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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-KSB/A
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number : 0-25986
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(Name of small business issuer in its charter)
OREGON 93-1131247
(State or other jurisdiction (I.R.S.Employer
of incorporation or organization) Identification No.)
66 SE MORRISON STREET
PORTLAND, OREGON 97214
(Address of principal executive offices and zip code)
(503) 231-7616
(Issuer's telephone number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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:
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $3,869,304.
The aggregate market value of voting stock held by non-affiliates of the
registrant: Not applicable The number of shares outstanding of the
Registrants Common Stock as of February 28, 1997 was 4,860,996 shares.
The index to exhibits appears on page 25 of this document.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
None.
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Items 6, 7, and 12 of the Annual Report on Form 10-KSB for Willamette
Valley, Inc. Microbreweries Across America are hereby amended to read in
their entirety as follows:
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results
of Operation and other sections of this Form 10-KSB contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements involve 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 statements. Therefore, actual
outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking statements due to numerous factors,
including, but not limited to, availability of financing for operations and
payment of past due creditors, 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-KSB and from time to time in the Company's Securities and
Exchange Commission filings and reports. In addition, such statements could
be affected by general industry and market conditions and growth rates, and
general domestic economic conditions.
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RESULTS OF OPERATIONS
The following table reflects selected data from the Company's statements of
operations stated as a percentage of net revenues:
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995
--------- ----------
Gross sales 102.6% 48.1%
Less excise taxes 5.4 2.1
--------- ----------
Net sales of beer and related
products 97.2 46.0
Management services to
affiliated companies 2.8 54.0
--------- ----------
Net revenues 100.0 100.0
Cost of beer and related
products sold 107.2 50.8
Cost of management services
to affiliated companies 2.8 47.1
--------- ----------
Total cost of sales 110.0 97.9
Selling, general and
administrative expenses 57.6 179.6
Impairment loss 26.3 --
Write-off of stock offering costs 11.9 --
--------- ----------
Operating income (loss) (105.9) (177.5)
--------- ----------
Loss before income taxes
and minority interest (111.6) (163.0)
--------- ----------
Net loss (63.7)% (109.9)%
GROSS REVENUES. Brewery revenues of the Company's subsidiaries include sales
of beer as well as retail merchandise such as T-shirts and caps. Net
revenues from brewery operations and retail products increased 574 percent in
1996, totaling $3,759,504 for the year ended December 31, 1996 compared to
$557,714 for the year ended December 31, 1995. The increase is primarily
attributable to a full year of revenues in 1996 for Aviator Ales and Mile
High Brewing which commenced their brewing operations in the third quarter of
1995 and the addition of the sale of $1,375,000 of beer under the Cooperative
Brewing Agreements during 1996. Mile High Brewing ceased normal operations
in the fourth quarter of 1996 due to its inability to successfully penetrate
its market.
The Microbreweries operated at the following capacity during 1996 and 1995:
Barrels Produced
----------------
Current
Capacity
(No. of Barrels
Brewery per Year) 1996 1995
- ------------------------- ---------------- --------- ---------
Aviator Ales 57,000 9,742 574
Bayhawk Ales 10,000 3,658 1,360
Mile High Brewing(1) 39,000 9,932 658
(1) Mile High Brewing ceased production of its own products in November 1996
and is currently producing limited quantities of beer pursuant to a
contract brewing arrangement with a third party.
Competition for market share with each of the Microbreweries' markets has
increased due to the level of market saturation by competing companies,
especially in the Northwest where there are many brands vying for available
shelf space. The industry is also facing a loss of shelf space, and
therefore sales, to the industrial brewers, who are threatening to withdraw
their business from distributors who also distribute microbrewery brands.
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Specifically, during 1996, Aviator Ales experienced significant competition
from one competitor who began selling its Hefe Weizen beer in bottles into
the same channels of distribution as Aviator Ales. This resulted in a
decline in market share for Aviator Ales and for Nor'Wester, an affiliated
company. To date, Aviator Ales has been unable to regain this market share.
COST OF BREWERY REVENUES. The cost of brewery revenues represents 107
percent of net revenues for 1996 and 51 percent for 1995, reflecting the
disproportionate cost of production for goods sold during a period when the
breweries are operating at less than their maximum designed capacity, as well
as start-up costs such as recipe testing. In addition, the margin on beer
brewed cooperatively for Nor'Wester under the Cooperative Brewing Agreements
is substantially less than the Microbreweries' own products. All of the
breweries commenced operations during 1995 and Mile High Brewing ceased
production of its own products during the fourth quarter of 1996 and entered
into a limited contract brewing agreement.
REVENUES AND COSTS RELATED TO MANAGEMENT SERVICES. Revenues from management
services provided to affiliated companies totaled $109,800 and $653,776 for
the years ended December 31, 1996 and 1995, respectively. Cost of management
services provided for the same periods was 100 percent and 87 percent of such
revenues, respectively. Revenues from management services represent the
Company's cost in 1996 and cost plus a certain mark-up in 1995. The
Company's cost includes all direct labor and other direct costs as well as a
portion of the Company's general and administrative costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") totaled $2.23 million and $2.18 million for
the years ended December 31, 1996 and 1995, respectively. SG&A reflect
management and administrative costs incurred on behalf of the Company and its
subsidiaries. The increase in SG&A is primarily a result of increased periods
of operations for the Microbreweries and increased shipping costs as the
Company's Microbreweries introduced their products into surrounding states.
During the third quarter of 1996, the selling and administrative staff was
restructured, thus decreasing such expenses during the later part of 1996,
partially offsetting the increase.
INTEREST INCOME AND INTEREST EXPENSE. Interest income totaled $33,605 and
$185,284 for the years ended December 31, 1996 and 1995, respectively, as a
result of interest earned on the Company's consolidated cash balances.
Interest expense of $68,406 and $9,300 was incurred during 1996 and 1995,
respectively, on the long-term debt for the purchase of land in Woodinville,
Washington and for capital equipment lease obligations.
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IMPAIRMENT LOSS. Mile High ceased operations in 1996, and subsequent to
December 31, 1996, Mile High began looking for opportunities for contract
brewing or to dispose of all of its assets. Mile High wrote off the value
of its inventory to $0, and wrote down the value of its equipment to $2
million as of December 31, 1996. In addition, Mile High management estimated
costs to sell the assets to be $50,000. Accordingly, Mile High has recorded
an estimated impairment loss of $1,018,879.
WRITE-OFF OF STOCK OFFERING COSTS. Consists of costs related to the write off
of legal and accounting fees related to Aviator's and Mile High's
discontinued public offerings.
INTEREST INCOME AND INTEREST EXPENSE. Interest income totaled $33,605 and
$185,284 for the years ended December 31, 1996 and 1995, respectively, as a
result of interest earned on WVI's consolidated cash balances. Interest
expense of $68,406 and $9,300 was incurred during 1996 and 1995,
respectively, on the long-term debt for the purchase of land in Woodinville,
Washington and for capital equipment lease obligations.
OTHER. Other expenses of $183,316 relate primarily to costs associated with
transferring partial ownership of North County Joint Venture, LLC from North
Country Brewing Company, Inc. to Nor'Wester.
NET LOSS. Net loss was $2.5 million in 1996 compared to $1.3 million in
1995, as a result of the individual line items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $1.0 million to $90,492 at December 31,
1996 from $1.1 million at December 31, 1995. The $90,492 in cash and cash
equivalents at December 31, 1996 is all held by the Company's subsidiaries.
Amounts held by each of the Company's subsidiaries have been earmarked for
use in developing the respective subsidiary's brewery and are not available
for use by the Company in developing new breweries. The decrease is
primarily a result of $1.6 million net cash used by operating activities,
$398,744 in capital expenditures, plus $995,520 in net cash provided by
financing activities which includes $1,072,368 in advances from affiliates.
Advances from affiliates increased $1.1 million to $1.8 million at December 31,
1996 from $700,000 at December 31, 1995. This increase resulted primarily
from advances by Nor'Wester to support Aviator Ales and Mile High Brewing,
each of which was engaged to cooperatively brew Nor'Wester's beer and each of
which reported operating losses for the year ended December 31, 1996.
Working capital decreased to a deficit of $2.9 million at December 31, 1996
from a surplus of $1.4 million at December 31, 1995. The current ratio
decreased to .18:1 at December 31, 1996 from 3.02:1 at December 31, 1995.
Accounts payable were $1.5 million at December 31, 1996 compared to $406,797
at December 31, 1995. At December 31, 1996 and currently, the Company was
past due on $1.1 million and $1.4 million, respectively, of its accounts
payable.
The Company has established a reserve of $50,000 at December 31, 1996 for
the potential sale and disposition of the assets of Mile High.
The Company believes that current working capital together with projected
income from operations are not sufficient to meet the Company's cash needs
over the next twelve months.
SUBSEQUENT EVENTS
PENDING CONSOLIDATION, BRIDGE LOANS, SUBSEQUENT INVESTMENT AND RENEGOTIATION OF
THE TERMS
On January 30, 1997, the Company, Nor'Wester, Aviator Ales, Mile High Brewing
and Bayhawk Ales (together the "Affiliated Companies"), entered into a
definitive Investment Agreement (the "Investment Agreement") with United
Breweries of America, Inc. ("UBA"). Under the terms of the Investment
Agreement, UBA has agreed to invest $8.63 million in the form of bridge loans
and cash at closing in exchange for a 45% equity interest in the consolidated
businesses of the Affiliated Companies. UBA, an affiliate of The UB Group of
Bangalore, India, was formed for the purpose of investing in the U.S. craft
beer industry. The UB Group is a diversified multi-national corporation whose
major operations consist of the production and sale of beer and spirits
through affiliated companies which operate in 20 countries on four
continents.
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Under the terms of the Investment Agreement, the Affiliated Companies have
each agreed to consolidate under the ownership of a new entity, United Craft
Brewers, Inc. ("UCB"). UCB will serve as a holding company for companies
which operate each of the five affiliated breweries--the Portland Brewery,
the Saratoga Springs Brewery, the Seattle Brewery, the Denver Brewery and the
Southern California Brewery. The proposed consolidation is a condition to
receipt of UBA's investment which will be made directly in UCB.
CONSOLIDATION. Under the proposed consolidation each of the Affiliated
Companies will become a wholly-owned subsidiary of UCB pursuant to a merger
and share exchange by which newly registered shares of UCB will be issued in
exchange for outstanding shares of the Affiliated Companies based on the
share exchange rates described below. The merger and share exchange has been
unanimously approved by the Boards of Directors of each of the Affiliated
Companies but remains subject to approval by shareholders of each Affiliated
Company. Following completion of the consolidation, shareholders of each
Affiliated Company will hold shares in UCB, which is intended to be listed
for trading on the Nasdaq National Market System under the symbol "ALES".
The consolidation is primarily an administrative step designed to simplify
the ownership structure of the Affiliated Companies, increase the operating
efficiencies of each brewery, decrease the production, marketing and
distribution costs of each brewery, increase the ability of the combined
breweries to finance operations and possible growth and provide all
shareholders with a liquid market for their shares.
The outstanding shares of each of the Affiliated Companies will be exchanged
for shares in UCB according to the following exchange ratios which are based
on the average closing price of Nor'Wester's Common Stock for the 20 trading
days immediately preceding January 30, 1997, the date of execution of the
Investment Agreement:
COMPANY EXCHANGE RATIO
- -------------------- ------------------
Nor'Wester 1:1
WVI 1.99159:1
Aviator Ales 2.98739:1
Bayhawk Ales 1.99159:1
Mile High Brewing 2.98739:1
BRIDGE LOANS. Under the Investment Agreement, UBA is obligated to provide
Nor'Wester with up to $2.75 million in bridge loans as interim financing
during the consolidation phase. Advances under the bridge loan are expected
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 $8.6 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. All bridge loans are made pursuant to a Credit
Agreement between Nor'Wester and UBA, the principal terms of which are as
follows:
(1) The bridge loans will be made at times and in amounts mutually
determined by UBA and Nor'Wester based on a periodic review of the cash
flow needs and creditor demands of the Affiliated Companies;
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(2) Interest on the bridge loan accrues at 11.25% per annum and is
payable to UBA in cash at closing of UBA's investment.
(3) All principal and interest is secured by the assets of North Country
Joint Venture, LLC (owner and operator of the Saratoga Springs Brewery)
and by Nor'Wester's ownership interest in the joint venture LLC.
Repayment of all principal and interest is guaranteed personally by Jim
Bernau.
(4) As a condition to each advance under the bridge loan, neither Jim
Bernau nor any of the Affiliated Companies shall be in breach of any
representation, warranty or covenant under the credit documents or the
Investment Agreement and there shall not be any "material adverse effect"
in the businesses of the Affiliated Companies as a whole.
(5) Unless converted at closing, all advances under the bridge loan
mature 60 days after termination of the Investment Agreement or the
occurrence of certain events of default under the credit documents
(including the breach by an Affiliated Company or Mr. Bernau of any
representation, warranty or covenantunder the Investment Agreement),
except that the bridge loan becomes due immediately if a "material
adverse effect" occurs in the businesses of the Affiliated Companies as a
whole or there is a breach by any Affiliated Company or Mr. Bernau of any
representation, warranty or covenant under the credit documents.
INVESTMENT. Following completion of the consolidation and assuming all
closing conditions have been met as required under the Investment Agreement,
UBA will invest an additional $5.88 million in cash combined with the
anticipated conversion of the $2.75 million bridge loan in exchange for a 45
percent equity interest in UCB.
Closing of the proposed investment remains subject to (i) approval by the
shareholders of each of the Affiliated Companies, (ii) achievement of certain
aggregate operating results by the breweries, (iii) maintenance of certain
operating conditions and covenants, including that there shall be no
"material adverse change" in the businesses of the Affiliated Companies taken
as a whole, (iv) approval by the U.S. Bureau of Alcohol, Tobacco and Fire
Arms and applicable state liquor control commissions, (v) registration with
the U.S. Securities and Exchange Commission of the UCB shares to be exchanged
in the consolidation; (vi) extension of Nor'Wester's $1.0 million line of
credit through September 30, 1997, the bank shall have waived any defaults
under the line of credit agreement and the line of credit shall have been
converted to a term loan and (vii) such other customary conditions for
transactions of this type.
As a further condition to UBA's investment, Jim Bernau has agreed to transfer
to UBA 1,124,195 of the UCB shares he receives in the consolidation (or
approximately 46% of his total UCB shares at consolidation). This transfer,
for which Mr. Bernau will receive no cash consideration, is being done
principally to provide UBA with the necessary equity interest in UCB (45%) to
cause UBA to make the investment.
Following completion of the consolidation and closing of UBA's investment, the
approximate ownership interests in UCB will be as follows: (i) UBA -- 45.0%,
(ii) Jim Bernau -- 10%, and (iii) the public shareholders of each Affiliated
Company will own the following
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interests: Nor'Wester--21.6%, WVI--7.1%, Aviator Ales--6.7%, Mile High
Brewing--5.9%, and Bayhawk Ales--3.7%. The initial Board of Directors of UCB
will be composed of 7 members consisting of (i) one person appointed by Jim
Bernau, (ii) four persons appointed by UBA (one of whom shall be Vijay
Mallya, Chairman of The UB Group, who shall be chairman) and (iii) two
outside Directors who shall be mutually satisfactory to Jim Bernau and UBA.
The initial Board will serve until the next regular meeting of shareholders.
At that time, UBA, with its 45% interest, will be in a position to
effectively elect all members of the Board of Directors and thereby control
UCB and in turn its subsidiary breweries.
Subject to completion or waiver of all closing conditions, closing of UBA's
investment will occur as soon as practicable following approval of the
consolidation by the shareholders of each of the Affiliated Companies which
is currently expected to occur in or about July 1997. In the event that the
investment is not closed by August 31, 1997, either party may terminate the
transaction and repayment of any outstanding bridge loan is due 60 days
thereafter.
While the Company is dependent upon the receipt of further loans under the
credit facility 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.
RENEGOTIATION OF THE TERMS OF THE UBA INVESTMENT. In light of lower than
anticipated 1996 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 are in the process of renegotiating the terms of
the UBA investment. The renegotiation will reflect a significantly lower
valuation for the Affiliated Companies, a reduction in the 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 the consolidation. It is not
anticipated that the $2.75 million bridge loan amount will be reduced. The
existing shareholders in the Affiliated Companies would retain a 60% interest
in UCB. The exact distribution of ownership interests among shareholders of
the Affiliated Companies has not yet been determined. Management will soon
seek Board approval by each of the Affiliated Companies of any renegotiated
terms. Failure of the parties to reach a mutually agreeable renegotiated
Investment Agreement could lead to a loss of the bridge loans and the
remainder of the UBA investment which would materially and adversely affect
the Company's financial condition and results of operations.
If for any reason, the Company and its subsidiaries are 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 its subsidiaries, 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.
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ITEM 7. FINANCIAL STATEMENTS
The information required by this item begins on page F-1 of this report.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
GENERAL
Each of Nor'Wester, Aviator, Bayhawk and Mile High is affiliated with WVI in
that James W. Bernau, WVI's founder, President and Chairperson of the Board
of Directors, is also President and Chairperson of the Board of Directors of
each such affiliated company. Mr. Bernau is also a significant equity owner
of each affiliated company either directly, as in the case of Nor'Wester, in
which Mr. Bernau owns approximately 25% of the outstanding capital stock, or
indirectly through his controlling interest in WVI (62%), which in turn owns
a controlling interest in each of Aviator (51%), Bayhawk (57%) and Mile High
(51%). As a result of certain arrangements between WVI and its affiliates, as
well as Mr. Bernau's positions 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 the allocation of WVI's President's
time.
LOANS AND ADVANCES TO AND FROM AFFILIATES
BAYHAWK BRIDGE LOAN. During 1994 and 1995, WVI loaned $1,353,823 to Bayhawk,
a subsidiary of WVI, to construct, equip and operate Bayhawk's brewery
pending completion of Bayhawk's direct public stock offering completed in
December 1995 (the "Bayhawk Bridge Loan"). In 1995 and 1996, Bayhawk repaid
$1,103,635 of loan principal. In January 1996, the loan was converted to a
promissory note issued to WVI. The note bears interest at 8% beginning on
January 1, 1996, provides for payments $4,600 principal and interest per
month, and is unsecured. As of December 31, 1996, $250,188 was owed on the
note.
MILE HIGH BRIDGE LOAN. During 1995, WVI loaned $800,000 to Mile High, a
subsidiary of WVI, to pay for leasehold improvements, purchase capital assets
and fund the working capital needs of Mile High's brewery (the "Mile High
Bridge Loan"). The Mile High Bridge Loan was to be repaid from the proceeds
of Mile High's planned second direct public stock offering which commenced in
May 1996 but was terminated in October 1996 as a result of the planned
Consolidation and investment by UBA. In October 1996, the loan was converted
to an 18 month installment note issued to WVI. The note bears interest at
10%, provides for monthly principal and interest payments of $5,300, and is
unsecured. As of December 31, 1996, no payments had been made on the note.
LOANS AND ADVANCES FROM NOR'WESTER. In 1995 and 1996, Nor'Wester
loaned and advanced $350,000 to each of Aviator and Mile High for working
capital needs and for the purchase of brewing ingredients and raw materials
to brew Nor'Wester beer under Nor'Wester's Cooperative Brewing Agreements
with Aviator and Mile High entered into as part of the Alliance. In 1996,
Nor'Wester also loaned $150,000 to Mile High to help pay for the construction
of Mile High's pub. In addition, in 1995 and 1996, in support of the creation
and development of the Alliance, Nor'Wester paid certain bills on behalf of
WVI, Aviator, Mile High and Bayhawk and provided certain of these companies
with services under the General Services Agreement also entered into as part
of the Alliance. These advances are unsecured and do not bear interest.
LOANS AND ADVANCES TO AFFILIATES. During 1996, WVI advanced $240,000
to Aviator and $186,364 to Mile High. These loans were made to purchase
capital assets and support the working capital needs of Aviator's and Mile
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High's respective breweries. In addition, in 1995 and 1996, WVI paid certain
bills on behalf of Nor'Wester, Aviator, Mile High and Bayhawk and provided
certain of these companies with services under the General Services Agreement
also entered into as part of the Alliance. These advances are unsecured and
do not bear interest. For a description of the purposes and terms of the
Alliance see "Strategic Alliance" below.
PAYMENTS TO AND FROM AFFILIATES. The following table represents net amounts
received by WVI from (or paid by WVI to) its affiliates in 1995 and 1996 in
connection with the repayment of loans/advances, other than the Bayhawk
Bridge Loan, or in payment of services associated with creating and
supporting the Alliance:
AMOUNTS RECEIVED
(PAID)
----------------------
COMPANY NAME 1996 1995
- ------------ ---------- ----------
Nor'Wester..................................... $ 146,364 $ 507,511
(516,620)
Aviator........................................ 37,000 219,920
Bayhawk........................................ 16,565 34,995
Mile High...................................... 10,000 257,286
North Country.................................. 93,044 62,466
---------- ----------
Total.................................... $ 302,973 $ 565,558
---------- ----------
---------- ----------
AMOUNTS OWED TO AND DUE FROM AFFILIATES AT DECEMBER 31, 1996. As a result of
the above-described transactions, at December 31, 1996, WVI and its
subsidiaries owed the following amounts to Nor'Wester: WVI--$418,821,
Aviator--$570,090, Mile High--$703,446, Bayhawk--$72,179. These amounts are
unsecured, do not bear interest, are payable on Nor'Wester's demand and are
reflected as "payable to affiliated companies" on WVI's balance sheet.
Further, as a result of the above-described transactions, other than the
Bayhawk Bridge Loan and the Mile High Bridge Loan, at December 31, 1996, WVI
was owed the following amounts from its affiliates: Aviator--$276,012,
Bayhawk--$7,760, and Mile High--$313,806. These amounts are unsecured, do not
bear interest and are payable on WVI's demand. At December 31, 1996, WVI was
owed $250,188 by Bayhawk on the Bayhawk Bridge Loan and $800,000 by Mile High
on the Mile High Bridge Loan. None of the foregoing amounts are reflected on
WVI's balance sheet as they have been eliminated in the process of
consolidating the financial statements of WVI and its subsidiaries.
STRATEGIC ALLIANCE
In January 1996, the Company established a strategic alliance with Aviator
Ales, Mile High Brewing, Bayhawk Ales and Nor'Wester (the "Alliance"). The
Alliance is created through a Strategic Alliance Agreement among the Alliance
members, a General Services Agreement between the Company and Nor'Wester and
separate Cooperative Brewing Agreements between Nor'Wester and each of
Aviator Ales, Mile High Brewing and Bayhawk Ales (the "Cooperative Brewers").
The terms of the Strategic Alliance Agreement, the Cooperative Brewing
Agreements and the General Services Agreement are four years, unless earlier
terminated under limited circumstances. However, due to the fact that
Nor'Wester's Portland Brewery is not currently operating at capacity as well
as the fact that Nor'Wester has changed its strategy and is not currently
attempting to develop other regional markets for its products, the
Cooperative Brewing Agreement is not being utilized. Certain other aspects
of the Strategic Alliance Agreement are also not being utilized due to
industry and individual company circumstances that have changed since the
Strategic Alliance Agreement was put in place.
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In addition, should the consolidation occur as described under "Subsequent
Events", all such agreements will terminate.
Details of the agreements are as follows (although, as indicated, many of the
terms are no longer applicable):
STRATEGIC ALLIANCE AGREEMENT. Under the terms of the Strategic Alliance
Agreement, each Alliance member has agreed to (i) support the expansion of
the Nor'Wester's products into the Alliance member's market by cooperatively
brewing Nor'Wester's beer and facilitating Nor'Wester's access to local
distributors; (ii) employ at least one Nor'Wester trained brewer at all times
during the term of the Agreement; and (iii) use the services, expertise and
personnel available within the Alliance before obtaining such resources from
outside sources. The Strategic Alliance Agreement does not preclude an
Alliance member from promoting its products in markets served by other
Alliance members. The Agreement provides that no Alliance member will use
the proprietary information or technology of another Alliance member to
produce any beer with a flavor profile or appearance of such other Alliance
member's beer. With the consent of all Alliance members, additional entities
owning and/or operating brewing facilities may be added as parties to the
Alliance.
COOPERATIVE BREWING AGREEMENTS. Under the terms of the Cooperative Brewing
Agreements, each of the Cooperative Brewers has agreed to produce
Nor'Wester's beer, in the amounts and packaged as specified in firm orders
submitted by the Nor'Wester on a periodic basis. All orders made by
Nor'Wester are subject to certain volume limits. The Cooperative Brewer's
production of Nor'Wester beer must comply with Nor'Wester's specifications
concerning recipes, quality control procedures, flavor profile and
appearance. Nor'Wester has a right to reject beer not meeting its
specifications. Pricing for the purchase of beer produced under Cooperative
Brewing Agreements are at the lesser of cost plus 10% or Nor'Wester's average
cost of production at its Portland Brewery, plus a mark-up of 10%. The
Agreement provides that no Alliance Member will use the proprietary
information or technology of another Alliance Member to produce any beer with
a flavor profile or appearance that is substantially similar to such Alliance
Member's beer.
GENERAL SERVICES AGREEMENT. The General Services Agreement requires that the
WVI perform for Nor'Wester and WVI's subsidiaries certain services relating
to (i) human resources support; (ii) stock transfer and (iii) investor
relations. Under the General Services Agreement, Nor'Wester is to provide WVI
and its subsidiaries certain services relating to (i) accounting and finance
support; (ii) sales and marketing management; (iii) executive services; and
(iv) production management; (v) point of sale and advertising services; and
(vi) centralization and coordination among the Alliance members of certain
operational and purchasing matters. Nor'Wester, in turn subcontracts with
WVV for point of sale and advertising services and certain sales and
marketing management support services.
11
<PAGE>
The Company was charged $169,425 by Nor'Wester for services under the General
Services Agreement during 1996. Amounts charged under the General Services
Agreement by the Company to its affiliates and subsidiaries during 1996 are
as follows:
Company Name Amount
- ------------------------------- -------------
Nor'Wester $ 85,575
Aviator Ales 55,125
Bayhawk Ales 20,175
Mile High Brewing 56,025
North Country Brewing 25,650
Willamette Valley Vineyards 24,225
-------------
$266,775
-------------
-------------
NORTH COUNTRY JOINT VENTURE AGREEMENT AND TERMINATION THEREOF
On January 1, 1996, Nor'Wester and North Country Brewing, a wholly owned
subsidiary of WVI entered into an Operating Agreement which details the
respective rights and obligations of the owners in a joint venture to
develop, own and operate a brewery in Saratoga Springs, New York (the "North
Country Joint Venture"). Nor'Wester's initial contribution to the North
Country Joint Venture consisted of (i) $3,500,000 in cash; (ii) deposits
toward the purchase of equipment with a value of approximately $500,000;
(iii) use of Nor'Wester's beer recipes pursuant to a licensing agreement
between Nor'Wester and the North Country Joint Venture. North Country
Brewing's initial contribution consisted of (i) an unsecured, noninterest
bearing $2,550,000 promissory note payable by North Country to the North
Country Joint Venture on or before the completion of North Country Brewing's
planned self underwritten public stock offering or October 1, 1996, whichever
occurs first; (ii) use of North Country Brewing's beer recipes pursuant to a
licensing agreement between the North Country Joint Venture and North Country
Brewing; and (iii) North Country Brewing's brewery development efforts
consisting of a business and operating plan for the Saratoga Springs Brewery,
a lease agreement for the facility in which the brewery will be established,
and a local brand name and imagery. Nor'Wester's and North Country Brewing's
capital accounts with the North Country Joint Venture were credited with
$4,000,000 and $2,550,000, respectively, upon formation.
North Country Brewing's public offering was canceled in September 1996 and
North Country Brewing did not pay the $2,550,000 due under the note.
Accordingly, on October 1, 1996, North Country Brewing withdrew from the
North Country Joint Venture Agreement and transferred its interest to
Nor'Wester. Concurrently, Nor'Wester executed a promissory note payable to
WVI evidencing the purchase price for North Country Brewing's membership
interest in the amount of $192,358, which amount represents WVI's out of
pocket development expenses to establish the Saratoga Springs Brewery and to
develop North Country Brewing's beer recipes and brand imagery.
ARMS-LENGTH TRANSACTIONS
WVI believes that the Alliance and the transactions set forth above were
made on terms no less favorable to WVI than could have been obtained from
unaffiliated third parties. All future transactions between WVI and its
officers, directors, principal shareholders and affiliates will be approved
by a majority of the independent outside members of WVI's Board of Directors
who do not have an interest in the transactions, and will be on terms no less
favorable to WVI than could be obtained from unaffiliated third parties.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and the Exchange Act of
1934, the registrant this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 14, 1997 WILLAMETTE VALLEY, INC. MICROBREWERES
ACROSS AMERICA
By:/s/ JAMES W. BERNAU
James W. Bernau
Chairperson of the Board, President
and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in their capacities on May 14, 1997:
Signature Title
- ------------ ------
/s/JAMES W. BERNAU Chairperson of the Board, President
- ------------------ and Secretary
James W. Bernau (Principal Executive Officer and Principal
Financial and Accounting Officer)
/s/ RONALD G. BRIGHAM Director
- ---------------------
Ronald G. Brigham
/s/ CAROL FISCHER Director
- ---------------------
Carol Fischer
/s/ CARL F. FLIPPER Director
- ---------------------
Carl F. Flipper
/s/ EARL K. LITTRELL Director
- ---------------------
Earl K. Littrell
/s/ DONALD E. VOORHIES Director
- ---------------------
Donald E. Voorhies
13
<PAGE>
WILLAMETTE VALLEY, INC.
MICROBREWERIES ACROSS
AMERICA AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
REPORT AND CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
<PAGE>
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statement of Shareholders' Equity . . . . . . . . . . . . . . F-5
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Willamette Valley, Inc. Microbreweries across America
(A Development Stage Company)
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Willamette
Valley, Inc. Microbreweries across America (a development stage company) and its
subsidiaries at December 31, 1996 and 1995 and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1996 and for the period from inception (December 2, 1993) through December 31,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company is a development stage company which has only a
limited and unprofitable operating history, has negative working capital of
$2,914,247 and has limited access to capital with which to fund future
operations. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty. Subsequent to December
31, 1996, the management of Mile High Brewing Company (MHBC), a
majority-owned subsidiary of the Company, formalized and approved a plan to
sell the operating assets of MHBC or to pursue contract brewing
opportunities. Accordingly, the assets have been reported at estimated fair
value at December 31, 1996 and management has recorded an impairment loss of
$1,018,879 in the accompanying statement of operations for the year ended
December 31, 1996. Such factors, among others, raise substantial doubt about
its ability to continue as a going concern.
As discussed in Note 12 to the financial statements, the Company and its
subsidiaries entered into an investment agreement subsequent to December 31,
1996 to be merged with other affiliated companies and convert their stock into
shares of a new publicly traded entity.
F-1
<PAGE>
To the Board of Directors and Shareholders of
Willamette Valley, Inc. Microbreweries across America
(A Development Stage Company)
Page 2
Willamette Valley, Inc. Microbreweries across America is a member of a group of
affiliated companies and, as disclosed in the financial statements, has
extensive transactions and relationships with members of the group. Because of
these relationships, it is possible that the terms of these transactions are not
the same as those that would result from transactions among wholly unrelated
parties.
As discussed in Note 14 to the financial statements, the Company has restated
its 1996 financial statements to revise the Company's share of the net losses
sustained for the period from January 1, 1996 to September 30, 1996 by North
Country Joint Venture, LLC, which was sold by the Company in October 1996 to
Nor'Wester Brewing Company, Inc., an affiliated company, and to reduce the
impairment loss by the amount of future estimated operating losses included
therein relating to a contract brewing arrangement of Mile High Brewing Company,
a majority-owned subsidiary of the Company. Such losses will be recorded in 1997
as incurred.
PRICE WATERHOUSE LLP
Portland, Oregon
March 21, 1997, except as to Notes 13 and 14,
which are as of March 24, 1997
F-2
<PAGE>
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
--------------- ---------------
(RESTATED - NOTE 14)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 90,492 $ 1,117,134
Accounts receivable 211,078 123,026
Receivables from affiliates (Note 8) - 198,569
Inventories (Notes 2 and 11) 349,870 368,656
Prepaid expenses and other current assets 8,170 215,712
--------------- ---------------
Total current assets 659,610 2,023,097
Property and equipment, net (Notes 3 and 11) 5,124,746 5,460,152
Deposits for the purchase of equipment - 51,000
Other non-current assets - 161,177
--------------- ---------------
Total assets $ 5,784,356 $ 7,695,426
--------------- ---------------
--------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease
obligations (Note 4) $ 73,328 $ 19,522
Accounts payable 1,470,891 406,797
Accrued liabilities 149,650 220,870
Container deposits 34,922 -
Reserve for impairment loss (Note 11) 50,000 -
Payable to affiliated companies (Note 8) 1,795,066 22,698
--------------- ---------------
Total current liabilities 3,573,857 669,887
Long-term debt and capital lease obligations (Note 4) 298,888 108,415
Advance from affiliate (Note 8) - 700,000
Deferred rent (Note 9) 70,103 91,328
--------------- ---------------
3,942,848 1,569,630
--------------- ---------------
Minority interest 283,706 1,871,191
--------------- ---------------
Commitments (Notes 9, 12 and 13)
Shareholders' equity (Notes 6, 7, 12 and 13):
Common stock, $.01 par value, 10,000,000 shares
authorized, 4,860,996 and 4,850,796 shares issued and outstanding 48,610 48,508
Additional paid-in capital 5,453,712 5,686,386
Deficit accumulated during development stage (3,944,520) (1,480,289)
--------------- ---------------
Total shareholders' equity 1,557,802 4,254,605
--------------- ---------------
Total liabilities and shareholders' equity $ 5,784,356 $ 7,695,426
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE
AMOUNTS FROM
INCEPTION
(DECEMBER 2,
YEAR ENDED 1993) TO
DECEMBER 31, DECEMBER 31,
1996 1995 1996
------------- ------------- --------------
(RESTATED-NOTE 14) (RESTATED-NOTE 14)
<S> <C> <C> <C>
Revenues:
Gross sales of beer and related retail products
(Notes 8 and 10) $ 3,967,975 $ 582,908 $ 4,594,582
Less excise taxes (208,471) (25,194) (233,665)
------------- ------------- -------------
Net sales 3,759,504 557,714 4,360,917
Management services to affiliated companies (Note 8) 109,800 653,776 893,190
------------- ------------- -------------
3,869,304 1,211,490 5,254,107
------------- ------------- -------------
Cost of sales:
Cost of beer and related retail products 4,148,847 615,518 4,787,853
Management services to affiliated companies
(Note 8) 109,800 570,507 799,527
------------- ------------- -------------
4,258,647 1,186,025 5,587,380
------------- ------------- -------------
Gross (deficit) margin (389,343) 25,465 (333,273)
Selling, general and administrative expenses (Note 8) 2,229,018 2,176,410 4,715,974
Impairment loss (Note 11) 1,018,879 - 1,018,879
Write-off of stock offering costs (Note 6) 461,969 - 461,969
------------- ------------- -------------
Loss from operations (4,099,209) (2,150,945) (6,530,095)
Interest income (expense) (34,801) 175,984 224,589
Other expense (183,316) - (183,316)
------------- ------------- -------------
Loss before income taxes and minority interest
in losses of consolidated subsidiary companies (4,317,326) (1,974,961) (6,488,823)
Income taxes (Note 5) - - -
------------- ------------- -------------
Loss before minority interest in losses of
consolidated subsidiary companies (4,317,326) (1,974,961) (6,488,823)
Minority interest in losses of consolidated
subsidiary companies 1,853,095 644,119 2,544,303
------------- ------------- -------------
Net loss as a development stage company $ (2,464,231) $ (1,330,842) (3,944,520)
------------- ------------- -------------
------------- ------------- -------------
Net loss per common share $ (0.51) $ (0.27) $ (1.10)
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of common shares
outstanding 4,852,513 4,850,796 3,602,166
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
PERIOD FROM INCEPTION (DECEMBER 2, 1993) TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL COMMON DURING
COMMON STOCK PAID-IN STOCK DEVELOPMENT
SHARES AMOUNT CAPITAL SUBSCRIPTION STAGE TOTAL
----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 2, 1993 - $ - $ - $ - $ - $ -
WVI common stock subscription 3,353,826 33,538 77,573 (111,111) -
----------- ------------ ------------ ------------ ------------ ------------
Balances, December 31, 1993 3,353,826 33,538 77,573 (111,111) - -
Proceeds from WVI common stock issuance
to founders ($0.03 per share) - - - 111,111 - 111,111
Net proceeds from WVI common stock
offerings ($1.65 per share) 1,496,970 14,970 2,164,607 - - 2,179,577
Interest in net proceeds from offerings
of majority-owned subsidiary company - - 2,611,633 - - 2,611,633
Net loss (149,447) (149,447)
----------- ------------ ------------ ------------ ------------ ------------
Balances, December 31, 1994 4,850,796 48,508 4,853,813 - (149,447) 4,752,874
Interest in net proceeds from offerings
of majority-owned subsidiary company - - 832,573 - - 832,573
Net loss - - - - (1,330,842) (1,330,842)
----------- ------------ ------------ ------------ ------------ ------------
Balances, December 31, 1995 4,850,796 48,508 5,686,386 - (1,480,289) 4,254,605
Shares granted to employees 10,200 102 20,298 - - 20,400
Decrease in interest in majority-
owned subsidiary company - - (252,972) - - (252,972)
Net loss - - - - (2,464,231) (2,464,231)
----------- ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996
(Restated - Note 14) 4,860,996 $ 48,610 $ 5,453,712 $ - $ (3,944,520) $ 1,557,802
----------- ------------ ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE
AMOUNTS FROM
INCEPTION
(DECEMBER 2,
YEAR ENDED 1993) TO
DECEMBER 31, DECEMBER 31,
1996 1995 1996
--------------- --------------- ---------------
(RESTATED - NOTE 14) (RESTATED - NOTE 14)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,464,231) $ (1,330,842) $ (3,944,520)
Minority interest in losses of consolidated
subsidiary companies (1,853,095) (644,119) (2,544,303)
Reconciliation of net loss to net cash used by
operating activities:
Depreciation 441,154 217,672 667,863
Deferred rent 22,152 91,328 113,480
Impairment loss 1,018,879 - 1,018,879
Shares of WVI and subsidiary company granted
to employees 33,782 10,870 44,652
Changes in assets and liabilities:
Accounts receivable (88,052) (119,393) (211,078)
Receivables from affiliates 198,569 (190,640) -
Other receivables - 32,813 -
Inventories (167,914) (343,984) (536,570)
Prepaid expenses and other current assets 207,542 (208,908) (8,170)
Accounts payable 1,064,094 281,145 1,470,891
Accrued liabilities and container deposits (36,298) 41,859 184,572
--------------- --------------- ---------------
Net cash used by operating activities (1,623,418) (2,162,199) (3,744,304)
--------------- --------------- ---------------
Cash flows from investing activities:
Deposits for equipment (51,000) (40,000) (51,000)
Purchases of property and equipment, net of disposals (347,744) (4,524,871) (5,995,776)
Purchase of other non-current assets - (146,583) (161,172)
------------ --------------- ---------------
Net cash used by investing activities (398,744) (4,711,454) (6,207,948)
------------ --------------- ---------------
Cash flows from financing activities:
Increase in advances and other payables to affiliates 1,072,368 722,698 1,795,066
Principal payments on capital lease obligations (76,848) (11,041) (87,889)
Proceeds from WVI and subsidiary company
stock offerings - 1,462,443 8,335,567
--------------- --------------- ---------------
Net cash provided by financing activities 995,520 2,174,100 10,042,744
--------------- --------------- ---------------
Net (decrease) increase in cash and cash equivalents (1,026,642) (4,699,553) 90,492
Cash and cash equivalents at beginning of period 1,117,134 5,816,687 -
--------------- --------------- ---------------
Cash and cash equivalents at end of period $ 90,492 $ 1,117,134 $ 90,492
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
WILLAMETTE VALLEY, INC. MICROBREWERIES ACROSS AMERICA
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
Willamette Valley, Inc. Microbreweries across America (WVI) is a
development stage company formed on December 2, 1993 to establish a series
of microbreweries throughout the United States using a consumer-owned
capitalization plan and certain marketing strategies. Each microbrewery
will produce and sell high-quality ales marketed under a label developed
specifically for each microbrewery. WVI plans to establish each
microbrewery as a subsidiary and expects to retain control and a
substantial interest in each microbrewery following completion of the
microbrewery's initial public offering. As of December 31, 1996, WVI has
established four microbreweries, three of which have raised capital in
public offerings of their stock and have begun producing beer. In July
1994, WVI began providing management services to its subsidiaries and to
other affiliated companies (see Note 8).
The Company was organized under the laws of the State of Delaware. From
the date of inception (December 2, 1993) through December 31, 1996, WVI's
efforts have been directed primarily toward organizing and issuing a public
offering of shares of its common stock and providing support to its
subsidiaries in their efforts to raise additional capital and to build and
equip their breweries.
WVI is a development stage company which has only a limited and
unprofitable operating history, has negative working capital of $2,914,247
and has limited access to capital with which to fund future operations.
There can be no assurance that WVI or its subsidiaries will produce and
sell its products on a profitable basis to sustain operations. Such
factors, among others, raise substantial doubt as to the Company's ability
to continue as a going concern.
Subsequent to December 31, 1996, the Company and its subsidiaries entered
into an investment agreement to be merged with its affiliate breweries
during 1997 and for all of the Company's common stock and the common stock
of its subsidiaries to be converted into shares of a new public company.
The Company currently has no source of capital other than the proposed
investor discussed in Note 12.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles 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
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of WVI and its
four subsidiaries, Aviator Ales, Inc. (AAI); Mile High Brewing Company
(MHBC); Bayhawk Ales, Inc. (BAI); and North Country Brewing Company Inc.
(NCBCI) (collectively, "the Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
F-7
<PAGE>
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MINORITY INTEREST
The minority interest represents the minority shareholders' share of the
equity and net losses of AAI, MHBC, and BAI. The minority shareholders'
interests in AAI, MHBC, and BAI are approximately 49%, 49% and 43%,
respectively, at December 31, 1996. The minority shareholders' interests
in AAI, MHBC, and BAI were approximately 35%, 49%, and 43%, respectively,
at December 31, 1995. There is no minority interest in the accounts of
NCBCI as it is a wholly owned subsidiary of WVI.
On March 4, 1996, the board of directors of WVI authorized WVI to
contribute 2,129,871 of its 4,845,455 shares in AAI to AAI for no
consideration in contemplation of a stock offering. AAI has retired these
shares. This transaction reduced WVI's ownership in AAI from approximately
65% to approximately 51%.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Cost includes the purchase price of materials, direct labor and an
allocation of indirect production costs.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated over their
estimated useful lives using the straight-line method, beginning at the
time the assets are placed in operation, as follows:
Leasehold improvements 5-15 years
Machinery and equipment 5-15 years
Expenditures for repairs and maintenance are charged to expense as
incurred, and expenditures for additions and betterments are capitalized.
Leasehold improvements are depreciated over the shorter of the life of the
asset or the lease.
OTHER NONCURRENT ASSETS
The Company has capitalized the fees and related legal costs of
organization which are included in other noncurrent assets in the
accompanying balance sheet. These items were written off in 1996 based on
the proposed merger as described in Note 12 as these intangible assets no
longer have future value.
INCOME TAXES
The Company accounts for income taxes using the asset and liability
approach prescribed by Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under this approach, deferred income taxes
are calculated for the expected future tax consequences of temporary
differences between the book basis and tax basis of the Company's assets
and liabilities. WVI will file a consolidated tax return with NCBCI; AAI,
MHBC, and BAI will file stand-alone federal and state tax returns.
F-8
<PAGE>
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue upon the shipment of its products to its
customers. Sales are recorded as trade accounts receivable and no
collateral is required. Management service revenues are recorded as
provided and are billed on a monthly basis.
OTHER EXPENSE
Other expense consists primarily of costs incurred by the Company's
subsidiaries related to attempted public stock offerings. These offerings
were not successful, and the related costs have been recorded as other
expenses in the accompanying statement of operations.
NET LOSS PER COMMON SHARE
Net loss per common share is calculated based on the weighted average
number of common shares outstanding after giving effect to shares granted
to employees throughout the periods presented. No common stock equivalents
with a dilutive effect were outstanding during the periods presented.
Shares held in escrow are included in the weighted average number of common
shares outstanding.
STATEMENT OF CASH FLOWS
The Company considers short-term investments which are highly liquid, are
readily convertible into cash, and have original maturities of fewer than
three months to be cash equivalents for the purposes of cash flows. For
the year ended December 31, 1996, the Company paid no income taxes and paid
interest of $72,180. For the year ended December 31, 1995, the Company
paid no income taxes and paid interest of approximately $9,300. During
1995, the Company obtained $88,000 of equipment under capital lease
obligations; these non-cash transactions have been excluded from the
accompanying statement of cash flows. The minority interest in subsidiary
companies includes adjustments related to the stock offerings of the
subsidiary companies; such non-cash adjustments are not included in the
accompanying statement of cash flows.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
Except as discussed in Note 8 under advances from affiliates, the fair
market values of the Company's recorded financial instruments approximate
the respective recorded balances, as the recorded assets and liabilities
are stated at amounts expected to be realized or paid, or carry interest
rates commensurate with current rates for instruments with a similar
duration and degree of risk.
LONG-LIVED ASSETS
Effective January 1, 1996 the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (FAS 121). Under FAS
121, property is carried at cost unless estimated future undiscounted cash
flows from the operation of such property are less than cost in which case
the carrying value is reduced to fair value (see Note 11).
F-9
<PAGE>
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
The Company adopted Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-Based Compensation" in 1996. SFAS 123
was issued by the Financial Accounting Standards Board in October 1995, and
allows companies to choose whether to account for stock-based compensation
under the current intrinsic method as prescribed in Accounting Principles
Board Opinion Number 25 (APB 25) or use the fair value method prescribed in
SFAS 123. The Company has selected to continue to follow the provisions of
APB 25. The impact of adoption has not had a significant effect on the
Company's financial position or results of operations (see Note 7).
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 financial statements
to conform with 1996 presentation. These reclassifications have no impact
on previously reported results of operations or shareholders' equity.
2. INVENTORIES
Inventories consist of:
DECEMBER 31,
1996 1995
------------ ------------
Raw materials $ 190,114 $ 76,042
Work-in-process 38,898 71,267
Finished goods 76,858 181,974
Retail inventory 44,000 39,373
------------ ------------
$ 349,870 $ 368,656
------------ ------------
------------ ------------
F-10
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of:
DECEMBER 31,
1996 1995
------------ ------------
Land and improvements $ 2,480,139 $ 2,196,516
Brewery equipment 3,838,112 3,112,557
Office furniture and equipment 166,267 313,756
Vehicles 40,740 41,223
Construction in progress 53,460 20,175
------------ ------------
6,578,718 5,684,227
Less accumulated depreciation (621,731) (224,075)
Impairment loss (832,241) -
------------ ------------
$ 5,124,746 $ 5,460,152
------------ ------------
------------ ------------
At December 31, 1996 property and equipment includes $88,000 of equipment
held under capital leases with related accumulated amortization aggregating
$10,909.
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt consists of a $50,000 note payable to an individual, issued
in connection with the purchase of land in the state of Washington. The
note bears interest at 9% and requires quarterly interest payments. The
note is secured by the land and is payable in a lump sum in June 1999.
The Company has entered into certain capital lease obligations related to
the acquisition of equipment including a bottling line for use at MHBC.
These leases bear interest at rates ranging from 9% - 15% and require
monthly payments of principal and interest. The leases are secured by the
equipment and mature in 1998 and 2000.
Future minimum payments under the Company's capital lease obligations are
as follows:
PRINCIPAL INTEREST TOTAL
------------ ------------ ------------
1997 $ 73,328 $ 31,660 $ 104,988
1998 78,153 23,280 101,433
1999 83,539 14,538 98,077
2000 87,196 5,227 92,423
------------ ------------ ------------
$ 322,216 $ 74,705 $ 396,921
------------ ------------ ------------
------------ ------------ ------------
F-11
<PAGE>
5. INCOME TAXES
Pre-tax loss was attributable to operations entirely within the United
States. For the periods ended December 31, 1996 and 1995, there were no
current or deferred provisions for income taxes.
The benefit for income taxes differs from the amount of income taxes
determined by applying the U.S. statutory graduated federal rate due to the
following:
YEAR ENDED DECEMBER 31,
1996 1995
------ ------
Statutory graduated federal rate 34.0% 34.0%
State taxes, net of federal benefit 4.4 4.4
Reserve of net deferred tax asset (38.4) (38.4)
------ ------
- % - %
------ ------
------ ------
Deferred tax assets (liabilities) consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Federal and state net operating loss carryforwards $ 3,705,000 $ 704,000
Expenses not currently deductible 468,000 28,000
Fixed assets (175,000) (70,000)
Deferred tax asset valuation allowance (3,998,000) (662,000)
------------ ------------
$ - $ -
------------ ------------
------------ ------------
</TABLE>
As of December 31, 1996, WVI and its subsidiaries had net operating loss
carryforwards aggregating approximately $6 million for federal and state
purposes, which may be used to offset future taxable income, if any.
However, based on the estimated current fair market value of each entity
included in the proposed consolidation (see Note 13) the net loss
carryforward may be limited.
6. SHAREHOLDERS' EQUITY
WVI is authorized to issue 10,000,000 shares of its common stock. Each
share of common stock entitles the holder to one vote. In December 1993,
WVI received $111,111 in stock subscriptions from its founding shareholders
in exchange for 3,353,826 shares of unregistered common stock. The cash
was received in 1994.
In connection with WVI's initial stock offering under Oregon securities
laws, WVI agreed to place in escrow 3,353,826 of its shares of common
stock. These shares will be released from escrow to WVI's founders when
WVI satisfies one or more certain earnings requirements or establishes a
bona fide over-the-counter trading market for its common stock and
maintains a bid price equal to or greater than a stipulated benchmark price
for 26 or more consecutive weeks. Unless released pursuant to
F-12
<PAGE>
6. SHAREHOLDERS' EQUITY (CONTINUED)
these conditions, the 3,353,826 shares shall remain in escrow until
unconditionally released in 25% increments on October 31, 2000, 2001, 2002,
and 2003. The shares, while in escrow, entitle WVI's founders to the same
rights and privileges as all other shareholders of common stock, except for
certain rights relating to transferability and liquidation. Based on the
ownership change anticipated by management described in Note 12, the shares
will not be released from escrow, and all shares will be converted to
shares of the new Company.
During 1994, WVI sold 1,496,970 shares of its common stock at $1.65 per
share pursuant to a Regulation A public offering filed with the U.S.
Securities and Exchange Commission (SEC). Cash proceeds from this
offering, net of offering expenses of $290,424, aggregated $2,179,577
during 1994.
During 1996 AAI and MHBC attempted their second direct public offerings to
sell common stock. The offerings have failed to raise the minimum escrow
amounts, and AAI is no longer soliciting investors, and MHBC has elected to
terminate its offering and return funds held in escrow to investors.
Accordingly, the costs of $461,969 related to these offerings have been
expensed in the current year.
7. STOCK INCENTIVE PLAN
WVI has adopted a 1993 Stock Incentive Plan (the "Plan") and has reserved
591,851 shares of its common stock thereunder. The Plan provides for the
grant of incentive stock options to employees of the Company and
non-qualified stock options, stock sales and stock grants to employees,
directors and consultants of the Company at fair market value. During
1996, the Company granted 10,200 shares to employees. The $20,400 value of
these shares is included in selling, general and administrative expenses in
the accompanying statement of operations.
During 1994, the Company granted a total of 125,000 options under the Plan
at an exercise price of $1.65 per share which approximated fair market
value at the date of grant.
During 1995, 122,500 options were granted under the plan at an exercise
price of $2.00 per share which approximated fair market value at the date
of grant. These options vest ratably over ten years. Of these, 41,500
were subsequently canceled. In 1996, an additional 70,000 options were
granted at an exercise price of $1.95, which approximates fair market value
at the date of grant. Of these, 15,000 and 40,000 options vest ratably
over ten and five years, respectively, beginning one year after the date of
grant. The remaining 15,000 options were subsequently canceled. As of
December 31, 1996, there were no options exercised, vested options were
18,000, and options outstanding were 185,000.
F-13
<PAGE>
7. STOCK INCENTIVE PLAN (CONTINUED)
The Company has elected to account for its stock-based compensation under
Accounting Principles Board Opinion 25. The Company has determined that
the pro forma effects of applying SFAS 123 would not have a material effect
on the results of operations for 1996 and 1995. This determination was
made using the Black-Scholes option pricing model. The weighted average
assumptions used for stock option grants for 1996 and 1995 were a risk-free
interest rate of 6.78% and 7.11%, respectively, an expected dividend yield
of 0% and 0%, respectively, an expected life of 6.66 years and 10 years,
respectively, and an expected volatility of 57% and 54%, respectively. The
weighted average fair value of stock options granted in 1996 and 1995 was
$1.20 and $1.46, respectively.
Options were assumed to be exercised upon vesting for purposes of this
valuation. Adjustments are made for options forfeited prior to vesting.
For the years ended December 31, 1996 and 1995, the total value of the
options granted was computed to be $65,960 and $116,520, respectively,
which would be amortized on a straight-line basis over the vesting period
of the options.
Note that all options granted by the Company are expected to be converted
to options of the new company expected to be formed at the same conversion
rate as the conversion of common stock as discussed in Note 12.
AAI, MHBC, and BAI each have similar stock incentive plans and each of
these subsidiaries has granted options thereunder.
8. RELATED PARTIES
NATURE OF RELATED PARTIES
WVI's president partially owns and controls Willamette Valley Vineyards
(WVV), a winery in Oregon, and Nor'Wester Brewing Company, Inc.
(Nor'Wester), a microbrewery in Oregon. WVI's president is also the
president of AAI, MHBC, BAI, and NCBCI. As a result of certain arrangements
between WVI and its affiliates, as well as WVI's 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 the allocation of the president's time.
RELATED PARTY TRANSACTIONS
From January through June of 1994, WVV provided the Company with management
services on a cost-plus-fee basis. These services consisted of accounting,
marketing, administrative, and stock transfer services. The cost of such
services aggregated approximately $77,000, of which approximately $4,000
was included in 1994 selling, general and administrative expenses, and
approximately $73,000 was charged directly to additional paid-in capital as
a component of stock offering cost. Beginning in July 1994, such
management services were performed by WVI's employees. From July through
December 1994, and for the year ended December 31, 1995, WVI charged WVV
and Nor'Wester for these services on a cost-plus basis. The revenues and
costs related to these services are shown separately as management services
in the accompanying consolidated
F-14
<PAGE>
8. RELATED PARTIES (CONTINUED)
statement of operations. In 1996, WVI began contracting for certain
management services under a general services agreement between WVI, WVV and
Nor'Wester.
In September 1995, MHBC paid for certain brewing equipment which was
ultimately sold to Nor'Wester for approximately $53,000. As a result of
this transaction, MHBC was owed approximately $52,000 from Nor'Wester at
December 31, 1995.
STRATEGIC ALLIANCE AND COOPERATIVE BREWING AGREEMENTS
In December 1995, WVI's subsidiaries entered into a Strategic Alliance (the
"Alliance") with Nor'Wester. Nor'Wester, AAI, MHBC, BAI, NCBCI, and WVI
are collectively referred to as "Alliance members," and AAI, MHBC, and BAI
are collectively referred to as the "Cooperative Brewers" and 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 Brewers' network of distributors.
The terms of the Strategic Alliance Agreement and the Cooperative Brewing
Agreements are four years, unless earlier terminated under limited
circumstances, which include material breach in the case of the Cooperative
Brewing Agreements. The Agreements are subject to renewal. Pricing for
the purchase of beer produced under the Cooperative Brewing Agreement is at
the lesser of cost plus 10% or Nor'Wester's average cost of production at
its Nor'Wester Brewery, plus a mark-up of 10%. The Agreement provides that
no Alliance member will use the proprietary information or technology of
another Alliance member to produce any beer with a flavor profile or
appearance that is substantially similar to such Alliance member's beer.
With the consent of all Alliance members, additional parties may be added
to the Alliance.
Under the terms of the Cooperative Brewing Agreements, the Company's
subsidiaries will produce Nor'Wester beer, in the amounts and packaging as
specified in firm orders submitted by Nor'Wester on a periodic basis. Each
Cooperative Brewer's production of Nor'Wester beer must comply with
specifications concerning recipes, quality control procedures, flavor
profile and appearance. Nor'Wester has a right to reject beer not meeting
its specifications.
Nor'Wester has acquired certain specified brewing equipment for the
subsidiaries' use in producing Nor'Wester's beer. To the extent that this
equipment is not needed for the production of Nor'Wester beers, the
subsidiaries may, upon notice to Nor'Wester, use this equipment to produce
their own beer subject to the payment of an agreed-upon lease fee. Certain
brewing equipment acquired by Nor'Wester was purchased by the Company in
1995.
F-15
<PAGE>
8. RELATED PARTIES (CONTINUED)
The Cooperative Brewing Agreement requires that the Cooperative Brewer
maintain the equipment supplied by Nor'Wester, that Nor'Wester insure this
equipment, and that the Cooperative Brewer and Nor'Wester each indemnify
the other for damages and losses in connection with the Agreement.
Nor'Wester may, at its cost, remove or replace its equipment at any time if
market conditions or other circumstances make such action desirable to
Nor'Wester.
Cooperative brewing revenues totaled $1,375,000, which is 36% of the
Company's net revenues. Because of the pricing terms surrounding
cooperative brewing discussed above and the fact that the Company's costs
to produce beer were higher than Nor'Wester's costs to produce beer,
cooperative brewing sales resulted in significant negative gross margins
for the Company. In addition, a significant portion of the beer brewed by
the Company and sold to Nor'Wester was determined to be unusable.
Subsequent to December 31, 1996, the cooperative brewing agreement was
canceled with the consent of all Alliance members.
ADVANCES FROM AFFILIATES
In connection with the Cooperative Brewing Agreement with Nor'Wester
described above, Nor'Wester advanced $250,000 each to AAI and MHBC in
December 1995 for the purchase of ingredients and packaging materials for
the subsidiaries' initial production of Nor'Wester's products. These
advances are unsecured and do not bear interest. In 1996, Nor'Wester
advanced an additional $100,000 and $250,000 respectively, to AAI and MHBC.
An additional $50,000 was advanced directly to WVI. Because management
plans to merge the Company into a new Company (see Note 12), management
believes these advances will be paid partially in 1997, and the remainder
will be considered in the conversions of the companies' shares into shares
of the new Company expected to be formed.
These advances remain outstanding as a current payable although the
cooperative brewing agreement has been terminated. Because these advances
will eventually be eliminated when the proposed merger occurs, as discussed
in Notes 12 and 13, these advances have been classified as current at
December 31, 1996.
9. COMMITMENTS
WVI's subsidiaries have entered into agreements with several independent
distributors for the distribution of the Company's products. These
agreements contain normal distribution provisions and are cancelable by
either the subsidiaries or the distributors.
The Companies have entered into operating lease arrangements for equipment
and facilities. Approximate future minimum lease payments are as follows:
F-16
<PAGE>
9. COMMITMENTS (CONTINUED)
YEAR ENDING
DECEMBER 31,
-------------
1997 $ 260,000
1998 264,000
1999 269,000
2000 276,000
2001 293,000
Thereafter 3,630,000
---------------
$ 4,992,000
---------------
---------------
The terms of certain of the leases allowed for no lease payments to be made
during the initial months of the lease term, and contain escalating
payments. The Company is recording lease expense on the straight-line
method over the lease term; accordingly, deferred rent has been recorded in
the accompanying balance sheet. Rent expense during 1996 and 1995 related
to these leases aggregated approximately $312,000 and $194,000,
respectively, and is allocated between cost of sales and selling, general
and administrative expenses in the accompanying statement of operations.
In addition, due to the nature of the industry the Company operates in, the
Company is exposed to certain hazards and liability risks resulting from
brewery operations which could impact the Company negatively.
10. SIGNIFICANT CUSTOMERS
Virtually all of the Company's products are sold in the states of Colorado,
Washington, and California. Sales to distributors in the Pacific Northwest
were 21% of gross beer sales in 1996. Sales to the Company's two largest
customers (excluding cooperative brewing) for the years ended December 31,
1996 and 1995 totaled 25% and 42%, respectively.
11. IMPAIRMENT OF MHBC ASSETS
Subsequent to December 31, 1996, the management of MHBC developed a plan to
sell all of the operating assets of MHBC or to pursue contract brewing
opportunities. Accordingly, and pursuant to SFAS 121, such assets were
reduced to their estimated fair value as of December 31, 1996.
Management's estimate of this write-down of approximately $969,000 is based
on a pending offer from an unaffiliated buyer. In addition, management
estimates the cost to dispose of the assets to be approximately $50,000,
and this amount is recorded in the financial statements as of December 31,
1996 as part of the impairment loss. While management searches for other
potential buyers, MHBC is operating on a limited basis as a contract brewer
for a local brewery and is looking for other contract brewing
opportunities. No definitive agreement has been reached, but management
has received an offer of approximately $2 million in exchange for all of
MHBC's property and equipment at the brewery and assumption of the facility
lease.
F-17
<PAGE>
12. PROPOSED MERGER AND INVESTMENT FROM UBA
Subsequent to December 31, 1996, the Company along with its subsidiaries
(AAI, MHBC and BAI) and affiliate (Nor'Wester) 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 consolidate into a company to be
known as United Craft Brewers, Inc. (UCB). This 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 consolidation, 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. Proposed exchange ratios for each of the entities
are as follows, 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
merger:
COMPANY EXCHANGE RATIO
---------- --------------
Nor'Wester 1:1
WVI 1.99159:1
AAI 2.98739:1
BAI 1.99159:1
MHBC 2.98739:1
Following the merger, UBA has proposed to invest $8.63 million in exchange
for a 45% equity interest in the new entity, UCB. Of the $8.63 million
proposed investment by UBA, $2.75 million is in the form of bridge loans
conditionally available to Nor'Wester during the consolidation phase. As
of March 21, 1997, $1,500,000 has already been loaned to Nor'Wester, the
majority of which has been advanced to North Country. At closing, it is
anticipated that the bridge loans will be converted into shares of UCB and
the remaining $5.88 million cash investment will be made directly in shares
of UCB (see Note 13).
The closing of the proposed investment remains subject to (i) approval by
the shareholders of each of the companies, (ii) achievement of certain
operating results at each of the breweries, (iii) maintenance of certain
operating conditions and covenants, including that there shall be no
material adverse change in the businesses of the affiliated breweries taken
as a whole, (iv) approval by federal and state liquor control agencies, (v)
registration with the U.S. Securities and Exchange Commission of UCB shares
to be exchanged in the merger, and (vi) such other customary conditions for
transactions of this type.
Immediately following the proposed investment by UBA, UBA would own 45% and
the Company's president would own 10% of UCB. The public shareholders of
Nor'Wester, WVI, and WVI's subsidiaries would own the remaining 45% of UCB
(see Note 13).
F-18
<PAGE>
13. SUBSEQUENT EVENTS
In light of lower than anticipated 1996 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 are in
the process of renegotiating the terms of the UBA investment discussed in
Note 12. The renegotiation will reflect a significantly lower valuation
and a change in the exchange ratios 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 the consolidation. It is anticipated that the $2.75 million
bridge loan amount will not be reduced. The existing shareholders in the
affiliated Companies would retain a 60% interest in UCB. The exact
distribution of ownership interests among shareholders of the affiliated
companies has not yet been determined. Management will soon seek Board
approval by each of the affiliated companies of any renegotiated terms.
Failure of the parties to reach a mutually agreeable renegotiated
investment agreement could lead to a loss of the bridge loans and the
remainder of the UBA investment which would materially and adversely affect
the Company's financial condition and results of operations. There can be
no assurance that the proposed merger will be completed or that the Company
and its subsidiaries will obtain the capital needed to sustain operations.
14. RESTATEMENT OF FINANCIAL STATEMENTS
The accompanying 1996 consolidated financial statements have been restated
to revise the Company's share of the net losses sustained for the period
from January 1 to September 30, 1996 by North Country Joint Venture, LLC,
which was sold by the Company in October 1996 to Nor'Wester, an affiliated
company.
In addition, the accompanying 1996 consolidated financial statements have
been restated to reduce the impairment loss by the amount of future
estimated operating losses initially included therein relating to a
contract brewing arrangement of MHBC. Such losses will be recorded by MHBC
in 1997 as incurred. The effects of these restatements on the consolidated
financial statements are summarized below:
F-19
<PAGE>
14. RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1996
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -------------
<S> <C> <C>
Consolidated balance sheet:
Reserve for impairment loss $ 338,000 $ 50,000
Payables to affiliated companies 1,572,569 1,795,066
Minority interest 142,585 283,706
Deficit accumulated during the
development stage (3,868,902) (3,944,520)
Consolidated statement of operations:
Impairment loss 1,306,879 1,018,879
Other expense (422,788) (183,316)
Minority interest in losses of consolidated
subsidiary companies 1,944,216 1,853,095
Net loss (2,388,613) (2,464,231)
Net loss per share (0.49) (0.51)
</TABLE>
F-20
<PAGE>
15. CONSOLIDATING INFORMATION
The following presents the consolidating balance sheet and statement of
operations of the Company.
<TABLE>
<CAPTION>
WVI CONSOLIDATING BALANCE SHEET
DECEMBER 31, 1996
------------------------------------------------------------------------------------------------
(RESTATED - NOTE 14)
WVI
WVI BAI AAI MHBC NCBCI ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ - $ 40,954 $ 19,218 $ 30,320 $ - $ - $ 90,492
Accounts receivable - 64,349 61,529 85,200 - - 211,078
Receivables from affiliates - - - - - - -
Inventories - 23,692 326,178 - - - 349,870
Prepaid and other
current assets - - - 8,170 - - 8,170
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total current assets - 128,995 406,925 123,690 - - 659,610
Property and equipment, net 63,556 802,798 2,258,392 2,000,000 - 5,124,746
Investment in affiliates 300,000 - - - - (300,000) -
----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 363,556 $ 931,793 $ 2,665,317 $ 2,123,690 $ - $ (300,000) $ 5,784,356
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current portion of long-
term debt and capital
lease obligations $ - $ - $ 4,058 $ 69,270 $ - $ - $ 73,328
Accounts payable 9,859 36,798 607,570 816,664 - - 1,470,891
Accrued liabilities 59,721 16,780 44,516 15,633 13,000 - 149,650
Container deposits - 19,339 15,583 - - - 34,922
Impairment loss - 50,000 - 50,000
Payables to affiliated
companies (1,333,974) 291,586 881,012 1,834,547 121,895 - 1,795,066
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities (1,264,394) 364,503 1,552,739 2,786,114 134,895 - 3,573,857
Long-term debt and capital
lease obligations - - 57,664 241,224 - - 298,888
Deferred rent - - 70,103 - - - 70,103
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total liabilities (1,264,394) 364,503 1,680,506 3,027,338 134,895 - 3,942,848
----------- ----------- ----------- ----------- ----------- ----------- -----------
Minority interest - - - - - 283,706 283,706
----------- ----------- ----------- ----------- ----------- ----------- -----------
Shareholders' equity:
Common stock 48,610 2,201 5,332 4,694 - (12,227) 48,610
Additional paid-in capital 2,261,734 1,427,982 2,582,553 2,252,274 - (3,070,831) 5,453,712
Deficit accumulated during
development stage (682,394) (862,893) (1,603,074) (3,160,616) (134,895) 2,499,352 (3,944,520)
----------- ----------- ----------- ----------- ----------- ----------- -----------
1,627,950 567,290 984,811 (903,648) (134,895) (583,706) 1,557,802
----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 363,556 $ 931,793 $ 2,665,317 $ 2,123,690 $ - $ (300,000) $ 5,784,356
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
F-21
<PAGE>
15. CONSOLIDATING INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
WVI CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------------------------------------
(RESTATED - NOTE 14)
WVI
WVI BAI AAI MHBC NCBCI ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Gross sales $ - $ 461,549 $ 1,905,511 $ 1,600,915 $ - $ $ 3,967,975
Less excise taxes - (41,611) (81,434) (85,426) - (208,471)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net sales - 419,938 1,824,077 1,515,489 - 3,759,504
Management services 266,775 - - - - (156,975) 109,800
----------- ----------- ----------- ----------- ----------- ----------- -----------
266,775 419,938 1,824,077 1,515,489 - (156,975) 3,869,304
----------- ----------- ----------- ----------- ----------- ----------- -----------
Cost of sales:
Cost of goods sold 364,450 1,879,062 1,905,335 - 4,148,847
Management services 266,775 - - - - (156,975) 109,800
----------- ----------- ----------- ----------- ----------- ----------- -----------
266,775 364,450 1,879,062 1,905,335 - (156,975) 4,258,647
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross (deficit) margin - 55,488 (54,985) (389,846) - - (389,343)
Selling, general and
administrative expenses 247,285 339,766 851,352 790,615 - 2,229,018
Impairment loss - - - 1,018,879 - - 1,018,879
Write-off of stock offering
costs - - 249,871 212,098 - - 461,969
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations (247,285) (284,278) (1,156,208) (2,411,438) - - (4,099,209)
Interest income (expense) 16,261 (11,606) (1,498) (37,958) - (34,801)
Other expense (308,605) 4,342 - 17,124 103,823 (183,316)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes and minority interest (539,629) (291,542) (1,157,706) (2,432,272) 103,823 - (4,317,326)
Income taxes - - - - - - -
Minority interest - - - - - 1,853,095 1,853,095
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss $ (539,629) $ (291,542) $(1,157,706) $(2,432,272) $ 103,823 $ 1,853,095 $(2,464,231)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
F-22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
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