................ $ 229,393 $ 65,358
Notes payable to related party............................... 90,238 109,072
----------- -----------
319,631 174,430
Stockholders' equity.............................................. 1,179,233 1,451,887
----------- -----------
$1,498,864 $1,626,317
=========== ===========
RESULTS OF OPERATIONS
AUGUST 2,
1995 TO
DECEMBER 31,
1995
FOUR ------------
MONTHS ENDED
APRIL 30,
1996
------------
(UNAUDITED)
Net sales......................................................... $ -- $ --
Cost of sales..................................................... -- --
----------- -----------
Gross profit............................................ -- --
Selling, general and administrative expenses...................... 486,842 359,823
----------- -----------
Loss from operations.................................... (486,842) (359,823)
Equity in loss of subsidiary...................................... 147,422 131,161
Interest expense.................................................. 7,220 --
----------- -----------
Net loss.......................................................... $ (641,484) $ (490,984)
=========== ===========
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, as well
as disclosure of contingent assets and liabilities at the date of the financial
statements.
F-29
87
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain estimates made by management also effect the reported amounts of
revenues and expenses during the reported periods. Actual results could
materially differ from those estimates. Significant estimates made by management
include the provision for loss on accounts receivable and the net realizability
of inventory.
Fair Value of Financial Instruments
The consolidated financial statements contain financial instruments whereby
the fair market value of the financial instruments could be different than those
recorded on a historical basis in the accompanying consolidated financial
statements. The Company's financial instruments consist of cash, accounts
receivable, accounts payable, notes payable and notes payable to related
parties. The carrying amounts of the Company's financial instruments generally
approximate their fair values at April 30, 1996 (unaudited) and December 31,
1995. In the case of the notes payable to related parties (see Note 6), it was
not practical to determine fair values due to the lack of a market for such
financial instruments.
Concentration of Credit Risk
The Company, at times, maintains cash balances at certain financial
institutions in excess of the federally insured deposits.
The Company sells its products to independent distributors for distribution
to retailers. The Company extends credit to its distributors and performs
periodic credit evaluations of such customers. The Company does not obtain
collateral to secure its accounts receivable. The Company periodically evaluates
its accounts receivable for collectibility and provides a reserve for losses
resulting therefrom.
Three customers accounted for 37%, 23% and 17% of sales (unaudited),
respectively, for the four-month period ended April 30, 1996. Such
concentrations were similar during the period from November 8, 1995 (date of
acquisition of Heritage) to December 31, 1995.
No one supplier of the raw material used in its brewing process is from a
single source which accounts for 10% or more of total purchases for the
four-month period ended April 30, 1996 (unaudited) and for the period from
incorporation (August 2, 1995) to December 31, 1995.
Risks and Uncertainties
Licenses and Permits
The brewery and wholesale operations require various Federal, state and
local licenses and permits. Brewers are required to file with the Federal Bureau
of Alcohol, Tobacco and Firearms (the "BATF"). The California Department of
Alcoholic Beverage Control (the "ABC") requires that companies file and maintain
licenses, permits or approvals for the production and sale of alcoholic
beverages. Other state and local laws and regulations governing the sale of
alcoholic beverages within a particular state by an out-of-state brewer or
wholesaler vary by state and locality. The Company's brewery operations are
subject to audit and inspection by the BATF and ABC at any time.
Because of the various state and Federal licensing and permitting
requirements, there is a risk that one or more regulatory authorities could
determine that the Company has not complied with applicable licensing or
permitting regulations or does not maintain the approvals necessary for it to
conduct business within their jurisdictions. Regulatory actions could have a
material adverse effect on the Company's financial position and its operating
results.
Seasonality
The beverage business traditionally has historically been seasonal.
Typically, net sales are highest during the third and fourth calendar quarters
and decline sequentially in the first and second calendar quarters. The
F-30
88
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
seasonal pattern is due primarily to the increased demand for consumer beverages
during the summer through the year-end holiday buying season. The Company
expects its net sales and operating results to continue to reflect seasonality.
Environmental Regulations and Operating Considerations
The Company's brewing operations are subject to a variety of extensive and
changing Federal, state and local environmental laws, regulations and ordinances
that govern activities or operations that may have adverse effects on human
health or the environment. Such laws, regulations ordinances may impose
liability for the cost of remediating, and for certain damages resulting from,
sites of past releases of hazardous materials. The Company believes that it
currently conducts, and in the past has conducted, its activities and operations
in substantial compliance with applicable environmental laws, and believes that
costs arising from existing environmental laws will not have a material adverse
effect on the Company's financial condition or results of operations. There can
be no assurance, however, that environmental laws will not become more stringent
in the future or that the Company will not incur costs in the future in order to
comply with such laws.
The Company's 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 occurrence of such a problem could
result in a costly product recall and serious damage to the Company's reputation
for product quality, as well as claims for product liability which may
negatively impact the Company. The Company maintains insurance which the Company
believes is sufficient to cover any liability claims which might result from a
contamination problem in its products, but which may not cover any damage to the
Company's reputation.
Cash Equivalents
The Company considers highly liquid investments with a remaining maturity
of 90 days or less when purchased to be cash equivalents.
Inventories
Inventories, consisting primarily of raw materials and purchased products,
and work in process and finished goods, are stated at the lower of cost or
market. Cost is determined by the first-in, first-out method.
Deferred Financing Costs
Deferred financing costs arose from the issuance of certain warrants which
were deemed by management to represent interest costs associated with the 1996
Bridge Financing (Note 11). Such interest costs are currently being amortized
over the nine-month period ending December 31, 1996. Amortization of such costs
during the four months ended April 30, 1996 was $7,220.
Deferred Offering Costs
Deferred offering costs represent costs associated with the Company's
private placement of common stock (Note 8) and proposed IPO (Note 11). Deferred
offering costs will be recorded as a reduction of proceeds received upon the
close of escrow of each transaction. In May 1996, the private placement of the
Company's common stock closed and, accordingly, $37,320 of such costs were
recorded net of the proceeds received. In the event the IPO is unsuccessful, the
$54,882 of costs incurred through April 30, 1996 (unaudited), and costs to be
incurred, will be charged to operations.
F-31
89
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation,
and are being depreciated on a straight-line basis over their estimated useful
lives, which range from five (5) to seven (7) years. Leasehold improvements are
being amortized using the straight-line method over the life of the asset or the
term of the lease (which expires on February 1998), whichever is shorter.
Major betterments and renewals are capitalized, while routine repairs and
maintenance are charged to expense when incurred.
Management of the Company assesses the recoverability of property and
equipment by determining whether the depreciation of such assets over their
remaining lives can be recovered through projected undiscounted cash flows. The
amount of impairment, if any, is measured based on projected undiscounted cash
flows and is charged to operations in the period in which such impairment is
determined by management. To date, management has not identified an impairment
of property and equipment.
Goodwill
Upon the consummation of the proposed IPO (Note 11), the excess of cost of
the investment over net assets to be acquired (goodwill) in connection with the
proposed acquisition of OEBC will be amortized on a straight-line basis over the
expected periods to be benefitted. The Company will assess the recoverability of
this intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through projected undiscounted
cash flows. The amount of goodwill impairment, if any, will be measured based on
projected undiscounted cash flows and will be charged to operations in the
period in which goodwill impairment is determined by management. Goodwill will
be amortized on the straight-line method over an expected 15 year life. The
methodology that management will use to project results of operations will be
based on a five-year trend line of expected cash flows.
Deferred Licensing Fees
Deferred licensing fees (Note 7) represent amounts paid by the Company to
acquire rights to use specified trademarks and tradenames for use in its craft
brewing operations. Such amounts will be amortized on a straight-line basis over
the term of the agreement. No amortization has been recorded during the periods
presented since the manufacture and distribution of such products using product
tradenames has not commenced.
Income Taxes
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement 109"). Under Statement 109, an asset and liability method is used
whereby deferred tax assets and liabilities are determined based on temporary
differences between bases used for financial reporting and income tax reporting
purposes. Income taxes are provided based on the enacted tax rates in effect at
the time such temporary differences are expected to reverse. A valuation
allowance is provided for certain deferred tax assets if it is more likely than
not that the Company will not realize the tax assets through future operations
(see Note 10).
Revenue Recognition
Revenues from product sales are recognized upon shipment. The Company
records a provision for the effect of returned products at the time the units
are shipped. Historically, the Company has experienced minimal product returns.
F-32
90
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Per Share Information
Net loss per common share is computed by dividing the net loss by the
number of shares of common stock and common stock equivalents outstanding during
the respective periods. Common stock equivalents include common shares issuable
upon the exercise of the Company's stock options and warrants. Pursuant to the
Securities and Exchange Commission (the "Commission"), Staff Accounting Bulletin
No. 83, common shares issued for consideration below an assumed IPO price
(estimated at $8.00 per share as discussed in Note 11) have been considered
outstanding for all periods presented, and common stock purchase options and
warrants granted (see Note 8) with exercise prices below the IPO price during
the twelve-month period preceding the date of the initial filing of the
registration statement (estimated to be September 12, 1996) have been included
in the calculation of the common shares outstanding, using the treasury stock
method, as if they were outstanding for all periods presented, including loss
years where the impact is anti-dilutive.
Interim Financial Statements
In the opinion of management, the accompanying unaudited consolidated
financial statements of the Company include all adjustments (consisting of only
normal recurring adjustments) necessary for a fair presentation of the
consolidated financial position of the Company as of April 30, 1996, and results
of operations and cash flows for the four months then ended. Although management
believes that the disclosures of interim financial information in these
financial statements are adequate to make the information presented not
misleading, certain information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
during the interim periods have been condensed or omitted pursuant to the rules
and regulations of the Commission. The unaudited results of operations for the
four months ended April 30, 1996 are not necessarily indicative of results of
operations to be expected for the year ending December 31, 1996.
NOTE 3 -- INVENTORIES
Inventories consist of the following:
DECEMBER 31,
1995
APRIL 30, ------------
1996
-----------
(UNAUDITED)
Raw materials and purchased packaging....................... $40,526 $ 32,900
Work in process and finished goods.......................... 12,879 12,235
------- -------
$53,405 $ 45,135
======= =======
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER
31, 1995
APRIL 30, -----------
1996
-----------
(UNAUDITED)
Machinery and equipment..................................... $ 1,434,848 $ 1,250,150
Furniture and fixtures...................................... 8,446 8,446
Leasehold improvements...................................... 68,120 68,120
---------- ----------
1,511,414 1,326,716
Less accumulated depreciation and amortization.............. (103,709) (30,282)
---------- ----------
$ 1,407,705 $ 1,296,434
========== ==========
F-33
91
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- NOTES PAYABLE
Notes payable consist of the following:
DECEMBER
31, 1995
APRIL 30, -----------
1996
-----------
(UNAUDITED)
Note payable to bank, bearing interest at prime, plus 2.75%
per annum (11.50% at December 31, 1995), payable in
monthly principal and interest installments of $6,286, due
May 4, 2004, secured by substantially all assets of
Heritage and personal guarantees of certain officers and
former stockholders of
Heritage.................................................. $ 398,323 $ 408,007
Note payable to bank, bearing interest at prime, plus 2.529%
per annum (11.279% at December 31, 1995), payable in
monthly principal and interest installments of $1,148, due
August 1, 1998, secured by substantially all assets of
Heritage, and personal guarantees of certain officers and
former stockholders of
Heritage.................................................. 28,049 31,519
-------- --------
426,372 439,526
Less current portion........................................ (41,286) (41,286)
-------- --------
$ 385,086 $ 398,240
======== ========
Interest expense on this indebtedness amounted to $12,050 (unaudited) for
the four months ended April 30, 1996 and $6,988 for the period November 8, 1995
(date of acquisition of Heritage) to December 31, 1995.
Future annual principal installments of notes payable as of December 31,
1995 are as follows:
YEARS ENDING
DECEMBER 31,
- ------------
1996............................................... $ 41,286
1997............................................... 46,237
1998............................................... 47,152
1999............................................... 43,042
2000............................................... 48,261
Thereafter......................................... 213,548
--------
$439,526
========
See Note 11 for issuance of a bridge note totaling $500,000 subsequent to
April 30, 1996.
NOTE 6 -- NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consist of two unsecured demand notes,
non-interest bearing, totaling $11,283 (unaudited) and $26,327 as of April 30,
1996 and December 31, 1995, respectively, and one unsecured note payable,
non-interest bearing, payable at a rate of 3% of monthly sales. As of April 30,
1996 and December 31, 1995, such note was $78,955 (unaudited) and $82,745,
respectively.
Also see Note 11 referencing the Company's right to draw down up to
$175,000 pursuant to a note agreement entered into with a related party (OEBC
stockholder).
F-34
92
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
Employment Contracts
The Company has entered into employment contracts with five of its
employees, including three officers, which expire on various dates through May
10, 1998. Such management agreements will be canceled and replaced with new
agreements upon the consummation of the IPO (Note 11). Certain of the employment
contracts provide for substantial incentive compensation if certain revenue
levels were achieved, as defined. No incentive compensation has been paid
through April 30, 1996. The employment contracts also provide for certain
expense allowances.
Future annual minimum base salaries plus allowances, as amended, and in the
aggregate, consist of the following at December 31, 1995:
YEARS ENDING
DECEMBER 31,
- ------------
1996.............................................. $ 451,200
1997.............................................. 451,200
1998.............................................. 203,025
----------
$1,105,425
=========
Operating Leases
The Company leases its Lake Elsinore, California facility under a
noncancelable operating lease which expires February 1998. Future annual minimum
lease payments at December 31, 1995 are as follows:
YEARS ENDING
DECEMBER 31,
- ------------
1996................................................ $26,050
1997................................................ 27,560
1998................................................ 4,630
-------
$58,240
=======
The Company leases its Newport Beach, California office on a month-to-month
arrangement for $2,105, monthly. Rent expense under all operating lease
agreements totaled $23,892 (unaudited) for the four months ended April 30, 1996,
and $10,525 for the period ended December 31, 1995.
Distributor Agreements
The Company is party to certain agreements with certain distributors which
grants the Company's distributors the right to sell certain products in
specified territories for a period of one year. The agreements may be terminated
by mutual agreement, or by written notice, subject to certain terms and fees, as
defined.
License Agreement
In February 1996, the Company entered into a license agreement to obtain an
exclusive right to manufacture, distribute and market beer products, as defined,
in specified territories, as well as use trademarks and tradenames of the
licensor. The term of the agreement is one year, renewable annually pursuant to
certain minimum sales quotas set forth in the agreement. Pursuant to the terms
of the agreement, the Company paid $25,000 in cash, issued 6,500 shares of its
common stock valued at $33,800 (see Note 8) to acquire the rights under the
agreement, and paid certain fees and expenses totaling $5,000, and paid advance
royalties of $10,000. Such amounts, excluding the advanced royalties, have been
capitalized as deferred licensing fees in
F-35
93
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the accompanying consolidated balance sheet at April 30, 1996 (unaudited);
advance royalties of $10,000 are included in prepaid expenses and other current
assets in such consolidated April 30, 1996 balance sheet (unaudited). In
addition, the Company is obligated to pay royalties ranging from $0.20 to $0.242
per gallon over the life of the agreement, as defined, and royalties of 10% of
the gross profit from the sale of any merchandise with the licensor's tradename,
as defined.
Litigation
The Company and its subsidiaries are currently not involved in any material
pending legal proceedings. Other than as described below, the Company is not
aware of any material legal proceedings threatened against it.
Tamkin Investments has asserted that it has been damaged by the Company
negotiating and entering the acquisition agreement with Riverside Brewing Co.
and the Partnership Agreement with St. Stan's Brewing Co. in violation of a
confidentiality agreement and letter agreement dated January 18, 1996 and
January 16, 1996, respectively. The confidentiality agreement provided that the
Company would not negotiate with these companies while these companies were
under letters of intent with Tamkin. The Company does not believe that Tamkin
Investments' claim has merit. The letters of intent with those companies expired
prior to the Company commencing negotiations with any of these companies. The
Company's consolidated financial statements do not reflect a provision for loss,
if any, that may result from the outcome of this matter.
Certain other claims were brought by or against the Company. In the opinion
of management, the ultimate outcome of these matters will not have a material
adverse effect the Company's consolidated operations or financial position.
NOTE 8 -- STOCKHOLDERS' EQUITY
The Company is authorized to issue up to 20,000,000 shares of common stock,
no par value and up to 5,000,000 shares of preferred stock, no par value. Since
the Company's incorporation, no preferred shares have been issued.
The Company has issued its common stock, and common stock purchase options
and warrants for cash, services rendered and interest since its inception. There
is currently no significant market for trading of the Company's common stock.
The Company's Board of Directors, through consensus, is responsible for
assessing the estimated fair value of the shares based on relevant information
available. Through the first quarter of 1996, the Board of Directors have
generally used the value of the consideration received (e.g. the private
placement proceeds), or services rendered to the Company, to determine the
estimated fair value of its common stock. Subsequent to the closing of the
private placement, the Board of Directors determined the estimated fair value of
common stock transactions using the estimated IPO price per share of $8.00. In
the event the securities are issued under Commission Rule 144 of the 1933 Act,
the Board of Directors reflected a discount of 35% from the estimated IPO price
due to the transferability restrictions. Should the shares have registration
rights (demand or best efforts) under the Commission Act of 1933, the Board of
Directors reflected a discount of 20% from the estimated IPO price.
Common stock transactions since incorporation (August 2, 1995) through
December 31, 1995, and during the four months ended April 30, 1996 (unaudited)
are as follows:
On August 2, 1995 (incorporation), the Company issued 245,310 shares
of common stock to its founders for cash at $0.01 per share. No
compensation expense was charged to operations as the value of the shares
was deemed nominal.
F-36
94
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On October 6, 1995, the Company issued 1,549,100 shares of common
stock to certain investors for cash at $0.05 per share. No compensation
expense was charged to operations as the value of the shares was nominal in
light of the fact the Company had no material assets or operations.
On October 6, 1995, the Company sold a warrant to purchase 2,810,000
shares of the Company's common stock at 8.25 per share to an investor for
cash at $0.01 per share ($28,100) under the warrant agreement (also see
warrants issued to purchase 190,000 shares discussed below). The warrants
expire five (5) years from the IPO, are subject to adjustment and an
anti-dilution provision, and are callable by the Company at $0.10 each
provided that the closing bid price of the IPO exceeds $15.00 per share for
thirty consecutive trading days. Such warrants are expected to be
registered in the Company's IPO, subject to a 13-month "lock-up" agreement,
which restricts the sale of such securities. Although the exercise price of
the warrant was considerably higher than the estimated fair value of the
underlying common stock, the purchase price was deemed appropriate due to
the right to purchase a significant block of common stock under the terms
of the agreement. The purchase price of $28,100 was reflected in the
accompanying consolidated statements of stockholders' equity.
On November 8, 1995, the Company issued 142,276 shares of common stock
valued at an effective price of approximately $3.11 per share in connection
with the Heritage acquisition (see Note 1). Such shares issued include
16,000 shares which have registration rights.
On November 12, 1995, the Company issued 49,015 shares of common stock
valued at $3.00 per share to two former stockholders of Heritage, one of
which is an officer and director of the Company. Such individuals are
considered experts in craft brewing operations and have performed certain
consultations to the Company related thereto. Accordingly, the Company
charged $147,045 to operations during the period ended December 31, 1995
for services rendered.
On November 12, 1995, the Company issued 5,333 shares of common stock
valued at $4.00 per share for interest to two former stockholders of
Heritage and current debt holders of the Company (Note 6). Accordingly, the
Company charged $21,332 to operations during the period ended December 31,
1995 for interest expense.
On November 15, 1995, the Company issued 16,583 shares of common
stock, valued at $3.47 per share to certain parties for consulting services
provided to the Company. Accordingly, the Company charged $57,570 to
operations during the period ended December 31, 1995 for services rendered.
On November 20, 1995, the Company engaged a placement agent to sell up
to 400,000 shares of its common stock at $4.00 per share. This private
placement was intended to comply with exemptions promulgated under Rule 506
of Regulation D. Such shares are expected to be registered in the Company's
IPO, subject to a 13-month lock-up agreement. Through December 31, 1995,
the Company issued 333,746 shares of its common stock for aggregate
proceeds of $1,166,088, net of offering costs of $168,896.
Through April 30, 1996, the Company issued an additional 80,000 shares
of common stock (unaudited) for aggregate proceeds of $277,280, net of
offering costs of $42,720 under its private placement discussed in the
preceding paragraph. A subscription receivable from the sale of this common
stock totaling $260,000 is reflected as a current asset in the accompanying
consolidated balance sheet as such funds were received by the Company in
May 1996.
On February 3, 1996, the Company issued 6,500 shares of common stock
(unaudited) valued at $5.20 per share pursuant to the terms of a license
agreement. The shares issued were deemed consideration for acquiring its
rights under the agreement and, accordingly, the Company capitalized
$33,800 (unaudited) for such value as deferred licensing fees in the
accompanying consolidated balance sheet at April 30, 1996 (see Notes 2 and
7).
F-37
95
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In April 1996, the Company issued warrants to purchase 35,000 shares
of its common stock (unaudited) at $4.75 each expiring April 20, 1999. The
underlying common stock has demand registration rights in the IPO subject
to a 13-month "lock-up" agreement. The Board of Directors determined the
estimated fair value to be $6.40 per share and, accordingly, $57,750 was
capitalized as deferred financing cost to be amortized to interest expense
over the term of the loan (Notes 2 and 11).
Since incorporation, the Board of Directors approved the issuance of
certain common stock purchase options and warrants at various exercise prices as
deemed appropriate by the Board of Directors.
In October 1995, the Board of Directors approved the grant of warrants to
purchase 190,000 shares to certain investors and directors of the Company which
are expected to be registered in the Company's IPO, subject to a 13-month
lock-up agreement. Each option entitles the holder to purchase one share of
common stock at an exercise price of $8.25 per share and is fully vested as of
the date of grant. The exercise price substantially exceeds the estimated fair
value of underlying common stock at the date of grant; such options expire five
(5) years under the IPO. In addition, the Board of Directors granted the
Company's securities counsel options to purchase 15,583 shares of common stock
at $4.50 per share under similar terms as described above.
See Note 11 for option plans adopted by the Board of Directors subsequent
to April 30, 1996.
The following table summarizes activity of the common shares available for
purchase, and their range of per share prices, during the period ended December
31, 1995 and the four months ended April 30, 1996:
NUMBER OF PRICE
SHARES PER SHARE
--------- -----------
Balances at August 2, 1995.................................. -- --
Granted................................................... 3,015,583 $4.50-$8.25
Exercised................................................. -- --
Canceled.................................................. -- --
--------- -----------
Balances at December 31, 1995............................... 3,015,583 $4.50-$8.25
Granted................................................... 35,000 $ 4.75
Exercised................................................. -- --
Canceled.................................................. -- --
--------- -----------
April 30, 1996 (unaudited).................................. 3,050,583 $4.50-$8.25
=========
Shares exercisable at April 30, 1996 (unaudited)............ 3,050,583
=========
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("Statement No. 123"). Statement No. 123 is primarily a disclosure standard for
the Company because the Company will continue to account for employee stock
options under Accounting Principles Board Opinion No. 25. The disclosure
requirements for the Company required by Statement No. 123 will be effective for
the Company's 1996 financial statements. Because of a lack of a market in the
Company common stock, the proforma effects on operations of the employee stock
options were not determinable.
NOTE 9 -- RELATED PARTY TRANSACTIONS
License Agreement
In August 1995, the Company entered into a license agreement to obtain an
exclusive right to sell non-alcoholic beverages in a specified territory. The
president of the Company was also the former president of the non-alcoholic
beverages company. The agreement is in effect until terminated by either party,
as defined. The
F-38
96
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company is obligated to pay $0.50 for every case of licensed product sold. In
addition, the Board of Directors approved the acquisition of this company;
however, in 1996, the Board of Directors resolved that the acquisition be
postponed indefinitely. During the four months ended April 30, 1996, the Company
paid $30,000 (unaudited) to this entity which was charged to operations as the
ultimate realizability of such fees, through future sales of the licensed
products, was not assured.
Notes Payable and Capital Leases
The Company has entered into certain notes payable with related parties
which are further discussed in Note 6. As discussed in Note 11, the Company will
assume certain notes from the stockholders, will be required to repay certain
notes payable to persons or entities, which after the IPO, will be stockholders
of the Company. In addition, the Company will assume a capital lease obligation
from a company controlled by a significant stockholder of OEBC upon the close of
the IPO (Note 11).
Management Agreements
The Board of Directors approved a series of management agreements with
certain officers and key employees for terms of generally three years (Note 7).
Upon the consummation of the IPO, new management agreements will be executed.
See Note 11 for further discussion of these management agreements to be in
effect upon the close of the IPO.
The Board of Directors approved certain fees for their services to the
Company. In November 1995, the Board of Directors approved the payment of
$25,000, per director, for future services to be rendered from January 1, 1996
to December 31, 1996. In order to reduce the Company's cash commitments, certain
directors (three) agreed to waive their fees permanently. The Board of Directors
have approved $50,000 for payments to be made to two directors, which have been
accrued in the accompanying balance sheet at April 30, 1996, and $25,000 has
been paid by the Company to one director as of April 30, 1996.
NOTE 10 -- INCOME TAXES
The benefit for income taxes in the accompanying consolidated statement of
operations consists of the reduction of the deferred tax liability associated
with the nondeductible depreciation expense for tax reporting purposes charged
to operations, using an effective tax rate of approximately 40%.
A reconciliation of the benefit for income taxes to expected income tax
benefit computed by applying the Federal statutory income tax rate of 34% to the
loss before provision for income taxes for the period ended December 31, 1995 is
as follows:
AMOUNT %
--------- -----
Income tax benefit computed at federal statutory tax rate........ $(169,555) (34.0)%
State income taxes, net of 50% limitation on loss
carryforwards.................................................. (15,757) (3.2)
Expenses not deductible for income tax purposes and other........ 2,920 0.6
Increase in the valuation allowance for deferred tax assets...... 174,686 35.0
------
-
---------
Benefit for income taxes......................................... $ (7,706) (1.6)%
========= =======
F-39
97
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred tax assets and liabilities recorded in the
accompanying balance sheet at December 31, 1995 is as follows:
Deferred tax asset:
Net operating loss carryforwards....................................... $ 214,086
Less valuation allowance............................................... (214,086)
----------
$ --
==========
Deferred tax liability -- nondeductible basis of assets acquired from
Heritage in
tax-free exchange...................................................... $ 358,294
==========
The valuation allowance increased $214,086 during the period ended December
31, 1995. The deferred tax liability was established from the expected tax-free,
stock-for-stock exchange with Heritage. Such amount represents the difference in
the nondeductible tax bases of property and equipment acquired upon the
acquisition. At December 31, 1995, the Company had Federal and state net
operating loss carryforwards of approximately $571,188 and $331,371,
respectively, available to offset future taxable federal and state income. The
federal and state carryforward amounts expire in varying amounts through 2010
and 2000, respectively.
Due to the change in ownership provisions of the Tax Reform Act of 1986,
net operating loss carryforwards for federal income tax reporting purposes may
be subject to annual limitations upon future stock issuances. Upon the
acquisition of Heritage (Note 1), a change in ownership occurred, and
accordingly, such net operating loss carryforwards will be limited as to use,
annually.
NOTE 11 -- SUBSEQUENT EVENTS
1996 Bridge Financing
In April 1996, the Company entered into an agreement whereby the Company
issued a $500,000 promissory note (the "Bridge Note"), bearing interest at 18%
per annum. Interest is payable monthly and the Bridge Note matures the earlier
of the closing of the intended IPO (see discussion below) or December 31, 1996.
The Bridge Note is secured by all equipment, inventory and accounts receivable
of the Company. As of April 30, 1996, no amounts were outstanding under the
terms of this financing as the proceeds were received by the Company in May
1996.
In connection with the Bridge Note, the Company issued warrants ("Bridge
Warrants") to purchase 35,000 shares of the Company's common stock. Each Bridge
Warrant entitles the holder to purchase one share of common stock at an exercise
price of $4.75 for a period of three years from the date of issuance. The
warrants were valued at $57,750 (Note 8). Such costs have been capitalized as
deferred financing costs in the accompanying consolidated balance sheet at April
30, 1996 and are net of accumulated amortization totaling $7,220 as of such
date. If the IPO has not occurred by December 31, 1996, the Company will be
required to issue an additional 35,000 Bridge Warrants with the same terms
described above.
Related Party Financing
On June 24, 1996, the Company entered into an agreement with a significant
stockholder of a company to be acquired (OEBC -- see discussion below), whereby
the Company can borrow up to an aggregate $175,000. Borrowings bear interest at
a maximum rate of 11%, as defined, payable monthly. The principal balance,
together with any unpaid interest, is due the earlier of the closing of an IPO
with aggregate proceeds of no less than $10,000,000, or June 30, 1997.
F-40
98
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Purchase Agreement
On July 10, 1996, the Company entered into an agreement whereby the
Company, through its subsidiaries and affiliated companies, will produce
specific beer products and the counterparty will purchase such specified
products, as defined. The agreement does not specify the quantities to be
produced by the Company and purchased by the counterparty. The term of the
agreement is one year. Management believes such contracts will be entered into
from time to time with other parties in the normal course of business until such
time the Company utilizes all available facilities.
Employment Contracts
As discussed in Note 7, the Company has entered into employment contracts
with five of its employees, including three officers, which expire on various
dates through May 10, 1998. Such management agreements will be canceled and
replaced with new agreements upon the consummation of the IPO. Certain of the
new employment contracts provide for substantial incentive compensation if
certain revenue levels are achieved, as defined. No incentive compensation has
been paid through April 30, 1996. The employment contracts also provide for
certain expense allowances and participation in the Company's incentive stock
option plan and nonqualified stock option plan (Note 8).
Future annual minimum base salaries plus allowances under new management
agreements, subject to the consummation of the IPO in the aggregate, consist of
the following at December 31, 1995 assuming the consummation of the IPO was on
January 1, 1997:
YEARS ENDING
DECEMBER 31,
- ------------
1996.............................................. $ --
1997.............................................. 637,200
1998.............................................. 638,400
1999.............................................. 423,148
2000.............................................. 256,800
----------
$1,955,548
=========
Incentive Compensation Plan
In August 1996, the Company adopted a cash incentive bonus compensation
plan, the 1996 Incentive Compensation Plan (the "Incentive Plan"). The Incentive
Plan is intended to qualify as performance based compensation under Section
162(m) of the Internal Revenue Code. The Incentive Plan provides that qualifying
employees may receive as a cash bonus as amount equal to the Company's modified
earnings, calculated before interest, taxes, depreciation and amortization
("Modified EBITDA"), for a particular fiscal year. The total cash bonus that the
Incentive Plan provides is 8.45% of Modified EBITDA up to $4,000,000 for such
fiscal year and 12.45% of Modified EBITDA if Modified EBITDA exceeds $4,000,000
for such fiscal year.
Stock Option Plans
In August 1996, the Board of Directors adopted, subject to stockholder
approval, an incentive stock option plan meeting the requirements of Section 422
of the Internal Revenue Code. The plan reserves 1,500,000 shares for issuance
over a term of 10 years. The Board of Directors approved the grant of options to
purchase 955,000 shares, exercisable at $5.20 per share (unless such options are
granted to a 10% stockholder, in which case the exercise price would be no less
than 110% of fair value). The options vest ratably over a period of four (4)
years.
F-41
99
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In August 1996, the Board of Directors adopted, subject to stockholder
approval, a nonqualified stock option plan. The Board of Directors granted
options to purchase 933,500 shares at $5.20 per share. The options vest
immediately and are exercisable at the end of four (4) years, subject to an
acceleration clause if certain profitability levels are achieved, as defined.
The options expire in 2006.
See Note 8 for other options and warrants granted by the Board of
Directors.
Second Private Placement
On September 9, 1996, the Company closed a second private placement of
15,000 common stock purchase units for $150,000, net of offering costs of
$20,000. Each unit consists of two shares of common stock and one common stock
purchase warrant exercisable at $7.00 per share. Such securities are restricted
under Commission Rule 144 of the 1933 Act.
Proposed Public Offering
The Company has negotiated a letter of intent on a "firm commitment" basis
with an underwriter to place 1,000,000 units, consisting of one share of the
Company's common stock and one common stock purchase warrant. The letter of
intent provides for options to be issued to the Underwriter to purchase units,
payment by the Company of certain fees and expenses aggregating 13% of the gross
proceeds raised in an offering, restrictions on sales by the Company and its
affiliates and certain other warranties and covenants. Also, the Underwriter
would be granted an option to purchase an additional 15% of the total shares
issued in the offering solely to cover over-allotments.
In connection with the IPO, the Company granted the underwriter an option
to purchase 100,000 units, each unit consisting of one share of common stock and
one common stock purchase warrant for 160% of the IPO price (based on an assumed
price per share of $8.00, the price for such unit would be $12.80 each). The
warrant will be exercisable at $8.25 per share, will be subject to adjustment
and an anti-dilution provision, and will expire five (5) years from the closing
date of the proposed IPO.
The Underwriter will be paid a cash or "in-kind" finder's fee of (i) five
percent (5%) of the first $1,000,000; (ii) four percent (4%) of the second
$1,000,000; (iii) three percent (3%) of the third $1,000,000; and (iv) two
percent (2%) of any consideration over $4,000,000 involved in any transaction
(including mergers, acquisitions, joint ventures, and any other business for the
Company introduced by the underwriter) consummated by the Company, in which the
underwriter introduced the other party to the Company for such purpose during a
period ending three years from the closing of the Offering.
The Company shall, for a period of two (2) years from the completion of the
Offering, employ the underwriter as its investment banker and financial
consultant, at an annual fee of $50,000, with the aggregate of $100,000 payable
on the closing of the Offering.
Transactions Proposed With Orange Empire Brewing Company
Exchange Agreement With OEBC
As discussed in Note 1, on September , 1996, the Company entered
into the Exchange Agreement with OEBC. Pursuant to the Exchange Agreement,
the Company is to issue 247,479 shares of its common stock, subject to
adjustment (based on the change in net assets of the OEBC, as defined), in
exchange for all of the outstanding shares of the OEBC. In addition, up to
130,000 additional shares of the Company's common stock may be issued, if
OEBC reaches certain production levels, as defined. Pursuant to the
Exchange Agreement, the exchange is to occur concurrently with the
consummation (the "Closing Date") of the Company's IPO. If for any reason
the IPO does not occur on or before March 31,
F-42
100
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 or the IPO does not raise in the aggregate $6,000,000, either party
may unilaterally terminate the Exchange Agreement.
Should such additional shares of the Company's common stock be issued,
the value of such shares will be deemed additional purchase consideration.
Management Agreements
In connection with the Exchange Agreement, the Company entered into a
management agreement (the "Management Agreement") with certain stockholders
of OEBC whereby they are to manage and operate the brewpub operations of
OEBC from the Closing Date through December 31, 1998. As compensation for
such services, they are to receive 10,000 shares of the Company's common
stock. Such shares are to be issued on a pro rata basis over the term of
the Management Agreement. In addition, the brewpub managers are obligated
to the Company for quarterly cash flow deficits, if any, as defined, during
the term of the Management Agreement. The Management Agreement can be
terminated by mutual written consent or in the event of a breach, as
defined.
On June 10, 1996, the Company entered into a management agreement with
OEBC, whereby it will manage and operate the brewery operations of OEBC. As
compensation for the management services provided, the Company is to
receive $6,500 per month, plus reimbursement of expenses, as defined. The
agreement terminates upon consummation of the IPO.
Capital Lease Agreement Amendment
In connection with the Exchange Agreement and concurrent with the
Closing Date, a capital lease with a related party of OEBC is required to
be modified for the benefit of the Company. The modifications to the
capital lease obligation include a reduction in the effective interest rate
to 12%, a provision that all such leased equipment may be purchased by the
Company for $1 upon expiration of the lease, the extension of such lease by
that number of months which is equal to the number of months the lease is
in arrears through December 31, 1995, the forgiveness of any lease payment
that the lessor was to receive for the period January 1, 1996 through
September 30, 1996 (which payments will total $140,488), and the repayment
of deferred lease payments, if any, for the period October 1, 1996 to
December 31, 1996 from net proceeds to be received from the IPO as
discussed below.
Note Payable to Bank
In connection with the Exchange Agreement and concurrent with the
Closing Date, notes aggregating approximately $545,000 (unaudited) due to a
bank by OEBC are required to be divided into two notes. The stockholders
will assume a note totaling $220,941 without further obligation of the
Company, and the remaining principal balance of the notes (which
approximates $324,128 at May 10, 1996), will be paid to the bank by the
Company. In consideration for assuming a portion of the OEBC's debt
obligations, the stockholders will be issued 27,618 shares of BWI common
stock. If on January 1, 1999, the per share market value of BWI common
stock is less than $6.00, the Company will issue to such stockholders an
additional 9,227 shares of its common stock.
Notes Payable To Stockholders
At April 30, 1996, OEBC has $644,000 (unaudited) of indebtedness due
to certain related parties (consisting of $603,525 (unaudited) in principal
and $40,475 (unaudited) in accrued interest). Upon the consummation of the
IPO, such indebtedness is to be satisfied as follows: (1) $301,000 is to be
paid in cash, and (2) $343,000 is to be refinanced with a new non-interest
bearing promissory note which will mature in 90 days, payable in cash
and/or up to 24,125 shares of the Company's common stock and/or
F-43
101
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
up to 50,000 warrants to purchase shares of the Company's common stock at
an exercise price of $5.00 per share, based on a formula, as defined.
Stockholder Advances
In connection with the Exchange Agreement, the Company has agreed to
use up to $150,000 of the proceeds from the IPO to repay advances made by
one stockholder of OEBC during the period May 1, 1996 through the Closing
Date, including deferred lease payments as discussed above.
Agreements Not to Compete
In connection with the Exchange Agreement and concurrent with the
Closing Date, the Company has agreed to enter into
agreements-not-to-compete with certain stockholders of OEBC for a period of
three years in specified territories. Management will ascribe no value to
the agreements as management believes that such agreements are not a
material component to the Exchange Agreement.
Transactions Proposed Prost Partners Limited Partnership
BWI-Prost Partnership Agreement
On September , 1996, the Company formed a California general
partnership with St. Stan's, BWI-Prost Partners. Pursuant to the terms of
the BWI-Prost Partners partnership agreement, St. Stan's has agreed to
contribute substantially all of its assets, net of certain liabilities, to
the Partnership for a 49% minority interest in the Partnership. BWISS has
agreed to contribute $2,295,000 to the Partnership for a 51% controlling
interest in the Partnership. The BWISS consideration is to be tendered in
cash commencing 18 months from the IPO and the assumption of certain debt
(as discussed below) on the contribution date, the "Contribution Date", the
date of the successful consummation of an initial public offering (the
"IPO") of BWI's common stock, occurring on or before March 31, 1997,
realizing minimum proceeds of at least $8,000,000 (before any deductions,
including, but not limited to, underwriters' compensation and expenses).
The profits and losses of the Partnership are to be allocated based on
each partner's respective ownership interest, subject to special
allocations as defined. The Partnership is to be managed by a five member
joint management committee (the "Committee") until dissolution of the
Partnership. BWISS will maintain three of the five positions on the
Committee. Substantially all management decisions of the committee are to
be approved by a majority vote of the members.
The Partnership Agreement contains a buy-out provision whereby BWISS,
during a three year period commencing with the Contribution Date, can
purchase St. Stan's 49% interest in the Partnership for $2,205,000. If
BWISS does not elect to purchase such interest at the end of the third
year, St. Stan's has the right to purchase BWISS's 51% interest at
appraised value of tangible assets plus a predetermined formula of modified
earnings, as adjusted. If St. Stan's does not elect to purchase BWISS's 51%
interest, BWISS has the right to purchase St. Stan's 49% interest at
appraised value of tangible assets plus a predetermined formula of modified
earnings, as adjusted. If neither partner elects to purchase the other
partner's interest, such non purchase is deemed a liquidating event, as
defined.
The Partnership Agreement contains provisions (the "Breach
Provisions") should either partner breach its responsibilities pursuant to
the Partnership Agreement, as defined. The Breach Provisions provide that
the breaching partner ceases to be a partner of the Partnership if such
breach is not cured within 120 days. The breaching partner is to receive
breach payments, as defined, in compensation for withdrawal from the
Partnership.
F-44
102
BEVERAGE WORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The BWISS Contribution
In accordance with the Partnership Agreement, BWISS is required to
make its $2,295,000 capital contribution through debt assumption and
periodic payments as follows: (1) the full assumption and partial repayment
of the note payable from the Partnership (which totals $676,836 at April
30, 1996, unaudited), (2) the full assumption and repayment of notes
payable to related party from the Partnership (which total $459,153 at
April 30, 1996, unaudited), (3) six cash payments of $100,000 to the
Partnership, each payable 18, 21, 24, 27, 30 and 33 months from the
Contribution Date, and (4) a cash payment of the remaining unpaid capital
contribution, subject to adjustment as defined, 36 months from the
Contribution Date. If the gross proceeds of the BWI IPO exceed $10,000,000,
BWISS is required to make a payment on its capital contribution 30 days
from the Contribution Date; such payment will equal to 10% of the gross
proceeds in excess of $10,000,000, up to $300,000.
The unpaid portion of the BWISS capital contribution bears interest at
10% per annum, subject to adjustment as defined, payable quarterly
beginning April 30, 1998.
The Note Payable
BWISS has obtained a commitment letter from the lender to refinance
the note payable that BWISS is to assume from the Partnership on the
Contribution Date (see discussion above). The lender requires a principal
reduction payment be made such that the outstanding balance of the note
will be $500,000. The revised note payable will bear interest at a variable
rate ranging from 11% to 16% per annum, with principal and interest payable
monthly based on a 15 year amortization period, with all unpaid principal
and interest due in five years.
Employment Agreements
On the Contribution Date, the Company is to execute employment
agreements with two of the officers of the general partner of Prost
Partners Limited Partnership (see discussion above).
F-45
103
INDEPENDENT AUDITORS' REPORT
To the General Partner
Prost Partners Limited Partnership
To the Board of Directors
Beverage Works, Inc.
We have audited the accompanying historical statement of assets and
liabilities (the "St. Stan's Brewery and Brewpub Operations") to be contributed
to BWI-Prost Partners, a California general partnership in the process of
formation, by Prost Partners Limited Partnership, a California limited
partnership, as of December 31, 1995, and the related historical statements of
operations of assets and liabilities to be contributed, changes in equity of
assets and liabilities to be contributed, and cash flows of asset and
liabilities to be contributed for each of the years in the two-year period ended
December 31, 1995. These financial statements are the responsibility of
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 audits 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.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for inclusion in the registration statement on Form SB-2 of Beverage
Works, Inc. as described in Note 1), and are not intended to be a complete
presentation of the financial position, results of operations or cash flows of
Beverage Works, Inc. or Prost Partners Limited Partnership.
In our opinion, the historical financial statements referred to above
present fairly, in all material respects, the financial position of the St.
Stan's Brewery and Brewpub Operations to be contributed to BWI-Prost Partners by
Prost Partners Limited Partnership as of December 31, 1995, and the results of
their historical operations and cash flows for each of the years in the two-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the financial statements, the St. Stan's Brewery
and Brewpub Operations have had recurring net losses and working capital
deficits. The St. Stan's Brewery and Brewpub Operations have received financial
support in the form of advances from the general partner of Prost Partners
Limited Partnership during the past two years to cover these recurring working
capital demands. Should the St. Stan's Brewery and Brewpub Operations continue
to incur losses, the general partner of Prost Partners Limited Partnership, and
the general partners of BWI-Prost Partners upon the close of the Beverage Works,
Inc. initial public offering (Note 1), will be required to provide additional
financial support. The lack of such financial support could have a material
adverse effect on the financial condition and/or results of operations of the
St. Stan's Brewery and Brewpub Operations.
CORBIN & WERTZ
Irvine, California
May 31, 1996, except for
Notes 1 and 9, as to which the
date is September , 1996
The foregoing auditors' report is in the form which will be signed upon
consummation of the transaction described in Note 9 to the financial statements.
F-46
104
ST. STAN'S BREWERY AND BREWPUB OPERATIONS
HISTORICAL STATEMENTS OF ASSETS AND LIABILITIES TO BE CONTRIBUTED
TO BWI-PROST PARTNERS GENERAL PARTNERSHIP (NOTES 1 AND 9)
ASSETS
(Note 5)
DECEMBER 31,
1995
APRIL 30, ------------
1996
-----------
(UNAUDITED)
Current assets:
Cash............................................................... $ 15,863 $ 68,105
Accounts receivable, less allowance for doubtful accounts of
$20,000 (unaudited) (1996) and $10,000 (1995) (Note 2).......... 143,548 84,846
Inventories (Notes 2 and 3)........................................ 150,283 197,070
Prepaid expenses and other current assets.......................... 44,249 46,404
---------- ----------
Total current assets....................................... 353,943 396,425
Property and equipment, net (Notes 2 and 4).......................... 2,435,738 2,492,400
Other assets......................................................... 11,189 14,759
---------- ----------
$ 2,800,870 $2,903,584
========== ==========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable................................................... $ 101,642 $ 126,455
Accrued expenses and other current liabilities..................... 57,409 103,280
Note payable (Note 5).............................................. 21,658 21,658
Notes payable to related party (Note 6)............................ 459,153 459,120
---------- ----------
Total current liabilities.................................. 639,862 710,513
Note payable, net of current portion (Note 5)........................ 655,178 662,803
---------- ----------
Total liabilities.......................................... 1,295,040 1,373,316
Commitments and contingencies (Notes 7 and 9)
Equity in assets and liabilities to be contributed................... 1,505,830 1,530,268
---------- ----------
$ 2,800,870 $2,903,584
========== ==========
See independent auditors' report and accompanying notes to financial statements
F-47
105
ST. STAN'S BREWERY AND BREWPUB OPERATIONS
HISTORICAL STATEMENTS OF HISTORICAL OPERATIONS OF ASSETS AND LIABILITIES
TO BE CONTRIBUTED TO BWI-PROST PARTNERS GENERAL PARTNERSHIP (NOTE 1 AND 9)
FOR THE YEARS ENDED
FOR THE FOUR MONTHS ENDED ----------------------------
-------------------------- DECEMBER 31, DECEMBER 31,
APRIL 30, 1995 1994
1995 ------------ ------------
-----------
APRIL 30, (UNAUDITED)
1996
-----------
(UNAUDITED)
Sales......................................... $ 691,498 $ 672,451 $2,128,877 $1,977,805
Less excise taxes............................. (30,035) (26,175) (99,453) (86,251)
-------- -------- ---------- ----------
Net sales (Notes 2 and 8)........... 661,463 646,276 2,029,424 1,891,554
Cost of goods sold (Note 2)................... 456,396 422,653 1,396,217 1,374,318
-------- -------- ---------- ----------
Gross profit........................ 205,067 223,623 633,207 517,236
Selling, general and administrative expenses
(Note 7).................................... 230,490 185,021 583,568 518,763
-------- -------- ---------- ----------
Income (loss) from operations (Note 8)........ (25,243) 38,602 49,639 (1,527)
Interest (Note 5 and 6)....................... 32,137 29,412 98,398 104,351
-------- -------- ---------- ----------
Net income (loss)............................. $ (57,560) $ 9,190 $ (48,759) $ (105,878)
======== ======== ========== ==========
See independent auditors' report and accompanying notes to financial statements
F-48
106
ST. STAN'S BREWERY AND BREWPUB OPERATIONS
HISTORICAL STATEMENTS OF CHANGES IN EQUITY OF ASSETS AND
LIABILITIES TO BE CONTRIBUTED TO BWI-PROST PARTNERS
GENERAL PARTNERSHIP (NOTES 1 AND 9)
FOR THE FOUR-MONTHS ENDED APRIL 30, 1996 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Equity in assets and liabilities to be contributed, January 1, 1994.............. $1,571,269
Non-cash contributions of general partner of Prost Partners Limited Partnership
(Note 7)....................................................................... 44,032
Net loss......................................................................... (105,878)
----------
Equity in assets and liabilities to be contributed, December 31, 1994............ 1,509,423
Non-cash contributions of general partner of Prost Partners Limited Partnership
(Note 7)....................................................................... 69,604
Net loss......................................................................... (48,759)
----------
Equity in assets and liabilities to be contributed, December 31, 1995............ 1,530,268
Non-cash contributions of general partner of Prost Partners Limited Partnership
(unaudited) (Note 7)........................................................... 33,122
Net loss (unaudited)............................................................. (57,560)
----------
Equity in assets and liabilities to be contributed, April 30, 1996 (unaudited)... $1,505,830
=========
See independent auditors' report and accompanying notes to financial statements
F-49
107
ST. STAN'S BREWERY AND BREWPUB OPERATIONS
HISTORICAL STATEMENTS OF CASH FLOWS OF ASSETS AND LIABILITIES
TO BE CONTRIBUTED TO BWI -- PROST PARTNERS GENERAL PARTNERSHIP (NOTES 1 AND 9)
FOR THE YEARS ENDED
FOR THE FOUR MONTHS ENDED ----------------------------
-------------------------- DECEMBER 31, DECEMBER 31,
APRIL 30, 1995 1994
1995 ------------ ------------
-----------
APRIL 30, (UNAUDITED)
1996
-----------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss)........................................ $ (57,560) $ 9,190 $ (48,759) $ (105,878)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 65,908 61,000 179,926 174,502
Gain on disposition of assets......................... -- -- (1,701) --
Management fees (Note 7).............................. 27,999 21,791 69,604 19,372
Changes in operating assets and liabilities:
Accounts receivable, net............................ (58,702) (16,802) 15,397 (25,532)
Inventories......................................... 46,787 (41,786) (73,643) (29,708)
Prepaid expenses and other current assets........... 2,155 4,079 (12,133) (1,066)
Accounts payable.................................... (24,813) (21,299) (1,773) (63,746)
Accrued expenses and other current liabilities...... (45,871) 8,809 8,807 21,831
-------- -------- --------- ---------
Net cash provided by (used in) operating
activities..................................... (44,097) 24,982 135,725 (10,225)
-------- -------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of equipment.......................... -- -- 50,000 --
Purchases of property and equipment...................... (6,262) (91,401) (307,560) (75,112)
Other assets............................................. 586 (21,322) (21,765) (4,059)
-------- -------- --------- ---------
Net cash used in investing activities............ (5,676) (112,723) (279,325) (79,171)
-------- -------- --------- ---------
Cash flows from financing activities:
Payments on note payable................................. (7,625) -- (5,539) --
Payments on notes payable to related party (Note 6)...... (696) (695) (2,382) (3,330)
Net additions to notes payable to related party (Note
6).................................................... 5,852 53,404 184,594 122,022
-------- -------- --------- ---------
Net cash provided by (used in) financing
activities..................................... (2,469) 52,709 176,673 118,692
Net increase (decrease) in cash............................ (52,242) (35,032) 33,073 29,296
Cash, beginning of period.................................. 68,105 35,032 35,032 5,736
-------- -------- --------- ---------
Cash, end of period........................................ $ 15,863 $ -- $ 68,105 $ 35,032
======== ======== ========= =========
Supplemental disclosures of cash flow information --
Cash paid during the year for interest................... $ 23,137 $ 6,155 $ 105,130 $ 105,612
======== ======== ========= =========
See Note 7 for supplemental disclosures of noncash financing activities
See independent auditors' report and accompanying notes to financial statements
F-50
108
ST. STAN'S BREWERY AND BREWPUB OPERATIONS
NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS AND LIABILITIES
TO BE CONTRIBUTED TO BWI -- PROST PARTNERS GENERAL PARTNERSHIP
FOR THE FOUR-MONTH PERIODS ENDED APRIL 30, 1996 AND 1995 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE 1 -- NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
Prost Partners Limited Partnership, a California limited partnership, dba
St. Stan's Brewing Company ("St. Stan's") was formed on July 26, 1988 to
construct and operate a brewery facility (the "Brewery") and an adjoining
restaurant, pub, and beer garden (the "Brewpub") in Modesto, California. St.
Stan's offered limited partnership interests to California residents who met
certain suitability standards. The general partner of St. Stan's is Stanislaus
Brewing Company, a California corporation. St. Stan's commenced operations on or
about October 12, 1990.
Beverage Works, Inc. ("BWI"), a California corporation, incorporated on
August 2, 1995, was formed to acquire interests in various craft brewing
operations. On June 25, 1996, BWI formed a wholly-owned subsidiary, BWI -- St.
Stan's, Inc. ("BWISS"). On September , 1996, St. Stan's entered into a joint
venture with BWISS named BWI-Prost Partners (the "Partnership"). Pursuant to the
terms of the BWI-Prost Partners partnership agreement (the "Partnership
Agreement"), St. Stan's has agreed to contribute substantially all of its
assets, net of certain liabilities, to the Partnership for a 49% minority
interest in the Partnership. BWISS has agreed to contribute $2,295,000 to the
Partnership for a 51% controlling interest in the Partnership. The BWISS
consideration is to be tendered in cash commencing 18 months from the IPO and
the assumption of certain debt (see Note 9) at the date of contribution, the
"Contribution Date", the date of the successful consummation of an initial
public offering (the "IPO") of BWI's common stock, occurring on or before March
31, 1997, realizing minimum proceeds of at least $8,000,000 (before any
deductions, including, but not limited to, underwriters' compensation and
expenses). See Note 9 for further discussion of the terms of the Partnership
Agreement which have a significant effect on the accompanying historical
financial statements.
Basis of Presentation
The accompanying historical financial statements include the assets and
liabilities to be contributed to the Partnership by St. Stan's, and the related
historical operations and cash flows thereof (the "St. Stan's Brewery and
Brewpub Operations"). In management's opinion, these historical financial
statements include the assets and liabilities, the revenues and expenses, and
the cash flows directly identifiable with the assets and liabilities to be
contributed by St. Stan's to the Partnership. The financial statements are not
intended to represent the historical assets and liabilities and historical
operations and cash flows of St. Stan's, the Partnership or BWI.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 reported
period. Actual results could materially differ from those estimates.
Fair Value of Financial Instruments
These historical financial statements contain financial instruments whereby
the fair market value of the financial instruments could be different than that
recorded on a historical basis on the accompanying historical financial
statements. The financial instruments consist of cash, accounts receivable,
accounts payable, notes
F-51
109
ST. STAN'S BREWERY AND BREWPUB OPERATIONS
NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS
GENERAL PARTNERSHIP -- (CONTINUED)
payable and notes payable to related party. The carrying amounts of the St.
Stan's Brewery and Brewpub Operations' financial instruments generally
approximate their fair values at April 30, 1996 (unaudited) and December 31,
1995. In the case of the notes payable to related party (see Note 6), it was not
practical to determine fair values due to the lack of a market for such
financial instruments.
Concentrations of Credit Risk
The customers of the Brewery operations consist of distributors who resell
St. Stan's Brewery and Brewpub Operations products domestically. The St. Stan's
Brewery and Brewpub Operations extends credit to its Brewery customers and
performs periodic credit evaluations of such customers. Management of the St.
Stan's Brewery and Brewpub Operations do not obtain collateral to secure its
accounts receivable. The Company maintains an allowance for doubtful accounts.
Management determines the adequacy of the allowance based on a period review and
evaluation of aged accounts receivable.
Five Brewery customers accounted for 35.4% and 28.9% of sales, of which one
customer accounted for 10.1% of 1995 sales, during the years ended December 31,
1995 and 1994, respectively. For the four months ended April 30, 1996
(unaudited), five customers accounted for 26.5% of sales. Five customers
accounted for 69.5% and 42.5%, of which one customer accounted for 33.6% of the
1995 balance, of the accounts receivable balance at December 31, 1995 and April
30, 1996 (unaudited), respectively.
The St. Stan's Brewery and Brewpub Operations purchase certain products
from two companies which accounted for approximately 27.3% and 12.0% of total
purchases in 1995, and 26.0% and 11.3% of total purchases in 1994. Two companies
accounted for approximately 26.8% and 17.9% of total purchases for the four
months ending April 30, 1996 (unaudited).
Risks and Uncertainties
Financial Support
The St. Stan's Brewery and Brewpub Operations have had recurring net losses
and working capital deficits. The Stan's Brewery and Brewpub Operations have
received financial support in the form of advances (see Note 6) from the general
partner of Prost Partners Limited partnership during the past two years to cover
these recurring working capital demands. Should the St. Stan's Brewery and
Brewpub Operations continue to incur losses, the general partner of Prost
Partners Limited Partnership, and the general partners of BWI-Prost Partners
upon the close of the BWI IPO (see Note 9), will be required to provide
additional financial support. The lack of such financial support could have a
material adverse effect on the financial condition and/or results of operations
of the St. Stan's Brewery and Brewpub Operations.
Licenses and Permits
Brewery (wholesale) and Brewpub (retail) operations require various
federal, state and local licenses and permits. Brewers are required to file with
the Federal Bureau of Alcohol, Tobacco and Firearms (the "BATF"). The California
Department of Alcoholic Beverage Control (the "ABC") requires that companies
file and maintain licenses, permits or approvals for the production and sale of
alcoholic beverages. Other state and local laws and regulations governing the
sale of alcoholic beverages within a particular state by an out-of-state brewer
or wholesaler vary by state and locality. The St. Stan's Brewery and Brewpub
Operations are subject to audit and inspection by the BATF and ABC at any time.
Should the IPO and proposed joint venture be consummated, management of the
Partnership must apply for a change in the Brewery's and Brewpub's management,
and for a change in the Brewery's ownership with Federal and state agencies.
Because of the many and various Federal and state licensing and permitting
F-52
110
ST. STAN'S BREWERY AND BREWPUB OPERATIONS
NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS
GENERAL PARTNERSHIP -- (CONTINUED)
requirements, there is a risk that one or more regulatory authorities may not
approve such changes in management and/or ownership, or determine the
predecessor partnership and/or management had not complied with applicable
licensing or permitting regulations. Should St. Stan's, or subsequently the
Partnership, not maintain the approvals necessary for it to conduct business,
there could be a material adverse effect on the financial condition and/or
operations of the St. Stan's Brewery and Brewpub Operations.
Seasonality
The beverage business traditionally has been seasonal. Typically, net sales
are highest during the third and fourth calendar quarters and decline in the
first and second calendar quarters. The seasonal pattern is due primarily to the
increased demand for consumer beverages during the summer months through the
holiday buying season. The management of St. Stan's Brewing and Brewpub
Operations expects its net sales and operating results to continue to reflect
this seasonality.
Environmental Regulations and Operating Considerations
The Brewery operations are subject to a variety of extensive and changing
Federal, state and local environmental laws, regulations and ordinances that
govern activities or operations that may have adverse effects on human health or
the environment. Such laws, regulations ordinances may impose liability for the
cost of remediating, and for certain damages resulting from, sites of past
releases of hazardous materials. Management of the St. Stan's Brewery and
Brewpub Operations believes that it currently conducts, and in the past has
conducted, its activities and operations in substantial compliance with
applicable environmental laws, and believes that costs arising from existing
environmental laws will not have a material adverse effect on the financial
condition or results of operations. There can be no assurance, however, that
environmental laws will not become more stringent in the future or that the St.
Stan's Brewery and Brewing Operations will not incur costs in the future in
order to comply with such laws.
The St. Stan's Brewery and Brewing Operations 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 occurrence of such a problem could result in a costly product recall and
serious damage to the St. Stan's Brewery & Brewpub Operations reputation for
product quality, as well as claims for product liability which may negatively
impact the St. Stan's Brewery & Brewpub Operations. The management of the St.
Stan's Brewery & Brewpub Operations maintains insurance which it believes is
sufficient to cover any liability claims which might result from a contamination
problem in its products, but which may not cover any damage to its reputation.
Inventories
Inventories, consisting of raw materials and purchased products, work in
process, and finished goods, are stated at the lower of cost or market (see Note
3). Cost is determined by the first-in, first-out method of accounting.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation,
and are being depreciated using the straightline method over their estimated
useful lives, which generally range from 5 to 40 years. Major betterments and
renewals are capitalized, while routine repairs and maintenance costs are
charged to expense when incurred.
F-53
111
ST. STAN'S BREWERY AND BREWPUB OPERATIONS
NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS
GENERAL PARTNERSHIP -- (CONTINUED)
Useful lives for property and equipment are as follows:
Equipment, furniture, and fixtures..................................... 5 to 10 years
Building and improvements (Note 6)..................................... 40 years
Management of the St. Stan's Brewery and Brewpub Operations assesses the
recoverability of property and equipment by determining whether the depreciation
of such assets over their remaining lives can be recovered through projected
undiscounted cash flows. The amount of impairment, if any, is measured based on
projected undiscounted cash flows and is charged to operations in the period in
which such impairment is determined by management. To date, management has not
identified an impairment of property and equipment.
Income Taxes
The Partnership will not be, and St. Stan's currently is not subject to,
income taxes. However, income or losses of the partnership will be included in
the tax returns of the partners. Accordingly, no provision for income taxes is
made in the accompanying financial statements.
Revenue Recognition
Brewery revenues are recognized at the time of shipment. The Company
records a provision for the effect of returned products at the time the units
are shipped. Revenues in connection with Brewpub operations are recognized at
the time the food and beverage sales are made.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred.
Interim Accounting Policy
In the opinion of the management of St. Stan's and BWISS, the accompanying
unaudited financial statements of the St. Stan's Brewery and Brewpub Operations
include all adjustments (consisting of only normal recurring adjustments)
necessary for a fair presentation of the historical financial position and
results of operations and cash flows as of April 30, 1996, and for the four
months ended April 30, 1996 and 1995. Although the management of St. Stan's and
BWISS believes that the disclosures regarding interim financial information in
these historical financial statements are adequate to make the information
presented not misleading, certain information and disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Unaudited historical
results of operations for the four months ended April 30, 1996 are not
necessarily indicative of results of operations to be expected for the year
ending December 31, 1996.
F-54
112
ST. STAN'S BREWERY AND BREWPUB OPERATIONS
NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS
GENERAL PARTNERSHIP -- (CONTINUED)
NOTE 3 -- INVENTORIES
The following is a summary of inventories:
APRIL 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
Raw materials and purchased
products.................................................. $ 89,506 $124,772
Work in process............................................. 20,856 18,480
Finished goods.............................................. 39,921 53,818
-------- --------
$ 150,283 $197,070
======== ========
NOTE 4 -- PROPERTY AND EQUIPMENT, NET
The following is a summary of property and equipment, at cost, less
accumulated depreciation:
APRIL 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
Buildings and improvements................................. $ 1,867,917 $1,867,917
Equipment, furniture, and fixtures......................... 1,442,746 1,436,484
----------- -----------
3,310,663 3,304,401
Less accumulated depreciation.............................. (874,925) (812,001)
----------- -----------
$ 2,435,738 $2,492,400
=========== ===========
NOTE 5 -- NOTE PAYABLE
The following is a summary of the note payable:
APRIL 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
Note payable to a lending institution, principal and
interest payable in equal monthly installments of $8,155,
with the remaining principal and interest due November
30, 1997, interest at 11% per annum, collateralized by
St. Stan's assets and personally guaranteed by officers
of the general partner of St. Stan's (Note 1)............ $ 676,836 $ 684,461
Less current portion....................................... (21,658) (21,658)
--------- ---------
$ 655,178 $ 662,803
========= =========
Interest expense approximated $23,688 (unaudited) and $23,821 (unaudited)
for the four months ended April 30, 1996 and 1995, respectively, and $71,740 and
$87,347 for the years ended December 31, 1995 and 1994, respectively.
F-55
113
ST. STAN'S BREWERY AND BREWPUB OPERATIONS
NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS
GENERAL PARTNERSHIP -- (CONTINUED)
Future annual principal installments of this note payable as of December
31, 1995 are as follows:
YEARS ENDING
DECEMBER 31,
- ------------
1996............................................... $ 21,658
1997............................................... 662,803
--------
Total.............................................. $684,461
========
See Note 9 for discussion regarding the planned assumption and partial
repayment of the note payable by BWISS on the Contribution Date.
NOTE 6 -- NOTES PAYABLE TO RELATED PARTY
The following is a summary of notes payable to related party:
APRIL 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
Unsecured note payable to the general partner of St. Stan's,
payable in monthly installments of interest only at 8% per
annum, due on the earlier of demand or December 31,
1996...................................................... $ 282,685 $ 281,956
Unsecured note payable to the general partner of St. Stan's,
payable in monthly installments of principal and interest
of $1,213, interest at a certain bank's reference rate
plus 2.35% (6.25% at April 30, 1996, unaudited, and
December 31, 1995), due on the earlier of demand or
December 31, 1996......................................... 176,468 177,164
-------- --------
$ 459,153 $ 459,120
======== ========
Interest incurred totaled $26,658 and $17,004 for the years ended December
31, 1995 and 1994, respectively, and $8,449 (unaudited) and $5,591 (unaudited)
for the four months ended April 30, 1996 and 1995, respectively.
See Note 9 for discussion regarding the planned assumption and repayment of
the notes payable to related party by BWISS on the Contribution Date.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
Operating Lease
St. Stan's Brewery and Brewpub Operations sublease its land under a 50 year
operating lease expiring on June 5, 2038. The sublease includes base rent
increases over the term of the lease at the lesser of (a) the percentage change
that occurs in the Consumer Price Index or (b) five percent (5%). In addition to
base rent increases, appraisals are required at scheduled dates. The minimum
annual rental payments, after a land appraisal, shall be based on no less than
twelve percent (12%) of the appraisal amount (assuming an undeveloped land
value). The total amount of the base rental payments is being charged to expense
as incurred over the term of the lease. In addition to the base rental payments,
the sublease agreement requires the payment of the real property taxes and
insurance costs. The Partnership is expected to assume this land sublease. The
Partnership is not expected to assume other significant operating leases or
rental commitments from St. Stan's.
F-56
114
ST. STAN'S BREWERY AND BREWPUB OPERATIONS
NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS
GENERAL PARTNERSHIP -- (CONTINUED)
Future annual minimum rental payments, excluding annual increases in base
rents, under this operating lease as of December 31, 1995 are as follows:
YEARS ENDING
DECEMBER 31,
- ------------
1996............................................. $ 51,000
1997............................................. 51,000
1998............................................. 51,000
1999............................................. 51,000
2000............................................. 51,000
Thereafter....................................... 1,908,930
----------
$2,163,930
=========
Rent expense under the ground lease totaled $17,180 (unaudited) and $17,000
(unaudited) for the four-month periods ended April 30, 1996 and 1995,
respectively, and $51,000 and $53,738 for the years ended December 31, 1995 and
1994, respectively (see Notes 2 and 5).
Management Agreements
Under the St. Stan's partnership agreement, the general partner is to be
paid $84,000, annually, for management of the partnership. At December 31, 1995,
all such amounts have not been paid (except for $83,000) and the obligation
related thereto is not to be assumed by the Partnership. The accompanying
historical statements of operations reflect the management fee expense pursuant
to said management contract. The unpaid management fees payable have been
reflected as non-cash contributions in the accompanying statements of changes in
equity.
See Note 9 for discussion regarding the employment agreements to be entered
into on the Contribution Date.
Distributor Agreements
St. Stan's is party to certain agreements with its various distributors. In
general, such agreements grant St. Stan's distributors the right to sell certain
products in specified territories. The agreements may be terminated by either
party if concerns or deficiencies, as defined, are not satisfied within 30 days.
F-57
115
ST. STAN'S BREWERY AND BREWPUB OPERATIONS
NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS
GENERAL PARTNERSHIP -- (CONTINUED)
NOTE 8 -- SEGMENT INFORMATION
Business segment information as of and for the periods presented are as
follows:
FOR THE FOUR MONTHS ENDED FOR THE YEAR ENDED
-------------------------- ----------------------------
APRIL 30, APRIL 30, DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
Net sales:
Brewery............................ $ 405,236 $ 367,765 $1,229,988 $1,024,018
Brewpub............................ 256,227 278,511 799,436 867,536
-------- -------- ---------- ----------
Total...................... $ 661,463 $ 646,276 $2,029,424 $1,891,554
======== ======== ========== ==========
Operating profit:
Brewery............................ $ 11,323 $ 30,651 $ 92,925 $ (21,606)
Brewpub............................ (36,566) 7,951 (43,286) 20,079
-------- -------- ---------- ----------
Total...................... $ (25,243) $ 38,602 $ 49,639 $ (1,527)
======== ======== ========== ==========
Depreciation and amortization:
Brewery............................ $ 42,903 $ 35,235 $ 92,586 $ 96,583
Brewpub............................ 23,005 25,765 87,340 77,919
-------- -------- ---------- ----------
Total...................... $ 65,908 $ 61,000 $ 179,926 $ 174,502
======== ======== ========== ==========
Capital expenditures:
Brewery............................ $ 6,262 $ 91,401 $ 307,560 $ 73,060
Brewpub............................ -- -- -- 2,052
-------- -------- ---------- ----------
Total...................... $ 6,262 $ 91,401 $ 307,560 $ 75,112
======== ======== ========== ==========
APRIL 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
Identifiable property and equipment:
Brewery.................................................... $ 1,471,521 $1,464,616
Brewpub.................................................... 1,839,142 1,839,785
---------- ----------
Total.............................................. $ 3,310,663 $3,304,401
========== ==========
In the determination of identifiable property and equipment, management
specifically identified all Brewpub and Brewery property and equipment except
for the buildings and improvements (see Note 4). Management allocated 70% and
30% of the buildings and improvements to the Brewpub and Brewery, respectively.
NOTE 9 -- SUBSEQUENT EVENTS
The Partnership Agreement
On September , 1996, St. Stan's formed a California general partnership
with BWISS named BWI-Prost Partners. Pursuant to the terms of the BWI-Prost
Partners partnership agreement, St. Stan's has agreed to contribute
substantially all of its assets, net of certain liabilities, to the Partnership
for a 49% minority interest in the Partnership. BWISS has agreed to contribute
$2,295,000 to the Partnership for a 51% controlling interest in the Partnership.
The BWISS consideration is to be tendered in cash commencing 18 months from the
IPO and the assumption of certain debt (as discussed below) at the date of
contribution,
F-58
116
ST. STAN'S BREWERY AND BREWPUB OPERATIONS
NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS
GENERAL PARTNERSHIP -- (CONTINUED)
the "Contribution Date", the date of the successful consummation of an initial
public offering of BWI's common stock, occurring on or before March 31, 1997,
realizing minimum proceeds of at least $8,000,000 (before any deductions,
including, but not limited to, underwriters' compensation and expenses).
The profits and losses of the Partnership are to be allocated based on each
partner's respective ownership interest, subject to special allocations as
defined. The Partnership is to be managed by a five member joint management
committee (the "Committee") until dissolution of the Partnership. BWISS will
maintain three of the five positions on the Committee. Substantially all
management decisions of the committee are to be approved by a majority vote of
the members.
The Partnership Agreement contains a buy-out provision whereby BWISS,
during a three year period commencing with the Contribution Date, can purchase
St. Stan's 49% interest in the Partnership for $2,205,000. If BWISS does not
elect to purchase such interest at the end of the third year, St. Stan's has the
right to purchase BWISS's 51% interest at appraised value, as adjusted. If St.
Stan's does not elect to purchase BWISS's 51% interest, BWISS has the right to
purchase St. Stan's 49% interest at appraised value, as adjusted. If neither
partner elects to purchase the other partner's interest, such non purchase is
deemed a liquidating event, as defined.
The Partnership Agreement contains provisions (the "Breach Provisions")
should either partner breach its responsibilities pursuant to the Partnership
Agreement, as defined. The Breach Provisions provide that the breaching partner
ceases to be a partner of the Partnership if such breach is not cured within 120
days. The breaching partner is to receive breach payments, as defined, in
consideration for withdrawal from the Partnership.
The BWISS Contribution
In accordance with the Partnership Agreement, BWISS is required to make its
$2,295,000 capital contribution through debt assumption and periodic payments as
follows: (1) the full assumption and partial repayment of the note payable from
the Partnership (which totals $676,836 at April 30, 1996, unaudited -- Note 5),
(2) the full assumption and repayment of the notes payable to related party from
the Partnership (which total $459,153 at April 30, 1996, unaudited -- Note 6),
(3) six cash payments of $100,000 to the Partnership, each payable 18, 21, 24,
27, 30 and 33 months from the Contribution Date, and (4) a cash payment of the
remaining unpaid capital contribution, subject to adjustment as defined, 36
months from the Contribution Date. If the gross proceeds of the BWI IPO exceed
$10,000,000, BWISS is required to make a payment on its capital contribution 30
days from the Contribution Date; such payment will be equal to 10% of the gross
proceeds in excess of $10,000,000, up to $300,000.
The unpaid portion of the BWISS capital contribution bears interest at 10%
per annum, subject to adjustment as defined, payable quarterly beginning April
30, 1998.
The Note Payable
BWISS has obtained a commitment letter from the lender to refinance the
note payable that BWISS is to assume from the Partnership on the Contribution
Date (see discussion above). The lender requires a principal reduction payment
be made such that the outstanding balance of the note will be $500,000. The
revised note payable will bear interest at a variable rate, ranging from 11% to
16% per annum, with principal and interest payable monthly based on a 15 year
amortization period, with all unpaid principal and interest due in five years.
F-59
117
ST. STAN'S BREWERY AND BREWPUB OPERATIONS
NOTES TO HISTORICAL FINANCIAL STATEMENTS OF ASSETS
AND LIABILITIES TO BE CONTRIBUTED TO BWI -- PROST PARTNERS
GENERAL PARTNERSHIP -- (CONTINUED)
Employment Agreements
On the Contribution Date, BWI is to execute employment agreements with two
of the officers of the general partner of Prost Partners Limited Partnership.
The agreements are for a term of three years, provide for base annual
compensation aggregating $157,000, including allowances, and allow for
participation in the BWI qualified incentive stock option plan. The employment
agreements can be terminated by mutual consent or for cause, as defined.
F-60
118
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Orange Empire Brewing Company
To the Board of Directors
Beverage Works, Inc.
We have audited the accompanying consolidated balance sheet of Orange
Empire Brewing Company and subsidiary (the "Company") as of December 31, 1995,
and the related statements of operations, stockholders' equity (capital
deficiency) and cash flows for each of the years in the two-year period ended
December 31, 1995. These consolidated financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Orange
Empire Brewing Company and subsidiary as of December 31, 1995, and the results
of their operations and their cash flows for each of the years in the two-year
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company had recurring losses from
operations, has current liabilities in excess of current assets and a
significant capital deficiency at April 30, 1996. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company has, and will continue to require, significant working capital to
fund operations. Management is currently funding operations through loans from
certain stockholders. Management's plans with regard to these matters are also
described in Note 2. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
CORBIN & WERTZ
Irvine, California
July 20, 1996, except for
Notes 1 and 11 as to which the date
is September , 1996
The foregoing auditors' report is in the form which will be signed upon
consummation of the transaction described in Note 11 to the financial
statements.
F-61
119
ORANGE EMPIRE BREWING COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Notes 2, 5, 6 and 10)
APRIL 30, DECEMBER 31,
1996 1995
----------- -------------
(UNAUDITED)
Current assets:
Cash............................................................ $ 14,634 $ 56,302
Accounts receivable, less allowance for doubtful accounts of
$7,500 (unaudited) and $5,000, at April 30, 1996 and December
31, 1995, respectively....................................... 171,493 92,273
Inventories (Note 3)............................................ 234,526 231,766
Prepaid expenses and other current assets....................... 17,222 44,441
----------- -----------
Total current assets.................................... 437,875 424,782
Property and equipment, net (Note 4).............................. 1,407,495 1,510,551
Deposits and other assets......................................... 21,409 20,679
----------- -----------
$ 1,866,779 $ 1,956,012
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
(Notes 1 and 2)
Current liabilities:
Accounts payable (Note 7)....................................... $ 332,747 $ 334,780
Accrued expenses and other current liabilities (Note 6)......... 177,053 196,886
Notes payable (Note 5).......................................... 142,548 58,980
Notes payable to related parties (Notes 6 and 11)............... 897,863 767,559
Capital lease obligations to related party (Notes 7 and 11)..... 86,410 109,408
----------- -----------
Total current liabilities............................... 1,636,621 1,467,613
Notes payable, net of current portion (Note 5).................... 191,735 211,416
Capital lease obligations to related party, net of current portion
(Notes 7 and 11)................................................ 949,965 971,985
----------- -----------
Total liabilities....................................... 2,778,321 2,651,014
----------- -----------
Commitments and contingencies (Notes 7 and 11)
Stockholders' equity (capital deficiency) (Notes 9 and 11):
Common stock, Series A, no par value; 1,000,000 shares
authorized, 110,000 shares issued and outstanding............ 412,500 412,500
Common stock, Series B, no par value; 1,000,000 shares
authorized, 247,401 shares issued and outstanding............ 1,067,766 1,067,766
Accumulated deficit............................................. (2,391,808) (2,175,268)
----------- -----------
Total capital deficiency................................ (911,542) (695,002)
----------- -----------
$ 1,866,779 $ 1,956,012
=========== ===========
See independent auditors' report and accompanying notes to these consolidated
financial statements
F-62
120
ORANGE EMPIRE BREWING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FOUR MONTHS
ENDED FOR THE YEARS ENDED
----------------------- --------------------------
APRIL 30, APRIL 30, DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994
---------- --------- ------------ ------------
(UNAUDITED) (UNAUDITED)
Sales........................................ $1,094,984 $ 645,014 $2,606,573 $1,399,515
Less excise taxes............................ 33,912 10,407 52,596 21,045
---------- --------- ---------- ----------
Net sales (Notes 2 and 10)......... 1,061,072 634,607 2,553,977 1,378,470
Cost of sales (Notes 2, 3 and 7)............. 783,856 414,558 1,824,065 1,025,191
---------- --------- ---------- ----------
Gross profit....................... 277,216 220,049 729,912 353,279
Selling, general and administrative
expenses................................... 411,104 349,507 990,701 624,209
---------- --------- ---------- ----------
Loss from operations (Note 10)............... (133,888) (129,458) (260,789) (270,930)
Interest expense (Notes 5, 6 and 7).......... 82,240 48,227 172,924 94,516
Other (income) expense....................... 412 (1,648) (9,755) 4,149
---------- --------- ---------- ----------
Loss before provision for income taxes....... (216,540) (176,037) (423,958) (369,595)
Provision for income taxes (Notes 2 and 8)... -- -- 1,600 1,600
---------- --------- ---------- ----------
Net loss..................................... $ (216,540) $(176,037) $ (425,558) $ (371,195)
========== ========= ========== ==========
Net loss per common share (Note 2)........... $ (0.61) $ (0.52) $ (1.24) $ (1.09)
========== ========= ========== ==========
Weighted average number of common shares
outstanding................................ 357,401 341,401 342,760 341,401
========== ========= ========== ==========
See independent auditors' report and accompanying notes to these consolidated
financial statements
F-63
121
ORANGE EMPIRE BREWING COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
FOR THE FOUR MONTHS ENDED APRIL 30, 1996 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
COMMON STOCK COMMON STOCK
SERIES A SERIES B
------------------ -------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
------- -------- ------- ---------- ----------- ---------
Balances -- January 1, 1994
(Note 9)...................... 110,000 $412,500 231,401 $ 867,766 $(1,378,515) $ (98,249)
Net loss........................ -- -- -- -- (371,195) (371,195)
------- -------- ------- ---------- ----------- ---------
Balances -- December 31, 1994... 110,000 412,500 231,401 867,766 (1,749,710) (469,444)
Common stock issued for cash at
$12.50 per share (Note 9)..... -- -- 16,000 200,000 -- 200,000
Net loss........................ -- -- -- -- (425,558) (425,558)
------- -------- ------- ---------- ----------- ---------
Balances, December 31, 1995..... 110,000 412,500 247,401 1,067,766 (2,175,268) (695,002)
Net loss........................ -- -- -- -- (216,540) (216,540)
------- -------- ------- ---------- ----------- ---------
Balances, April 30, 1996 (Notes
9 and 11)..................... 110,000 $412,500 247,401 $1,067,766 $(2,391,808) $(911,542)
======= ======== ======= ========= ========== =========
See independent auditors' report and accompanying notes to these consolidated
financial statements
F-64
122
ORANGE EMPIRE BREWING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FOUR MONTHS ENDED FOR THE YEARS ENDED
-------------------------- ----------------------------
APRIL 30, APRIL 30, DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net loss....................................... $(216,540) $(176,037) $ (425,558) $ (371,195)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............... 92,470 44,114 161,325 93,959
Provisions for losses on accounts receivable
and inventory............................. 2,500 5,000 25,000 --
Changes in operating assets and liabilities:
Accounts receivable....................... (81,720) (17,212) (70,945) (25,578)
Inventories............................... (2,760) (47,324) (196,985) (15,794)
Prepaid expenses and other current
assets................................. 27,219 4,631 (24,997) (8,267)
Accounts payable.......................... (2,033) 54,971 242,692 16,024
Accrued expenses and other current
liabilities............................ (19,833) 7,560 134,172 15,826
--------- --------- --------- ---------
Net cash used in operating
activities........................... (200,697) (124,297) (155,296) (295,025)
--------- --------- --------- ---------
Cash flows from investing activities:
Deposits and other assets...................... (730) (3,998) (11,088) (9,400)
Capital expenditures........................... (10,172) (45,022) (199,216) (59,323)
--------- --------- --------- ---------
Net cash used in investing
activities........................... (10,902) (49,020) (210,304) (68,723)
--------- --------- --------- ---------
Cash flows from financing activities:
Issuance of common stock for cash (Note 9)..... -- -- 200,000 --
Borrowings under bank note payable (Note 5).... -- -- -- 37,500
Borrowings under notes payable from vendors,
net (Note 5)................................ 83,552 -- -- --
Borrowings under notes payable to related
parties (Note 6)............................ 130,304 200,425 307,714 375,099
Repayments under bank note payable (Note 5).... (19,665) (17,500) (42,081) (35,000)
Payments under capital lease obligation to
related party (Note 7)...................... (24,260) (16,745) (50,868) (28,234)
--------- --------- --------- ---------
Net cash provided by financing
activities........................... 169,931 166,180 414,765 349,365
--------- --------- --------- ---------
Net increase (decrease) in cash.................. (41,668) (7,137) 49,165 (14,383)
Cash at beginning of period...................... 56,302 7,137 7,137 21,520
--------- --------- --------- ---------
Cash at end of period............................ $ 14,634 $ -- $ 56,302 $ 7,137
========= ========= ========= =========
Supplemental disclosures of cash flow
information --
Cash paid during the year for:
Interest.................................. $ 44,824 $ 43,319 $ 100,223 $ 82,144
========= ========= ========= =========
Income taxes.............................. $ -- $ -- $ 1,600 $ 3,200
========= ========= ========= =========
Supplemental schedule of noncash financing and investing activities:
During the four months ended April 30, 1996 and 1995, the Company
(returned) purchased $(20,758) and $85,366, respectively, of equipment under a
capital lease agreement with a related party (see Note 7).
During the years ended December 31, 1995 and 1994, the Company purchased
$777,633 and $56,937, respectively, of equipment under a capital lease agreement
with a related party (see Note 7).
See independent auditors' report and accompanying notes to these consolidated
financial statements
F-65
123
ORANGE EMPIRE BREWING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FOUR-MONTH PERIODS ENDED APRIL 30, 1996 AND 1995 (UNAUDITED),
AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
NOTE 1 -- NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Nature of Operations
Orange Empire Brewing Company and its wholly owned subsidiary, Riverside
Brewing Company (collectively the "Company"), were incorporated in the state of
California on June 1, 1993 to operate a brewpub and brewery. The Company
currently brews and markets six distinctive beers in 27 states. During October
1995, the Company expanded its brewing operations by leasing an additional
brewery facility and its brewing equipment in Riverside, California (see Note
7).
As discussed in Note 11, on September , 1996, the Company entered into a
stock-for-stock exchange (the "Exchange Agreement") with Beverage Works, Inc.
("BWI"), a California corporation. Additional agreements were entered into
concurrently with the execution of the Exchange Agreement, including an
agreement with BWI to actively manage the Company's operations (see Note 11).
Basis of Presentation
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and the satisfaction of liabilities in
the normal course of business. As shown in the accompanying consolidated
financial statements, at April 30, 1996, the Company had excess current
liabilities in excess of current assets of $1,198,746 (unaudited) and a capital
deficiency of $911,542 (unaudited). In addition, the Company has incurred net
losses of $425,558 and $371,195, for the years ended December 31, 1995 and 1994,
respectively, and $216,540 (unaudited) for the four months ended April 30, 1996.
Successful completion of its marketing program, and the transition, ultimately,
to the attainment of profitable operations is dependent upon the Company
obtaining adequate financing and generating sales sufficient to fund profitable
operations. These factors, among other things, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans include,
but are not limited to, entering into a stock-for-stock exchange whereby the
Company will become a wholly-owned subsidiary of BWI (see Notes 1 and 11). BWI
plans to effect an initial public offering ("IPO") to raise capital, certain of
which, if the IPO is successful and the Exchange Agreement is consummated, will
be used to partially reduce the Company's indebtedness and to fund working
capital requirements. Management also plans to reduce the Company's costs on a
per unit basis through increased plant utilization and through combined
purchases with other brewing facilities acquired, or to be acquired, by BWI.
There are no assurances that management's plans will be effected, which includes
the IPO being consummated in a timely manner. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
NOTE 2 -- SUMMARY OF SIGNIFICANT POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Orange Empire
Brewing Company and its wholly-owned subsidiary Riverside Brewing Company. All
significant intercompany transactions and balances have been eliminated.
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, as well
as disclosure of contingent assets and liabilities at the date of the financial
statements.
F-66
124
ORANGE EMPIRE BREWING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain estimates made by management also effect the reported amounts of
revenues and expenses during the reported periods. Actual results could
materially differ from those estimates.
Fair Value of Financial Instruments
These consolidated financial statements contain financial instruments
whereby the fair market value of the financial instruments could be different
than those recorded on a historical basis in the accompanying consolidated
financial statements. The Company's financial instruments consist of cash,
accounts receivable, accounts payable, notes payable to related parties, and
notes payable and capital lease obligations. The carrying amounts of the
Company's financial instruments generally approximate their fair values at April
30, 1996 (unaudited) and December 31, 1995. In the case of the notes payable to
related parties (see Note 6), it was not practical to determine fair values due
to the lack of a market for such financial instruments.
Concentrations of Credit Risk
The customers of the brewery operations consist of distributors which
resell the Company's products domestically. The Company performs periodic credit
evaluations of its customers and does not require collateral to secure its
accounts receivable. The Company maintains an allowance for potential credit
losses; such losses have historically been within management's expectations.
One brewery customer accounted for approximately 23% (unaudited) of
consolidated net sales for the four months ended April 30, 1996. No one customer
made up 10% or more of consolidated net sales for the four months ended April
30, 1995 (unaudited). One brewery customer accounted for approximately 12% of
consolidated net sales for the year ended December 31, 1995 and one brewery
customer accounted for approximately 18% of consolidated net sales for the year
ended December 31, 1994. Accounts receivable from four brewery customers totaled
23%, 18%, 18% and 16%, respectively, of accounts receivable at December 31,
1995. Accounts receivable from three brewery customers totaled 69%, 16% and 15%,
respectively, of accounts receivable at April 30, 1996 (unaudited).
The Company purchased certain products from one company which accounted for
approximately 13% (unaudited), and purchased certain products from two companies
which accounted for 50% (unaudited) and 15% (unaudited) of consolidated
purchases for the four months ended April 30, 1996 and 1995, respectively. One
Company accounted for approximately 40% and 38% of consolidated purchases for
the years ended December 31, 1995 and 1994, respectively. Accounts payable to
one company accounted for 31% (unaudited) and 26% of total accounts payable as
of April 30, 1996 and December 31, 1995, respectively.
Risks and Uncertainties
Licenses and Permits
The brewery operations (wholesale) and the brewpub operations (retail),
require various federal, state and local licenses and permits. Brewers are
required to file with the Federal Bureau of Alcohol, Tobacco and Firearms (the
"BATF"). The California Department of Alcoholic Beverage Control (the "ABC")
requires that companies file and maintain licenses, permits or approvals for the
production and sale of alcoholic beverages. Other state and local laws and
regulations governing the sale of alcoholic beverages within a particular state
by an out-of-state brewer or wholesaler vary by state and locality. The
Company's brewery and brewpub operations are subject to audit and inspection by
the BATF and ABC at any time.
Should the Exchange Agreement be consummated (see Notes 1 and 11),
management of the Company will be required to apply for a change in the
brewery's and/or the brewpub's management, and for a change in ownership with
Federal and state agencies. Due to the various Federal and state licensing and
permitting requirements, there is a risk that one or more regulatory authorities
may not approve such changes in management and/or ownership, or may determine
the predecessor managers/owners had not complied with
F-67
125
ORANGE EMPIRE BREWING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
applicable licensing or permitting regulations. Should the brewery or brewpub
operations not maintain the licenses and permits necessary for it to conduct
business, there could be a material adverse effect on the consolidated financial
condition and/or the consolidated results of operations of the Company.
Seasonality
The beverage business traditionally has been seasonal. Typically, net sales
are highest during the third and fourth calendar quarters and decline in the
first and second calendar quarters. This pattern is due primarily to the
increased amount of consumer demand for beverages during the summer months
through the holiday buying season. Management of the Company expects its
consolidated net sales and operating results to continue to reflect this
seasonality.
Environmental Regulations and Operating Considerations
The Company's brewing operations are subject to a variety of extensive and
changing Federal, state, and local environmental laws, regulations and
ordinances that govern activities or operations that may have adverse effects on
human health or the environment. Such laws, regulations ordinances may impose
liability for the cost of remediating, and for certain damages resulting from,
sites of past releases of hazardous materials. The Company believes that it
currently conducts, and in the past has conducted, its activities and operations
in substantial compliance with applicable environmental laws, and believes that
costs arising from existing environmental laws will not have a material adverse
effect on the Company's financial condition or results of operations. There can
be no assurance, however, that environmental laws will not become more stringent
in the future or that the Company will not incur costs in the future in order to
comply with such laws.
The Company's 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 occurrence of such a problem could
result in a costly product recall and serious damage to the Company's reputation
for product quality, as well as claims for product liability which may
negatively impact the Company. The Company maintains insurance which the Company
believes is sufficient to cover any liability claims which might result from a
contamination problem in its products, but which may not cover any damage to the
Company's reputation.
Inventories
Inventories, consisting of raw materials and purchased packaging, as well
as certain in process and finished goods, are valued at the lower of cost
(average cost method) or market (see Note 3).
Property and Equipment
Property and equipment, including equipment under capital leases, as
amended, with a related party (see Note 7), are stated at cost and are
depreciated using the straight-line method over the estimated useful lives of
the related assets, generally ranging from three to seven years. Betterments are
capitalized, while repairs and maintenance costs are charged to expense as
incurred.
Leasehold improvements are being amortized over the shorter of the lease
term or the estimated useful lives of the improvements, generally ranging from
three to ten years.
Management of the Company assesses the recoverability of property and
equipment by determining whether the depreciation of such assets over their
remaining lives can be recovered through projected undiscounted cash flows. The
amount of impairment, if any, is measured based on projected undiscounted cash
flows and is charged to operations in the period in which such impairment is
determined by management. To date, management has not identified an impairment
of property and equipment.
F-68
126
ORANGE EMPIRE BREWING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company accounts for its income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement 109"). Under Statement 109, a liability method is used whereby
deferred tax assets and liabilities are determined based on temporary
differences between bases used for financial reporting and income tax reporting
purposes. Income taxes are provided based on tax rates in effect at the time
such temporary differences are expected to reverse. A valuation allowance is
provided for certain deferred tax assets if it is more likely than not that the
Company will not realize the tax assets through future operations (see Note 8).
Revenue Recognition
Revenues from brewery product sales are recognized upon shipment. The
Company records a provision for the effect of returned products at the time the
units are shipped. Historically, the Company has experienced minimal product
returns. Revenues in connection with brewpub operations are recognized at the
time the food and beverage sales are made.
Advertising and Marketing Expense
Advertising and marketing costs are expensed as incurred.
Per Share Information
Net loss per common share is computed by dividing net loss by the weighted
average number of shares of Series A and Series B common stock outstanding
during each respective period presented. During the periods presented, the
Company did not have common stock equivalents outstanding (see Note 9).
Interim Accounting Policy
In the opinion of management, the accompanying unaudited consolidated
financial statements of the Company include all adjustments (consisting of only
normal recurring adjustments) necessary for a fair presentation of the
consolidated financial position of the Company as of April 30, 1996, and results
of operations and cash flows as of and for the four months ended April 30, 1996
and 1995. Although management believes that the disclosures regarding interim
financial information in these financial statements are adequate to make the
information presented not misleading, certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles during the interim periods have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. The unaudited results of operations for the four months ended April
30, 1996 are not necessarily indicative of results of operations to be expected
for the year ending December 31, 1996.
NOTE 3 -- INVENTORIES
Inventories consist of the following:
DECEMBER
APRIL 30, 31,
1996 1995
---------- ----------
(UNAUDITED)
Finished goods and work in process.......................... $ 28,427 $ 30,616
Raw materials and purchased products........................ 206,099 201,150
---------- ----------
$ 234,526 $ 231,766
========= =========
F-69
127
ORANGE EMPIRE BREWING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER
APRIL 30, 31,
1996 1995
---------- ----------
(UNAUDITED)
Equipment under capital lease with a related party (Note
7)........................................................ $1,139,737 $1,160,495
Equipment................................................... 82,227 76,888
Furniture and fixtures...................................... 50,875 50,875
Leasehold improvements...................................... 499,980 495,147
---------- ----------
1,772,819 1,783,405
Less accumulated depreciation and amortization.............. (365,324) (272,854)
---------- ----------
$1,407,495 $1,510,551
========= =========
NOTE 5 -- NOTES PAYABLE
Notes payable consist of the following:
DECEMBER
APRIL 30, 31,
1996 1995
---------- ----------
(UNAUDITED)
Note payable to bank, bearing interest at prime plus 3% per
annum (11.75% at December 31, 1995), payable monthly in
principal payments of $4,916 plus accrued interest,
matures May 1, 1998, secured by substantially all assets
of the Company and guaranteed by a former officer and
certain stockholders of the Company....................... $ 250,731 $ 270,396
Unsecured demand notes with vendors generally bearing
interest at 11% per annum, payable in aggregate monthly
installments ranging from $5,082 to $15,083 through
February, 1997............................................ 83,552 --
---------- ----------
334,283 270,396
Less current portion........................................ (142,548) (58,980)
---------- ----------
$ 191,735 $ 211,416
========= =========
Interest expense amounted to $11,172 (unaudited) and $9,686 (unaudited) for
the four months ended April 30, 1996 and 1995, respectively, and amounted to
$33,515 and $29,057 for the years ended December 31, 1995 and 1994,
respectively.
Future annual principal installments of notes payable as of December 31,
1995 are as follows:
YEARS ENDING
DECEMBER 31,
- ------------
1996............................................... $ 58,980
1997............................................... 58,960
1998............................................... 152,456
--------
$270,396
========
See Note 6 for discussion regarding the refinance of the note payable to
bank.
F-70
128
ORANGE EMPIRE BREWING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- NOTES PAYABLE TO RELATED PARTIES
Notes payable to related parties consist of the following:
APRIL 30, DECEMBER 31,
1996 1995
--------- ------------
(UNAUDITED)
Unsecured demand note payable to a former officer and current
stockholder, interest at prime plus 2% per annum (10.75% at
December 31, 1995)........................................... $ 93,462 $ 96,132
Unsecured demand notes payable to certain stockholders,
interest at prime plus 2% per annum (10.75% at December 31,
1995), refinanced with bank note discussed below............. 294,338 254,364
Unsecured demand notes payable to certain officers and
stockholders, interest at 7.75% per annum.................... 428,229 335,229
Unsecured demand notes payable in default to stockholders,
interest rates ranging from 8% per annum to prime plus 2% per
annum 10.75% at December 31, 1995)........................... 81,834 81,834
-------- --------
$ 897,863 $767,559
======== ========
On May 10, 1996, the Company entered into an agreement with a bank to
refinance a note payable with the bank totaling $250,731 (see Note 5) and
unsecured demand notes payable to certain stockholders totaling $294,338. The
new note payable totals $545,069, payable with interest at prime plus 1.75% per
annum (initial rate of 11.0%). Interest is payable monthly beginning June 1,
1996 and principal is payable in 48 installments of $11,576, beginning September
1, 1996. The new note matures August 1, 2000. The new note is secured by
substantially all assets of the Company and is guaranteed by certain
stockholders. See Note 11 for further discussion regarding this new note payable
to bank.
Interest expense on notes payable to related parties amounted to $21,155
(unaudited) and $19,490 (unaudited) for the four months ended April 30, 1996 and
1995, respectively, and amounted to $63,464 and $20,447 for the years ended
December 31, 1995 and 1994, respectively. Accrued interest due on the notes
payable to related parties totaled $40,475 (unaudited) and $27,995 at April 30,
1996 and December 31, 1995, respectively.
Also See Note 7 for discussion of capital lease obligations with a related
party.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities and certain equipment under noncancelable
operating leases which expire at various dates through August 2003.
The Company leases certain brewing, kitchen and equipment, as well as
leasehold improvements under a capital lease obligation, as amended, with an
entity controlled by a Company stockholder. Such lease has components with
effective interest rates ranging from 14% to 17% per annum, payable monthly at
varying amounts ranging from $193 to $10,663, scheduled to mature through 2003.
F-71
129
ORANGE EMPIRE BREWING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future annual aggregate minimum lease payments under noncancelable
operating lease arrangements and under the capital lease obligation, as amended,
with a related party as of December 31, 1995 are as follows:
YEARS ENDING CAPITAL OPERATING
DECEMBER 31, LEASE LEASES
------------------------------------------------------------- ---------- --------
1996...................................................... $ 256,114 $183,012
1997...................................................... 272,028 189,829
1998...................................................... 270,415 106,285
1999...................................................... 270,348 74,501
2000...................................................... 261,742 74,160
Thereafter................................................ 286,185 197,760
---------- --------
1,616,832 $825,547
========
Less amounts representing interest........................ (535,439)
----------
Present value of minimum lease payments................... 1,081,393
Less current portion...................................... (109,408)
----------
$ 971,985
==========
Rent expense under operating lease agreements totalled $62,495 (unaudited)
and $34,134 (unaudited) for the four months ended April 30, 1996 and 1995,
respectively, and $130,884 and $77,457 for the years ended December 31, 1995 and
1994, respectively, and is included in selling, general and administrative
expense in the accompanying consolidated statements of operations.
Interest expense under the capital lease obligation, as amended, amounted
to $49,914 (unaudited) and $19,051 (unaudited) for the four months ended April
30, 1996 and 1995, respectively, and $75,945 and $45,012 for the years ended
December 31, 1995 and 1994, respectively.
As of April 30, 1996, the Company was in default on the capital lease
obligation to the related party. Past due capital lease payments totaling
$103,164 (unaudited) and $42,053 as of April 30, 1996 and December 31, 1995,
respectively, are included in accounts payable on the accompanying consolidated
balance sheets.
See Note 11 for discussion of the amendment to the capital lease to be made
in conjunction with the consummation of the Exchange Agreement.
Distributor Agreements
The Company is party to certain agreements with its various distributors.
In general, such agreements grant the Company's distributors the right to sell
certain products in specified territories. The agreements may be terminated by
either party by written 30 day notice or immediately if certain conditions
exist, as defined.
F-72
130
ORANGE EMPIRE BREWING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Purchase Commitment
During 1995, the Company entered into a purchase agreement with a vendor to
buy specified quantities of grain to be delivered through June 1999, as defined,
at fixed contract prices. No provision for loss has been made as the difference
between the contract price and the market price has not been significant. The
Company's annual obligation under the agreement is as follows:
YEARS ENDING
DECEMBER 31,
--------------------------------------------------
1996............................................ $ 71,454
1997............................................ 59,538
1998............................................ 59,957
1999............................................ 39,125
--------
$230,074
========
The Company is also obligated to pay storage fees, as defined, for any
goods not shipped as agreed. The Company does not anticipate storage charges
will be incurred.
Management Agreements
See Note 11 for discussion of the management agreements entered into in
connection with the stock-for-stock exchange (see Notes 1 and 11).
Contingencies
In January 1996, the Company entered into a settlement agreement with a
stockholder whereby for past services the stockholder would retain 10,000 shares
of the Company's common stock and receive $43,000 in cash. Such was paid in
November 1995. In May 1996, the Company received a letter from such
stockholder's legal counsel demanding 13,792 additional shares be issued to the
stockholder as the settlement agreement was signed without knowledge of certain
material information. The Company's management believes these allegations are
without merit and believes that no additional amounts are due the stockholder in
cash or common stock. No provision for any additional loss has been reflected in
the accompanying consolidated financial statements.
A breach of contract action was filed on July 25, 1996 by a retail chain
against the Company alleging damages in the amount of $64,000. Management of the
Company intends to vigorously defend against this action. The consolidated
financial statements reflect a $14,000 accrual for losses relating to this
matter at April 30, 1996 (unaudited).
In the ordinary course of business, there are various claims and lawsuits
brought by or against the Company. In the opinion of management, the ultimate
outcome of these matters will not have a material adverse effect the Company's
operations or financial position.
NOTE 8 -- INCOME TAXES
The provision for income taxes for the years ended December 31, 1995 and
1994 is comprised of minimum state taxes due to the historical losses incurred
by the Company.
F-73
131
ORANGE EMPIRE BREWING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the provision for income taxes from operations with
expected income tax benefit computed by applying the federal statutory income
tax rate to loss before provision for income taxes for the years ended December
31, 1995 and 1994 is as follows:
1995 1994
------------------ ------------------
$ % $ %
--------- ----- --------- -----
Income tax benefit computed at federal
statutory tax rate......................... $(144,146) (34.0%) $(125,662) (34.0%)
State and local tax benefit, net of reduction
of loss carryforward....................... (12,930) (3.0) (11,273) (3.1)
Change in valuation allowance for deferred
tax
assets..................................... 160,886 37.9 138,875 37.6
Other........................................ (2,210) (0.5) (340) (0.1)
--------- ----- --------- -----
$ 1,600 0.4% $ 1,600 0.4%
========= ===== ========= =====
At December 31, 1995, significant components of the Company's net deferred
taxes are as follows:
Deferred tax assets:
Net operating loss carryforwards....................................... $ 688,229
Reserves and allowances................................................ 10,035
Depreciation........................................................... 89,898
Other.................................................................. 34,674
Less valuation allowance............................................... (812,778)
---------
Total deferred tax assets...................................... 10,058
---------
Deferred tax liability --
Property, equipment and other.......................................... (10,058)
---------
Deferred income taxes.......................................... $ --
=========
The net change in the total valuation allowance was an increase of $160,886
and $138,875 for the years ended December 31, 1995 and 1994, respectively.
At December 31, 1995, the Company has approximately $1,857,000 and $930,000
of net operating loss carryforwards for Federal and state income tax reporting
purposes, respectively, which expire through 2010. Because of the "change in
ownership" provisions of the Tax Reform Act of 1986, net operating loss
carryforwards will be subject to annual limitations should the Company complete
its stock-for-stock exchange (see Notes 1 and 11).
NOTE 9 -- COMMON STOCK
The Company is authorized to issue up to 5,000,000 shares of common stock.
Such common shares may be divided into various series. The Company is currently
authorized to issued 1,000,000 shares of Series A common stock and 1,000,000
shares of Series B common stock. The rights, preferences, privileges and
restrictions of the Series A common shares and the Series B common shares shall
be equal and identical in all respects except that, unless otherwise provided by
law, the Company may declare dividends to holders of Series B common shares
without declaring dividends to holders of Series A common shares. No dividends
shall be declared on Series A common shares without also declaring like
dividends on Series B common shares. Through April 30, 1996, no dividends have
been declared or paid by the Company and pursuant to the California Corporations
Code, dividends may not be paid with an accumulated deficit.
F-74
132
ORANGE EMPIRE BREWING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Through January 1, 1994, the Company issued 110,000 shares of Series A
common stock for compensation to officers of the Company for services provided
valued at $412,500 or $3.75 per share. Such shares were valued by the Board of
Directors based on cash paid for shares near the date of issuance (see below).
Through January 1, 1994, the Company sold for cash at $3.75 per share,
112,824 shares of Series B common stock for an aggregate $423,102. In addition,
the Company issued 118,577 shares of Series B common stock for debt and services
provided valued at $444,664.
In November 1995, the Company issued 16,000 shares of Series B common stock
at $12.50 per share totalling $200,000.
NOTE 10 -- SEGMENT INFORMATION
Business segment information as of and for the periods presented is as
follows:
FOR THE FOUR MONTHS ENDED FOR THE YEAR ENDED
-------------------------- ----------------------------
APRIL 30, APRIL 30, DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994
----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
Sales:
Brewery.............................. $ 497,249 $ 110,907 $ 865,433 $ 252,154
Brewpub.............................. 597,735 534,107 1,741,140 1,147,361
---------- --------- ---------- ----------
Total........................ $ 1,094,984 $ 645,014 $2,606,573 $1,399,515
========== ========= ========== ==========
Operating loss:
Brewery.............................. $ (91,746) $ (54,617) $ (162,850) $ (92,469)
Brewpub.............................. (42,142) (74,841) (97,939) (178,461)
---------- --------- ---------- ----------
Total........................ $ (133,888) $(129,458) $ (260,789) $ (270,930)
========== ========= ========== ==========
Depreciation and amortization:
Brewery.............................. $ 53,598 $ 2,716 $ 49,054 $ 2,663
Brewpub.............................. 38,872 41,398 112,271 91,296
---------- --------- ---------- ----------
Total........................ $ 92,470 $ 44,114 $ 161,325 $ 93,959
========== ========= ========== ==========
Capital expenditures(1):
Brewery.............................. $ 10,172 $ 6,212 $ 833,785 $ 31,076
Brewpub.............................. -- 124,176 143,064 85,184
---------- --------- ---------- ----------
Total........................ $ 10,172 $ 130,388 $ 976,849 $ 116,260
========== ========= ========== ==========
Identifiable property and equipment, net:
APRIL 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
Brewery.................................................... $ 751,167 $ 815,351
Brewpub.................................................... 656,328 695,200
---------- ----------
Total............................................ $ 1,407,495 $1,510,551
========== ==========
- ---------------
(1) Includes equipment acquired under capital lease obligation with a related
party (see Note 7). For the four months ended April 30, 1996, the brewery
returned certain capital lease equipment totaling $20,758. Accordingly,
such returns are excluded from brewery capital expenditures.
F-75
133
ORANGE EMPIRE BREWING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11 -- SUBSEQUENT EVENTS
Exchange Agreement With BWI
On September , 1996, the Company entered into a stock-for-stock exchange
with Beverage Works, Inc., a California corporation. Pursuant to the Exchange
Agreement, BWI is to issue 247,479 shares of its common stock, subject to
adjustment (based on the change in net assets of the Company, as defined), in
exchange for all of the outstanding shares of the Company. In addition, up to
130,000 additional shares of BWI common stock may be issued, if the Company
reaches certain production levels, as defined. Pursuant to the Exchange
Agreement , the exchange is to occur concurrently with the consummation (the
"Closing Date") of the BWI IPO. If for any reason the IPO does not occur on or
before March 31, 1997 or the IPO does not raise in the aggregate $6,000,000,
either party may unilaterally terminate the Exchange Agreement.
Should such additional shares of BWI common stock be issued, the value of
such shares will be deemed additional purchase consideration.
Management Agreements
In connection with the Exchange Agreement, the Company will enter into a
management agreement (The "Management Agreement") with certain stockholders
whereby the stockholders are to manage and operate the brewpub operations of the
Company from the Closing Date through December 31, 1998. As compensation for
such services, the stockholders are to receive 10,000 shares of BWI common
stock. Such shares are to be issued on a pro rata basis over the term of the
Management Agreement. In addition, the stockholders are obligated to the Company
for quarterly cash flow deficits, if any, as defined, during the term of the
Management Agreement. The Management Agreement can be terminated by mutual
written consent or in the event of a breach, as defined.
In connection with the Exchange Agreement on June 10, 1996, the Company
entered into a management agreement with BWI, whereby BWI will manage and
operate the Company. As compensation for the management services provided, BWI
is to receive $6,500 per month, plus reimbursement of expenses, as defined. The
agreement terminates upon consummation of the BWI IPO.
Capital Lease Agreement Amendment
In connection with the Exchange Agreement and concurrent with the Closing
Date, the related party is required to enter into an agreement with the Company
to modify the existing terms of the capital lease obligation (see Note 7). The
modifications to the capital lease obligation include a reduction in the
effective interest rate to 12%, a provision that all such leased equipment may
be purchased by the Company for $1 upon expiration of the lease, the extension
of such lease by that number of months which is equal to the number of months
the lease is in arrears through December 31, 1995, the forgiveness of any lease
payment that the lessor was to receive for the period January 1, 1996 through
September 30, 1996 (which payments total $140,488, unaudited), and the repayment
of deferred lease payments, if any, for the period October 1, 1996 to December
31, 1996 from net proceeds expected to be received from the IPO.
Note Payable to Bank
As discussed in Note 6, the Company refinanced certain notes payable to a
bank and to certain stockholders aggregating approximately $545,000 (unaudited)
(the "Note"). In connection with the Exchange Agreement and concurrent with the
Closing Date, the Company is required to obtain the agreement of such
stockholders and the bank to amend and modify the Note to have two notes. The
stockholders will assume a note totaling $220,941 without further obligation of
the Company, and the remaining principal balance of the Note (which approximates
$324,128 at May 10, 1996, unaudited), will be paid to the bank by the Company.
In consideration for assuming a portion of the Company's debt obligations, the
stockholders will
F-76
134
ORANGE EMPIRE BREWING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be issued 27,618 shares of BWI common stock. If on January 1, 1999, the per
share market value of BWI common stock is less than $6.00, BWI will issue to
such stockholders an additional 9,227 shares of BWI common stock.
Notes Payable To Stockholders
At April 30, 1996, the Company has $644,000 (unaudited) of indebtedness due
to certain related parties (consisting of $603,525 (unaudited) in principal and
$40,475 (unaudited) in accrued interest -- Note 6). Upon the consummation of the
IPO, such indebtedness is to be satisfied as follows: (1) $301,000 is to be paid
in cash, and (2) $343,000 is to be refinanced with a new non-interest bearing
promissory note which will mature in 90 days, payable in cash and/or up to
24,125 shares of BWI stock and/or up to 50,000 warrants to purchase shares of
BWI stock at an exercise price of $5.00 per share, based on a formula, as
defined.
Stockholder Advances
In connection with the Exchange Agreement, BWI agreed to use up to $150,000
of the proceeds from the IPO to repay advances made by one stockholder of the
Company during the period May 1, 1996 through the Closing Date, including
deferred lease payments as discussed above.
Agreements Not to Compete
In connection with the Exchange Agreement and concurrent with the Closing
Date, BWI has agreed to enter into agreements-not-to-compete with certain
stockholders of the Company for a period of three years in specified
territories. Management will ascribe no value to the agreements as management
believes that such agreements are not a material component to the Exchange
Agreement.
F-77
135
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING HEREIN CONTAINED, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO BUY
ANY SECURITY OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES, OR AN
OFFER TO OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER
OF SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE FACTS HEREIN SET FORTH SINCE THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
Prospectus Summary..................... 3
Risk Factors........................... 6
Capitalization......................... 12
Dilution............................... 13
Use of Proceeds........................ 14
Selected Financial Data................ 15
Management's Discussion and Analysis... 18
Business............................... 26
Management............................. 41
Principal Stockholders................. 47
Description of Securities.............. 48
Underwriting........................... 51
Legal Matters.......................... 52
Experts................................ 53
Additional Information................. 53
Index to Financial Statements.......... F-1
------------------------
UNTIL , 1996 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,000,000 UNITS
EACH UNIT CONSISTING OF
ONE SHARE OF COMMON STOCK
(NO PAR VALUE)
AND ONE CLASS A WARRANT
BEVERAGE WORKS, INC.
------------------------------
PROSPECTUS
------------------------------
STATE CAPITAL MARKETS CORP.
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
136
ALTERNATE PAGE
SUBJECTION TO COMPLETION DATED , 1996
PROSPECTUS
BEVERAGE WORKS, INC.
520,745 SHARES OF COMMON STOCK
This Prospectus relates to the Offering (the "Offering") by certain selling
securityholders (the "Selling Shareholders") of 520,745 shares of Common Stock,
no par value, (the "Shares") of Beverage Works, Inc., a California corporation
(the "Company"). The Shares offered hereby may be sold from time to time by the
Selling Shareholders, or by transferees, on or after the date of this
Prospectus, subject to contractual restrictions which provide that such
securities may not be sold for a period of thirteen months after the closing of
the Company Offering (defined below) without the prior written consent of State
Capital Markets Corp. as representative of the several underwriters of the
Company Offering (the "Representatives"). See "Risk Factors -- Shares Available
for Future Sale," "Description of Securities" and "Common Stock."
No underwriting arrangements have been entered into by the Selling
Shareholders. The distribution of the Shares by the Selling Shareholders may be
effected from time to time in transactions on the Nasdaq Small Cap Market
System, in negotiated transactions, through the writing of options on the
Shares, or a combination of such methods of sale, at fixed prices that may be
changed, at market prices prevailing at the time of sale, at prices related to
such prevailing market prices, or at negotiated prices. The Selling Shareholders
may effect such transactions by the sale of the Shares to or through
broker-dealers, and such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Shareholders and/or the
purchasers of the Shares for whom such broker-dealers may act as agent or to
whom they may sell as principal, or both. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the Selling Shareholders
in connection with sales of the Shares.
The Selling Shareholders and intermediaries through whom the Shares are
sold may be deemed "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities offered
and any profits realized or commissions received may be deemed underwriting
compensation. The Company will not receive any proceeds from sales of the
Shares.
A registration statement under the Securities Act has been filed with the
Securities and Exchange Commission with respect to an underwritten public
offering on behalf of the Company of 1,000,000 Units, each Unit consisting of
one share of Common Stock and one Class A Warrant, which are immediately
separate upon trading, plus up to 150,000 Units which may be offered by the
Company pursuant to the exercise of the Underwriters' over-allotment option (the
"Company Offering"). The registration statement also includes 3,000,000 Class A
Warrants and the Shares of Common Stock underlying the Class A Warrants and
35,000 Class B Warrants and the shares of Common Stock underlying the Class B
Warrants which are being offered by other selling securityholders. See
"Concurrent Sales By Company and Selling Securityholders."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
137
ALTERNATE PAGE
THE OFFERING
Securities Offered......... 520,745 shares of Common Stock, no par value. See
"Risk Factors-Shares Available for Future Sale" and
"Description of Securities." No underwriting
arrangements have been entered into by the Selling
Shareholder.
Common Stock Outstanding
after the Company
Offering(1)(2)........... 3,767,085 shares
Shares of Common Stock to
be Outstanding After this
Offering(1)(2)........... 3,767,085 shares
Use of Proceeds............ The Company will not receive any proceeds from the
sale of the Shares. See "Use of Proceeds."
Trading Symbol............. The Common Stock is traded on the Nasdaq Small Cap
Market under the symbol .
- ---------------
(1) Does not include (i) 4,150,000 shares of Common Stock issuable at $8.25 per
share upon exercise of the 1,000,000 Class A Warrants offered by the Company
in its initial public offering, plus 150,000 Class A Warrants which may be
offered pursuant to the underwriter's over-allotment option, and the
3,000,000 Class A Warrants which are part of this offering, (ii) 2,433,500
shares of Common Stock issuable upon exercise of outstanding options granted
under the Company's stock option plans, (iii) 35,000 shares of Common Stock
issuable at $4.75 per share upon exercise of the Class B Warrants, (iv) the
200,000 shares of Common Stock upon exercise of the Representative's Unit
Purchase Option and Underwriter's Warrants and (v) 80,583 shares of Common
Stock issuable upon exercise of other outstanding options and warrants. Does
not include 150,000 shares issuable upon exercise of the underwriters'
overallotment option.
(2) Includes 309,222 shares of Common Stock as follows: 247,479 shares of Common
Stock which are to be issued to the Riverside shareholders in accordance
with the Share Exchange Agreement, 51,743 shares of Common Stock to be
issued to the Riverside debtholders in accordance with the Debt Exchange
Agreement, and 10,000 shares of Common Stock to the Riverside brewpub
managers pursuant to the Brewpub Management Agreement.
138
ALTERNATE PAGE
SELLING SECURITYHOLDERS
A registration statement under the Securities Act of 1933, as amended (the
"Act"), has been filed by the Company with the Securities and Exchange
Commission with respect to an underwritten public offering by the Company of
1,000,000 Units, each Unit consisting of one share of Common Stock and one Class
A Warrant, plus 150,000 shares which may be offered pursuant to exercise of the
Underwriters' over-allotment option. Concurrent sales of securities by the
Company, the Selling Securityholders and the Class A Warrantholders would likely
have an adverse effect on the market price of the Common Stock. The Shares are
subject to contractual restrictions upon resale with the representative of the
Underwriters. See "Risk Factors -- Shares Available for Future Sale" and
"Description of Securities."
139
ALTERNATE PAGE
SELLING SHAREHOLDERS
The following table sets forth the name of each person who is a Selling
Shareholder, the number of Shares and other shares of Common Stock beneficially
owned by each Selling Shareholder's account and the number of shares of Common
Stock such Shareholder will own after the completion of this Offering assuming
all Shares are sold. Unless otherwise indicated, all beneficial ownership
consists solely of Shares. Certain of the listed persons currently have or have
had a position, office or other material relationship with the Company or any
predecessor in the past three years. See "Management." For each Selling
Shareholder, the figure in each column represents number and percentage
ownership of the total number of shares of Common Stock owned.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
------------------------ ------------------------
NAME SHARES PERCENTAGE SHARES PERCENTAGE
- ------------------------------------------ ------- ---------- ------- ----------
Kathleen Burke(1)......................... 62,758 2.55% 58,758 1.56%
c/o Beverage Works, Inc.
2431 West Coast Highway Suite 204
Newport Beach, CA 92663
Stefdan, Ltd.(2).......................... 33,000 1.34% 0 0
c/o Steven M. Scarano Scarano
& Lipton
333 Earle Ovington Blvd. Suite 102
Mitchell Field, NY 11553
Bob Molinaro.............................. 666 <1% 0 0
1854 Pt. Taggart
Newport Beach, CA 92660
Kevin McCarthy............................ 4,000 <1% 0 0
209 John Street
Manhattan Beach, CA 90266
Jack Stoner(3)............................ 13,598 <1% 0 0
8716 Frontera Avenue
Yucca Valley, CA 92284
John & Terri Langhans..................... 14,691 <1% 10,289 <1%
5712 Horsham Ave
Westminster, CA 92683
Hecht & Steckman, P.C.(4)................. 14,000 <1% 0 0
Attn: Charles J. Hecht, Esq.
60 East 42nd Street, Suite 5101
New York, NY 10165
Patrick H. Miller and(5).................. 100,000 4.07% 0 0
Lee M. Miller
1300 W. Garmon Road, NW
Atlanta, GA 30327
Gerald T. Cochran......................... 100,000 4.07% 0 0
400 Horton Road,
SW Rainsville, AL 35986
Robert H. Mudd, Jr........................ 10,000 <1% 0 0
6108 Sturbridge Drive
Mobile, AL 36609
140
ALTERNATE PAGE
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
NAME SHARES PERCENTAGE SHARES PERCENTAGE
- ------------------------------------------ --------- --- --------- ---
M Co., a partnership...................... 10,000 <1% 0 0
c/o Robert H. Mudd, Jr.
P.O. Box 1248
Mobile, AL 36633
Larry Murk................................ 20,000 <1% 0 0
607 Palmer Avenue
Maywood, NJ 07607
Johann Vets(6)............................ 99,996 4.06% 6,250 <1%
39 Graaf de Granvellelaan
2650 Edegem Belgium
Douglas Barat............................. 10,000 <1% 0 0
317 Richmond Avenue
Massapequa, NY 11758-3232
William Hess, Jr.......................... 10,000 <1% 0 0
P.O. Box 15856
Asheville, NC 28813
Marcel Aronheim........................... 20,000 <1% 0 0
419 101st Street, Apt. 2C
Brooklyn, NY 11209
Gary S. and M. Cristina Leske............. 5,000 <1% 0 0
165 Old Field Road
Setauket, NY 11733
Robert Deutsch............................ 10,000 <1% 0 0
8820 Millbrook Road
Newark, IL 60541
A.C. Brown................................ 10,000 <1% 0 0
406 N. Lee Street
Alexandria, VA 22314-2302
Kimberly A. Stoner(7)..................... 3,333 <1% 0 0
6549 E. Camino Vista, #3
Anaheim, CA 92807
Michael Pizitz............................ 7,500 <1% 0 0
2140 11th Avenue South,
Suite 318
Birmingham, AL 35205
Richard Pizitz............................ 7,500 <1% 0 0
Hidden Dunes, #1901
9815 Highway 98 West
Destin, FL 32541
W.E. Stephens, Jr......................... 10,000 <1% 0 0
13214 Allysum Ct.
Cypress, TX 77429
Guy Schebowitz............................ 20,000 <1% 0 0
931 East 77th, 2nd Flr
Brooklyn, NY 11236
141
ALTERNATE PAGE
- ---------------
(1) Ms. Burke is Vice President of Sales of the Company. In addition to 4,000
Shares offered hereby, beneficial ownership includes 58,758 shares of Common
Stock.
(2) Stefdan, Ltd. is a wholly-owned company of Steven Scarano, a director of the
Company. In addition to 33,000 Shares offered hereby, beneficial ownership
includes 50,000 Class A Warrants.
(3) Mr. Stoner is the father of John Stoner, a director and the Vice President
of New Breweries. In addition to 2,000 Shares offered hereby, beneficial
ownership includes 11,598 shares of Common Stock.
(4) Hecht & Steckman, P.C. is Company counsel. In addition to 14,000 Shares
offered hereby, beneficial ownership includes 15,583 Class C Warrants.
(5) In addition to 100,000 Shares offered hereby, beneficial ownership includes
100,000 Class A Warrants.
(6) In addition to 93,746 Shares offered hereby, beneficial ownership includes
6,250 shares in the name of Group Nollett Vets, of which Mr. Vets is a
principal.
(7) Ms. Stoner is the wife of John Stoner, a director and Vice President of New
Breweries.
142
ALTERNATE PAGE
LOCK-UP ARRANGEMENTS
The Selling Shareholders have agreed, prior to the closing of the Company
Offering, that they will not publicly sell, offer to sell, contract to offer to
sell, transfer, assign or pledge any of the Shares which are being registered on
their behalf by the Registration Statement of which this Prospectus forms a
part, for a period of thirteen months from the closing of the Company Offering
without the prior written consent of State Capital Markets Corp., as
representative of the several Underwriters. See "Risk Factors -- Shares
Available for Future Sale" and "Description of Securities."
PLAN OF DISTRIBUTION
The distribution of the Shares by the Selling Shareholders may be effected
from time to time in transactions on Nasdaq, in negotiated transactions, through
the writing of options on the Shares, or a combination of such methods of sale,
at fixed prices that may be changed, at market prices prevailing at the time of
the sale, at prices related to such prevailing market prices, or at negotiated
prices. The Selling Shareholders may effect such transactions by the sale of the
Shares to or through broker-dealers, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Shareholders and/or the purchasers of the Shares for whom such
broker-dealers may act as agent or to whom they may sell as principal, or both.
Usual and customary or specifically negotiated brokerage fees or commissions may
be paid by the Selling Shareholders in connection with sales of the Shares. No
underwriting arrangements have been entered into by the Selling Shareholders.
The Selling Shareholders and intermediaries through whom the Shares are sold may
be deemed "underwriters" within the meaning of the Securities Act with respect
to the securities offered and any profits realized or commissions received may
be deemed underwriting compensation.
143
ALTERNATE PAGE
SUBJECTION TO COMPLETION DATED , 1996
PROSPECTUS
BEVERAGE WORKS, INC.
3,000,000 ISSUED CLASS A WARRANTS AND
3,000,000 SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OF ISSUED CLASS A WARRANTS
This Prospectus relates to the Offering (the "Offering") by certain selling
securityholders (the "Issued Class A Warrantholders") of 3,000,000 Issued Class
A Warrants and 3,000,000 shares of Common Stock, no par value, (the "Common
Stock") of Beverage Works, Inc., a California corporation (the "Company"),
purchasable upon exercise of the Issued Class A Warrants (the "Issued Class A
Warrants and Issued Class A Warrant Shares"). The Issued Class A Warrants and
Issued Class A Warrant Shares offered hereby may be sold from time to time by
the Issued Class A Warrantholders, or by transferees, on or after the date of
this Prospectus, subject to contractual restrictions which provide that such
securities may not be sold for a period of thirteen months after the closing of
the Company Offering (defined below) without the prior written consent of State
Capital Markets Corp. as representative of the several underwriters of the
Company Offering (the "Representatives"). See "Risk Factors -- Shares Available
for Future Sale," "Description of Securities" and "Issued Class A
Warrantholders."
No underwriting arrangements have been entered into by the Issued Class A
Warrantholders. The distribution of the Issued Class A Warrants and Issued Class
A Warrant Shares by the Issued Class A Warrantholders may be effected from time
to time in transactions on the Nasdaq Small Cap Market System, in negotiated
transactions, through the writing of options on the Issued Class A Warrants and
Issued Class A Warrant Shares, or a combination of such methods of sale, at
fixed prices that may be changed, at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, or at negotiated
prices. The Issued Class A Warrantholders may effect such transactions by the
sale of the Issued Class A Warrants and Issued Class A Warrant Shares to or
through broker-dealers, and such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the Issued Class A
Warrantholders and/or the purchasers of the Issued Class A Warrants and Issued
Class A Warrant Shares for whom such broker-dealers may act as agent or to whom
they may sell as principal, or both. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the Issued Class A
Warrantholders in connection with sales of the Issued Class A Warrants and
Issued Class A Warrant Shares.
The Issued Class A Warrantholders and intermediaries through whom the
Issued Class A Warrants and Issued Class A Warrant Shares are sold may be deemed
"underwriters" within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities offered and any profits
realized or commissions received may be deemed underwriting compensation. Other
than the exercise price payable upon exercise of the Issued Class A Warrants,
the Company will not receive any proceeds from sales of the Issued Class A
Warrants and Issued Class A Warrant Shares. See "Issued Class A Warrantholders."
A registration statement under the Securities Act has been filed with the
Securities and Exchange Commission with respect to an underwritten public
offering on behalf of the Company of 1,000,000 Units, each Unit consisting of
one share of Common Stock and one Issued Class A Warrant, which are immediately
separable upon trading, plus up to 150,000 Units which may be offered by the
Company pursuant to the exercise of the Underwriters' over-allotment option (the
"Company Offering"). The registration statement also includes 520,745 shares of
Common Stock, 35,000 Class B Warrants and the shares of Common Stock underlying
the Class B Warrants which are being offered by other selling securityholders.
See "Concurrent Sales By Company and Selling Securityholders."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
144
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THE OFFERING
Securities Offered.......................... 3,000,000 Issued Class A Warrants and
3,000,000 shares of Common Stock, no par
value, issuable upon exercise of the
outstanding Issued Class A Warrants (the
"Issued Class A Warrants and Issued Class A
Warrant Shares"). See "Description of
Securities," "Risk Factors -- Shares
Available for Future Sale" and "Description
of Securities." No underwriting arrangements
have been entered into by the Issued Class A
Warrantholders. See "Issued Class A
Warrantholders."
Class A Warrants Outstanding after the 4,000,000 Class A Warrants
Company Offering(1).......................
Class A Warrants to be Outstanding After 4,000,000 Class A Warrants
this Offering(1)..........................
Use of Proceeds............................. Other than the exercise price payable upon
exercise of the Issued Class A Warrants, the
Company will not receive any proceeds from
the sale of the Issued Class A Warrants and
Issued Class A Warrant Shares. Because the
Company is unable to predict the time at
which such Warrants will be exercised, if
ever, the Company has not allocated the
proceeds to any particular purpose. See "Use
of Proceeds."
Trading Symbol.............................. The Common Stock is traded on the Nasdaq
Small Cap Market under the symbol . The
Issued Class A Warrants are traded on the
Nasdaq Small Cap Market under the symbol
.
- ---------------
(1) Includes 1,000,000 Class A Warrants offered in the Company Offering, but
excludes 150,000 Class A Warrants which may be offered pursuant to the
underwriter's over-allotment option. Does not include the 100,000
Representative's Warrants upon exercise of the Representative's Unit
Purchase Option. The Underwriter's Warrants are identical to the Class
Warrants except that the Underwriter's Warrants are not redeemable.
145
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SELLING SECURITY STOCKHOLDERS
A registration statement under the Securities Act of 1933, as amended (the
"Act"), has been filed by the Company with the Securities and Exchange
Commission with respect to an underwritten public offering by the Company of
1,000,000 Units, each Unit consisting of one share of Common Stock and one Class
A Warrant, plus 150,000 shares which may be offered pursuant to exercise of the
Underwriters' over-allotment option. Concurrent sales of securities by the
Company, the Selling Securityholders and the Issued Class A Warrantholders would
likely have an adverse effect on the market price of the Common Stock and Issued
Class A Warrants. The Issued Class A Warrants and Issued Class A Warrant Shares
are subject to contractual restrictions upon resale with the representative of
the several Underwriters. See "Risk Factors -- Shares Available for Future
Sale," "Description of Securities" and "Issued Class A Warrantholders."
146
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ISSUED CLASS A WARRANTHOLDERS
The following table sets forth the name of each person who is an Issued
Class A Warrantholder, the number of Issued Class A Warrants and Issued Class A
Warrant Shares and other shares of Common Stock beneficially owned by each
Issued Class A Warrantholder's account and the number of Issued Class A Warrants
and Issued Class A Warrant Shares such Issued Class A Warrantholder will own
after the completion of this Offering assuming all Issued Class A Warrants are
sold. Unless otherwise indicated, all beneficial ownership consists solely of
Issued Class A Warrants and Issued Class A Warrant Shares. The percentage
figures are after the Company Offering excluding the underwriters' overallotment
option. Certain of the listed persons currently has or has had a position,
office or other material relationship with the Company or any predecessor in the
past three years as described in the footnotes. See "Management."
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
-------------------------- --------------------------
ISSUED ISSUED
CLASS A CLASS A
NAME WARRANTS PERCENTAGE WARRANTS PERCENTAGE
- --------------------------------------- --------- ---------- --------- ----------
Imafina, S.A.(1)....................... 2,710,000 67.8% 0 0%
c/o Mr. Hubert Hendrickx
Administrateur Delegue
4, Route de Beaumont
1700 Fribourg CH
Switzerland
Stefdan, Ltd.(2)....................... 50,000 1.3% 0 0%
c/o Steven M. Scarano
Scarano & Lipton
333 Earle Ovington Blvd.,
Suite 102
Mitchell Field, NY 11553
Robert E. Reale(3)..................... 65,000 1.6% 0 0%
6501 5th Avenue
Brooklyn, NY 11220
Robert F. Reale(4)..................... 29,250 <1% 0 0%
7312 Ridge Blvd.
Brooklyn, NY 11209
Bradley W. Kabbash(5).................. 32,500 <1% 0 0%
52 Thunder Mountain Road
Greenwich, CT 06831
Lord Charles Spencer-Churchill(6)...... 10,000 <1% 0 0%
91 Eaton Terrace
London SW1Y4W, England
Winchester Investment Securities(7).... 3,250 <1% 0 0%
c/o Alan Miller
7007 College Blvd. Suite 260
Overland Park, KS 66209
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BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
ISSUED ISSUED
CLASS A CLASS A
NAME WARRANTS PERCENTAGE WARRANTS PERCENTAGE
- --------------------------------------- --------- --- --------- ---
Patrick & Lee Miller(8)................ 100,000 2.5% 0 0%
1266 W. Paces Ferry Road,
N.W., Suite 457
Atlanta, GA 30327
- ---------------
(1) Adam Wachtel, a director and controlling shareholder of the Company, is a
director of Imafina, S.A.
(2) Stefdan, Ltd. is a wholly-owned Company of Steven Scarano, a director of the
Company. In addition to 50,000 Issued Class A Warrants and Issued Class A
Warrant Shares offered hereby, beneficial ownership includes 33,000
outstanding shares.
(3) In addition to 65,000 Issued Class A Warrants and Issued Class A Warrant
Shares offered hereby, beneficial ownership includes 78,050 outstanding
shares.
(4) In addition to 29,250 Issued Class A Warrants and Issued Class A Warrant
Shares offered hereby, beneficial ownership includes 34,515 outstanding
shares.
(5) In addition to 32,500 Issued Class A Warrants and Issued Class A Warrant
Shares offered hereby, beneficial ownership includes 38,500 outstanding
shares. Mr. Kabbash was a director of the Company at the time he received
the Issued Class A Warrants, Issued Class A Warrant Shares and these
additional shares.
(6) Lord Spencer-Churchill is a director of the Company. In addition to 10,000
Issued Class A Warrants and Issued Class A Warrant Shares offered hereby,
beneficial ownership includes 5,000 outstanding shares.
(7) In addition to 3,250 Issued Class A Warrants and Issued Class A Warrant
Shares offered hereby, beneficial ownership includes 3,335 outstanding
shares.
(8) In addition to 100,000 Issued Class A Warrants and Issued Class A Warrant
Shares offered hereby, beneficial ownership includes 100,000 outstanding
shares.
148
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LOCK-UP ARRANGEMENTS
The Issued Class A Warrantholders have agreed, prior to the closing of the
Company Offering, that they will not publicly sell, offer to sell, contract to
offer to sell, transfer, assign or pledge any of the Issued Class A Warrants and
Issued Class A Warrant Shares which are being registered on their behalf by the
Registration Statement of which this Prospectus forms a part, for a period of
thirteen months from the closing of the Company Offering without the prior
written consent of State Capital Markets Corp., as representative of the several
Underwriters. See "Risk Factors -- Shares Available for Future Sale,"
"Description of Securities" and "Certain Transactions."
PLAN OF DISTRIBUTION
The distribution of the Issued Class A Warrants and Issued Class A Warrant
Shares by the Issued Class A Warrantholders may be effected from time to time in
transactions on Nasdaq, in negotiated transactions, through the writing of
options on the Issued Class A Warrants and Issued Class A Warrant Shares, or a
combination of such methods of sale, at fixed prices that may be changed, at
market prices prevailing at the time of the sale, at prices related to such
prevailing market prices, or at negotiated prices. The Issued Class A
Warrantholders may effect such transactions by the sale of the Issued Class A
Warrants and Issued Class A Warrant Shares to or through broker-dealers, and
such broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the Issued Class A Warrantholders and/or the
purchasers of the Issued Class A Warrants and Issued Class A Warrant Shares for
whom such broker-dealers may act as agent or to whom they may sell as principal,
or both. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Issued Class A Warrantholders in connection with
sales of the Issued Class A Warrants and Issued Class A Warrant Shares. No
underwriting arrangements have been entered into by the Issued Class A
Warrantholders. The Issued Class A Warrantholders and intermediaries through
whom the Issued Class A Warrants and Issued Class A Warrant Shares are sold may
be deemed "underwriters" within the meaning of the Securities Act with respect
to the securities offered and any profits realized or commissions received may
be deemed underwriting compensation.
149
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SUBJECTION TO COMPLETION DATED , 1996
PROSPECTUS
BEVERAGE WORKS, INC.
35,000 CLASS B WARRANTS AND
35,000 SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OF CLASS B WARRANTS
This Prospectus relates to the Offering (the "Offering") by certain selling
securityholders (the "Class B Warrantholders") of 35,000 Class B Warrants and
35,000 shares of Common Stock, no par value, (the "Common Stock") of Beverage
Works, Inc., a California corporation (the "Company"), purchasable upon exercise
of the Class B Warrants (the "Class B Warrants and Class B Warrant Shares"). The
Class B Warrants and Class B Warrant Shares offered hereby may be sold from time
to time by the Class B Warrantholders, or by transferees, on or after the date
of this Prospectus, subject to contractual restrictions which provide that such
securities may not be sold for a period of thirteen months after the closing of
the Company Offering (defined below) without the prior written consent of State
Capital Markets Corp. as representative of the several underwriters of the
Company Offering (the "Representatives"). See "Risk Factors -- Shares Available
for Future Sale," "Description of Securities" and "Class B Warrantholders." No
underwriting arrangements have been entered into by the Class B Warrantholders.
The distribution of the Class B Warrants and Class B Warrant Shares by the Class
B Warrantholders may be effected from time to time in transactions on the Nasdaq
Small Cap Market System, in negotiated transactions, through the writing of
options on the Class B Warrants and Class B Warrant Shares, or a combination of
such methods of sale, at fixed prices that may be changed, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, or at negotiated prices. The Class B Warrantholders may effect such
transactions by the sale of the Class B Warrants and Class B Warrant Shares to
or through broker-dealers, and such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the Class B
Warrantholders and/or the purchasers of the Class B Warrants and Class B Warrant
Shares for whom such broker-dealers may act as agent or to whom they may sell as
principal, or both. Usual and customary or specifically negotiated brokerage
fees or commissions may be paid by the Class B Warrantholders in connection with
sales of the Class B Warrants and Class B Warrant Shares.
The Class B Warrantholders and intermediaries through whom the Class B
Warrants and Class B Warrant Shares are sold may be deemed "underwriters" within
the meaning of the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the securities offered and any profits realized or commissions
received may be deemed underwriting compensation. Other than the exercise price
payable upon exercise of the Warrants, the Company will not receive any proceeds
from sales of the Class B Warrants and Class B Warrant Shares. See "Class B
Warrantholders." A registration statement under the Securities Act has been
filed with the Securities and Exchange Commission with respect to an
underwritten public offering on behalf of the Company of 1,000,000 Units, each
Unit consisting of one share of Common Stock and one Class A Warrant, which are
immediately separate upon trading, plus up to 150,000 Units which may be offered
by the Company pursuant to the exercise of the Underwriters' over-allotment
option (the "Company Offering"). The registration statement also includes
shares of Common Stock, 300,000 Class A Warrants and the shares of
Common Stock underlying the Class A Warrants which are being offered by other
selling securityholders. See "Concurrent Sales By Company and Selling
Securityholders."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE OFFERING
Securities Offered....................... 35,000 Class B Warrants and 35,000 shares of Common
Stock, no par value, issuable upon exercise of the
outstanding Class B Warrants (the "Class B Warrants
and Class A Warrant Shares"). See "Description of
Securities," "Risk Factors-Shares Available for
Future Sale" and "Description of Securities." No
underwriting arrangements have been entered into by
the Class B Warrantholders. See "Class B
Warrantholders."
Class B Warrants Outstanding after the
Company Offering....................... 35,000 Class B Warrants
Class B Warrants to be Outstanding After
this Offering.......................... 35,000 Class B Warrants
Use of Proceeds.......................... Other than the exercise price payable upon exercise
of the Class B Warrants, the Company will not
receive any proceeds from the sale of the Class B
Warrants and Class B Warrant Shares. Because the
Company is unable to predict the time at which such
Warrants will be exercised, if ever, the Company has
not allocated the proceeds to any particular
purpose. See "Use of Proceeds."
Trading Symbol........................... The Common Stock is traded on the Nasdaq Small Cap
Market under the symbol . The Class B
Warrants will not be listed on the Nasdaq.
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SELLING SECURITYHOLDERS
A registration statement under the Securities Act of 1933, as amended (the
"Act"), has been filed by the Company with the Securities and Exchange
Commission with respect to an underwritten public offering by the Company of
1,000,000 Units, each Unit consisting of one share of Common Stock and one Class
A Warrant, plus 150,000 shares which may be offered pursuant to exercise of the
Underwriters' over-allotment option. Concurrent sales of securities by the
Company, and the Selling Securityholders would likely have an adverse effect on
the market price of the Common Stock. The Class B Warrants and Class B Warrant
Shares are subject to contractual restrictions upon resale with the
representative of the several Underwriters. See "Risk Factors -- Shares
Available for Future Sale," "Description of Securities" and "Class B
Warrantholders."
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CLASS B WARRANTHOLDERS
The following table sets forth the name of each person who is a Class B
Warrantholder, the number of Class B Warrants and Class B Warrant Shares and
other shares of Common Stock beneficially owned by each Class B Warrantholder's
account and the number of shares of Common Stock such Class B Warrantholder will
own after the completion of this Offering. Unless otherwise indicated, all
beneficial ownership consists solely of Class B Warrants and Class B Warrant
Shares.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
----------------------- -----------------------
CLASS B CLASS B
NAME WARRANTS PERCENTAGE WARRANTS PERCENTAGE
- -------------------------------------------------- -------- ---------- -------- ----------
Frederik Friedman(1).............................. 35,000 100% 35,000 100%
- ---------------
(1) Mr. Friedman does not beneficially own any other security of the Company.
153
ALTERNATE PAGE
LOCK-UP ARRANGEMENTS
The Class B Warrantholder has agreed, prior to the closing of the Company
Offering, that he will not publicly sell, offer to sell, contract to offer to
sell, transfer, assign or pledge any of the Class B Warrants and Class B Warrant
Shares which are being registered on his behalf by the Registration Statement of
which this Prospectus forms a part, for a period of thirteen months from the
closing of the Company Offering without the prior written consent of State
Capital Markets Corp., as representative of the several Underwriters. See "Risk
Factors -- Shares Available for Future Sale," "Description of Securities" and
"Certain Transactions."
PLAN OF DISTRIBUTION
The distribution of the Class B Warrants and Class B Warrant Shares by the
Class B Warrantholders may be effected from time to time in transactions on
Nasdaq, for the Class B Warrant Shares in negotiated transactions, through the
writing of options on the Class B Warrants and Class B Warrant Shares, or a
combination of such methods of sale, at fixed prices that may be changed, at
market prices prevailing at the time of the sale, at prices related to such
prevailing market prices, or at negotiated prices. The Class B Warrantholders
may effect such transactions by the sale of the Class B Warrants and Class B
Warrant Shares to or through broker-dealers, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the Class
B Warrantholders and/or the purchasers of the Class B Warrants and Class B
Warrant Shares for whom such broker-dealers may act as agent or to whom they may
sell as principal, or both. Usual and customary or specifically negotiated
brokerage fees or commissions may be paid by the Class B Warrantholders in
connection with sales of the Class B Warrants and Class B Warrant Shares. No
underwriting arrangements have been entered into by the Class B Warrantholders.
The Class B Warrantholders and intermediaries through whom the Class A Warrants
and Class A Warrant Shares are sold may be deemed "underwriters" within the
meaning of the Securities Act with respect to the securities offered and any
profits realized or commissions received may be deemed underwriting
compensation.
154
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
CALIFORNIA STATUTES
Section 317 of the California General Corporation Law, as amended, provides
for the indemnification of the Company's officers, directors, employees and
agents under certain circumstances as follows:
(a) For the purposes of this section, "agent" means any person who is
or was a director, officer, employee or other agent of corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another foreign or domestic corporation, partnership,
joint venture, trust or other enterprise, or was a director, officer,
employee or agent of a foreign or domestic corporation which was a
predecessor corporation of the corporation or of another enterprise at the
request of the predecessor corporation; "proceeding" means any threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative; and "expenses" includes without limitation
attorneys' fees and any expenses of establishing a right to indemnification
under subdivision (d) or paragraph (4) of subdivision (e).
(b) A corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any proceeding (other
than an action by or in the right of the corporation to procure a judgment
in its favor) by reason of the fact that the person is or was an agent of
the corporation, against expenses, judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with the proceeding
if that person acted in good faith and in a manner the person reasonably
believed to be in the best interests of the corporation and, in the case of
a criminal proceeding, had no reasonable cause to believe the conduct of
the person was unlawful. The termination of any proceeding by judgment,
order, settlement, conviction, or upon a please of nolo contendere or its
equivalent shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed
to be in the best interests of the corporation or that the person had
reasonable cause to believe that the person's conduct was unlawful.
(c) A corporation shall have power to indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending,
or completed action by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that the person is or was an
agent of the corporation, against expenses actually and reasonably incurred
by that person in connection with the defense or settlement of the action
if the person acted in good faith, in a manner the person believed to be in
the best interests of the corporation and its shareholders.
No indemnification shall be made under this subdivision for any of the
following:
(1) In respect of any claim, issue or matter as to which the person
shall have been adjudged to be liable to the corporation in the
performance of that person's duty to the corporation and its
shareholders, unless and only to the extent that the court in which the
proceeding is or was pending shall determine upon application that, in
view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for expenses and then only to the
extent that the court shall determine.
(2) Of amounts paid in settling or otherwise disposing of a pending
action without court approval.
(3) Of expenses incurred in defending a pending action which is
settled or otherwise disposed of without court approval.
(d) To the extent that an agent of a corporation has been successful
on the merits in defense of any proceeding referred to in subdivision (b)
or (c) or in defense of any claim, issue, or matter therein, the
II-1
155
agent shall be indemnified against expenses actually and reasonably
incurred by the agent in connection therewith.
(e) Except as provided in subdivision (d), any indemnification under
this section shall be made by the corporation only if authorized in the
specific case, upon a determination that indemnification of the agent is
proper in the circumstances because the agent has met the applicable
standard of conduct set forth in subdivision (b) or (c), by any of the
following:
(1) A majority vote of a quorum consisting of directors who are not
parties to such proceeding.
(2) If such a quorum of directors is not obtainable, by independent
legal counsel in a written opinion.
(3) Approval of the shareholders (Section 153), with the shares
owned by the person to be indemnified not being entitled to vote
thereon.
(4) The court in which the proceeding is or was pending upon
application made by the corporation or the agent or the attorney or
other person rendering services in connection with the defense, whether
or not the application by the agent, attorney or other person is opposed
by the corporation.
(f) Expenses incurred in defending any proceeding may be advanced by
the corporation prior to the final disposition of the proceeding upon
receipt of an undertaking by or on behalf of the agent to repay that amount
if it shall be determined ultimately that the agent is not entitled to be
indemnified as authorized in this section. The provisions of subdivision
(a) of Section 315 do not apply to advances made pursuant to this
subdivision.
(g) The indemnification authorized by this section shall not be deemed
exclusive of any additional rights to indemnification for breach of duty to
the corporation and its shareholders while acting in the capacity of a
director or officer of the corporation to the extent the additional rights
to indemnification are authorized in an article provision adopted pursuant
to paragraph (11) of subdivision (1) of Section 204. The indemnification
provided by this section for acts, omissions, or transactions while acting
in the capacity of, or while serving as, a director or officer of the
corporation but not involving breach of duty to the corporation and its
shareholders shall not be deemed exclusive of any other rights to which
those seeking indemnification may be entitled under any by-law, agreement,
vote of shareholders or disinterested directors, or otherwise, to the
extent the additional rights to indemnification are authorized in the
articles of the corporation. An article provision authorizing
indemnification "in excess of that otherwise permitted by Section 317" or
"to the fullest extent permissible under California law" or the substantial
equivalent thereof shall be construed to be both a provision for additional
indemnification for breach of duty to the corporation and its shareholders
as referred to in, and with the limitations required by, paragraph (11) of
subdivision (a) of Section 204 and a provision for additional
indemnification as referred to in the second sentence of this subdivision.
The rights to indemnity hereunder shall continue as to a person who has
ceased to be a director, officer, employee, or agent and shall inure to the
benefit of the heirs, executors, and administrators of the person. Nothing
contained in this section shall affect any right to indemnification to
which persons other than the directors and officers may be entitled by
contract or otherwise.
(h) No indemnification or advance shall be made under this section,
except as provided in subdivision (d) or paragraph (4) of subdivision (e),
in any circumstance where it appears:
(1) That it would be inconsistent with a provision of the articles,
by-laws, a resolution of the shareholders, or an agreement in effect at
the time of the accrual of the alleged cause of action asserted in the
proceeding in which the expenses were incurred or other amounts were
paid, which prohibits or otherwise limits indemnification.
(2) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
II-2
156
(i) A corporation shall have power to purchase and maintain
insurance on behalf of any agent of the corporation against any
liability asserted against or incurred by the agent in that capacity
or arising out of the agent's status as such whether or not the
corporation would have the power to indemnify the agent against that
liability under this section. The fact that a corporation owns all or
a portion of the shares of the company issuing a policy of insurance
shall not render this subdivision inapplicable if either of the
following conditions are satisfied: (1) if the articles authorize
indemnification in excess of that authorized in this section and the
insurance provided by this subdivision is limited as indemnification
is required to be limited by paragraph (11) of subdivision (1) of
Section 204; or (2)(A) the company issuing the insurance policy is
organized, licensed, and operated in a manner that complies with the
insurance laws and regulations applicable to its jurisdiction of
organization, (B) the company issuing the policy provides procedures
for processing claims that do not permit that company to be subject
to the direct control of the corporation that purchased that policy,
and (C) the policy issued provides for some manner of risk sharing
between the issuer and purchaser of the policy, on one hand, and some
unaffiliated person or persons, on the other, such as by providing
for more than one unaffiliated owner of the company issuing the
policy or by providing that a portion of the coverage furnished will
be obtained from some unaffiliated insurer or reinsurer.
(j) This section does not apply to any proceeding against any trustee,
investment manager, or other fiduciary of an employee benefit plan in that
person's capacity as such, even though the person may also be an agent as
defined in subdivision (a) of the employer corporation. A corporation shall
have power to indemnify such a trustee, investment manager, or other
fiduciary to the extent permitted by subdivision (f) of Section 207.
ARTICLES OF INCORPORATION
The Company's Articles of Incorporation provides for the indemnification of
the Company's directors under certain circumstances as follows:
PART IV
LIMITATION OF LIABILITY
The liability of the directors of this corporation for monetary
damages shall be eliminated to the fullest extent permissible under
California law.
PART V
INDEMNIFICATION OF AGENTS
This corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the Corporations Code) for breach of duty to
the corporation and its stockholders through bylaw provisions or through
agreements with the agents, or both, in excess of the indemnification
otherwise permitted by Section 317 of the Corporations Code, subject to the
limits on such excess indemnification set forth in Section 204 the
Corporations Code.
BY-LAWS
The Company's By-Laws provide for the indemnification of the Company's
directors, officers, employees, or agents under certain circumstances as
follows:
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157
ARTICLE VI
INDEMNIFICATION OF
DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS
SECTION 1. AGENTS, PROCEEDINGS, AND EXPENSES.
For the purposes of this Article, "agent" means any person who is or
was a director, officer, employee, or other agent of this corporation, or
who is or was serving at the request of this corporation as a director,
officer, employee, or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise, or who was a
director, officer, employee, or agent of a foreign or domestic corporation
that was a predecessor corporation of this corporation or of another
enterprise at the request of such predecessor corporation; "proceeding"
means any threatened, pending, or completed action or proceeding, whether
civil, criminal, administrative, or investigative; and "expenses" includes,
without limitation, attorney fees and any expenses of establishing a right
to indemnification under Section 4 or Section 5(d) of this Article VI.
SECTION 2. ACTIONS OTHER THAN BY THE CORPORATION.
This corporation shall have the power to indemnify any person who was
or is a party, or is threatened to be made a party, to any proceeding
(other than an action by or in the right of this corporation to procure a
judgment in its favor) by reason of the fact that such person is or was an
agent of this corporation, against expenses, judgments, fines, settlements,
and other amounts actually and reasonably incurred in connection with such
proceeding if that person acted in good faith and in a manner that the
person reasonably believed to be in the best interests of this corporation
and, in the case of a criminal proceeding, had no reasonable cause to
believe the conduct of that person was unlawful. The termination of any
proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent shall not, of itself, create a
presumption that the person did not act in good faith and in a manner that
the person reasonably believed to be in the best interests of this
corporation or that the person had reasonable cause to believe that the
person's conduct was not unlawful.
SECTION 3. ACTIONS BY OR IN THE RIGHT OF THE CORPORATION.
This corporation shall have the power to indemnify any person who was or is
a party, or is threatened to be made a party, to any threatened, pending, or
completed action by or in the right of this corporation to procure a judgment in
its favor by reason of the fact that such person is or was an agent of this
corporation, against expenses actually and reasonably incurred by such person in
connection with the defense or settlement of that action, if such person acted
in good faith, in a manner such person believed to be in the best interests of
this corporation and its shareholders. No indemnification shall be made under
this Section 3 for the following:
(a) With respect to any claim, issue, or matter on which such
person has been adjudged to be liable to this corporation in the
performance of such person's duty to the corporation and its
shareholders, unless and only to the extent that the court in which such
proceeding is or was pending shall determine on application that, in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for expenses and then only to the
extent that the court shall determine;
(b) Amounts paid in settling or otherwise disposing of a pending
action without court approval; or
(c) Expenses incurred in defending a pending action that is settled
or otherwise disposed of without court approval.
SECTION 4. SUCCESSFUL DEFENSE BY AGENT.
To the extent that an agent of this corporation has been successful on
the merits in defense of any proceeding referred to in Section 2 or 3 of
this Article VI, or in defense of any claim, issue, or matter
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therein, the agent shall be indemnified against expenses actually and
reasonably incurred by the agent in connection therewith.
SECTION 5. REQUIRED APPROVAL.
Except as provided in Section 4 of this Article VI, any indemnification
under this Section shall be made by the corporation only if authorized in the
specific case, after a determination that indemnification of the agent is proper
in the circumstances because the agent has met the applicable standard of
conduct set forth in Section 2 or 3 by one of the following:
(a) A majority vote of a quorum consisting of directors who are not
parties to such proceeding;
(b) Independent legal counsel in a written opinion if a quorum of
directors who are not parties to such a proceeding is not available;
(c) (i) The affirmative vote of a majority of shares of this
corporation entitled to vote represented at a duly held meeting at which
a quorum is present; or
(ii) the written consent of holders of a majority of the
outstanding shares entitled to vote (for purposes of this subsection
5(c), the shares owned by the person to be indemnified shall not be
considered outstanding or entitled to vote thereon); or
(d) The court in which the proceeding is or was pending, on
application made by this corporation or the agent or the attorney or
other person rendering services in connection with the defense, whether
or not such application by the agent, attorney, or other person is
opposed by this corporation.
SECTION 6. ADVANCE OF EXPENSES.
Expenses incurred in defending any proceeding may be advanced by the
corporation before the final disposition of such proceeding on receipt of
an undertaking by or on behalf of the agent to repay such amounts if it
shall be determined ultimately that the agent is not entitled to be
indemnified as authorized in this Article VI.
SECTION 7. OTHER CONTRACTUAL RIGHTS.
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors, or otherwise, both as to action in an official capacity and as
to action in another capacity while holding such office, to the extent such
additional rights to indemnification are authorized in the articles of the
corporation. Nothing in this section shall affect any right to
indemnification to which persons other than such directors and officers may
be entitled by contract or otherwise.
SECTION 8. LIMITATIONS.
No indemnification or advance shall be made under this Article VI,
except as provided in Section 4 or Section 5(d), in any circumstance if it
appears:
(a) That it would be inconsistent with a provision of the articles,
bylaws, a resolution of the shareholders, or an agreement in effect at
the time of the accrual of the alleged cause of action asserted in the
proceeding in which expenses were incurred or other amounts were paid,
which prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving settlement.
SECTION 9. INSURANCE.
This corporation may purchase and maintain insurance on behalf of any
agent of the corporation insuring against any liability asserted against or
incurred by the agent in that capacity or arising out of the
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agent's status as such, whether or not this corporation would have the
power to indemnify the agent against that liability under the provisions of
this Article VI. Notwithstanding the foregoing, if this corporation owns
all or a portion of the shares of the company issuing the policy of
insurance, the insuring company and/or the policy shall meet the conditions
set forth in section 317(i) of the Corporations Code.
SECTION 10. FIDUCIARIES OF CORPORATE EMPLOYEE BENEFIT PLAN.
This Article VI does not apply to any proceeding against any trustee,
investment manager, or other fiduciary of an employee benefit plan in that
person's capacity as such, even though that person may also be an agent of
the corporation. The corporation shall have the power to indemnify, and to
purchase and maintain insurance on behalf of any such trustee, investment
manager, or other fiduciary of any benefit plan for any or all of the
directors, officers, and employees of the corporation or any of its
subsidiary or affiliated corporations.
SECTION 11. SURVIVAL OF RIGHTS.
The rights provided by this Article VI shall continue for a person who
has ceased to be an agent and shall inure to the benefit of the heirs,
executors, and administrators of such person.
SECTION 12. EFFECT OF AMENDMENT.
Any amendment, repeal, or modification of this Article VI shall not
adversely affect an agent's right or protection existing at the time of
such amendment, repeal, or modification.
SECTION 13. SETTLEMENT OF CLAIMS.
The corporation shall not be liable to indemnify any agent under this
Article VI for (a) any amounts paid in settlement of any action or claim
effected without the corporation's written consent, which consent shall not
be unreasonably withheld, or (b) any judicial award, if the corporation was
not given a reasonable and timely opportunity to participate, at its
expense, in the defense of such action.
SECTION 14. SUBROGATION.
In the event of payment under this Article VI, the corporation shall
be subrogated to the extent of such payment to all of the rights of
recovery of the agent, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the
execution of such documents as may be necessary to enable the corporation
effectively to bring suit to enforce such rights.
SECTION 15. NO DUPLICATION OF PAYMENTS.
The corporation shall not be liable under this Article VI to make any
payment in connection with any claim made against the agent to the extent
the agent has otherwise actually received payment, whether under a policy
of insurance, agreement, vote, or otherwise, of the amounts otherwise
indemnifiable under this Article.
WRITTEN AGREEMENTS
The Company has entered into written agreements with each of its officers
and directors, including Frederik G.M. Rodenhuis and Lyle R. Maul, pursuant to
which the Company is required to indemnify each person under circumstances and
to the extent generally equivalent to those which are permissible under the
Company's By-Laws.
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ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the offering are as follows:
ITEM AMOUNT*
------------------------------------------------------------------ --------
Securities and Exchange Commission Registration Fee............... $ 17,252
National Association of Securities Dealers, Inc. and Blue Sky
Registration Fees............................................... 25,000
Accounting Fees and Expenses......................................
Legal Fees and Expenses...........................................
Printing, Design and Advertising..................................
Underwriters' Non-Accountable Expense Allowance...................
Miscellaneous.....................................................
--------
Total........................................................... 569,752
========
- ---------------
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Within the last three (3) years, the Company has issued the following
securities which were not registered under the Securities Act of 1933.
On August 2, 1995, the date of incorporation, the Company authorized the
issuance of 245,310 shares of Common Stock to its founders for $0.01 per share.
This sale was made in reliance on the exemption from registration under Section
4(2) of the 1933 Act.
On October 6, 1995, the Company issued 192,400 shares of its common stock
and 190,000 warrants to purchase shares of the Company's Common Stock,
exercisable at $8.25 per share. The gross proceeds realized from the issuance
was $76,756. 2,810,000 warrants to were issued to Imafina, S.A., a Swiss money
management firm. The gross proceeds realized from the sale was $28,000. Imafina,
S.A. sold 100,000 warrants to one of the Company's existing shareholders. These
issuances were made in reliance on the exemption from registration under Section
4(2) of the 1933 Act.
On October 31, 1995, the Company issued 14,000 shares of its Common Stock
and 15,583 warrants to purchase shares of the Company's Common Stock exercisable
at $4.50 per share to Hecht & Steckman, P.C., counsel to the Company. The gross
proceeds realized from the sale was $140.00. This issuance was made in reliance
on the exemption from registration under Section 4(2) of the 1933 Act.
On November 8, 1995, the Company acquired Heritage Brewing Company in a
stock-for-stock exchange. The Company acquired 94.85% of all of the outstanding
voting capital stock of Heritage in exchange for 142,276 shares of the Company's
Common Stock. The Heritage shareholders have an option to call the Heritage
stock if the Company does not close a public offering of the Company's common
stock realizing gross proceeds of at least $5,000,000 by December 31, 1995. The
issuance was made in reliance on the exemption from registration under Section
3(a)(9) of the 1933 Act.
On November 12, 1995, the Company authorized the issuance of 49,015 shares
of its Common Stock to John Stoner and Mark Mericle as consideration for
consulting services provided to the Company. The Company also issued 5,333
shares to Jack Stoner and Edward Hansen to reduce notes owed by Heritage. The
shares were issued in reliance on the exemption from registration under Section
4(2) of the 1933 Act.
On November 15, 1995, the Company authorized the issuance of 16,583 shares
to certain parties for consulting services previously rendered to the Company
and advances made to the Company at its pre-formation stages in the total amount
of $57,034. The issuance was made in reliance on the exemption from registration
under Section 4(2) of the 1933 Act.
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On November 20, 1995, the Company made a nonpublic offer of 400,000 shares
of Common Stock at the price of $4.00 per share. These offers and sales were
conducted by an NASD member firm in consideration for payment of commission of
9%, plus 3% nonaccountable expense allowance, of the gross proceeds. On August
28, 1996, the Company authorized the acceptance of additional subscriptions of
15,000 causing the total number of shares issued in the private placement to be
413,746. The 413,746 shares in the private placement were sold to fourteen (14)
investors realizing gross proceeds, before deducting for commissions and
expenses of $1,654,984. The private placement was made in reliance on the
exemption from registration afforded by Rule 506 of Regulation D promulgated
under the 1933 Act.
On January 22, 1996, the Company authorized the issuance of 6,500 shares of
its Common Stock to C.A. Wittwer & Associates and its designees as part of the
consideration for the license agreements between Heritage Brewing Company, a
subsidiary of the Company, and C.A. Wittwer & Associates. Heritage and the
Company have executed an agreement whereby the Company has the right to assume
the contract upon the close of a public offering by the Company realizing gross
proceeds of at least $5,000,000 on or before December 31, 1995. The sale was
made in reliance on the exemption from registration afforded by Section 4(2) of
the 1933 Act.
On May 20, 1996, the Company issued a $500,000 promissory note, secured by
all equipment, inventory and accounts receivable of the Company, and warrants to
Frederick Friedman. The note, which pays simple interest at 18% per annum,
mature on the earlier of (i) closing of a public offering by the Company with
aggregate gross proceeds of no less than $6,000,000, or (ii) December 31, 1996.
Interest is payable monthly until the principal is paid in full. The purchaser
of the note was also granted 35,000 Class B Warrants, which are registered in
this Offering, to purchase shares of the Company's Common Stock. If the Company
does not close a public offering by December 31, 1996, the purchaser is entitled
to an additional 35,000 warrants on the same terms and conditions. The sale was
made in reliance on the exemption from registration afforded by Section 4(2) of
the 1933 Act.
On August 5, 1996, the Company made a nonpublic offer of 32,500 units, each
unit consisting of two shares of the Corporation's common stock and one Class H
Warrant at the price of $10.00 per unit. These offers and sales were conducted
by an NASD member firm in consideration for payment of commission of 10% of the
gross proceeds. The offer closed after 15,000 units were subscribed by two (2)
investors realizing gross proceeds, before deducting for commissions and
expenses of $150,000. The private placement was made in reliance on the
exemption from registration afforded by Rule 506 of Regulation D promulgated
under the 1933 Act.
On September 10, 1996, the Company entered into a Share Purchase Agreement
with the shareholders of Orange Empire Brewing Company ("OEBC"), the parent of
Riverside Brewing Company. Under the terms of the Share Purchase Agreement, the
Company will issue up to 247,479 shares of its Common Stock for all of the
voting capital stock of OEBC. The Company will also issue 27,618 shares to
shareholders of Orange Empire for assuming certain Orange Empire debts and up to
130,000 shares based on Orange Empire meeting certain production levels. On
September 10, 1996, the Company entered into a Debt Exchange Agreement, which
provides that the Company will issue 24,125 shares of its Common Stock to
certain holders of OEBC's debts in return for extinguishing such debt. On
September 10, 1996, the Company and two individuals, Mike Hagerman and Norman
Kretschmar, two principals of OEBC, entered into the Brewpub Management
Agreement, whereby the two individuals will operate the brewpub. Under the
Brewpub Management Agreement, the Company will also issue 10,000 shares to these
individuals. The Share Purchase Agreement, Debt Exchange Agreement, and Brewpub
Management Agreement each provide that these respective transactions will close
on the closing of a public offering by the Company of the Company's Common Stock
realizing gross proceeds of at least $6,000,000. The issuance of shares of
Common Stock under the Share Purchase Agreement, Debt Exchange Agreement and
Brewpub Management Agreement was made in reliance on the exemption from
registration afforded by Rule 506 of Regulation D promulgated under the 1933
Act.
The Company had reasonable grounds to believe, prior to accepting the
subscription of each purchaser under all offers and sales under this Item 26
based in part on subscription agreements or investment letters
II-8
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executed by the purchasers, that the purchasers were purchasing for investment
and not with a view to distribution. Other than in connection with the private
placements of common stock on November 20, 1995 and August 8, 1996, there were
no broker-dealers involved in any of the transactions listed above.
ITEM 27. EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------------------
1.1 [Form of] Underwriting Agreement*
1.2 [Form of] Agreement Among Underwriters*
1.3 [Form of] Selected Dealers Agreement*
2.1 Agreement and Plan of Reorganization dated November 8, 1995 between the
Company and Heritage Brewing Company, a California corporation, and
exhibits thereto
2.2 Agreement of Partnership dated September , 1996 between Prost Partners,
L.P., a California limited partnership, and BWI-St. Stan's, Inc., a
California corporation, a wholly-owned subsidiary of the Company, and
exhibits thereto
2.3 Share Purchase Agreement dated September 10, 1996 between Orange Empire
Brewing Company, Inc., a California corporation and the Company and
exhibits thereto
2.4 Debt Exchange Agreement Orange Empire Brewing Company, et al, and the
Company dated September , 1996.*
3.1 Amended and Restated Articles of Incorporation of the Company
3.2 By-Laws of the Company
4.1 Specimen of Common Stock Certificate*
4.2 Class A Warrant Agreement*
4.3 Class B Warrant Agreement
4.4 Class C Warrant Agreement (Counsel Warrants)*
4.5 Class D Warrant Agreement (Riverside Warrants)*
4.6 Representative's Warrant Agreement*
4.7 Class H Warrant Agreement*
4.8 Registration Rights Agreement*
4.9 $500,000 Note Agreement and Promissory Note dated May 7, 1996 between the
Company and Frederick Friedman
4.10 Owens Financial Note
5.1 Opinion of Hecht & Steckman, P.C. re: legality of shares*
10.1 $445,000 Small Business Administration Loan dated November 10, 1993
between Heritage and Liberty National Bank*
10.2 Equipment Lease dated , as amended, between Riverside
Brewing Company and Brewery Leasing Company*
10.3 Ground Lease Agreement dated June 6, 1988 between Randall and Susan Steele
and Stanislaus Brewing Company, Inc., as amended*
10.4 Riverside Brewing Company Brewery Lease with Hunsaker-Hunter dated April
1, 1995
10.5 Riverside Brewing Company Brewery Lease with Hunsaker-Hunter dated
December 6, 1995
10.6 Riverside Brewing Company Brewpub Lease with Kowashoji USA, Inc. dated
March 31, 1993
10.7 Lease between Heritage Brewing Company and Central Business Park
Investors -- 89 dated November 3, 1993
II-9
163
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------------------
10.8 Employment Agreement between the Company and Frederik G.M. Rodenhuis
10.9 Employment Agreement between the Company and Lyle R. Maul
10.10 Employment Agreement between the Company and John Stoner
10.11 Employment Agreement between the Company and Kathy Burke
10.12 Employment Agreement between the Company and Garith Helm
10.13 Distributorship Agreement dated August 20, 1996 between the Company and
Southern Wine and Spirits
10.14 Distributorship Agreement dated June 6, 1995 between Riverside Brewing
Company and Wine Warehouse*
10.15 Distributorship Agreement dated August 1, 1996 between the Company and
Cabo Distributing Company, Inc.
10.16 1996 Nonqualified Stock Option Plan
10.17 1996 Incentive Stock Option Plan
10.18 Incentive Compensation Plan*
10.19 Hussong's License Agreement dated February 3, 1996 between Heritage
Brewing Company and C.A. Wittwer & Associates
10.20 Reciprocal Production and Marketing Agreement dated August 1, 1996 between
the Company and Chicago Brewing Company*
10.21 Management Agreement between Riverside Brewing Company and the Company
dated July 19, 1996
21.1 List of Subsidiaries
23.1 Consent of Hecht & Steckman, P.C.*
23.2 Consent of Corbin & Wertz
23.3 Consent of Corbin & Wertz
23.4 Consent of Corbin & Wertz
27.1 Financial Data Schedule
- ---------------
* To be filed by amendment.
ITEM 28. UNDERTAKINGS.
A. The undersigned registrant hereby undertakes (a) to file during any
period in which offers or sales of the securities are being made, a
post-effective amendment to this registration statement including any prospectus
required by Section 10(a)(3) of the Securities Act of 1933, reflecting any facts
or events arising after the effective date of the registration statement (or
most recent post-effective amendment) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement, and including any material information with respect to the plan of
distribution not previously disclosed or any material change to such information
set forth in the registration statement. The undersigned registrant further
undertakes that, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof. The undersigned registrant further undertakes to remove
from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the offering.
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164
B. The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
C. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
D. For determining any liability under the Securities Act of 1933, the
registrant shall treat the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the small business issuer under Rule 424(b)(1),
or (4) or 497(h) under the Securities Act as part of this registration statement
as of the time the Commission declared it effective. For determining any
liability under the Securities Act of 1933, the registrant shall treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has authorized this registration
statement to be signed on its behalf by the undersigned, in the City of New
York, State of New York on September 11, 1996.
BEVERAGE WORKS, INC.,
a California corporation
By: /s/ FREDERIK G.M. RODENHUIS
------------------------------------
Frederik G.M. Rodenhuis
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Frederik G.M. Rodenhuis and Lyle R. Maul, and each of them, with full power of
substitution and resubstitution in each of them, our true and lawful
attorneys-in-fact and agents, in any and all capacities, with full power to act
alone, to sign any and all amendments (including post-effective amendments) to
this Registration Statement, and to file each such amendment to this
Registration Statement, with all exhibits thereto, and any and all other
documents in connection therewith, with the Securities and Exchange Commission,
hereby granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform any and all acts and things requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them, may lawfully do or
cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
- ------------------------------------- ----------------------------------- -------------------
/s/ FREDERIK G.M. RODENHUIS
- -------------------------------------
Frederik G.M. Rodenhuis Chief Executive Officer, President September 11, 1996
and Director
/s/ JOHN STONER
- -------------------------------------
John Stoner Director September 11, 1996
/s/ LYLE R. MAUL
- -------------------------------------
Lyle R. Maul Chief Financial Officer and September 11, 1996
Secretary
/s/ ADAM B. WACHTEL
- -------------------------------------
Adam B. Wachtel Director September 11, 1996
/s/ STEVEN M. SCARANO
- -------------------------------------
Steven M. Scarano Director September 11, 1996
- -------------------------------------
Lord Charles Spencer-Churchill Director September , 1996
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166
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------------------
1.1 [Form of] Underwriting Agreement*
1.2 [Form of] Agreement Among Underwriters*
1.3 [Form of] Selected Dealers Agreement*
2.1 Agreement and Plan of Reorganization dated November 8, 1995 between the
Company and Heritage Brewing Company, a California corporation, and
exhibits thereto
2.2 Agreement of Partnership dated September , 1996 between Prost Partners,
L.P., a California limited partnership, and BWI-St. Stan's, Inc., a
California corporation, a wholly-owned subsidiary of the Company, and
exhibits thereto
2.3 Share Purchase Agreement dated September 10, 1996 between Orange Empire
Brewing Company, Inc., a California corporation and the Company and
exhibits thereto
2.4 Debt Exchange Agreement Orange Empire Brewing Company, et al, and the
Company dated September , 1996.*
3.1 Amended and Restated Articles of Incorporation of the Company
3.2 By-Laws of the Company
4.1 Specimen of Common Stock Certificate*
4.2 Class A Warrant Agreement*
4.3 Class B Warrant Agreement
4.4 Class C Warrant Agreement (Counsel Warrants)*
4.5 Class D Warrant Agreement (Riverside Warrants)*
4.6 Representative's Warrant Agreement*
4.7 Class H Warrant Agreement*
4.8 Registration Rights Agreement*
4.9 $500,000 Note Agreement and Promissory Note dated May 7, 1996 between the
Company and Frederick Friedman
4.10 Owens Financial Note
5.1 Opinion of Hecht & Steckman, P.C. re: legality of shares*
10.1 $445,000 Small Business Administration Loan dated November 10, 1993
between Heritage and Liberty National Bank*
10.2 Equipment Lease dated , as amended, between Riverside
Brewing Company and Brewery Leasing Company*
10.3 Ground Lease Agreement dated June 6, 1988 between Randall and Susan Steele
and Stanislaus Brewing Company, Inc., as amended*
10.4 Riverside Brewing Company Brewery Lease with Hunsaker-Hunter dated April
1, 1995
10.5 Riverside Brewing Company Brewery Lease with Hunsaker-Hunter dated
December 6, 1995
10.6 Riverside Brewing Company Brewpub Lease with Kowashoji USA, Inc. dated
March 31, 1993
10.7 Lease between Heritage Brewing Company and Central Business Park
Investors -- 89 dated November 3, 1993
10.8 Employment Agreement between the Company and Frederik G.M. Rodenhuis
10.9 Employment Agreement between the Company and Lyle R. Maul
10.10 Employment Agreement between the Company and John Stoner
167
EXHIBIT
NUMBER DESCRIPTION
------ --------------------------------------------------------------------------
10.11 Employment Agreement between the Company and Kathy Burke
10.12 Employment Agreement between the Company and Garith Helm
10.13 Distributorship Agreement dated August 20, 1996 between the Company and
Southern Wine and Spirits
10.14 Distributorship Agreement dated June 6, 1995 between Riverside Brewing
Company and Wine Warehouse*
10.15 Distributorship Agreement dated August 1, 1996 between the Company and
Cabo Distributing Company, Inc.
10.16 1996 Nonqualified Stock Option Plan
10.17 1996 Incentive Stock Option Plan
10.18 Incentive Compensation Plan*
10.19 Hussong's License Agreement dated February 3, 1996 between Heritage
Brewing Company and C.A. Wittwer & Associates
10.20 Reciprocal Production and Marketing Agreement dated August 1, 1996 between
the Company and Chicago Brewing Company*
10.21 Management Agreement between Riverside Brewing Company and the Company
dated July 19, 1996
21.1 List of Subsidiaries
23.1 Consent of Hecht & Steckman, P.C.*
23.2 Consent of Corbin & Wertz
23.3 Consent of Corbin & Wertz
23.4 Consent of Corbin & Wertz
27.1 Financial Data Schedule
- ---------------
* To be filed by amendment.