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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 : 33-95606
MILE HIGH BREWING COMPANY
(Name of small business issuer in its charter)
OREGON 93-1145738
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2401 BLAKE STREET
DENVER, COLORADO 80205
(Address of principal executive offices and zip code)
(303) 299-0147
(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 $1,600,915. 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 4,693,787 shares.
The index to exhibits appears on page 17 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 Mile High Brewing
Company are hereby amended in their entirety as follows:
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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 Operations 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,
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availability of financing for operations and payment of past due creditors,
ability to sell the Company's assets on favorable terms, 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, including but not limited to the Company's
Prospectus dated June 9, 1996. Copies of the Prospectus are available from
the Company. In addition, such statements could be affected by general
industry and market conditions and growth rates, and general domestic
economic conditions.
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 revenues 105.6% 101.8%
Less excise taxes 5.6 1.8
---------- ----------
Net revenues 100.0 100.0
Cost of goods sold 125.7 103.8
Selling, general and administrative expenses 52.2 342.5
---------- ----------
Operating loss (159.1) (346.3)
---------- ----------
Loss before income taxes (160.5) (314.5)
---------- ----------
Net loss (160.5)% (314.5)%
========== ==========
GROSS REVENUES. The Company began brewing and selling beer in August 1995,
with gross revenues from beer and retail products totaling $1,600,915 for the
year ended December 31, 1996 and $216,498 for the year ended December 31,
1995. The increase is primarily attributable to the fact that the Company
did not start selling beer until late August 1995 and the addition of the
sale of $796,549 (50 percent of gross sales) of Nor'Wester brand beer under
the Cooperative Brewing Agreement during 1996. The Company ceased normal
operations in November 1996 and is researching various options for the sale
of its assets or for contract brewing arrangements. During this time, the
Company is performing a limited amount of contract brewing for a third party.
The Company's facility has a current annual production capacity of 39,000
barrels and sold 13,191 barrels and 658 barrels during 1996 and 1995,
respectively.
EXCISE TAXES. Excise taxes increased to $85,426 (5.3 percent of gross sales)
for the year ended December 31, 1996 from $3,917 (1.8 percent of gross sales)
for the year ended December 31, 1995. The increase as a percent of gross sales
is a result of increased sales of beer products in relation to retail items
during 1996.
COST OF GOODS SOLD. Cost of goods sold totaled $1,905,335 (126 percent of net
sales) for the year ended December 31, 1996 compared to $220,656 (104 percent
of net sales) for the year ended December 31, 1995. The cost of goods sold
percentage continues to reflect the disproportionate cost of production for
goods sold during a period when the facility was operating at less than its
maximum designed capacity. In addition, the Company achieved lower margins
on products produced and sold under the Cooperative Brewing Agreement during
1996.
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SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses increased to $790,615 (52 percent of net sales) for the
year ended December 31, 1996 from $728,021 (342 percent of net sales) for the
year ended December 31, 1995. SG&A expenses reflect operating management and
administrative services provided by the Company's parent, WVI, and by
Nor'Wester, an affiliated company as well as direct charges such as selling
and administrative salaries and advertising expenses. The increase in SG&A
expenses is primarily attributable to eleven months of operations in 1996 and
increased shipping costs as the Company introduced its products into
surrounding states, offset in part by higher costs incurred during the first
months of the Company's operations in late 1995.
IMPAIRMENT LOSS. Impairment loss of $1,018,879 in 1996 resulted from the
write down of Mile High's operating assets to fair value.
WRITE-OFF OF STOCK OFFERING COSTS. Consists of costs related to the write-off
of legal and accounting fees related to Mile High's discontinued public
stock offering.
NET LOSS. Net loss increased to $2,432,272 for the year ended December 31,
1996 from $668,481 for the year ended December 31, 1995 as a result of the
individual line items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
In June 1996, the Company embarked upon its second direct public stock offering
to sell up to 1,053,000 shares of Common Stock at $1.85 per share, generating
estimated net proceeds of approximately $1,948,050. The offering has failed to
raise the minimum escrow amount of $750,000. Furthermore, the terms of the
Investment Agreement with UBA prohibits the Company from selling any of its
securities without the approval of UBA. In October 1996, the Company elected
to terminate the offering and return funds held in escrow to investors.
Cash and cash equivalents decreased $349,371 to $30,320 at December 31, 1996
from $379,691 at December 31, 1995. The decrease is primarily a result of
$662,434 net cash used for operating activities including $1,018,879 write
down of assets held for sale to net realized value, $385,712 used for capital
expenditures and $698,775 net cash provided by financing activities,
including $763,933 in net borrowings from WVI and affiliated companies.
Working capital deficit was $2,662,424 at December 31, 1996 compared to a
working capital deficit of $89,510 at December 31, 1995. The current ratio
decreased to .04:1 at December 31, 1996 from .87:1 at December 31, 1995.
Accounts payable increased $672,914 to $816,664 at December 31, 1996 from
$143,750 at December 31, 1995. At December 31, 1996 and currently, the
Company was past due on $722,284 of its accounts payable.
During 1995, WVI loaned $800,000 to the Company for the purpose of paying for
leasehold improvements, the purchase of capital assets and for funding
working capital. When issued, the note was unsecured and carried no
interest, however, upon termination of the Company's offering in October
1996, the note converted into an installment note at 10 percent per annum and
was secured by all assets of the Company. The note was due in monthly
installments of $5,300, with the remaining principal balance
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due 18 months after the issuance of the note. Because of the anticipated
consolidation, management does not expect to repay the note. Instead, the
note will be considered in the stock conversion ratios being used in the
Consolidation.
In November 1996 the Company ceased its normal operations, except for a small
amount of contract brewing for third party brewers and is currently
researching various options for additional contract brewing opportunities or
for liquidating the Company's assets.
SUBSEQUENT EVENTS
PENDING CONSOLIDATION, BRIDGE LOANS, SUBSEQUENT INVESTMENT AND RENEGOTIATION OF
THE TERMS
On January 30, 1997, the Company, Nor'Wester, WVI, Aviator Ales, 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.
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.
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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;
(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 covenant under 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.
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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 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 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
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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 is unable to pay past due creditors and finance
working capital requirements through an investment by UBA, alternative methods
of financing would have to be obtained. No assurance can be given that
alternative methods of financing would be obtained. No assurance can be given
that alternative methods of financing would be available on terms acceptable to
the Company, or at all. Having to develop alternative means of financing would
likely slow development of the existing breweries and such alternative
financing may be costly. The inability of the Company to obtain additional
capital would adversely affect the Company's business and results of
operations.
ITEM 7. FINANCIAL STATEMENTS
The information required by this item begins on page F-1 of this report.
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GENERAL
Each of Nor'Wester, WVI, Aviator and Bayhawk is affiliated with Mile High
in that James W. Bernau, Mile High'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 Mile
High 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 Mile High's President's time.
LOANS, ADVANCES AND SERVICES FROM AFFILIATES
MILE HIGH BRIDGE LOAN. During 1995, WVI loaned $800,00 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 before the minimum amount could be raised
in the offering. 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, the entire amount of the note remained unpaid.
LOANS AND ADVANCES FROM NOR'WESTER AND WVI. In 1995 and 1996, Nor'Wester
loaned or advanced $350,000 to Mile High for working capital needs and for
the purchase of brewing ingredients and raw materials to brew Nor'Wester beer
under Mile High's Cooperative Brewing Agreement with Nor'Wester entered into
as part of the Alliance. For a description of the purposes of the Alliance
and the terms of the Cooperative Brewing Agreement see "Strategic Alliance"
below. In 1996, Nor'Wester also loaned $150,000 to Mile High to help pay for
the construction of Mile High's pub. During 1995, Mile High's parent, WVI,
loaned $800,000 to Mile High for the purpose of paying for leasehold
improvements, purchasing capital assets and funding the working capital needs
of Mile High's brewery. During 1996, WVI advanced $186,364 to Mile High to
purchase capital assets and support the working capital needs of Mile High's
brewery. Each of these loans and advances are unsecured and do not bear
interest.
ADVANCES AND SERVICES FROM WVI, WVV AND NOR'WESTER. In 1995 and 1996, WVI
and WVV paid certain bills on behalf of Mile High and provided Mile High with
certain accounting, marketing and administrative services. Further, in 1995
and 1996, in support of the creation and development of the Alliance,
Nor'Wester paid certain bills on behalf of Mile High and provided Mile High
with services under the General Services Agreement entered into as part of
the Alliance. For a description of the General Services Agreement see
"Strategic Alliance," below.
PAYMENTS TO AFFILIATES. During 1995, Mile High paid WVI, WVV and
Nor'Wester $257,286, $15,300 and $62,854, respectively, in payment of the
above-described loans, advances and services. During 1996, Mile High paid WVI
$10,000 in payment of the above-described loans, advances and services.
AMOUNTS OWED TO AFFILIATES AT DECEMBER 31, 1996. As a result of the
above-described transactions, other than the Mile High Bridge Loan, at
December 31, 1996, Mile High owed $313,806 to WVI, $17,743 to WVV, and
$702,998 to Nor'Wester. These amounts are unsecured, do not bear interest,
are payable on demand by WVI, WVV and Nor'Wester, as the case may be. At
December 31, 1996, Mile High owed $800,000 to WVI on the Mile High Bridge
Loan. The foregoing amounts are reflected as "payables to parent and
affiliated companies" on Mile High's balance sheet.
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STRATEGIC ALLIANCE
In January 1996, the Company established a strategic alliance with WVI, Aviator
Ales, 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 WVI 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.
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
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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 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.
The Company was charged by Nor'Wester and WVI $51,500 and $56,025,
respectively, for services under the General Services Agreement during 1996.
ARMS-LENGTH TRANSACTIONS
The Company believes that the transactions set forth above were made on terms
no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions between the Company and
its officers, directors, principal shareholders and affiliates will be
approved by a majority of the independent outside members of the Company's
Board of Directors who do not have an interest in the transactions, and will
be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
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SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 14, 1997
MILE HIGH BREWING COMPANY
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,
- ------------------- General Manager and Secretary
James W. Bernau (Principal Executive Officer and Principal
Financial and Accounting Officer)
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MILE HIGH
BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
REPORT AND FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
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MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . . F-1
Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Statement of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Statement of Shareholders' Equity. . . . . . . . . . . . . . . . . . . . . F-5
Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . F-7
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Mile High Brewing Company
(A Development Stage Company)
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of Mile High Brewing Company (A
Development Stage Company) at December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended and the period from
inception (June 8, 1994) to 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 a limited
and unprofitable operating history, has negative working capital of
$2,662,424 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 Company's management formalized and approved a plan to sell the
operating assets of the Company 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 entered into an
investment agreement subsequent to December 31, 1996 to be merged with other
affiliated companies and convert its stock into shares of a new publicly traded
entity.
F-1
<PAGE>
To the Board of Directors and Shareholders of
Mile High Brewing Company
(A Development Stage Company)
Page 2
Mile High Brewing Company 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 reduce the impairment loss by the amount of
future estimated operating losses initially included therein relating to a
contract brewing arrangement. Such losses will be recorded in 1997 as
incurred.
PRICE WATERHOUSE LLP
Portland, Oregon
March 17, 1997 except as to Notes 13 and 14
which are as of March 24, 1997
F-2
<PAGE>
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------------- ------------
(RESTATED - NOTE 14)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 30,320 $ 379,691
Accounts receivable 85,200 44,118
Inventories (Notes 2 and 11) - 86,763
Prepaid and other current assets 8,170 67,837
------------- ------------
Total current assets 123,690 578,409
Property and equipment (Notes 3, 4 and 11) 2,000,000 2,178,732
Other noncurrent assets - 131,950
------------- ------------
$ 2,123,690 $ 2,889,091
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 816,664 $ 143,750
Reserve for impairment loss (Note 11) 50,000 -
Other accrued liabilities 15,633 79,526
Payables to parent and affiliated companies (Note 8) 1,834,547 20,614
Current portion of loan from parent (Note 8) - 416,200
Current portion of capital lease obligation (Note 4) 69,270 7,829
------------- ------------
Total current liabilities 2,786,114 667,919
Capital lease obligation, less current portion (Note 4) 241,224 22,068
Advances from affiliates (Note 8) - 250,000
Loan from parent less current portion (Note 8) - 383,800
Deferred rent (Note 10) - 43,377
------------- ------------
3,027,338 1,367,164
------------- ------------
Commitments and contingencies (Notes 10, 12 and 13)
Shareholders' equity (deficit) (Notes 6, 7, 12 and 13):
Common stock, $.001 par value, 10,000,000 shares
authorized, 4,693,787 and 4,690,167 shares issued and
outstanding at December 31, 1996 and 1995, respectively 4,694 4,690
Additional paid-in capital 2,252,274 2,245,581
Deficit accumulated during the development stage (3,160,616) (728,344)
------------- ------------
(903,648) 1,521,927
------------- ------------
Total liabilities and shareholders' equity $ 2,123,690 $ 2,889,091
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE
AMOUNTS FROM
INCEPTION
YEAR ENDED (JUNE 8, 1994) TO
DECEMBER 31, DECEMBER 31,
1996 1995 1996
----------- ------------ -----------
(RESTATED - NOTE 14) (RESTATED NOTE 14)
<S> <C> <C> <C>
Gross sales (Notes 8 and 9) $ 1,600,915 $ 216,498 $ 1,817,413
Less excise taxes (85,426) (3,917) (89,343)
------------ ------------ ------------
Net sales 1,515,489 212,581 1,728,070
Cost of goods sold (Note 8) 1,905,335 220,656 2,125,991
------------ ------------ ------------
Gross deficit (389,846) (8,075) (397,921)
Selling, general and administrative
expenses (Note 8) 790,615 728,021 1,582,915
Impairment loss (Note 11) 1,018,879 - 1,018,879
Write-off of stock offering costs (Note 6) 212,098 - 212,098
------------ ------------ ------------
Loss from operations (2,411,438) (736,096) (3,211,813)
Other income (expense):
Interest income (expense) (37,958) 67,615 34,073
Other income 17,124 - 17,124
------------ ------------ ------------
Loss before income taxes (2,432,272) (668,481) (3,160,616)
Income taxes (Note 5) - - -
------------ ------------ ------------
Net loss as a development stage company $ (2,432,272) $ (668,481) $ (3,160,616)
------------ ------------ ------------
------------ ------------ ------------
Net loss per common share $ (0.52) $ (0.14) $ (0.74)
------------ ------------ ------------
------------ ------------ ------------
Weighted average number of common
shares outstanding 4,691,810 4,685,649 4,243,217
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
PERIOD FROM INCEPTION (JUNE 8, 1994) TO DECEMBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
COMMON STOCK PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTAL
--------- --------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Balances, June 8, 1994 - $ - $ - $ - $ -
Stock issued to Willamette Valley, Inc.
($0.04 per share) 2,391,985 2,392 97,608 - 100,000
Proceeds from stock offering
($1.10 per share) 2,258,994 2,259 2,104,902 - 2,107,161
Net loss - - - (59,863) (59,863)
--------- --------- ------------ ---------- ----------
Balances, December 31, 1994 4,650,979 4,651 2,202,510 (59,863) 2,147,298
Proceeds from stock offering
($1.10 per share) 39,188 39 43,071 - 43,110
Net loss - - - (668,481) (668,481)
--------- --------- ------------ ---------- ----------
Balances, December 31, 1995 4,690,167 4,690 2,245,581 (728,344) 1,521,927
Stock issued to employees (Note 6) 3,620 4 6,693 - 6,697
Net loss - - - (2,432,272) (2,432,272)
--------- --------- ------------ ---------- ----------
Balances, December 31, 1996
(Restated - Note 14) 4,693,787 $ 4,694 $ 2,252,274 $ (3,160,616) $ (903,648)
--------- --------- ------------ ---------- ----------
--------- --------- ------------ ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE
AMOUNTS FROM
INCEPTION
YEAR ENDED (JUNE 8, 1994) TO
DECEMBER 31, DECEMBER 31,
1996 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
(RESTATED - NOTE 14) (RESTATED - NOTE 14)
Cash flows from operating activities:
Net loss as a development stage company $ (2,432,272) $ (668,481) $ (3,160,616)
Reconciliation of net loss to cash used by
operating activities:
Depreciation and amortization 216,593 51,323 267,916
Deferred rent - 43,377 43,377
Impairment loss (Note 11) 1,018,879 - 1,018,879
Shares granted to employees 6,697 - 6,697
Changes in current assets and current
liabilities:
Accounts receivable (41,082) (44,118) (85,200)
Inventories (99,937) (81,230) (186,700)
Prepaid and other assets 59,667 (67,837) (8,170)
Accounts payable 672,914 122,442 816,664
Accrued liabilities (63,893) 79,526 15,633
------------ ------------ ------------
Net cash used for operating activities (662,434) (564,998) (1,271,520)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (385,712) (2,195,078) (2,581,190)
Cash paid for other noncurrent assets - (119,834) (132,439)
------------ ------------ ------------
Net cash used for investing activities (385,712) (2,314,912) (2,713,629)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from the sale of common stock
to parent company - - 100,000
Net proceeds from common stock offering - 43,110 2,150,271
Principal payments on capital lease
obligation (65,158) (4,191) (69,349)
Net borrowings and advances from parent
and affiliated companies 763,933 968,595 1,834,547
------------ ------------ ------------
Net cash provided by financing activities 698,775 1,007,514 4,015,469
------------ ------------ ------------
Net decrease in cash (349,371) (1,872,396) 30,320
Cash and cash equivalents, beginning of period 379,691 2,252,087 -
------------ ------------ ------------
Cash and cash equivalents, end of period $ 30,320 $ 379,691 $ 30,320
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, OPERATIONS AND BASIS OF PRESENTATION
Mile High Brewing Company (the Company) is a development stage company
organized under the laws of the State of Delaware. From the date of
inception (June 8, 1994) through December 31, 1996, the Company's efforts
have been directed primarily toward organizing and issuing a public
offering of shares of its common stock and building, equipping its brewery
and developing a marketable beer. The brewery began producing and selling
beer in September 1995, however in 1996 the Company was brewing at only 19%
of its expected capacity. The Company built and operated a brewery in a
leased facility in Denver, Colorado. The Company is one of four majority
or wholly owned subsidiaries of Willamette Valley, Inc. Microbreweries
across America (WVI), a company located in Oregon, organized to establish
microbreweries throughout the United States. At December 31, 1996 and
1995, WVI owned approximately 51% of the Company's common stock.
The Company is a development stage company which has only a limited and
unprofitable operating history, has negative working capital of
$2,662,424, has limited access to capital with which to fund future
operations, and ceased production of its products in November 1996.
During 1996, the Company recorded an impairment loss and has written
its assets down to fair value and recorded a reserve for estimated
costs to dispose of its assets. Subsequent to December 31, 1996, the
Company's management formulated a plan either to sell the operating
assets of the Company or to pursue contract brewing opportunities. Such
factors, among others, raise substantial doubt as to the Company's
ability to continue as a going concern (see Note 12).
Subsequent to December 31, 1996, the Company entered into an investment
agreement to be merged with its affiliate breweries during 1997 and for all
of the Company's common stock 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 Notes 12 and 13.
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.
INVENTORIES
Inventories at December 31, 1996 and 1995 are stated at the lower of cost
(first-in, first-out basis) or market (see Note 2).
F-7
<PAGE>
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 are stated at cost and are
depreciated over their estimated useful lives estimated to be 5-15 years
using the straight-line method, beginning at the time the assets are placed
in operation. See Note 3.
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
In 1995, the Company 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
management's intention of being merged into a new public company (see 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. The Company files a stand-alone federal and state income
tax return.
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.
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 $37,958. For the year ended December 31, 1995, the Company
paid no income taxes and paid interest of $4,781. During 1996 and 1995,
the Company acquired $366,000 and $34,000, respectively, of equipment under
capital lease obligations. These non-cash transactions have been excluded
from the accompanying statement of cash flows.
F-8
<PAGE>
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
their 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).
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
The Company adopted Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-Based Compensation," for its year ended
December 31, 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 continues to
follow the provisions of APB 25. The impact of adoption does not have 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 common shareholders' equity
(deficit).
2. INVENTORIES
At December 31, 1996, inventories consist primarily of raw materials
considered by management to have no value at year end because the brewery
had ceased operations and the inventory had been subsequently discarded.
See Note 11. Inventories at December 31, 1995 consisted of:
Raw materials $ 18,372
Work-in-process 26,332
Finished goods 25,915
Retail inventory 16,144
-----------
$ 86,763
-----------
-----------
F-9
<PAGE>
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
3. PROPERTY AND EQUIPMENT
The property and equipment of the Company has been written down to
estimated fair value as of December 31, 1996 to reflect management's
intention to dispose of the assets or operate them in a more limited manner
(see Note 11). Property and equipment consisted of:
1996 1995
--------------- --------------
Land and improvements $ 1,504,610 $ 1,277,484
Brewery equipment 1,495,074 893,798
Office furniture and equipment 25,274 23,034
Vehicles 21,250 21,250
Construction in progress 53,460 14,000
--------------- --------------
3,099,668 2,229,566
Less accumulated depreciation (267,427) (50,834)
Write-down to fair value (832,241) -
--------------- --------------
$ 2,000,000 $ 2,178,732
--------------- --------------
--------------- --------------
4. CAPITAL LEASE OBLIGATIONS
Capital lease obligations relate to the acquisition of a bottling line in
1996 and to other equipment purchased in 1995. These leases bear interest
rates ranging from 9% to 15% and require monthly payments of principal and
interest. These leases are secured by the equipment and mature in the
years of 1998 and 2000. Future minimum payments under the Company's
capital lease obligations are as follows:
PRINCIPAL INTEREST TOTAL
--------------- --------------- --------------
1997 $ 69,270 $ 30,727 $ 99,997
1998 73,696 22,746 96,442
1999 80,332 14,423 94,755
2000 87,196 5,227 92,423
--------------- --------------- --------------
$ 310,494 $ 73,123 $ 383,617
--------------- --------------- --------------
--------------- --------------- --------------
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 was no
current or deferred provision for income taxes.
F-10
<PAGE>
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
5. INCOME TAXES (CONTINUED)
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 3.3 3.3
Reserve of net operating loss carryforward assets (37.3) (37.3)
----- -----
-% -%
----- -----
----- -----
Deferred tax assets (liabilities) consist of:
DECEMBER 31,
1996 1995
------------ ------------
Federal net operating loss carryforwards $ 795,000 $ 235,000
Expenses not currently deductible 444,000 13,000
Fixed assets (70,000) (30,000)
Deferred tax asset valuation allowance (1,169,000) (218,000)
------------ ------------
$ - $ -
------------ ------------
------------ ------------
As of December 31, 1996, the Company had a net operating loss carryforward
aggregating approximately $2,337,000 for federal purposes, which may be
used to offset future taxable income, if any. The annual utilization of
this carryforward may be limited after the Company undergoes the ownership
change anticipated by management (see Note 12) or fails to meet the
continuity of business requirements defined by the Internal Revenue Code.
The Company's net operating loss carryforwards begin expiring in 2010.
6. SHAREHOLDERS' EQUITY
The Company is authorized to issue 10,000,000 shares of its common stock.
Each share of common stock entitles the holder to one vote. In June 1994,
the Company received $100,000 cash from WVI in exchange for 2,391,985
shares of unregistered common stock.
In connection with the Company's initial stock offering under Oregon
securities laws, WVI agreed to place in escrow its 2,391,985 shares of the
Company's common stock. These shares were to be released from escrow to
WVI when the Company satisfied one or more certain earnings requirements or
established a bona fide over-the-counter trading market for its common
stock and maintained a bid price equal to or greater than a stipulated
benchmark price for 26 or more consecutive weeks. Unless released pursuant
to these conditions, the 2,391,985 shares were to remain in escrow until
unconditionally released in 25% increments on July 31, 2001, 2002, 2003 and
2004. Based on the
F-11
<PAGE>
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
6. SHAREHOLDERS' EQUITY (CONTINUED)
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. The shares, while in escrow, entitle WVI to the
same rights and privileges as all other shareholders of common stock,
except for certain rights relating to transferability and liquidation.
During 1994 and 1995, the Company sold 2,298,182 shares of its common stock
at $1.10 per share pursuant to a Form SB-2 public offering filed with the
Securities and Exchange Commission. Cash proceeds from this offering, net
of offering expenses of $377,729, aggregated $2,107,161 in 1994 and $43,110
in 1995.
During 1996, the Company granted a total of 3,620 shares to employees. The
Company recorded $6,697 of expense related to these grants which is
included in selling, general and administrative expenses in the
accompanying financial statements for the year ended December 31, 1996.
During 1996, the Company attempted its second direct public stock offering
to sell up to 1,053,000 shares of common stock at $1.85 per share. The
offering has failed to raise the minimum escrow amount, and in October 1996
the Company elected to terminate the offering and return funds to
investors. Accordingly, the costs of $212,098 related to the offering have
been expensed in the current year.
See Notes 12 and 13 for additional discussion of the planned ownership
change.
7. STOCK INCENTIVE PLAN
The Company adopted a 1994 Stock Incentive Plan (the "Plan") and has
reserved 250,000 shares of the Company's 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. In 1995, the Company
granted 19,400 options under the Plan at an exercise price of $1.10 and
$1.85 per share, which approximated fair market value at the date of grant.
These options vest ratably over five and ten years, respectively, beginning
one year from the date of grant. In 1996, the Company granted 31,500
options under the Plan. Of these, 7,500 options vest over a ten-year term
and 6,500 vest over a five-year term and 17,500 were subsequently canceled.
These options have an exercise price of $1.85 per share, which approximated
the fair market value at the date of grant. At December 31, 1996, vested
options totaled 23,900 and options that remain outstanding totaled 33,400.
No options have been exercised to date.
The Company has elected to account for its stock-based compensation under
Accounting Principles Board Opinion No. 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 6.67% and 7.35%, respectively, an expected
dividend yield of 0% and 0%, respectively, an expected life of 8.04 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 $1.22 and $0.81, respectively.
F-12
<PAGE>
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
7. STOCK INCENTIVE PLAN (CONTINUED)
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 $17,045 and $15,741, 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.
8. RELATED PARTIES
NATURE OF RELATED PARTIES
The Company'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; as well as WVI. Additionally, WVI
is the majority owner of Aviator Ales, Inc. (AAI) and Bayhawk Ales, Inc.
(BAI), and fully owns North Country Brewing Company, Inc. (NCBCI),
companies located in Washington, California and New York, respectively.
As a result of certain arrangements between the Company and its affiliates,
as well as the Company president's positions with and/or ownership
interests in each of these companies, inherent conflicts of interest exist
with respect to the pricing of services, the sharing of resources and the
allocation of the Company president's time.
RELATED PARTY TRANSACTIONS
For the period from inception through December 31, 1996, WVI and WVV
provided secretarial, accounting, marketing, and administrative services
related to the Company's initial stock offering and for general and
administrative purposes. Beginning in 1996, the Company began contracting
certain of these services from Nor'Wester under a general services
agreement between Nor'Wester, WVI and WVV. During 1996 and 1995, the
Company purchased these services at an approximate cost of $146,000 and
$163,000, respectively, which is included in selling, general and
administrative expenses in the accompanying financial statements.
Additionally, WVI has allowed the Company to utilize certain proprietary
concepts for no cash consideration. As a result of these and certain other
transactions, the Company owed approximately $1,834,000 and $1,071,000, at
December 31, 1996 and 1995, respectively, to affiliated companies.
In 1995, the Company paid for certain brewing equipment costing $53,000
which was ultimately shipped to Nor'Wester. As a result of this
transaction, the Company was owed approximately $47,000 from Nor'Wester at
December 31, 1995; this balance was collected in March 1996.
ADVANCES FROM PARENT AND AFFILIATE
In connection with the Cooperative Brewing Agreement with Nor'Wester
described below, Nor'Wester advanced $250,000 and $250,000 to the Company
in 1996 and 1995, respectively, for the purchase of ingredients and
packaging materials for the Company's initial and continued production of
Nor'Wester's products. The advances received in 1996 were also used for
the Company's production of its own beers. These advances are unsecured
and do not bear interest.
F-13
<PAGE>
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
8. RELATED PARTIES (CONTINUED)
Because of the anticipated ownership change discussed in Note 12,
management does not expect to repay these advances. Instead, the advances
are being considered in determining the purchase price and stock conversion
ratios being used in the transaction.
In 1995, WVI loaned $800,000 to the Company to fund operations and purchase
capital assets. This loan was to be repaid in the following manner: as
soon as the Company had raised $800,000 in net proceeds through its planned
stock offering, $400,000 of the loan would have been payable under the
terms of a note requiring monthly payments of $5,300 per month including
interest at 10% per annum, with the remaining principal balance due
eighteen months after the issuance of the note. The Company was not
successful raising $800,000 in capital in its planned offering.
Accordingly, the entire loan amount became payable under the terms
described above with such note being issued in October 1996. Because
management plans to merge the Company into a new company, and because
subsequent to December 31, 1996 management decided to sell the operating
assets of the Company (see Note 11), management believes the entire balance
is considered to be payable currently. The amount has been included in
payables to parent and affiliated companies. Note that the Company expects
to repay a portion of the loan with the proceeds it expects to receive when
the operating assets are sold, and any remaining payables to WVI or to
Nor'Wester will be considered in the conversion of the Company's shares
into shares of the new company to be formed.
STRATEGIC ALLIANCE AND COOPERATIVE BREWING AGREEMENTS
In December 1995, the Company entered into a Strategic Alliance (the
"Alliance") with Nor'Wester, AAI, BAI, NCBCI, and WVI. The Company,
Nor'Wester, AAI, BAI, NCBCI, and WVI are collectively referred to as
"Alliance members," and the Company, AAI, 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 has agreed to cooperatively brew Nor'Wester's products,
and to support the entry of these products into new markets by facilitating
Nor'Wester's access to the Cooperative Brewer's network of distributors.
The Alliance is created through a Strategic Alliance Agreement between
Nor'Wester and each of the Companies, AAI, and BAI. 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.
F-14
<PAGE>
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
8. RELATED PARTIES (CONTINUED)
Under the terms of the Cooperative Brewing Agreements, the Company 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
Company's use in producing Nor'Wester's beer. To the extent that this
equipment is not needed for the production of Nor'Wester beers, the Company
may, upon notice to Nor'Wester, use this equipment to produce its own beer
subject to the payment of an agreed-upon lease fee.
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 $797,000, which is 53% 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. Accordingly, the Company ceased its cooperative brewing of
Nor'Wester beers in November 1996.
Subsequent to December 31, 1996, the cooperative brewing agreement was
canceled with the consent of all Alliance members.
9. SIGNIFICANT CUSTOMERS
Approximately 20% and 62% of the Company's sales were to wholesale
distributors located in Colorado for the year ended December 31, 1996 and
1995, respectively. Sales to the Company's largest customer (excluding
cooperative brewing) represented approximately 9% and 48% of gross sales
for the years ended December 31, 1996 and 1995, respectively.
10. COMMITMENTS
The Company has entered into agreements with several independent
distributors for the distribution of the Company's products in Colorado.
These agreements contain normal distribution provisions and are cancelable
by either the Company or the distributors.
During 1995, the Company entered into a 15-year operating lease arrangement
with optional renewal terms for its production facility in Denver,
Colorado. Management expects to terminate the lease during 1997. However,
minimum future lease payments according to the lease are as follows:
F-15
<PAGE>
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
10. COMMITMENTS (CONTINUED)
YEAR ENDING
DECEMBER 31,
------------
1997 $ 107,000
1998 111,000
1999 116,000
2000 121,000
2001 130,000
Thereafter 1,274,000
------------
$ 1,859,000
------------
------------
The terms of this lease allowed for no lease payments to be made during the
initial four months of the lease term, and contain escalating payments.
The Company has recorded lease expense on the straight-line method over the
lease term; accordingly, deferred rent has been recorded in the
accompanying balance sheet as of December 31, 1995. Because the Company
intends to dispose of its assets and terminate its lease during 1997, it is
not likely to experience escalating lease payments.
Accordingly, deferred rent recorded in 1995 and 1996 has been reversed and
has been netted against the estimated impairment loss, and no deferred rent
balance is recorded as of December 31, 1996. See Note 11. Rent expense,
including common area charges and rental of temporary storage in 1995,
aggregated approximately $102,000 and $85,000 during 1996 and 1995,
respectively, and is allocated between cost of sales and selling, general
and administrative expenses in the accompanying statement of operations.
11. IMPAIRMENT OF ASSETS
Subsequent to December 31, 1996, the Company's management developed a
plan to sell all of the operating assets of the Company 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, the Company 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-16
<PAGE>
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
12. PROPOSED MERGER AND INVESTMENT FROM UBA
Subsequent to December 31, 1996, the Company along with its parent (WVI)
and its affiliates (Nor'Wester, AAI and BAI) 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-17
<PAGE>
MILE HIGH BREWING COMPANY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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
will obtain the capital needed to sustain operations.
14. RESTATEMENT OF FINANCIAL STATEMENTS
The accompanying 1996 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.
Such losses will be recorded in 1997 as incurred. The effects of this
restatement on the financial statements are summarized below:
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1996
AS PREVIOUSLY
REPORTED AS RESTATED
------------ ------------
Balance sheet:
Reserve for impairment loss $ 338,000 $ 50,000
Deficit accumulated during the
development stage (3,448,616) (3,160,616)
Statement of operations:
Impairment loss 1,306,879 1,018,879
Net loss (2,720,272) (2,432,272)
Net loss per share (0.58) (0.52)
F-18
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<PAGE>
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 30,320
<SECURITIES> 0
<RECEIVABLES> 85,200
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 123,690
<PP&E> 2,000,000
<DEPRECIATION> 229,566
<TOTAL-ASSETS> 2,123,690
<CURRENT-LIABILITIES> 2,786,114
<BONDS> 241,224
0
0
<COMMON> 4,694
<OTHER-SE> (908,342)
<TOTAL-LIABILITY-AND-EQUITY> 2,123,690
<SALES> 1,515,489
<TOTAL-REVENUES> 1,515,489
<CGS> 1,905,335
<TOTAL-COSTS> 3,926,927
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,397
<INCOME-PRETAX> (2,432,272)
<INCOME-TAX> 0
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