$220,660,000 MAINE MUNICIPAL BOND BANK Liquor Operation Revenue Bonds, Series 2013 (Federally Taxable)

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1 NEW ISSUE Ratings: See RATINGS herein In the opinion of Hawkins Delafield & Wood LLP, Bond Counsel to the Bank, interest on the Offered Bonds (hereinafter defined) (i) is included in gross income for Federal income tax purposes, pursuant to the Internal Revenue Code of 1986, as amended (the Code ), and (ii) is exempt under the Bond Bank Act (as defined herein), from personal income taxes imposed by the State of Maine. See TAX MATTERS herein. $220,660,000 MAINE MUNICIPAL BOND BANK Liquor Operation Revenue Bonds, Series 2013 (Federally Taxable) Dated: Date of Delivery Due: June 1, as shown on the inside cover The Maine Municipal Bond Bank Liquor Operation Revenue Bonds, Series 2013 (Federally Taxable) (the Offered Bonds ) are being issued by the Maine Municipal Bond Bank (the Bank ) pursuant to the Maine Municipal Bond Bank Act, being Chapter 225 of Title 30-A of the Maine Revised Statutes, as amended (the Bond Bank Act ), including without limitation subchapter 5 of the Bond Bank Act, which was enacted by Public Laws of Maine 2013, Chapter 269, effective June 14, 2013 (the Program Act ) and the Bank s General Bond Resolution Authorizing the Issuance of State Liquor Operation Revenue Bonds which was adopted August 21, 2013 (the 2013 General Resolution ), its Series 2013 Series Resolution which was adopted August 21, 2013 (the 2013 Series Resolution and, with the 2013 General Resolution, the Resolutions ) and a certificate of determination of an authorized officer of the Bank. The Offered Bonds are being issued to finance the amount of $183,500,000 for the purpose of making payments to health care providers for services provided prior to December 1, 2012 under the MaineCare program, to fund a Capital Reserve Fund, to provide for capitalized interest and to pay the costs of issuance of the Offered Bonds. The Offered Bonds will be secured primarily by revenues received by the Bank from the State Bureau of Alcoholic Beverages and Lottery Operations (the Bureau ), for deposit in the Liquor Operation Revenue Fund pursuant to 30-A MRSA 6054 and the Maine Liquor Operation Agreement among the Bank and the State of Maine (the State ), acting by and through the Commissioner of the Department of Administrative and Financial Services ( AFS ). Each month the Bureau will be required to transfer to the Bank for deposit in the Revenue Account of the Liquor Operation Revenue Fund the net receipts (gross receipts less certain operating expenses) from the operation of the State s liquor program. Most of the everyday operating, administrative and trade marketing responsibility will be carried out pursuant to two contracts to be entered into with one or more private operators. For a description of the State s oversight of and management of the State s liquor operations, see THE MAINE LIQUOR OPERATION herein. The Offered Bonds will only be issued as fully registered bonds under a book-entry-only system. The Offered Bonds will be registered initially in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ( DTC ), which will act as securities depository for the Offered Bonds. Purchases of beneficial interests in the Offered Bonds will be made in book-entry-only form in denominations of $5,000 or whole multiples thereof. Purchasers will not receive certificates representing their ownership interests in the Offered Bonds purchased by them. Interest on the Offered Bonds will be payable on June 1 and December 1 of each year, commencing December 1, So long as the Offered Bonds are registered in the name of DTC, or its nominee, payments of the principal of and interest on the Offered Bonds will be made directly by U.S. Bank National Association, as trustee pursuant to the 2013 General Resolution (the Trustee ), to DTC which, in turn, is obligated to remit such payments to its participants for subsequent distribution to beneficial owners of the Offered Bonds, as described herein. The maturities, interest rates and prices or yields of the Offered Bonds are shown on the inside cover hereof. The Offered Bonds are subject to redemption prior to their respective maturity dates as described herein. The Offered Bonds are special, limited obligations of the Bank. The Offered Bonds, together with any additional liquor operation revenue bonds (the Additional Bonds ) that are subsequently issued on a parity therewith (collectively, the Bonds ), are payable from, and secured solely by a pledge of, the Trust Estate (as defined herein) including amounts on deposit in the Capital Reserve Fund authorized under the Bond Bank Act, created under the 2013 General Resolution and held by the Trustee. The Offered Bonds and any amount payable pursuant thereto do not constitute a debt or liability of the State and neither the faith and credit nor the taxing power of the State is pledged to the payment of any amount due pursuant to the Offered Bonds. The Bank has no taxing power. The Offered Bonds are offered when, as and if issued and accepted by the Underwriters, subject to prior sale, to withdrawal or modification of the offer without notice, and to the approval of legality by Hawkins Delafield & Wood LLP, New York, New York, Bond Counsel to the Bank. Certain legal matters will be passed upon for the Underwriters by their counsel, Preti, Flaherty, Beliveau & Pachios, LLP, Augusta, Maine. First Southwest Company, Lincoln, Rhode Island, has acted as financial advisor to the Bank with respect to the Offered Bonds. It is expected that the Offered Bonds in definitive form will be available for delivery to The Depository Trust Company in New York, New York on or about September 5, Wells Fargo Securities J.P. Morgan Dated: August 27, 2013 Morgan Stanley BofA Merrill Lynch Raymond James

2 MATURITIES, AMOUNTS, INTEREST RATES AND PRICES $220,660,000 MAINE MUNICIPAL BOND BANK Liquor Operation Revenue Bonds, Series 2013 (Federally Taxable) Maturity (June 1) Principal Amount Interest Rate Price CUSIP Number 2015 $19,660, % 100% 56045TAA ,870, TAB ,210, TAC ,695, TAD ,295, TAE ,015, TAF ,820, TAG ,700, TAH ,675, TAJ ,720, TAK1 CUSIP numbers have been assigned by an independent company not affiliated with the Bank and are included solely for the convenience of the holders of the Offered Bonds. Neither the Bank nor the State of Maine is responsible for the selection or uses of these CUSIP numbers, and no representation is made as to their correctness on the Offered Bonds or as indicated above. The CUSIP number for a specific maturity is subject to being changed after the issuance of the Offered Bonds as a result of various subsequent actions including, but not limited to, a refunding in whole or in part of such maturity or as a result of the procurement of secondary market portfolio insurance or other similar enhancement by investors that is applicable to all or a portion of certain maturities of the Offered Bonds. ii

3 No dealer, broker, salesperson or other person has been authorized by the Maine Municipal Bond Bank, the State of Maine or the Underwriters to give any information or to make any representation, other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the Offered Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. The information set forth herein has been obtained from the Maine Municipal Bond Bank and the State of Maine and from other sources which are believed to be reliable but it is not guaranteed as to accuracy or completeness. The information and expressions of opinion herein are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstance, create any implication that there has been no change in the affairs of the Maine Municipal Bond Bank or the State of Maine since the date hereof. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER- ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. This Official Statement contains certain forward-looking statements that are subject to a variety of risks and uncertainties that could cause actual results to differ from the projected results, including without limitation general economic and business conditions, conditions in the financial markets, the financial condition of the State of Maine and various state agencies and authorities, litigation, arbitration, force majeure events and various other factors that are beyond the control of the Maine Municipal Bond Bank or the State of Maine. Because of the inability to predict all factors that may affect future decisions, actions, events or financial circumstances, what actually happens may be different from what is set forth in such forward-looking statements. Forwardlooking statements are indicated by use of such words as may, should, intends, expects, believes, anticipates, estimates, assumes and others. iii

4 TABLE OF CONTENTS INTRODUCTION... 1 THE PROGRAM ACT... 2 PLAN OF FINANCE... 2 The Program Act Plan of Finance... 2 Sources and Uses of Proceeds of the Offered Bonds... 3 Additional Bonds... 3 THE MAINE LIQUOR OPERATION... 3 State s Powers and Authority Related to Liquor Sales... 3 Administration... 5 AFS Leadership... 6 Bureau Key Administrative Personnel... 6 Licensees... 8 Pricing Methodology... 9 Operations Enforcement The Current Wholesale Intermediary Program Act Contract Requirements The Wholesale Administrator to be Engaged Pursuant to the Program Act The Marketing Contractor to be Engaged Pursuant to the Program Act Business Development and Sales Recovery Initiative Pro Forma Forecasts THE OFFERED BONDS General Description Redemption SECURITY AND SOURCES OF PAYMENT FOR THE OFFERED BONDS Creation of Trust Estate Flow of Pledged Revenues Capital Reserve Fund State Liquor Agreement Operating Contracts Agreement of the State Minimum Debt Service Coverage Ratio No Acceleration of Offered Bonds ANNUAL DEBT SERVICE REQUIREMENTS PROJECTED DEBT SERVICE COVERAGE RATIOS THE MAINE MUNICIPAL BOND BANK INVESTMENT CONSIDERATIONS Secondary Market Considerations Suitable Investment Considerations General Economic Conditions Changes in Consumer Preferences or Discretionary Consumer Spending Federal or State Policies With Respect to, or Taxation of, Liquor Loss of Management Personnel Action or Inaction of Other Holders of the Offered Bonds Special, Limited Obligations Factors Affecting Remedies Offered Bonds Are Not Subject to Acceleration State Has No Obligation to Appropriate for the Capital Reserve Fund The Administration Agreement SECONDARY MARKET DISCLOSURE Continuing Disclosure Agreement Continuing Disclosure History OFFERED BONDS AS LEGAL INVESTMENTS 39 SECURITY FOR PUBLIC DEPOSITS TAX MATTERS General Discussion U.S. Holders Interest Income Bond Premium U.S. Holders Disposition U.S. Holders Defeasance U.S. Holders Backup Withholding and Information Reporting Circular 230 Disclosure Miscellaneous FINANCIAL ADVISOR RATINGS UNDERWRITING LITIGATION APPROVAL OF LEGALITY MISCELLANEOUS APPENDIX A HEALTH CARE PROVIDERS AND TOTAL PAYMENTS... A-1 APPENDIX B THE DEPOSITORY TRUST COMPANY... B-1 APPENDIX C PROPOSED FORM OF THE 2013 GENERAL RESOLUTION... C-1 APPENDIX D PROPOSED FORM OF CONTINUING DISCLOSURE AGREEMENT.. D-1 APPENDIX E PROPOSED FORM OF STATE LIQUOR AGREEMENT... E-1 APPENDIX F PROPOSED FORM OF APPROVING OPINION OF BOND COUNSEL F-1 iv

5 $220,660,000 MAINE MUNICIPAL BOND BANK Liquor Operation Revenue Bonds, Series 2013 (Federally Taxable) INTRODUCTION This Official Statement is provided for the purpose of setting forth information concerning the sale by the Maine Municipal Bond Bank (the Bank ) of its $220,660,000 Liquor Operation Revenue Bonds, Series 2013 (Federally Taxable) (the Offered Bonds ). The Offered Bonds are issued pursuant to the Maine Municipal Bond Bank Act, being Chapter 225 of Title 30-A of the Maine Revised Statutes, as amended (the Bond Bank Act ), including without limitation subchapter 5 of the Bond Bank Act ( Subchapter 5 ) which, together with certain amendments of the State Liquor Law, was enacted by Public Laws of Maine 2013, Chapter 269, effective June 14, 2013 (the Program Act and, together with the Bond Bank Act and any other law that may be enacted in the future that amends the Program Act, authorizes the issuance of additional bonds secured as described herein or otherwise affects the pledged revenues or liquor operation described herein, the Act ). The Offered Bonds are to be issued under the Bank s General Resolution Authorizing the Issuance of State Liquor Operation Revenue Bonds which was adopted August 21, 2013 (the 2013 General Resolution ), its Series 2013 Series Resolution which was adopted August 21, 2013 (the 2013 Series Resolution and, with the 2013 General Resolution, the Resolutions ) and a certificate of determination of an authorized officer of the Bank dated the date hereof. The Offered Bonds are the first issue of Bonds pursuant to the 2013 General Resolution. The Offered Bonds, and any additional liquor operation revenue bonds which may be issued pursuant to the 2013 General Resolution (referred to herein as the Additional Bonds ), are referred to collectively herein as the Bonds. The Bank and the State of Maine (the State ), acting by and through the Department of Administrative and Financial Services ( AFS ) pursuant to the Program Act, have entered into the Maine Liquor Operation Agreement (the State Liquor Agreement ), dated the date hereof. The right, title and interest of the Bank to the State Liquor Agreement has been assigned and pledged by the Bank pursuant to the 2013 General Resolution to secure the payment of amounts due with respect to all Bonds outstanding thereunder. See SECURITY AND SOURCES OF PAYMENT FOR THE OFFERED BONDS - State Liquor Agreement and Appendix E - Proposed Form of State Liquor Agreement. The Offered Bonds are not in any way a debt or liability of the State and do not constitute a loan of the credit of the State or create any debt or debts or liability or liabilities on behalf of the State or constitute a pledge of the faith and credit of the State. The Offered Bonds, unless 1

6 funded or refunded by bonds of the Bank, are payable solely from revenues or funds pledged or available for their payment as authorized in Subchapter 5. Each of the Offered Bonds must contain on its face a statement to the effect that the Bank is obligated to pay the principal, interest and redemption premium, if any, solely from the revenues pledged for those purposes and that neither the faith and credit nor the taxing power of the State is pledged to the payment of the principal, interest or redemption premium, if any, on the Offered Bonds. Certain capitalized terms used but not defined herein should have the respective meanings set forth in Appendix C - Proposed Form of the 2013 General Resolution or in Appendix E - Proposed Form of State Liquor Agreement. THE PROGRAM ACT The Program Act authorizes the issuance of the Offered Bonds, a substantial portion of the proceeds of which will provide funding for payment of a State obligation to health care providers within the State, and authorizes and requires AFS to enter into contracts with the private sector for (i) administration of the State s governmentally controlled liquor operation, warehousing and distribution of spirituous liquor within the State (the Administration Agreement ) and (ii) spirits trade marketing (the Marketing Agreement ). The Administration Agreement and the Marketing Agreement are collectively referred to as the Operating Contracts. The Program Act established within the Bank a Liquor Operation Revenue Fund into which all net receipts from the State s liquor operation are required to be deposited. The Liquor Operation Revenue Fund was established to provide a source of revenues to pay principal of and interest on the Offered Bonds and to fund certain other purposes set forth in the Program Act. Pursuant to the Program Act, the State, including AFS, is authorized to enter into contracts to implement the obligations of AFS and the Bank set forth in the Program Act with respect to the State s liquor operations and the issuance of and security for the Offered Bonds. For a discussion of the State Liquor Agreement to be entered into pursuant to the contract authorization set forth in the Program Act, see SECURITY AND SOURCES OF PAYMENT FOR THE OFFERED BONDS State Liquor Agreement herein and Appendix E PROPOSED FORM OF STATE LIQUOR AGREEMENT. Particular elements of the Program Act are discussed throughout this Official Statement. For a discussion of the State s control of the liquor operations within the State, see THE MAINE LIQUOR OPERATION State s Powers and Authority Related to Liquor Sales herein. For a discussion of the Program Act s mandate that AFS enter into the Operating Contracts, see THE MAINE LIQUOR OPERATION Program Act Contract Requirements herein. For an overview of the plan of finance to be implemented to effectuate the purposes of the Program Act, see PLAN OF FINANCE The Program Act Plan of Finance herein. The Program Act Plan of Finance PLAN OF FINANCE The Offered Bonds are being issued to carry out a statutory plan of finance specifically authorized by the Program Act. The Program Act authorizes the Bank to issue the Offered 2

7 Bonds to finance the amount of $183,500,000 for the purpose of making payments to health care providers for services provided prior to December 1, 2012 under the MaineCare program established by 22 MRSA 3172 and following, to pay the costs of issuance of the Offered Bonds, to fund capitalized interest and to fund the Capital Reserve Fund. Upon the receipt of the proceeds from the sale of the Offered Bonds, the amount of $183,481, will be deposited in accordance with the Program Act directly into the Health Care Liability Retirement Fund established in 22-A MRSA 216 and the balance thereof will be applied to pay capitalized interest through December 1, 2014, fund the Capital Reserve Fund and pay costs of issuance of the Offered Bonds. Payment of these amounts prior to September 30, 2013 will entitle the State to receive federal matching funds in an amount equal to approximately $306,718,140. Amounts currently expected to be paid to such health care providers from proceeds of the Offered Bonds and from corresponding federal matching funds are set forth in Appendix A hereto. Sources and Uses of Proceeds of the Offered Bonds Sources: Uses: The sources and uses of the proceeds of the Offered Bonds are estimated to be as follows: Par Amount of Offered Bonds $220,660, Total Sources Health Care Liability Retirement Fund $183,481, Capital Reserve Fund 26,843, Capitalized interest (through December 1, 2014) 8,895, Costs of issuance (including underwriters discount) 1,438, Total Uses $220,660, Additional Bonds The Program Act does not authorize the issuance of any bonds in addition to the Offered Bonds. Future laws of the State authorizing the Bank to issue additional liquor operation revenue bonds for various purposes may, however, be enacted. Additional liquor operation revenue bonds that are secured on a parity with the Offered Bonds are permitted to be issued pursuant to the 2013 General Resolution subject to certain conditions. See APPENDIX C - PROPOSED FORM OF THE 2013 GENERAL RESOLUTION Conditions to Issuance of Bonds. THE MAINE LIQUOR OPERATION State s Powers and Authority Related to Liquor Sales Since the end in 1933 of the nationwide prohibition ( Prohibition ) of the manufacture, sale, transportation, import and export of liquor, the State has controlled the importation, manufacture, sale and possession of liquor in Maine. Under the Twenty-First Amendment to the United States Constitution, the State s power and authority within its borders over liquor is virtually plenary. The Twenty-First Amendment, which repealed Prohibition, provides in part 3

8 that the transportation or importation into any state for delivery or use therein of intoxicating liquors, in violation of the law thereof, is hereby prohibited. Maine liquor control laws apply to all forms of intoxicating beverages. The State Liquor Law defines liquor as spirits, wine, malt liquor or hard cider, or any substance containing liquor, intended for human consumption, that contains more than 1/2 of 1% of alcohol by volume and spirits as any liquor produced by distillation or, if produced by any other process, strengthened or fortified by the addition of distilled spirits of any kind and excludes low-alcohol spirits products and fortified wine. In this Official Statement, the term liquor means only, and may be used interchangeably with, the term spirits and the term alcoholic beverages means all forms of intoxicating beverages. The State s role in the distribution and retail sale of spirits has been almost completely transformed since the 1970 s. After the repeal of Prohibition in 1933, the only way one could purchase spirits in the State was from a State-operated liquor store. In the 1970 s, private retailers were licensed as agents of the State for purposes of selling spirits to the citizens of Maine. The State sold spirits to these agents at a discount and established a uniform retail price at which the spirits would be sold throughout Maine. Beginning in the mid 1990 s, the State began to close some of its liquor stores as more private retail stores were licensed. State stores had not only been serving as retail outlets but had also become wholesale outlets for licensees. Licensees, particularly smaller ones, used the State stores to order split cases because the minimum order and full-case requirements of the State s contracted bailment warehouse were prohibitive in terms of cost and storage space. The State stores were also convenient for keeping an agent s shelves stocked in between deliveries from the warehouse or for keeping one or two bottles of a specialty item on hand. By the end of 2002, more State liquor stores were closed in accordance with State law. Through the operation of a liquor enterprise (the Liquor Operation ) described below, and regulation, permitting, enforcement, licensing and taxation of other aspects of the alcoholic beverage business in the State, the State impacts virtually every aspect of the production, distribution, use and sale of alcoholic beverages in the State. The Liquor Operation is administered by the State, acting through the Bureau of Alcoholic Beverages and Lottery Operations (the Bureau ). The core powers and authorities of the State with respect to spirits are vested in the Bureau and the State Liquor and Lottery Commission (the Commission ) and consist of the following: 1. Approval of all spirit products for sale in Maine (called listings); 2. Approval of all spirit products to be removed from sale in the State (called delisting); 3. Approval of all spirits labels and consumer promotions (mail in rebates, sweepstakes, instant redeemable coupons) on spirits; 4. Determination and approval of retail selling prices, both everyday retail prices and monthly special retail prices; 5. Determination and approval of retail store gross profit margin, established through administrative rulemaking with a minimum gross profit margin set by State law; 4

9 6. Licensing of both off-premise (such as grocery stores and convenience stores) and on-premise (such as bars, restaurants, taverns, hotels and clubs); and 7. Enforcement of State laws relating to licensed establishments. The Liquor Operation is the sole legal source in the State of wholesale sales of spirits. The Liquor Operation manages the wholesale distribution of spirits and retail sales to consumers in Maine pursuant to arrangements with private sector businesses, including off-premise and onpremise licensees. One advantage of the Liquor Operation is that the State has no capital investment in the spirits business. The State does not own product inventory, except during the period when product inventory is in transit from a wholesale warehouse to a facility of an Off- Premise Licensee (hereinafter defined), during which period the State requires provision of insurance against loss of such inventory by the transporter of such inventory. In addition, the State does not own warehouses, trucks or locations where retail sales occur. Also, because the State sets retail prices, it has substantial control of its own profit margin. Maine has not been unique in its handling of liquor control by means of a state monopoly. It is one of the 17 so-called Control States, which sell intoxicants as a state control function. Not all Control States have the same method of distribution as Maine, nor do they sell identical products. Twelve of the Control States are in both the retail package sale and the wholesale business. Five, including Maine, are in the wholesale business only. The Control States are: Alabama Montana Utah Idaho New Hampshire Vermont Iowa North Carolina Virginia Maine* Ohio West Virginia* Michigan* Oregon Wyoming* Mississippi* Pennsylvania *Wholesale only Administration The Bureau Director, who reports to the Commissioner of AFS, is charged with the overall management of the Bureau, with individual functional units reporting to the Bureau Director for day to day operations. The Bureau s headquarters are located in Hallowell, Maine. The Bureau fits within AFS as follows: 5

10 AFS Leadership Sawin Millett. Mr. Millett was appointed to the position of Commissioner of the Department of Administrative and Financial Services by Governor Paul LePage in January of Prior to becoming Commissioner, Mr. Millett served as the Co-Chair of Governor-Elect LePage s Transition Team assigned to prepare the state budget. Mr. Millett brings a wealth of legislative and executive experience to this Administration. He has served six terms in the Maine House of Representatives and has 18 years of prior executive branch service, including stints as Commissioner of the Departments of Education, Finance, and Administrative and Financial Services for four previous Maine Governors. From , Mr. Millett served on the Joint Standing Committee on Appropriations and Financial Affairs, including six years as a ranking member of that budget writing Committee. He also has been active in elective capacities in municipal government for more than 40 years. Mr. Millett received a Bachelor s of Science degree with a major in Mathematics from Bates College in Lewiston and a Master of Education degree in Educational Administration from the University of Maine. Terry Brann, CPA. Mr. Brann was appointed as the State Controller by Commissioner Millett in March Mr. Brann was also appointed State Controller during the previous administration in August As State Controller, he is responsible for statewide accounting and payroll policy, internal audit and financial reporting, including the preparation of the State s Comprehensive Annual Financial Report. He has been a member of the Controller s Office since 1998, serving as the Deputy State Controller since Prior to working in the Controller s Office, he was an auditor with the Maine Department of Audit for eleven years. He is a graduate of the University of Maine at Augusta with a Bachelor s of Science Degree in Accounting. Bureau Key Administrative Personnel Gerald Reid. Mr. Reid was appointed Director of the Bureau in January As Director, he is responsible for the overall management of the Bureau. Mr. Reid has over 30 years of experience in brand strategy, marketing and new product development for various 6

11 companies including those in the food and beverage industry. Prior to this appointment he was Managing Director at Jose Cuervo International, and had worked at Diageo North America as Senior Vice President of the company s global tequila portfolio. He also held prior positions at Diageo as Vice President of Strategy and Vice President of Consumer Marketing. Throughout his career, he gained extensive experience in the food industry, working for Kraft Foods in new product development and as Vice President for confectionary products. He served in the U.S. Army reserve for six years. He graduated from the University of Wisconsin at Madison with a Master s Degree in Marketing, and earned a Bachelor s Degree in Marketing and Economics from the University s Whitewater campus. Timothy Poulin. Mr. Poulin was appointed Deputy Director of the Bureau in February He directs the day to day operations of the Bureau, develops and recommends new and revised statutes, rules, policies and procedures to ensure that the establishment of the appropriate goals and the implementation methods are in place to achieve these goals. Prior to this appointment, he was the Director of the Division of Corporations, UCC and Commissions with the Office of the Secretary of State where he lead numerous successful projects to modernize the business processes of the Division. He has more than three years of experience with the lottery and liquor businesses and more than 26 years of experience in state government. Mr. Poulin has a Bachelor s of Arts Degree in History and Political Science from the University of Southern Maine. Johnnie Meehl. Ms. Meehl is the Manager of Liquor Operations. She initially started working for the Bureau in November 2007 as the Lottery Field Supervisor before being promoted in August As Manager of Liquor Operations, she is responsible for the day to day communication and coordination between the Bureau, spirits suppliers and brokers and the wholesale services partner relative to listing, pricing and general management of all distilled spirits available for sale in the state. In the current environment, it is critical that pricing is managed carefully to ensure the gross profit to the State is met annually. Ongoing analysis of currently listed products and their sales trends, management of monthly special pricing and quarterly processing of price adjustments are the main functions in meeting this goal. She is an active member of the National Alcohol Beverage Control Association ( NABCA ) Education Advisory Committee and the Maine Underage Drinking Enforcement Task Force, which is coordinated through Maine s Substance Abuse Mental Health Services ( DHHS ). This work helps to ensure that the Bureau s policies and procedures are kept in line with the core mission (to effectively regulate the beverage alcohol industry to ensure responsible business practices and create a favorable economic climate while prohibiting sales to minors). Ms. Meehl has more than 10 years of experience in state government and served in the U.S. Air Force Reserves and the Maine Air National Guard. State Liquor and Lottery Commission. The Bureau is overseen by the Commission of which there are five members appointed by the Governor for a three-year term. The Commission is required by State law to meet at least once each month with the Director of the Bureau to review and approve Bureau listings, pricing and promotions actions. The current members of the Commission are: Orland G. McPherson, Chair, term expires 06/06/2016; Walter J. Simcock, term expires 03/14/2013; Lawrence J. Davis, term expires 06/02/2014; and Anne M. Vallee-LaChance, term expires 09/07/

12 The fifth member of the Commission has resigned and a new member has not been appointed. Licensees Establishments licensed by the Bureau to sell spirits for consumption at locations other than such establishments ( Off-Premise Licensees ) include grocery stores and convenience stores. Establishments licensed by the Bureau to sell spirits for consumption at such establishments ( On-Premise Licensees ) include bars, restaurants, taverns, hotels and clubs. Off-Premise Licensees may be licensed by the Bureau to resell spirits to On-Premise Licensees ( Reselling Licensees and, collectively with Off-Premise Licensees and On-Premise Licensees, the Licensees ). As of February 28, 2013, there were 488 Off-Premise Licensees, 201 of which were Reselling Licensees, and 2,798 On-Premise Licensees in the State. The Off-Premise Licensees listed by County as of June 30, 2012 and their Fiscal Year 2012 sales are as set forth in the following table: County County Census 2010 FY 2012 Off- Premise Licensees FY2012 Sales % of Total Sales % of Total Population Androscoggin 107, $9,382, % 8.11% Aroostook 71, ,905, % 5.41% Cumberland 281, ,260, % 21.20% Franklin 30, ,158, % 2.32% Hancock 54, ,180, % 4.10% Kennebec 122, ,180, % 9.20% Knox 39, ,283, % 2.99% Lincoln 34, ,760, % 2.59% Oxford 57, ,811, % 4.35% Penobscot 153, ,256, % 11.59% Piscataquis 17, ,669, % 1.32% Sagadahoc 35, ,856, % 2.66% Somerset 52, ,056, % 3.93% Waldo 38, ,683, % 2.92% Washington 32, ,200, % 2.47% York 197, ,755, % 14.84% Totals: 1,328, $137,403,081 Source: The Bureau. As the table above shows, spirits sales throughout the State correlate with population, except in York County. Sixty-one percent (61%) of total spirits sales occur, and fifty-seven percent (57%) of the population resides, in the four largest of the sixteen counties in the State. In descending order of importance, these counties are Cumberland (in southern Maine), Penobscot (in central Maine), York (in southern Maine) and Kennebec (in south central Maine). York is, however, the State s southernmost county and is bordered on the south and west by the state of New Hampshire. Within approximately 13 miles south of the Maine (York County) New Hampshire border, and directly accessible from Interstate 95, the principal motor vehicle connection between the two states, are two New Hampshire state liquor stores which are within approximately an hour by automobile of approximately 51% of Maine s population. Recovering purchases by Maine residents in these two New Hampshire stores and others along the York County New Hampshire border will be a principal objective of a sales recovery initiative described under the heading THE MAINE LIQUOR OPERATION Business Development and Sales Recovery Initiative and ProForma Forecasts. 8

13 Pursuant to the State Liquor Law, Off-Premise Licensees may sell or deliver liquor from 6 a.m. on any day until 1 a.m. of the following day. Reselling Licensees may sell or deliver liquor to On-Premise Licensees from 4 a.m. on any day until 1 a.m. the following day. There are some additional restrictions on these hours on Sundays and holidays. All Licensees acquire the product upon delivery and must pay within three business days of delivery and receipt of a valid invoice. Beginning July 1, 2014, Off-Premise Licensees will, pursuant to the State Liquor Law, receive a discount of at least 12% of the retail selling price set by the Bureau for each liquor product approved by the Bureau. The Bureau may, by administrative rulemaking and with the approval of the Commission, establish higher discount rates. The discount rate established in 2004 and in effect through June 30, 2014 averages approximately 10.5% of such retail selling price set by the Bureau. Each Licensee is solely responsible for its own overhead costs, including without limitation business structuring, equipment, insurance, utilities, payroll and the costs of product damage and theft. The Bureau is authorized to license additional Licensees. Municipal officials, or in certain circumstances county commissioners, may hold a public hearing to consider an application of a prospective On-Premise Licensee for a new establishment, subject to later license confirmation by the Bureau or appeal to the Bureau by an aggrieved party. In issuing a license, factors considered are the applicant s character and the location of such new establishment. With certain exceptions, such new establishment may not be located within 300 feet of a school, school dormitory, church, chapel or parish house. After a license has been issued, the Licensee may lose the license by violating the terms thereof. Pricing Methodology Pricing of liquor by the Liquor Operation is a function of purchase costs from the distillers, statutory requirements, State and federal tax levels, and control and revenue production. The Bureau sets retail prices taking into consideration neighboring states prices, its own gross profit targets and the brand strategies of the distillers. State rules permit price changes on a quarterly cycle. Current law requires that the wholesale and retail prices for the same product be the same throughout the State. The Bureau fixes the retail prices at which the various classes, varieties, sizes and brands of liquor are sold. In fixing those selling prices the Bureau computes an anticipated profit at least sufficient to provide in each calendar year all costs and expenses of the Bureau (including all its functions, not just the Liquor Operation). Pursuant to the State Liquor Law, the Bureau is required to sell spirits at a price that will produce, in addition to any other tax or charge imposed by law, a premium in the amount of $1.25 per proof gallon (the Premium ). The Premium with respect to spirits sold is periodically calculated by the Bureau and transferred from Gross Receipts to the State s General Fund. In addition, pursuant to the State Liquor Law, the Bureau is required to sell spirits (and fortified wine) at a price that will produce an aggregate State liquor tax sufficient to pay all liquor-related expenses of the Bureau and to return to the State s General Fund an amount substantially equal to the State liquor tax collected in the previous Fiscal Year. The State liquor tax with respect to spirits (and fortified wine) sold is periodically calculated by the Bureau and transferred from Gross Receipts to the State s General Fund. The Premium and the tax referred 9

14 to in this paragraph are included in the term Liquor Excise Taxes as used in the State Liquor Agreement. The collection and remittance to the State of sales tax on retail sales of spirits at establishments such as grocery stores, convenience stores, bars, taverns and restaurants is the responsibility of the Licensees. The various elements of pricing are illustrated by the following breakdown of the $19.99 cost to a purchaser (before sales tax) of a popular brand of liquor sold in a 1.75 liter bottle: Element Amount Distiller price to Liquor Operation ( costs of goods sold ) $10.18 Liquor Operation gross profit 7.81 Subtotal (Liquor Operation gross sales price to Off-Premise Licensee) $17.99 Off-Premise Licensee discount or gross margin 2.00 Price paid by purchaser (individual or On-Premise Licensee; excludes sales tax) $19.99 The terms gross sales, costs of goods sold and gross profit are explained or calculated as set forth in the Pro Forma Financial Forecast table under the subheading THE MAINE LIQUOR OPERATION Pro Forma Forecasts hereinabove. The Liquor Operation participates in comparative price surveys through the Distilled Spirits Council of the United States and NABCA which is the trade association of the Control States. Price comparisons vary with the time and the product. In recent years prices in the State have generally been higher than in contiguous states. In general, prices are higher in Control States than in states which are not Control States. New Hampshire, the only state that is contiguous to the State, is a Control State. Operations The Bureau communicates monthly its distribution, pricing and promotion decisions to the Off-Premise Licensees and the Wholesale Intermediary (and expects to communicate such decisions to the Wholesale Administrator on and after July 1, 2014). The Bureau monitors business performance through monthly internal profit and loss statements, annual audit reports, and monthly syndicated sales and pricing reports from NABCA. Sales forecasting and warehouse inventory management is the responsibility of the distillers. With respect to Off- Premise Licensees, delivery, customer service and accounts receivable and payable are the responsibility of the Wholesale Intermediary (and are expected to be the responsibility of the Wholesale Administrator on and after July 1, 2014). Enforcement The production, distribution, use or sale of liquor contrary to State law is a crime. The drinking age for liquor in the State is 21 years. An individual may import into the State no more than four quarts of liquor in a 30-day period. Enforcement of State Liquor Law is provided by local police and by the Bureau. 10

15 The Current Wholesale Intermediary Pursuant to an amendment of the State Liquor Law enacted in 2003, closure of the remaining State liquor stores and the lease or subcontracting of the State s spirits wholesale function was authorized. Following a competitive bid process, the State on May 14, 2004 entered into an agreement (the 2004 Agreement ) with a company (the Wholesale Intermediary ) pursuant to which the Wholesale Intermediary made payments to the State totaling $125,000,000 on or prior to July 1, 2004 and has provided and will provide over the term of the 2004 Agreement certain profit sharing payments to the State. The duties of the Wholesale Intermediary pursuant to the 2004 Agreement include managing logistics, taking orders, implementing marketing techniques and warehousing and delivery of spirits to Off-Premise Licensees. The termination date of the 2004 Agreement is June 30, The first table which follows this paragraph sets forth certain financial information with respect to the Wholesale Intermediary s performance of the 2004 Agreement, including revenue, operating expense and net revenue information, for the partial year ended December 31, 2004 and the years ended December 31, 2005 through The second table which follows this paragraph sets forth certain historical gross sales and other information for the six months ended December 31, 2004 and the years ended December 31, 2005 through For a discussion of the relationship between the following two tables and the Pro Forma Financial Forecast Prepared by the State of Maine, see THE MAINE LIQUOR OPERATION Pro Forma Forecasts hereafter. 11

16 SUMMARY STATEMENTS OF INCOME AND EXPENSE (1) For the Years Ended December 31, 2004 through /31/2004 (2) 12/31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/2012 Sales 52,655, ,391, ,516, ,659, ,973, ,826, ,160, ,546, ,094,470 Cost of sales 34,466,291 63,037,740 66,065,269 68,474,493 70,978,863 73,196,308 74,974,801 78,362,743 82,023,207 Gross profit before state revenue sharing 18,189,109 37,353,522 41,451,594 44,185,165 45,994,281 47,630,583 49,185,799 51,183,575 53,071,263 State revenue sharing income (expense) 69,924 (2,604,315) (4,412,264) (5,534,346) (6,190,531) (6,756,583) (7,278,311) (8,017,479) (8,697,709) Gross profit after state revenue sharing 18,259,033 34,749,207 37,039,330 38,650,819 39,803,750 40,874,000 41,907,488 43,166,096 44,373,554 Operating expenses: Contracted services for warehousing, delivery and customer service 1,596,281 2,945,607 2,976,684 3,128,237 3,281,316 3,410,909 3,530,439 3,786,170 3,976,774 Bottle redemption expenses, net of bottle deposits 261, , , , , , , , ,176 Selling, general and administrative expenses 737,827 1,728,738 1,998,562 2,098,231 2,452,097 2,592,886 2,464,897 2,538,923 2,726,302 Total operating expenses 2,595,952 5,149,635 5,436,081 5,673,150 6,222,750 6,514,303 6,568,369 6,931,878 7,302,252 Operating income 15,663,081 29,599,572 31,603,249 32,977,669 33,581,000 34,359,697 35,339,119 36,234,218 37,071,302 (1) Derived from reports provided to by the Bureau by the Wholesale Intermediary pursuant to the 2004 Agreement. (2) The Wholesale Intermediary operated pursuant to the 2004 Agreement for a part of 2004 only. 12

17 Department of Administrative and Financial Services Bureau of Alcoholic Beverages and Lottery Operations HISTORICAL GROSS LIQUOR WHOLESALE SALES ($ Thousands) 160, , , ,000 80,000 60,000 40,000 20,000 Liquor Wholesale Sales(1)(2) CY Liquor Wholesale Sales (1)(2) 12/31/2004 $52,676,422 YOY Change 12/31/2005 $100,391, % 12/31/2006 $107,516, % 12/31/2007 $112,659, % 12/31/2008 $116,973, % 12/31/2009 $120,827, % 12/31/2010 $124,160, % 12/31/2011 $129,546, % 12/31/2012 $135,094, % 0 Liquor Wholesale Sales(1)(2) Annual Statistics Minimum $52,676,422 Maximum $135,094,470 Average $111,093,946 (1) Derived from reports provided to by the Bureau by the Wholesale Intermediary pursuant to the 2004 Agreement. The liquor sales amounts for calendar years ended December 31 include listing fees, premium tax and the profit sharing amount received by the State from the Wholesale Intermediary pursuant to the 2004 Agreement and are reported on a calendar year basis. Average Growth Rate (CY2006-CY2012) 4.34% (2) Pursuant to the 2004 Agreement, sales made by the Wholesale Intermediary were for part of 2004 only. 13

18 Program Act Contract Requirements Pursuant to the Program Act, the Commissioner of AFS is required to enter into a contract for warehousing, distribution and spirits administration (the Administration Contract ) and a contract for spirits trade marketing (the Marketing Contract ), each for a term of 10 years. Each contract must be awarded pursuant to a separate competitive bid process in accordance with the Program Act. Pursuant to the Program Act, both contracts may be awarded to the same bidder. Pursuant to the Program Act, "spirits administration" includes, but is not limited to, financial and performance management; profitable and responsible growth management; management of contracts; management of agency liquor store matters and orders; personnel management; monitoring and reporting of spirits inventory; management of bailment records and billing; management of accounts receivable, accounts payable and tax collection and reporting; and sales and profit reporting and "spirits trade marketing" includes, but is not limited to, agency liquor store category management, analysis and recommendations; agency liquor store shelf reset recommendations; agency liquor store displays, advertising, point-of-sale material and event marketing recommendations; development, production and distribution of sales, marketing and informational publications; consultation and coordination with suppliers and brokers on matters affecting their brands; and development, production and distribution of any social responsibility initiatives and compliance related to those initiatives. The Wholesale Administrator to be Engaged Pursuant to the Program Act Pursuant to the Program Act, the State expects, in the last quarter of calendar year 2013, to initiate the competitive bidding process required by the Program Act and to select a successful bidder (the Wholesale Administrator ) in accordance with award criteria set forth in the Program Act and with which the State expects to enter into an Administration Agreement which will satisfy the Program Act requirements for the Administration Contract, be effective July 1, 2014 and terminate June 30, Many services to be provided to the State by the Wholesale Administrator pursuant to the Administration Agreement are expected to be substantially similar to those provided pursuant to the 2004 Agreement, including administration, warehousing, delivery and bottle redemption services. The compensation of the Wholesale Administrator pursuant to the Administration Agreement is expected to be determined differently from the way in which the compensation was determined for the Wholesale Intermediary pursuant to the 2004 Agreement and is expected to be a fee based upon sales value generated. In addition, the Bureau will cause the Administration Agreement to include such provisions as are required pursuant to the Program Act and the State Liquor Agreement. Pursuant to the Program Act, the Administration Agreement must prohibit the Wholesale Administrator from engaging in activities reserved for Off-Premise Licensees licensed as reselling agents to provide spirits to On-Premise Licensees. For a summary of the conditions set forth in the State Liquor Agreement, see SECURITY AND SOURCES OF PAYMENT FOR THE OFFERED BONDS - State Liquor Agreement and Appendix F - Proposed Form of State Liquor Agreement. The Bureau will be responsible for all aspects of the Liquor Operation and will be required under the State Liquor Agreement to cause the Liquor Operation to be operated in accordance with the State Liquor Agreement and the Program Act and will pay or cause to be paid all costs and expenses relating to the Liquor Operation as and when those costs and expenses are due and payable. 14