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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-QSB
_________________________
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Quarter Ended September 30, 1996
Commission File Number 33-82208-LA
BAYHAWK ALES, INC.
(Exact name of registrant as specified in charter)
Delaware 33-0606860
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
_______________________________
2000 Main Street - Suite A
Irvine, California 92714
(714) 442-7565
(Address, including Zip code, and telephone number,
including area code, of registrant's principal executive offices)
_________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. [ X] YES [ ] NO
Transitional Small Business Disclosure Format [ ] YES [X] NO
Number of shares of common stock outstanding as of September 30, 1996:
2,200,814 shares, $.001 par value
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BAYHAWK ALES, INC.
INDEX TO FORM 10-Q
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Part I - Financial Information
Item 1 -- Financial Statements
Balance Sheet - September 30, 1996 and December 31, 1995. . . 3
Statement of Operations - Three Months and Nine Months Ended
September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . 4
Statement of Cash Flows - Nine Months Ended September 30, 1996
and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements. . . . . . . . . . . . . . . . . 6
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . 9
Part II - Other Information
Item 6 -- Exhibits and Reports on Form 8-K . . . . . . . . . 12
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . 13
BAYHAWK ALES, INC.
(A Development Stage Company)
Balance Sheet
September 30,
1996 December 31,
ASSETS (unaudited) 1995
_____________ ____________
Current assets:
Cash and cash equivalents $ 66,244 $ 302,247
Accounts receivable 73,884 26,405
Inventories 38,686 37,620
Other current assets, net 10,687 12,165
_____________ ____________
Total current assets 189,501 378,437
Property and equipment, net 779,310 876,213
Other non-current assets, net 32,897 6,998
_____________ ____________
Total assets $ 1,001,708 $ 1,261,648
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,132 $ 9,249
Accrued liabilities 82,976 36,482
Payable to parent and affiliated
companies, net 57,230 13,995
Current portion of note payable
to parent company 30,041 26,000
_____________ ____________
Total current liabilities 190,379 85,726
Note payable to parent company 225,585 321,000
Shareholders' equity:
Common stock, $.001 par value - 10,000,000
shares authorized, 2,200,814 and 2,198,444
shares outstanding 2,200 2,198
Additional paid-in capital 1,419,810 1,424,075
Deficit accumulated during the development
stage (836,266) (571,351)
_____________ ____________
Total shareholders' equity 585,744 854,922
_____________ ____________
Total liabilities and
shareholders' equity $ 1,001,708 $ 1,261,648
============== =============
BAYHAWK ALES, INC.
(A Development Stage Company)
Statement of Operations
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
_________ __________ _________ _________
Gross sales $ 145,497 $ 93,474 $385,603 $143,264
Less: excise
taxes 10,849 6,653 36,043 12,771
_________ __________ _________ _________
Net sales 134,648 86,821 349,560 130,493
Cost of sales 106,531 104,658 314,064 163,603
_________ __________ _________ _________
Gross profit
(deficit) 28,117 (17,837) 35,496 (33,110)
Selling, general
and administrative
expenses 108,822 146,554 287,749 329,757
_________ _________ _________ _________
Loss from
operations (80,705) (164,391) (252,253) (362,867)
Other income (expense)
Interest income 922 5,524 5,286 5,794
Interest expense (6,516) - (17,948) -
_________ _________ ___________ ___________
Net income (loss) (86,299) $(158,867) $(264,915) $(357,073)
========= ========= =========== ===========
Net loss per
common share $ (0.04) $ (0.08) $ (0.12) $ (0.24)
Weighted average number
of common shares
outstanding 2,200,814 1,932,826 2,200,725 1,488,122
BAYHAWK ALES, INC.
(A Development Stage Company)
Statement of Cash Flows
Nine Months Ended September 30,
1996 1995
Cash flows from operating activities: ___________ ____________
Net loss $ (264,915) $ (357,072)
Reconciliation of net loss
to net cash provided by operating activities:
Depreciation and amortization 35,500 49,250
Changes in assets and liabilities:
Accounts receivable (47,479) (16,851)
Inventories (1,066) (39,724)
Other current assets 1,478 (18,903)
Other non-current assets (25,899) 2,000
Accounts payable 10,883 19,539
Accrued liabilities 46,494 (29,055)
Payables to parent and
affiliated companies 43,235 (528,813)
__________ ___________
Net cash used for operating activities (201,769) (919,629)
Cash flows from investing activities:
Purchases of property and equipment (12,847) (67,061)
Sale of equipment 74,250 -
__________ ___________
Net cash (used for) provided by
investing activities 61,403 (67,061)
Cash flows from financing activities:
Deferred stock offering costs - 77,207
Net proceeds from stock offerings (4,263) 1,287,591
Borrowings from (repayments to
parent and affiliated company) (91,374) -
___________ __________
Net cash (used for) provided by
financing activities (95,637) 1,364,798
Net increase in cash and cash equivalents (236,003) 378,108
Cash and cash equivalents:
Beginning of period 302,247 27,005
___________ __________
End of period $ 66,244 $405,113
=========== ==========
BAYHAWK ALES, INC.
NOTES TO FINANCIAL STATEMENTS
DEVELOPMENT STAGE COMPANY
Bayhawk Ales, Inc. ("the Company") was formed on February 14, 1994 to
produce and sell hand-crafted ales in Southern California. The Company
operates a brewery adjacent to McCormick and Schmick's Pilsner Room in
Irvine, California. This "showcase" brewery is capable of producing 10,400
barrels per year. The Company is a majority owned subsidiary of Willamette
Valley, Inc. Microbreweries across America ("WVI"), a company organized to
establish a series of microbreweries throughout the United States. WVI owns
approximately 57% of the Company's Common Stock. The Company is a
development stage company that was organized under the laws of the State of
Delaware.
BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited and have been
prepared by Bayhawk Ales, Inc. pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures typically included in financial statements prepared in
accordance with generally accepted accounting standards have been condensed
or omitted pursuant to such rules and regulations. In the opinion of
management, the financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
the results for the interim period presented. The financial statements
should be read in conjunction with the audited financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1995 filed with the Securities and Exchange
Commission on April 1, 1996. The results of operations for an interim
period are not necessarily indicative of the results of operations for a
full year.
Inventories
Inventories consist of the following:
September 30, December 31,
1996 1995
_____________ ____________
Raw materials $ 11,231 $ 9,081
Work-in-process 15,138 14,835
Finished goods 7,083 12,067
Retail products 5,234 1,637
_____________ ____________
$ 38,686 $ 37,620
============= ============
BAYHAWK ALES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Property and Equipment
Property and Equipment consists of the following:
September 30, December 31,
1996 1995
_____________ ____________
Leasehold improvements $ 270,267 $ 270,267
Equipment 602,083 664,490
Office furniture and equipment 4,644 3,640
_____________ ____________
876,994 938,397
Less accumulated depreciation and amortization (97,684) (62,184)
______________ _____________
$ 779,310 $ 876,213
============== =============
Income Taxes
No benefit for income taxes was recognized for the periods ended September
30, 1996 and 1995 in the accompanying statement of operations as there can
be no assurance that the Company will generate taxable income in the future
against which such benefit could be realized. Accumulated net operating
loss carryforwards which may be used to offset future taxable income were
approximately $875,000 and $610,000, respectively, at September 30, 1996 and
December 31, 1995.
Shareholders' Equity
In January 1996, the Company completed the public offering of its Common
Stock pursuant to Regulation A of the Securities and Exchange Commission. A
total of 951,003 shares were sold, generating proceeds of $1,322,011 net of
offering expenses of $253,725.
Related Party Transactions
For the nine months ended September 30, 1996, the Company purchased
management and administrative services from WVI at a total cost of $1,785.
WVI contracts for certain of these services under a general services
agreement between WVI and Nor'Wester Brewing Company, Inc., an affiliated
company.
In April 1996, the Company commenced brewing of Nor'Wester brand beer under
the terms of a Cooperative Brewing Agreement with Nor'Wester Brewing
Company, Inc. ("Nor'Wester"). Sales to Nor'Wester under this agreement
totaled $19,560 through September 30, 1996. Nor'Wester provided a loan of
$35,000 to the Company for the purchase of grain silo and milling system to
reduce cooperative brewing costs. This loan is to be repaid over ten years
with interest at 10%.
The Company also purchases bottled Bayhawk brand beer under an agreement
with an affiliate, Aviator Ales, Inc. ("AAI"). Purchases of the Company's
Bayhawk brand in bottles under this agreement with AAI totaled $38,596
through September 30, 1996.
Net Loss Per Common Share
Net loss per common share is calculated based on the weighted average number
of common shares outstanding. No common stock equivalents with a dilutive
effect were outstanding during 1996. Shares held in escrow are included
in the weighted average number on common shares outstanding.
Contingencies
In September 1996, the Company's parent, WVI, entered into a non-binding
letter of intent with The UB Group of Bangalore, India setting forth the
proposed terms of The UB Group's planned investment of $9.0 million in
cash and certain intangible consideration in exchange for an equity
interest in the resulting entity following the proposed consolidation
of the Company, WVI, and the Company's affiliates, Nor'Wester, AAI, Mile
High Brewing Company, and North County Brewing Company. Although the
parties are proceeding toward signing a definitive agreement setting
forth the terms and conditions of the proposed investment, there can
be no assurance that an equity investment by The UB Group will be made or,
if made, the ultimate terms of such investment.
BAYHAWK ALES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. Actual future results and trends may differ
materially depending on a variety of factors, including, but not limited
to, pricing and availability of raw materials and packaging, successful
execution of internal performance and expansion plans, impact of competition,
distributor changes, availability of financing, and other risks detailed
below and in the Company's Securities and Exchange Commission filings,
including the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995.
Results of Operations
Three Months Ended September 30, 1996
Gross Sales. Sales for the three months ended September 30, 1996 were
$145,497, an increase of 56% as compared to gross sales of $93,474 for the
same period in 1995. This reflects an increase of sales volume from 547
barrels in 1995 to 1,086 in 1996. The increase in sales are primarily
attributable to (i) the sale of $19,560 of Nor'Wester brand beer under the
Cooperative Brewing Agreement with Nor'Wester, the Company's affiliate and
(ii) an increased market share of the Company's beer throughout Southern
and Northern California. This increase in sales however is not sufficient
for the Company to become self-sustaining in the near term. In July 1996,
Nor'Wester temporarily suspended brewing under the Cooperative Brewing
Agreement with the Company as the brewing capacity for Nor'Wester brand
beer on draft was not needed. The Company expects this will have material,
adverse effects on future revenues as cooperative brewing accounted for 15%
and 39% of sales for the three month and nine month periods, respectively.
Excise Taxes. Excise taxes increased from $6,653 (7% of gross sales) for
the three months ended September 30, 1995 to $10,849 (8% of gross sales) for
the third quarter of 1996. Excise taxes increased slightly as a percentage
of net sales due to beer sales in states with a higher tax rate than
California.
Cost of Sales. Cost of sales as a percentage of net sales for the three
months ended September 30, 1996 and 1995 was 79% and 119%, respectively,
reflecting the disproportionate cost of production for goods sold during
a period when the facility is operating at less than its maximum designed
capacity, as well as development-stage production costs such as recipe
testing. In addition, the gross margin on cooperative brewed Nor'Wester
beer is substantially less than the Company's own products thereby increasing
the cost of sales as a percentage of net revenues. The cooperative brewing
arrangement between the Company and Nor'Wester increased the brewing volume
and with that, the Company was able to realize a positive gross margin for
the three month ended September 30, 1996.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses for the three months ended September 30, 1996
totaled $108,822 or 81% of net sales as compared to $146,554 or 157% of net
sales for the comparable period in 1995. This is primarily due to higher
administrative costs incurred during the first months of the Company's
operations in 1995. Management is developing strategies to reduce
expenses while increasing sales. These strategies include restructuring
of sales related compensation, implementing expense controls, reducing staff
and other alternatives.
Nine Months Ended September 30, 1996
Gross Sales. Sales for the nine months ended September 30, 1996 were
$385,603, an increase of 169% as compared to gross sales of $143,264 for
the same period in 1995. This reflects an increase sales volume from
948 barrels in 1995 to 3,209 in 1996. The increase in sales are primarily
attributable to (i) the sale of Nor'Wester brand beer under the Cooperative
Brewing Agreement with Nor'Wester, the Company's affiliate and (ii) an
increased market share of the Company's beer throughout Southern and Northern
California. This increase in sales however is not sufficient for the
Company to become self-sustaining in the near term. In July 1996, Nor'Wester
temporarily suspended brewing under the Cooperative Brewing Agreement with
the Company as the brewing capacity for Nor'Wester brand beer on draft was
not needed. The Company expects this will have material, adverse effects
on future revenues as cooperative brewing accounted for 15% and 39% of sales
for the three month and nine month periods, respectively.
Excise Taxes. Excise taxes increased from $12,771 (9% of gross sales) for
the nine months ended September 30, 1995 to $36,043 (9% of gross sales) for
the same period of 1996. The slight increase is due to beer sales in
states with a higher tax rate than California.
Cost of Sales. Cost of sales as a percentage of net sales for the nine
months ended 1996 and 1995 was 89% and 123%, respectively, reflecting
the disproportionate cost of production for goods sold during a period when
the facility is operating at less than its maximum designed capacity, as
well as development-stage production costs such as recipe testing. In
addition, the gross margin on cooperative brewed Nor'Wester beer is
substantially less than the Company's own products thereby increasing the
cost of sales as a percentage of net revenues.
BAYHAWK ALES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 (Continued)
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses for the nine months ended September 30, 1996 totaled
$287,749 or 82% of net sales as compared to $329,757 or 230% of net sales
for the comparable period in 1995. This is primarily due to higher
administrative costs incurred during the first nine months of the Company's
operations in 1995.
Liquidity and Capital Resources
For the nine months ended September 30, 1996, cash and cash equivalents
decreased $236,003 primarily due to operating losses of $264,915.
Other principal uses of funds include an increase in accounts receivable of
$47,479, an increase in other non-current assets of $25,899, purchases of
property and equipment of $12,847 and a decrease in note payable to
affiliated companies of $91,374. Primary sources of funds include an
increase in accounts payable of $10,883, an increase in accrued liabilities
of $46,494, and increase in amounts payable to affiliates of $43,235.
On November 30, 1995, the Company issued a note to WVI for monies loaned
by WVI to construct, equip and operate the brewery. The note, which had
a principal balance of $255,626 at September 30, 1996, bears interest at
8% per annum, and is secured by all of the Company's assets. Principal and
interest are payable in monthly installments of $4,600 with a balloon payment of
$124,739 due on December 31, 1999, but only if such payments do not, in the
reasonable good faith judgment of the Company's Board of Directors, materially
and negatively impact the Company's cash flow requirements. The Company is
current on loan payments to WVI as of September 30, 1996.
The Company requires significant capital to continue its operations at
current levels. However, the Company has very little capital resources,
has insufficient operating results to obtain a bank line of credit, and
WVI, its parent, does not currently have adequate resources to support the
Company's operations. The Company has been developing alternative strategies
including serving as a contract brewer for other companies to increase its
operating cash flow. No assurances can be given that these alternative
strategies will provide the necessary revenue and profits to sustain the
Company's operations.
Management believes that the Company's resources will fund only limited
activities for the next several months. Thereafter, the Company will be
required to obtain additional capital to continue to fund its activities.
There is no assurance, however, that such additional capital will be
available, or if available, whether it will be available on terms
acceptable to the Company.
To address the liquidity and capital resources concerns of the Company
and certain of its affiliated breweries, in September 1996, the Company's
parent, WVI and its affiliate Nor'Wester, entered into a non-binding
letter of intent with The UB Group of Bangalore, India setting
forth the proposed terms of The UB Group's planned investment of
$9.0 million in cash and certain intangible consideration including
the grant of an exclusive right to manufacture The UB Group's Kingfisher
brand beer for sale in North America and The UB Group's provision of
certain management and technical services to the craft breweries controlled
by WVI and its affiliate, Nor'Wester. Under the terms of the letter of
intent, The UB Group's investment will be made in the resulting entity
following a proposed consolidation of the Company, WVI and WVI's
subsidiaries-- Mile High Brewing Company, Inc., located in Denver, Colorado,
Aviator Ales, Inc., located in Woodinville, Washington and Nor'Wester and
Nor'Wester's subsidiary, North Country Brewing Company, located in
Saratoga Springs, New York.
The closing of the proposed investment remains subject to (i) The UB Group's
completion of satisfactory due diligence, (ii) negotiation and execution of a
definitive investment agreement between the parties, (iii) approval by the
boards of directors and shareholders of each of the Companies, WVI,
Nor'Wester and their respective subsidiaries, (iv) registration with the U.S.
Securities and Exchange Commission of Nor'Wester to be exchanged in the
merger, and (v) such other customary conditions for transactions of this
type.
Following execution of the letter of intent, The UB Group has provided the
WVI/Nor'Wester alliance of craft breweries with bridge loans in the amount
of $650,000 to sustain and grow their brewing operations. The UB Group has
also agreed to provide additional bridge loans or guarantees on bank loans
in such amounts and at such times as are neccessary to sustain the breweries'
operations and growth until completion of the planned consolidation and
closing of the investment. There can be no assurances that additional bridge
loans will be made by The UB Group, that an equity investment by The UB Group
will ultimately be made or, if made, the final terms of such investment.
BAYHAWK ALES, INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None.
(b) Report on Form 8-K.
On September 26, 1996, the Company filed a Form 8-K in
connection with its execution of a non-binding letter of
intent with The UB Group of Banagalore, India relating to The
UB Group's proposed investment of $9.0 million in cash along
with certain other non-cash intangible consideration into the
entity resulting from the proposed consolidation of the
Company with its affiliates, Willamette Valley, Inc.
Microbreweries Across America, Aviator Ales, Inc., Mile High
Brewing Company, Nor'Wester Brewing Company, Inc. and North
Country Brewing Company. The Form 8-K set forth the terms
and conditions of the proposed investment as outlined in the
letter of intent, and included as exhibits copies of the
letter of intent dated September 18, 1996, a September 26,
1996 press release relating to the matter, and a September 26,
1996 letter to the Company's shareholders describing the
matter.
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAYHAWK ALES, INC.
Date: November 19, 1996 By _____________________
Dave Voorhies
General Manager
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAYHAWK ALES, INC.
Date: _______________ By /s/ Dave Voorhies
Dave Voorhies
General Manager
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<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet at September 30, 1996 (Unaudited) and the Statement of Operations for the
Nine Months Ended September 30, 1996 (Unaudited) and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
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