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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-QSB
_________________________
Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Quarter Ended June 30, 1997
Commission File Number 0-27458
Nor'Wester Brewing Company, Inc.
(Exact name of registrant as specified in charter)
Oregon 93-1099661
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
_______________________________
66 SE Morrison Street
Portland, OR 97214
(503) 232-9771
(Address, including Zip code, and telephone number,
including area code, of registrant's principal executive
offices)
____________________________________________________________
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
[ X] YES [ ] NO
Transitional Small Business Disclosure Format
[ ] YES [X] NO
Number of shares of common stock outstanding as of
June 30, 1997:
3,711,097 shares, $.001 par value
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Nor'Wester Brewing Company, Inc.
INDEX TO FORM 10-QSB
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Part I - FINANCIAL INFORMATION
The information included herein is unaudited. However, such
information reflects all adjustments (consisting solely of
normal, recurring adjustments) which are, in the opinion of
the Company's management, necessary for a fair presentation
of the results of operations for the interim periods. The
interim financial information and notes thereto should be
read in conjunction with the Company's latest annual report
on Form 10-KSB/A. The results of operations for the six
months ended June 30, 1997 are not necessarily indicative of
results to be expected for the entire year.
Item 1 -- Financial Statements
Balance Sheet - June 30, 1997 and December 31, 1996. . .
Statement of Operations - Three Months Ended and Six
Months Ended June 30, 1997 and 1996 . . . . . . . . . .
Statement of Cash Flows - Three Months Ended and Six
Months Ended June 30, 1997 and 1996 . . . .. . . . . . .
Notes to Financial Statements. . . . . . . . . .. . . . .
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . .
Part II - OTHER INFORMATION
Item 3 -- Defaults on Senior Securities
Item 6 -- Exhibits and Reports on Form 8-K . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . .
Item 1 -- Financial Statements
<TABLE>
NOR'WESTER BREWING COMPANY, INC.
Consolidated Balance Sheet
<CAPTION>
June 30,
1997 December 31
(unaudited) 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 40,269 $ 252,049
Accounts receivable 979,591 606,642
Income tax receivable 103,761 103,761
Receivable from affiliated companies 2,272,069 1,798,350
Inventories 866,578 720,507
Marketing supplies 36,841 77,530
Deferred consolidation charges 391,057 -
Other current assets, net 137,066 221,223
------------ ------------
Total current assets 4,827,232 3,780,062
Property and equipment, net 11,453,795 11,968,471
Other non-current assets, net 65,000 40,000
------------ ------------
Total assets $16,346,027 $15,788,533
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 1,050,000 $ 1,041,000
Current portion of long-term debt
and capital lease 4,633,590 3,088,709
Accounts payable 2,502,008 2,427,073
Container deposits 115,985 130,921
Accrued payroll and other liabilities 281,512 309,256
------------ ------------
Total current liabilities 8,583,095 6,996,959
Long-term debt and capital lease 12,166 11,405
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Total liabilities 8,595,261 7,008,364
Shareholders' equity:
Common stock, no par value - 10,000,000 shares
authorized, 3,711,097 and
3,711,097 shares outstanding 11,064,480 11,064,480
Retained deficit (3,313,714) (2,284,311)
------------ ------------
Total shareholders' equity 7,750,766 8,780,169
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Total liabilities and shareholders' equity $16,346,027 $15,788,533
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</TABLE>
<TABLE>
NOR'WESTER BREWING COMPANY, INC.
Consolidated Statement of Operations
(unaudited)
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross revenues $ 1,514,505 $ 2,024,354 $ 2,831,718 $ 3,579,200
Less: excise taxes 53,009 86,031 116,373 161,093
------------ ------------ ------------ ------------
Net revenues 1,461,496 1,938,323 2,715,345 3,418,107
Cost of sales 1,261,090 1,503,110 2,262,469 2,471,377
------------ ------------ ------------ ------------
Gross profit 200,406 435,213 452,876 946,730
Selling, general and
administrative expenses 695,713 873,984 1,232,142 1,349,455
------------ ------------ ------------ ------------
Loss from operations (495,307) (438,771) (779,266) (402,725)
Interest income (expense)and
other income (expense),net (131,539) 51,252 (250,137) 89,572
------------ ------------ ------------ ------------
Loss before income taxes and
minority interest (626,846) (387,519) (1,029,403) (313,153)
Provision for income taxes - 29,004 - -
------------ ------------ ------------ ------------
Loss before minority interest (626,846) (358,515) (1,029,403) (313,153)
Minority interest - 76,777 - 94,469
------------ ------------ ------------ ------------
Net loss $ (626,846) $ (281,738) $ 1,029,403) $ (218,684)
============ ============ ============ ============
Net loss per common share $ (0.17) $ (0.08) $ (0.28) $ (0.06)
============ ============ ============ ============
Weighted average number of
common shares outstanding 3,711,097 3,710,419 3,711,097 3,680,987
============ ============ ============ ============
</TABLE>
<TABLE>
NOR'WESTER BREWING COMPANY, INC.
Consolidated Statement of Cash Flows
(unaudited)
<CAPTION>
Six Months Ended June 30,
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,029,403) $ (218,684)
Minority interest in loss from joint venture - (94,469)
Increase in deferred rent - 24,000
Reconciliation of net income to net cash
provided by operating activities:
Depreciation and amortization 422,229 142,098
Changes in assets and liabilities:
Accounts receivable (372,949) (501,036)
Inventories (146,071) (129,416)
Marketing supplies 40,689 -
Deferred consolidation charges (391,057) -
Other current assets 84,157 307,154
Other non-current assets (25,000) (4,467)
Accounts payable 74,935 (188,949)
Container deposits (14,936) -
Accrued liabilities (27,744) (286,440)
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Net cash used for operating activities (1,385,150) (950,209)
Cash flows from investing activities
Sale of property and equipment 220,000 -
Purchases of property and equipment (127,553) (4,952,571)
------------ ------------
Net cash provided (used) for investing
activities 92,447 (4,952,571)
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Cash flows from financing activities:
Payments on credit facilities and
long-term debt (140,959) (200,000)
Increase in borrowings 1,695,601 230,558
Advances to affiliates (473,719) (538,786)
Net proceeds from stock offering - 7,693,916
------------ ------------
Net cash provided by financing activities 1,080,923 7,185,688
------------ ------------
Net increase (decrease) in cash and
cash equivalents (211,780) 1,282,908
Cash and cash equivalents:
Beginning of period 252,049 276,807
------------ ------------
End of period $ 40,269 $ 1,559,715
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</TABLE>
BASIS OF PRESENTATION
The Company's financial statements enclosed herein are unaudited and,
because of the seasonal nature of the business and the varying schedule
of its special sales efforts, these results are not necessarily
indicative of the results to be expected for the entire year. In the
opinion of management, the interim financial statements reflect all
adjustments, consisting of only normal recurring items which are
necessary for a fair presentation of the results for the periods
presented. The accompanying financial statements have been prepared in
accordance with GAAP and SEC guidelines applicable to interim financial
information which require management to make certain estimates and
assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets
and liabilities as of the date of the financial statements, and the
reported amounts of revenues and expenses during the period. Actual
results could differ from those estimates. The accompanying financial
statements and related notes should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual
Report on Form 10-KSB/A.
The accompanying financial statement have been prepared assuming the
Company will continue as a going concern. The Company has recorded
significant losses in the current year, has negative working capital of
$3,755,863, is not in compliance with debt convenants, and has limited
access to capital to fund future operations. There can be no assurance
that the Company will produce and sell its products on a profitable
basis to sustain operations. Such factors, among other, raise
substantial doubt as to the Company's ability to continue as a going
concern.
In light of significant losses and negative working capital the Company
has developed and is implementing plans for the continuation of the
business. In particular, the Company has taken steps to: (i) reduce or
eliminate cooperative brewing arrangements which proved to be
inefficient and costly; (ii) eliminate national roll-out programs in
favor of stepped-up regional sales and marketing efforts; (iii)
negotiate with past due creditors which could involve extended terms and
payment plans; (iv) hire and retain high-quality employees familiar with
the brewing industry, (v) use available bridge loans from a proposed
investor (see Proposed Merger note) to fund operations until new
strategies result in positive cash flows and improved profitability,
and; (vi) use proceeds from the disposition of duplicative and/or under
utilized assets created by the proposed merger. Management believes
these plans will result in the Company sustaining operations as a going
concern for the next 12 months.
As part of the plan, the Company entered into an investment agreement to
be merged with other affiliated companies and convert its stock into
shares of a new publicly traded entity as discussed in the Proposed
Merger note.
Statement of Cash Flows
The Company considers short-term investments which are highly liquid,
have maturities of fewer than three months and are readily convertible
into cash to be cash equivalents.
Inventories
Inventories consist of the following:
June 30, December 31
1997 1996
----------- -----------
Raw Materials $ 496,366 $ 460,423
Work-in-process 101,849 75,553
Finished goods 268,363 184,531
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$ 866,578 $ 720,507
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Property and Equipment
Property and Equipment consists of the following:
June 30, December 31
1997 1996
------------ ------------
Land and improvements $ 23,071 $ 243,071
Leasehold improvements 2,364,545 2,338,391
Equipment 10,093,616 9,612,828
Construction in progress 168,403 547,792
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$12,649,635 $12,742,082
Less accumulated depreciation (1,195,840) (773,611)
------------ ------------
$11,453,795 $11,968,471
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Shareholders' Equity
The Company is authorized to issue 10 million shares of its common
stock. Each share of common stock entitles the holder to one vote. At
its discretion, the Board of Directors may declare dividends on share of
common stock, although the Board does not anticipate paying dividends in
the foreseeable future. During 1996, the Company completed a public
offering of 1,115,000 shares of common stock at $7.00 per share. The
underwriters for the offering exercised an over-allotment option for an
additional 172,500 shares of common stock at $7.00 per share. Net
proceeds to the Company totaled approximately $7,693,000, net of selling
commissions and offering expenses of approximately $1,320,000. In
January 1996, the shareholders of the Company authorized 15 million
shares of preferred stock to be available for issuance, the terms of
which the Board of Directors have the authority to establish. There are
no current agreements or understandings for the issuance of any shares
of preferred stock.
Net Loss Per Share
Net loss per common share is calculated based on the weighted average
number of common shares and common share equivalents outstanding.
Outstanding options to purchase shares of the Company's common shares
have not been included in the calculations as their effect would be
anti-dilutive.
Line of Credit and Notes Payable
The Company had a $1,000,000 revolving bank line of credit bearing
interest at the bank's reference rate plus 0.5% (9.00% at June 30, 1997)
which expired on December 31, 1996. The line is secured by the
Company's assets, and contains certain covenants and restrictions (see
Proposed Merger note). At June 30, 1997 $1,000,000 was outstanding
under this line of credit. In addition, the Company's North Country
subsidiary had $50,000 outstanding on a separate line of credit bearing
interest at 9.75% at June 30, 1997. The Company has a $250,000 loan
payable to its president, bearing interest at 10.5%. Repayment of the
loan is required upon completion of the proposed merger with UBA (see
Proposed Merger note). The Company has a $2.537 million bridge loan
payable to UBA, bearing interest at 11.25%, related to an investment
agreement the Company entered into during the three months ended June
30, 1997 (see Proposed Merger note). The Company has a $1,771,492 bank
term loan which bears interest at 8.63% and is payable in equal monthly
installments over seven years. At June 30, 1997, $1,771,492 was
borrowed under this facility. This non-revolving credit facility and
the revolving credit facility discussed above are secured by the
Company's assets and contain covenants which require the Company to
maintain financial ratios and prohibit the Company from making any
dividend payments without the bank approval. At June 30, 1997, the
Company was not in compliance with certain loan covenants relating to
both the non-revolving credit facility and the revolving credit
facility. The Company is involved in discussions with the lender in
order to (i) renew the $1 million revolving line of credit facility to
mature on the earlier of September 30, 1997, or 10 days following
closing of the investment by UBA (see Proposed Merger note). and (ii)
waive the loan covenants associated with theses loans so long as the
Company remains in compliance with all terms of the investment agreement
and achieves reasonable progress toward closing the investment with UBA.
However, final approval of amendment to the lender's loan agreements has
not yet been received. If final approval is not received or if received
but the Company subsequently violates the terms of the amendment, then
the Company would be in default of its loans which could lead to
foreclosure and sale of all or an important part of the Company's
assets. Such an event would have a material adverse impact on the
Company's business, financial condition and results of operations. The
Company is obligated under the provisions of a capital lease to make
monthly payments of $248 through the year 2002.
Stock Incentive and Stock Grant Plans
In 1993, the Board of Directors established a pool of 128,482 shares of
the Company's common stock for a stock incentive plan for issuance to
employees, consultants, distributors and their employees, and directors
of the Company pursuant to the exercise of stock options granted under
the plan or stock grants or stock sales. Administration of the plan,
including determination of the number of shares to be issued, the term
of exercise of any option, the option exercise price, and type of
options to be granted, lies with the Board of Directors or a duly
authorized committee of the Board of Directors. In January 1996, the
shareholders of the Company approved an increase to the number of shares
available under the Company's stock incentive plan to 360,000 shares.
In January 1996, the shareholders also approved the adoption of a non-
employee director's stock option plan and the reservation of 40,000
shares thereunder. As of June 30, 1997, options for a total of 266,539
shares have been awarded, net of cancellations. Options have vesting
periods ranging from two years to ten years. Exercise prices range from
$1.99 per share to $3.25 per share with a weighted average exercise
price per share of $3.09. No options have been exercised June 30, 1997.
No compensation expense has been recorded as a result of granting any of
the options as all such options were granted with an exercise price
equal to the market price on the date of grant. Options granted by the
Company are expected to be converted to options of the new company
expected to be formed in the consolidation of the Company and its
affiliates. See Proposed Merger note. The options will be converted at
the same conversion rate as the conversion of common stock discussed in
the Proposed Merger note.
Income Taxes
No benefit for income taxes was recognized for the six months or three
months ended June 30, 1997 and 1996 in the accompanying statement of
operations as there can be no assurance that the Company will generate
taxable income in the future against which such benefits could be
realized.
At June 30, 1997, the Company had a net operating loss carryforward
aggregating approximately $3.3 million for federal income tax purposes,
which may be used to offset future taxable income, if any. The annual
utilization of this carryforward may be limited if the Company undergoes
the ownership change anticipated by management (see Proposed Merger
note) or fails to meet continuity of business requirements defined by
the Internal Revenue Code. The Company's net operating loss
carryforwards beginning expiring in 2010.
Related Parties
Nature of related parties
The Company's president, Jim Bernau, partially owns and controls
Willamette Valley Vineyards (WVV), a winery in Oregon, Willamette Valley
Inc. (WVI) and Nor'Wester Brewing Company, Inc.(Nor'Wester), a
microbrewery in Oregon. Additionally, Mr. Bernau is the president of
each of the following subsidiaries of WVI: Aviator Ales, Inc. (AAI);
Mile High Brewing Company (MHBC); Bayhawk Ales, Inc. (BAI); and North
Country Brewing Company, Inc. (NCBCI); development stage companies
located in Washington, Colorado and California, respectively. As a
result of certain arrangements between the Company and its affiliates,
as well as Mr. Bernau's positions with and/or ownership interests in
each of these companies, inherent conflicts of interest exist with
respect to the pricing of services, the sharing of resources and
allocation of the Mr. Bernau's time.
Related party transactions
For the three months ended June 30, 1996, the Company purchased human
resources and other administrative services from affiliated companies,
under a general services agreement at a total cost of $12,150. For the
three months ended June 30, 1997, the Company performed these services
internally. Under the general services agreement, the Company provided
services such as accounting, sales management and executive oversight to
WVI and it's subsidiaries and WVV. The Company charged affiliates
$42,285 for such services for the three months ended June 30, 1997 and
$60,075 for the three months ended June 30, 1996.
Strategic Alliance and Cooperative Brewing Agreements
The Company has entered into a Strategic Alliance (the "Alliance") with
AAI, MHBC, BAI, NCBCI, and WVI. The Company, AAI, MHBC, and BAI are
individually referred to as a "Cooperative Brewer." The purpose of the
Alliance is to promote and support the growth of all of the Alliance
members by increasing production at each Cooperative Brewer's facility
and supporting the entry of Nor'Wester products into new markets. To
achieve this goal, each Cooperative Brewer agreed to cooperatively brew
Nor'Wester's products, and to support the entry of these products into
new markets by facilitating Nor'Wester's access to the Cooperative
Brewer's network of distributors. However, due to the fact that
Nor'Wester's Portland Brewery is not currently operating at capacity, as
well as the fact that attempting to develop other regional markets for
its products, the Cooperative Brewing Agreements are not being utilized.
Should the consolidation occur as planned (see Proposed Merger note),
the Strategic Alliance and agreements thereunder will terminate. In
connection with the Cooperative Brewing Agreement with AAI and MHBC
described above, Nor'Wester advanced $250,000 to each AAI and MHBC
during 1995 for the purchase of ingredients and packaging materials for
the cooperative brewer's initial production of Nor'Wester's products.
In 1996, the Company advanced $100,000 and $350,000 to AAI and MHBC,
respectively, for the cooperative brewing purchases and operating
expenses. In addition, the Company provided a loan of $35,000 to
Bayhawk Ales, Inc. ("BAI") for the purchase of a grain silo and milling
system to reduce cooperative brewing costs. At June 30, 1997 these
advances remain outstanding. Because management expects these advances
will eventually be eliminated when the proposed merger occurs, as
discussed in the Proposed Merger note, these advances have been
classified as current receivables from affiliates at June 30, 1997.
Joint Venture Agreement and Principles of Consolidation
In 1996, the Company entered into a joint venture agreement with NCBI
for the purpose of constructing, owning and operating a brewery in
Saratoga Springs, New York (the "Saratoga Springs Brewery"). Under the
terms of this agreement, the Company contributed $4,000,000 in cash and
equipment which was used to construct and operate the brewery, as well
as certain intangible assets for a 61% interest in the joint venture
known as North Country Joint Venture, LLC (NCJV). The Company also
advanced $2,550,000 to the joint venture. NCBCI was to repay the
Company $2,550,000 in cash by October 1996 for its 39% of the joint
venture in accordance with the agreement. NCBI did not repay the
Company. Accordingly, NCBCI's rights to NCJV terminated and Nor'Wester
became the 100% owner of NCJV. Because Nor'Wester owned 100% of NCJV at
June 30, 1997, no minority interest is recorded in the accompanying
balance sheet or statement of operations.
Receivables from affiliates
The Company has not been repaid for a significant portion of the
services provided and cash advanced to the affiliated companies.
Accordingly, the Company has recorded on the accompanying balance sheet
receivables from affiliates aggregating $2.27 million. Because these
receivables are expected to be eliminated or received in cash after the
proposed merger with UBA occurs (see Proposed Merger note), these
receivables have been classified as current June 30, 1997 Receivables
from each of the affiliated companies are as follows:
WVV $ 50,584
WVI 415,650
AAI 805,651
MHB 829,440
BAI 74,616
NCBI 96,128
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$2,272,069
==========
These balances are not expected by management to be fully collected in
cash. Instead, a portion is expected to be collected when the assets of
MHBC are sold subsequent to June 30, 1997 and the remainder are expected
to be eliminated when the companies are merged into the new company
expected to be formed (see Proposed Merger note).
Commitments
The Company has entered into five-year operating lease arrangements for
brewery and pub facilities in Oregon and New York which expire on
January 31, 2000 and February 15, 2002, respectively. The term of the
lease in Oregon is renewable for an additional 10 years. The New York
lease has three five-year renewal options. Annual payments under the
leases total $178,740 (totaling approximately $2,078,717, including
payments under renewal terms, over the terms of the leases) plus net
charges for property taxes, fire insurance, and utilities. Rent
payments are adjusted annually based on increases in the consumer price
index, limited to no more than a four percent annual increase. The
Company paid lease consideration of $50,000 in 1995 to hold the New York
facility until construction began.
Significant Customers
A significant portion of the Company's sales are to distributors located
in Oregon.
Proposed Merger and Investment by UBA
In light of lower than anticipated 1996 operating results, lower than
anticipated first quarter 1997 sales and other operating results and
adverse conditions within the craft beer industry in general,
representatives of UBA and management and the investment bankers of the
affiliated companies renegotiated the terms of the original UBA
investment discussed in Form 10KSB/A for the year ended 1996 and Form
10QSB/A for the quarter ended March 31, 1997. The renegotiation
reflects a significantly lower valuation for the affiliate companies, a
reduction in the total amount of cash to be invested by UBA to $5.5
million and a reduction of UBA's percentage ownership position in UCB to
40% following consolidation. The Company and its affiliates (WVI, AAI,
BAI and MHB) entered into an investment agreement with United Breweries
of America, Inc. (UBA), an entity controlled by the UB Group of
Bangalore, India. The agreement provides for Nor'Wester, WVI, AAI, MHBC
and BAI to merge into a company to be known as United Craft Brewers
(UCB). This proposed merger will result in the issuance of newly
registered shares of UCB common stock in exchange for shares of
Nor'Wester, WVI and its subsidiaries. The merger and share exchange
will require approval by the Boards of Directors and shareholders of
each of the entities. Following the merger, all shareholders in the
Nor'Wester /WVI alliance will hold shares in UCB, a company which is
intended to be listed for trading on the Nasdaq National Market system
under the symbol ALES. Shares of Nor'Wester, WVI, AAI, BAI, and MHB
outstanding at the effective time of each merger (other than shares of
Aviator common stock, Bayhawk common stock and Mile High common stock
owned by WVI) will be converted into the right to receive 0.3333333,
0.0785714, 0.0523809, 0.0785714 and 0.0523809 shares, respectively, of
UCB common stock.
Impact of Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board("FASB")
issued Statement of Financial Accounting Standards No. 128 "Earnings Per
Share" ("SFAS 128") and Statement of Financial Accounting Standards No.
129, "Disclosure of Information about Capital Structure" ("SFAS
129")which are effective for fiscal years ending after December 15,
1997. The Company believes the implementation of these statements will
not have a material effect on its results of operations or financial
statement disclosures.
Subsequent Events
Final adoption of the Proposed Merger and Investment is subject to
approval by shareholder vote scheduled to take place at the Company's
annual shareholder meeting on August 25, 1997, shareholder approval by
vote for each of the Company's affiliates (WVI, AAI, BAI and MHB) also
scheduled to be held on August 25, 1997 and other closing conditions
contained within the Investment Agreement.
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Information
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Form 10-QSB contains
forward-looking information within the meaning of the Private Securities
Litigation Reform Act of 1995. This forward-looking information
involves risks and uncertainties that are based on current expectations,
estimates and projections about the Company's business, management's
beliefs and assumptions made by management. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates" and
variations of such words and similar expressions are intended to
identify such forward-looking information. Therefore, actual outcomes
and results may differ materially from what is expressed or forecasted
in such forward-looking information due to numerous factors, including,
but not limited to, availability of financing for operations, successful
performance of internal operations, impact of competition, changes in
distributor relationship or performance, successful completion of the
planned consolidation of the Affiliated Companies, and other risks
detailed below as well as those discussed elsewhere in this Form 10-QSB.
In addition, such statements could be affected by general industry and
market conditions and growth rates, and general domestic economic
conditions.
Results of Operations
Three Months Ended June 30, 1997 Compared to Three Months
Ended June 30, 1996
Gross Revenues
Gross revenues from beer, pub and retail products totaled $1,514,505 for
the quarter ended June 30, 1997 compared to gross revenues of $2,024,354
during the same quarter in 1996, resulting in a 25% decline in gross
revenues. The decrease in revenues is primarily a result of increased
competition in its Pacific Northwest market from the continued
proliferation of new and existing craft brewers and the introduction of
fuller-flavored products by certain major national brewers. North
Country Brewery's gross revenues represented $582,818 of consolidated
gross revenues for the quarter ended June 30, 1997.
Nor'Wester's Portland Brewery currently has an annual production
capacity of 41,000 barrels. Nor'Wester sold 6,152 barrels and 8,360
barrels during the quarter ended June 30, 1997 and 1996 respectively.
Nor'Wester's Saratoga Springs Brewery currently has an annual production
capacity of 30,000 barrels and sold 3,147 and 0 barrels during the
quarter ended June 30, 1997 and 1996, respectively.
Excise Taxes
Excise taxes were $53,009 (3.5% of gross revenues) for the three months
ended June 30, 1997 compared to $86,031 (4.2% of gross revenues) for the
same period in 1996.
Cost of Goods Sold.
Cost of goods sold totaled $1,261,090 (86% of net revenues) for the
quarter ended June 30, 1997 compared to $1,503,110 (78 % of net
revenues) for the quarter ended June 30, 1996. The increase in cost of
goods sold as a percentage of net revenues is due primarily to the
commencement of brewing operations at the Saratoga Springs facility
which is operating below designed capacity and the increased cost
structure due to additional brewing equipment (tanks and cooperage)
acquired to meet anticipated sales that never materialized.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased to
$695,713 (47% of net revenues) for the quarter ended June 30, 1997 from
$873,984 (45% of net revenues) for the quarter ended June 30, 1996. The
increase in SG&A expenses is primarily attributable to marketing and
related costs associated with initial production at the Saratoga Springs
Brewery and increased shipping costs associated with delivering beer to
markets located considerable distances from the Portland and Saratoga
Brewing facilities.
Net Loss
As a result of the individual line items discussed above, net loss was
$626,846 for the quarter ended June 30, 1997 compared to a net loss of
$281,738 for the quarter ended June 30, 1996.
Six Month Ended June 30, 1997 compared to Six Months Ended
June 30, 1996
Gross Revenues
Gross revenues from beer, pub and retail products totaled $2,831,718 for
the year ended June 30, 1997 compared to gross revenues of $3,579,200
for the same period in 1996, resulting in a 21% decline in gross
revenues. The decrease in revenues is primarily a result of increased
competition in its Pacific Northwest market from the continued
proliferation of new and existing craft brewers and the introduction of
fuller-flavored products by certain major national brewers. North
Country Brewery's gross revenues represented $1,080,125 of consolidated
gross revenues for the quarter ended June 30, 1997.
Nor'Wester sold 10,631 barrels and 18,700 barrels during the six months
ended June 30, 1997 and 1996, respectively.
Nor'Wester's Saratoga Springs Brewery sold 5,667 and 0 barrels during
the six months ended June 30, 1997 and 1996, respectively.
Excise Taxes
Excise taxes were $116,373 (4.1% of gross revenues) for the three months
ended June 30, 1997 compared to $161,093 (4.5% of gross revenues) for
the same period in 1996.
Cost of Goods Sold.
Cost of goods sold totaled $2,262,469 (83% of net revenues) for the six
months ended June 30, 1997 compared to $2,471,377 (72% of net revenues)
for the six months ended June 30, 1996. The increase in cost of goods
sold as a percentage of net revenues is due primarily to the
commencement of brewing operations at the Saratoga Springs facility
which is operating below designed capacity and the increased cost
structure due to additional brewing equipment (tanks and cooperage)
acquired to meet anticipated sales that never materialized.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased to
$1,232,142 (45% of net revenues) for the six months ended June 30, 1997
from $1,349,455 (40% of net revenues) for the six months ended June 30,
1996. The increase in SG&A expenses is primarily attributable to
marketing and related costs associated with initial production at the
Saratoga Springs Brewery and increased shipping costs associated with
delivering beer to markets located considerable distances from the
Portland and Saratoga Brewing facilities.
Net Loss
As a result of the individual line items discussed above, net loss was
$1,029,403 for the quarter ended June 30, 1997 compared to a net loss of
$218,684 for the quarter ended June 30, 1996.
Liquidity and Capital Resources
Nor'Wester had cash and cash equivalents at June 30, 1997, December 31,
1996 and June 30, 1996 of $40,269, $252,049 and $1,559,714,
respectively. Cash was used for the six months ended 1997 to fund
operating activities of $1,385,150, purchase equipment at the Saratoga
facility for $127,553, make principal payments on it's Bank of America
term loan of $140,959 and advance proceeds to affiliates for $473,719.
Additional bridge loans provided by UBA of $1,646,000 was the primary
source of funds during the same period. From June 30, 1996 to December
31, 1996, the primary uses of funds were to support the operating
activities at the Portland and Saratoga brewing facilities, completion
of construction, equipping and start-up activities at the Saratoga
plant, advances to affiliates to support cooperative brewing activities
and marketing efforts aimed at regaining market share in the Pacific
Northwest.
The Company's working capital deficit was $3,755,863 at June 30, 1997, a
working capital deficit of $3,216,897 at December 31, 1996 and working
capital surplus of $3,260,021 at June 31, 1996. At June 30, 1997,
December 31, 1996 and June 30, 1996, the current ratio was .56:1, .54:1
and 3.37:1, respectively.
Accounts payable at June 30, 1997, December 31, 1996 and June 30, 1996
was $2,502,008, 2,427,073, and $681,782, respectively. Of the accounts
payable total at June 30, 1997, $2,225,063 is past due.
At June 30, 1997, December 31, 1996 and June 30, 1996, Nor'Wester had
receivables from affiliated companies of $2,272,069, $1,798,350, and
$542,306, respectively. The change during 1997 is due primarily to the
need to support the brewing operations of Nor'Wester's affiliates as the
affiliates continued to struggle in it's own increasingly competitive
market place. The increase in receivables from affiliates at December
31, 1996 from June 30, 1996 is due primarily to the financial support
Nor'Wester provided to the affiliates as each engaged to cooperatively
brew Nor'Wester products coupled with and the operating losses as the
affiliates continued to struggle in it's own markets. Management
expects that the receivables from affiliates will be eliminated upon
completion of the Consolidation.
At June 30, 1997, the Company had $2,771,492 outstanding under its bank
credit facilities consisting of a $1 million revolving line of credit
and a $1,771,492 term loan. The term loan bears interest at 8.63% and
calls for equal monthly installments over a 7-year period. The revolving
line of credit expired on December 31, 1996 and remains unpaid. Under
the credit facilities, Nor'Wester must (I) maintain certain financial
ratios, (ii) not incur further debt or create or assume any other lien
on its property without the bank's prior approval, and (iii) make no
payment dividends without the bank's prior approval. Nor'Wester is in
violation of items (I) and (ii). The bank has notified Nor'Wester that
the $2.0 million term loan will become due and payable immediately
unless an acceptable amendment to the bank's loan agreements is
executed. Nor'Wester is involved in discussions with the bank in order
to (I) extend the $1.0 million credit facility to mature on the earlier
of September 30, 1997 or 10 days following closing of the investment by
UBA, (ii) renew the term loan and (iii) waive the loan covenants
associated with these loans so long as Nor'Wester remains in compliance
with all terms of the Investment Agreement and achieves reasonable
progress toward closing the investment with UBA. However, final approval
of the amendment to the bank's loan agreements has not yet been received
and the bank has notified the Company that all amounts owed under the
credit facilities are currently due.
Nor'Wester's management believes that current working capital together
with projected income from operations is not sufficient to meet
Nor'Wester's cash needs through the end of 1997. Nor'Wester's
independent accountants expressed substantial doubt as to Nor'Wester's
ability to continue as a going concern in their report on Nor'Wester's
1996 consolidated financial statements.
To address recent losses and the need for working capital, Nor'Wester
has developed and are in the process of implementing plans designed to
sustain operations until profitability is reached. In particular,
Nor'Wester has taken steps to: (i) implement a more focused marketing
and sales plan designed to increase sales on a regional basis; (ii)
significantly reduce or eliminate cooperative brewing arrangements with
affiliates which proved to be inefficient and costly; (iii) negotiate
with past-due creditors for extended terms and payment plans and to
allow for the possibility of obtaining debt financing; (iv) hire and
retain highly qualified employees familiar with the brewing industry;
(v) use bridge loans from UBA to fund operations until the Investment
closes; and (vi) sell duplicate and/or under utilized assets created by
the Consolidation for cash.
While management believes these plans will sustain Nor'Wester's
operations through June 30, 1998, no assurance can be given that these
plans will provide the necessary revenue and profits to sustain
operations through that period. Nor'Wester is highly dependent upon the
receipt of additional amounts from UBA under the bridge loan and closing
of the Investment. No assurance can be given that the Investment will
close. If, for any reason, the Investment does not occur, alternative
sources of debt financing and/or equity capital would have to be
developed. There can be no assurance that such debt financing or capital
will be available or, if available, under terms and conditions
acceptable to Nor'Wester. Nor'Wester's inability to obtain additional
capital would result in a material adverse effect on Nor'Wester's
business and results of operations.
Furthermore, assuming the Investment closes, UCB will be dependent upon
the receipt of additional debt or equity financing to sustain operations
of the Company until revenues are sufficiently increased and costs
controlled to enable them to achieve positive cash flow and
profitability. No assurance can be given that additional debt or equity
financing will be available on terms acceptable to UCB or at all.
Failure to obtain additional financing would have a material adverse
effect on the operations and financial condition of the Company.
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
The Company had a $1,000,000 revolving bank line of credit which expired
on December 31, 1996. The line is secured by the Company's assets, and
contains certain covenants and restrictions. At June 30, 1997
$1,000,000 was outstanding under this line of credit.
The Company has a $1,771,492 term loan with the same financial
institution. At June 30,1997, $1,771,492 was borrowed under this
facility, which is secured by certain assets of the Company.
Under the credit facilities, Nor'Wester must (i) maintain certain
financial ratios, (ii) not incur further debt or create or assume any
other lien on its property without the bank's prior approval, and (iii)
make no payment dividends without the bank's prior approval. Nor'Wester
is in violation of items (i) and (ii). The bank has notified Nor'Wester
that the $2.0 million term loan will become due and payable immediately
unless an acceptable amendment to the bank's loan agreements is
executed. Nor'Wester is involved in discussions with the bank in order
to (i) extend the $1.0 million credit facility to mature on the earlier
of September 30, 1997 or 10 days following closing of the investment by
UBA, (ii) renew the term loan and (iii) waive the loan covenants
associated with these loans so long as Nor'Wester remains in compliance
with all terms of the Investment Agreement and achieves reasonable
progress toward closing the investment with UBA. However, final approval
of the amendment to the bank's loan agreements has not yet been received
and the bank has notified the Company that all amounts owed under the
credit facilities are currently due.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None.
(b) No reports were filed on Form 8-K during the quarter
which this report is filed.
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of
1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
Nor'Wester Brewing Company, Inc,
Date: August 14, 1997 By _____________________
Jim Bernau
President
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of
1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
Nor'Wester Brewing Company, Inc.
Date: August 14, 1997 By /s/ Jim Bernau
Jim Bernau
President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from the consolidated balance sheet and the
consolidated statement of operations filed as part of the
quarterly report on form 10-QSB and is qualified in its
entirety by reference to such report on form 10-QSB.
</LEGEND>
<S> <C>
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<PERIOD-END> JUN-30-1997
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<CURRENT-LIABILITIES> 8583095
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0
0
<COMMON> 11064480
<OTHER-SE> 7750766
<TOTAL-LIABILITY-AND-EQUITY> 16346027
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<CGS> 1261090
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