UNITED STATES
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 March 31, 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, Oregon 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 March
31, 1997: 3,711,097 shares, no par value.
NOR'WESTER BREWING COMPANY, INC.
INDEX TO FORM 10-QSB
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 three months ended March 31, 1997 are not necessarily
indicative of results to be expected for the entire year.
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet March 31, 1997 and December 31, 1996
Consolidated Statement of Operations - Three Months Ended
March 31, 1997 and 1996
Consolidated Statement of Cash Flows - Three Months Ended
March 31, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II - Other Information
Item 3 -- Defaults Upon Senior Securities
Item 6 -- Exhibits and Reports on Form 8-K
Signatures
Item 1 - Consolidated Financial Statements
NOR'WESTER BREWING COMPANY, INC.
Consolidated Balance Sheet
March 31,
1997 December 31,
ASSETS (unaudited) 1996
Current assets: ----------- -----------
Cash and cash equivalents $80,543 $252,049
Accounts receivable 592,813 606,642
Income tax receivable 103,761 103,761
Receivable from affiliated companies 1,928,984 1,798,350
Inventories 830,902 720,507
Marketing supplies 77,982 77,530
Other current assets, net 336,912 221,223
--------- ---------
Total current assets 3,951,897 3,780,062
Property and equipment, net 11,787,919 11,968,471
Other non-current assets, net 65,000 40,000
---------- ----------
Total assets $15,804,816 $15,788,533
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $1,041,000 $1,041,000
Current portion of long-term debt
and capital lease 1,939,289 285,318
Notes payable 1,750,000 1,150,000
Accounts payable 2,356,868 2,427,073
Container deposits 127,396 130,921
Accrued payroll and other
liabilities 223,266 309,256
--------- ---------
Total current liabilities 7,437,819 5,343,568
Long-term debt and capital lease 10,825 1,664,796
--------- ---------
Total liabilities 7,448,644 7,008,364
Shareholders' equity:
Preferred stock, 15,000,000 shares
authorized in 1996, no shares
issued and outstanding - -
Common stock, no par value - 10,000,000
shares authorized, 3,711,097 shares
outstanding 11,064,480 11,064,480
Accumulated deficit (2,708,308) (2,284,311)
--------- ---------
Total shareholders' equity 8,356,172 8,780,169
--------- ---------
Total liabilities and
shareholders' equity $15,804,816 $15,788,533
========== ==========
NOR'WESTER BREWING COMPANY, INC.
Consolidated Statement of Operations
(unaudited)
Three Months Ended March 31,
1997 1996
---------- ----------
Gross sales $1,317,212 $1,554,845
Less: excise taxes (63,365) (75,059)
--------- ---------
Net sales 1,253,847 1,479,786
Cost of sales 980,409 968,267
--------- ---------
Gross profit 273,438 511,519
Selling, general and administrative
expenses 578,838 475,471
--------- ---------
Income (loss) from operations (305,400) 36,048
Interest and other income, net (118,597) 38,321
--------- ---------
Income (loss) before income taxes and
minority interest (423,997) 74,369
Provision for income taxes - (29,004)
--------- ---------
Income (loss) before minority interest (423,997) 45,365
Minority interest - 17,692
--------- ---------
Net income (loss) $(423,997) $63,057
========= =========
Net income (loss) per common share $(0.11) $0.02
========= =========
Weighted average number of
common shares outstanding 3,711,097 3,651,554
---------- ---------
NOR'WESTER BREWING COMPANY, INC.
Consolidated Statement of Cash Flows
(unaudited)
Three Months Ended March 31,
1997 1996
Cash flows from operating ---------- ----------
activities:
Net income (loss) $(423,997) $63,057
Minority interest in loss from
joint venture - (17,692)
Reconciliation of net income to net
cash provided by operating activities:
Depreciation and amortization 209,707 67,742
Changes in assets and liabilities:
Accounts receivable 13,829 (126,284)
Inventories (110,395) 14,732
Other current assets (116,141) 239,957
Other non-current assets (25,000) 102,521
Accounts payable (70,205) (391,715)
Accrued liabilities and container
deposits (89,515) (259,992)
--------- --------
Net cash used for operating activities (611,717) (307,674)
Cash flows from investing activities
Advances to affiliated companies (130,634) (218,966)
Purchases of property and equipment (29,155) (928,938)
--------- ---------
Net cash used for investing activities (159,789) (1,147,904)
Cash flows from financing activities:
Payments on line of credit - (500,000)
Increase in borrowings 600,000 231,282
Net proceeds from stock offering - 7,689,840
--------- ---------
Net cash provided by financing activities 600,000 7,421,122
--------- ---------
Net increase (decrease) in cash and
cash equivalents (171,506) 5,965,544
Cash and cash equivalents:
Beginning of period 252,049 276,807
--------- ---------
End of period $80,543 $6,242,351
========= =========
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The Company's consolidated 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 for the year ended December 31, 1996.
The Company has recorded significant losses in the quarter ended March 31,
1997 and during the prior year, has negative working capital of
$3.5 million, is not in compliance with certain debt covenants containde in
its bank loan agreement, and has limited access to capital with which 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 others, raise substantial doubt as to its ability to continue
as a going concern. During the quarter ended March 31, 1997 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 Pending Consolidation note below.
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.
During the quarter ended March 31, 1996 the North Country Brewing Company,
Inc. ("NCBCI") entered into a joint venture agreement with the Company
relating to the ownership and operation of a brewery in Saratoga Springs New
York. NCBCI financed its minority interest in the joint venture with a
short-term note payable, in the amount of $2,550,000, to the joint venture.
NCBCI has failed to make payment on the note and its interest in the joint
venture has been terminated. This non-cash transaction has been excluded
from the accompanying statement of cash flows.
Inventories
Inventories consist of the following:
March 31, December 31,
1997 1996
------------- ------------
Beer-making and packaging materials $ 520,806 $ 460,423
Work-in-process 74,933 75,553
Finished goods 235,163 184,531
------------- ------------
$ 830,902 $ 720,507
NOR'WESTER BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Property and Equipment
Property and Equipment consists of the following:
March 31, December 31,
1997 1996
-------------- -------------
Land and improvements $ 243,072 $ 243,071
Leasehold improvements 2,359,098 2,338,391
Equipment 10,004,764 9,612,828
Construction in progress 164,303 547,792
-------------- -------------
12,771,237 12,742,082
Less accumulated depreciation (983,318) (773,611)
-------------- --------------
$ 11,787,919 $ 11,968,471
============== ===============
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 shares 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
$7,963,000, 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 during the three
month periods ended March 31, 1997 and 1996. Outstanding options to purchase
shares of the Company's common shares have not been included in the
calculation for the quarter ended March 31, 1997 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 thebank's reference rate plus 0.5% (8.75% at March 31, 1997) which expired
on December 31, 1996. The line is secured by the Company's assets, and
contains certain covenants and restrictions (see Pending Consolidation note)
At March 31, 1997 $1,000,000 was outstanding under this line of credit.
In addition, the Company's North Country subsidiary had $41,000 outstanding on
a separate line of credit bearing interest at 9.75% at March 31, 1997
The Company has a $250,000 loan payable to its president, bearing interest at
10%. Repayment of the loan is required upon completion of the proposed
merger with UBA (see Pending Consolidation note).
The Company has a $1.5 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 March 31, 1997 (see Pending Consolidation note).
The Company has a $1,842,351 bank term loan which bears interest at the bank's
reference rate plus 0.5% (8.63% at March 31, 1997) and is payable in equal
monthly installments over seven years. At March 31, 1997, $1,842,351 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 March 31, 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 Pending Consolidation 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. Subsequent to March 31, 1997,
the bank notified the Company that the non-revolving credit
facility would also be due on September 30, 1997. 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 March 31, 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 through March 31, 1997. During the quarter ended March
31, 1997, options for 140,000 shares of the Company's common stock were issued
with an exercise price of $3.25 per share. In addition, during the quarter
ended March 31, 1997, the Company adjusted the exercise price to $3.25 for
all previously issued and outstanding options with an exercise price in
excess of $3.25. Subsequent to March 31, 1997 the company repriced all
outstanding options to $1.75. A total of 126,539 options were re-priced.
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 Pending Consolidation note. The options will be converted at
the same conversion rate as the conversion of common stock discussed in the
Pending Consolidation note.
Income Taxes
No benefit for income taxes was recognized for the quarters ended March 31,
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 March 31, 1997, the Company had a net operating loss carryforward
aggregating approximately $4.6 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 Pending Consolidation note ) or fails
to meet continuity of business requirements defined by the Internal Revenue
Code. The Company's net operating loss carryforwards begin expiring in 2013.
Related Parties
Nature of related parties
The Company's president partially owns and controls Willamette Valley
Vineyards (WVV), a winery in Oregon, and Willamette Valley Inc.
Microbreweries across America (WVI), a company organized to establish
microbreweries throughout the United States. Additionally, the Company's
president , Jim Bernau, is the president of each of the following
subsidiaries of WVI: Aviatior 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 the Company president'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 Company president's time.
Related party transactions
For the three months ended March 31,1996, 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 March 31, 1997, the Company performed these services internally.
For the three months ended March 31, 1996, the Company purchased stock and
sales support services from an affiliated company, Willamette Valley
Vineyards, Inc., for $3,600. For the three months ended March 31, 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 $48,567 for such
services for the three months ended March 31, 1997 and $60,075 for the three
months ended March 31, 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 productsinto 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, dut 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 Pending Consolidation 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 March 31, 1997 these advances remain outstanding. Because
management expects these advances will eventually be eliminated when the
proposed merger occurs, as discussed in the Pending Consolidation note,
these advances have been classified as current receivables from affiliates at
March 31, 1997.
Joint Venture Agreement and Principles of Consolidation
In 1996, the Company entered into a joint venture agreement with
NCBI for the pupose 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 March 31, 1997, no minority interest is
recorded in the accompanying balance sheet or statement of operations.
The Saratoga Springs brewery makes up approximately 57% of the Company's net
fixed assets.
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 $1.9 million. Because these receivables are expected
to be eliminated or received in cash after the proposed merger with UBA
occurs (see Pending Consolidation note), these receivables have been
classified as current at March 31, 1997. Receivables from each of the
affiliated companies are as follows:
WVV $ 21,093
WVI 379,275
AAI 629,857
MHB 735,134
BAI 67,497
NCBI 96,128
----------
$1,928,984
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 March 31, 1997, and the remainder are expected to be
eliminated when the companies are merged into the new company expected to be
formed (see Pending Consolidation note).
Commitments and Contingencies
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. This payment was capitalized and is being
amortized over a period of five years.
Significant Customers
A significant portion of the Company's sales are to distributors located in
Oregon.
Pending Consolidation, Bridge Loan, Subsequent Investment By UBA(Private)
The Company, WVI, AAI, MHB and BAI (together the "Affiliated Companies")
have entered into an Investment Agreement with United Breweries of America,
Inc. ("UBA") dated January 30, 1997 (the "Investment Agreement"). Under
the Investment Agreement, UBA is obligated toprovide Nor'Wester with up to
$2.75 million in bridge loans as interim financing during the consolidation
phase. Advances under the bridge loan areexpected to be used by Nor'Wester
to help cover operating expenses and pay existing creditors of the Affiliated
Companies until closing of the investment, at which time the balance of UBA's
$5.5 million investment is expected to be made. Of the $2.75 million, $1.5
million has already been advanced and spent as of the date of this report.
Item 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NOR'WESTER 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 and from time to
time in Nor'Wester's Securites and Exchange Commisstion filings and reports.
In addition,such statements could be affected by general industry and market
conditions and growth rates, and general domestic economic conditions.
Consolidated Results of Operations
Nor'Wester's Saratoga Springs Brewery (North Country Brewing) began producing
and selling beer in October 1996. Therefore, the Company's consolidated
results of operations for the quarter ended March 31, 1997 include those of
North Country Brewing while the results for the quarter ended March 31, 1996
do not.
Gross Revenues.
Gross revenues from beer, pub and retail products totaled $1,317,212 for the
quarter ended March 31, 1997 and $1,554,845 for the quarter ended March 31,
1996. 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
certainmajor national brewers. North Country Brewery's gross revenues
represented $497,307 of consolidated gross revenues for the quarter ended
March 31, 1997.
Nor'Wester's Portland Brewery currently has an annual production capacity of
41,000 barrels. Nor'Wester sold 4,480 barrels and 7,966 barrels during the
quarter ended March 31, 1997 and 1996 respectively.
Nor'Wester's Saratoga Springs Brewery currently has an annual production
capacity of 30,000 barrels and sold 2,724 and 0 barrels during the
quarter ended March 31, 1997 and 1996, respectively.
Excise Taxes
Excise taxes decreased to $63,365 (4.8 % of gross revenues) for the quarter
ended March 31, 1997 from $75,059 (4.8 % of gross revenues) for the quarter
ended March 31, 1996. The decrease in excise taxes is the result of the
decreasd gross sales on which the taxes are assessed.
Cost of Goods Sold.
Cost of goods sold totaled $980,409 (78 % of net revenues) for the quarter
ended March 31, 1997 compared to $968,267 (65 % of net revenues) for the
quarter ended March 31, 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 $578,838
(46 % of net revenues) for the quarter ended March 31, 1997 from $475,471
(32 % of net revenues) for the quarter ended March 31, 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 Income (Loss).
As a result of the individual line items discussed above, net loss was
$423,997 for the quarter ended March 31, 1997 compared to net income of
$63,057 for the quarter ended March 31, 1996.
Liquidity and Capital Resources
Cash and cash equivalents decreased $171,506 to $80,543 for the quarter ended
March 31, 1997 primarily due to operating losses incurred during the quarter.
Uses of funds included an increase in inventory of $110,395, an increase in
other current assets (mostly marketing and point of sale materials) of
$116,141, and increases in receivables to affiliates of $130,634. Bridge
loans provided by UBA of $600,000 was the primary source of funds.
The Company's working capital deficit was $3,485,922 at March 31, 1997,
compared to working capital of $10.4 million at March 31, 1996. The decrease
in working capital reflects the use of funds generated from the Company's
initial public offering in January 1996 to support the Company's operations,
provide capital to build the Saratoga Springs facility, and fund efforts to
expand its markets nationally.
Accounts payable at March 31, 1997 totaled $2,365,868 compared to $2,427,073
at December 31, 1996, and $479,000 at March 31, 1996. Of the $2,365,868
at March 31, 1997 $2,093,991 was past due.
At March 31, 1997 and December 31, 1996, the Company had outstanding $2,842,351
million under its bank credit facilities consisting of a $1 million revolving
line of credit and a $1,842,351 non-revolving credit facility. The
non-revolvingloan 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 of dividends without the bank's
prior approval. Nor'Wester is in violation of items (i) and (ii).
Nor'Wester is involved in discussions with the lender in order to (i) renew
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 and (ii) 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. Subsequent to March 31, 1997,
the bank notified the Company that the non-revolving credit facility would also
be due on September 30, 1997.
In 1996, Nor'Wester utilized capital primarily to finance the construction
and start-up of the Saratoga Springs Brewery and increases in brewing
capacity to its existing facilities. In addition, Nor'Wester required
capital to finance operations and continues to require capital for ongoing
operations. The recently completed construction and start-up of the Saratoga
Springs Brewery and Nor'Wester's attempts to regain market share in the
Portland area for its Nor'Wester branded products has had and is expected to
continue to have a material impact on Nor'Wester's assets, liabilities,
capital expenditure commitments, and liquidity.
The Company's management believes that projected income from operations is
not sufficient to meet the Company's cash needs over the next twelve months.
The Company's independent accountants expressed substantial doubt as to the
Company's ability to continue as a going concern in their report on the
Company's 1996 consolidated financial statements.
DEPENDENCE UPON BRIDGE LOANS AND INVESTMENT FROM UNITED BREWERIES OF AMERICA,
INC. The Company has been and continues to be highly dependent upon the
receipt of bridge loans and investment funds from UBA to pay creditors and
sustain the Company's operations during the expected periods of loss until
profitability is restored. Since October 1996 through the date of this
report, UBA has provided $1.9 million in bridge loans under the $2.75 million
credit facility. The receipt of additional advances under the credit facility
and closing of the investment is subject to the Affiliated Companies'
compliance with certain covenants and conditions set forth in the Investment
Agreement and credit documents, including the condition that no "material
adverse effect" occurs in the businesses of the Affiliated Companies as a
whole. While the Company is dependent upon the receipt of further bridge and
closing of the UBA investment, the Company does not control the business or
operations of the other Affiliated Companies and can not assure that it or
another Affiliated Company will not violate one or more covenants in the
Investment Agreement or that a closing condition will not be met.
Accordingly, there can be no assurance that the Company will receive further
bridge loan amounts or that the investment will ultimately close or will close
on the terms set forth in the Investment Agreement. See footnotes to
consolidated financial statements -- Pending Consolidation.
If for any reason, the Company is unable to pay past due creditors and finance
working capital requirements through an investment by UBA, alternative methods
of financing would have to be obtained. No assurance can be given that
alternative methods of financing would be obtained. No assurance can be given
that alternative methods of financing would be available on terms acceptable
to the Company, or at all. Having to develop alternative means of financing
would likely slow development of the existing breweries and such alternative
financing may be costly. The inability of the Company to obtain additional
capital would adversely affect the Company's business and results of
operations.
AMOUNTS PAST DUE TO CONTRACTORS, SUPPLIERS AND EQUIPMENT VENDORS. At March
31, 1997 and as of the date of this report, the Company was past due on $1.9
million and $2.1, respectively, of its accounts payable. The Company has
communicated with these creditors and has negotiated acceptable payment terms
to be funded primarily through bridge loans from UBA. If the Company does not
have the cash needed to pay the amounts due and is not able to work out
satisfactory alternative payment arrangements, these contractors, suppliers
and vendors may seek to exercise their remedies, including the filing of liens
against the Company's assets. As of the date of this report, management is
aware of three creditors who have filed liens to secure an aggregate of
$414,103 owed. Resolving the Company's payment obligations to its contractors,
suppliers and vendors may distract Management from its other duties, involve
additional expense, and result in production delays which in turn could have
a material adverse impact on the Company's business, financial condition, and
results of operations.
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 March 31, 1997 $1,000,000 was
outstanding under this line of credit.
The Company has a $1,842,351 term loan with the same financial
institution. At March 31, 1997, $1,842,351 was borrowed under this facility.
This 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 March 31, 1997, the Company was not in compliance with certain loan
covenants relating to both the term loan 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, 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. Subsequent to March 31, 1997, the bank notified the
Company that the non-revolving credit facility would also be due on September
30, 1997. 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. Subsequent to March 31, 1997
the bank notified the Company that the non-revolving credit facility would also
be due on September 30, 1997.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 1 - Definitive Investment Agreement press release dated January
30, 1997.
(b) Reports on Form 8-K:
On January 30, 1997, the Company filed a Form 8-K in connection with its
executionof a definitive investment agreement with United Breweries of
America, Inc., an affiliate of the UB Group of Bangalore, India. Under terms
of the agreement, UBA will invest approximately $9 million in cash in
exchange for a 45% equity interest in a new entity comprised of the
consolidated businesses of Nor'Wester, North Country Brewing Company, LLC.,
Willamette Valley, Inc., Microbreweries across America and its affiliates -
Aviator Ales, Inc., Bayhawk Ales, Inc., Mile High Brewing Company, Inc. The
Form 8-K set forth the terms and conditions of the proposed investment as
outlined in the letter of intent ,and included as exhibits copies of the
letter of intent dated September 26, 1996, and a January 30, 1997 press
release relating to the matter.
Exhibit 1
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: May 15, 1997 By _________________________
James W. 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: May 15, 1997 by /s/ James W. Bernau
James W. Bernau
President
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
January 30, 1997
Date of Report (Date of earliest event reported)
Nor'Wester Brewing Company, Inc.
(Exact name of registrant as specified in its charter)
Oregon 0-27458 93-1099661
(State or other (Commission (IRS Employer
jurisdiction of ) File No.) Identification No.)
of incorporation
66 SE Morrison Street
Portland, Oregon 97214
(503) 232-9771
(Address of principal executive offices)
Not applicable
(Former name or former address, if changed since last report)
Item 5. Other Events.
On January 30, 1997, Nor'Wester Brewing Company, Inc. ("Nor'Wester") and
Willamette Valley, Inc. Microbreweries Across America ("WVI"), a public
holding company comprised of three partially-owned public subsidiaries,
Aviator Ales, Inc. ("AAI"), Bayhawk Ales, Inc. ("BAI"), and Mile High Brewing
of Denver ("MHB"), Colorado, announced the signing of a definitive investment
agreement with United Breweries of America, Inc. ("UBA"), an affiliate of The
UB Group of Bangalore, India.
Under the terms of the agreement, UBA will invest $8.63 million in cash
in exchange for a 45% equity interest in a new entity comprised of the
consolidated businesses of Nor'Wester (which includes Nor'Wester Brewing of
Portland, Oregon and North Country Brewing of Saratoga Springs, New York),
WVI and WVI's partially-owned public subsidiaries. The consolidation is
expected to occur by the end of the second quarter of 1997, pending approval
by the various companies' shareholders. The new entity will be a holding
company for five craft breweries being consolidated and will operate under
the name, United Craft Brewers, Inc.
Of the $8.63 million investment by UBA, $2.75 million is in the form of
bridge loans conditionally available to Nor'Wester during the consolidation
phase to cover any shortfalls in operating cash or payments required to be
made to existing creditors. Of this amount, $1,000,000 has previously been
loaned. In addition to obtaining a perfected security interest in all the
assets of North Country Brewing, among other conditions, all advances under
the bridge loan are conditioned upon there being no material adverse change
in the business of the various brewing companies taken as a whole. At
closing, the $2.75 million in loans and the remaining $5.88 million cash
investment will be converted into shares of United Craft Brewers.
Jim Bernau, President of Nor'Wester and WVI, is transferring to UBA part
of his existing equity stake in the regional breweries. He will receive no
cash consideration in this transaction, and as a result of the transfer, UBA
will own 45% of United Craft Brewers, with Bernau owning 10% of the new
company. The public shareholders of Nor'Wester and WVI, Aviator Ales, Bayhawk
Ales and Mile High Brewing will own the remaining 45% of United Craft
Brewers. The terms of UBA's investment as set forth in the definitive
investment agreement differ from and supersede the terms of a Letter of
Intent between the parties dated September 18, 1996, previously disclosed by
the Company.
Mr. Bernau will serve as President of United Craft Brewers and will be a
member of the Board of Directors. Vijay Mallya, Chairman of The UB Group,
will serve as Chairman of the Board of United Craft Brewers.
United Craft Brewers intends to acquire other craft brewers in the U.S.
to expand its alliance of breweries. Furthermore, United Craft Brewers
intends to utilize The UB Group's experience and resources to pursue
international opportunities for its craft beer alliance.
The UBA investment is subject to several closing conditions including
(i) registration with the Securities and Exchange Commission of the United
Craft Brewers shares to be issued to the public shareholders of Nor'Wester,
WVI and WVI's subsidiary breweries in the consolidation as well as to UBA in
its investment, (ii) successful completion of the consolidation of the
regional breweries including approval by the shareholders of Nor'Wester, WVI
and each of WVI's subsidiary breweries, and (iii) the achievement of certain
designated or agreed operating results by the breweries. The investment is
expected to close on or about June 1997.
The consolidation is expected to be accomplished through a series of
stock-for-stock mergers whereby shareholders of Nor'Wester, WVI and its
subsidiaries-Aviator, Mile High and Bayhawk-will each exchange their
respective shares for shares of United Craft Brewers according to the
following exchange ratios (based on an average closing price for Nor'Wester's
common stock of $2.63 for the 20 trading days immediately preceding execution
of the definitive investment): Nor'Wester-1:1, WVI-1.99159:1;
Aviator-2.98739:1; Mile High-2.98739:1; and Bayhawk-1.99159:1. Following
consolidation and UBA's investment, the combined entity will have
approximately 13 million shares outstanding.
The Company believes that the information set forth in this Form 8-K and
the Press Release dated January 30, 1997, and attached as an exhibit hereto
include "forward looking statements" within the meaning of Section 27A of the
Securities Act and are subject to the safe harbor created by that Section.
In particular, there can be no assurance that the consolidation will be
approved by the shareholders of the various companies, that each of the other
closing conditions to the definitive investment agreement will be met in time
to close or that the investment will ultimately close. Furthermore, even if
the UBA investment closes, there can be no assurance that UCB will have
adequate capital to pursue acquisitions of, or alliances with, other craft
brewers in the U.S. and internationally, nor can there be any assurance of
continued or additional market acceptance in the U.S. or internationally of
UCBs' beers and ales. Finally, during the consolidation phase, there can be no
assurance that Nor'Wester will meet each of the conditions required to
receive a bridge loan advance from UBA at the time such advance is needed.
There are additional risks and uncertainties that could cause the actual
results to differ materially from the forward-looking statements including,
but not limited to, the factors discussed in Nor'Wester's Securities and
Exchange Commission filings.
Nor'Wester's press release regarding UBA's investment in Nor'Wester is
incorporated herein by reference and filed as an exhibit to this Form 8-K.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
Exhibits
Number Description
99.1 Press Release dated as of
January 30, 1997
SIGNATURES
Pursuant to the requirements of the Securities 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: January 30, 1997 By:/s/ James W. Bernau
James W. Bernau
President
EXHIBIT INDEX
Exhibit No. Description Page
99.1 Press Release dated as of January 30, 1997
UB GROUP SIGNS DEFINITIVE INVESTMENT AGREEMENT
WITH FIVE U.S. MICROBREWERIES
U.S. Craft Breweries to be Subsidiaries of New Holding Company;
UB to Hold 45% Stake in Consolidated Entity
Portland, OR January 30, 1997 -- Nor`Wester Brewing Company (Nasdaq:
ALES) and Willamette Valley, Inc./Microbreweries Across America, a non-listed
public holding company comprised of three partially-owned public subsidiaries
- -- Aviator Ales, Inc. of Woodinville, WA; Bayhawk Ales, Inc. of Irvine, CA;
and Mile High Brewing of Denver, CO. -- today announced the signing of a
definitive investment agreement with United Breweries of America, Inc.
("UBA"), an affiliate of The UB Group of Bangalore, India. Under the terms
of the agreement, UBA will invest $8.63 million in cash in exchange for a 45%
equity interest in a new entity comprised of the consolidated businesses of
Nor`Wester Brewing Company -- including Nor`Wester Brewing of Portland, OR
and North Country Brewing of Saratoga Springs, NY -- and WVI/Microbreweries
Across America. The consolidation is currently expected to occur by the end
of the second quarter of 1997, pending approval of the various companies'
shareholders. The new entity will be a holding company for the five craft
breweries being consolidated and will operate under the new name, United
Craft Brewers, Inc.. The company will be traded on the Nasdaq National
Market System under the symbol ALES. Of the $8.63 million investment by UBA,
$2.75 million is in the form of bridge loans conditionally available to
Nor`Wester during the consolidation phase ($1,000,000 has already been
loaned). At closing, the $2.75 million in loans and the remaining $5.88
million cash investment will be converted into shares of United Craft Brewers.
Jim Bernau, founder and president of both Nor`Wester Brewing and WVI-
Microbreweries Across America, is transferring to UBA part of his existing
equity stake in the regional microbreweries. He will receive no cash
consideration in this transaction, and as a result of the transfer, UBA will
own 45% of United Craft Brewers, with Bernau owning 10% of the new company.
The public shareholders of Nor`Wester Brewing and WVI-Microbreweries Across
America will own the remaining 45% of United Craft Brewers. The terms of
UBA's investment as set forth in the definitive investment agreement differ
from and supersede the terms of a Letter of Intent between the parties dated
September 18, 1996. Bernau will serve as President of United Craft Brewers and
will be a member of the Board of Directors. Vijay Mallya, Chairman of The UB
Group, will serve as Chairman of the Board of the new company. "The signing
of this agreement puts our goal of creating a national craft brewing alliance
one large step closer to realization," said Bernau. "And because we will be
benefiting from the experience and resources of The UB Group, I firmly
believe that the alliance is also a very large step closer to success."
Bernau noted that The UB Group and Vijay Mallya have pursued an
operating philosophy similar to that of the microbreweries in the alliance.
"The UB Group is India's largest beer producer, but it is comprised of twelve
smaller, individual breweries that each pursues a craft beer approach to
producing lagers and ales," he explained. "This emphasis on smaller scale
brewing will be at the heart of United Craft Brewers. We couldn't have found a
better partner to join us as we build this national alliance of leading
microbreweries." Mallya agreed that the investment will significantly
strengthen -- and potentially expand -- the craft brewing alliance.
"Nor`Wester and the other breweries being consolidated in the new company
make some of the best ales and lagers in America," Mallya said. "Our goal
now is twofold: first, to enhance the financial, marketing and operating
strength of these breweries, and second, to bring other like-minded U.S. craft
brewers under the UCB umbrella. In addition, UCB intends to leverage the UB
Group's strengths to pursue international opportunities for the craft beer
market. "By expanding the size of this unique microbrewery alliance, we will
gain important economies of scale in manufacturing, marketing and
distribution -- all while maintaining and enhancing the unique character and
individual excellence that have made craft brewed beer increasingly popular
in America and elsewhere." Successful consolidation of the regional
breweries is a precondition for closing of the investment by UBA, as is the
achievement of certain operating results by the five breweries. The
investment is expected to close shortly after the consolidation is completed.
The consolidation is expected to be accomplished through a series of stock-
for-stock mergers whereby shareholders of Nor'Wester, WVI/Microbreweries
Across America and its subsidiaries -- Aviator, Mile High and Bayhawk -- will
each exchange their respective shares for shares of United Craft Brewers
according to the following exchange ratios which are based on an average
closing price of $2.63 for Nor'Wester's common stock for the 20 trading days
immediately preceding execution of the definitive investment : Nor'Wester --
1:1; WVI -- 1.99159:1; Aviator -- 2.98739:1; Mile High -- 2.98739:1; and
Bayhawk -- 1.99159:1. Following consolidation and UBA's investment, the
combined entity will have approximately 13 million shares outstanding. The
Nor`Wester Brewing Company and WVI--Microbreweries Across America were
founded by Jim Bernau with his first microbrewery, Nor`Wester in Portland,
Oregon in 1993. Bernau is also founder and president of Willamette Valley
Vineyards in Salem, Oregon (Nasdaq: WVVI). The UB Group is a global beer and
spirits company operating in 20 countries on four continents.
[Note: this press release contains forward-looking statements that are
made pursuant to the safe harbor provisions of The Private Securities
Litigation Reform Act of 1995. The forward-looking statements involve risks
and uncertainties that could cause actual results to differ materially from
the forward-looking statements, including, but not limited to, the factors
detailed in the Securities and Exchange Commission filings of Nor'Wester,
Willamette Valley, Inc. Microbreweries across America, Aviator Ales, Inc.,
Mile High Brewing Company, Inc. and Bayhawk Ales, Inc. The forward-looking
statements should be considered in light of these risks and uncertainties.]
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This schedule contains summary financial information extracted from the
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